Momentum Grows for Executive Pay Rules
Wednesday, May 20, 2009
New efforts are taking shape in Washington to overhaul governance of public companies in the wake of the financial crisis, with both the Securities and Exchange Commission and lawmakers proposing tough new measures.
The SEC is planning to propose new rules today that would allow pension funds and individual shareholders alike to shape executive compensation and nominate who sits on corporate boards, officials said. The rules would allow at least 1 percent of shareholders to vote directly on who should sit on the board. The figure would be higher for smaller companies.
Though the SEC is just proposing the rules today, they are likely to pass after a comment period. Three of the agency's five commissioners support proxy access.
Yesterday, Senator Charles E. Schumer (D-N.Y.) introduced legislation that would require companies to hold shareholder votes each year on the compensation of top executives and seek approval from investors for "golden parachutes" -- pay packages given to executives upon departure.
Under the bill, both votes would be nonbinding. The measure also calls for the separation of the role of chairman and chief executive, and instructs the SEC to issue rules that would give shareholders more power to nominate directors on corporate boards.
Wall Street and corporate America have long opposed versions of the SEC rules and have been willing to go to court to fight them. But legislation would make defeating them more difficult.
The bill, which business groups had lobbied against even before its introduction, was immediately criticized by Wall Street and other industries as another example of intrusion by the federal government into areas best left to market forces. Opponents also criticized the bill as regulatory overkill given efforts already underway in Washington to address executive compensation.
The Federal Reserve is working on its own pay proposals. And the Treasury is expected to issue long-awaited guidelines soon on how to limit pay for executives at firms that have received government funds. The House and Senate, meanwhile, are working on a proposal for broad financial regulatory reform that is expected to address executive compensation.
"We will do something about all three," said Scott Talbott, chief lobbyist for the nation's largest financial services firms. "We are worried about duplication and conflict. If we have a regulation and a law working in conflict, it'll create more confusion for the industry."
Schumer characterized the bill, co-sponsored by Maria Cantwell (D-Wash.), as a "moderate proposal."
"The best check against unchecked CEOs is an empowered shareholder group," he said in an interview. "The government can put in regulations, but it's the shareholders who have the day-to-day, month-to-month interest in seeing that the company perform."
Schumer added that the bill would provide a "permanent change in the balance of power" even after financial institutions begin returning government funds and get out from the program's restrictions on executive compensation.
Lawmakers have blamed what they see as excessive executive compensation practices that rewarded short-term profits and risk-taking as a cause of the financial crisis.
Schumer's bill also requires that corporate directors receive a majority of votes cast in uncontested elections. It would also ban "staggered" boards and require all directors to face reelection annually.
Schumer is hoping the bill would be included in legislation that is being worked on by both the House and Senate on broader financial regulatory changes.