by James Hyatt
Sen. Christopher Dodd’s latest financial services bill contains several provisions long advocated by shareholder governance activists.
It would require directors to win by a majority vote in uncontested elections, require that compensation committees include only independent directors, and require public companies to set policies to take back executive compensation if it was based on inaccurate financial statements that don’t comply with accounting standards.
“In this country, you are supposed to be rewarded for hard work,” declared the Senate Banking Committee chairman’s summary of the provisions in his proposal, titled the “Restoring American Financial Stability Act of 2010.” But, it adds, “Wall Street has developed an out of control system of out of this world bonuses that rewards short-term profits over the long-term health and security of their firms. Incentives for short-term gains likewise created incentives for executives to take big risks with excess leverage, threatening the stability of their companies and the economy as a whole.”
The governance provisions are only a small part of the entire 1,300-plus-page measure which seeks to address a wide variety of problems uncovered by the recent financial crisis. Provisions include creating a Consumer Financial Protection Bureau at the Federal Reserve to regulate financial products and practices, and requirements intended to eliminate firms considered “Too Big to Fail,” as well as regulation of derivative products and registration of large hedge funds.
Many of the shareholder provisions were included in a previous measure introduced last year by New York’s Sen. Charles Schumer. The House has passed a similar measure.
Sen. Dodd (D.-Conn.) introduced many of them in the latest financial services measure after failing to gain Republican backing. While there was agreement on many items, the Republicans objected to consumer protection and corporate governance proposals, he has said.
The SEC has been moving toward proxy access rules, but requiring them in legislation could prevent some legal challenges to an SEC move.