Q&A With Nell Minow – Financial Regulatory Reform

As financial regulatory reform remains in limbo in the U.S. Senate, shareholders and corporate watchdogs are becoming more vociferous and taking more action. One such organization taking the lead in this area is The Corporate Library and its founder Nell Minow.

When Nell isn’t being quoted in the Wall Street Journal, New York Times, Corporate Board Member or Directorship on such issues as executive compensation or corporate governance, she is testifying before Congress, writing books and articles on these topics.

Recently, she has taken on the topic of financial regulatory reform [See this article on CNN’s Web site, “Wall Street bonuses are outrageous.”] Below are some excerpts from that CNN article:

“I believe in the market,” she wrote. “But executives and their boards of directors have hijacked the market to externalize costs and it is doing critical damage to capitalism. The key is always persuading providers of capital that managers will use the funds to create shareholder value and not to enrich themselves. This compensation mess calls that into question.

“…I also support banking of bonuses, which is preferable to clawbacks and amounts to a kind of escrow to ensure that any adjustments to the financial reports will result in adjustments to the bonus. No proof of bad intent should be necessary. If they are paid a bonus based on numbers that turn out to be wrong, it was never theirs in the first place.”

In a recent interview, she told me that the power behind real financial regulatory reform lies more in the shareholders than it does in government regulations. She believes such powers as Say on Pay and Proxy Access will help shareholders in the coming years. Below is her Q&A:

What do you think are the changes of any significant financial reform in 2010 or beyond? What form do you think it will come in?

That’s hard to predict. In corporate governance, we will see a lot of changes. It’s hard to tell what will happen in Congress regarding financial reform with the election of Scott Brown [a U.S. senator from Massachusetts who gives the Republicans the 41 votes needed to filibuster] and the U.S. Supreme Court decision [which dismantles a major part of campaign finance reform for corporate contributions]. It depends on what you mean by significant. In my mind, the market can weed out the bad boards of directors. We have flagged individual directors for exceptionally bad behavior. We are now working on ratings of individual directors for the first time. You will see more targeted withhold votes.

What do you see as the biggest shareholder concerns this proxy season in the first full year following the financial crisis?

It’s the board of directors. The biggest concern is executive pay. All the boards who jacked up their pay and bonuses deserve to be thrown out.

If you don’t think reform is the way to go with regulating executive pay, what do you think would work?

The only thing that will work is to replace the boards that are acting badly. Shareholders having the vote [say on pay and proxy access] will help.

Should financial institutions be held to different principles regarding executive compensation plans? If so, why?

There are certain [executive compensation] principles that apply to everyone. They are:

• 100 percent clawbacks (no “weasel-outs”)

• No option or stock grants given unless they are indexed to peer groups

• All bonuses have to be discounted to reflect subsidies from TARP [Troubled Asset Relief Program]

Where should such principles come from?

It should not come from the government, except when the government becomes the largest shareholder. It should come from the shareholders and industry groups like The Conference Board and the National Association of Corporate Directors (NACD).

How can the U.S. avoid another financial crisis as severe as the one we just witnessed?

The one we just witnessed was like all upheavals before – the market crashes and Great Depression – have been made possible by externalizing risks. They should require adequate capital reserves and remove impediments to regulation. I support the President’s proposal to break up the big banks. Too big to fail is too big to succeed. What you wind up with is a utility. They should have to be treated and regulated like one.

- Gary Larkin