Corporate Governance Parts of Financial Regulatory Reform Intact

After listening to Sen. Christopher Dodd’s financial regulatory reform bill press conference this afternoon and poring over the summary, I can say that not a whole lot has changed from the initial discussion draft from November. And, for some, that is both good and bad.

The biggest changes in the 1,300-page bill are some new powers granted to the Federal Reserve (including extending regulatory powers to the Fed over nonbanks that pose risk to the economy), a new name for the systemic risk overseer (Financial Stability Oversight Council, which sounds a lot like the G-20’s Financial Stability Board), the number of independent members on that board (from two to one), and the addition of the so-called Volcker Rule (named after former Federal Reserve Chair Paul Volcker, it prohibits proprietary trading for banks).

“This legislation will create an early warning system so that someone is tasked with looking out for the next crisis, which will surely come,” Dodd said during the press conference. “We will create a systemic risk council with a job of scanning the economic radar to identify unsafe products or practices that could threaten our economic stability, and the authority to stop them when they occur.”

Two of the changes in the council portion of the legislation were significant: the nine-member panel would be chaired by the Treasury Secretary and include only one independent member and the council would need two-thirds approval for votes on regulating nonbank financial companies and breaking up large, complex companies. Those changes tend to take away some of the teeth of the nascent council. [See my Nov. 17, 2009 blog post on Dodd’s initial proposal.]

On the other hand, what Dodd left in the proposal could potentially have a far-reaching effect on U.S. public companies for the foreseeable future.

The bill would:

• End “too big to fail” bailouts
• Give shareholders an advisory vote on executive pay
• Give shareholders proxy access to nominate directors
• Establish standards calling for independent compensation consultants
• Establish clawback language for executive compensation based on inaccurate financial statements.

Charles Elson, chair of the Weinberg Center for Corporate Governance at the University of Delaware, was not impressed with those corporate governance measures that were left alone.

“I agree with the goals, however I disagree with the method,” Elson said. “The problem with that is that you are federalizing the whole thing [shareholder rights]. This needs to be done on the state level. In fact, Delaware has already done it.”

The Corporate Library doesn’t quite see things that way.

“There was some speculation that these governance provisions were on the ‘chopping block’ and would not make it into the final bill. But the fact that they remained is an indication that the government is beginning to take shareholder rights more seriously,” Alexandra Higgins, a governance advisor, wrote in the TCL blog today.

The bill would also add regulations for the derivatives market where transactions would be cleared through central clearinghouses and traded on exchanges. The SEC and Commodities and Futures Trading Commission (CFTC) would oversee the derivatives markets.

Of course, now the tough part begins as the Democrats attempt to get the bill through the Senate before reconciling it with the House version that was passed before Christmas.

- Gary Larkin