Governance Center Blog

May
14
2010

Executives Worry as Financial Reform Nears

If you have been following the debate on the financial regulatory reform bill in the Senate, [See Wall Street Journal coverage here.] you are probably starting to realize that change is coming. In the past two days alone, the Senate approved amendments that would remove the SEC certification of rating agencies and have the SEC create a self-regulatory body to assign credit rating agencies to assign initial ratings.

If those actions aren’t proof that Congress is serious about following through on its promise to reform Wall Street to avoid another financial crisis like that of 2008-2009, then maybe you should take a look at the recent survey results released by KPMG LLP, the audit firm that operates Audit Committee Institute A separate survey commissioned by ACI also listed uncertainties of economic/legislative environments as a No. 1 concern among directors this year. [Read that report here.] Read the rest of this entry »

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Apr
29
2010

Corporate Governance Changes Still Linchpin of Financial Reform

Whether or not you have been watching the Goldman Sachs “synthetic CDOs” hearings, it has become more and more clear that the corporate governance parts of the legislation will remain when the financial regulatory reform is finally passed.

Let’s be honest, those will have the most effect on public boards. Sure, the regulation of the derivatives market, creation of a consumer financial protection agency and instituting the so-called Volcker Rule (named after former Fed Chair Paul Volcker), which would limit certain investment practices such as swaps and derivatives by banks, could be felt by non-financial companies. But will they really change how public boards operate?

I bring up those three parts of the financial overhaul legislation because they are being cited as the big stumbling blocks by Republicans, who this morning relented after blocking the bill from a floor vote for three days. And in the end those parts will either be modified or left out of the bill. Read the rest of this entry »

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Apr
20
2010

Goldman Sachs Suit May be Start of Derivative Reform

If you are a director on a public company that relies on the derivatives market (i.e. credit default swaps, collateralized debt obligations, synthetic CDOs) to manage risk or a financial services company that is a player in that market, your world is about to change drastically.

It probably is not too surprising that on the same day the SEC charged Goldman Sachs in a civil suit for fraud in structuring and marketing a synthetic CDO tied to subprime mortgages, the head of the Senate Agriculture Committee, which oversees futures trading, proposed regulation of the derivatives market. My point is that just as the Obama Administration didn’t give up on health care reform it will do the same with financial regulatory reform. It seems that whatever financial reform is finally passed, regulation of the derivatives market will be included.

As you all know, the Dodd financial regulatory reform bill, due to hit the Senate floor in the next couple of weeks, also calls for derivative transactions to go through a clearinghouse and be traded on an exchange while the SEC and the Commodities and Futures Trading Commission would oversee them. [Read my March 15 blog post.] Read the rest of this entry »

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Apr
13
2010

Worth Reading … Say on Pay

Sen. Chris Dodd has added an amendment to the proposed financial regulatory reform bill that could be problematic for company boards seeking approval of Say on Play proposals. Meanwhile, at least one company has a compelling argument for not allowing Say on Pay.

Dodd’s amendment would deem all votes regarding executive compensation plans, policies and procedures to be non-routine. If approved, that would mean that under the change in the broker voting Rule 452 (which went into effect earlier this year) brokers holding “uninstructed” shares (mostly retail investors) could not vote those shares. Instead, each investor would have to. Under the revised Rule 452, brokers can only vote uninstructed shares if the matter is routine.

Eric W. Hilfers, who blogs The Tally Sheet for Boardmember.com and who is a partner and the head of the executive compensation practice at Cravath, Swaine & Moore LLP, wrote, “With the change in broker voting rules, however, it will be harder to obtain that majority support because the retail vote will essentially not exist (the SEC would like the outcome to be that retail investors spend the time to instruct their brokers, but many observers think this is unlikely.” Read the rest of this entry »

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Mar
26
2010

Directors May Have to Deal With Reform this Year After All

Now that all the excitement about health care reform in has begun to dissipate in Washington, D.C., the focus is back on financial regulatory reform. Or so it seems.

According to the latest comments [Read The Hill blog’s coverage.] coming out of Senate Banking Committee Republican Ranking Member Richard Shelby’s (R-Alabama) camp on Friday, there’s a chance for a bill to clear the full Senate before Memorial Day. This follows the news that two fellow Republicans on that same committee – Bob Corker of Kentucky and Judd Gregg of New Hampshire – announced Monday that the Democratic bill could receive strong bipartisan support in the Senate.

And then there were Treasury Secretary Timothy Geithner’s comments [Read here.] on Monday to the American Enterprise Institute on Financial Reform. They are as eye-opening and harsh as his predecessor, Henry Paulson, in the fall of 2008 when he revealed just how deep the financial crisis was. Read the rest of this entry »

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Mar
15
2010

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.” Read the rest of this entry »

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Mar
12
2010

Say on Pay Takes Early Lead in Proxy Season Shareholder Proposal Race

Executive compensation continues to be a hot topic in the board room and among shareholders. In the beginning of the 2010 proxy season RiskMetrics reports that four of the Top 10 governance shareholder proposals are compensation-related with advisory vote on compensation, or Say on Pay, ranked first with 46 proposals on the ballot.

The other three compensation proposals include having a retention period for stock awards (13 proposals), establishing anti-gross-ups policy (six proposals) and limiting the number of CEOs on compensation committees (three proposals). [By the way No. 2 on RiskMetrics list is shareholders’ right to call special meetings with 42 proposals.]

While Say on Pay has been considered by the SEC and included in several financial regulatory reform bills on Capitol Hill, momentum for advisory votes on compensation has picked up steam in the past year following the requirement for TARP (Troubled Asset Relief Program) recipients to hold such a vote. As of March 2, a coalition of investors reports that more than 70 Say on Pay shareholder proposals have been filed for this proxy season. And more than 50 public companies have voluntarily adopted advisory votes for compensation. Read the rest of this entry »

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Feb
11
2010

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.

Nell Minow, Editor and Founder of The Corporate Library

Nell Minow, Editor and Founder of The Corporate Library

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.” Read the rest of this entry »

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