Financial Reform Bill, Part 5

Posted in Financial Markets, Politics and Policy at 8:50 pm

In this post I’ll address Section 5, entitled, “Executive Compensation and Corporate Governance”.

From the summary:

Provides shareholders with a say on pay and corporate affairs with a non-binding vote on executive compensation and golden parachutes.

Here are the specifics:

Giving Shareholders a Say on Pay and Creating Greater Accountability

Vote on Executive Pay and Golden Parachutes: Gives shareholders a say on pay with the right to a non-binding vote on executive pay and golden parachutes. This gives shareholders a powerful opportunity to hold accountable executives of the companies they own, and a chance to disapprove where they see the kind of misguided incentive schemes that threatened individual companies and in turn the broader economy.

Nominating Directors: Gives the SEC authority to grant shareholders proxy access to nominate directors. Also required directors to win by a majority vote in uncontested elections. These can help shift management’s focus from short-term profits to long-term growth and stability.

Independent Compensation Committees: Standards for listing on an exchange will require that compensation committees include only independent directors and have authority to hire compensation consultants in order to strengthen their independence from the executives they are rewarding or punishing.

No Compensation for Lies: Requires that public companies set policies to take back executive compensation if it was based on inaccurate financial statements that don’t comply with accounting standards.

SEC Review: Directs the SEC to clarify disclosures relating to compensation, including requiring companies to provide charts that compare their executive compensation with stock performance over a five-year period.

Enhanced Compensation Oversight for Financial Industry: Requires Federal financial regulators to issue and enforce joint compensation rules specifically applicable to financial institutions with a Federal regulator.

I’ll make this one short and sweet. Independent compensation committees on Boards of Directors are a good thing. Giving shareholders a say on pay CAN be a good thing if it’s tightly controlled and used in only the most egregious cases. Proxy access for nominating Directors CAN be a good thing if it’s used by investors to get control of underperforming management, as opposed to being used by special interest groups with political agendas unrelated to the performance of the company. Clawbacks of performance pay in the event of manipulated accounting results are also generally a good thing.

However, none of this has anything to do with the financial crisis. What’s noticeably absent is any proposal to align compensation on Wall Street with incentives for long term performance (as opposed to bet the farm and then retire with this year’s bonus before the whole thing implodes).

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