Financial Reform Watch

The Say on Pay Train is Moving -- The House Strikes First

The House of Representatives took the first steps towards enacting President Obama’s sweeping financial reform proposal today, voting 237-185 to approve the Corporate and Financial Institution Compensation Fairness Act of 2009 (H.R. 3269) requiring all publicly-held companies to hold non-binding annual shareholder votes and expanding SEC authority over incentive-based compensation structures. Although the bill’s passage represents a major victory for the president and the Democratic Congress, it may prove to be the least controversial element of financial reform, as stark divisions remain on both sides of the aisle concerning the creation of a Consumer Financial Protection Agency and an expanded role for the Fed as a systemic risk regulator.

Unsurprisingly, this afternoon’s vote fell largely along party lines, with only two GOP members supporting the measure and 16 Democrats opposing. The House also approved, by a vote of 242-178, an amendment offered by Chairman Barney Frank (D-MA) that struck language prohibiting “clawbacks ” of executive compensation approved by shareholders. The amendment also inserted language that would prohibit clawbacks of incentive-based pay if a compensation agreement was in effect prior to this bill's enactment.

As the executive compensation legislation moves to the other side of the Capitol, conventional wisdom dictates that the Senate saucer will ultimately cool the House’s hot teacup – but this historical assumption may not apply for this bill.  The executive compensation debate was further inflamed yesterday following the release of New York Attorney General Andrew Cuomo's report showing that the nine largest U.S. banks paid out $32.6 billion in bonuses in 2008 -- a year in which total losses reached $81 billion and nearly $200 billion of taxpayer money was directly injected through the Troubled Asset Relief Program (TARP).  Moreover, a handful of lawmakers on the Senate Banking, Housing and Urban Affairs Committee currently facing tough re-election bids in 2010 – including Committee Chairman Christopher Dodd (D-CT) – will likely avoid putting themselves in a vulnerable political position by advocating reforms that deviate too much from the House legislation.

At a Senate Banking Committee subcommittee hearing Wednesday on corporate governance, there was a sense of inevitability about say on pay. The Securities and Exchange Commission (SEC) has already proposed say-on-pay rules for TARP recipients; while Sen. Chuck Schumer (D-NY), a senior member of the Senate Banking Committee, eagerly promoted his Shareholder Bill of Rights Act of 2009, which is even broader than the House legislation.

One aspect of the legislation that may receive more consideration in the Senate is the state issue. With the possible exception of Sarbanes-Oxley legislation in 2002, corporations law until now has largely, if not exclusively, been a province of the states. This has been true for over a century and was confirmed by the U.S. Supreme Court in 1987 in CTS Corp. v. Dynamics Corp, where the court asserted that a state has a legitimate “interest in promoting stable relationships among parties involved in the corporations it charters, as well as in ensuring that investors in such corporations have an effective voice in corporate affairs.” Several lawmakers and witnesses at Wednesday’s Senate hearing praised the Delaware Court of Chancery, which, with 70 percent of all publicly traded companies based in Delaware, handles the majority of corporate disputes. Delaware, which has the most at stake, only has one representative in the House, but its weight equals that of every other state in the Senate. It can also claim the president of the senate: Vice President Joe Biden (D-DE). Whether Vice President Biden enters into this debate or not, there are likely to be more changes to say on pay legislation before its eventual enactment.


Brief Overview of the Current Say on Pay Bills

H.R. 3269 as approved by the full House -- 

  • Requires public companies to hold annual, non-binding share holder votes on executive compensation packages and also authorize the Securities and Exchange Commission to “exempt certain categories” (e.g. smaller companies) from say on pay
  • Imposes stricter standards to insure the independence of corporate compensation committees of publicly traded companies
  • Authorizes financial regulators to prohibit incentive-based compensation structures at covered financial institutions
  • Directs the GAO to determine if there is any link between compensation structures and “excessive risk taking”
  • Subjects Fannie Mae and Freddie Mac to the same executive compensation regulations that apply to covered financial institutions
  • Exempts financial institutions with under $1 billion in assets from the new regulations covering incentive-based compensation structures

Sen. Schumer’s Shareholder Bill of Rights (S. 1074) sets out to achieve the following six goals –

  • All public companies must hold advisory shareholder votes on executive compensation and golden parachutes.
  • Grant long term shareholders (who have owned at least one percent of a company’s shares for a minimum of two years) access to a public company’s proxy form if they wish to nominate someone to the board of directors.
  • Require members of the board of directors to receive at least 50 percent of the vote in uncontested elections in order to retain their seats.
  • Require all directors to be re-elected annually and eliminate staggered board terms.
  • Split the roles of Chairman of the Board and Chief Executive Officer so that the Chairman is an independent director, not part of management.
  • Require company boards to create separate risk committees, separate and apart from audit committees.


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