The SEC and US politicians want shareholders to have more say, so we may not have to over-react with regulation

We have noted in a past article (see HERE) that if the US fixed its governance then it would save the rest of the world having to over-respond in attempts to constrain executive pay.  So we are happy with the trend revealed below.

The US SEC is planning to propose new rules that would allow pension funds and individual shareholders alike to shape executive compensation and nominate who sits on corporate boards. The rules would allow shareholders only at least 1 percent to vote directly on who should sit on the board. The percentage would be higher for smaller companies.

Though the SEC is just proposing the rules today, they are likely to pass after a comment period. Three of the agency’s five commissioners support proxy access.

Interestingly, the Chairman of the SEC, Mary Schapiro, echoing concerns also expressed in the Productivity Commission background document, said in a recent on-line interview that:

“I am concerned that executive compensation has, for a number of years, become disconnected from actual long-term company performance. I worry that the structure of compensation has driven executives to make decisions that have significantly increased company risk — without a full understanding by either shareholders or boards of the impact of additional risk on the company’s long-term financial condition. While issues recently have been most pronounced in the financial services industry, they appear throughout the market.”

Senator Charles Schumer introduced a bill that would require companies to hold shareholder votes each year on the compensation of top executives and seek approval from investors for “golden parachutes” – pay packages given to executives upon departure.

Under the bill, both votes would be nonbinding. The measure also calls for the separation of the role of chairman and chief executive, and instructs the SEC to issue rules that would give shareholders more power to nominate directors on corporate boards.

The US Treasury is expected to issue long-awaited guidelines soon on how to limit pay for executives at firms that have received government funds. The House and Senate, meanwhile, are working on a proposal for broad financial regulatory reform that is expected to address executive compensation in ways expected to be in line with FSF guidelines (see HERE).

US politicians, like the Australian government, have identified what they see as excessive executive compensation practices that rewarded short-term profits and risk-taking as a cause of the financial crisis.

Senator Schumer’s bill also requires that corporate directors receive a majority of votes cast in uncontested elections. It would also ban “staggered” boards and require all directors to face re-election annually.

© Guerdon Associates 2024
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