As I’ve pointed out before, one of the lower-profile issues included in the financial reform legislation that is currently being reconciled in conference committee is corporate governance reform, which is an attempt to rein in some of the perverse corporate incentives that contributed to the financial meltdown. This is an important thing to do, as just this week the Federal Reserve announced findings that the structure of pay packages on Wall Street still incentivizes too much risk.
One of the key problems in our current corporate governance system is shareholders (who are the owners of a company) can’t get their own candidates onto the ballot for election to a company’s board of directors. Currently, during an board election, a company sends out a “proxy” (ballot) with its preferred slate of candidates and bills the cost to the company, while “dissenting shareholders [must] pay up for mailing and publicity costs, sometimes in the millions of dollars,” to send out their own, separate ballot.
A provision that would have guaranteed investors “proxy access” was included in the House version of financial reform. The Senate, however, changed the provision to limit proxy access to investors holding 5 percent of a company’s shares. The Street’s Eric Jackson has a theory as to what happened:
Why did the Senate — unprovoked by the House — decide to insert this change into its own legislation? Sources have told me that both Senators Bayh and Mark Warner insisted on this new language after strong lobbying from the Business Roundtable. Apparently, both men threatened Sen. Dodd that they would vote against the financial reform bill without this new language, which would block cloture on the bill and slow down its passing.
According to the Huffington Post, the White House also lobbied for the higher threshold.
The problem, though, is that most investors don’t come anywhere close to owning 5 percent of a company. “We’re just horrified that the Senate would try to weaken language that was similar in both bills. To set such a high threshold makes the reform totally unworkable,” said Ann Yerger of the Council of Institutional Investors. As Ryan Grim pointed out, “the biggest pension funds are more likely to hit the half-percent threshold in rare cases.”
Former SEC chairman Arthur Levitt penned an op-ed in the Wall Street Journal today calling the Senate’s version of the provision “comically useless.” “The bill, already weakened by deal-making as it emerged from the Senate, has been bled dry of nearly every meaningful protection of investors,” he wrote.
Studies have shown that both total returns and share performance are better for companies with an investor presence on their board, which makes sense, as investors have a vested interest in the entire company’s performance, not just lining the pockets of executives. It doesn’t make sense for the Senate to water down what the House has done.