In the last year, we’ve talked a great deal about the failures of regulation and government oversight in the financial system. However, in many instances, equally important were failures of internal oversight: Compensation packages that rewarded short term actions but not long-term thinking; executives who encouraged risk-taking that they did not understand; and boards that did not do their most important jobs – prioritizing the long-term interests of their firms, their employees and their shareholders, and carefully overseeing management.
In other words, there was a widespread failure of corporate governance that has proven to be disastrous not just for individual businesses, but for the economy as a whole. During this recession, the leadership at some of the nation’s most renowned companies took too many risks and too much in salary, while their shareholders had too little say.
That’s why Senator Cantwell and I yesterday introduced a new bill called the Shareholder Bill of Rights. We believe this bill is vital to improving the financial security of American families as well as the health of the broader economy and will go a long way to making sure that these sorts of failures do not happen again. The bill contains six key components:
First, it would require that all public companies hold an advisory shareholder vote on executive compensation. By allowing shareholders to have a ‘say on pay’, we are far less likely to see compensation packages that reward myopic focus on short-term profits, without any attention to ballooning long-term risks.
Second, the SEC would be instructed to issue rules allowing shareholders to have access to the proxy form if they want to nominate directors to the board. In order to make a nomination, shareholders would have to have owned at minimum 1% of a public company’s shares for at least two years. We think this is essential to making sure that long-term shareholders have a real voice in selecting the men and women who sit on the boards of the companies they own.
Third, the bill would require board directors to receive at least 50% of the vote in uncontested elections in order remain on the board. It makes no sense for board members to be re-elected if a majority of shareholders casting ballots vote against them.
Fourth, all board directors would be required to face re-election annually. ‘Staggered boards’ just serve to insulate board members from the consequences of their decisions.
Fifth, the bill would require public companies to split the jobs of CEO and Chairman of the Board, and requires the Chairman to be an independent director. We think it is vital that the Chairman of the Board, who sets the board’s agenda, should be someone who works closely with the CEO, but also brings a different perspective to the table.
Sixth, and finally, public companies would be required to create a separate risk committee of the board. Today, the oversight of how companies manage their risks is most often a responsibility of the audit committee, whose members have enough responsibilities as it is without also having to focus on risk. By creating separate risk committees, boards will never again be able to say they did not understand the risks that their firms were taking.
Many of the elements of this bill have already been put in place by some of our leading corporations – indeed, for many corporations, these are already best practices. It’s in companies that were not accountable – what we saw, for example, at AIG, or at Bear Stearns – where we saw the real problems. Stockholders should have the ability to apply the emergency brakes the next time the company’s management appears to be driving off a cliff – this legislation will give it to them.
That is why the bill is supported by nearly 20 major pension funds, labor unions, and consumer groups, including the AFL-CIO, AFSCME, SEIU, CalPERS, the Council of Institutional Investors, Consumer Federation of America and all the major New York pension funds.
However, this legislation is also opposed by some very powerful special interests such as the U.S. Chamber of Commerce whose spin machine is already in full effect.
I hope you, like so many others, will support this effort to create more accountability, more transparency, and ultimately more long-term stability and profitability within the corporations that are so vital to the health, well-being, and prosperity of the American people and our economy.
I look forward to reading your comments and will be around for a while to take some of your questions.