Financial Reform Legislation Gives Shareholders More Say
Financial reform seems certain to usher in rules that shareholder advocates have been trying to win for decades as a way to rein in runaway executive pay and make corporate boards more responsive to shareholders.
That could be very good news for the roughly 70 percent of investors who hold company stocks in their investment portfolios.
Issues including better regulation of both financial and consumer services are part of the sweeping financial reform measure that's now being reconciled in
Although all the details won't be known until the reconciliation between the House and
"It's not going to turn things around immediately," said
There are three key measures in this part of the financial reform legislation, and they all focus on corporate directors, who are supposed to be shareholder representatives. The changes would give shareholders a bigger say in executive pay, as well as in the selection and reelection of company directors.
Boards of directors are expected to rein in and guide a company's management. They provide a company with an outside view of whether company policies are reasonable and in the best interest of the everyday people who own company stock.
Critics say, however, that current rules allow managers to stack their boards with cronies and yes men, who can become insensitive to shareholder interests.
What's proposed and how might it affect shareholders?
"Say on pay" would require companies to put executive pay policies, already approved by the directors, up for an annual vote of shareholders.
Such a vote would be advisory, so shareholders would not be able to nix an executive's bonus. The board also would have the right to ignore shareholder wishes. But if a pay plan were to get a high disapproval vote, it would send a clear signal to the directors that they were doing something wrong.
Most directors, once named to a company board, are routinely reelected. But another big change would revise today's system for reelecting directors. The current system allows directors to maintain their seats, even when shareholders vote against them.
"Majority vote" regulations proposed in the legislation would demand that every director receive "yea" votes from at least a majority of the company's shareholders. If a director failed to get a majority, he or she would be compelled to resign. The director could be retained only if other directors, by unanimous vote, determine that they need to keep the director and are willing to explain why.
About 80 percent of
So why is this needed? Of the 90 individuals who were not able to gain a majority shareholder vote in the last year, 50 remain on their boards, said
The third change would give shareholders more power to propose company directors not nominated by the company's current board.
Known as "proxy access," this provision would give shareholders the right to demand that such a director-nominee appear on the company's annual proxy statement along with the board's recommended nominees. Rees said this was perhaps the most important of the three measures.
What this provision would do is give the
These organizations contend that this would allow labor unions and other activists to elect incompetent or one-note candidates more interested in pushing an agenda than representing shareholders.
Most companies wouldn't suffer any upset from these rules, said Hodgson of the
All of these reform measures will mean nothing, however, if shareholders don't spend the time to become informed and vote on company directors and other shareholder issues, experts said.
If you're not sure how to vote, Web sites such as ProxyDemocracy.org and MoxyVote.com can provide at least a glimpse at how some institutional shareholders are voting.
Your vote makes a difference, added Allen, the
"One of the most important things a shareholder can do is vote," Allen said. "But it's a real problem to get them to do it."
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Financial Reform Legislation Gives Shareholders More Say
(c) 2010 Kathy Kristof