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29 Apr. 2010 | Comments (0)

Whether or not you have been watching the Goldman Sachs “synthetic CDOs” hearings, it has become more and more clear that the corporate governance parts of the legislation will remain when the financial regulatory reform is finally passed. Let’s be honest, those will have the most effect on public boards. Sure, the regulation of the derivatives market, creation of a consumer financial protection agency and instituting the so-called Volcker Rule (named after former Fed Chair Paul Volcker), which would limit certain investment practices such as swaps and derivatives by banks, could be felt by non-financial companies. But will they really change how public boards operate? I bring up those three parts of the financial overhaul legislation because they are being cited as the big stumbling blocks by Republicans, who this morning relented after blocking the bill from a floor vote for three days. And in the end those parts will either be modified or left out of the bill. As most of you are probably aware, the Senate Democrats have been short the necessary 60 votes needed to officially start time-limited debate on the bill. The political fight between both parties will likely go on for the next six weeks, leading up to the Memorial Day recess. With that said, I thought it made sense to focus on the corporate governance parts of the legislation and draw your attention to some law firms’ client memos. As a reminder, in the corporate governance area, the bill would:
  • Give shareholders an advisory vote on executive pay
  • Give shareholders proxy access to nominate directors
  • Call for majority vote in uncontested elections
  • Require companies to disclose chair and CEO structure
  • Establish standards calling for independent compensation consultants
  • Establish clawback language for executive compensation based on inaccurate financial statements.
Additionally, I thought it was noteworthy that the Senate version of the bill does not allow exemptions in all but one corporate governance area. It allows the SEC to exempt small issuers from the majority voting in uncontested elections requirement if the agency “deems necessary and appropriate in the public interest or for the protection of investors.” Gibson, Dunn & Crutcher LLP published Financial Reform: 2010, Working Summary No. 1 – Washington Report on Financial Institutions on April 2. Under the subsections on Accountability and Executive Compensation and Strengthening Corporate Governance of the section called Investor Protections and Improvements to the Regulation of Securities, the firm spells out the requirements. It cites the sections of the proposed law and describes what each section calls for and whether or not SEC regulations are needed. As the bill is amended and finally reconciled with the House version, expect Gibson and Dunn to update its working summary. Shearman & Sterling came out with a client memo on Monday (Global Financial Regulatory Reform Proposals: An Overview [version 2]) that not only provides a synopsis of the financial reform proposals in the U.S., but also around the world. The firm points out that there are two main objectives for improving the regulatory environment worldwide: “to decrease the likelihood of a similar financial crisis and to ensure the costs of any future failure are not borne by taxpayers but by the failing bank and the financial sector more generally.” In a 69-page report, Shearman & Sterling compares the various reform proposals in chart form. The firm breaks the comparisons down into such areas as restructuring of financial institutions, custody/client money, supervisory infrastructure (systemic risk councils), capital requirements, liquidity, corporate governance, remuneration (executive compensation), OTC derivative markets, credit rating agencies and short selling. It looks at main proposals from the U.S., United Kingdom, European Union and international (G-20, etc.), their next steps and expected timeframe.
  • About the Author:Gary Larkin

    Gary Larkin

    Gary Larkin is a research associate in the corporate leadership department at The Conference Board in New York. His research focuses on corporate governance, including succession planning, board compo…

    Full Bio | More from Gary Larkin


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