Post by jannikki on Dec 1, 2006 22:15:42 GMT -4
The coming crackdown on CEOs
When Democrats take control of Congress in January, Rep. Barney Frank will set the agenda on policies that affect public companies. He's pushing for extraordinary reforms and supersized shareholder power -- including say over executive pay.
By Michael Brush
Democrats want to bring democracy to the boardroom. And -- more bad news for CEOs -- to the corner office.
After six years in which Republicans have run the show in Washington -- and during which CEO salaries have climbed 209% -- Democrats in Congress see executive-compensation reform as one way of flexing their populist muscles. Their goal is to give shareholders more say in how corporations are run and, more specifically, how top executives are paid.
Spearheading those efforts will be Rep. Barney Frank of Massachusetts. In January, when his party once again takes control of the House and Senate, he'll take over as chairman of the House Committee on Financial Services, a key panel for setting policies that affect public companies, the stock markets and investors.
In what would be a major power shift inside corporations, Frank hopes to give shareholders an absolute right to reject bloated compensation -- everything from salaries, bonuses, options and huge pensions to private use of the corporate jet. Frank says change is sorely needed because boards are too often stacked with management cronies who fail at their assigned task of looking out for shareholders.
"Boards of directors cannot be relied on because too many are themselves CEOs or they have been hand-picked by CEOs," says Frank, who spoke with me earlier this week. "Directors can do some things well. But being a check on CEOs is not one of them."
Extraordinary reforms
Frank's wish list goes far beyond whatever reformers had thought possible. Shareholder activists have seen reducing the size of bloated executive retirement packages as their best hope for change. Frank wants that, but also much more.
"It is extraordinary because it would get the shareholder and the federal government into the internal operations of a corporation to a much greater degree than ever before," says Patrick McGurn, special counsel for Institutional Shareholder Services, a company that advises institutional investors. "It goes to the core of who is responsible for running the day to day operations of corporations." Because the change would be so radical, McGurn is skeptical of its success.
Here's a quick look at Frank's hoped-for reforms:
Access to the boardroom
Frank wants the Securities and Exchange Commission to give shareholders more power to change corporate rules on how boards are elected. Frank favors allowing shareholders to tinker with corporate bylaws so that they can get their own board candidates on proxies paid for by companies.
This could go a long way to breaking up the cozy relationship among board members and executives. Right now, board candidates are typically selected by nominating committees made up of other board members and management. So cracking the chummy insider network is tough for outsiders who want a bigger say in how a company is run.
The issue surfaced recently in the courts when American International Group (AIG, news, msgs) challenged a proposal from the American Federation of State, County and Municipal Employees (AFSCME) that would give shareholders a binding vote on changes in the rules behind board nominations.
The union wants changes to nomination rules so that shareholders owning more than 3% of AIG stock would have the right to put board candidates up for election on the company proxy.
AIG barred the proposal from its proxy, and the SEC sided with the insurance company. To AFSCME lawyers, that looked like a big shift away from a policy set by the SEC 30 years ago. The union challenged the SEC decision, and a federal appeals court told the SEC to clarify its rules.
Frank says he's leaning on SEC Chairman Christopher Cox to side with AFSCME and let the labor union put the proposed changes to election rules to vote on AIG's proxy. "I am urging Cox to allow shareholders to put that on the proxy. You should be able to force a vote on that." The change fits in squarely with Frank's agenda for more shareholder democracy.
He suggested Congress might step in to take action if the SEC falls short. He also urged business -- which has been fighting the change tooth and nail -- to back off. "If you want the benefits of being a public corporation, then we have a right to condition it," says Frank. "Business should see shareholder democracy as alternative to imposed regulation."
Greater pay transparency
Frank believes new SEC rules requiring better disclosure of executive pay -- which we'll start seeing in proxy statements rolling out in December -- will go a long way to making it easier for investors to understand how much bosses make. But he wants to go a step further by making companies unveil the details behind performance incentive packages.
Right now, companies reveal the performance metrics they use in awarding incentive pay, such as growth in net company income. But the companies don't reveal the actual targets the executives have to hit and say that doing so would reveal too much proprietary information. Shareholder advocates say this prevents investors from knowing whether boards are structuring fair pay packages, or excessive ones. "It's like having a car without gasoline. It doesn't get you where you want to go," says McGurn.
Frank would stop short, however, of forcing companies to reveal salaries of extremely well-paid employees outside of the executive ranks, a proposal dubbed the "Katie Couric rule" because it would reveal the salaries of stars. "Statistically, there are not many of them," says Frank, so the change isn't worth it.
Claw backs
Frank also wants to make it easier to force executive to give back incentive pay when companies restate earnings shortly after a manager gets a bonus for hitting performance targets. Whenever this scenario plays out, it suggests managers simply cooked the books to hit their targets. So they should have to give up their incentive pay.
"There is often a correlation between heavy incentives and need to restate results later," says Frank. Sarbanes-Oxley, enacted in 2002 to improve corporate accountability, has claw-back provisions when restatements result from fraud. But Frank wants to go further and force executives to give back incentive pay even when there are significant restatements not caused by obvious fraud.
Sarbanes-Oxley
Section 404 of the Sarbanes-Oxley Act of 2002 requires publicly traded companies to assess the controls they have in place to ensure that their financial reporting is reliable. Many companies complain the rules are too strict and too expensive to follow.
To help ease the burden, Frank wants regulatory bodies like the SEC and the Public Company Accounting Oversight Board to reform the implementation of Sarbanes-Oxley to ease the burden. "We want to see a reduction across the board but with particular attention to problems with small companies," says Frank. He's opposed to any outright changes in the law itself.
Regulation of hedge funds
Frank, who is more stock-market friendly than many Democrats, doesn't see the need for dramatic new regulation of hedge funds. He points out that the hedge fund Amaranth Advisors didn't create any broad systemic problems in the market when it collapsed a few months ago. "The one thing I think we should be looking at is potential problem of pension funds getting in over their head," says Frank. "But by and large I am not opposed to rich people making bad decisions."
At the time of publication, Michael Brush did not own or control shares of any of the equities in this column
articles.moneycentral.msn.com/Investing/CompanyFocus/TheComingCrackdownOnCEOs.aspx
When Democrats take control of Congress in January, Rep. Barney Frank will set the agenda on policies that affect public companies. He's pushing for extraordinary reforms and supersized shareholder power -- including say over executive pay.
By Michael Brush
Democrats want to bring democracy to the boardroom. And -- more bad news for CEOs -- to the corner office.
After six years in which Republicans have run the show in Washington -- and during which CEO salaries have climbed 209% -- Democrats in Congress see executive-compensation reform as one way of flexing their populist muscles. Their goal is to give shareholders more say in how corporations are run and, more specifically, how top executives are paid.
Spearheading those efforts will be Rep. Barney Frank of Massachusetts. In January, when his party once again takes control of the House and Senate, he'll take over as chairman of the House Committee on Financial Services, a key panel for setting policies that affect public companies, the stock markets and investors.
In what would be a major power shift inside corporations, Frank hopes to give shareholders an absolute right to reject bloated compensation -- everything from salaries, bonuses, options and huge pensions to private use of the corporate jet. Frank says change is sorely needed because boards are too often stacked with management cronies who fail at their assigned task of looking out for shareholders.
"Boards of directors cannot be relied on because too many are themselves CEOs or they have been hand-picked by CEOs," says Frank, who spoke with me earlier this week. "Directors can do some things well. But being a check on CEOs is not one of them."
Extraordinary reforms
Frank's wish list goes far beyond whatever reformers had thought possible. Shareholder activists have seen reducing the size of bloated executive retirement packages as their best hope for change. Frank wants that, but also much more.
"It is extraordinary because it would get the shareholder and the federal government into the internal operations of a corporation to a much greater degree than ever before," says Patrick McGurn, special counsel for Institutional Shareholder Services, a company that advises institutional investors. "It goes to the core of who is responsible for running the day to day operations of corporations." Because the change would be so radical, McGurn is skeptical of its success.
Here's a quick look at Frank's hoped-for reforms:
Access to the boardroom
Frank wants the Securities and Exchange Commission to give shareholders more power to change corporate rules on how boards are elected. Frank favors allowing shareholders to tinker with corporate bylaws so that they can get their own board candidates on proxies paid for by companies.
This could go a long way to breaking up the cozy relationship among board members and executives. Right now, board candidates are typically selected by nominating committees made up of other board members and management. So cracking the chummy insider network is tough for outsiders who want a bigger say in how a company is run.
The issue surfaced recently in the courts when American International Group (AIG, news, msgs) challenged a proposal from the American Federation of State, County and Municipal Employees (AFSCME) that would give shareholders a binding vote on changes in the rules behind board nominations.
The union wants changes to nomination rules so that shareholders owning more than 3% of AIG stock would have the right to put board candidates up for election on the company proxy.
AIG barred the proposal from its proxy, and the SEC sided with the insurance company. To AFSCME lawyers, that looked like a big shift away from a policy set by the SEC 30 years ago. The union challenged the SEC decision, and a federal appeals court told the SEC to clarify its rules.
Frank says he's leaning on SEC Chairman Christopher Cox to side with AFSCME and let the labor union put the proposed changes to election rules to vote on AIG's proxy. "I am urging Cox to allow shareholders to put that on the proxy. You should be able to force a vote on that." The change fits in squarely with Frank's agenda for more shareholder democracy.
He suggested Congress might step in to take action if the SEC falls short. He also urged business -- which has been fighting the change tooth and nail -- to back off. "If you want the benefits of being a public corporation, then we have a right to condition it," says Frank. "Business should see shareholder democracy as alternative to imposed regulation."
Greater pay transparency
Frank believes new SEC rules requiring better disclosure of executive pay -- which we'll start seeing in proxy statements rolling out in December -- will go a long way to making it easier for investors to understand how much bosses make. But he wants to go a step further by making companies unveil the details behind performance incentive packages.
Right now, companies reveal the performance metrics they use in awarding incentive pay, such as growth in net company income. But the companies don't reveal the actual targets the executives have to hit and say that doing so would reveal too much proprietary information. Shareholder advocates say this prevents investors from knowing whether boards are structuring fair pay packages, or excessive ones. "It's like having a car without gasoline. It doesn't get you where you want to go," says McGurn.
Frank would stop short, however, of forcing companies to reveal salaries of extremely well-paid employees outside of the executive ranks, a proposal dubbed the "Katie Couric rule" because it would reveal the salaries of stars. "Statistically, there are not many of them," says Frank, so the change isn't worth it.
Claw backs
Frank also wants to make it easier to force executive to give back incentive pay when companies restate earnings shortly after a manager gets a bonus for hitting performance targets. Whenever this scenario plays out, it suggests managers simply cooked the books to hit their targets. So they should have to give up their incentive pay.
"There is often a correlation between heavy incentives and need to restate results later," says Frank. Sarbanes-Oxley, enacted in 2002 to improve corporate accountability, has claw-back provisions when restatements result from fraud. But Frank wants to go further and force executives to give back incentive pay even when there are significant restatements not caused by obvious fraud.
Sarbanes-Oxley
Section 404 of the Sarbanes-Oxley Act of 2002 requires publicly traded companies to assess the controls they have in place to ensure that their financial reporting is reliable. Many companies complain the rules are too strict and too expensive to follow.
To help ease the burden, Frank wants regulatory bodies like the SEC and the Public Company Accounting Oversight Board to reform the implementation of Sarbanes-Oxley to ease the burden. "We want to see a reduction across the board but with particular attention to problems with small companies," says Frank. He's opposed to any outright changes in the law itself.
Regulation of hedge funds
Frank, who is more stock-market friendly than many Democrats, doesn't see the need for dramatic new regulation of hedge funds. He points out that the hedge fund Amaranth Advisors didn't create any broad systemic problems in the market when it collapsed a few months ago. "The one thing I think we should be looking at is potential problem of pension funds getting in over their head," says Frank. "But by and large I am not opposed to rich people making bad decisions."
At the time of publication, Michael Brush did not own or control shares of any of the equities in this column
articles.moneycentral.msn.com/Investing/CompanyFocus/TheComingCrackdownOnCEOs.aspx