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November 10, 2008 12:00 AM

Shareholders see victory in Obama administration

Barry B. Burr
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    Michael A. Marcotte
    Richard C. Ferlauto wants early action on say on pay.

    Corporate governance and executive compensation likely will become key parts of the initial legislative agenda of the Obama administration, giving the issues unprecedented political prominence and transforming shareholder power, corporate governance experts say.

    Topping the legislative wish list: proposals giving shareholders a say on executive compensation and giving them access to the corporate proxy.

    Meanwhile, observers expect a soon-to-be Democrat-dominated Securities and Exchange Commission to push through other measures that are favorable to shareholders.

    “I would be absolutely surprised if there is not a major piece of corporate governance legislation in the first 100 days of the Obama adminstration,” said Patrick McGurn, special counsel, executive vice president and director-corporate programs, RiskMetrics Group Inc., a New York-based risk management and corporate governance advisory company.

    “It shows how the issues have evolved and become populist” and ripe for Washington action, Mr. McGurn said. “This is unprecedented.”

    Added Charles M. Elson, professor of law, University of Delaware, and director of its John L. Weinberg Center for Corporate Governance: The election results “will mean an increase in government involvement, for better or worse, through the SEC and Congress.”

    Activists' hopes

    Corporate governance activists say they hope say on pay and access to the proxy — both long-time goals for many institutional investors — will be included in legislation backed by President-elect Barack Obama.

    “We hope our corporate governance agenda is incorporated in the new Obama administration agenda,” said Richard C. Ferlauto, director-pension and benefit investment policy at the American Federation of State, County and Municipal Employees, Washington, which has an $850 million staff pension fund active in corporate governance issues.

    “We hope for the new administration to move early on to support a CEO reform compensation package. The centerpiece of that is a say-on-pay vote. As part of a legislative package, we believe the shareholder right to review executive compensation through an advisory vote would be made more effective with proxy access,” allowing shareholders to use corporate proxy material to nominate directors. "So you can pair say on pay with the hammer to nominate directors to the compensation committee or any director,” Mr. Ferlauto explained.

    Amy Borrus, deputy director, Council of Institutional Investors, Washington, said the council has an extensive corporate governance agenda, fired up by the current financial crisis, which “represents a massive failure of oversight at all levels.”

    “Corporate governance should be part of any regulatory overhaul that’s coming down the pike,” including such issues as majority voting, shareholder access, broker voting of uninstructed shares, independent board chairmen, independent executive compensation advisers, shareholder advisory voting on pay, severance pay limits, and “a strong clawback provision that at a minimum should require return of unearned compensation,” she said.

    A clawback involves recouping senior executive incentive compensation, awarded based on meeting performance targets that were subsequently cut or wiped out in corporate financial restatements. As the clawback idea goes, if it isn't earned, it must be returned.

    CII “isn’t necessarily seeking legislation” to enact corporate governance changes, Ms. Borrus added. “In some cases we think the board should do this. But we want make use of the bully pulpit prodding corporations” to make changes on their own.

    In terms of which corporate governance change the CII favors from legislation or regulation or corporate-shareholder action, Ms. Borrus said, “We haven’t thought through how each of those issues should be pursued.”

    The AFL-CIO plans to pursue the legislative and regulatory agenda “it has sought since the beginning of President Bush’s second term in 2005: say on pay, (proxy) access, SEC authority to register hedge funds…clawbacks” on unearned incentive compensation, said Damon A. Silvers, associate general counsel of the labor union coalition.

    Some experts, such as Mr. Elson, would prefer change to occur through the shareholder process. “When the federal government gets involved, there are typically unintended consequences. It’s better to do it internally than have the government do it.”

    Mr. Elson pointed to the example being set by Schering-Plough Corp. The Kenilworth, N.J.-based pharmaceutical company plans to survey all its shareholders on executive and director pay, asking specific questions that will be included in the company’s forthcoming 2009 proxy statement.

    The results of the survey will be discussed in the company’s proxy 2010 statement the following year. Company officials are still preparing the questions to be used in the survey. Richard H. Koppes, attorney at the Jones Day law firm in San Francisco and former general counsel of the $197.6 billion California Public Employees’ Retirement System, Sacramento, is overseeing the process for the company.

    “This survey is evidence of our commitment to seek and consider shareholder input,” Pat Russo, chair of the board’s nominating and corporate governance committee, said in a statement.

    Congressional action “would clearly be a shift away from private ordering of corporate governance,” Mr. McGurn said. “It would lead to a one-size-fits-all approach,” which might not be suitable for different corporate organizations. But when private action isn’t getting things done, government will step in. “The federal government is going to fill the void,” Mr. McGurn said.

    Changes at the SEC also will advance a corporate governance agenda.

    With Mr. Obama likely naming a Democrat as chairman of the SEC to replace Christopher Cox, who is expected to resign early next year, Democrats will enjoy a 3-2 majority. The new SEC chief likely will end the logjam of proposals, especially ones restricting brokers from voting uninstructed shares in director elections and proxy access.

    “A number of issues at the SEC can be freed from the regulatory purgatory they have been in,” Mr. McGurn said.

    Using the financial market bailout legislation as a guide, clawbacks could be toughened to cover more executives, regardless of whether they actively participated in corporate fraud, which would go beyond the Sarbanes-Oxley Act requirements, limiting the return of unearned incentive pay to the two top officers of a company, Mr. McGurn said.

    Mr. McGurn also sees possibly more restrictions on severance pay and limiting tax-favored treatment of deferred compensation, which might come in for congressional action.

    Mr. Ferlauto would like to extend clawbacks “to include high-flying traders,” such as at investment banks when their actions lead to financial losses at the companies. Proposals requiring clawbacks and restricting golden parachute severance payments would expand “many of the reforms and principles in the bailout bill,” he said. He also favors congressional action to limit the tax advantage of executive deferred compensation programs.

    “We’ve reached the tipping point when it comes to executive compensation, and that issue has reach the top of the concerns of Americans,” Mr. Ferlauto said.

    AFSCME’s “preference is to negotiate voluntary solutions with companies,” Mr. Ferlauto said. “But we haven’t seen much accommodation. Time is running out.”

    Both AFSCME and AFL-CIO officials want the SEC to remain an independent agency, albeit with more resources and tougher enforcement capabilities, and have the Commodity Futures Trading Commission merged into it, said Messrs. Ferlauto and Silvers.

    “We need to merge the CFTC into the SEC to regulate and oversee anything connected to a public security,” Mr. Silvers said.

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