Today, the Subcommittee on Securities, Insurance and Investment of the Senate Committee on Banking, Housing & Urban Affairs held a hearing entitled “Protecting Shareholders and Enhancing Public Confidence by Improving Corporate Governance

Testifying before the Subcommittee were the following witnesses.

  • Meredith B. Cross , Director, Division of Corporation Finance, U.S. Securities and Exchange Commission (SEC)
  • John C. Coates IV, John F. Cogan, Jr. Professor of Law and Economics, Harvard Law School
  • Ann Yerger, Executive Director, Council of Institutional Investors (CII)
  • John J. Castellani, President, The Business Roundtable
  • J.W. Verret, Assistant Professor of Law, George Mason University School of Law
  • Richard C. Ferlauto, Director of Corporate Governance and Pension Investment, American Federation of State, County and Municipal Employees

Committee Chairman Christopher J. Dodd (D-CT) provided an overview of the purpose of the hearing, stating that shareholders need to be better empowered to hold corporate boards responsible and keep executive pay in line and that there should be increased shareholder input into corporate governance, annual meeting and majority voting requirements for the election of directors, shareholder endorsement of executive pay, independent compensation committees and mandatory risk management committees for public companies. Ranking Member Richard Shelby (R-AL), disagreed, noting that corporate law has been adequately handled by the states for over 200 years.

Senator Charles E. Schumer (D-NY), who introduced a shareholder bill of rights on May 19, stated that the focus, over the last year, has been on lapses in government regulation as a major contributor to the recent financial crisis and that there also needs to be a focus on the problems in corporate boardrooms. “Widespread failure of corporate governance has proved disastrous not just for individuals but also for the economy as a whole.” This is because taxpayers have had to bail out failed companies. He concluded, “The greatest damage occurs not when boards are too active but when they are not active enough.”

Ms. Cross described recent SEC proposals regarding corporate governance including a proposal to allow shareholders the ability to propose a limited number of director candidates and proposals in company proxy statements, increased disclosure requirements in proxy statements and say-on-pay vote requirements for public companies that have received but not repaid TARP funds. She also addressed the SEC prohibition on broker-dealers voting on behalf of their clients unless specifically instructed to do so, which was adopted on July 1.

Professor Coates said that risk taking may actually be in the interest of shareholders, particularly given the prospect of a government bail out should their company fail. For that reason, it may not be a good idea to give shareholders too much power in financial regulatory matters. There is no consensus in the academic world regarding the effects of corporate governance measures, and therefore, Professor Coates cautioned against rules that are fixed, mandatory or hard to change over time. He concluded with a summary of his views on some of the proposed reforms:

  • Academic research does support “say-on-pay” rules;
  • The evidence runs against eliminating staggered boards; and
  • There is no evidence as to what effect shareholder proxy access rules will have.

He said that Congress should still act on the shareholder proxy access issue, but that it should proceed cautiously given the lack of evidence.

Ms. Yeager favored majority voting for directors of public companies, shareholder proxy access and mandatory advisory votes on executive pay.

Mr. Castellani took issue with the idea that the most significant cause of the financial crisis was failures in corporate governance. He noted that many companies have already proactively adopted strengthened corporate governance measures. He cautioned that a one-size-fits all approach to corporate governance will not work. Each company should periodically review and update its corporate governance procedures to ensure they are tailored to each company’s needs. According to Mr. Castellani, state law is the best regulator of corporate governance because of its flexibility to address changing circumstances. He also testified that shareholders are empowered and do take actions to further their interests. He concluded that the SEC has an important role in making sure shareholders get the information they need in order to make good decisions.

Professor Verret stated that the proposed reforms do not necessarily address the financial crises and may have unintended consequences. The proposed reforms actually impede the shareholder voice because they do not give shareholders the option to opt out of the federal regulations. There is no evidence that executive compensation paid a role in the current crisis. There is not a difference in terms of executive pay between companies that have received TARP funds and those that have not. The government has a bad track record in producing corporate governance laws that are effective. The current economic crises occurred despite the adoption of the Sarbanes-Oxley Act in 2002.

Mr. Ferlauto stated that investors want Congress to take strong federal action. He was in favor of creating proxy access rights and “say-on-pay” rules. He said that SEC prohibition on broker-dealers voting on behalf of their clients unless specifically instructed to do so is absolutely essential.