Yesterday, the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises held a hearing entitled "Corporate Governance and Shareholder Empowerment." The hearing focused on several bills introduced in the House intended to reform corporate governance, including the Shareholder Empowerment Act of 2009 and the Corporate Governance Reform Act of 2009. In opening the hearing, Chairman Paul Kanjorski (D-PA) stated that “all too frequently corporate management and boards failed to consider the long-term interests of their shareholders” and that “Congress must act to democratize corporate governance rules so that investors have a greater say in the companies that they own.”

The panel consisted of following witnesses:

  • Steven D. Irwin, Pennsylvania Securities Commissioner
  • Gregory W. Smith, Chief Operating Officer and General Counsel, Colorado Public Employees’ Retirement Association
  • Thomas F. Brier, Deputy Chief Investment Officer and Director of Corporate Governance, Pennsylvania State Employees’ Retirement System
  • Alexander M. Cutler, Chairman and Chief Executive Officer, Eaton Corporation and Chair, Business Roundtable Corporate Leadership Initiative
  • Brandon J. Rees, Deputy Director, Office of Investment, AFL-CIO
  • Robert E. Smith, Vice President, Deputy General Counsel, and Assistant Secretary, NiSource on behalf of the Society of Corporate Secretaries and Governance Professionals
  • James Allen, Head of Capital Markets Policy, CFA Institute

Commissioner Irwin began by urging Congress to restore public confidence in the securities markets through significant financial services regulatory reform. Specifically, he endorsed the SEC’s shareholder proxy access proposal and the say-on-pay provisions of the financial regulatory reform bill that passed the House late last year. Gregory Smith echoed Commissioner Irwin’s support for corporate governance reform, arguing that “in order to restore market confidence and ensure that such a crisis never happens again, regulators and investors must be given stronger market-based tools necessary to guarantee robust oversight and meaningful accountability of corporate managers and directors.”

Similarly, Thomas Brier stated his concern that shareholders currently do not have sufficient ability to influence the management of the companies they own stock in. Mr. Brier specifically referenced the federal proxy rules, and the lack of majority voting rules for directors in most public companies as being impediments to shareholders’ ability to hold boards of directors accountable.

Brandon Rees also testified as to the need for greater influence of shareholders on compensation, as well as the ability of shareholders to access a company’s proxy statement. James Allen supported the say-on-pay provisions in the proposed legislation but warned against provisions included in the bills that would require the SEC to vet board nominees and require independent chairmen of companies’ boards.

Alexander Cutler, speaking in his role as Chair of the Business Roundtable Corporate Leadership Initiative, took issue with the premise that corporate governance was a significant cause of the financial crisis. Instead, he said, the crisis “likely stemmed from a variety of complex financial factors, including major failures of a regulatory system, over-leveraged financial markets and a real estate bubble.” Mr. Cutler argued that a better approach would be for Congress to focus on fixing the shareholder communication system, updating the proxy voting system, and addressing the undue influence of proxy advisory firms. Along the same lines, Robert Smith argued that true shareholder empowerment is allowing shareholders to choose what is best for their particular company.