Legislation Includes 'Say-on-Pay' Measure To Give Shareholders A Vote On Lavish Executive Compensation Packages

Bill Also Includes Proxy Access And Requires Independent Board Chairmen

Schumer Joined By Officials From CalPERS, AFSCME at Announcement

WASHINGTON, DC—U.S. Senators Charles E. Schumer (D-NY) and Maria Cantwell (D-WA) announced Tuesday they have introduced a comprehensive “Shareholder Bill of Rights” that will increase accountability and oversight at publicly traded corporations. The legislation, which incorporates some proposals already being considered by the Securities and Exchange Commission (SEC), is aimed at empowering shareholders in order to curb the types of excessive risk-taking and runaway executive compensation that contributed to the nation’s economic recession.
“When you buy stock in a company, it should come with some peace of mind that the business is being run responsibly,” Schumer said. “During this recession, the leadership at some of the nation’s most renowned companies took too many risks and too much in salary, while their shareholders had too little say. This legislation will give stockholders the ability to apply the emergency brakes the next time the company management appears to be heading off a cliff. Millions of Americans who invested in the stock market have seen their safety net shredded by the risky behavior of corporate executives. When these companies go bust, it doesn’t just deplete the retirement savings of American workers, it can have disastrous ripple effects on the entire economy.”
 “Accountability to shareholders and investors is key to restoring confidence in our capital markets," Cantwell said. "Too many hard working Americans have seen their pension savings disappear because of the current financial crisis.  Financial institutions and corporate boards of directors took excessive risks with shareholders’ savings and lost, but these same executives are now walking away with lavish compensation packages.  This legislation will give those shareholders and pension fund investors a voice in the corporate board room so they can make sure the directors for the corporations they own are working for shareholders’ best long-term interests not just executives’ short-term gain. Institutional investors, like CalPERS and the Washington State Investment Board are responsible for the pension security of our public employees, teachers, school employees, law enforcement officers, firefighters and judges. Once this legislation is enacted, these institutional investors will have the tools they need to protect these workers’ assets.”
The “Shareholders’ Bill of Rights” comes amid a recession brought on in part by risky corporate behavior that went unchecked by company boards. The results have been calamitous. In 2009, the stock market dipped below 7,000 points for the first time since 1997 and, prior to its mild recovery in recent months, had lost more than 50 percent of its value compared to its 2007 high. Earlier this year, the once venerable insurance firm, AIG, recorded the largest quarterly loss in U.S. history. In turn, U.S. workers who report being “very confident” about their retirement savings hit the lowest level (13 percent) in the history of the Retirement Confidence Survey. In addition, a study by Hewitt Associates showed that the median 401(k) plan balance dipped from $79,600 in 2007 to $57,200 by the end of last year. The Federal Reserve estimates the total decline in household wealth to be around $11.2 trillion.
The “Shareholder Bill of Rights” includes the following provisions to empower shareholders and rein in excessive risk-taking by runaway corporate executives:
1.      It requires that all public companies hold an advisory shareholder vote on executive compensation.  By allowing shareholders to have a “say on pay,” companies are far less likely to award compensation packages that are excessively lavish or tied to risk-taking that is not good for the long-term health of the firm.
2.      It instructs the SEC to issue rules allowing shareholders to have access to the proxy form if they want to nominate directors to the board.  In order to make a nomination, shareholders will have to have owned at least 1% of a public company’s shares for at least two years. Schumer and Cantwell said it is essential that long-term shareholders have a real voice in selecting the men and women who sit on the boards of the companies they own.
3.      It requires board directors to receive at least 50% of the vote in uncontested elections in order remain on the board. It makes no sense for board members to be re-elected if a majority of shareholders cast their ballots against them.
4.      It requires all board directors to face re-election annually.  Schumer and Cantwell said there is no reason that directors at a well-run company should fear facing their shareholders every year.  So-called “staggered boards” just serve to insulate board members from the consequences of their decisions.
5.      It requires public companies to split the jobs of CEO and Chairman of the Board, and requires the Chairman to be an independent director.  It is vital that the Chairman of the Board, who sets the board’s agenda, should be someone who works closely with the CEO, but also brings a different perspective to the table.
6.      It requires that public companies create a board risk committee.  Today, the oversight of how companies manage their risks is most often a responsibility of the audit committee, which has enough responsibilities already without also having to focus on risk.  By creating separate risk committees, boards will never again be able to say they did not understand the risks that the firms they oversee were taking.
The introduction of the “Shareholders’ Bill of Rights” comes as the Securities and Exchange Commission considers giving shareholders greater power to nominate directors to corporate boards. Even though such action would represent a lawful exercise of the SEC’s authority, the business community is already threatening lawsuits if any steps are taken. Schumer and Cantwell’s legislation would give this proposed change the force of law and eliminate any debates over the agency’s authority.
The “Shareholders’ Bill of Rights” is supported by nearly 20 major pension funds, labor unions, and consumer groups such as the Consumer Federation of America. Schumer was joined at the announcement of the bill Tuesday by top officials from CalPERS, the nation’s largest public pension fund; the Council of Institutional Investors, the main association of public, union and corporate pension funds, who together have assets that exceed $3 trillion; and the American Federation of State, County and Municipal Employees (AFSCME), which is one of the nation’s largest unions.
“We applaud your leadership in the advocacy of shareowner rights in America and the ongoing effort to improve board accountability to shareowners,” said Joe Dear, Chief Investment Officer for CalPERS, in a letter to Schumer this week.  “We believe that stronger investor oversight is critically needed to restore trust and confidence in the integrity of the U.S. capital markets.”
“With these rights, stockholders will be able to protect themselves from the egregious CEO compensation practices that promote excessive risk taking and to hold directors accountable for their failure to monitor corporate decision making. Had these rights been in place years ago, they would have helped protect working families invested in the market through their pension systems and savings plan from the $11 trillion in wealth that has been destroyed by the economic meltdown,” said Richard Ferlauto, AFSCME’s Director of Corporate Governance and Pension Investment.
“Investor confidence is vital to maintaining a healthy and efficient marketplace, and that confidence has been sorely shaken," said New York State Comptroller Thomas P. DiNapoli, who is the sole trustee of the $122 billion New York State Common Retirement Fund. "Senator Schumer's efforts will give shareholders a greater voice in the nominating and electing of directors and the compensation of executives. This will help rebuild the sound, accountable management that is essential to restoring confidence in the public equity markets. Investors should have a stronger say over the behavior of corporate boards. The levels of oversight, risk management, and accountability should be calibrated to promote long-term shareholder value. As a long-term investor, the New York State Common Retirement Fund supports strengthening corporate governance provisions and bolstering shareholder rights.”
Below is a list of individuals and organizations that support the “Shareholder Bill of Rights.”
List of Supporting Organizations and Individuals
Colorado Public Employees Retirement Association
Connecticut State Employees Retirement System
The Consumer Federation of America
The Council of Institutional Investors
Massachusetts Pension Reserve Investment Management Board
Nell Minow, The Corporate Library
New Jersey Division of Investment
New State Investment Council (NJ)
New York City Board of Education Retirement System
New York City Employees Retirement System
New York City Fire Department Pension Fund
New York City Police Pension Fund
New York City Teachers Retirement System
New York State Common Retirement Fund
Service Employees International Union
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