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May 26, 2010
Investors and Shareowners Applaud Senate Passage of Financial Reform Bill
    by Robert Kropp

Corporate governance provisions would improve accountability by management, while consumer protection provisions will help stabilize small businesses.


Last week's passage by the US Senate, by a vote of 59-39, of the Restoring American Financial Stability Act of 2010 was a signal achievement by a body not currently known for carving out decisive legislation. While the fight is not yet over—a conference committee that will iron out the differences between the House and Senate versions of the bill hopes to have completed its work within a month—the provisions included in the bill will, when enacted, protect consumers and small business, and empower investors and shareowner activists.

The temptation for Senators to ignore the voices of Americans angry over the central role of the financial industry in the financial crisis and the recession must have been great. As a recent
report by the Campaign for America's Future indicates, Wall Street spent $1.4 million a day in lobbying Congress, and hired over 240 former government insiders as lobbyists.

According to the report, "The six biggest banks – Goldman Sachs, Bank of America, JPMorgan Chase, Citigroup, Morgan Stanley, and Wells Fargo – account for a disproportionate share of this activity."

The report continued, "The six big banks and their trade associations have spent close to $600 million since the first major federal bailout of Bear Stearns in March 2008 on lobbying, trade association activity and political contributions."

Following the Senate's passage of the bill, Heather Booth, the Director of
Americans for Financial Reform, stated, "The Senate has resisted these forces, standing with the 8 million who lost their jobs and countless other Americans who lost their homes to foreclosure, savings and pensions because of the irresponsible actions on Wall Street. Today they said no more, holding Wall Street accountable and taking action to prevent another financial crisis."

Many of the provisions included in the bill were greeted with enthusiasm by sustainability investors and shareowner activists, who found acknowledgement in the bill for their years-long efforts to improve corporate governance and support small businesses.

Important provisions addressing corporate governance included proxy access. The bill as passed by the Senate gives the Securities and Exchange Commission (SEC) clear authority to authorize the right of shareowners to nominate candidates for corporate boards of directors.

SocialFunds.com spoke with Peter DeSimone, who is the Director of Programs at the
Social Investment Forum (SIF), about the implications of the proxy access provision.

"Most director slates are put forth by management," DeSimone said. "For shareholders to nominate their own directors today, they would have to enter into a very costly proxy contest. Not many shareholders will do it, because it is such a costly proposition. Proxy access facilitates director nominations going forward, which is another way to increase accountability by the board and management, and oversight of them."

DeSimone continued, "Last year the SEC did come up with its own rules for proxy access and put them out for comment. There were a lot of concerns about possible legal challenges to the rules. With this clear legislative mandate, it is less likely that the SEC will have costly legal battles with corporations and other interests."

For members of the Social Investment Forum, the most important provision on corporate governance included in the Senate bill addresses a majority voting standard, according to DeSimone. In recent years, many publicly owned corporations have adopted majority voting standards, often in response to shareowner engagement on the issue.

"Right now, board members at most corporations are still elected on plurality voting standards," DeSimone said. "As many of them are uncontested, that means all they need is one vote to get elected to the board. With the majority voting standards, if nominees do not get a majority of the vote, they would have to tender their resignations."

Another corporate governance issue advocated by sustainability investors and shareowner activists is a mandatory annual shareowner vote on executive compensation. In response to public outrage over astronomical salaries and bonuses paid to Wall Street executives, all Troubled Asset Relief Program (TARP) beneficiaries were required to allow such a vote, but only until they had paid back the TARP funding. As with proxy access and majority voting, the provision mandating an annual shareowner vote on executive compensation at all publicly owned companies is included in both the House and Senate versions of the bill.

"Our members and other institutional investors have been filing proposals on say on pay for years," DeSimone said. "Hopefully, now they won't have to ask for it anymore."

One corporate governance provision that is included in the Senate version of the bill, but not the House version, addresses so-called "clawbacks," and would allow shareowners to sue for the return of incentive-based executive compensation in cases when inaccurate financial statements had been submitted by corporations.

Other areas in which the two versions of the bill differ address the trading of derivatives and proprietary trading. The Senate bill, unlike the House version, contains elements of the Volcker Rule, which would restrict banks from making investments that are not on behalf of their customers. The Obama administration has publicly supported the inclusion of the Volcker Rule in financial reform legislation.

Consumers and small businesses are hopeful about finding relief in a final version of the bill, as well. Both versions include provisions for the establishment of consumer protection. In the House version, it would take the form of an independent Consumer Protection Agency, while in the Senate version a Consumer Protection Bureau would be housed in the Federal Reserve. Although the House version would appear to be the stronger, both versions provide for independent funding. Furthermore, the House version exempts such lenders as auto dealers from oversight, while the Senate version only exempts small businesses that do not engage in financial activities.

"A lot of our members work on issues such as predatory lending," DeSimone said. "A lot of what's happened in the past few years could have been avoided, or at least mitigated," if an agency to protect consumers from such practices was in place.

SocialFunds.com asked Fran Teplitz, the Director of Social Investing and Strategic Outreach at
Green America, about her organization's preference.

"We prefer a standalone independent agency," Teplitz said, "Rather than one housed in the Federal Reserve, which doesn't have an august history of protecting the consumer."

Asked about the benefit of a Consumer Protection Agency, Teplitz said, "It would be good for small business in general. Anything that's detrimental to consumers often comes back to hit small businesses. It's also true that many small businesses in their financial life function more like individuals than major corporations. For instance, small businesses often rely on personal credit to sustain their business. Small businesses benefit if lending terms and marketing are not deceptive."

"For far too long, major banks and other lenders have used unscrupulous policies," Teplitz said. "It's been about greed for a few, and small businesses and consumers haven't had the level of protection that they need. We hope that era is coming to an end."

"The passage of this legislation will be remembered as a historic turning point in our economic history," Booth of Americans for Financial Reform stated. "The battle now moves to conference where the big banks will look to weaken or kill the bill behind closed doors. We cannot and will not allow this to happen."

 

 
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