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June 16, 2010
Sustainability Investors Make Their Voices Heard on Financial Reform Legislation
    by Robert Kropp

As a Congressional conference committee determines the final version of legislation, the Social Investment Forum and government pension funds speak out on corporate governance and other issues.

Legislation addressing financial regulatory reform has passed in both chambers of Congress, a development which may be especially heartening to sustainability investors and shareowner activists who have been calling for the adoption of many of the provisions for years. As reported last week in the New York Times, Paul Volcker, the former Chairman of the Federal Reserve, told a conference of financial market regulators, “The United States will go from laggard to the head of the parade if we get this legislation passed.”

Volcker is the architect of the so-called Volcker Rule, which would require banks to spin off their derivatives trading business. Although neither version of the bill specifically contains the Volcker Rule as a provision, the Obama administration has strongly supported it, and there seems to be momentum to include it in the final version of the bill. The Senate version does contain a provision to force banks to spin off their derivatives business from Federal Deposit Insurance Corporation (FDIC) insured functions.

Despite the momentum for agreement on a strong financial reform bill, negotiations over its provisions are currently underway in conference committee. And whenever there are legislators meeting, there is the opportunity for lobbyists to influence politicians in the interest of denying shareowners their ownership rights. As Peter DeSimone, the Director of Programs at the
Social Investment Forum (SIF), told, “There’s fierce opposition from corporations on all fronts, and the Chamber of Commerce has been lobbying fiercely against basic governance reforms.”

The sustainable investment community is not standing by while efforts to weaken financial reform are underway. Last week, Lisa Woll, the CEO of SIF, sent a
letter to Senate and House conferees, outlining the organization’s support for provisions that would improve corporate governance, protect consumers, and provide regulatory oversight of investment products.

Provisions addressing corporate governance may be of the greatest importance to advocates of strengthened shareowner rights. In her letter, Woll wrote, “Shareholders need majority voting and proxy access to foster greater accountability and oversight in America’s boardrooms.”

The majority voting standard would require that nominees for corporate boards of directors receive a majority vote to win a seat. At present, most corporations simply require a plurality, which means that a nominee could conceivably gain a board seat by receiving a single vote.

“Majority voting is a basic democratic principle, and one that would restore accountability in the market without costing the US taxpayer anything,” DeSimone told “It’s a market-based reform, which means that shareholders hold directors accountable without the necessity for regulatory oversight.”

“Unfortunately,” DeSimone continued, “It looks like we might lose majority voting in this battle.” The Senate version of the bill contain provisions for the adoption of the practice, while the House version does not.

A provision included in both bills directs the Securities and Exchange Commission (SEC) to adopt a form of proxy access. In speech delivered last week, Mary Schapiro, Chairman of the SEC, indicated her commitment to “a timeframe that would put the rules into effect for the 2011 proxy season.”

The provision for proxy access would “give the SEC clear authority to proceed with a new rule to allow shareholders to nominate alternative candidates,” according to Woll’s letter.

In a
letter that specifically addresses proxy reform, a coalition of State and local government pension funds and plan sponsors representing over $1 trillion in assets stated, “We have a compelling interest in ensuring that these companies operate with transparency.”

“Proxy access will provide investors with the necessary tool to ensure appropriate transparency, accountability and management of risk at the corporate level,” the letter continued.

The threshold for allowing shareowner nominees on proxy ballots is being challenged by lobbyists for the Chamber of Commerce, which wants the one percent threshold proposed for large corporations increased to five percent, according to DeSimone.

As Woll noted in her letter, both versions include provisions for annual shareowner votes on executive compensation (although the Senate version also includes a requirement that companies highlight pay disparity), the establishment of a regulatory body to oversee consumer financial products, and self-funding for the SEC through fees it imposes on securities transactions and corporate filings.

An important provision included in the Senate version would prevent brokers from voting unrestricted shares, when their clients have not specified how they want to vote. Already a listing requirement of the
NYSE Euronext stock exchange, the provision would extend the requirement to other exchanges as well.

In his speech before the conference of financial regulators, Volcker also said, “I’m really hopeful for the first time there is a chance of getting international acceptance for the basic principles,” and it is interesting to note that many of the proposed corporate governance reforms do follow the lead of regulations that have been in place in Europe for years.

Asked about the perspective in Europe, that the relationship between shareowners and corporations is more adversarial in the US than elsewhere, DeSimone said, “I think the European perspective is accurate. To get most corporations to the table in the US, there usually has to be the threat of a shareholder proposal. In reality, shareholders and corporate managers should be on the same page in the interest of building long-term shareholder value.”

Recognizing the importance of active involvement in the process currently underway in the conference committee, DeSimone said, “Our members have sent letters, and we’re up on the Hill every day. There’s a model letter on our web site.”

“It is more important than ever to have our voices heard now,” he said.


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