Thursday, January 04, 2007

New House Oversight Chair Pledges Legislation on Executive Compensation

Calling the relationship between corporate boards and CEOs collusive with regard to executive compensation, House Financial Services Committee chair Barney Frank said that shareholders must be the real check on excessive compensation. He promised legislation to increase the ability of shareholders to vote on compensation packages. Staff is currently working out the details of the legislation, which includes what will happen if the shareholders vote no. Mr. Frank made his remarks at a recent National Press Club luncheon.

In the first place, he noted, the CEO picked the board of directors; and they picked the CEO. It is a very collusive relationship, he posited, and, in his view, it is clear that boards of directors do not provide any real check on CEOs. He mentioned recent action by the board of directors of Home Depot, which finally decided the CEO had to go, and they gave him $210 million and asked him to please leave.

They have a shareholder vote in the UK, he added, and Britain has become an example that a lot of US corporate leaders have said that they admire. They believe that the Financial Services Authority is more flexible than the SEC. Since 2002, the United Kingdom has required a shareholder advisory vote on board pay, which was coupled with the introduction of required disclosure of key compensation data.

The chair said that the issue of executive compensation is not just a matter of envy. Rather, he emphasized that it has reached the point of having some macro economic significance. He cited a recent study by Lucien Bebchuk and others showing that the percentage of the profit of the top 1,500 corporations that goes to compensation for the top three officials has reached almost 10 percent.

In the 109th Congress, Rep. Frank introduced a bill that would have allowed shareholders to approve their company’s executive compensation. The Protection Against Executive Compensation Abuse Act, HR 4291, would also have allowed for a company policy for recapturing any form of incentive compensation, such as when the company pays bonuses or grants stock options to executives for meeting performance targets only to later learn that these numbers were inaccurate and must be restated. Similarly, the bill would have required that shareholders separately approve any additional ``golden parachute’’ compensation for top executives that coincides with the sale or purchase of substantial company assets.