Wednesday, April 07, 2010

Institutional Investors and Corporate Governance Experts Praise Senate Reform Bill

Institutional investors and leading corporate governance experts expressed support for the financial reform legislation reported out of the Senate Banking Committee. “The time to act is now,” Executive Director Ann Yerger of the Council of Institutional Investors emphasized, adding that investors have suffered trillions of dollars in investment losses and confidence in the integrity of public markets has been undermined. She called the Senate bill a sensible effort that is in line with global standards

Ira Millstein, Senior Associate Dean for Corporate Governance at Yale, said that the bill’s corporate governance provisions are key. He urged Congress to have confidence in long-term shareholders to act like the owners of the company and to improve boards and performance. Shareholders will only vote for candidates who will make a contribution, said the Dean, and then only when changing the board is necessary for valid business reasons. He is not fearful that the legislation will lead to an SEC proxy access proposal that would upset board cohesion and lead to bomb throwers populating the board room. The job of the SEC is to monitor this process, he noted, and the Commission has demonstrated caution and reflection.

Former SEC Chair Richard Breeden pointed out that a common element in the failure of Lehman Brothers, AIG, Fannie Mae, and other firms was that their boards of directors did not control excessive risk-taking, did not prevent compensation systems from encouraging a ``bet the ranch’’ mentality, and did not hold management sufficiently accountable. When boards failed to do their jobs of overseeing risk taking and encouraging sustainable performance, investors and taxpayers both suffered enormously.

According to the former SEC Chair, accountability is a critical element of sound corporate governance. An effective board can help every business understand and control its risks, thereby encouraging safety and stability in the financial system and reducing the pressure of regulators, who will never be able to find every problem.

Echoing that sentiment, Anne Sheehan, Director of Corporate Governance at CalSTRS, said that regulators need to be supported by market mechanisms and chief among these are tools to hold boards accountable. She noted that the Dodd bill reaffirms the authority of the SEC to introduce rules to allow shareowners access to the proxy. She cautioned Congress not to get into the weeds with the SEC. It is the role of the Commission to work out the rules on proxy access, with proper consultation. The job of Congress is to provide authority, or in this case, to confirm it.

Commenting on the derivatives provisions in the bill, Anne Simpson, head of CalPERS Corporate Governance, urged Congress to ensure that derivatives are brought in from the shadows, fully regulated and traded on exchanges. Transparency is vital, she emphasized, and exceptions and exemptions must be resisted at all costs.


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