Senator Schumer Readies Major Corporate Governance Reform Legislation

Posting that a main cause of the current financial crisis is the widespread failure of corporate governance legislation, Senator Charles Schumer plans to introduce legislation requiring say on pay as part of broad shareholder rights reforms. The Shareholder Bill of Rights Act would require public companies to hold an annual advisory vote on executive compensation policies, as well as require shareholder approval of executive golden parachutes. The measure would also authorize the SEC to grant shareholders access to the corporate proxy for nominations to the board of directors. In a letter to Senate colleagues, Senator Schumer urged them to support the legislation in order to create accountable and transparent corporate governance structures at public companies and make boards and management more responsive to their shareholders.

The legislation would subject company directors to annual shareholder votes and require that directors receive a majority of votes cast by shareholders in order to remain on the board. In a provision endorsed by many as key to sound corporate governance, the Schumer bill would require public companies to separate the duties of chief executive officer and board chairman in order to ensure board independence.

Noting that risks were taken without appropriate analysis and responsibility, Senator Schumer said that the legislation would require public companies to create a separate risk management committee of the board of directors. This committee would ensure that risk management is given appropriate oversight.

A measure requiring public companies to allow a non-binding advisory shareholder vote on corporate executive compensation plans passed the House of Representatives by a vote of 269-134 in the 110th Congress. Very importantly, on the day of passage, then Sen. Barack Obama introduced a companion bill in the Senate (S 1181) requiring a shareholder advisory vote on executive compensation.

Specifically, this type of legislation builds on the SEC’s executive pay disclosure rules to require that companies include in their annual proxy to investors the opportunity to vote on the company’s executive pay packages. Last year, the SEC took a major step forward by requiring that companies significantly improve their executive compensation disclosures to shareholders. House Financial Services Committee Chair Barney Frank believes that shareholder say on pay is needed because the SEC-mandated disclosure, while important, is incomplete.

The Shareholder Vote on Executive Compensation Act (H 1257) also contained a separate advisory vote if a company gives a new, not yet disclosed, golden parachute to executives while simultaneously negotiating to buy or sell a company.