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Geithner announces support for executive compensation reforms, but Congress might have its own agenda

On Wednesday, June 10, Secretary of the Treasury, Timothy Geithner outlined the Obama administration’s new proposals on executive compensation. The proposals focused on greater independence of corporate compensation committees and giving shareholders a nonbinding vote on executive compensation, commonly known as ‘say on pay’ provisions. Geithner outlined five guiding principals for executive compensation, namely:

  1. compensation plans should properly measure and reward performance;
  2. compensation should be structured to account for the time horizon of risks by aligning executive (and highly compensated individual) pay with long-term value creation;
  3. compensation should be aligned with sound risk management;
  4. golden parachutes and supplemental retirement packages should properly align the interests of executives with the interests of shareholders; and
  5. the compensation setting process should promote transparency and accountability.

Geithner promoted the administration’s support for legislation requiring greater compensation committee independence for companies listed on the national securities exchanges. The proposed legislation would require compensation committee members to meet the stringent independence standards required of audit committee members under the Sarbanes Oxley Act. In addition, the proposed legislation would provide compensation committees with the right to (i) hire compensation consultants, (ii) hire legal counsel, and (iii) require each company to “appropriately” fund the compensation committee to allow it to execute its independent compensation oversight responsibilities.

In addition, Geithner promoted the administration’s support for legislation requiring non-binding ‘say on pay’ votes by shareholders. The legislation would require all public companies to include a proposal to allow shareholders to approve or disapprove of the compensation arrangements listed in a company’s …

SEC Investor Protection Measures

The SEC is pursuing a slew of investor protection measures:

  • In public remarks earlier this year, SEC Commissioner Elisse Walter and Chairman Schapiro expressed support for say-on-pay proposals. Officially, the Staff does not object to say-on-pay resolutions in proxy materials if non-binding and advisory.
  • On May 20, 2009, the SEC voted to solicit public comment on proposed rules that will allow shareholders to nominate directors for election by using the company proxy materials. Depending on market capitalization, shareholders of 1-5% could nominate up to a quarter of board seats.
  • On June 3, 2009, the SEC announced the creation of an Investor Advisory Committee “to give investors a greater voice in the Commission’s work.”
  • Finally, also on June 3, 2009, Commissioner Luis A. Aguilar gave a speech at the Compliance Week Annual Conference calling for a shift in regulatory focus from financial institutions to “what is best for investors.” As examples of investors, Aguilar evokes individuals feeling pain “in their retirement nest eggs, their college savings plans and in their brokerage accounts.”

While there is no doubt that institutional investors are in favor of initiatives like say-on-pay and proxy access (perhaps as a tool to pressure boards) and the Investor Advisory Committee (numerous institutional investors are represented on the Committee), it remains to be seen whether such initiatives will provide any real benefits to retail investors like the individuals Commissioner Aguilar mentions.  As Commissioner Aguilar pointed out in a speech earlier this year, the percentage of retail investors who read …