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6/16/2010

Sustainability Investors Make Their Voices Heard on Financial Reform Legislation

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.

SocialFunds.com -- 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, %147The United States will go from laggard to the head of the parade if we get this legislation passed.%148

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 SocialFunds.com, %147There%146s fierce opposition from corporations on all fronts, and the Chamber of Commerce has been lobbying fiercely against basic governance reforms.%148

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%146s 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, %147Shareholders need majority voting and proxy access to foster greater accountability and oversight in America%146s boardrooms.%148

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.

%147Majority voting is a basic democratic principle, and one that would restore accountability in the market without costing the US taxpayer anything,%148 DeSimone told SocialFunds.com. %147It%146s a market-based reform, which means that shareholders hold directors accountable without the necessity for regulatory oversight.%148

%147Unfortunately,%148 DeSimone continued, %147It looks like we might lose majority voting in this battle.%148 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 %147a timeframe that would put the rules into effect for the 2011 proxy season.%148

The provision for proxy access would %147give the SEC clear authority to proceed with a new rule to allow shareholders to nominate alternative candidates,%148 according to Woll%146s 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, %147We have a compelling interest in ensuring that these companies operate with transparency.%148

%147Proxy access will provide investors with the necessary tool to ensure appropriate transparency, accountability and management of risk at the corporate level,%148 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, %147I%146m really hopeful for the first time there is a chance of getting international acceptance for the basic principles,%148 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, %147I 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.%148

Recognizing the importance of active involvement in the process currently underway in the conference committee, DeSimone said, %147Our members have sent letters, and we%146re up on the Hill every day. There%146s a model letter on our web site.%148

%147It is more important than ever to have our voices heard now,%148 he said.