Banking Reform Legislation Targets Corporate Governance

Sweeping financial reforms cast a wider net than you might think

On May 21, the Senate passed the most extensive reform of financial services regulation since the Great Depression, aimed at preventing the risky behavior and regulatory failures that nearly brought the economy to its knees.

Detailed in a new CCH Briefing Special Report, “Senate Passes Sweeping Financial Reform Bill,” the legislation:

Creates a new consumer-protection watchdog to prevent abuse in mortgage, auto and credit card lending.

Gives the government power to wind down large failing financial firms and police the financial landscape.

Establishes tougher oversight of the derivatives market.

But watch out. “Corporate governance provisions have so far flown under the radar,” says CCH Principal Analyst James Hamilton, JD, LLM, who authored the briefing paper. “This is a big corporate governance bill, too,” he says.

Both the Senate bill and an earlier House version contain corporate governance provisions likely to survive in a final conference committee version. The reforms will:

Give shareholders a nonbinding “say on pay” vote on executive compensation packages. “It’s a good way to hold companies accountable,” Hamilton says, adding that it follows a practice common in Europe.

Require companies to separate the position of chairman and CEO or be able to present a reasoned explanation why the same person holds both positions. “Comply-or-explain is another European best practice,” Hamilton says.

Mandate independent board compensation committees composed of independent directors with the authority to hire compensation consultants.

Grant SEC the authority to develop “proxy access” procedures, which allow shareholders to nominate their own directors on proxy cards. “Right now the only way you can do that involves a proxy fight,” Hamilton explains.

Other provisions in the Senate bill require “clawbacks” of incentive compensation awarded any current or former officer in the three-year period prior to a financial restatement, and additional disclosure of executive compensation and director hedging.

“These provisions are not in the House version,” Hamilton says, “so it’s too soon to say whether or not they will appear in the final version.”

“The governance provisions expected to survive pose enough problems,” Hamilton says. “Companies need to get ready to comply.”

Just one of the issues to consider: “If shareholders vote against a compensation package, and the board decides to go ahead with it anyway, how do you plan to handle that?”

This story is from the CCH e-newsletter Figures, written specifically for corporate tax professionals. Figures offers tips, tricks and ideas about how to increase your organization’s productivity and efficiency.  Every issue also features insights with a corporate tax professional

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