Financial reform legislation likely to give shareholders more say

Financial reform seems certain to usher in rules that shareholder advocates have been trying to win for decades as a way to rein in runaway executive pay and make corporate boards more responsive to shareholders.

That could be very good news for the roughly 70 percent of investors who hold company stocks in their investment portfolios.

Issues including better regulation of both financial and consumer services are part of the sweeping financial reform measure that’s now being reconciled in Congress and is expected to land on President Obama’s desk before July 4.

Although all the details won’t be known until the reconciliation between the House and Senate bills is complete, experts believe the bulk of these “corporate governance” rules are likely to survive. That, they say, is another glimmer of hope that shareholders are winning a long-fought battle to regain control over rogue companies that have savaged shareholder values.

“It’s not going to turn things around immediately,” said Paul Hodgson, senior research associate with the Corporate Library, a governance research firm. “But it is going to help in some of the most extreme cases.”

There are three key measures in this part of the financial reform legislation, and they all focus on corporate directors, who are supposed to be shareholder representatives. The changes would give shareholders a bigger say in executive pay, as well as in the selection and re-election of company directors.

Boards of directors are expected to rein in and guide a company’s management. They provide a company with an outside view of whether company policies are reasonable and in the best interest of the everyday people who own company stock.

Critics say, however, that current rules allow managers to stack their boards with cronies and yes men, who can become insensitive to shareholder interests.

What’s proposed and how might it affect shareholders?

“Say on pay” would require companies to put executive pay policies, already approved by the directors, up for an annual vote of shareholders.

Such a vote would be advisory, so shareholders would not be able to nix an executive’s bonus. The board also would have the right to ignore shareholder wishes. But if a pay plan were to get a high disapproval vote, it would send a clear signal to the directors that they were doing something wrong.

Most directors, once named to a company board, are routinely re-elected. But another big change would revise today’s system for re-electing directors. The current system allows directors to maintain their seats, even when shareholders vote against them.

“Majority vote” regulations proposed in the legislation would demand that every director receive “yea” votes from at least a majority of the company’s shareholders. If a director failed to get a majority, he or she would be compelled to resign. The director could be retained only if other directors, by unanimous vote, determine that they need to keep the director and are willing to explain why.

About 80 percent of Standard & Poor’s 500 companies have already adopted some form of majority voting, said Claudia Allen, a corporate governance expert and partner at the Chicago law firm of Neal, Gerber & Eisenberg.

So why is this needed? Of the 90 individuals who were not able to gain a majority shareholder vote in the last year, 50 remain on their boards, said Brandon Rees, deputy director of the AFL-CIO’s office of investment.

The third change would give shareholders more power to propose company directors not nominated by the company’s current board.

Known as “proxy access,” this provision would give shareholders the right to demand that such a director-nominee appear on the company’s annual proxy statement along with the board’s recommended nominees.

What this provision would do is give the Securities and Exchange Commission statutory authority to say when individual shareholders are able to present their own candidate for election to the board and demand that management put this candidate on the company proxy for a vote.

The SEC has been threatening to provide shareholders with this type of proxy access for at least 10 years. But rules have never been finalized, largely as the result of opposition from groups such as the Business Roundtable and the U.S. Chamber of Commerce.

These organizations contend that this would allow labor unions and other activists to elect incompetent or one-note candidates more interested in pushing an agenda than representing shareholders.

Most companies wouldn’t suffer any upset from these rules, Hodgson said. But shareholders at the 5 percent of companies that are doing a poor job might be able to effect change if they win the ability to threaten a director with being ousted.

All of these reform measures will mean nothing, however, if shareholders don’t spend the time to become informed and vote on company directors and other shareholder issues, experts said.

If you’re not sure how to vote, websites such as and can provide at least a glimpse at how some institutional shareholders are voting.

Your vote makes a difference, Allen said. “Yahoo had this campaign by a guy named Eric Jackson who held 75 shares. Ultimately, he helped topple their management—with just 75 shares,” she said. “It may not happen at every company. But it happens.”

Kathy Kristof’s column is syndicated by Tribune Media Services. She welcomes comments and suggestions but regrets that she cannot respond to each one. E-mail her at

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