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House Democrats Push for Governance Improvements in BailoutSubmitted by: Ted Allen, Publications

As Congress debates the proposed $700 billion bailout of the financial industry, House Democrats are pushing for the U.S. government to require financial firms that receive assistance to hold annual ?say on pay? votes on executive compensation, curb severance payouts, and provide for proxy access.

A Sept. 22 draft of the House Democratic bailout bill calls for the Treasury Department to require the following governance standards of firms that participate in the bailout:

* a requirement that the financial institution permit any shareholder or group of shareholders holding, in the aggregate, equity securities of the institution representing three percent or more of the equity securities of the financial institution, access to the proxy solicitation and shareholder vote for any election of the board of directors of the institution for the purposes of nominating and electing a designated individual to the board of directors of the institution;

* a requirement that the financial institution afford all shareholders the opportunity to cast a non-binding vote, in any annual proxy solicitation and shareholder vote, on the executive compensation to be provided to the executive officers of the financial institution; and

* a prohibition on the institution paying severance compensation to its senior executive officers during any period in which the Secretary [of Treasury] continues to hold an equity position in the financial institution.

These governance provisions would apply only as long as the firms participate in the bailout program. While the Senate Democratic bailout legislation does not include proxy access or ?say on pay? provisions, the bill does call for ?claw backs? of incentive compensation based on earnings that later prove to be inaccurate, as well as limits on incentives to take risks that the Treasury Department ?deems to be inappropriate or excessive.?

It?s unclear whether any of these governance provisions will be included in the final bailout bill. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are urging Congress to pass bailout legislation ?quickly? to avoid a recession.

Richard Ferlauto, director of pension benefit policy at the American Federation of State, County, and Municipal Employees, which has advocated for ?say and pay? votes and proxy access, said he anticipates that the final bailout bill will include some limits on ?golden parachute? payments and a ?claw-back? provision. ?It?s pretty clear there is bipartisan support to demand some reciprocity [from financial firms] on the pay issue,? he said.

Regardless of what happens with the bailout legislation, Ferlauto said he expects that Congress will consider legislation to address ?say on pay,? claw-back provisions, and possible caps on deferred compensation early next year. In the long run, the bailout debate ?gives a tremendous impetus to ?say on pay? as a market-wide response,? he said.

Full post as published by Institutional Shareholder Services -- Corporate Governance Blog on September 23, 2008 (boomark / email).