US plays catch-up, institutions applaud “say on pay” reforms

Institutional investors in the US, including the largest pension fund in the country, CalPERS, have applauded the introduction of the Shareholder Bill of Rights which includes reform to allow long-term investors to nominate their own director candidates on the management proxy card.

The Council of Institutional Investors in the US, which represents public, union and corporate pension funds with combined assets of more than $3 trillion and is chaired by chief investment officer of CalPERS, Joe Dear, says the bill will enhance shareholder power over the nomination and election of directors and the compensation of executives.

Introduced by Senator Charles Schumer, the reforms include the separation of the chair and chief executive at US companies; the election of all directors annually; electing directors by a majority of votes; and providing annually for an advisory shareowner vote on the compensation of senior executives.

It is believed the bill is part of a wider legislative package of financial regulatory reforms, including more executive remuneration reform the Obama administration will propose to Congress in coming weeks.

In a separate letter to Senator Schumer, Dear said on behalf of CalPERS that the legislation would enhance the fund’s ability to be an active and prudent shareholder.

“CalPERS believes that good corporate governance leads to better investment performance and that corporate governance practices should focus the board’s attention on optimising operating performance, profitability and returns for shareholders. And, given recent events, CalPERS believes that stronger board oversight by investors is critically needed to restore trust and confidence in the integrity of the US capital markets.”

“CalPERS strongly believes allowing shareowners access to the company’s proxy in order to nominate candidates for election to the board of directors is a fundamental shareowner right and the most effective mechanism for ensuring director accountability. Responsible shareowner access to the director nomination process, requirements for the annual election of directors, a majority vote standard, and the separation of the role of the board chair and CEO, are significant and vital components in a system of corporate governance that fosters director accountabilityt and long-term value creation.”

In the bill, Congress acknowledged that among the central causes of the financial and economic crisis faced by the US has been a widespread failure of corporate governance.

Further, the bill states: “within too many of the nation’s most important businesses and financial institutions, both executive management and boards of directors have failed in their most basic duties, including to enact compensation policies that are linked to the long-term profitability of their institutions, to appropriately analyse and oversee enterprise risk, and most importantly, to prioritise the long-term health of their firms and their shareholders… a key contributing factor to such failure was the lack of accountability of boards to their ultimate owners, the shareholders.”