When you only have the appearance of reform, the cruel joke is on you. by Bill Gee
(centrist)
Wednesday, June 22, 2011
Following the Financial Crisis of 2008, politicians vowed that they would do something to prevent the next crisis. They promised that they would either punish or prevent Wall Street executives from taking enormous risks with investor or depositor's money, keep all the spoils while ultimately leaving the taxpayer to bear the brunt of the downside of their risks.
At first, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was an ambitious piece of reform legislation that included regulations on everything from Executive Pay to Derivatives Markets. Unfortunately, (or by design) a full-court press by the Wall Street lobby and with strong pushback by Republican lawmakers, a watered-down version of the bill finally made it to President Obama's desk for his signature in July 2010.
Almost a year after the much-lauded bill was signed into law, its first test comes back with a failing grade.
In the watered-down version of the law, instead of Executive pay being overseen by a "Pay Czar" in Washington, the power to protest excessive pay for top executives was given to the individual shareholders of a company. After all, it made sense that if a shareholder's dividend was going to the top Executives of their company, they would have a financial interest to say something about it, right?
Only a Suggestion
First of all, shareholder rejection of executive pay is treated only as a suggestion to the company's Board of Directors, and carries no actual weight. In the end, the Board makes the ultimate decision over top paychecks and other compensations to their managers. The Board itself is made up of other top executives or former top executives. These men (and a few token women) like to see their friends do well because they know that they will likely return the favor when it's their turn to discuss their next compensation package.
One might think, however, that with all the bad press that top Executive pay has been getting in the press over the past three years, that common shareholders would be up in arms and would be using this new law to voice their opposition. Yet in the past year, a mere 2% of common shareholders voiced their concerns and all Boards of Directors ignored their pleas.
Who Are The Shareholders?
The problem with giving the power to protest Executive pay to the Common shareholder is that most of the time, those same shareholders have a vested business interest in letting the Board of Directors do whatever they want.
70% of all common shareholders are not people, but mutual funds. The Boards of Directors of these mutual funds are the very same people who sit on the Boards of Directors of the companies that they own the stock. The ultimate investors of the mutual fund are pension funds, 401Ks, and other contributor programs where the investor themselves (you and I) have no idea what is in the portfolio and they could probably care less as long at the fund is generating a modest return on their investment. (Most people who own 401K's have never read a prospectus and/or would not understand it even if they did!) In the off-chance that we did care about executive pay, in order to exercise our right to protest, we would have to convince the Directors of the mutual fund to lodge the complaint on our behalf. In order to be heard, we would need to get together with as many other 401K contributors as we could find and file the complaint as a "class". However, the Board of Directors at the Mutual Fund still has the right to ignore your campaign by citing "business reasons" as their excuse not to lodge your complaint.
25% of common shareholders are made up of large corporations, or other top executives throughout the world. Again, why would they file a complaint against the same guy they play golf with?
The remaining 5% of common shareholders consist of the rest of us who own modest portfolios of common stock that we purchased on E-Trade or INGDirect. Over the past few months, we have seen our portfolios gain and then lose value, and we have seen our dividends cut to pennies on the share, while at the same time we have seen Executive compensation reach all-time highs in 2010!
Ready For Rebuttal
Let us say that as a member of that 5% minority, you have had enough and you exercise your right under the Financial Reform Act to lodge your complaint to the Center on Executive Compensation, a three-year-old agency that has been tasked with overseeing shareholder complaints under the terms of the law. Waiting for you is a team of lawyers and lobbyists from your company who have prepared detailed rebuttals for every complaint you have. The overworked and underpaid Regulator (who secretly wants a job with the company he is charged with regulating) barely glances at your complaint and gives the full benefit of the doubt to the company.
The Cruel Joke
Almost four years after the financial crisis that nearly destroyed the world economy and the only thing we have to show for it is a Financial Reform Law that is a mockery of reform. The worst practices of Wall Street are still perfectly legal, and practices that are illegal are simply overlooked by the regulators. To date, not one senior executive responsible for causing the financial crisis has been seriously investigated by the Securities and Exchange Commission. No one has been brought before a Grand Jury, let alone indicted. Wall Street firms are bigger than ever and their executives are compensated more than ever while again passing the lion's share of their risky behavior onto you, the taxpayer.
This has to stop!
(Source material: "After Much Hoopla, Investor 'Say On Pay' Is a Bust", Bloomberg BusinessWeek, June 20-26, 2011, available by subscription only)
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