Underreporting of Proposals for US Market Reforms

What is and isn’t fair reporting is very much in the eye of the beholder. However, it seems odd that a story that the Financial Times thought important enough to run on its first page has gotten no play in the US:

Democrats look to boost investor rights

Signs are emerging of a Democratic effort to boost shareholder rights in the US after a top lawmaker said he planned to hold “informational hearings” on the harmonisation of regulatory systems between the US and Europe.

Paul Kanjorski, the new chairman of the House of Representatives sub-committee on capital markets, insurance and government sponsored entities said “the time is ripe” to examine the issue.

He said if global markets were to grow and mature, “we have to start recognising some international standards”.

“It’s something I want to pay attention to because one of the things that ties in very closely is investors’ rights in corporations. I think Europe has shown that they have a greater investor right concept and it’s working fairly well,” he said in an interview with the Financial Times.

His call comes after Barney Frank, Democratic chair of the House financial services committee, said last week he planned to pass a bill by the summer that would “legislate greater shareholder involvement in setting CEO salaries”. Mr Kanjorski’s sub-committee operates under the financial services committee.

He said: “We’ve got some focus points now that [Mr Frank] is very much interested in executive salary. We’re really going to have to look at what rights should the shareholders have, and what is being done in the UK and Europe. We may find out just by adopting some of their systems within our system, if we can create a better control or transparency factor.”

European corporate governance experts have called for a better balance between shareholder rights and what they say is excessive use of litigation to settle corporate and boardroom disputes in the US.

The Securities and Exchange Commission is deadlocked over whether to proceed with a proposal allowing shareholder access to company proxies for the purpose of voting board directors – a move that would give shareholders more say in setting executive pay.

Mr Kanjorski, a 12-term Pennsylvania congressman, said his interest was broader than executive compensation. “Let’s look fundamentally at whether we have enlarged or protected shareholder rights in this country relative to the rest of the world. There’s a push to limit litigation. Maybe if we had better shareholder rights we wouldn’t have as much litigation.”

Now why has this development been ignored? It can’t be that the press isn’t interested in the US having competitive markets for capital. There have been quite a few articles on how American exchanges have lost business to the UK; it’s been a major argument for curtailing SarbOx. But here we have another avenue for making our financial markets more competitive, namely, adhering to international standards, and whaddya get? Dead silence.

Similarly, the Democrats are proposing stronger shareholder rights, particularly in setting CEO salaries (and interestingly, arguing that it might reduce litigation). Now this is an interesting twist. Market fundamentalists have long argued against government involvement in companies’ internal affairs, but how can they argue, credibly, against shareholders having greater say? As discussed here earlier, CEO pay has long been considered a classic example of an agency problem, that is, when a principal hires someone to act on their behalf but has to worry whether the agent is truly serving his master, or more concerned with enriching himself. In a recent Wall Street Journal interview, Barney Frank pointed out the lack of any evidence showing a correlation between CEO pay and performance. Making the CEOs more directly answerable to their constituents is an elegant solution.

As an aside, most people also seem to accept the idea that there is such a thing as demonstrably excessive pay. There has been relatively little sympathy for Dick Grasso once it came out that he paid himself 1/4 of the NYSE’s earnings. So once you accept the premise that there is a level of compensation that is outside the pale, you are talking numbers, not the basic premise. (And as discussed in earlier posts, the idea that CEO pay is determined by the market is utter rubbish. “Market” price implies that the prices are set on an arm’s length basis. The boards and the comp consultants know that the CEO they choose will have a significant impact on their fortunes going forward. Hardly an arm’s-length transaction. And the search firms’ fees are set as a percentage of first year compensation, so they too have incentives to argue for richer pay in the negotiations).

Here we’ve had the media wringing its hands about the loss of US financial market competitiveness, and keenly interested in shareholder activism, the ouster of overpaid, underperforming CEOs like Hank McKinnell and Bob Nardelli, and the gap between average worker’s pay and that of executives, yet they are curiously silent when a story involving corrective measures comes to light. Is it that no one takes the Democrats seriously? Or are they just enjoying the status quo too much?

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