Financial Market Reform: US investors have their say

The Investors Working Group, a bi-partisan panel of experts created in February 2009 by the Council of Institutional  Investors and the CFA Institute Centre for Financial Market Integrity, has released its recommendations for reform and modernisation of the US financial markets.

According to the report, strengthening existing regulatory agencies, closing gaps in the regulatory structure, enhancing consumer and investor protections and improving corporate governance are the most important steps that the US Congress and the Obama administration can take to restore integrity to the financial system and stability to the financial markets.

On the governance front there are similarities between the Walker Report and the IWG Report, notably an underpinning of the view that share-owner-driven market discipline and risk management is critical to healthy markets. However, owners of US companies currently have limited ways to hold directors accountable. To address this  the IWG report has proposed a series of governance reforms:

  • In uncontested elections, directors should be elected by a majority of votes cast;
  • Federal securities laws should be changed to affirm the SEC’s authority to implement rules allowing share-owners to place their nominees for directors on companies’ proxy cards;
  • Boards should determine whether the chair and CEO roles should be separated or whether some other method, such as lead director, should be used to provide board oversight or leadership when required, and, if they choose to not separate the roles they should explain why they have adopted another method to assure independent leadership of the board;
  • Exchanges should adopt listing standards that require compensation advisers to corporate boards to be independent of management;
  • Companies should give share-owners an annual, advisory vote on executive compensation; and
  • Federal clawback provisions should be strengthened to require senior executives to return unearned bonus and incentive payments that were awarded due to fraudulent activity, incorrectly stated financial results or some other cause.
  • Institutional investors—including pension funds, hedge funds and private equity firms—should make timely public disclosures about their proxy voting guidelines, proxy votes cast, investment guidelines, and members of their governing bodies and report annually on holdings and performance.

Links

The full text of the report is available here on the CII’s web site.

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