US Council of Institutional Investors speaks out against regressive “Choice” Act

The US Council of Institutional of Investors (CII) has written to the House of Representatives’ Financial Services Committee objecting to a number of proposals in its Financial CHOICE Act – which has now been approved by committee.

This proposed law is part of earlier attempts by the Committee – in a series of bills passed in the summer – to repeal large chunks of the Dodd-Frank Act which was enacted following the 2008 financial crash and subsequent recession and aimed to address some of the failings of the financial system.

In its letter, the CII said the Financial Choice Act would result in a reduction in the frequency of say on pay votes which it said had improved the engagement between investors and company boards about pay, meant more alignment between executive pay and company performance and and led to the reduction of executive perks. The amendments of Dodd-Frank proposed by he committee would also narrow the scope of the claw back requirement the CII. In its letter the CII noted that its “support for a broad clawback policy appears to be consistent with the “Commonsense Principles of Corporate Governance” recently endorsed by a number of prominent leaders of U.S. public companies.”

Governance Failings at Wells Fargo

At a hearing before the Senate Banking Committee last week, Wells Fargo CEO John Stumpf  testified that in 2011 it uncovered widespread fraud which led to the termination of 1,000 employees for opening fake accounts.

Although the fraud involved more than 1% of Wells Fargo’s workforce, neither Stumpf nor the bank’s board of directors were told of the fraud until 2013.

Since the revelations, over 4,000 more employees have been dismissed.

To date no senior executives have been terminated.

Other causes of concerns included that the Financial Choice Act would:

* repeal a section of Dodd-Frank supporting reasonable, appropriately structured executive pay-for-performance programs at financial institutions;

* rescind the Security and Exchange Commissions’s (SEC) required disclosure rules on board leadership;

* restrict the ability of proxy advisory firms to provide voting information to institutional investors who voluntarily contract for such information by, among other things, allowing companies to review their research prior to publication; and

* eliminate a provision allowing for proxy access.

The Committee claims that the bill would end the Dodd-Frank Act’s taxpayer-funded bailouts of large financial institutions; relieve banks that elect to be strongly capitalised from growth-strangling regulation that slows the economy and harms consumers; impose tougher penalties on those who commit financial fraud; and demand greater accountability from Washington regulators.

The CII’s intervention is particularly timely set against the revelations of widespread governance failures at Wells Fargo (see box). Commenting in Fortune magazine, Mark Rogers, CEO of board recruitment specialists, Board Prospect, said the proposed bill was a”stunning example of Congress’ inability to understand the implications of failures in corporate governance.” and that it would be “simply reckless to repeal the legislation”.

Speaking to the Wall Street Journal Morning Risk Report, Ed Batts, a partner at Orrick Herrington and Sutcliffe LLP in California criticised the bill as “over-reaching”.  As currently drafted Batts believes that the bill is “pushing the envelope on regulating the free enterprise market.” Batts observed that “Proxy advisors aren’t taking advantage of the little guy, aren’t manipulating the market and…are getting paid to [provide advice]. In many ways, this is a government-created market, and the fundamental question is, how much do you regulate the demand for the services created by the government?,” said Mr. Batts. “This is a classic dichotomy, to some degree.”

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