UPDATE, 6/24/10: Barney Frank and his House colleagues are standing strong against a White House effort to block shareholders from having proxy access to governance issues in corporations in which they have a stake. Investors, pension funds and labor unions reacted with alarm when Sen. Chris Dodd (D-Conn.) introduced the Senate proposal that would effectively deny so-called "proxy access." The provision had not been approved by either the Senate or the House and several sources, both in Congress and in the industry, said the White House is pushing the measure. The White House proposal would require a shareholder to hold a five percent stake in order to have proxy access -- a level met by virtually no institutional investors.
Frank vowed at the time to fight it and today he did. After rejecting the Senate proposal earlier this week, Frank made the House counter-offer Thursday, suggesting that the authority to write rules remain with the Securities and Exchange Commission, which is currently drafting language to allow proxy access.
It shouldn't be difficult for Dodd to accept the counter-offer. Indeed, in 2007, Dodd wrote to the SEC arguing against the very proposal that he recently offered. "The proposed rule requires that a proposal be submitted by a shareholder or group that owns more than five percent of a registrant's stock in order to be included in the proxy, which would effectively bar most shareholders from ever filing such proposals. Since an institution has a duty to diversify its portfolio, the level of it[s] holdings in any one company would be small and insufficient to meet this threshold. This threshold should be eliminated," wrote Dodd, joined by other senators, including Sen. Tim Johnson (D-S.D.), who joined Dodd in backing the opposite of what he'd previously proposed. Read the letter here.
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June 17, 2010 - The White House is intervening at the last minute to come to the defense of multinational corporations in the unfolding conference committee negotiations over Wall Street reform.
A measure that had been generally agreed to by both the House and Senate, which would have affirmed the SEC's authority to allow investors to have proxy access to the corporate decision-making process, was stripped by the Senate in conference committee votes on Wednesday and Thursday. Five sources with knowledge of the situation said the White House pushed for the measure to be stripped at the behest of the Business Roundtable. The sources -- congressional aides as well as outside advocates -- requested anonymity for fear of White House reprisal.
The White House move pits the administration against House Speaker Nancy Pelosi (D-Calif.), who told Barney Frank (D-Mass.) to stand strong against the effort.
"I met with the Speaker today and she said, 'Don't back down. I'll back you up,'" Frank, the lead House conferee, told HuffPost. "Maxine Waters is very upset, as are CalPERS and others."
Advocates said that the corporations fought the issue primarily over executive compensation concerns. Given proxy access, investors could rein in executive salaries. The Business Roundtable is a lobby of corporate CEOs.
Valerie Jarrett, a senior White House adviser and Obama confidante, is the administration liaison to the Business Roundtable.
An administration spokesperson said that the White House isn't flip-flopping because it has never made proxy access an explicit position it supports. "It was not part of our original financial reform proposals, and we have not taken a position explicitly. We have heard from and understand the various concerns on this critical corporate governance issue from multiple stakeholders including business, investors, labor and others. We are confident that the House and Senate conferees will come to a resolution and deliver a consensus view," said the spokesperson.
But two top administration officials publicly supported proxy access, and the Senate version in particular, at the Council of Institutional Investors annual conference in April. Deputy Secretary of the Treasury Neal Wolin addressed the provision. "The Senate bill will make clear that the SEC has unambiguous authority to issue rules permitting shareholder access to the proxy. We support that proposal. The SEC's rulemaking process will define the precise parameters of proxy access," he said. "But the principle is clear: long-term shareholders meeting reasonable ownership thresholds should have the ability to hold board members accountable by proposing alternatives and making their voices heard."
Valerie Jarrett followed Wolin. "The Senate bill will make it clear that the SEC has unambiguous authority to issue rules permitting shareholders access to the proxy -- essential, as I know you guys know," she said. "We agree that corporate governance means more transparency, more responsibility, more accountability, and once again -- I can't say it too often -- we stand firmly with you on that point."
The statements were heartening to the investors, who were blindsided by the reversal this week.
The investor-protection language was stripped and replaced by an amendment from Sen. Chris Dodd (D-Conn.), who leads the upper chamber's negotiations in the conference committee. Dodd is retiring at the end of this Congress.
Dodd's amendment to the Senate language inserts a requirement that only an individual with a five percent stake in a corporation can nominate candidates to the board or otherwise participate in corporate governance. Even the largest pension funds don't come anywhere close to owning five percent of a major corporation. The biggest pension funds are more likely to hit the half-percent threshold in rare cases.
"I guess this is the way it works, but the sucker was like a bolt from the heavens. It came out of nowhere," said one advocate working on the issue.
Frank said that he wasn't certain the White House was involved. "There may be some sense that the White House -- I'll explain it this way: this affects, of course, not just the financial institutions, but all corporations and, yeah, I think there are some people in the White House who think, 'Well, we're fighting the financial institutions, but why fight with some of the others you know, the other corporations?' But all I can do is stand firm in our position, which we're doing. I think there may be some White House influence, but I don't really know. I would ask the Senate. It is interesting that they are reversing their own position," he said.
Backers of the underlying House and Senate language said that, as of last week, there was no indication that the provision would be stripped.
Because the conference committee deliberations are televised, a broad range of interested observers were able to watch corporate America gut the reform proposal live. On Thursday, Sen. Chuck Schumer (D-N.Y.) fought back, attempting to amend the language to strike the five percent requirement. It failed; the only Democrats to back Schumer in the vote were Pat Leahy (D-Vt.), Tom Harkin (D-Iowa) and Jack Reed (D-R.I.).
The SEC is planning to issue rules related to proxy access. Those rules would be made meaningless by the language currently being pushed.
"We're just horrified that the Senate would try to weaken language that was similar in both bills. To set such a high threshold makes the reform totally unworkable," said Ann Yerger of the Council of Institutional Investors.
"It is very, very costly for investors to mount a proxy contest and to solicit votes against directors. Proxy access changes that by giving investors -- the owners of the business -- the same access to the proxy as management has for purposes of nominating a director," said
Lynn E. Turner, the Securities and Exchange Commission's chief accountant from 1998 to 2001. "It is extremely important [that] to avoid systemic risk investors be able to hold boards accountable. Otherwise, board members see no upside, only downside, to ever opposing management or putting the tough questions to them."
LISTEN to Jarrett at the CII conference:
This story has been updated to include the White House response. Lucia Graves contributed reporting