June 01, 2007

The Chairman

CORPORATE AMERICA IS getting an earful these days now that the Democrats control Congress and Barney Frank, the liberal stalwart from Massachusetts, is firmly ensconced as chair of the Financial Services Committee. Directorship profiled Frank in the April/May issue, and recently caught up with him to hear his plans for changing corporate behavior in areas such as CEO pay.

You are working on several major governance initiatives, including "Say on Pay," or the Shareholder Vote on Executive Compensation Act, as it's formally known. The bill passed the House by a vote of 269 to 134, with support from 55 Republicans. What's the outlook now?
I predict passage. In the Senate, the man carrying the water on this will be Frank Lautenberg, and it is going to be challenging to portray him as antibusiness or not business savvy. [The New Jersey senator co-founded Automatic Data Processing, where he was chairman and CEO before entering politics.] The White House, I believe, will be disinclined to do much if anything. They subscribe to the belief that certain phenomena like income inequality and global warming are merely unfortunate accidents of nature and not the result of human activity, and so cannot be corrected by human activity.

Is the United Kingdom model on which "Say on Pay" is based the right standard for setting executive compensation?
According to the Financial Services Authority [the independent body that regulates Britain's financial industry], their approach has resulted in new listings going to England. Somehow, the right of shareholders to vote on pay has not hurt English companies and certainly not English listings. Many in American corporate leadership have long held England as an example to follow insofar as corporate governance is concerned. Is compensation the one exception? In the U.K., they have set a standard by which competence can be measured according to performance, and the shareholders have a say in the outcomes. I know there will be cases where things may not come out perfectly, but I am a believer in the market, and the collective wisdom of the market outweighs individual wisdom, at least that is what my good capitalist friends tell me.

Does "Say on Pay" take away needed discretion on the part of boards?
I would argue that shareholders don't have bona fide access to the board. When they do, access only means shareholders can nominate directors, which is no big deal as long as majority voting is not a reality. We can nominate all day and not see a single director named to the board. Secondly, I want to single out the relationship between boards and their CEOs, especially when it comes to compensation, and it can only be described as a bit too cozy in many cases. Now after the disasters [at companies such as Enron and WorldCom], the heat is turned up and it's true, changes are being made, if somewhat glacially, because the media is suddenly paying serious attention.

There is a systemic issue that may be more important than mere coziness. CEOs often select their board members and, in turn, boards select the CEO, so the one area where they should not be cooperating is in the setting of compensation. It should be done in an unalloyed environment where there is no conflict.

What about ballot and proxy access?
I said recently that this was not necessarily on my short-term do-to list, but I want to correct that. My motive was to let [Securities and Exchange Commission] Chairman Chris Cox play out the decision. As to litigation and further regulation, you are not likely to see this unless we see a pattern of board directors ignoring shareholder advisory votes on pay and other issues. But let's keep an eye on the SEC and see how they play it out.

The level of anxiety and complaints about Sarbanes-Oxley has risen. Is that a problem?
SOX was among the most innovative of regulations of its kind. When something is innovative by definition, it does not have a lot of history to guide you going forward. This means you need to revisit and review, which is just what is happening. One of the greatest critics of SOX, the U.S. Chamber of Commerce, recently said that board of director performance actually improved under SOX. But this comment was a result of their desire to defeat a bill on shareholder votes I had proposed. It took that threat to get them to admit the benefits of SOX.

What about Section 404 (dealing with a company's internal controls)? Good or bad?
Neither. But overdrawn, yes. It may have more to do with the accounting profession than with the law. Asking accountants to play a larger—perhaps too large—a role in SOX implementation was like asking your barber if you need a hair cut.

When Mike Oxley was chair of the Finance Committee, we had a hearing as to whether the core of 404 was justified, and now we are doing just that. The committee will be hearing from the SEC commissioners, and we are well on our way to preserving the dimensions of 404 but curbing the excesses.

Frankly, when it comes to our regulation, we have a very unique and difficult problem. We have 50 states. They all have their own regulation and that as much as anything is what passes for our regulatory morass. There is another remedy on the horizon. One thing I believe will be fully appreciated is the potential agreement between the SEC and the EU on each other's accounting standards—and we are on our way to agreement by 2009 in which two different accounting standards will not be harmonized but be mutually accepted.

Is there a heated-up environment about such issues now due to the subprime mortgage lending issue?

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