A New Era of Regulation?

No matter who takes the oath of office in January, directors can expect significant changes in corporate governance to come out of Washington.

It’s likely that broader measures also will emerge from the regulatory gale that swept through in the wake of the historic financial market interventions that began in September. While it’s too early to predict exact changes, it seems clear that companies and boards should brace for a new era of government oversight and scrutiny. Likely areas include stronger rules for the ratings agencies, tougher accounting standards in order to expose excessive debt, beefed-up oversight for risk takers in the financial markets, and perhaps even new rules for executive compensation.

New rules for compensation consultants are high on the list for Democrats, as is even more disclosure on total pay packages. A full-blown shareholder bill of rights is also a possibility.

No matter who wins, investors now have a better chance of prevailing on several signature issues they’ve been battling for on the governance front. Executive pay will be in the gun sights of politicians from both parties. Giving shareholders an advisory vote on compensation already has been endorsed by both presidential candidates, and Barack Obama was a sponsor of the Senate bill on the subject.

Senator John McCain actually topped his rival by suggesting such a vote should be mandatory when he first spoke out on the topic in the early summer. He hasn’t repeated that strong language, so it may have been mostly campaign rhetoric, but he would be hard-pressed to not go along with a law requiring companies to hold advisory votes. “McCain may not want to pick a fight on an issue he said in the popular press he’s in favor of,” says Patrick McGurn, special counsel at RiskMetrics.

The real question is whether a Congress that looks likely to remain in Democratic hands will ram through even stronger pay control measures. If Obama takes over, he may well pursue the sweeping bill that Hillary Clinton introduced in April that would put a $1-million cap on deferred compensation, include stock options backdating in clawback provisions and extend their length, and expand pay rules to cover more corporate executives. New rules for compensation consultants are high on the list for Democrats, as is even more disclosure on total pay packages. A full-blown shareholder bill of rights is also a possibility.

An Obama victory would also usher in a party switch at the Securities and Exchange Commission, likely leading to reversals on many of the issues that Chairman Christopher Cox has held in check. That scenario would open the door to shareholder proxy access, a bitterly fought battle over the past few years. A Democratic controlled SEC also would be likely to go along with new rules restricting broker votes in those elections, which would deprive the management slate of a built-in block of support. “If there’s a blue state sweep, it will be like Christmas for us,” says Richard Ferlauto, corporate governance director at the American Federation of State, County, & Municipal Employees (AFSCME).

Of course, a McCain administration would undoubtedly soften any law that might come out of Congress. Still, major changes are in the offing for next year, no matter who’s in power.