WASHINGTON–Boards of directors should be more accountable to shareholders for their corporate governance decisions including those involving executive pay and risk management, Securities and Exchange Commission Chairman Mary L. Schapiro said today before the Congressional Financial Crisis Inquiry Panel.
“The quality of a board’s oversight of risk management–traditionally viewed as just a compliance cost–can make an enormous difference in our economy, and particularly in financial markets,” Schapiro said in prepared remarks released by the SEC.
Today marks the 10-member panel’s second day of public hearings. It is chaired by former California State Treasurer Phil Angelides and is tasked to work with Congress to overhaul financial regulation as a result of the worst U.S. economic cycle since the Great Depression. The panel is modeled in part on the Pecora Commission, which investigated the 1929 stock market crash and led to a series of progressive market reforms, including the establishment of the SEC in 1933 to protect investors.
Schapiro noted that SEC rule amendments adopted in December require public companies to disclose their compensation policies and practices for all employees (not just executives) especially if these policies and practices create risks that are reasonably likely to have a material adverse effect on the firm. “In considering whether a company’s compensation programs create these risks, we expect that companies will carefully examine their compensation practices and how they may incentivize risk, which should enable companies and their boards to more appropriately calibrate risks and rewards,” the chairman said.
Schapiro added that a fundamental concept underlying corporate law is that a company’s board of directors, while charged with oversight of the company, is accountable to its shareholders, who in turn have the power to elect the board.
“Enhanced disclosure about the decisions and performance of directors will help shareholders make informed decisions about the election of directors,” said Schapiro, a Democrat who starts her second year at the helm of the SEC this month. She told the panel the agency’s current proxy access proposals, now in its second comment period, are designed to facilitate the effective exercise of the rights of shareholders to nominate directors.
“These proposals go to the heart of good corporate governance,” said Schaprio, a veteran federal regulator who served as a public director on the boards of Duke Energy and Kraft Foods. She said the proposals also include amendments to Rule 14a-8 under the Exchange Act to further facilitate shareholder involvement in the nomination of directors.
“If adopted, these new rules would afford shareholders a stronger voice in determining who will oversee management of the companies that they own. Strengthening the ability of shareholders to hold boards of directors accountable to them-including for their oversight of compensation and risk management-should further empower shareholders and help to restore investor trust in our markets,” Schapiro said.
Schapiro, who’s been criticized in some circles for what has been called weak rulemaking efforts to date, said she is committed to “bringing final rules in this area to the full Commission for consideration early this year.”
Click here to see the entire text of Schapiro’s prepared testimony which includes comments on financial market regulations, transparency and investor information, and reducing systemic risk.