Senator Tim Johnson

The Senator recently responded to questions submitted by NACD Directorship’s Jeffrey M. Cunningham on his efforts to improve the economy, protect Dodd-Frank and reform the U.S. housing finance structure.

What did the 2010 elections mean from a political perspective?
The 2010 election was obviously not the best cycle for Democrats as a whole, but these things swing back and forth. Voters elected a Republican House of Representatives and a Democratic Senate, so neither party has a mandate. I don’t know what 2012 will bring, but I know that the American people expect their elected officials to work together to help get the economy back on track and create jobs instead of playing partisan political games.

What do you make of the House efforts to repeal or change Dodd-Frank?
Despite the fact that Americans lost millions of jobs, millions of homes and trillions of dollars in wealth, Republicans apparently believe we were adequately protected during the financial crisis. Efforts to tear down Dodd-Frank are attempts to go back to the days of too big to fail banks, backroom derivatives deals and risky subprime mortgages. I think the American people want Congress to focus on the future and on creating new jobs, rather than trying to dismantle this historic reform.

You have said: “I hope that in the great tradition of this body we can disagree without being disagreeable.” How?
I have always believed that part of my job as a Senator is to work to build consensus, and with a divided Congress that is more important than ever. Neither party has a monopoly on good ideas. The American public wants us to find common ground that creates jobs, grows the economy and deals with the real challenges we’re faced with.

Why was proxy access a controversial measure even in committee?
As with many parts of the bill, there was a lot of disagreement over proxy access because there were legitimate concerns raised on both sides of the issue. In the end, Congress gave the authority to set proxy access rules to the SEC. The SEC’s proposed rule is currently the subject of litigation, and I am closely monitoring the situation. It’s important that a balance be struck between shareholder rights and board autonomy.

To what extent is Fannie Mae and Freddie Mac a focus for the SBC?
Housing finance reform is a top priority, and I have already held three hearings on the topic. It is a very complex issue, so we need to examine it thoroughly and build bipartisan consensus in order to move forward on legislation.

How do you feel about the Financial Stability Oversight Council and its “too big to fail” law?
Dodd-Frank ended too big to fail and ensured that American taxpayers will never again be forced to throw billions of dollars at Wall Street to save firms that run the risk of bringing down our entire economy. The Financial Stability Oversight Council (FSOC) is an essential component of the law, because the systemic problems we saw in the financial crisis cut across the traditional boundaries between regulators. The FSOC has improved coordination and increased transparency between agencies, and I am confident it will help better protect the stability of our financial system.

It’s important that shareholders have a say on executive compensation, and Dodd-Frank ensures that they do. I have no doubt that talented and successful executives who deliver value to shareholders will be appropriately compensated.

We hear that public accounting firms will be a focus of your efforts.
Reliable, accurate and transparent accounting is clearly vital for investor protection and confidence. This is an important issue that the Committee has and will continue to monitor, most recently at a subcommittee hearing in April.

Do you feel the Dodd-Frank ‘say on pay’ provision gives investors adequate safeguards?
The SEC’s final rules regarding shareholder votes on executive compensation are only a few months old at this point. We should give the new rules adequate time to work before jumping to conclusions or introducing new legislation.

What suggestions do you have for setting CEO compensation?
It’s important that shareholders have a say on executive compensation, and Dodd-Frank ensures that they do. I have no doubt that talented and successful executives who deliver value to shareholders will be appropriately compensated.

What concerns you most about funding for the SEC?
It is vitally important that both the SEC and CFTC get the resources they need – the 2008 economic crisis showed us the dangers of regulatory shortfalls. The Wall Street reform bill strengthened regulators ability to police the financial system and help prevent another financial crisis. These two important regulators serve on the front lines investigating fraud and abuse, and it is imperative that they are provided with the necessary resources to do their jobs and protect American taxpayers and investors.

What do you hope your legacy as banking chair will be?
I am focused on doing the best job I can. My top priority for the Committee is to support the nation’s economic recovery and promote job growth, and my agenda as chair reflects that.

This column was written by the research staff at the NACD.

SEC Seeks ‘Deeper Meaning’
As directors already know, companies must include new disclosures in this year’s proxy:

• Risk oversight: More information on risk and compensation

• Compensation for directors: Changes to options reporting in the compensation table

• Director qualifications: “Experience, qualifications, attributes or skills” that led to board appointment/nomination—including how a nominating committee “considers diversity in identifying nominees for a director”

• Leadership: Whether and why a company has chosen to combine or separate the roles of chairman and CEO

What directors may not realize is that the Securities and Exchange Commission is on a relentless search for deeper meaning. Based on past trends, the agency will soon be sending letters to companies about their 2010 governance disclosures. Shelley Parratt, deputy director in the SEC’s Division of Corporation Finance, emphasized at an NACD Capital Area Chapter meeting earlier this year that the SEC does not need detailed descriptions of process, but wants “reasons why.”

When a company explains its compensation decision-making processes but does not explain why it made the decisions, Parratt told the NACD audience, the SEC will ask for enhanced disclosure of the analysis.

Dodd Bill Distilled
Even while comments are still coming in to the SEC on proxy access, there is parallel movement on the Hill. Proxy access is one of no less than nine general governance issues proposed by Sen. Christopher Dodd (D-CT), chair of the Senate Committee on Banking, Housing and Urban Affairs. This new phoenix rose from the ashes of the Restoring American Financial Stability Act, originally proposed last year.

Overall, the new Dodd bill contains governance guidance for most financial companies, including investment advisors and/or private equity funds, and last but not least, non-bank financial companies and some bank-holding companies (which are required to have a risk committee). The bill even includes governance instructions for the Federal Reserve System itself. If you are a director of a financial company, it’s probably a good idea to read the entire 1,336-page bill.

Here is a checklist of the more general governance items, starting with the subsection on Accountability and Executive Compensation:

Say on pay: Proxies would have to include “a separate resolution subject to shareholder vote to approve the compensation of executives.” This provision would not limit the ability of shareholders to make additional pay proposals. Their vote would not be binding and could not overrule a decision by the company or its board. This is in accordance with the NACD’s Key Agreed Principles, founded on the basic premise that corporate governance should be determined by the board (assuming legal and listing compliance.)

Compensation committee independence: Compensation committee provisions cover independence, advice, disclosures and funding. The bill mandates an all-independent compensation committee, indicating that any receipt of consulting fees or any affiliations would disprove independence (think Sarbanes-Oxley audit committee independence). Compensation committees would have the right (but not the obligation) to maintain independent legal counsel and independent compensation consultants. In a move many compensation committees would welcome, the bill states that committees would have a right to obtain funding for advice: “Each issuer shall provide for appropriate funding, as determined by the compensation committee in its capacity as a committee of the board of directors, for payment of reasonable compensation—(1) to a compensation consultant; and (2) to independent legal counsel or any other advisor to the compensation committee.”

Showing admirable legislative temperance, the proposed bill also includes rules of “construction” protecting directors’ business judgment. A typical rule reads: “This paragraph may not be construed to …affect the ability or obligation of a compensation committee to exercise its own judgment in fulfillment of the duties of the compensation committee.” Again, this language accords with NACD principles.

Pay vs. performance: In their proxies, companies would have to disclose (using charts if they wish) the relationship between executive compensation actually paid and the financial performance of the issuer, taking into account any change in the value of the shares of stock and dividends of the issuer and any distributions. The relationship of pay to performance requires use of performance metrics. This will be the subject of NACD’s 2010 Blue Ribbon Commission, co-chaired by John Dillon, retired chairman and CEO of International Paper, and Bill White, retired chairman and CEO of Bell & Howell.

Clawbacks: The bill would mandate recovery of erroneously awarded compensation. No listing would be allowed for companies unless they develop and implement a policy on clawbacks and  recovery from any incentive-based compensation awarded within the past three years based on an accounting restatement, with or without fraudulent intent.

Disclosure of hedging by employees and directors: This would include prepaid variable forward contracts, equity swaps, collars, and exchange funds designed to hedge or offset any decrease in the market value of equity securities granted to or held by employees or directors.

Excessive compensation by bank-holding companies: A “safe and unsound” tag would be put on banks that pay executives or others pay that could lead to material financial loss to the company. Although this would apply only to banks, if approved, it could spread to other industries, so it should be watched carefully.

The Strengthening Corporate Governance subsection consists of three main parts:

Majority vote: In an uncontested election, each director who receives a majority of the votes cast would be deemed to be elected. If a director of an issuer received less than a majority of the votes cast in an uncontested election, the director would tender the resignation to the board of directors. The board could refuse the resignation but it would have to disclose why. (If the number of nominees exceeds the number of directors, each director would have to be elected by the vote of a plurality).

SEC’s right to mandate proxy access: The SEC would have the right to issue proxy access rules. This has been under dispute, with some saying the SEC does not have  jurisdiction in such matters.

Disclosures regarding chairman and CEO structure: These rules  would require that the proxy sent to investors must state the reasons the issuer chose the same, versus different individuals, to serve as chairman of the board of directors and chief executive officer (or equivalent positions). Such disclosure is already required by the SEC.

The penalty for not conforming to any of these rules could be delisting—or not getting listed in the first place. But the bill makes it clear that it will give companies time to conform, and that regulators will make exceptions for small-company size.

Even if this bill is signed into law by the time the next issue of NACD Directorship arrives at your door—always possible with this hasty Congress—its real impact will come through the typical Washington fare of rules and technical corrections.

For just-in-time, confidential answers to governance questions, contact NACD’s confidential hotline, ExpressSource, at nacdonline.org (go to “Governance Resources”).

This column was written by the research staff at the NACD.

Neil Goldenberg

Under the current SEC rules, small public companies are subject to the audit of internal controls for the first time in years endi

ng on or after June 15, 2010. While there were previous efforts in Congress to exempt these companies permanently, the exclusion of such a proposal in the Dodd bill makes it less likely.

Furthermore, Congressional concerns over the new regulations over financial institutions and derivatives trading have overshadowed any concerns over SOX 404(b). It can be expected that the June 15 deadline will come before the Dodd bill is finalized in Congress.

It would be risky for companies becoming subject to the requirement to ignore its pending arrival. Management should have open discussions with their auditors about the scope of their work. Specific technical requirements, such as controls in information technology and technical financial reporting, require expertise not always inherent in smaller companies, so the services of a specialist may be required. Additionally, auditors will be taking a closer look at management’s documentation and assessment, as it may be used in part by the auditors and defray some costs if properly aligned.

Overall, these efforts may be a challenge for companies to address in the limited time left. Now that most fiscal year companies are completing their annual reports, this is the best time to consider these internal controls over financial reporting audit issues.

Neil Goldenberg, CPA, CIA is the partner-in-charge of the technology assurance and advisory services practice at Eisner LLP.

Of the many elements to financial reform bills pending in both chambers, the one that is perhaps of most interest to directors of public companies is self-funding of the Securities and Exchange Commission. This has been a critical but unsuccessful mission for every SEC commissioner since the agency was founded in 1933 as a way of ensuring adequate funding in which to perform its mandate as the advocate for shareholders.

Chairman Mary L. Schapiro has been lobbying Congress to pass self-funding during the past year she has been in office.  It was included in the financial regulatory reform bill introduced by Dodd, who was up for a sixth term, on Nov. 10, 2009 in the Senate. Under a similar House bill, self-funding fell shy, but there was a provision to increase Congressional funds appropriated to the agency.

Dodd’s lame-duck status could mean the SEC self-funding mechanism currently included in the bill falls off the table to other items in the measure deemed either more “pro-consumer” or more “industry-friendly” by respective parties.

George B. Curtis, deputy director of enforcement at the SEC until December when he returned to Gibson, Dunn and Crutcher, describes the agency as “remarkably underfunded” and “hobbled” in its ability to meet basic business-as-usual needs.

Curtis and other current and former agency staff say the ability to self fund from fees and fines collected from companies and individuals rather than rely on Congressional purse strings would bring state-of-the-art resources, including hundreds of additional employees as well as white-hot technology, which would increase the agency’s effectiveness.

“Self-funding has a good a chance as ever as this time,” he said yesterday, but added he did not know what the immediate impact Dodd’s announcement would have. “Chris Dodd was a firm supporter of enforcement.”

The SEC declined to comment yesterday.

Dodd, 65, stunned the political landscape with his announcement. He said he was is the “toughest political shape” of his career during a press conference surrounded by family members outside his home in East Haddam, Conn.  Dodd also said that he still has “important work to do” in the Senate.  Not only was he trailing in the polls, but Dodd underwent a particularly grueling personal year that included health issues and the deaths of his sister in July and best friend — in and out of the Senate — Edward M. Kennedy in August.

What we also discovered in putting the list together was that in some instances, it became impossible to separate the captain from the team. This year’s D100 is a case in point: Our editors and board of advisors were nearly unanimous in our selection of President Barack Obama as this year’s most powerful corporate governance influence. And yet, to do justice to the seismic shift his policies have brought about in the boardroom, we also had to recognize the many other  “New Voices” in the Administration who are now leading the greatest financial reform of American business since the 1930s.

So, we ask that in the pages ahead you pay more attention to who counts, and less to how we count, in arriving at our final selection of individuals and institutions that have met the requirement to be “most influential.” We think you’ll agree it’s an intricate and impressive mosaic where the whole equals much more than the sum of its parts, which may or may not be greater than 100.

Regulators & Rulemakers

Team Obama
It is often written that reasonable people may disagree, and with Americans and their Presidents, it is practically a way of life. But even an unreasonable person could only conclude that this President and his Administration are having a profound and lasting influence over the boardroom. President Barack Obama has demonstrated an enormous capacity for calm in uncertain times. His relative youth leads to frequent comparisons to John F. Kennedy and his communications skills to those of Ronald Reagan. But it is his aggressive response to the unparalleled economic challenges that greeted him at the dawn of his young presidency that harkens back to an earlier figure of towering influence,  Franklin D. Roosevelt.

FDR’s massive social and financial reform programs—the creation of Social Security as part of the New Deal, the establishment of the Securities and Exchange Commission (SEC) and the Federal Deposit Insurance Company (FDIC)—helped restore confidence in the nation’s banking system coming out of the Great Depression. One could plausibly take major portions of FDR’s New Deal and substitute his name with President Obama’s.  The implementation of the $787-billion American Economic Recovery Act one month after Obama took office, coupled with his handling of the Troubled Asset Relief Program (TARP), which sought to strengthen the financial sector by buying up the assets and equity from troubled banks, has clearly helped the nation avoid further financial disaster and put the economy on the path to recovery.

And finally, turning again to the FDR playbook, Obama assembled a team of wise men and women, formidable economic and business minds, whose decisions are having a lasting effect on the role of the corporate director. Preeminent among them was the choice of Rahm Emanuel as chief of staff. Described as a veritable “influence machine,” within the Administration and Congress, the former Congressman from Obama’s home state of Illinois is known as a hard-charging, brutally candid, sometimes combative, acutely intelligent man who can get things done and knows the ways of the Capitol and the boardroom.

The Enforcers
Perhaps second only to Obama in terms of her influence on boards and corporate governance, career regulator Mary Schapiro heads up the 75-year-old SEC. Before the crisis, the agency’s very existence was in question: “Obsolete,” “out of touch,” and “behind the times” were just some of the many terms uttered by detractors. The Commission, under former chairman Christopher Cox, was pilloried for missing the Madoff scandal.

As former SEC chairman and Directorship 100 Hall of Famer, Arthur Levitt described her: “She has the skills, the intellect, and the character to be a superb SEC chair.” But Schapiro will face a new kind of challenge in the role, not just that of proving her own qualifications, but also instituting a significant remodeling of the SEC itself, as she works to bring it into the new regulatory era.

Moving swiftly to address regulatory concerns in the wake of the financial crisis, the SEC has rolled out a series of proposals that could embody the biggest change to the rules of the game for directors in some time. Schapiro, who is no stranger to the boardroom, having served on the boards of Duke Energy and Kraft Foods, has overseen proposed rule changes on proxy access, broker voting, say on pay, and new requirements for disclosure on executive compensation and director qualifications. It’s now up to her and fellow commissioners Kathleen Casey, Elisse Walter, Luis Aguilar, and Troy Paredes to determine the final regulations that emerge from the proposals.

Other key players Schapiro has brought into the SEC include Senior Advisor Kayla Gillan, Chief Accountant James Kroeker, and Director of Enforcement Robert Khuzami. Gillan was a founding board member of the Public Company Accounting Oversight Board (PCAOB) and former general counsel to CalPERS. Kroeker joined the SEC as deputy chief accountant in 2007 from Deloitte and Touche where he had been a partner in the firm’s national accounting services group. Kroeker recently said that the proposed road map for the convergence of International Financial Reporting Standards,pushed to the back burner amid the larger issues of market reform, would be restored as another top priority. Khuzami is a former federal prosecutor, has pledged to improve the SEC’s enforcement performance by creating specialized units to provide “structure and resources for staff to ‘get smart’ about certain products, markets, regulatory regimes, practices and transactions.”

TARP Overseers
Another example of Obama’s preference for brains over politics was his reappointment of Sheila Bair to chair the FDIC. Another fiscally conservative Republican, on Bair’s watch alone this year, 94 banks have failed, creating a new challenge:  how to replenish the fund. Bair has also been an integral part of the team overseeing TARP. Neil Barofsky is a former New York assistant attorney general confirmed by the Senate in December as special inspector general. Dubbed the “TARP Cop,” his job is to figure out how and where the $700-billion TARP funds are spent, reporting directly to the President and providing updates to the Congressional Oversight Panel chaired by bankruptcy expert and Harvard Law School professor, Elizabeth Warren. COP’s first report, released in February, casti-  gated then-Treasury Secretary Henry Paulson for his performance and lack of transparency, reporting that the Treasury Department  had overpaid by $78 billion for the assets it bought from banks.

Interestingly, while Obama sponsored and was a strong proponent of  “say on pay” legislation while a senator, since appointing Kenneth Feinberg special master of compensation, he has appeared unwilling to make the issue a top priority. Feinberg, who has immersed himself in some of the country’s most troublesome and high-profile cases, is considered a superb choice, both in terms of skill and temperament, by Capitol Hill insiders. His most noteworthy case was the 33 months of pro-bono work he did following the 2001 terrorist attacks to determine how much each victim would receive from the federal government’s September 11th Victim Compensation Fund.

Feinberg may in fact be perfectly suited for a job that most compensation specialists see as thankless, and possibly as a “no win” situation. As the Obama Administration’s comp expert, Feinberg was called on to monitor the compensation of executives in what were once some of America’s most prestigious corporations, now TARP recipients, including American International Group (AIG), Bank of America, Citibank, Chrysler, GMAC, and General Motors.

Fed to the Rescue
To prevent American capitalism from spiraling deeper into the abyss, nine months after President Obama made his first Cabinet announcement, he re-nominated Ben Bernanke as Federal Reserve chairman. The former Princeton economics professor was selected by Bush in 2005 to succeed Alan Greenspan. In 2008 after the market crashed, Bernanke invoked emergency powers, slashed interest rates, and spent trillions of dollars to right the financial system. Just last month, he declared the recession “likely over.” Though he seldom gives interviews, Bernanke is never far from the public eye and has been a stalwart in the transition between presidential administrations and in the effort to stem the economic slide.

When then President-elect Obama named his economics team, it included players who, like Bernanke, were already steeped in the crisis details, demonstrated a studied understanding of Depression-era economics, or some combination of both. Enter Treasury Secretary Timothy Geithner and Chief White House Economic Advisor Lawrence H. Summers. Geithner, who is currently pushing legislation to provide more systematic regulation of financial institutions, including new limits on executive compensation, recently told one interviewer that he is optimistic major reforms will be passed.

Prior to his appointment replacing Henry Paulson, Geithner was president of the Federal Reserve Bank of New York and part of the team central to the critical negotiations that resulted in Bear Stearns being tucked into JPMorgan Chase, Merrill Lynch going to Bank of America, Lehman Bros. disappearing, and Citigroup and other struggling banks getting a lifeline.

Summers, the former Harvard University economist who became its president following his tenure as Treasury Secretary to President Clinton, is director of the Cabinet’s National Economic Council. The group was established in 1993 to coordinate and ensure that the President’s economic policy agenda is carried out.

Rounding out the team, Paul Volcker, the former Fed chief under Clinton, was selected to chair the president’s economic recovery advisory board. And Christina Romer, a former UC Berkeley economist, who administration sources suggest is well- regarded by both parties, chairs the Council of Economic Advisers. Her appointment was seen as a further triumph of brain over politics in Obama’s approach to talent recruitment.