U.S. regulation tilting toward shareholders

WASHINGTON Thu Nov 6, 2008 6:47pm EST

WASHINGTON (Reuters) - The U.S. regulatory landscape is tilting toward shareholders on issues such as curbing executive compensation under a Barack Obama presidency and enlarged majorities in the Democrat-controlled Congress.

The loss of trillions of dollars of shareholder value on global stock markets, even as chief executives walked away with hefty pay packages from failed companies, has damaged management's standing in Washington.

Rep. Barney Frank, the chairman of the influential House Financial Services Committee, is determined to give shareholders more say on setting executive pay, a proposal favored by President-elect Obama during his time as a Democratic senator.

Frank has also said he may tackle giving shareholders a less expensive path to influencing the composition of a company's board -- an issue known as proxy access and opposed by business.

Sen. Christopher Dodd, chairman of the equally influential Senate Banking Committee, says regulators must be strong cops on the beat and one of the main legislative focuses in 2009 will be to regain confidence of investors and consumers.

"The response to this crisis may be to give shareholders greater rights with regards to issues like executive compensation," said John Coffee, a professor at Columbia Law School.

Any changes to corporate governance enacted by the new Congress, that first meets in early January, would likely be enforced by the U.S. Securities and Exchange Commission.

Obama, to be sworn in on January 20, will get to appoint a new chairman of the SEC, an agency criticized by lawmakers and its own inspector general for not properly supervising investment banks.

"I think it will become a more robust agency with increased powers," said Rich Ferlauto, director of pension and benefit policy at the American Federation of State, County and Municipal Employees (AFSCME). "I think they will appoint a strong chairman."

The Republican administration of President George W. Bush has already set some limits on executive pay as part of its $700 billion financial services rescue plan aimed at thawing frozen credit markets.

For example, companies getting cash from the government must agree to "claw back" any bonus or incentive compensation paid to a senior executive based on statements later proven to be materially inaccurate.

Also, banks getting funds must ensure that compensation does not encourage executives to take unnecessary and excessive risks that threaten the value of the financial institutions.

Although critics say the Treasury department's rules are vague and subject to government interpretations, some investor advocates take heart from the election result and foresee a much friendlier environment.

"The failed policies of the last eight years have destroyed trillions of dollars in shareholder value, and America strongly indicated we need to move in a new direction," said Dan Pedrotty, director of investment at the AFL-CIO, the country's biggest labor federation.

Rep. Frank steered a "say on pay" bill to passage in the House in 2007 that gave shareholders the right to cast nonbinding votes on the pay of top executives.

Obama had backed a companion bill in the Senate that never gained any traction. A spokesman from Obama said in February he would commit to supporting it as president. On Thursday, an Obama spokesman declined to comment.

Former Democratic SEC commissioner Roel Campos and former Republican SEC chairman William Donaldson, who were supportive of proxy access, are part of Obama's economic advisory board.

Labor groups such as the AFL-CIO and AFSCME view Campos and Donaldson as particularly investor friendly.

Barbara Roper, director of investor protection at the Consumer Federation of America, said an Obama administration "could hardly be less investor friendly" than the current administration, but said she does not know what to expect.

"Don't assume that everything is magically OK because they are in control. (Democrats) are going to need to acknowledge their past contributions to the current crisis," said Roper.

(Reporting by Rachelle Younglai; Editing by Tim Dobbyn)

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