Michael Brush

Company Focus11/30/2006 12:00 AM ET

The coming crackdown on CEOs

When Democrats take control of Congress in January, Rep. Barney Frank will set the agenda on policies that affect public companies.  He's pushing for extraordinary reforms and supersized shareholder power -- including say over executive pay.

By Michael Brush

Democrats want to bring democracy to the boardroom. And -- more bad news for CEOs -- to the corner office.

After six years in which Republicans have run the show in Washington -- and during which CEO salaries have climbed 209% -- Democrats in Congress see executive-compensation reform as one way of flexing their populist muscles. Their goal is to give shareholders more say in how corporations are run and, more specifically, how top executives are paid.

Spearheading those efforts will be Rep. Barney Frank of Massachusetts. In January, when his party once again takes control of the House and Senate, he'll take over as chairman of the House Committee on Financial Services, a key panel for setting policies that affect public companies, the stock markets and investors.

In what would be a major power shift inside corporations, Frank hopes to give shareholders an absolute right to reject bloated compensation -- everything from salaries, bonuses, options and huge pensions to private use of the corporate jet. Frank says change is sorely needed because boards are too often stacked with management cronies who fail at their assigned task of looking out for shareholders.

"Boards of directors cannot be relied on because too many are themselves CEOs or they have been hand-picked by CEOs," says Frank, who spoke with me earlier this week. "Directors can do some things well. But being a check on CEOs is not one of them."

Extraordinary reforms

Frank's wish list goes far beyond whatever reformers had thought possible. Shareholder activists have seen reducing the size of bloated executive retirement packages as their best hope for change. Frank wants that, but also much more.

"It is extraordinary because it would get the shareholder and the federal government into the internal operations of a corporation to a much greater degree than ever before," says Patrick McGurn, special counsel for Institutional Shareholder Services, a company that advises institutional investors. "It goes to the core of who is responsible for running the day to day operations of corporations." Because the change would be so radical, McGurn is skeptical of its success.

Here's a quick look at Frank's hoped-for reforms:

Access to the boardroom

Frank wants the Securities and Exchange Commission to give shareholders more power to change corporate rules on how boards are elected. Frank favors allowing shareholders to tinker with corporate bylaws so that they can get their own board candidates on proxies paid for by companies.

This could go a long way to breaking up the cozy relationship among board members and executives. Right now, board candidates are typically selected by nominating committees made up of other board members and management. So cracking the chummy insider network is tough for outsiders who want a bigger say in how a company is run.

The issue surfaced recently in the courts when American International Group (AIG, news, msgs) challenged a proposal from the American Federation of State, County and Municipal Employees (AFSCME) that would give shareholders a binding vote on changes in the rules behind board nominations.

The union wants changes to nomination rules so that shareholders owning more than 3% of AIG stock would have the right to put board candidates up for election on the company proxy.

AIG barred the proposal from its proxy, and the SEC sided with the insurance company. To AFSCME lawyers, that looked like a big shift away from a policy set by the SEC 30 years ago. The union challenged the SEC decision, and a federal appeals court told the SEC to clarify its rules.

Frank says he's leaning on SEC Chairman Christopher Cox to side with AFSCME and let the labor union put the proposed changes to election rules to vote on AIG's proxy. "I am urging Cox to allow shareholders to put that on the proxy. You should be able to force a vote on that." The change fits in squarely with Frank's agenda for more shareholder democracy.

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