Shareholder activism and the Dodd-Frank Wall Street Reform and Consumer Protection Act

by Olivia Grugan, Northeast Student Organizer

On July 21, 2010 President Obama signed the Wall Street Reform and Consumer Protection Act into law.  This bill is designed to respond to the financial meltdown by increasing transparency and accountability on Wall Street, ending bailouts, and protecting consumers from exploitative financial practices.

I have neither the space, nor the expertise to provide a comprehensive overview of this bill in this blog.  Instead, my goal is to discuss what this bill means for the future of shareholder activism, one of the central tenants of REC’s Socially Responsible Investment initiatives.

The bill was introduced by Barney Frank (a Democrat from Massachusetts) and Chris Dodd (the Chairman of the Senate Banking Committee, a Democrat from Connecticut), in the House and the Senate respectively.  As stated in the title of the Act, it aims
“To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘‘too big to fail’’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.”

For REC, one of the most relevant parts of the bill is Title IX, which stipulates that shareholders have a “say on pay,” meaning shareholders have the right to vote on executive compensation.  Furthermore, shareholders determine the frequency with which they vote on this compensation—once a year, once every two years, or once every three years.  The bill also requires full transparency of CEO pay, median compensation of all other workers, and the ratio of these two numbers.

As the AFL-CIO says, “the new Wall Street Reform and Consumer Protection Act will help rein in CEO pay if it’s allowed to work. That’s a good thing for working people and the whole economy.”

Speaker of the House Nancy Pelosi says the bill will bring “an era of transparency for our financial markets, tough oversight of Wall Street, and strong consumer protections on Main Street.”

The implications for shareholder activism are clear.  Starting in January 2011 when the bill goes into effect, shareholders will have increased access to information about the compensation of all company employees.  They will also have the opportunity to approve executive pay.  Managing the much distained discrepancy between the salary of the CEO and the average worker will become the opportunity—and the responsibility—of the shareholder.

The implications are especially poignant for college endowments.  Since colleges often have larger holdings than individuals, their opinions are also more likely to be heard when voicing a concern.  Imagine what college SRI groups could do if they could play a role in determining corporate salaries.

However, we have yet to make it to January 2011.   In the meantime, Big Business is lobbying the SEC (Securities and Exchange Commission) to put restraints on proxy voting and limit the influence of shareholders.  This would cripple the essential channel through which shareholders could manage executive compensation. However, the SEC is accepting public comments on the issue and tracks all bill activity to date.  Visit their website to express your concern for shareholder rights.

Or if you’d just like to learn more about this, visit the SEC’s website on the Dodd-Frank Act. And keep your eyes and ears open to see what progress is made in the coming months!

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