Bank executives took big risks before the financial crisis and paid themselves lavishly. Shareholders couldn't stop them.
That could change under the financial overhaul Congress is completing. It could give shareholders more influence over corporate pay and decision-making.
Still, no one thinks the bill would eliminate abuses. It wouldn't force companies to honor shareholder votes on executive pay, for example. And hedge funds, rather than individuals, could control elections for new board members.
Here are some questions and answers about the likely changes for corporate management:
Q: How would the legislation rein in reckless executives?
A: By giving them tougher bosses. Shareholders would find it easier to nominate board members — and thereby have a chance to influence a board's decisions. Fewer shares would qualify a stockholder to nominate a director. Directors who represent shareholders are more likely to vote to limit pay or reduce the company's financial risks.
Shareholders also would vote on the executive pay packages devised by boards. Directors nominated by shareholders would be less likely to rubber-stamp excessive pay. This could make it harder for executives whose decisions damage their companies to pocket short-term profits.
Before the crisis, executives controlled banks' boards of directors. Shareholders got to vote on the directors. But the executives chose the candidates — and they didn't nominate people who favored lower pay or safer investments.
Q: What would the changes mean for financial companies?
A: Executives would be more accountable for reckless business decisions or tricky accounting. Most executives are paid based on a company's financial performance. They earn more when profits are falsely inflated. In cases where companies must correct earnings statements, the executives would repay the companies. In addition, big financial companies would be required to have committees of directors focused on risk.
And banks would be more likely to face serious charges from their employees. The legislation establishes larger payouts for whistleblowers.
Q: What would all this mean for ordinary people?
A. For one thing, employees who spot wrongdoing and call attention to it would be protected — and rewarded. Those whose accusations of financial fraud lead to corporate fines or monetary settlements could receive millions of dollars.
Shareholders would have an easier time nominating board members. Pension funds, political advocacy groups and others could find more sympathetic directors. And executives and directors of big financial companies would be punished financially if their banks failed. That could reduce the need for taxpayer bailouts.
Q: Where does the bill fall short?
The shareholder votes on executives pay packages wouldn't be binding. Boards could ignore them. And though the Federal Reserve would be able to veto pay practices it deems unsafe, few think that's likely.
The risk committees that companies would have to establish wouldn't necessarily help. Lehman Brothers had a risk committee. Yet before it failed, Lehman took on huge risks and hid its financial weaknesses.
And giving shareholders more power won't reduce risk in many cases. Hedge funds are among the largest shareholders of some companies. They have the money and expertise to get their candidates elected to company boards.
Hedge funds can make huge profits when share prices fluctuate by a few pennies. Directors representing them could try to affect share prices by pushing for big, risky bets. And big, risky bets for short term-profits are how the financial system succumbed to a crisis in the first place.
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