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Rep. Frank Pledges Legislation on Executive Compensation

House Financial Services Committee Chair Barney Frank said the relationship between corporate boards and executive officers is collusive with regard to executive compensation. Shareholders must be the real check on excessive compensation, in his view. Rep. Frank promised legislation to increase the ability of shareholders to vote on compensation packages. The staff is currently working out the details of the legislation, which includes provisions for what will happen if the shareholders vote no. Rep. Frank's remarks were in response to a question submitted at the end of a recent speech at the National Press Club.

Rep. Frank noted that CEOs pick the board of directors and the board of directors picks the CEO. It is a very collusive relationship, he said. Rep. Frank believes it is clear that boards of directors do not provide any real check on CEOs. He mentioned the recent action by the board of directors of Home Depot which decided the CEO had to go and paid him $210 million to do so.

The United Kingdom has a shareholder vote, he added, which has become an example that many U.S. corporate leaders have said that they admire. Some believe that the Financial Services Authority is more flexible than the SEC. Since 2002, the United Kingdom has required a shareholder advisory vote on board pay, which was coupled with the introduction of required disclosure of key compensation data.

Rep. Frank said that the issue of executive compensation is not just a matter of envy, but has reached the point of having some macro economic significance. He cited a recent study by Harvard University law professor Lucien Bebchuk and others showing that the percentage of the profit of the top 1,500 corporations that goes to compensation for the top three officials has reached almost 10 percent.

In the 109th Congress, Rep. Frank introduced a bill that would have allowed shareholders to approve their company's executive compensation. The Protection Against Executive Compensation Abuse Act, H.R.4291, would also have allowed companies to adopt a policy for recapturing any form of incentive compensation, such as when a company pays bonuses or grants stock options to executives for meeting performance targets only to later learn that the numbers were inaccurate and must be restated. The bill also would have required that shareholders separately approve any additional "golden parachute" compensation for top executives that coincides with the sale or purchase of substantial company assets.