Obama proposals include risk assessments, shareholder votes - 21 June 2009

Obama proposals include risk assessments, shareholder votes

Changes to the way executive compensation committees do business could
be on the way as President Barack Obama's proposed financial system
reforms begin to take shape.

Executive compensation packages
contributed to the current financial crisis because “incentives for
short-term gains overwhelmed the checks and balances meant to mitigate
against the risk of excess leverage,” Treasury Secretary Timothy
Geithner said in a June 10 statement.

But Steve Seelig, executive compensation counsel with Watson Wyatt Worldwide in Arlington, Va., says it's harder than one would think to attribute compensation packages to excessive risk.

Complex
financial products such as credit default swaps and securitized
mortgages that sparked the financial meltdown were assessed for risk by
the institutions that created the tools.

“The big question is,
did those risk models just fail or were they ignored?” Seelig said.
“Until you can prove that (executives) ignored them, I'm not sure you
can say the pay model caused them to take excessive risks and ignore
those risk profiles.”

Still, the proposed new regulations call
for all firms receiving funds from the Treasury's Troubled Asset Relief
Program, or TARP, to publish an assessment of risks related to the
companies' executive compensation packages.

Doug Friske, an executive compensation consultant with Towers Perrin
in Chicago, expects risk assessment will get some traction and extend
beyond banks and other financial institutions that received TARP
funding, becoming a more standard component of proxy disclosure.

Also
proposed is a required shareholder vote on executive compensation
packages for all public companies, known as “say-on-pay” rules.

The
votes would be nonbinding, but the administration says the votes would
“provide a strong message to management and boards and serve to support
a culture of performance, transparency and accountability in executive
compensation,” the Treasury summary said.

But exactly what
shareholders will be asked to approve — the pay packages or the
compensation philosophy itself — has yet to be defined.

Shareholders have proposed similar programs directly to companies

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