With the focus this week on health care’s “home stretch” and concerns about government limiting the ability of ordinary Americans to make choices about medical treatment, another threat to freedom is accelerating this week that could harm Americans’ abilities to start a business, invest for retirement, and get affordable home and auto insurance policies. Today, after abruptly shutting down earnest negotiations between Senate Republicans, Senate Banking Committee Chairman Chris Dodd announced a partisan so-called financial regulatory reform bill that he will try to ram through his committee within a week.
Dodd's bill would do nothing to put restrictions on two entities that were proximate causes of the housing bubble, the government-sponsored Fannie Mae and Freddie Mac, and instead would hit Main Street businesses and entrepreneurial firms that had nothing to do with the crisis. The bill’s specific provisions would penalize the corporate structure of public companies from Google to Warren Buffett’s Berkshire Hathaway, tax prudent banks and stable home and auto insurers and their policy holders to pay for the bailout of the next Lehman or AIG,depress revenues from incorporation fees in Sen. Harry Reid’s Nevada and Vice President Biden’s Delaware by federalizing corporate governance laws, and put thousands of retailers who issue gift cards or even offer layaway plans under a new Federal Reserve bureaucracy to regulate credit.
The one virtue the Dodd bill has is making the President of the Federal Reserve Bank of New York subject to Presidential nomination and Senate confirmation. But that will not fix the bill’s many other provisions giving the Federal Reserve direct regulatory power over thousands of America’s big and small businesses without more transparency and accountability for the entity itself.
Here are the highlights of some of the main provisions for the economy.
1. The Shareholder Rights jujitsu with “proxy access” and other corporate governance mandates.
According to Politico, so-called “proxy access” language was one of the main issues “not resolved.” There is good reason for it was not resolved is because proxy access has nothing to do with complex financial products and everything to do with empowering shareholder groups on the Left, such as union pension funds, to pressure public companies to bow to their various agendas.
For more than 150 years, state law has governed the director nomination and election process for corporations and their shareholders. In states such as Delaware and Nevada, where many companies are incorporated, any shareholder can nominate a candidate for the board, but that candidate has to pay for the campaign out of his or her own pocket. Under Dodd’s bill, the federal government would force the companies and other shareholders to subsidize the campaigns of dissident shareholders and include them in a company’s proxy materials.
But as I have written in BigGovernment.com, subsidizing shareholders to let them run director candidates on the cheap opens the floodgates to special interest agendas that hurt the bottom line for ordinary shareholders. “Groups from unions to animal rights groups could run their own candidate for corporate directors and promote their special interest agendas at the company’s (and ultimately other shareholders) expense.”
The bill also takes the unwise step of forcing companies to justify having the same person serve as chairman and CEO. Some corporate governance activists have flagged this as a bad practice, but there is no evidence it harms shareholder returns. In fact, shareholders of Google and Berkshire Hathaway seem quite pleased with their CEOs – Eric Schimidt and Warren Buffett, respectively (both of whom supported Obama) -- also serving as chairmen, and would be quite angry if the government were to penalize this practice that had been so effective for these companies’ growth.
Finally, the one-size fits all corporate governance procedures would greatly reduce the competitiveness of Delaware and Nevada in attracting firms from all over the world incorporating their because of the variety of corporate structures the states allow that work both entrepreneurs and investors.
More to come.