Financial Reform Hits the Skids
In March of this year, in the depths of the market sell-off, Treasury Secretary Timothy F. Geithner appeared before the House Financial Services Committee to discuss the need to fix the nation’s financial regulatory system. Geithner told the committee “Our system failed in fundamental ways,” and to “address this will require comprehensive reform. Not modest repairs at the margin, but new rules of the game.” This conclusion was echoed by Representative Barney Frank (D-MA), chairman of the committee. “The days of light-touch regulation are over,” he said.
The implications of the crisis went even further. As New York Times columnist Andrew Ross Sorkin wrote in his new book Too Big To Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System — and Themselves, “The calamity would definitively shatter some of the most cherished principles of capitalism.”
Indeed there has been widespread agreement that the financial system is flawed in many important ways. The list of ills is long and varied – greed, overconfidence, stupidity, lack of accountability, excessive compensation, under-resourced regulators, uncoordinated regulation, conflicts of interest, and too many financial intermediaries.
It has been persuasively argued that reform efforts are necessary because under our current regulatory system and government guarantees, large financial companies are excessively insulated from the risk of failure. Many features of our system promote excessive risk-taking and while such risks may (or may not) meet the narrow interests of particular financial institutions or their managers, they may not meet the interests of society and the larger economy. This factor is of particular interest to investors who have an eye on long-term and sustainable performance. We need a system that aligns the interests of financial company executives with socially beneficial and sustainable long-term performance.
Whatever the cause(s), the impact of the near-collapse of the financial system has been felt far and wide, with the greatest burden falling on the poor and underprivileged. Unemployment hovers at ten percent. The “hidden” unemployment rate, which includes discouraged and underemployed workers, is estimated at 17%. Many economists fear that without further action, the recovery will be a jobless one. Foreclosures continue to stalk communities as the dream of being more prosperous than the previous generation seems farther away.
The Obama administration’s first tangible response to this crisis was its June 2009 plan, Financial Regulatory Reform: A New Foundation, which outlined five goals: (1) promote robust supervision and regulation of financial firms, (2) establish comprehensive supervision of financial markets, (3) protect consumers and investors from financial abuse, (4) provide the government with the tools it needs to manage financial crises, and (5) raise international regulatory standards and improve international cooperation.
These goals are similar, but also different in very important ways, to those of the Social Investment Forum which called for improved corporate governance, disclosure on environmental, social and governance factors, regulation and oversight of all investment products, ‘resourcing’ the regulators, creation of a systemic risk regulator, better consumer protection, and improving the rating agencies. (Cheryl Smith of Trillium Asset Management Corporation serves as the Social Investment Forum’s board chair.)
But for all intents and purposes, nothing has been done thus far. For all of the talk of crisis and opportunity – of a real need to change business as usual – there has been surprisingly little done since the eight days in September 2008 when Lehman went into bankruptcy and Merrill Lynch was absorbed into Bank of America. “I think the real danger here is almost nothing done to prevent another financial crisis from coming down the pike,” said Jeffrey Garten, former dean of the Yale University business school and a top international economic adviser to former President Bill Clinton. Former Clinton labor secretary Robert Reich observed “Congress is struggling to produce the tiniest shards of regulation that would at least give the appearance of doing something to rein in the Street,” for which he lays most of the blame on political donations. In fact, lobbying by the financial services industry even prompted President Obama and several administration officials to call on Wall Street to stop lobbying against the proposed regulations
Where do we go from here, as citizens, voters, and investors?
One avenue is through Americans For Financial Reform (AFR), a large umbrella organization of many familiar organizations from the SRI, unions and consumer advocacy communities. AFR is pressing the administration and congress to move quickly to “to repair our nation’s broken financial system, establish integrity in the financial markets, and facilitate productive economic activity that benefits all segments of our communities.” AFR provides position papers, action alerts, and legislative updates.
We can also support legislation such as the Shareholder Bill of Rights or the Consumer Financial Protection Agency Act. The Social Investment Forum has been coordinating lobbying in support of these bills and Trillium has been an active participant in those actions.
These efforts, aimed at generating a government response to the crisis, are the most popular and obvious way to address systemic financial reform. To focus exclusively on them, however, as some have, is to miss the role that other change agents like shareholders can play. Shareholders have a critical role to play in fostering socially desirable outcomes. While many apologists for corporate management have blamed shareholders for the crisis, their arguments fail to take into account the fact that many shareholders have not exercised direct influence over management and are in fact distanced from corporate executives by layers of brokers, mutual fund managers and investment firms. As Judge Leo Strine, Jr. of the Delaware Chancery Court recently put it:
The difficulty is compounded when those who directly influence public corporations are not primarily end user investors focused on the long term and keenly worried about excessive risk — think workers who must invest in mutual funds for retirement — but far more likely to be financial intermediaries whose investment horizons are often less than a year.*
Shareholders need to surmount these barriers and exercise their unique rights to advocate for meaningful reform.In recent years we have seen growing support for shareholder proposals that call for advisory votes on executive pay packages, independent board chair, and political contribution disclosure. These votes, in some cases majority votes, indicate that many shareholders are ready to take a more active role in corporate governance – an important step towards meaningful corporate social responsibility.
At Trillium we are at the nexus of those interests and for years have taken this opportunity as a shareholder to hold financial companies accountable and to push them to conduct themselves in a socially beneficial manner. We have filed and co-filed shareholder proposals for the last seven years at companies like AIG, JP Morgan, Bank of America, Wells Fargo, Citigroup, Countrywide, and Goldman Sachs on issues such as social impact reporting; predatory lending, and executive compensation. This year, we have submitted shareholder proposals to Goldman Sachs on executive compensation and State Street Bank on political contributions. These proposals make it clear that as far as we are concerned, the days of business as usual are over.
We are extremely concerned at the lack of meaningful financial reform in the last 18 months and firmly believe we must continue to apply pressure on the financial services industry to reform. As Chief of Staff Rahm Emmanuel is famous for saying, “never let a serious crisis go to waste.” We heartily agree and will remain strong advocates for socially responsible behavior at the financial services companies in our portfolios.
* Risk-Taking by Boards and the Financial Crisis October 7, 2009 at http://www.directorship.com/author/leo-strine-jr/. In the previous Investing For A Better World, we wrote about efforts to empower shareholders to exercise their influence directly rather than through intermediaries such as brokers, mutual fund managers and investment firms.