Professor J.W. Verret, a former law clerk for the Delaware Chancery Court, has been testifying before the U.S. Congress over the past two months regarding pending federal legislation and its impact on Delaware corporate governance law, including, for example, executive compensation issues and fiduciary duties of the government as a majority shareholder. Below is an overview that he sent me today.
Financial Crisis Congressional Hearings
Assistant Professor of Law, George Mason University School of Law
Senior Scholar, Mercatus Center Financial Markets Working Group
Congress has been particularly active this summer holding hearings in response to the financial crisis. Now that it has gone into recess, I thought I would take this opportunity to summarize the events at three hearings in the U.S. House of Representatives and U.S. Senate where I have testified over the last two months that have very serious implications for Delaware.
I had the opportunity to testify at a House Financial Services Committee hearing on the link between Executive Compensation and Systemic Risk. My opening statement is available here. I noted that executive compensation’s link to the present crisis is unclear. In particular, executive compensation practices at those banks able to return their TARP funds were mostly identical to those at banks that will need additional injections of capital, and I argued that the Committee should consider how say-on-pay will give substantial power to proxy advisory firms. The questions for this hearing were also particularly lively, with the members expressing interest in the role of Delaware in corporate law. One of the witnesses, former SEC Chief Accountant Lynn Turner, supported a mandatory shareholder vote on state of incorporation, a proposal which I opposed and one which fortunately has not been considered by either chamber. The legislation considered at the hearing, including say-on-pay and compensation committee disclosure, eventually passed the House and has been remitted to the Senate. You may also view my interview on The News Hour with Jim Lehrer on this issue here.
I also had the opportunity to testify, see here before the U.S. Senate Committee on Banking, Housing, and Urban Development regarding corporate governance and shareholder power. Executive compensation was considered, but the SEC’s Proxy Access Proposal and Senator Schumer’s Shareholder Bill of Rights were more central to the discussion. The role of Delaware in corporate law was also sharply debated by myself and the other witnesses. Senator Johanns quipped "When I was Governor of Nebraska, I decided I was going to take on Delaware. You know what I realized about Delaware? It had one heck of a good start. And they were doing more things right than they were doing wrong, and it was going to be very difficult to dent that…." Senator Corker seemed to express interest in some, but not all, of the Schumer Bill’s provisions. If the Schumer Bill obtains bi-partisan support from Senator Corker, which would likely require significant compromise in the current language of the bill, I predict its swift passage.
Finally, I testified (here) at a hearing before the House Committee on Oversight, alongside the CEO and Trustees of AIG, regarding deficiencies in the AIG Trust crafted by the Federal Reserve to maintain the government’s investment in AIG. My work has recently led to bi-partisan legislation from Senator Warner and Senator Corker, The TARP Recipient Ownership Trust Act of 2009 (see here), to alleviate some of the deficiencies I discovered in the AIG trust. In particular, the fiduciary duty of the trustees is to the Treasury, rather than the taxpayer, and indemnification for the trustees has no form of good faith limitation.