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Corporate Governance, Retirement Reforms Seek Home on Democratic Platform

August 25, 2008
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Reformers are licking their chops over the  Democratic National Convention, with high expectations to place on the party’s platform new corporate governance rules such as “say on pay,” higher taxes on hedge funds and private equity shops, and wider pension coverage.

“In many ways this is a unique moment in the corporate governance world,” said Daniel Pedrotty, director of the Office of Investment at the AFL-CIO in Washington. “There is an upbeat, hopeful mood in the investor community.”

While experts don’t expect the platform to clearly lay out a path to reform on each issue, they are confident Sen. Barack Obama, D-Illinois, is on board with their causes.

“He’s proven himself an advocate time and time again” on corporate governance issues, Pedrotty said, referring to Obama, the party’s presumptive nominee.

In addition to formally nominating Obama, delegates to the convention in Denver will adopt the party’s official platform on issues ranging from health care to immigration to foreign policy.

AFL-CIO officials are particularly keen to advance say-on-pay issues, which would give shareholders an annual nonbinding vote on executive compensation, and to provide shareholders access to the corporate proxy to nominate directors. They also want to limit the influence of Wall Street brokers over corporate director elections, preventing them from casting votes of shares they hold but do not own.

Critics say unions are backing these issues to advance labor’s agenda, rather than having the best interests of shareholders in mind.

Although most corporate executives think say on pay is “stupid,” they “expect it to become a reality,” said Geoff Loftus, vice president, Society of Corporate Secretaries and Governance Professionals in New York.

However, he doesn’t see an Obama victory as crucial to bringing about corporate governance changes. If the Democrats win a veto-proof majority in Congress, they would be able to push through changes even if Sen. John McCain, R-Arizona, the presumptive Republican nominee, were elected, he said.

“Right now this is about Congress and how much of a majority the Democrats will roll up,” he said. “If they get over the override threshold, they’ll use (McCain) for batting practice.”

Thomas J. Lehrer, director of public policy at the Washington-based Business Roundtable, disagreed. “Governance issues are not partisan issues,” he said. Changing policies “for the sake of change” undermines the efficiency of the business model, he said.

AFL-CIO officials also want to tax carried interest as regular earnings. This issue, advanced last year by Sens. Max Baucus, D-Montana, and Charles Grassley, R-Iowa, and Rep. Charles Rangel, D-New York, would change taxation on carried interest to an income tax levy, now at 35 percent, instead of the 15 percent capital gains rate. The move would affect all kinds of investment partnerships, including hedge funds, real estate and venture capital firms.

Mark G. Heesen, president of the National Venture Capital Association in Arlington, Virginia, said that boosting taxes on carried interest would be especially harmful to venture capital firms.

“Hitting venture capital with this is not what most people see as a good remedy,” Heesen said. “We believe [taxing carried interest] is not where this country should be going.”

However, he believes that Obama’s economic advisors understand the difference between investing in established companies and investing in startups. Heesen said venture capital could get a pass, even if carried interest taxes are upped.

“The devil is going to be in the details, and we’re not going to see the details until and if Obama becomes the president,” he added.

Meanwhile, Obama’s Web site calls for creating automatic individual retirement accounts in the workplace and expanding an existing tax credit for savers to match 50 percent of the first $1,000 saved by families who earn less than $75,000. Requests to Obama’s campaign staff for comment and further information were not returned.

“I think there is a lot of excitement that finally some significant progress may well be in sight on the retirement savings coverage front,” said J. Mark Iwry, a nonresident senior fellow at the Brookings Institution in Washington.

Iwry and David John, senior research fellow at the Thomas A. Roe Institute for Economic Policy Studies of the Heritage Foundation in Washington, co-authored the proposal, which enjoys bipartisan support. Iwry will speak at the convention as part of a roundtable symposium on retirement issues.

However, Obama’s retirement proposals could also cause concern for large pension plans, said Jan Jacobson, senior counsel, retirement policy, at the American Benefits Council in Washington.

ABC members are mostly plan sponsors of large corporate plans, so mandating an automatic workplace savings program with direct-deposit individual retirement accounts would not likely have a direct effect on them. But Jacobson wondered whether mandating expanded coverage could open the door for other government-required retirement programs.

On his Web site, Obama pledges to “require full disclosure of company pension investments” and states that “the lack of transparency [on pension investments] can make it easier for fund managers to make imprudent or even fraudulent investment decisions.”

“That might raise concerns of plan sponsors, which might see that as a first step of requiring types of investments in defined-benefit plans, or outlawing specific kinds of investments,” Jacobson said. “Are we going to get to the point that DB plans can only invest in what is politically correct at the time?”

Further details on Obama’s proposal were not available. But enhancing retirement security is a big vote-getter.

There’s little doubt that retirement security is an important topic for lower- and middle-income voters, whom Democrats typically draw, said Teresa Ghilarducci, the Bernard L. and Irene Schwartz Chair in Economic Policy Analysis at the New School for Social Research in New York.

She pointed to a poll by Lake Research Partners in Washington that asked workers what would make “the American dream more attainable.” A greater number of workers said preserving Social Security and ensuring all workers have adequate retirement benefits was more important to them than guaranteed health care or raising the minimum wage.

Expanding retirement coverage will come at a cost, and Democrats might look at reining in tax benefits of contributions to employer-sponsored plans and IRAs, which now cost the federal government $139 billion annually in lost taxes, one expert said.

“It is larger than home mortgages or charitable donations,” said Ann Combs, principal and head of the institutional strategic consulting group at Vanguard Group in Valley Forge, Pennsylvania. “I think it will definitely come into play, especially if [Democrats] have new proposals to expand coverage.”

Filed by Drew Carter of Pensions & Investments, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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