Indiana Senator Looks Out for His Pocketbook

Indiana Sen. Evan Bayh has good reason to use his dwindling political capital to alter the 'proxy access' language in the financial reform bill.
Author:
Publish date:

Eight months ago, I wrote about Sen. Evan Bayh's (D., Ind.) self-interested views on the proposed health care reform.

His wife, Susan Bayh, sits on the board of

WellPoint

(WLP)

from her hometown of Indianapolis. Over the last six years, Susan Bayh has received at least $2 million in compensation from WellPoint alone for serving on its board. What's more, she has four other lucrative corporate directorships. In 2008, she collected $656,062 in cash and stock for all her board work.

Sen. Evan Bayh (D., Ind.) and wife Susan

Sen. Bayh receives $165,000 in annual salary. According to 2008 reports filed, Susan Bayh's stock holdings were worth between $1.3 million and $2.7 million. Their family's total net worth was between $4.3 million and $15.1 million. And they owned a $1 million home in Washington in the name of Susan Bayh.

Why wouldn't Susan Bayh's financial relationships have a material impact on shaping Evan Bayh's views on health care reform and the countless other political issues he voted on through the years?

Last November, Bayh surprisingly announced he wouldn't seek re-election this fall. After all, he was a strong front-runner to be Obama's vice presidential candidate back in 2008. So the 54-year old went from potentially being a heartbeat away from the presidency to -- a year later -- professing that he no longer wanted to be in politics.

Politicians -- even lame duck ones -- just can't seem to leave without trying to polish up their image before they go. Sen. Dodd has been feverishly trying to pass his financial reform bill before the clock strikes midnight on his political career. On the surface, you would think that -- given the state of the economy after Wall Street basically stopped functioning two years ago and given the Democratic majorities in both the Senate and the House -- financial reform would be a slam dunk to pass. Not so.

One of the latest changes to have emerged as part of the plan is the issue of "proxy access." Despite the fact that our free market system is the most open and transparent in the world -- and despite us believing that CEOs work for their shareholders -- our current system allows CEOs to have a huge influence in selecting their board of directors who is charged with overseeing their performance and setting their salary.

That's right. Our current governance system doesn't easily allow shareholders to propose potential directors to be voted on by others as representatives overseeing management. "Proxy access" rules would permit such openness.

Special interest groups who represent the views of CEOs and their staff, such as the Chamber of Commerce and the Business Roundtable, have feverishly opposed any "proxy access" in favor of keeping the status quo. Their argument is similar to those who said women or blacks shouldn't be allowed to vote in general elections: shareholders can't be trusted to propose the "right" kinds of directors, so CEOs must continue to do that themselves. The Business Roundtable likes to fear-monger, claiming that any change to the status quo could have disastrous effects on our capital markets (ignoring what's gone on in the last two years).

Earlier this year, both the House and the Senate proposed financial reform bills. Both included "proxy access" language. Those two bills have been consolidated into the Senate's version. Late last week, we learned that the Senate version altered the "proxy access" language to say that shareholders could only nominate potential directors if they held 5% of the stock in the company at a minimum.

So, under these new rules, if you think

Citigroup

(C) - Get Report

has been poorly governed by a lot of current and ex-CEO with non-bank experience like Dick Parsons from

Time Warner

(TWX)

, you merely have to buy $5.8 billion worth of stock in the company to propose a couple of new director nominees. That means, even if

John Paulson

,

Bruce Berkowitz

from Fairholme, Gordy Crawford of Capital Research, Northern Trust, and Fidelity combined their collective ownership stakes in Citigroup and wanted to nominate someone for the board, they couldn't. They'd still fall short of the Senate's 5% ownership requirement.

It's not fair. The Council of Institutional Investors (CII), which represents pension fund assets in excess of $3 trillion, has said, via its General Counsel Jeff Mahoney: "Even if the 10 largest public pension funds in the U.S. aggregated their holdings in public companies, they'd rarely, if ever, surpass this proposed 5% level. We strongly oppose this anti-investor rewrite of the financial reform legislation."

Why did the Senate -- unprovoked by the House -- decide to insert this change into its own legislation? Sources have told me that both Senators Bayh and Mark Warner insisted on this new language after strong lobbying from the Business Roundtable. Apparently, both men threatened Sen. Dodd that they would vote against the financial reform bill without this new language, which would block cloture on the bill and slow down its passing. Dodd caved.

Sen. Warner, who bills himself as a pro-business, low-taxes Democrat, apparently buys in to the Business Roundtable's argument that large investors like John Paulson, Fidelity, CalPERS, and others can't be trusted to pick good director nominees as much as CEOs. I guess he would have been totally comfortable when Dick Fuld of Lehman Brothers asked a Broadway producer buddy, Richard Berlind, to not only serve on the Lehman board but also join its Risk Committee. That's pro-business. Perhaps Sen. Warner should propose that

Goldman Sachs

(GS) - Get Report

and the other Wall Street banks should take over the messy day-to-day operations of the Securities and Exchange Commission. Wouldn't that be equally pro-business by his logic?

Starting in November, Sen. Bayh will join the nation's unemployment ranks. Although he hasn't ruled out a return to politics one day, that's not in his immediate future. Why not take a page out of his wife's playbook and join six corporate boards? He could -- I would assume -- at least match her income from these activities. It's easy work. Fly around and attend a few meetings a year. Rubber stamp a few wishes from the CEO. That sure beats manual labor.

So, if that is Bayh's goal, he has good reason to use his dwindling political capital to block this small piece of a 1,400-page financial reform bill. By doing so, he just made a lot of friends among Business Roundtable members: his future potential employers.

We contacted Sen. Bayh's office to ask him whether and why he blocked "proxy access" and they didn't respond to our questions before we went to press.

Proxy access is fair and should be part of any future financial reform -- without restrictions.

At the time of publication, Jackson held a long position in Citigroup.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson