Barney Frank (D-Massachusetts) introduced H.R. 4291 in the House of Representatives on November 10, 2005. Section 1 entitles the act "Protection Against Executive Compensation Abuse Act." Section 2 requires annual reports and proxy statements to disclose fully the compensation plan for top executive officers. It also requires a shareholder vote to approve the compensation package. The next part of Section 2 requires business enterprises to disclose the existence and the details of any golden parachute compensation; it also requires a shareholder vote to approve such golden parachute arrangements. The bill would enable the SEC to adopt rules relating necessitating the return of compensation under various contingencies, such as the fraud or any negative material restatement.

The bill did not pass in the 109th Congress. Undeterred, Barney Frank reintroduced the bill on March 1, 2007, in the 110th Congress (H.R. 1257). A similar bill was introduced in the Senate on April 20, 2007, by Senator Barak Obama (D-Illinois) (S. 1181) The current bill is a scaled down version of the previous 2005 bill. Section 2 of the bill allows shareholders a vote to approve or disapprove compensation packages for corporate executives; however, the vote is nonbinding. Section 2 also would require proxy statements to provide clear disclosures of golden parachute arrangements if a business combination would occur. It also permits shareholders to vote on the acceptability of these golden parachutes; again, the outcome does not bind the actions of the board of directors. Notice that the current version does not prescribe compensation disclosures in the annual reports or proxy statements.

It is understandable for Congress to investigate these matters, as the populace is growing discontent over the gargantuan pay discrepancies between corporate officers and mere mortals, especially as corporate leaders seem incompetent, such as investment bankers and others involved in the credit market fiascos, or immoral. Even so, these proposals miss the mark, beginning with their impotence. Who cares if shareholders can vote if directors can ignore them with impunity?

Perhaps Congress should get involved since recent SEC administrations seem to favor managers instead of shareholders. If the Congress does anything, it should empower shareholders in real, substantive ways, and not just symbolically.

The first thing to do is to separate the position of chairman of the board from the CEO position. The board should represent the shareholders and, as such, it ought to supervise and control the activities and the proposals of managers. The board cannot function very effectively for these purposes if the board is populated with the top executives. As the British have learned, there are important benefits to separating these functions, including better oversight by the board of directors.

The second thing to do is to empower shareholders to vote. It is shameful for managers to prevent votes to take place on important issues, including but not limited to, compensation. But I would not take the toothless position of having these votes nonbinding. After all, these are the shareholders -- the owners of the corporation! Surely in a capitalistic society such as ours the owners of the firm or their agents can have a say in how the business is run.

The SEC had several chances during recent years to empower owners to regain control over their firms, but instead the SEC fumbled the ball. It wouldn't hurt for Congress to question Christopher Cox and ask him why the commission's recent decisions favor managers over shareholders. I thought the purpose of the SEC was to represent and protect the interests of shareholders.

I doubt that Congress should say much about the magnitude of the pay at this time. For the present, it should empower the shareholders to do this. If the shareholders are thwarted in their efforts, then Congress can intervene in a more forceful manner.

This essay reflects the opinion of the author and not necessarily the opinion of The Pennsylvania State University.

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J. EDWARD KETZ is accounting professor at The Pennsylvania State University. Dr. Ketz's teaching and research interests focus on financial accounting, accounting information systems, and accounting ethics. He is the author of Hidden Financial Risk, which explores the causes of recent accounting scandals. He also has edited Accounting Ethics, a four-volume set that explores ethical thought in accounting since the Great Depression and across several countries. He is the co-author of a monograph, Fair Value Measurements: Valuation Principles and Auditing Techniques (with Mark Zyla, Managing Director, Acuitas, Inc.) to be published by BNA.