Public Policy Outlook and Trends: Is this the End of Corporate Governance?
The Obama Administration added another level of uncertainty in the financial markets when on March 29, 2009 it asked General Motors chairman Rick Wagoner to step down as chairman and chief executive officer of the embattled automaker. The Administration’s rationale was that if General Motors was to receive any additional financing from the federal government, the company would have to make changes in its management. In addition, General Motors would also have to make changes in its board of directors. Wagoner may go off silently into the night (and given today’s climate, probably without a substantial severance package) but more importantly this raises the issue as to the state of corporate governance in the United States.
Granted the United States government is lending money to General Motors and corporate governance addresses the relationship between shareholders, directors, and managers. What Wagoner’s departure and the changes in the structure of General Motors’ board of directors may mean is the disruption of this relationship and circumvention of state law that has historically maintained this balance. State law has historically governed the rights that shareholders, directors, and management have had in relation to one another. Shareholders have a right to share in a firm’s profits. Directors are responsible for setting overall firm policies, deciding when dividends would be paid, and appointing executive officers and monitoring their performance. Executive officers are responsible for managing a firm’s day-to-day operations and have their powers dictated by the directors. The separation of ownership and management protects shareholders from a director’s or officer’s misuse of position and power. Requiring that a chief executive step down represents a major intervention in the operation of a firm. On the one hand, one could argue that if you look at the United States as a venture capitalist, such a request for this type of restructure is not without precedence. It is done all the time.
My concern is whether the government will extend these types of requirements to other government aid recipients. Typically, shareholders are relegated to assenting, requesting, or recommending changes in board policies. The recommendations of shareholders can only be enforced through the board of directors. When it comes to changing company management, shareholders do this indirectly by voting for new directors at an annual shareholder meeting. Should we expect government requests for change say in bank management? Where the government is acting as a shareholder versus a lender, the government may take an indirect route to removing an executive by seeking to influence the board of directors of a bank. As American International Group’s largest shareholder, the federal government could make changes in the firm’s executive management by voting out the current board of directors at an annual meeting. The government could decide to call a special meeting of shareholders in order to remove an executive, although this option is limited by the laws of the state where the bank is incorporated.
Given the expected continued deterioration in the economy and the pressure to have taxpayers enjoy some return from their investment into these firms, I expect the federal government to exercise more of this type of influence over executive officers. The House of Representatives has already tasted blood by requiring AIG to return over $165 million in bonuses. The fall off in stock prices upon news of Mr. Wagoner’s departure is evidence of the impact intervention will have. It is indicative not only of Wall Street being caught off guard by the Obama Administration’s recommendation that Mr. Wagoner must go but shows how weak a reaction a board of directors, whose company is beholden to bailouts, will be. If corporate governance is to mean anything over the next few months, it will call for all three prongs to show diligence in pushing back against government’s attempts to restructure Wall Street. This may be asking for too much.