Corporate Governance

Corporate Governance, the Bailout Bill, and Opposition from the Executive Branch

By J. Robert Brown

Apparently efforts to include corporate governance provisions in the Bailout Bill have caused a firestorm, with fierce opposition emanating from the White House and Treasury.   The White House put out the following statement on the efforts:

• We certainly understand and are sympathetic to the sentiment regarding the pay of CEOs and senior management of these firms, but we have to focus on the problem, and the problem is that we need these firms to participate in the program and sell us this debt. Having punitive measures would provide a disincentive for firms to participate, and that would make the program much less likely to succeed. 

• CEO compensation and corporate governance in public companies are very important issues ? especially when receiving taxpayer support ? but we need to be focused on fixing this problem in our markets right now. We can and should return to those issues once we get this legislation passed.
  

The statement demonstrates the fundamental problem with executive compensation in the United States.  The White House is acknowledging that CEOs will not participate, even if participation will benefit their company, if compensation can be affected.  This is another way of saying that under Delaware law, there is really no obligation on the part of management to act in the best interests of the company or shareholders.  Instead, they can put their own interests (in the form of their compensation) above all others.   

Paulson at Treasury has likewise vigorously resisted the efforts.  No surprise there.  This is the same person who spearheaded the current Administration's efforts to oppose allowing shareholders to sue vendors for fraud Rule 10b-5 even where they participated in an issuer's false disclosure by providing backdated and inaccurate documents.  It is the same person who tried, in an anti-regulatory fury, to blame securities litigation for a perceived decline in US competitiveness.  Of course he would object to federal regulation of executive compensation. 

On the legislative front, it has apparenlty been Congressman Frank who has pushed the hardest for the reforms.  It remains to be seen if they stay in the final bill.  It seems likely since a $700 billion bailout will look bad to ordinary voters unless there is some penalty for management.  Nonetheless, whatever the outcome, it is clear that Congress is no longer willing to leave executive compensation matters entirely up to the pro-business courts in Delaware. 

Full post as published by The Race to the Bottom on September 24, 2008 (boomark / email).