Corporate Governance

The Automobile Manufacturers Return to Washington (Better Prepared) (Part 1)

By J Robert Brown Jr et al.

We are taking a short break from the discussion of the book by Jon Macey on corporate governance to discuss the recent proposals submitted by the automobile companies in connection with their renewed request for federal funds.

General Motors, Ford and Chrysler have presented Congress with plans on what would happen if they receive a bailout.  We have provided links to each report.  It is the type of plan that should have been presented the first time the CEOs of the three auto makers traveled to Washington.  In the proposals are some concessions with respect to corporate governance.  General Motors, for examples, provides the following:

• The Chairman and CEO will reduce his salary to $1 for 2009. He will not receive an annual bonus for 2008 and 2009.
• Consistent with this action, members of the GM Board of Directors will reduce their annual retainer to $1 for 2009.
• The next four most senior officers (Executive Vice Presidents and above) will reduce their total cash compensation by approximately 50% in 2009, which includes no bonus paid for 2008 and 2009 and a 30% salary reduction for the President and COO, and 20% salary reductions for the remaining three.

In addition, the company made some vague concessions on executive compensation. 

• GM agrees to maintain the strictest oversight on Executive compensation including annual bonuses and golden parachutes. The top 5 most senior officers do not have any employment or severance agreements. Post-2009 compensation will be determined in conjunction with the Oversight Board, and would be dependent upon the achievement of the benchmarks in the Plan.

As for corporate aircraft, the company "is immediately ceasing all corporate aircraft operations" and is "exploring options for transferring the aircraft". 

In other words, there is no real change in governance.  The reduction of salary and retainer to $1 does not address performance based compensation such as stock options.  To the extent, for example, that the reference to "salary" simply means the annual cash component of Wagoner's compensation, it isn't much of a sacrifice.  Thus, in the 2007 proxy statement, he received $1,558,333 in "salary" but his total compensation (including stock awards, options, and deferred compensation) was $14,415,914.

What else ought to be done?  A truly independent board, with the removal of any director who has overseen the steep decline of General Motors.  Wagoner should be required to step down as chairman of the board, replaced by an independent director.  Finally, shareholders should be given slots on the board to ensure that shareholder interests are actively protected in the decision making process.

Full post as published by The Race to the Bottom on December 03, 2008 (boomark / email).