It appears, at least at some companies, that the bailout plan has caused some boards of directors to more closely securitize the actions of their CEOs. In a recent business week article, it was noted how GM’s new board has placed increased expectations on its recently installed CEO, Frederick A. "Fritz" Henderson. The old board gave a substantial amount of deference to former CEO Rick Wagoner. Because of GM’s excessive cost, Wagoner was more focused on cutting cost rather than building market share and increasing profit. In essence, the board and the CEO were solely focused on keeping GM afloat.
Under the new regime, this is not enough. In fact, Henderson has already come under fire by the board, as the board has “said that GM’s revised recovery plan filed on Apr. 27 isn't quite good enough.” “That plan, which cut four brands, downsized the company and its dealer network, and led the way into bankruptcy to clean up the balance sheet, only keeps GM above water. It doesn't show growth. Some directors were concerned GM wouldn't push to grow beyond the sales and market share laid out in the plan, say two sources familiar with the discussion.” The current board is chiefly concerned with paying the bailout money back and making GM a profitable going concern; however, in order “for taxpayers to break even, GM will have to eventually issue new stock and the company's value will need to reach $69 billion, more than it has ever been valued.”
To maintain this type of accountability, two things mush happen, boards must put more pressure on their officers to perform, and the law must put pressure on boards to remain focused on this goal. In regards to the first consideration, because of the current market conditions, it is likely that boards will continue to put this type pressure on their CEO’s; however, as the economy improves, it is less certain whether this will continue. As to the second consideration, to ensure that boards remain accountable, there must be a better system for watching the watch dogs (the board). Under the current legal framework, the officers are kept in check by the board. The officers have the greatest level of accountability under the current frame work considering that business judgment protection generally does not extend to them. As such, with the current market conditions, increased board oversight, and lack of business judgment protection, CEOs will be under an increased pressure to perform and they will finally have to prove that they are worthy of their exorbitant salaries. Conversely, the law does not put the same level of pressure on the board. Since the board’s decisions are protected by the business judgment rule, they have less accountability than the officers. This is extremely problematic considering that the board is the critical lynchpin in increasing corporate accountability and responsibility. Without greater levels of board oversight or a less deferential business judgment standard, history is bound to repeat itself.
Repealing the Private Securities Litigation Reform Act would help, too.
ReplyDeleteAn interesting case that shows your point rather vividly is In Re Citigroup, which dismisses an oversight claim without a showing of bad faith. Notably, the Delaware court made no distinction between officers and directors in dismissing the claim.
http://www.delawarelitigation.com/uploads/file/int99(1).pdf
Unfortunately this is like every other legislation that we create in America. It takes some failure or catastrophic event for there to be change. Understandably hindsight is 20/20, but corporations such as GM should have been putting pressure on its CEO's before it went to shambles. Let's hope that history does not repeat itself!
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