The Auto Bailout and Corporate Governance

As the showdown over the Auto Bailout Bill continues (it passed in the House but Republican opposition in the Senate seems to be on the increase, a particular problem given the potential for a filibuster), most of the attention is on the amount involved and the authority of the Car Czar.  Tucked in the Bill are provisions that address corporate governance.  The provisions are stricter than those in TARP but still relatively mild. 

The Car Czar will receive the authority to require the auto companies accepting bailout money to "meet appropriate standards for executive compensation and corporate governance."  The Bill specifies the executive compensation provisions that must be implemented.  Some of them resemble the provisions included in TARP.  Specifically, the restrictions in the Bill include:

• (A) limits on compensation that exclude incentives for senior executive officers of an eligible automobile manufacturer which received assistance under this Act to take unnecessary and excessive risks that threaten the value of such manufacturer during the period that the loan is outstanding;
• (B) a provision for the recovery by such automobile manufacturer of any bonus or incentive compensation paid to a senior executive officer based on statements of earnings, gains, or other criteria that are later found to be materially inaccurate;
• (C) a prohibition on such automobile manufacturer making any golden parachute payment to a senior executive officer during the period that the loan is outstanding;

So far, the provisions are essentially the same as those in TARP, including clawbacks and limits on golden parachutes.  Nonetheless, the auto companies are treated to a number of additional restrictions not present in the bank bailout.  The Auto companies will be subject to:

• (D) a prohibition on such automobile manufacturer paying or accruing any bonus or incentive compensation during the period that the loan is outstanding to the 25 most highly-compensated employees; and
• (E) a prohibition on any compensation plan that would encourage manipulation of such automobile manufacturer’s reported earnings to enhance the compensation of any of its employees.

Banks can still pay bonuses but auto companies cannot.   Moreover, the Auto Bailout Bill contains a penalty for the indolence of the CEOs when they came to Washington without a plan and flew back in their private aircraft.  In what would almost be comical if the circumstances were not so extreme, the Auto Bailout Bill provides that the auto companies:

• may not own or lease any private passenger aircraft, or have any interest in such aircraft, except that such eligible automobile manufacturer shall not be treated as being in violation of this provision with respect to any aircraft or interest in any aircraft that was owned or held by the manufacturer immediately before receiving such assistance, as long as the recipient demonstrates to the satisfaction of the President’s designee that all reasonable steps are being taken to sell or divest such aircraft or interest.

Given the often lack of common sense so evident amoung management of the auto makers, we can guess that this provision will be read literally but will not be viewed as applying to expensive yacts or private rail cars. 

What is most intriguing about the Bill is that it gives the Car Czar the authority to ensure appropriate standards for corporate governance.  This language goes beyond the executive compensation requirements contained in the Auto Bailout.  As a result, they hold out the tantalizing prospect that the Car Czar can, in fact, impose meaningful governance standards.  What might this include?  Exclusion of the CEO from the nomination and compensation process, separation of chairman and CEO positions, and allowing shareholders access to the company's proxy statement for their nominees.  Let's toss in say on pay as well. 

Of course, the current president gets to appoint the Car Czar and it will be that individual that decides the corporate governance standards that become a precondition for the bailout funds.  And, this is the White House that has had little sympathy for shareholders (witness access and the position taken in Stoneridge).   So, unless Congress specifically requires it, don't look for the Car Czar to engage in any meaningful reform of the governance process at the auto makers.

We have reprinted the governance provisions from the Auto Bailout Bill below.

Executive Pay Provisions of Auto Bailout Bill

Here are the executive compensation provisions from the House version of the proposed automotive industry bailout legislation, the "Auto Industry Financing and Restructuring Act" (HR 7231).

Section 12(b): EXECUTIVE COMPENSATION AND CORPORATE GOVERNANCE

(1) IN GENERAL.—During the period in which any financial assistance under this Act remains outstanding, the eligible automobile manufacturer which received such assistance shall be subject to—

(A) the standards established by the President’s designee under paragraph (2); and

(B) the provisions of section 162(m)(5) of the Internal Revenue Code of 1986, as applicable.

(2) STANDARDS REQUIRED.—The President’s designee shall require any eligible automobile manufacturer which received any financial assistance under this Act to meet appropriate standards for executive compensation and corporate governance.

(3) SPECIFIC REQUIREMENTS.—The standards established under paragraph (2) shall include—

(A) limits on compensation that exclude incentives for senior executive officers of an eligible automobile manufacturer which received assistance under this Act to take unnecessary and excessive risks that threaten the value of such manufacturer during the period that the loan is outstanding;

(B) a provision for the recovery by such automobile manufacturer of any bonus or incentive compensation paid to a senior executive officer based on statements of earnings, gains, or other criteria that are later found to be materially inaccurate;

(C) a prohibition on such automobile manufacturer making any golden parachute payment to a senior executive officer during the period that the loan is outstanding;

(D) a prohibition on such automobile manufacturer paying or accruing any bonus or incentive compensation during the period that the loan is outstanding to the 25 most highly-compensated employees; and

(E) a prohibition on any compensation plan that would encourage manipulation of such automobile manufacturer’s reported earnings to enhance the compensation of any of its employees.

(4) DIVESTITURE.—During the period in which any financial assistance provided under this Act to any eligible automobile manufacturer is outstanding, the eligible automobile manufacturer may not own or lease any private passenger aircraft, or have any interest in such aircraft, except that such eligible automobile manufacturer shall not be treated as being in violation of this provision with respect to any aircraft or interest in any aircraft that was owned or held by the manufacturer immediately before receiving such assistance, as long as the recipient demonstrates to the satisfaction of the President’s designee that all reasonable steps are being taken to sell or divest such aircraft or interest.

(5) DEFINITIONS.—For purposes of this subsection, the following definitions shall apply:

(A) SENIOR EXECUTIVE OFFICER.—The term ‘‘senior executive officer’’ means an individual who is 1 of the top 5 most highly paid executives of a public company, whose compensation is required to be disclosed pursuant to the Securities Exchange Act of 1934, and any regulations issued thereunder, and nonpublic company counterparts.

(B) GOLDEN PARACHUTE PAYMENT.—The term ‘‘golden parachute payment’’ means any payment to a senior executive officer for departure from a company for any reason, except for payments for services performed or benefits accrued.