The Automobile Manufacturers Return to Washington (Better Prepared) (Part 2)

We are looking at the corporate governance commitments made by the automobile companies should they receive federal funds. 

Chrysler is not a public company, but is mostly owned by Cerberus Capital Management, a private equity firm.  The company has agreed to "comply with all conditions relating to executive compensation established under the Emergency Economic Stabilization Act of 2008 ("EESA") and such other conditions as the Government may require."  The company committed to doing so for "the term of the loans."  Presumably that means clawbacks and limits on golden parachutes.

Ford, which is a public company, and not as desperate as the other two, has committed to, among other things, the elimination of all merit increases and bonuses to be paid in 2009.  The company vaguely indicated a willingness to abide by the compensation limits in the bailout legislations.

• Ford recognizes that transforming our industry will require the shared sacrifice of many stakeholders and we will be asking our employees, dealers, and others to make changes to help save their jobs and our company. To underscore our commitment, Ford’s senior executives will not receive any salary increases or bonuses in 2009, and we will extend that restriction if business conditions continue to warrant it. We believe that the executive compensation limits imposed under TARP (to which we may be availing ourselves even without bridge loans if the TALF program is implemented so that our credit operations can participate and benefit from this program) are equally appropriate for the automobile industry.

The language stops short of an actual commitment (the company merely thinks they are appropriate) perhaps because Ford may not even use funds under the bailout.  Nor does the commitment contain a time period for adherence.

Both CEOs (Alan Mulally at Ford and Robert Nardelli at Chrysler), like Rick Wagoner at GM, have agreed to reduce their annual pay to $1.  To the extent this involves only a reduction in salary, the impact is minimal.  Thus, for example, Mulally received in 2007 a salary of $2 million and a bonus of about twice that amount.  But his total compensation (including deferred comp, options, stock awards, perqs, etc.) was $21.6 million.  Ultimately, the salary/bonus component of his salary was a modest portion.

In other words, neither company has committed to any permanent, lasting corporate governance reform.  Chrysler has less reason to make the commitments since its corporate governance structure presumably reflects the interests of its controlling shareholder.  But Ford, a public company, needs improved confidence in its future direction.  Leaving in place a system of governance that has resulted in near disaster does not provide confidence.