AIG and an Even Bigger Bailout: Conditioning Payments on Corporate Governance Reforms

The WSJ reports that AIG will get an even bigger bailout than previously announced, one that will amount to $150 billion.  The package will involve a $60 billion loan, $40 billion in preferred stock (under the Bailout Bill), and $50 billion in the form of asset purchases.  The precise terms will be announced, apparently, later today.

The government continues to shower funds on poorly performing companies without demanding any significant corporate governance reform.  By participating in the bailout, AIG will be subject to the modest restrictions on executive compensation (clawbacks, limits on golden parachutes, and so on).  But otherwise, the company will not be required to alter any governance standards or otherwise demonstrate that its approach to management will be improved.  What might Treasury have required?

Treasury could condition any acceptance of government funds upon the following:

• The separation of the chairman and CEO positions.  AIG has a history of combining the two positions, with Martin Sullivan and Hank Greenberg serving as Chairman and CEO.  The current CEO, Edward Liddy, likewise holds both positions.
• A bylaw providing 3% shareholders with access to the company's proxy statement;
• A bylaw that provides shareholders with an advisory vote on compensation (say on pay);
• A requirement that the company put in place internal controls designed to inform the board on a regular basis of changes in the risk profile of the company and any changes in the risk profile;
• The revision of the charter for the audit committee of the board to require review all significant changes in the risk profile of AIG's business; 
• An obligation of the entire board to meet at least monthly and, at each meeting, to meet without the CEO or other interested directors and, at each rump meeting, have an opportunity to question the top officers about the nature and direction of the company's business; and
• An obligation on the part of the Compensation Committee to publish a report setting out the grounds for the committee's belief that any conflict of interest transaction to be approved by the board (most noticeably executive compensation) is "fair" and to include as an attachment any report issued by a consultant (including compensation consultants) setting out the basis for the belief that the transaction is fair.  Finally, the company should commit to disclosing in its proxy statement any possible conflicts of interest between the consultant and the company.

These reforms would both increase the role of shareholders but mostly increase the role of the board in supervising compensation and additional risk taking by the company.  Most of these requirements ought to already be in place but are not, primarily because of the lack of standards imposed on the board under Delaware law.

Comments

[Jason]

The AIG bailout is small change and means nothing to the Fed. The Fed is transparent in that it is subject to the oversight of Congress. Is twice a year not fast enough? The intent of Congress in shaping the Federal Reserve Act was to keep politics out of monetary policy. Legislation requires that the Federal Reserve reports annually on its activities to the Speaker of the House of Representatives.

http://nomedals.blogspot.com

[James McRitchie]

I like the provision for proxy access: A bylaw providing 3% shareholders with access to the company's proxy statement.

However, I'd like to see it also include the same right for 100 shareholders. UK has that provision and it is important to keep pushing that here -- not so much for the AIGs of the world but for the many small companies that need board improvements but where institutional investors are mostly absent.