Corporate Governance, the Obama Administration, and AIG: The Proper Way to Excercise Governance Rights

As the Obama administration finds itself owning large blocks of stock in public companies, the issue of governance becomes something of more immediate importance.  Nowhere is it more important than with respect to AIG.  Moreover, shareholders, particularly the unions, are seeking to test the Administration's mettle.  We take a look at two posts on the AIG matter.  This one examines the role of the Trustees appointed by the Department of Treasury to handle the 80% of the voting power held by the Government.  The second post examines the utter ineffectiveness of shareholder rights under Delaware law, suggesting that the Government, as an 80% shareholder, may have little say in the management of the company.

AIG has been the largest recipient of federal bailout funds so far.  In return, the government has received, among other things, voting control over the company. The government holds approximately 80% of the voting rights of AIG (see AIG Annual Report on Form 10-K, March 2009 (noting that series C preferred stock is entitled to: "to the extent permitted by law, vote with AIG’s common stock on all matters submitted to AIG’s shareholders and hold approximately 77.9 percent of the aggregate voting power of common stock, treating the Series Preferred Stock as converted.").

The shares are in a trust and three trustees have been appointed.  Who are they?

• One of them is Jill M. Considine, a former chief executive of the Depository Trust and Clearing Corporation and a former banking regulator, now chairwoman of the Butterfield Fulcrum Group in Bermuda, a firm that provides administrative support to hedge funds.

• The two other trustees are Chester B. Feldberg, a former senior official at the New York Fed and a former chairman of Barclays Americas; and Douglas L. Foshee, the chief executive of the El Paso Corporation, a natural gas producer and pipeline operator.

Despite the presence of voting control, the trustees have been quiet.  The NYTimes described them as having "no office, no staff and almost no mission" although they apparently have a lawyer and a part time spokesperson to field media inquiries.  Quiet does not, however, mean inactive.  In fact, they are likely acting in a manner that is the most appropriate for AIG and its shareholders.

The impact of these trustees will become more overtly apparent at the company's annual meeting, now scheduled for May 13 (no proxy statement has yet been filed and AIG has indicated that it will be setting a new meeting date).  As we will discuss in the next post, the Trustees, despite controlling 80% of the vote, have no ability to displace the incumbent directors.  The incumbent board will all be management nominees.  There will be no shareholder nominated directors on the AIG Board.

This does not mean that the Trustees will not have influence over the nomination process.  A number of directors have already indicated that they will not stand for reelection.  Moreover, the delay in filing the proxy statement occurred in connection with a reshuffling of the board, suggesting that more changes at the top are likely.  This suggests that behind the scenes, the Trustees are negotiating over a more independent board.  Indeed, as the NYTimes reports, meetings between the Trustees and management are taking place.

• “The trustees meet once a month in person and have a standing weekly conference call,” the spokesman, Peter Bakstansky, wrote in response to an inquiry. The group is also meeting with A.I.G. executives and government officials, he continued. “And yes, there have been more meetings recently, many in the context of the upcoming A.I.G. shareholders meeting.“

In other words, this is an example of management listening to shareholders and shareholders (actually shareholder) behind the scenes providing input.  Thus, while the directors will all be nominated by management, the nominees will reflect shareholder input.  The SEC tried to do something like this back in the 1990s when it put in place disclosure requirements designed to encourage shareholders to submit nominees to the board.  (This is discussed at length in The SEC, Corporate Governance, and Shareholder Access to the Board Room).  It didn't work. 

This is the type of back and forth discussion that ought to be a regular part of the governance process.  In Great Britain, where the governance code recommends a separation of chairman and CEO, the chairman's role is essentially designed to be a liaison with large shareholders.  Unfortunately, it is not.  Instead, it takes the overwhelming presence of an 80% shareholder to induce this type of dynamic.