The US Government and Corporate Governance

The big news on Sunday was that the Obama Administration insisted on the removal of Rick Wagoner, the CEO at General Motors as a precondition for any additional bailout money.  As the article summarized:

• Mr. Wagoner has been CEO since 2000 and has managed the company through some of its most difficult moments. The company has not logged a profit since 2004, reporting losses since then of $82 billion, and it nearly ran out of money at the end of 2008 before the Treasury Department provided emergency loans. GM's stock was trading above $70 when Mr. Wagoner took over as CEO in June of 2000. Shares closed last week trading at $3.62, placing the company's market capitalization at $2.21 billion.

The degree to which these circumstances can be blamed on Wagoner is not clear (turning a huge barge like General Motors is not a simple matter).  But it seemed clear that as General Motors tottered on the edge of bankruptcy and the Company asked for additional government money, a change in management was in order.  As usual, the salient question is where was the board of directors? 

As the announcement was being made that the US government had to step in and do the board's job by insisting on regime change, the board of Peugeot Citroën did its job and removed its CEO.

In addition to demonstrating continued weakness in the system of corporate governance in the United States, the act demonstrates the unfortunate ad hoc practice still taking place in the federal government with respect to these corporate governance problems.  Congress wants to take away the bonuses paid by AIG, the Obama Administration wants to replace management.  These are tasks that rest with the board.  It is not useful to interfere with board duties on a case by case basis.  This entire problem screams for systemic solutions, none of which are apparently under serious consideration.

Later in the week we will propose a legislative solution, at least with respect to the executive compensation problem.  It is time to move beyond an ad hoc approach and beyond temporary reform that is limited only to companies taking public funds.