Corporate Governance

• But the Treasury isn't replacing any of the directors on the boards of the banks it's investing in, or adding new directors to represent taxpayer interests. That means there's no way for the Treasury to check if executive compensation is encouraging too much risk-taking. "It was a very bold statement to say that executive compensation shouldn't encourage excessive risk taking," McGurn said. "There was potentially some meat there, but now this will make for very thin gruel."  Instead, oversight and enforcement will be left in the hands of the current directors, many of whom who oversaw the big banks and brokerage firms when they were taking huge risks during the recent boom, he noted. "These boards had no idea about the risks these firms were taking on and relied on management to tell them," said Robert McCormick, chief policy officer at Glass Lewis & Co., a corporate governance consulting firm.

There are few blogs more aggressive in promoting corporate governance than this one.  But the idea that the US Government would take a more active role in the governance process by selecting directors causes pause, if for no other reason than the inevitable doubt about the Government's ability to properly exercise the authority. 

Having said that, there is little doubt, as we have discussed, that the Bailout Bill should have and could have imposed greater obligations on the board of directors, the ones most immediately responsible for supervision of activities within the company.  In this sense, much of the current turmoil can be traced to the failure of Delaware law and the standards developed for directors. 

More directly, the original house version of the Bailout Bill contained a provision for say on pay and a provision providing large shareholders with access to management's proxy statement for their nominees.  Access would have allowed large shareholders greater opportunity to elect their representatives to the board.  This right, more than any others, would have focused the board on the needs and interests of shareholders.  Yet in the end, the potentially far reaching reform was deleted in the final version.