June 08, 2009
HLS Professor Reinier Kraakman co-wrote the following op-ed, “The Directors Guild,” with Ronald J. Gilson, a professor of law and business at Stanford and Columbia. The piece— on the government’s role in selecting corporate directors as a result of its growing investments in private industry—appeared in the June 7, 2009, issue of the New York Times.
Our government has invested more than $50 billion in General Motors and is now the majority stakeholder in the company. This is one of the largest investments that the Treasury has recently made in private industry, but hardly the only one. The Troubled Asset Relief Program has infused hundreds of billions of dollars into the nation’s biggest banks. And taxpayers have given $83 billion to American International Group, the world’s largest insurer. Like it or not, the government is now the controlling investor in some of America’s largest companies.
As a result, it is taking a more direct role in their management. In March, the White House summarily dismissed G.M.’s chief executive, Rick Wagoner, and signaled its intention to help replace most of the company’s directors. The Treasury is reported to have directed G.M. to appoint a search firm to identify new board members. It has also actively encouraged the replacement of corporate directors for Citigroup and Bank of America, the two biggest banks. And government-appointed trustees for A.I.G. recently nominated six new directors.
But do Treasury officials know how to choose candidates for the boards of banks and other big companies? Lacking a tradition of direct investment in private companies, our government has no experience in selecting corporate directors.
It is not an easy job, no matter who does it. Corporations often look for board members among the ranks of sitting chief executives at other publicly held companies. But chief executives have very few extra hours to devote to other companies’ boards; their day jobs are more than full time. Also, they may lack the psychological distance that board members must have in order to assess the work of chief executives. The scandals of Enron, WorldCom and Adelphia several years ago revealed the kinds of corrupt behavior that can happen when boards fail to monitor corporations effectively.
But it is even harder to choose board members for companies that are so troubled they require significant taxpayer investment. During a crisis, a director’s job takes more time, and because much of these boards’ work will involve dealing with the government over the use of taxpayer money, the directors will be subject to political scrutiny and pressure.
State corporate laws mandate that a director’s fiduciary duties run to the company and its shareholders, regardless of who places him on the board; a director may not act in the exclusive interests of any controlling investors, employees, creditors or even the federal government. The directors of G.M., for example, should still see that the company manufactures cars that appeal to consumers, not to environmentalists or to congressmen hoping to save auto plants in their districts. Yet the government-appointed directors face extra pressure to be responsive to public needs.
Where can the Treasury find directors who have the time needed for the job, and the ability to withstand political pressure? As it did in the case of A.I.G., it could ask for recommendations from the very trustees it has appointed to watch over the government’s equity. Or it could get help from executive search firms. But both trustees and paid search firms, being employed by the government, would be inclined to seek people who would put the government’s interests first.
What the Treasury needs is an independent, nonprofit clearinghouse to recruit and screen independent directors. Such an institution could easily be created by the government in cooperation with large institutional investors like public pension funds or large mutual fund groups like Vanguard or Fidelity. (Disclosure: one of us, Professor Gilson, is a director at American Century, a large mutual fund group.) At Harvard Business School, graduate students working under the supervision of Prof. Rakesh Khurana are exploring the forms that such a public-private clearinghouse could take.
Independent professional directors could help steer privately run corporations through this period of partial government ownership, helping to rebuild investor confidence in those companies. After all, private investors have no more experience investing in government-controlled businesses than the government has in running them.
Strong and independent boards of directors are needed to insulate corporations from political meddling. A chief executive cannot face down the government, but independent directors, who understand that their job is to protect the company from politics, can. In the end, Americans should be able to put their faith in these directors to assure that corporations that receive taxpayer assistance do not end up being run by the government.