Tag Archive: Charles M. Elson

Uncle Sam as Shareholder and Regulator

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The regulatory burden on U.S. public companies continues to increase and the government’s role has expanded from that of just regulator to, in some cases, shareholder. That might leave some directors wondering how far into the boardroom Uncle Sam can reach.

A panel of financial industry and government experts convened last fall to discuss the influence of the federal government when it acts as either a shareholder or a regulator. The Clearing House Association and the University of Delaware’s John L. Weinberg Center for Corporate Governance facilitated the discussion with a program called The Government as Regulator and/or Shareholder—The Impact on Director Duties, which  included the following speakers and panel members:

  • Rolin P. Bissell, partner, Young Conaway Stargatt & Taylor LLP
  • Amy Borrus, interim executive director, Council of Institutional Investors
  • Laban P. Jackson, Jr., director, JP Morgan Chase & Co.
  • Peter A. Langerman, CEO, Franklin Mutual Advisers, LLC
  • Giovanni P. Prezioso, partner, Cleary Gottlieb Steen & Hamilton LLP
  • Gregg L. Rozansky, managing director, The Clearing House Association
  • Mary Schapiro, former chair, U.S. Securities and Exchange Commission (SEC)
  • Collins J. Seitz, Jr., justice, Supreme Court of Delaware

Charles M. Elson, director of the Weinberg Center and professor of finance, moderated the discussion.

The panel offered a wide range of perspectives, but a few common themes emerged that are applicable to directors across a variety of industries.  

Most panelists agreed that the 2010 Dodd-Frank Act was a response proportional to the 2008 global financial crisis, but expressed frustration with certain government bailouts and the political motivations influencing them. Several panelists indicated they felt uneasy about the broad scale of intervention that the federal government made into the private sector to bail out failing companies. The panelists cited the example of the U.S. Federal Reserve Bank’s $85 billion bailout of American International Group (AIG) to illustrate how far agencies reached—even in the face of the internal corruption at the company. AIG’s credit default swaps lost the company $30 billion and are often blamed as a major reason the company collapsed in 2008. Controversy swirled when in March 2009, publicly disclosed information revealed that after the bailout, employees of AIG’s financial services division were going to be paid $218 million in bonuses. A June 2010 report by the Congressional Oversight Panel (COP)—a five-member group created by Congress in 2008 to oversee the U.S. Treasury’s actions—concluded that the Federal Reserve Board’s close relations to powerful people on Wall Street influenced its decision to help AIG.

While the panelists were critical of the bailouts, they agreed that Dodd-Frank was a reasonable response to help prevent future failure of companies. Directors’ bandwidth, however, to address their corporation’s most important strategic matters, including emerging risks, may be limited by the need to spend time ensuring compliance with Dodd-Frank. Most agreed that they do not expect a lessening of regulations in the near future.

Panelists also agreed that the Delaware court system—one of the most powerful legal arbiters of U.S. corporate governance—is not designed to address scenarios in which the federal government acts as an investor. When the federal government intervenes by investing in a company to salvage it, the government becomes a shareholder with greater legal privileges than a traditional, human shareholder who might challenge corporate decisions in the Delaware courts. In the event that the government challenges a company in the federal court system, the federal government would be tried in legal institutions where the ultimate power of appeal is granted by its own founding documents. Challenges to federal sovereign immunity and the federal government as shareholder would be difficult, if not impossible, to navigate.

The line between the government as a stockholder and regulator could be blurred when the regulatory influence over the company is pervasive. This issue may be particularly acute for wholly owned subsidiaries of public companies when the government closely reviews company decision-making and expresses views on what is in the best interest of the subsidiary.

Relationships between regulators and directors—though once strained by mistrust after the financial crisis—are beginning to improve. A panelist observed that, in several global markets, relationships between regulators and directors have steadily normalized over the past year and a half, in contrast to more tense interactions of previous years. As global regulatory standards are established, markets recover and stabilize, and businesses and regulators deepen their understanding of each other.

Forming relationships with regulators should be a strategic priority for directors. Most panelists insisted that good relationships with representatives from regulatory agencies are essential. Boards should aim to keep a level of candor with regulatory contacts that could be helpful when pushing back against regulatory action and when directors have suggestions for upcoming regulations. Directors should also acknowledge that regulators have an important function to carry out in a high-pressure, multi-stakes market environment that is a challenge to navigate for regulators and companies alike. A “kicking and screaming” approach to relationships with regulators was frowned upon, as it is not productive and is insensitive to the fact that developing or implementing regulation is demanding and complex.

Directors seeking to strengthen their oversight of corporate compliance and ethics programs can access the National Association of Corporate Directors’ (NACD) publication Director Essentials: Strengthening Compliance and Ethics Oversight. The guide provides an overview of the board’s role in compliance oversight and offers practical insights about fulfilling regulatory expectations.

NACD Prepares Directors for Heightened Responsibilities and Regulation

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America’s economic health is inextricably linked to business growth and sound boardroom practices. And while many decry the corporate scandals that erupted in recent years, NACD believes in looking towards the future and working with directors to better prepare them to lead America’s companies.

How to Be(come) a Director is our new Web-based course designed to educate newly minted directors and help aspiring directors advance their board careers by learning about boardroom best practices that will enable them to become responsible stewards of companies and shareholders. This is not some sterile academic exercise, to be sure. Rather, the 4 hour eLearning course provides real-life lessons from top corporate governance experts, including directors of Fortune 500 companies and scholars at prominent academic institutions. The topics covered in the course are essential to sound corporate management: fiduciary responsibilities, essential directorship skills, the board selection process, understanding committees, and much more.

Watch the trailer:

How to Be(come) A Director Trailer

Want a sneak peek to see how this course works?

  • Click here to play video bios of the expert directors who teach the course.
  • Click here to enjoy this free sample of some of the course videos.

Course participants will learn from a veritable “Who’s Who” in corporate governance, including Kenneth Daly, the president and CEO of NACD; Denny Beresford, director at Fannie Mae, Kimberly-Clark Corporation and Legg Mason; Reatha Clark King, former director at General Mills Foundation and at Exxon Mobil Corporation; and Professor Charles M. Elson, the director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

For just under $400, this self-paced program fills an urgent need, seeking to raise the standards of ethical behavior, accountability and competence in boardroom leadership. It also helps current and future directors cope with an atmosphere of heightened regulation and scrutiny.

Repeat access to the course gives participants the flexibility to review certain sections again for better understanding. In addition, the core course content is supplemented by downloads that can be used to build a personal corporate governance library, as well as video, bonus materials and knowledge checks for participants to see how much they’ve learned.

It is not getting any easier to run a company in this age of intensified public scrutiny and government regulation. However, How to Be(come) a Director provides a solid platform to help corporate directors prepare for boardroom success both for their companies and for their own careers.