Oswald Letter

Do Shareholder Rights Matter to Obama?

I was amazed when I first learned that the Obama administration had requested the resignation of GM CEO Rick Wagoner. After thinking about it for a few minutes, I became dismayed.

Did Rick Wagoner deserve to lose his job? I don’t know. But I do know that it is not the role of government to call for the job of the chief executive of a public company. Public companies are typically run by an executive. That executive is hired by and answers to a board of directors. The board of directors is elected by the shareholders, and the board is responsible for ensuring that the company is run in the best interests of the shareholder owners. Nowhere in this chain of command do I see the federal government!

I can hear people screaming now, “But GM was asking for a bailout from the Federal government. That gives them the right to pick the CEO.” I disagree. The shareholders are still the owners of GM, and they should get to pick who runs their company. The government can choose whether or not the company is deserving of the bailout based on a number of factors including who is running the company. But when they force the resignation of the chief executive, they’re taking away the power and authority of the current owners, and that’s not right.

Should the Federal government choose to take an ownership position in return for their money, then they should have a voice in the running of the business that is equal to their ownership stake. That’s what they deserve — no more and no less. If they purchase a controlling stake in the company, then they should have enough seats on the board to fire the CEO should they choose.

That’s not what the Obama administration did. Instead, they said “If you want us to consider a bailout, you need to fire the CEO.” Why? Was it because the board of directors was incompetent? It doesn’t appear so. The board has accomplished individuals from both the public and private sector. The Chancellor of the University of Georgia System, the retired Chairman and CEO of Kodak, the President of the University of North Carolina, and the Chairman of Coca-Cola are just few of the GM board members who the Obama administration decided were not capable of representing the shareholders when it came to the hiring and firing of GM’s chief executive.

Did the Obama administration have some new insight into how GM should be run or maybe even a “ringer” waiting in the wings who would fix everything? No. The result of Wagoner’s firing was that the number two executive at GM was promoted. How’s that for change?

It seems that the Obama administration did the politically expedient thing. The American public is terribly upset with Wall Street and greedy senior executives. Congress and the President had just stemmed the public outcry over the AIG bonuses. The sentiment of the American people is squarely against further bailouts of large companies. My guess is their reasoning went something like this: We can’t let GM fail, but we don’t want to be seen as kowtowing to big company interests. What if we fire the CEO?  Will that make a bailout more palatable for the average American? Maybe. It will show we’re being tough, but still allow us to do what needs to be done to help save jobs and the economy.

Let me give you one more potential scenario that argues against the government getting involved in the decisionmaking at American companies. Government officials ask CEO Wagoner to submit a plan to demonstrate that GM is worthy of a bailout. In order for the plan to work, significant costs need to be cut. Wagoner approaches the head of the union with a list of concessions that they must make in order for the company to survive. The union balks at the demands not wanting to give up hard fought concessions from the company. The union approaches a senator whom it supported in the last election and will again in November. It tells the senator that Wagoner’s plan is unrealistic and won’t work. In fact, in order for GM to survive, Wagoner must go. The senator must let the president know that he won’t support the bailout as long as Mr. Wagoner is CEO.

The union’s support is critical to the senators re-election bid, so he honors the request of his largest constituency and carries the message back to Washington. The result is that Mr. Wagoner is out of a job and the one really pulling the strings is the union. Is that decision what’s best for the company and its owners?  Not necessarily. It’s what is best for the union.

Did this happen? I don’t think so. But the real issue is that it could happen and that’s not right. It’s not right when the owners of a company are not the ones calling the shots. If the government owns the company, then they can call the shots, but only when they own it.

We have a system of governance for public companies. One could argue that it’s not working. If that’s the case, then the government has the power to change the system. Changing the system so that shareholder rights are protected is a noble cause. Taking away those shareholder rights and firing the CEO of a single company in order to send a message is not.

11 thoughts on “Do Shareholder Rights Matter to Obama?”

  1. I’ve waffled a bit on this, but today I think I support the right to demand Wagoner’s resignation. I think the Prez did leave control in the hands of the Board of Directors. He gave them the option to accept the bailout money, or keep Wagoner. The BoA made the choice.

    As I said, I’ve waffled. So tomorrow, I may think differently. But even so, my opinion probably won’t change any more frequently than GM’s restructuring plan.

  2. Who is the biggest shareholder of GM? If it is the government (us) by virtue of the bailout with our tax money, why can’t we dictate changes to a top heavy system that isn’t working?

  3. I was wondering when someone would question this. Doesn’t the Constitution still require the Gov’t to demonstrate just cause before depriving a private citizen of his property rights?

  4. The problem stems more from intrusion into the free market by Govnerment. I find few individuals that can survive without a motor vehicle. If there is a market demand for a product and your company cannot use that demand to market a product to address the need and make a profit . . . you really should not be in business. Using the excuse of a down economy, government is making terrific inroads regarding control. The government now has the strength to fire a private sector CEO, set salary caps and direct what products will be produced. It seems like a flash-back to my younger years but it occurred far, far away in other countries and it was called communism way back then.

  5. The government is not a shareholder in GM. That’s one of the problems with the administration pushing Wagoner out. They don’t have any stake in the company as of yet, but they still are calling the shots. GM’s board had no choice but to accept the administration’s ultimatum if they want any shot at the bailout dollars they so desperately need to survive.

  6. Has anyone even given any thought to what message this action may send to others considering accepting opportunities as CEO of publich held companies? Forget the fact that Obama intruded on the rights of a publicly held company’s Board of Directors; forget that the government was/is not a major sharehokder of GM (yet); forget the fact that perhaps Wagoner may indeed need to go. Think instead of the future of our free economy and of those publicly held companies who will need strong CEOs to lead their companies through not only this economc downturn, but into the future. What sane person will willingly, knowingly accept an offer to be CEO when the possibility of salary caps and yes, even termination, resides in the hands of one man – who, by the way, is not even a shareholder. I believe it is a sad day for free enterprise in the US.

  7. Ayn Rand wrote an interesting book about government intrusion into free enterprise. It’s called “Atlas Shrugged.” If you’ve never read it, now might be a good time to give it a look.

    Ms. Rand wrote the book over 50 years ago, but it’s theme is just as pertinent today.

  8. Sharon! You’re just trying to push my buttons! 😉

    Seriously, folks, there’s a lot of hand-wringing and comparisons to communism and all sorts of ridiculous comments about this. It still boils down to this: GM’s board still had the power to say yes, or no.

    Plengle – who was the citizen deprived of his property rights?

  9. Frank, I’m not sure that either fire the CEO or go without the money that is necessary for the survival is much of a choice for the board of directors.

    I still think that many of the issues faced by the company are legacy issues (related to pension obligations) that Wagoner inherited and will prevent GM from being competitive with the foreign competition who do not have those same issues. When the first 20% or so of the average new car purchase is going to meet pension obligations it’s tough to make money.

    I did read the other day that the government was considering converting its debt in GM to equity, which then would give them a legitimate right to have a say in the management of the company.

  10. Hi Frank!

    I didn’t even know you had buttons.

    In Atlas Shrugged there is one small section devoted to a story about how the heirs to a company changed the pay structure so that workers were paid according to their “need” rather than their ability. However, the book is about the rights of the individual to control his or her own intellectual property such as patents. etc.

    It illustrates how a government nationalized private businesses and cannibalized them to the point of extinction. It wouldn’t be too much of a stretch to compare it to how union demands can stranglehold a business to the point they can no longer survive.


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