Did I miss it, or is nobody even paying lip service to the idea that only the Board of Directors can make decisions for (banking) corporations of the kind the banks have apparently made by "accepting" the Treasury's latest plan? As I understand things, Bernanke, Paulson, Geitner and the other gov't officials met with the CEOs of the 9 big banks and laid out their plan and sought the banks' "voluntary" acceptance — yes or no, all or nothing. The conversation presumably went something like this:
Paulson: "Here's the plan: We inject capital and we take equity back. You agree to certain conditions (on e.g. executive compensation), we'll extend the FDIC guarantees to all your deposits. Etc. We could force you to accept the deal (or at least we'd argue that we could, based on authorization contained in the bailout bill to re-capitalize the banks), but for various reasons we don't want to — we want you to accept the deal voluntarily. We have to get all of you on board at once — otherwise, if we went one bank at a time, it would look like the bank we're helping out is in particularly bad shape, and that would send the wrong message to investors."
And the CEOs agreed (and the market went up 900 points).
The CEOs, though, can't possibly have the power to agree, on behalf of their corporations, to a deal of this magnitude, can they? Surely the Boards of Directors, and only the Board of Directors, can commit the banks to a plan involving the issuance of billions of dollars of new equity. It's possible, I suppose, that each of the CEOs spoke to a specially-convened Board meeting and the Boards all voted to go along (and nobody mentioned anything about it because it's just too boring). Or maybe everybody is assuming that the respective Boards will just retroactively rubber-stamp the deal some time this week (though from what I hear from a source inside JP Morgan/Chase, there are a whole lot of people there who are very unhappy with this deal (and the dilutive effects on the value of current shareholders' shares).
Update. As some commenters pointed out, it looks like the possibility that I mentioned in the original posting — that the Boards of the banks did convene by phone at some point, and they all voted to go along, and nobody said much about that part of the process because it was just too boring and insignificant — was indeed how things played out.
To some commenters, that makes it all a "non-story" — they all hooked up by cellphone, had brief discussion (the entire meeting took 3 hours, from the initial statements by Paulson to the signature of the CEOs on the document), and that was that.
It seems to me, though, that the non-story is the story. Board action is treated by pretty much everyone as an afterthought to the real action, which was in the room. The NY Times story today about the whole drama — 37 paragraphs + sidebar — mentions the Boards of Directors at the very end, the penultimate paragraph, in passing. It is treated as an unimportant afterthought because it is an unimportant afterthought. That, it strikes me, is interesting, on two levels: first, illustrating the obvious but interesting point that deliberative bodies (like Boards of Directors, or legislatures) are ineffective during "crises," and, second, that it illustrates how we still haven't solved the problem that AA Berle and Gardiner Means (two members of FDR's "brain trust," incidentally) wrote about in their 1932 classic "The Modern Corporation", viz. the separation of "ownership" and "control" in corporate governance. Shareholders (owners) are supposed to control corporations through Boards of Directors — but they don't, in reality; management controls corporations. It's a big problem, and I'm not sure we've made a great deal of headway on it since 1932.
I may be wrong, but isnt "none" the correct answer?
"The top bankers were then told to show up for a meeting Monday at 3 p.m., but were given few details. Expecting an uproar over the plan, government officials secretly planned to break off the first meeting, giving CEOs time to vent, talk to their boards, clear their heads, and reconvene at 6:30 p.m."
The second meeting never happened, because there wasn't the uproar they expected. Paperwork was all in by 6:30.
Kay Adams: Michael, you never told me you knew Johnny Fontane!
Michael: Sure, you want to meet him?
Kay Adams: Well, yeah! Sure.
Michael: My father helped him with his career.
Kay Adams: How did he do that?
Michael: ...Let's listen to the song
Kay Adams: [after listening to Johnny for a while] Tell me, Michael. Please.
Michael: ...Well when Johnny was first starting out, he was signed to a personal services contract with this big-band leader. And as his career got better and better he wanted to get out of it. But the band leader wouldn't let him. Now, Johnny is my father's godson. So my father went to see this bandleader and offered him $10,000 to let Johnny go, but the bandleader said no. So the next day, my father went back, only this time with Luca Brasi. Within an hour, he had a signed release for a certified check of $1000.
Kay Adams: How did he do that?
Michael: My father made him an offer he couldn't refuse.
Kay Adams: What was that?
Michael: Luca Brasi held a gun to the bandleader's head, and my father assured him that either his signature or his brains would be on the release.
Kay Adams: ...
Michael: ...That's a true story.
As to the governance issue, I am sure the boards will be involved (and have been already). The most likely scenario is (a) the boards were told in a telephone meeting that the CEO was going to the meeting, (b) a subsequent phone meeting relayed what happened at the meeting, and comments were received and considered, and (c) a formal in-person meeting will occur shortly to adopt the proposals, or to reject them, as the case may be.
A handful of politicians in Congress did the negotiating with Paulson, leaving committees of jurisdiction, and every other rank and file legislator outside the closed door meetings that determined our collective fate. No democratic debate, no democracy. Just raw political power shoving a pre-formed, non-negotiable plan down the throats of party members, or else. It's how our "Congress" now works on every issue of import to the White House and its allied worshippers atop the two political parties.
Pattern established - repeat as desired. Next up: Bank CEOs. What are the Boards of Directors going to do - say no? Ask the majority of the House of Representatives how that ended up working out for them in the hysterical media-manipulated aftermath.
Nevertheless, they oughta say no, if they disagree and it's the wrong move for their company (Barclay's did just that in Britain). Anything else - rubberstamping to CYA like the politicians feel entitled to do - would just be a repeat of the (Congressional and corporate) behavior that got us into this mess in the first place.
You forget bank board members includes some people that are the executives and or board members for some major major government contractors and their companies must lobby said government for access and for the passage of certain laws and regulations including tax cuts.
This blog post confuses me. Doesn't Prof. Post have any friends at any of the bank or their outside law firms? Why doesn't he call some of them to confirm that boards did meet? Professors are so divorced from the real world.
Regarding one of the comments above, I don't have the bylaws of each bank in my possession, but, in general, boards can meet by telephone. There is no need for a later, "formal" meeting to confirm the telephone meeting. If anyone is more interested than I, the bylaws of the relevant entities are probably available on-line somewhere, or by calling Investor Relations.
"As the meeting wound down, participants said, the bankers focused more on contacting their boards before signing the agreement with the Treasury Department."
www.sec.gov
Go to any corporation's 10-K and scroll to the exhibit list, under exhibit 3 it will provide where you can pull the bylaws (or it will be attached if it was recently amended).
If you are interested in the composition of a board and their independence, go to their proxy statement for the last annual meeting which will be coded as a DEF 14A unless the annual meeting is also held to vote on a business combination in which case the S-4 registering the securities to be issued or the 424(b)(3) proxy mailed to shareholders will have the information.
And yes, in rush situations board meeting are held by telephone and can be done quite efficiently. If they weren't, nothing would ever get done. This is a complete non-story.
-Gene
Now if the theory is that human life is happier, or more real, or something, when all the villagers collectively decide on what to plant, and all work in the same field, and dispense justice collectively in the lord's court, and so on, then I can't help with that.
Amen. This is precisely why the perhaps unnecessarily-provocatively-named concept of "shareholder empowerment" is beginning to get more attention in academia. When the corporate democracy of some firms suffers systemic failures resulting in the thwarting of the collective will of the owners of the corporation, it is time to reevaluate the constitutional structure, as it were, of those corporations. The problem of board failure to control management has become especially bad--and the need for increased shareholder involvement concomitantly acute--in contexts where the interests of shareholders may conflict with those of the board, such as CEO compensation (many directors are CEOs themselves, and have every incentive to approve of very generous compensation packages for the CEOs on whose boards they serve).
One thing, it is tangentially related, is I don't understand why when a company breaks the law we fine the company. this is, in effect, fining the owners. But if as noted above boards barely can control management, this seems hardly fair. Should we not instead fine the managers who made the decisions to break the law? This would not only actually punish the people committing the crime, but also be a much more effective discouragement.
The relevant power involved here is not that of CEOs but of the bully, aka the feds.
Well, if it was a small corporation, the shareholders could exert direct control. What happens with large corporations (in a free market) is that if they're run counter to shareholders' interests, then shareholders begin selling, so the stock price declines, so corporations become vulnerable to hostile takeover with the management losing their jobs. Of course, the feds have their ways of blocking or manipulating market processes, and THAT's the problem.
However, the management can employ poison pills that prevent takeovers, so that they can keep on enjoying the perks of their positions. If it was not for such tactics, I would agree with you.
My understanding (from the WSJ) is that the government offered to invest money (lots of it) in each bank at the meeting and handed out terms sheets which specified that, in exchange for billions of dollars, the government only wanted preferred shares, paying a 5 percent dividend, and agreement to the very loose restrictions on executive compensation that Congress enacted (which are laughable). The CEOs likely sent the term sheets around to the board members, who, with their lawyers, could easily understand and justify their approval of the terms.
What is wrong with the process, is it (1) that the CEOS received the outlines of the deals and accepted only a few hours later or (2) that the goverment didn't negotiate with the entire board?
The latter never happens. The former is only a problem if the board was not adequately informed of the details of what it was asked to approve and thus could not make a prudent business decision. I haven't seen the term sheets, but they do not sound very complicated, so I would venture a guess that the boards could easily understand the terms.
http://mises.org/story/3142