The Volokh Conspiracy - Corporate Governance and the Bailout::

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.

	[David Post, October 14, 2008 at 10:03pm] Trackbacks Corporate Governance and the Bailout:: 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.