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U.S.’s Role Expands in the Boardroom

U.S.’s Role Expands in the Boardroom

By

JOANN S. LUBLIN

Frederick "Fritz" Henderson’s sudden exit from the CEO suite at General Motors Co. signals a new phase in the government’s role in U.S. business.

Boards crammed with government appointees have prompted the departure announcements of three CEOs in the past two months: Mr. Henderson, Kenneth D. Lewis at

Bank of America Corp. and Alvaro de Molina at GMAC Financial Services.joann.lublin@wsj.com

The departures, and friction at other government-backed companies, raise a sticky question: Whose interests are these boards serving?

Each of the outgoing CEOs clashed with directors appointed to represent the government’s sizable stakes in the companies. Some corporate-governance specialists say the boards are in effect doing the administration’s work without being told to do so.

Boards of businesses with extensive taxpayer support "are only accountable to the government," distorting traditional corporate governance practices, observes Charles Elson, head of the Weinberg Center for Corporate Governance at the University of Delaware business school. "Politics influence decision making."

Mr. Elson said that Democratic Rep. Barney Frank’s demand that GM not close a Massachusetts parts-distribution center is evidence of interference. "The fact that he was pressuring GM management to keep it open is offensive," Mr. Elson says.

A spokesman for Mr. Frank said the Massachusetts congressman last winter asked the auto maker to keep the facility in his district open. In June, GM agreed to postpone closing the depot in Norton, Mass., for at least 14 months, the spokesman said. Mr. Elson’s criticism represents the views of someone who "is uninformed,” the spokesman added.

As a result, board decisions "are sound politically, but not necessarily sound from a business standpoint," Mr. Elson says. Mr. Henderson’s resignation "seems to be the result of that dynamic," Mr. Elson added.

"We were not involved in the decision," a Treasury spokeswoman said. A White House adviser also insisted that the administration had no involvement. Similarly, government officials said they made no suggestion to GMAC’s board to oust Mr. de Molina.

In another sign of friction Tuesday, Bank of America directors seeking Mr. Lewis’s successor have rejected some candidates’ proposal that the giant bank should consider breaking itself up. Their resistance is one of several factors slowing the hunt, according to people familiar with the conversations.

The tensions may grow as the government deepens its involvement in certain firms. The Treasury Department last month hired an executive-search firm to help seek possible candidates for the board of troubled insurer American International Group Inc. The government, which owns nearly 80% of AIG, gained the right to elect two or three more directors after the insurer missed four quarterly dividend payments.

Even when government officials don’t actually call the shots, boards of bailed-out businesses know they must act in the government’s interests because "we have effectively nationalized these companies," says John Olson, a senior partner at Gibson Dunn & Crutcher in Washington who advises several corporate boards.

"They are not being run for the benefit of any [other] stakeholders," Mr. Olson says. In effect, "private investors are left in the back seat," Mr. Olson says. He predicts some private investors may sue these boards "if something goes wrong."

Not all governance experts are alarmed by the government’s ramped up involvement in taxpayer-assisted companies, however. Government-appointed directors "are not robots," said Jeffrey Sonnenfeld, a senior associate dean at Yale University’s School of Management.

GM Chairman Edward Whitacre Jr., named interim CEO Tuesday, "is not just reading political winds,” Mr. Sonnenfeld says. "He’s taking charge, building an enterprise the way he thinks it should be built.”

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Joann S. Lublin at

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