Liability and Your Board of Directors

(page 4 of 4)

Further, both the Emergency Economic Stabilization Act of 2008 (EESA), the legislation under which TARP was created and implemented, and the American Recovery and Reinvestment Act of 2009, signed into law by President Obama on February 17, contain provisions relating to executive compensation and the oversight role of boards of directors in this area. For example, boards and compensation committees must adopt company policies with respect to approval of excessive or luxury expenditures as identified by Treasury and must evaluate employee compensation plans in the light of any risks posed to the TARP recipient from such plans. The acts also impose other obligations on boards that have traditionally been reserved for companies' management teams.

In February, SIGTARP began sending detailed "letters of inquiry" to companies that were recipients of TARP funds, including financial institutions and major U.S. automakers. The letters requested detailed information regarding the companies' anticipated use of TARP funds, actual use of TARP funds, and whether these funds were segregated from other institutional funds. Of particular note, the letters included a request that the companies provide information on "specific plans and the status of implementation of those plans, for addressing executive compensation requirements associated with the funding." In addition to requesting information related to the expenditure and compensation issues, the letters asked for details on how executive compensation limitations will be implemented in line with Department of Treasury guidelines and whether any such limitations "may be offset by other changes to other, longer-term or deferred forms of executive compensation."

The responses to these letters are to be signed by a duly authorized senior executive officer of the company who certifies the accuracy of all statements, representations, and supporting information provided. In subsequent guidance, SIGTARP clearly indicates that it is not seeking certification of compliance with TARP. However, the letters do not clearly exclude boards of directors for accountability for the contents of these responses or the programs and policies described therein, leaving open the possibility of further investigations into director oversight.

As TARP and its related programs move forward, directors on both financial and non-financial corporate boards will need to educate themselves on the issues that these federal programs will create for their entities and should be prepared for the possibility that actions with these funds will be subject to SIGTARP review. Directors may also consider the creation of a corporate oversight board tasked with monitoring issues that may arise in relation to TARP and the use of TARP funds. James Sanders, a former federal prosecutor and regional administrator with the Securities and Exchange Commission, is a partner at law firm McDermott Will & Emery.

Provided by Directorship—The Leading Publication for Boardroom Intelligence

Business Exchange

Track and share business topics across the Web.