Treasury Plans to Limit Voting of Shares in Rescued Companies

By Robert Schmidt

July 6 (Bloomberg) -- The U.S. Treasury signaled it intends to refrain from using stock acquired in rescued companies to influence corporate decisions, aside from approving board members and major transactions.

The Obama administration is set to release a policy on how it will vote the government’s shares in the coming weeks. On many resolutions offered by investors -- from demanding pro- environment policies to allowing domestic partner benefits to reining in executive bonuses -- the Treasury plans to ask that its ballots be counted in the same proportion as the votes of other stockholders so it won’t impact the results.

The rules are similar to an accord the government reached last month with Citigroup Inc. and guidance issued May 31 on ownership in the auto industry, said Treasury spokesman Andrew Williams. “Those are a good gauge of where we are going on this,” he said in an interview.

While the strategy may ease Wall Street concern of greater federal intrusion into commercial decision-making, it could spark tensions with labor and consumer-rights advocates who often use shareholder votes to advance social agendas in line with the Obama administration.

The Treasury is saying “this is not a policy tool, this is the result of a financial crisis,” said Stephen Myrow, a former department official who is now a consultant to hedge funds and other investment firms.

‘Reluctant’ Owner

The guidelines would also reflect statements from President Barack Obama, Treasury Secretary Timothy Geithner and others that the government is a “reluctant” owner that wants to exit the private sector as soon as possible.

As part of their annual meetings, companies hold non- binding votes on a number proposals sponsored by shareholders, often unions and big pension funds. The resolutions can range in topic from executive pay to climate change to health-care reform.

On such issues, the Treasury plans to use proportional, or “mirror,” voting. The method, which directs that the shares be counted in the same proportion as those that have been already cast, is used by some brokers who hold large amounts of stock on behalf of clients that aren’t interested in exercising their proxy rights.

While the Treasury guidelines will draw a distinction between voting on major corporate matters and other issues, they may garner criticism from some advocates who say the government would be abdicating its responsibilities. The Securities and Exchange Commission, for example, tells investment advisers to vote their clients’ shares on issues that have an impact on a company’s bottom line.

‘Absentee Landlord’

“To say you are going to walk softly and carry a big stake is kind of ridiculous,” said Patrick McGurn, special counsel at proxy advisory company RiskMetrics Group in Rockville, Maryland. “It does beg the question of an absentee landlord, and that usually is a prescription for disaster.”

The government can still have a major influence on the companies it holds stakes in beyond the proxy process. On pay, for example, the administration has appointed Kenneth Feinberg, a Washington lawyer, to regulate executive compensation at seven companies that have received “exceptional” aid from taxpayers.

The Treasury proxy voting rules are being issued in the wake of the government’s agreement with Citigroup last month to trade some of the $25 billion of preferred shares acquired under the Troubled Asset Relief Program for common stock. The deal will make the U.S. the bank’s largest shareholder, giving it about a 34 percent stake.

Citigroup Role

In the Citigroup exchange offering documents, the government said it will mirror the votes of the other common shareholders, except in six areas: the election or removal of directors, approval of mergers or consolidation, the sale of “substantially all” of the assets, dissolution, the issuance of securities or amendments to the bank’s charter or bylaws.

In addition, the Treasury issued principles for managing its ownership stake in General Motors Corp. They say “the government will only vote on core governance issues, including the selection of a company’s board of directors and major corporate events or transactions.”

The Treasury added that while it aims to protect taxpayer interests, “the government intends to be extremely disciplined as to how it intends to use even these limited rights.”

Treasury spokesman Williams said that the department doesn’t have a date yet for releasing the guidelines. The rules aren’t likely to involve the government’s 77.9 percent holding in insurer American International Group Inc. because those shares are held in a trust on behalf of U.S. taxpayers.

‘No Desire’

Herb Allison, the Treasury’s assistant secretary overseeing the $700 billion bailout, told a Senate committee last month that the department will “very shortly” issue the policy.

“We have all heard the president as well as Secretary Geithner say the government has no desire to be a day-to-day manager of these companies,” Allison told the Senate Banking Committee at his June 4 nomination hearing. “It will be a shareholder.”

Such an approach makes sense for both taxpayers wanting their money protected and companies concerned about federal officials telling them what to do, said Kevin Petrasic, a banking attorney at the Paul, Hastings, Janofsky & Walker law firm in Washington.

“It comes down to a balancing act: make sure there is accountability but also that the government doesn’t micromanage,” he said.

To contact the reporter on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net.