U.S. taxpayers to get say in GM board reshuffle

NEW YORK (Reuters) - General Motors Corp's GM.N board of directors is set for an overhaul at the hands of the U.S. government, but some observers are questioning whether potentially complex allegiances could hobble the new board and stand in the way of the automaker's recovery.

The GM board has long been dismissed by critics as weak and too cozy with management, so any boardroom shake-up may be welcomed by the company's detractors. The government also has a big stake in recruiting effective directors, because taxpayers want the best possible return on their investment.

But some corporate governance experts say thorny issues could come into play as the government, set to become the controlling stockholder in the restructured company when it emerges from its historic bankruptcy, reshapes the board.

They say there could be times when the interests of the corporation and the taxpayers are not the same. That could complicate things for directors who have a fiduciary duty to represent all shareholders, not just one group -- even one as powerful as the U.S. government.

The situation creates the potential for boardroom tension and could lead to a difficult relationship between the board and management, said Barry Genkin, a partner at law firm Blank Rome LLP in Philadelphia who advises corporate boards. Some current GM directors who only recently joined the board are expected to stay and work alongside the new directors.

"Is a regular board member going to want to be on a board with government representatives?" Genkin said. "I think there is a potentially chilling effect on the remaining directors if someone is now dictating who is going to be on the board."

FIDUCIARY DUTIES

Outside directors are supposed to represent shareholders and keep an eye on management. At GM, independent directors could get caught in the middle if the company, for instance, wants to move more manufacturing abroad but the government opposes such a decision because of the impact on U.S. jobs.

For their part, government officials have said that no government employees will serve on the GM board and that it does not intend to exert control over day-to-day operations. The new board is expected to be in place within 90 days, GM Chief Financial Officer Ray Young has said.

Experts say corporate law is fairly clear that directors owe a fiduciary duty to all shareholders, not just some.

Still, directors in reality are mindful of who put them on the board, said corporate law professor Lawrence Mitchell of George Washington University Law School.

"You dance with the guy you came with," he said. Assuming directors want to keep their jobs, "they know perfectly well that they have to keep the controlling shareholder happy."

Adding to the mix will be a board member appointed by the United Auto Workers and another by the Canadian government.

Mitchell said he also sees potential for boardroom conflict. The U.S. government intends to be a short-term shareholder in the company, but the UAW, the second-largest stakeholder, would be a long-term investor, he said.

"You'd be surprised not to see some significant conflict of interest between the controlling shareholder and the minority shareholder," he said. "You'd be kind of surprised not to see that reflected in the way GM is managed."

U.S. GOVERNMENT AS STOCKHOLDER

At GM, the U.S. taxpayers will get a 60 percent stake in the new company in exchange for providing $50 billion in financing since the beginning of the year.

It is not the only company where the government is wrestling with its new role as shareholder. Bailed-out American International Group (AIG.N) last month announced six new board nominees, who all needed the approval of the three trustees who oversee taxpayers' majority stake in the insurer. The trustees are supposed to act independently from the government.

At GM, federal officials will reshuffle a board that has frequently been criticized in the past as ineffective.

Two decades ago, Texas tycoon Ross Perot dubbed his fellow GM directors "pet rocks" who sat silently beside then-CEO Roger Smith. More recently, the board was considered too close to former CEO and Chairman Rick Wagoner, who was ousted by President Barack Obama's administration in March after the company lost tens of billions under his watch.

New blood for GM's board may be a welcome thing. While boards should be collegial, "that doesn't mean everybody agrees with everyone else," said Claudia Allen, a partner at law firm Neal Gerber & Eisenberg LLP in Chicago who specializes in governance issues.

The current 12-member GM board includes George Fisher, retired chairman and CEO of Eastman Kodak Co (EK.N), another iconic U.S. company whose luster has faded; Erskine Bowles, ex-President Bill Clinton's former chief of staff, and Neville Isdell, retired chairman and CEO of Coca-Cola Co (KO.N).

Isdell only joined the board last year, and could be among those asked to stay. Young, the CFO, recently singled him out as a "tremendous addition" whose marketing background has helped as the automaker struggles to sell cars.

Executive search firm Spencer Stuart has been hired to help find new directors. GM Chairman Kent Kresa says he has already discussed possible candidates with Steve Rattner, head of the White House-appointed autos task force.

Mitchell said he hoped the company would gain more board members with manufacturing industry expertise, but said he worried that the Obama administration might not have the same view and would look elsewhere.

"What GM needs are directors from industry who understand industry," he said. "It needs people who understand how to run a business and the new realities of the automobile industry."

(Reporting by Martha Graybow; Editing by Tim Dobbyn)