Pension Benefit Guaranty Corporation
Governance Structure Needs Improvements to Ensure Policy Direction and Oversight Gao ID: GAO-07-808 July 6, 2007The Pension Benefit Guaranty Corporation (PBGC) insures the pensions of millions of private sector workers and retirees in certain employer-sponsored pension plans. It is governed by a board of directors consisting of the Secretaries of the Treasury, Labor, and Commerce, who are charged with providing PBGC with policy direction and oversight. This report assesses (1) the extent to which PBGC's governance structure provides PBGC with policy direction and oversight, and (2) whether administrative responsibilities among the PBGC board, Department of Labor (DOL), and PBGC management are clearly defined. We examined corporate governance practices, select federal government corporations, and reviewed documents on PBGC's structure. We interviewed officials from all board member agencies and PBGC, among others.
Although PBGC's board has provided greater attention to PBGC since 2003, the board has limited time and resources to provide policy direction and oversight and has not established comprehensive written procedures and mechanisms to monitor PBGC operations. Because PBGC's board is composed of three cabinet secretaries, who have numerous other responsibilities, the board structure does not guarantee that PBGC's board is active and diverse. For example, since 1980, a span of 27 years, there were only 18 official board meetings. Further, the board has not established formal procedures to ensure that PBGC management provides it information on all policy matters nor has it developed standing committees to oversee operations. Instead, the board relies on PBGC's Inspector General and management's oversight committees to ensure that PBGC is operating effectively. However, there are no formal protocols concerning the Inspector General's interaction with the board, and PBGC internal management are not independent and are not required to routinely report all matters to the board. Even though PBGC uses informal channels of communication to inform its board members, the board's oversight may be limited, because it cannot be certain that it is receiving high quality and timely information about all significant matters facing the corporation. PBGC's lack of formal guidelines to articulate the administrative roles and responsibilities among the board, the Secretary of Labor as the board chair, board members' agencies, and the PBGC Director has led, at times, to confusion and inefficiencies. The board has not addressed uncertainty over the extent to which PBGC is a separate and distinct executive agency, a fact that has resulted in confusion over when DOL has the authority to manage PBGC's operations. Further, neither DOL nor PBGC has developed formal policies and procedures to define the board's authorities and responsibilities. Instead, PBGC officials typically react to DOL's periodic written and oral communications, which PBGC officials said sometimes become a part of PBGC's operational framework. For example, PBGC is required to incorporate its budget request with DOL's budget request, and over the years, DOL has taken a more active role in reviewing PBGC's budget. However, PBGC officials believe that DOL has in some cases overstepped its role. For instance, DOL and PBGC officials disagreed over the inclusion of a funding request in PBGC's fiscal year 2007 budget.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-07-808, Pension Benefit Guaranty Corporation: Governance Structure Needs Improvements to Ensure Policy Direction and Oversight
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
July 2007:
Pension Benefit Guaranty Corporation:
Governance Structure Needs Improvements to Ensure Policy Direction and
Oversight:
GAO-07-808:
GAO Highlights:
Highlights of GAO-07-808, a report to congressional committees
Why GAO Did This Study:
The Pension Benefit Guaranty Corporation (PBGC) insures the pensions of
millions of private sector workers and retirees in certain employer-
sponsored pension plans. It is governed by a board of directors
consisting of the Secretaries of the Treasury, Labor, and Commerce, who
are charged with providing PBGC with policy direction and oversight.
This report assesses (1) the extent to which PBGC‘s governance
structure provides PBGC with policy direction and oversight, and (2)
whether administrative responsibilities among the PBGC board,
Department of Labor (DOL), and PBGC management are clearly defined. We
examined corporate governance practices, select federal government
corporations, and reviewed documents on PBGC‘s structure. We
interviewed officials from all board member agencies and PBGC, among
others.
What GAO Found:
Although PBGC‘s board has provided greater attention to PBGC since
2003, the board has limited time and resources to provide policy
direction and oversight and has not established comprehensive written
procedures and mechanisms to monitor PBGC operations. Because PBGC‘s
board is composed of three cabinet secretaries, who have numerous other
responsibilities, the board structure does not guarantee that PBGC‘s
board is active and diverse. For example, since 1980, a span of 27
years, there were only 18 official board meetings, as shown below.
Further, the board has not established formal procedures to ensure that
PBGC management provides it information on all policy matters nor has
it developed standing committees to oversee operations. Instead, the
board relies on PBGC‘s Inspector General and management‘s oversight
committees to ensure that PBGC is operating effectively. However, there
are no formal protocols concerning the Inspector General‘s interaction
with the board, and PBGC internal management are not independent and
are not required to routinely report all matters to the board. Even
though PBGC uses informal channels of communication to inform its board
members, the board‘s oversight may be limited, because it cannot be
certain that it is receiving high quality and timely information about
all significant matters facing the corporation.
Figure: Number of PBGC Board Members Held, 1974- May 2007:
[See PDF for Image]
Source: GAO analysis of PBGC documents and board meeting minutes.
[End of figure]
PBGC‘s lack of formal guidelines to articulate the administrative roles
and responsibilities among the board, the Secretary of Labor as the
board chair, board members‘ agencies, and the PBGC Director has led, at
times, to confusion and inefficiencies. The board has not addressed
uncertainty over the extent to which PBGC is a separate and distinct
executive agency, a fact that has resulted in confusion over when DOL
has the authority to manage PBGC‘s operations. Further, neither DOL nor
PBGC has developed formal policies and procedures to define the board‘s
authorities and responsibilities. Instead, PBGC officials typically
react to DOL‘s periodic written and oral communications, which PBGC
officials said sometimes become a part of PBGC‘s operational framework.
For example, PBGC is required to incorporate its budget request with
DOL‘s budget request, and over the years, DOL has taken a more active
role in reviewing PBGC‘s budget. However, PBGC officials believe that
DOL has in some cases overstepped its role. For instance, DOL and PBGC
officials disagreed over the inclusion of a funding request in PBGC‘s
fiscal year 2007 budget.
What GAO Recommends:
GAO recommends that the board develop policies and mechanisms
consistent with corporate governance practices, and develop formal
guidelines to clarify roles and responsibilities. In response, PBGC‘s
board stated that its review of the corporation‘s bylaws will help
delineate authorities, and PBGC‘s interim director said he was
committed to working with the board to enhance PBGC‘s governance
processes.
GAO is also asking Congress to consider expanding the PBGC‘s board of
directors.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-808.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Barbara Bovbjerg, 202-512-
7215, bovbjergb@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Board Structure Provides Limited Attention and Mechanisms for
Overseeing PBGC:
Lack of Protocols for Administering PBGC Can Result in Confusion and
Inefficiencies:
Conclusions:
Matter for Congressional Consideration:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: List of Selected Federal Government Corporations:
Appendix III: Examples of Corporate Governance Practices:
Appendix IV: Comments from the Pension Benefit Guaranty Corporation
Board of Directors:
Appendix V: Comments from the Pension Benefit Guaranty Corporation:
Appendix VI: Contacts and Acknowledgments:
GAO Related Products:
Tables:
Table 1: Examples of Corporate Governance Practices:
Table 2: Comparison of Select Government Corporations with a Similar
Mission:
Figures:
Figure 1: Comparison of Public and Private Entities:
Figure 2: Net Financial Position of PBGC's Single-Employer Program:
Figure 3: Number of PBGC Board Meetings Held, 1974-May 2007:
Abbreviations:
DOL: Department of Labor:
ERISA: Employee Retirement Income Security Act of 1974:
FDIC: Federal Deposit Insurance Corporation:
GCCA: Government Corporation Control Act:
GSE: government-sponsored enterprise:
OMB: Office of Management and Budget:
PBGC: Pension Benefit Guaranty Corporation:
PPA: Pension Protection Act of 2006:
United States Government Accountability Office:
Washington, DC 20548:
July 6, 2007:
The Honorable Max Baucus:
Chairman:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on Finance:
United States Senate:
The Honorable Edward M. Kennedy:
Chairman:
The Honorable Michael B. Enzi:
Ranking Member:
Committee on Health, Education, Labor and Pensions:
United States Senate:
The Pension Benefit Guaranty Corporation (PBGC) insures the pensions of
more than 44 million private sector workers and retirees in over 30,000
employer-sponsored pension plans. Since its creation in 1974, PBGC's
assets have increased significantly, and its financial portfolio is now
one of the largest of any federal government corporation. In addition,
PBGC has become responsible for a number of large terminated pension
plans, which have brought the corporation record numbers of claims from
plan participants. In fact, between fiscal year 2000 and 2005, the
number of participants to whom PBGC has paid benefits increased from
around 243,000 to almost 700,000, with another half million expected to
receive benefits from PBGC when they become eligible to retire. To
strengthen pension plan funding, Congress passed the Pension Protection
Act of 2006 (PPA).[Footnote 1] However, PBGC still shows an accumulated
$18 billion deficit for its single-employer insurance program.
Established as a self-financing government corporation, PBGC is
governed by a three-member board of directors consisting of the
Secretaries of the Treasury, Labor, and Commerce. PBGC board members
are charged with providing policy direction and oversight of PBGC's
finances and operations. Because of concerns about PBGC's long-term
financial condition, in 2003, we added PBGC's single-employer pension
insurance program--its largest insurance program--to our high-risk
list; a group of federal programs that need urgent attention and
transformation. PBGC's insurance program remains on the high-risk list
today.[Footnote 2] We reviewed PBGC's governance and management
structure to determine whether PBGC is well positioned to address
current and growing fiscal and operational challenges. Specifically,
this report assesses (1) the extent to which PBGC's governance
structure provides PBGC management with policy direction and oversight,
and (2) whether the administrative responsibilities among PBGC's board,
the Department of Labor (DOL), and PBGC's management are clearly
defined.
To identify the extent to which PBGC's governance structure provides
policy direction and oversight, we reviewed the Employee Retirement
Income Security Act of 1974[Footnote 3] (ERISA) and PPA to understand
the authority of PBGC's board of directors as well as the
administrative responsibilities of PBGC's Director. We examined private
sector corporate governance guidelines and those of similar federal
government corporations to determine the extent to which other
corporations have similar policy mandates, structures, and oversight
functions. We selected similar federal government corporations with
similar missions and designations as listed under the Government
Corporation Control Act (GCCA).[Footnote 4] To determine the extent to
which PBGC's administrative structure has affected PBGC's internal
operations, we collected and reviewed documents related to PBGC's
organizational structure and administrative reporting requirements,
such as its relationship with DOL and the Office of Management and
Budget (OMB). In addition, we reviewed the work of PBGC's Office of the
Inspector General and GAO to determine what weaknesses or
inefficiencies resulted from the corporation's governance and
organizational structure. We met with officials from PBGC; the
Departments of the Treasury, Labor, and Commerce; and OMB; as well as
with former PBGC executive directors, former general counsels, and
former PBGC staff. While we met with the board representatives and
their staff, we did not meet with the cabinet secretaries who
constitute the board.
We conducted our work between November 2006 and May 2007 in accordance
with generally accepted government auditing standards. Appendix I
discusses our scope and methodology in further detail.
Results in Brief:
PBGC's board has limited time and resources to provide policy direction
and oversight and has not established comprehensive written procedures
and mechanisms to monitor PBGC operations. While PBGC's board has
provided greater attention to the corporation since 2003, the three-
member board structure may not be large enough to dedicate the
necessary time and attention or provide the skills needed to direct and
oversee PBGC. In addition, because the board is composed only of
cabinet secretaries, PBGC's board members typically change with each
Administration, potentially limiting the board's institutional
knowledge of the corporation. Since the board members have limited time
to direct and oversee PBGC, they have designated representatives within
their respective agencies to act on their behalf. However, these
officials also have limited staff and resources to dedicate to PBGC. In
fact, we found that between 1980 and May 2007, a span of 27 years,
there were only 18 board meetings, 10 of which were since 2003. While
the board is now meeting regularly, it appears that these meetings only
last about an hour, with very little time spent on strategic and
operational issues. The board also has not established formal
procedures to ensure that PBGC management provides it with information
on all policy matters, nor has it developed standing committees to
oversee operations. Instead, the board relies on the Inspector General
and PBGC management's oversight committees to ensure that PBGC is
operating effectively. However, there are no formal protocols
concerning the Inspector General's interaction with the board, and
PBGC's management committees are not independent of management and are
not required to routinely report all matters to the board. Even though
PBGC uses informal channels of communication to inform its board
members, the effectiveness of the board's oversight may be limited,
because it cannot be certain that it is receiving high-quality and
timely information about all significant matters facing the
corporation.
The PBGC's lack of formal guidelines to articulate the administrative
roles and responsibilities among the board, the Secretary of Labor as
board chair, the board members' agencies, and the PBGC Director has
led, at times, to confusion and inefficiencies. Although ERISA places
PBGC in DOL, the board has not addressed the uncertainty that exists
over the extent to which PBGC is a separate and distinct executive
agency, a fact that has resulted in confusion over the extent to which
DOL has the authority to manage PBGC's operations. DOL officials
believe that PBGC is one of its agencies, and PBGC officials believe
that it is a separate and distinct executive branch agency that is
responsible to the entire Board of Directors. PBGC has developed its
own policies, procedures, directives, and systems separate from DOL,
and does not rely on DOL-wide services, such as legal, procurement, and
information technology services. Neither DOL nor PBGC has developed
formal policies and procedures to define the administrative authorities
and responsibilities of PBGC. Instead, PBGC officials typically react
to DOL's periodic written and oral communications, which PBGC officials
said sometimes become a part of PBGC's operational framework. For
example, PBGC is required to incorporate its budget request with DOL's
budget request. Over the years, DOL has taken an increasingly active
role in reviewing PBGC's budget, and PBGC officials believe that DOL
has in some cases overstepped its role. For instance, DOL and PBGC
officials disagreed on the inclusion of a funding request in PBGC's
fiscal year 2007 budget.
We are asking Congress to consider expanding PBGC's board of directors.
If Congress decides to take such action, it would be helpful to appoint
additional members of diverse backgrounds who possess knowledge and
expertise useful to PBGC's responsibilities and can provide the
attention that would be needed. Further, dedicating staff, independent
of PBGC's executive management, with relevant pension and financial
expertise, to solely support the revised board's policy and oversight
activities may be warranted. We are also making recommendations to the
Secretaries of the Treasury, Labor, and Commerce, as the PBGC board of
directors, to establish policies, procedures, and mechanisms to improve
accountability and oversight of PBGC. In response to our draft report,
the PBGC board of directors recognized that the current law establishes
an unusual corporate structure for PBGC, and stated that if Congress
considers making changes to PBGC governance structure, they would be
pleased to discuss the merits of various corporate governance proposals
for PBGC. The board also stated that the review and revisions of PBGC
bylaws will help delineate the respective roles, responsibilities, and
authorities of PBGC's board and Director in the management of PBGC. The
PBGC interim director stated that PBGC management is committed to
working with the board to enhance PBGC's governance processes on issues
identified in our review. PBGC's board of directors and PBGC interim
director's comments are reproduced in appendixes IV and V,
respectively.
Background:
Congress passed ERISA to protect the rights and interests of
participants and beneficiaries of private sector employee benefit
plans. Before the enactment of ERISA, few rules governed the funding of
defined benefit pension plans,[Footnote 5] and participants had no
guarantee that they would receive promised benefits. Title IV of ERISA
created PBGC to insure plan participants' benefits and to encourage the
continuation and maintenance of private sector defined benefit pension
plans by providing timely and uninterrupted payment of pension
benefits.[Footnote 6] Through its two insurance programs, PBGC covers
certain private sector defined benefit plans.[Footnote 7] PBGC is
funded through insurance premiums from employers that sponsor insured
pension plans as well as investment income and assets from terminated
pension plans.
ERISA established a governance structure consisting of a board of
directors, with the Secretary of Labor as the Chairman of the Board.
ERISA provided the Secretary of Labor with responsibility for
administering PBGC's operations, personnel, and budget. The Secretary
delegated the responsibility for administering PBGC to an Executive
Director through a series of chairman's orders describing the Executive
Director's responsibilities. For example, one order issued in 1984
authorized the Executive Director to make final decisions addressing
legal matters on behalf of the corporation. In 2006, PPA replaced the
Chairman of the Board as PBGC's administrator with a Senate-confirmed
director. The PPA established the director position at the same level
of the executive schedule as two of the PBGC board representatives--
Under Secretaries of Commerce and Treasury as well as the heads of
other federal government corporations, such as the Federal Deposit
Insurance Corporation (FDIC) and the Export-Import Bank of the United
States. In addition, the corporation is aided by a seven-member
Advisory Committee appointed by the President to represent the
interests of labor, employers, and the general public.[Footnote 8] This
committee has an advisory role but has no statutory authority to set
PBGC policy or conduct formal oversight.
Under the GCCA, PBGC is a wholly owned government corporation--that is,
the government holds all its assets and liabilities. However, the
United States is not liable for any obligation or liability incurred by
the corporation.[Footnote 9] (See app. II for a list of selected
government corporations). According to public administration experts, a
government corporation is appropriate for the administration of
governmental programs that:
* are predominately of a business nature,
* produce revenue and potentially are self-sustaining,
* involve a large number of business-type transaction with the public,
and:
* require greater budget flexibility than a government department or
agency.
Under ERISA, PBGC is also empowered to sue and be sued; appoint and fix
the compensation of officers, employees, attorneys, and agents; and
utilize the personnel and facilities of any other agency or department
of the U.S. government with or without reimbursement (with its head's
consent).[Footnote 10] Figure 1 illustrates some of the differences
among traditional government departments/agencies, government
corporations, government-sponsored enterprises (GSE),[Footnote 11] and
private corporations.
Figure 1: Comparison of Public and Private Entities:
[See PDF for image]
Source: GAO.
[End of figure]
With the financial collapse of several large corporations over the past
years and the passage of the Sarbanes-Oxley Act of 2002,[Footnote 12]
which outlined a framework for more effective corporate governance,
many private sector companies have reassessed their corporate
governance practices. Although the Sarbanes-Oxley Act is intended to
strengthen the corporate governance of private sector entities, certain
corporate governance elements from it may also be relevant to
government corporations and government-sponsored enterprises.[Footnote
13] For example, corporate governance practices suggest that
corporations headed by boards of directors should have people in place
with the appropriate qualifications, independence, and resources to
conduct their responsibilities effectively. (See table 1 for examples
of corporate governance practices.) Additional information on corporate
governance practices is included in appendix III.
Table 1: Examples of Corporate Governance Practices:
Corporate practices: Board's fiduciary duties;
Corporate governance guidelines: In carrying out their duties,
directors should fulfill their fiduciary duties of care, loyalty, and
good faith and act in the best interests of the corporation and its
shareholders. Boards usually delegate the day-to-day management of the
company to the Chief Executive Officer (CEO) and other senior
management, but the board retains responsibilities for oversight and
monitoring of these delegated functions.
Corporate practices: Roles of board and management clearly defined;
Corporate governance guidelines: A strong and effective board should
have a clear view of its role in relationship to management. How a
board organizes itself and structures its processes will vary with the
nature of the business, business strategy, size and maturity of the
company, and talents and personalities of the chief executive officer
and the board. The Board should focus principally on guidance and
strategic issues, choice of the CEO and other senior management,
oversight and monitoring of management and company performance, and
adherence to legal requirements.
Corporate practices: Corporate governance guidelines available;
Corporate governance guidelines: The board should have a set of written
guidelines in place to articulate corporate governance principles and
the roles and responsibilities of the board and management. These
guidelines should be reviewed at least annually and help the board and
individual directors understand their obligations and the general
boundaries within which they will operate.
Corporate practices: Board access to information;
Corporate governance guidelines: The effectiveness of the board depends
on the quality and timeliness of the information each director
receives. The board and management should agree on the important
information needed for board oversight and monitoring to enable the
board to make informed decisions.
Corporate practices: Board composition and size;
Corporate governance guidelines: The composition and skill set of the
board should be linked to the company's particular challenges and
strategic vision. As companies develop and experience changed
circumstances, the desired composition of the board may be different
and should be reviewed.
Corporate practices: Board committee structure;
Corporate governance guidelines: Boards should establish committees
that will enhance the overall effectiveness of the board by ensuring
focus and oversight on matters of particular concern. Committees can
enhance board effectiveness by permitting closer focus, oversight, and
monitoring of sensitive areas. In the private sector, certain statutes
and standards require that companies maintain a number of standing
committees, such as an audit, nominating, and compensation committees.
In addition, boards have established committees, such as risk,
technology, pension and benefits, public policy, and corporate
governance, which focus on substantive issues of particular concern to
the company or the board.
Source: Carolyn K. Brancato and Christian A. Plath, Corporate
Governance Handbook, 2005: Legal Standards and Board Practices, The
Conference Board (New York, New York: 2005).
[End of table]
PBGC's financial outlook has improved since 2004, when it reported an
accumulated deficit of $23 billion, but PBGC still projects large
deficits for its single-employer program. Despite PPA's provisions to
strengthen defined benefit plan funding, PBGC reported an accumulated
deficit of $18.1 billion as of September 30, 2006. While PBGC currently
has assets exceeding $60 billion, sufficient to meet its
responsibilities in the coming years, the single-employer program has
had an accumulated deficit for much of its existence--the value of its
program assets is less than the present value of benefits and other
obligations (see fig. 2).
Figure 2: Net Financial Position of PBGC's Single-Employer Program:
[See PDF for image]
Source: Pension Benefit Guaranty Corporation.
Note: Net position equals program assets less the current value of
future benefit obligations for terminated plans and those deemed likely
to default. Values are for the end of the fiscal year.
[End of figure]
Board Structure Provides Limited Attention and Mechanisms for
Overseeing PBGC:
PBGC's board has limited time and resources to provide policy direction
and oversight and has not established procedures and mechanisms to
monitor PBGC operations. Although PBGC's board members have met more
frequently since 2003, the three cabinet secretaries composing the
board have numerous other responsibilities, and have been unable to
dedicate consistent and comprehensive attention to PBGC. In fact, we
found that between 1980 and May 2007, a span of 27 years, there were
only 18 board meetings, 10 of which were since 2003. The three-member
board is also not large enough to ensure diverse skills, such as
knowledge in strategic risk assessment and management, are included to
direct and oversee PBGC. Since the board has limited time to direct and
oversee PBGC, the members have designated officials within their
respective agencies to conduct much of the work on their behalf.
However, these officials also have limited resources to dedicate to
PBGC. Further, the board has not established important mechanisms, such
as the use of standing committees, to monitor and review PBGC
operations and programs. Instead, the board mostly relies on the
Inspector General and PBGC's management oversight committees to ensure
that PBGC is operating effectively. However, there are no formal
protocols requiring the Inspector General to routinely meet with the
board or its representatives and staff, and PBGC's management
committees are neither independent of PBGC, nor are they required to
routinely report all matters to the board. As a result, the
effectiveness of the board's oversight may be limited, because it
cannot be certain that it is receiving high-quality and timely
information about all significant matters facing the corporation, even
though PBGC officials report that they informally communicate with the
board representatives weekly.
PBGC's Board Structure Limits Board Members' Ability to Direct and
Oversee PBGC:
PBGC's board members have numerous other responsibilities in their
roles as cabinet secretaries and have been unable to dedicate
consistent and comprehensive attention to PBGC. ERISA charges the PBGC
board with directing and overseeing PBGC management in several ways.
The board is required to approve final decisions on policy matters that
could affect many American employers and their workers. The board is
also responsible for reviewing and approving PBGC's budget, monitoring
financial performance, approving the corporation's strategic plan, and
evaluating the effectiveness of its managers, among other
responsibilities. Beyond their roles as heads of executive agencies and
sitting on PBGC's board, two of the cabinet secretaries are also
members of other boards. For example, the Secretary of the Treasury
serves on the boards of the Millennium Challenge Corporation, the
Community Development Financial Institutions Fund, and is a managing
trustee of the Social Security and Medicare trust funds.[Footnote 14]
The Secretary of Commerce is on the board of the Export-Import Bank of
the United States.[Footnote 15] The Secretary of Labor is also a
trustee of the Social Security and Medicare trust funds.
According to some corporate governance guidelines, boards should have
no fewer than 5 members and no more than 15.[Footnote 16] With only 3
members, PBGC's board may not be large enough to include the knowledge
needed to direct and oversee PBGC, such as expertise in accounting,
management, or strategic risk assessment. According to corporate
governance guidelines, the board of directors should be large enough to
provide the necessary skill sets, but also small enough to promote
cohesion, flexibility, and effective participation. We did not identify
any other government corporations with a similar board size as PBGC.
Government corporations' boards averaged about 7 board members, with
one having as many as 15. For example, the Overseas Private Investment
Corporation's board of directors consists of 15 members--8 from the
private sector and 7 from the federal government, as shown in table 2.
Table 2: Comparison of Select Government Corporations with a Similar
Mission:
Federal government corporation: Commodity Credit Corporation; 15 U.S.C.
§ 714;
Number of board members: 8;
Board composition: Board of directors is subject to the general
supervision and direction of the Secretary of Agriculture, who is an ex-
officio director and chairperson of the board. The board consists of
seven members, in addition to the Secretary, who are appointed by the
President, with the advice and consent of the Senate.
Federal government corporation: Export-Import Bank of the United
States; 12 U.S.C. § 635;
Number of board members: 5;
Board composition: Board of directors consists of the bank's president
and chairman, the first vice president, as vice chairman, and three
other directors. All of the members of the board of directors are
appointed by the President with the advice and consent of the Senate
and serve 4- year terms.
Federal government corporation: Federal Crop Insurance Corporation; 7
U.S.C. § 1505;
Number of board members: 10;
Board composition: Board of directors, who are appointed by and serve
at the pleasure of the Secretary of Agriculture.
Federal government corporation: Federal Deposit Insurance Corporation;
12 U.S.C. § 1811;
Number of board members: 5;
Board composition: Board of directors consists of the Comptroller of
the Currency, the Director of the Office of Thrift Supervision, and
three citizens appointed by the President with the advice and consent
of the Senate. Members serve 6-year terms.
Federal government corporation: Overseas Private Investment
Corporation; 22 U.S.C. § 2191;
Number of board members: 15;
Board composition: Board of directors consists of eight members from
the private sector and seven from the federal government. At least two
of the private sector directors must be experienced in small business,
one must represent organized labor, and another must have experience in
cooperatives. Government members include the Administrator of the
Agency for International Development, the United States Trade
Representative or Deputy U.S. Trade Representative, the President of
the Overseas Private Investment Corporation, and four additional
members who are senior officials of other government agencies,
including the Department of Labor. All members must be appointed by the
President, with advice and consent of the Senate.
Federal government corporation: Pension Benefit Guaranty Corporation;
29 U.S.C § 1301;
Number of board members: 3;
Board composition: Board of directors consists of the Secretaries of
Labor, Commerce, and the Treasury, with the Secretary of Labor as
Chairman. The corporation is headed by a Director appointed by the
President with the advice and consent of the Senate.
Source: GAO analysis of U.S. Code.
[End of table]
PBGC's board structure does not guarantee that the board represents a
diverse set of interests and contains areas of expertise particular to
PBGC. According to corporate governance guidelines published by The
Conference Board,[Footnote 17] corporate boards should be structured so
that the composition and skill set of a board is linked to the
corporation's particular challenges and strategic vision, and should
include a mix of knowledge and expertise targeted to the needs of the
corporation. Boards of directors should include certain expertise in
accounting and finance, strategic risk assessment, management, and
industry knowledge, among other factors. PBGC's board members represent
the interests of three government agencies--DOL and the Treasury share
responsibility for ERISA, and Commerce represents the interests of
business and economic sectors. While having these interests represented
on PBGC's board is important and the members can draw on the expertise
within their respective agencies, PBGC's governance structure does not
necessarily guarantee that board members will have a range of diverse
expertise needed to specifically address PBGC's policy and oversight
because the current structure only consists of members who serve by
virtue of their position in the federal government.
Our review of other governance structures found that many government
corporations' boards of directors consist of a variety of individuals
reflecting a mix of knowledge, perspectives, and political
affiliations. For instance, the FDIC board includes a full-time
Chairman as well as the directors of the Office of the Comptroller of
the Currency, the Office of Thrift Supervision, and two other directors
with specific banking expertise, such as state bank supervision. In
addition, because PBGC's board is composed of cabinet secretaries,
PBGC's board members typically change with each administration,
limiting the board's institutional knowledge of the corporation. Other
government corporations have integrated staggered term limits to avoid
such gaps. For example, OPIC's directors may be appointed for a term of
no more than 3 years, and the terms of no more than 3 of the 15
directors can expire in any 1 year.[Footnote 18]
Since PBGC's inception, the board has met infrequently. While corporate
governance guidelines do not specify either frequency or duration of
board meetings, the literature states that the appropriate number of
hours to be spent by a director on his or her duties and the frequency
and length of the meetings depend largely on the complexity of the
corporation and its operations.[Footnote 19] Longer meetings may permit
directors to explore key issues in more depth, whereas shorter but more
frequent meetings may help the directors stay up to date on emerging
corporate trends and business and regulatory developments. However, as
shown in figure 3, PBGC has only recently begun to meet regularly. In
2003, after several high-profile pension plan terminations and with the
urging of PBGC's Executive Director, PBGC's board agreed to begin
meeting twice a year to discuss PBGC matters. As a result, between July
2003 and May 2007, the PBGC board met 10 times. PBGC officials told us
that it is a challenge to find a time when all three cabinet
secretaries are able to meet. As a result, the board members'
representatives officially met in their place 3 of the 10 times.
Government corporations' boards vary in the number of times they meet,
but our review found that on average many government corporations meet
about 5 times per year, with some meeting more often. For example, we
found that the Export-Import Bank of the United States' board generally
met more than twice a month between 2004 and 2006.
Figure 3: Number of PBGC Board Meetings Held, 1974-May 2007:
[See PDF for image]
Source: GAO analysis of PBGC documents and board meeting minutes.
[End of figure]
While the PBGC board is now meeting twice a year, it appears that very
little time is spent on addressing PBGC's strategic and operational
issues. According to corporate governance guidelines, boards should
meet regularly and focus principally on broader issues, such as
corporate philosophy and mission, broad policy, strategic management,
oversight and monitoring of management, and company performance against
business plans.[Footnote 20] However, our review of the board's
recorded minutes found that although some meetings devoted a portion of
time to certain strategic and operational issues, such as investment
policy, the financial status of PBGC's insurance programs, and outside
audit reviews, the board meetings generally only lasted about an hour.
Since the board members have limited time to direct and oversee PBGC,
they have designated officials and staff within their respective
agencies to conduct much of the work on their behalf. These officials
are referred to as board representatives and act as liaisons between
their cabinet secretaries and PBGC. They hold the rank of assistant
secretary or above.[Footnote 21] Yet PBGC's board representatives have
no policy-making authority under ERISA. Under PBGC's bylaws, however, a
representative may represent a board member at a board meeting, and
take action on behalf of the board member if the board member ratifies
the representative's actions in writing within a reasonable time.
PBGC officials told us that the board representatives meet regularly--
several times a year--and generally provide staff with broad policy
direction and oversight on behalf of the cabinet secretaries. They also
receive briefings on emerging issues and matters requiring the board's
attention. However, we found limited documentation of such meetings. In
fact, we were informed that no formal minutes were kept of these
meetings, and the only documentary evidence we found of the board
representatives' meeting was when they represented their respective
board members at select board meetings. Each representative has a
dedicated staff person whose assignments include working on PBGC
matters. Although the board representatives can draw on the expertise
of other staff within their respective agencies as needed, these staff
persons have other job responsibilities, which could limit the amount
of time they can dedicate to PBGC. Consequently, limited time and
attention may be dedicated to PBGC matters.
Board Lacks Mechanisms to Monitor and Review PBGC Operations and
Programs:
Neither the board nor PBGC has developed formal procedures to ensure
information is elevated to the board on all pertinent policy matters.
Further, likely because of its small size, the board has not
established standing oversight committees. As a result, the board may
be unaware of significant PBGC management actions. According to
corporate governance guidelines, corporate boards should have
mechanisms to monitor and review operations, assess progress against
performance measures, and manage risks to the institution, and boards
should operate using committees to assist them. The board has not
established formal policies and procedures describing the types of
policy matters that should be raised to the board's attention. Rather,
the board relies mostly on PBGC's management to inform the board of
pending issues when management believes it's appropriate, which is done
through weekly communications to the board representatives. While
officials believe that this process has generally worked well, in some
cases board members have not received information in a timely manner.
For example, in 2005, PBGC's Inspector General found that the board
members and their representatives were not told of certain actions
taken by PBGC's management regarding a large bankruptcy settlement
until after the case had been settled. In response, PBGC drafted a
protocol to govern communications with the board representatives about
potential settlements. At this writing, the board is also revising the
PBGC's bylaws, which establish board governing procedures. However,
since there are no formal policies and procedures describing what other
policy matters should be elevated to the board's attention, the board
may be unaware of other significant actions of PBGC's management.
The board has not established standing committees, such as audit and
ethics committees, to perform certain oversight and monitoring
functions. A committee structure permits the board to address key areas
in more depth than may be possible in a full board meeting. In prior
years, the board established certain committees--staffed with
individuals from PBGC's Advisory Committee--to probe specific issues.
However, the board has not used this approach since the early 1990s.
Instead, the board has generally relied on PBGC's Inspector General and
its executive management to provide oversight of PBGC's operations.
As of May 2007, PBGC's Inspector General reports directly to the board
and conducts reviews of PBGC's operations and financial condition and
monitors PBGC's contractors. Even though the current board has required
the Inspector General to brief it at its now semiannual meetings, there
are no formal protocols describing the Inspector General's interaction
with the board or its representatives and staff. Consequently, if the
Inspector General or the board were to change, it is unclear whether
the Inspector General or the board would be aware of this informal
protocol. Further, the board relies on PBGC's executive management
committees and working groups for monitoring and reviewing PBGC's
operations.[Footnote 22] However, these committees and working groups
are not independent of PBGC's management and are not required to
routinely report to the board. Some government corporations, such as
FDIC, the Export-Import Bank of the United States, the Overseas Private
Investment Corporation, and the National Railroad Passenger Corporation
(Amtrak), have established standing committees to conduct certain
oversight functions to assist their boards of directors. For example,
FDIC's board of directors established standing committees, such as the
Case Review Committee and the Audit Committee, to conduct certain
oversight functions. FDIC's committees are governed by formal rules
that cover areas such as membership, functions and duties, and, in some
cases, submission of activity reports to the board.
Lack of Protocols for Administering PBGC Can Result in Confusion and
Inefficiencies:
While ERISA provides the board, the Secretary of Labor as Chair, and
PBGC's Director the authority to oversee and administer PBGC, no formal
guidelines articulate the different roles and responsibilities of the
board and PBGC management. ERISA established PBGC "within the
Department of Labor" and provided the Secretary of Labor administrative
authority over the corporation. As a consequence, the Secretary has
been responsible for overseeing PBGC's operations, including overall
supervision of PBGC's personnel, organization, and budget practices. As
a result, DOL officials consider PBGC to be a DOL agency and have
required the corporation to follow its policies and procedures.
However, under its authorities, PBGC has also developed its own
policies, procedures, directives, and systems separate from DOL, and it
does not rely on DOL-wide services, such as legal, procurement, and
information technology. As a result, DOL and PBGC disagree over the
extent to which PBGC is a separate and distinct executive agency.
A November 2005 PBGC memorandum stated that Congress' intention in
placing PBGC within DOL was to provide PBGC with a physical location
and was not meant in an organizational or operational sense. Some PBGC
managers now view the language as an anachronism. One former PBGC
Executive Director also noted that PBGC could not be just like any
other DOL agency, because if it were, the Secretaries of the Treasury
and Commerce, by a two-vote majority, could theoretically direct
policies of another federal cabinet department. Further, federal
agencies, including DOL, recognize PBGC's separateness either directly
or indirectly through various types of reporting requirements that are
required of PBGC and the board. For example, PBGC is responsible for
representing itself in matters before other agencies, such as the Equal
Employment Opportunity Commission, the Federal Labor Relations
Authority, and the Merit Systems Protection Board. In another instance,
DOL's Office of the Solicitor stated in a March 2007 letter to the
Department of Justice that while PBGC was "within the Department of
Labor," the two agencies have historically operated with separate
administrative structures and should be considered separate for matters
relating to postemployment ethics.
The uncertainty of PBGC's status has resulted in confusion over the
extent to which DOL has the authority to manage PBGC's operations.
According to our internal control standards,[Footnote 23] agencies
should ensure that key areas of authority and responsibilities are
defined and communicated. However, neither the board, DOL, nor PBGC has
developed formal policies and procedures to define its authorities and
responsibilities. Instead, PBGC officials typically react to DOL's
periodic written and oral communications, which PBGC officials said
sometimes become a part of PBGC's operational framework. DOL and PBGC
provided us with memorandums and e-mail correspondence outlining some
of these administrative requirements. The following are examples of the
confusion and disagreement resulting from the uncertainty related to
PBGC's status:
* In December 2006, the Office of the Secretary of Labor, without
consulting with officials from the Departments of the Treasury or
Commerce, orally directed PBGC to obtain DOL's clearance before it
could advertise for or select individuals to fill three vacant
executive management positions, even though DOL had not required this
in prior years. According to PBGC officials, this resulted in hiring
delays. DOL officials stated that this requirement was needed to
oversee PBGC's hiring activities only while PBGC has an interim
director.
* A May 2006 DOL memorandum to all its agency heads, including PBGC,
provided guidance for the preparation and submission of information
technology investments in DOL's fiscal year 2008 budget request.
However, because OMB considers PBGC's information technology program
independent from DOL's, there has been confusion not only between DOL
and PBGC officials, but also among DOL officials, over the role that
DOL's Chief Information Officer has in PBGC's information technology
program and whether DOL's guidance is applicable to PBGC on this issue.
DOL and PBGC have also disagreed on management approaches to PBGC's
operations. For example:
* During the fiscal year 2007 budget process, DOL and PBGC officials
disagreed over the amount of money included in PBGC's budget for the
development of a new system for pension plan sponsors to file their
required annual reports to DOL electronically.[Footnote 24] While PBGC
benefits from these annual reports, PBGC's Inspector General reviewed
PBGC's fiscal year 2007 budget request, which included $7 million to
cover these costs. After investigating, the Inspector General concluded
that the requested increase was disproportionate to PBGC's usage of the
annual reports. However, DOL officials disagreed with the Inspector
General's findings and said that the Inspector General's methodology
for determining the percentage usage was flawed.[Footnote 25] Further,
the board representatives from the Departments of the Treasury and
Commerce were unaware of DOL and PBGC's actions until they were brought
to their attention by PBGC's Inspector General. In May 2007, the
direction to transfer funds was enacted by Congress and PBGC is
providing $7 million to DOL as part of a fiscal year 2007 supplemental
appropriation.[Footnote 26]
* In January 2007, DOL officials orally directed PBGC to have no direct
contact with OMB without DOL's approval, a condition that PBGC
officials believe has strained the relationship between DOL and PBGC
budget offices. In previous years, PBGC's budget office worked directly
with OMB examiners to resolve matters related to its annual budget
submissions, even though PBGC submitted its budget to OMB through DOL's
Office of the Assistant Secretary for Administration and Management.
DOL now closely monitors PBGC's interactions with OMB by attending
meetings and participating in telephone calls. DOL officials said that
such action is needed to coordinate with PBGC in order to provide OMB
examiners with a consistent message. OMB officials said that DOL's
review of PBGC's budget submission was useful.
* DOL and PBGC officials have also disagreed over PBGC's authority to
explore and establish an independent compensation system for its
employees. In the early 1990s, PBGC officials requested approval from
DOL to establish a new compensation system (outside of the federal
government's "general schedule" pay system and merit pay), arguing that
PBGC employees should be exempt from these pay systems because their
compensation was not wholly from appropriated funds. In a 1992
memorandum, DOL cited the absence of an explicit exception for PBGC
employees, the legislative history of ERISA, and prior rulings by the
Federal Labor Relations Authority and the United States Court of
Appeals for the District of Columbia to argue against such an
exemption. Consequently, some PBGC officials believe PBGC is limited in
attracting and retaining the types of expert financial and actuarial
staff it needs.
Conclusions:
As PBGC continues to navigate the challenges presented by the changing
defined benefit pension environment, ensuring that the corporation is
soundly governed and efficiently managed is essential to the thousands
of Americans who rely on PBGC for their retirement income. Since 1974,
the private sector pension industry has evolved and corporate
governance models have changed. Yet, PBGC is still directed and
overseen by one of the smallest and least diverse boards of directors,
even though it is financially one of the largest corporations within
the federal government.
While the current board members recognize PBGC's importance and are
meeting more frequently than before, the limited amount of time they
can dedicate to PBGC is troubling. In fact, if PBGC's board of
directors were held to private sector standards, the corporation could
be considered vulnerable to mismanagement. Because the Secretaries
change with each administration, the board may also have limited
institutional knowledge. This could weaken PBGC's governance further,
since the ever-changing board membership may not understand the
corporation's business or the vulnerabilities it faces. Even though
each agency has a variety of staff who may be able to fill the gaps in
institutional knowledge, each board agency has only assigned a board
representative and one staff person, both of whom have other job
responsibilities, a fact that may limit the time and attention given to
PBGC. As a result, oversight of this $60 billion corporation that
provides pension benefits to over a half a million participants in
terminated pension plans may be limited.
Because the Secretary of Labor has historically had the authority to
administer PBGC, DOL has, in some ways, filled the void in
accountability. However, the confusion resulting from the lack of
clarity over who is responsible for certain matters has raised
additional questions about the extent to which DOL should be involved
in directing PBGC's activities. Board representatives from the
Departments of Commerce and the Treasury have often deferred to DOL on
administrative matters and not generally questioned DOL on its actions.
Perhaps some aspects of the relationship between DOL and PBGC could be
clarified in the revised bylaws currently being prepared, but it
remains essential that the board exercise its authority to oversee PBGC
and coordinate with DOL and each other not only on major policy issues,
but also on the oversight of PBGC's activities. PBGC's management staff
should also work with the board to ensure that all significant matters
are formally elevated to the board's attention. This will become even
more critical in the coming months as the new Senate-confirmed Director
begins to work with the board to clarify the Director's role in
administering PBGC.
Matter for Congressional Consideration:
To strengthen PBGC's policy direction and oversight, Congress should
consider expanding PBGC's board of directors. If Congress decides to
expand the board, it would be helpful to appoint additional members of
diverse backgrounds who possess knowledge and expertise useful to
PBGC's responsibilities and can provide the attention that would be
needed. This revised board structure could resemble those at other
government corporations, such as the Federal Deposit Insurance
Corporation, the Export-Import Bank of the United States, or the
Federal Crop Insurance Corporation. Further, dedicating staff,
independent of PBGC's executive management, with relevant pension and
financial expertise, to solely support the revised board's policy and
oversight activities may be warranted.
Recommendations for Executive Action:
To improve overall accountability and oversight of PBGC, we recommend
that the Secretaries of the Treasury, Labor, and Commerce, as PBGC's
board of directors,
* establish policies, procedures, and mechanisms for providing
oversight of PBGC that are consistent with corporate governance
guidelines and:
* establish formal guidelines that articulate the authorities of the
Board Chair and the Department of Labor, the other board members and
their respective departments, and PBGC's Director.
Agency Comments and Our Evaluation:
We obtained written comments on a draft report from the Secretary of
Labor, on behalf of the PBGC board of directors, and from the interim
director of PBGC. Their comments are reproduced in appendixes IV and V,
respectively. In addition, the Departments of the Treasury, Labor, and
Commerce, as well as PBGC, provided technical comments, which were
incorporated in the report where appropriate.
In response to our draft report, the PBGC board of directors recognized
that the current law establishes an unusual corporate structure for
PBGC, and stated that a number of corporate structures are possible for
addressing PBGC's unique purpose and authority under the law. The board
members added that if Congress considers making changes to PBGC
corporate structure, they would be pleased to discuss the merits of
various corporate governance proposals. Further, the board reiterated
its continued commitment to improving the corporate governance of PBGC
within the current statutory structure, and stated that in addition to
the board members meeting regularly, the board representatives and
their staffs of resident experts in pension and financial matters meet
frequently throughout the year to address PBGC matters. The board also
stated that the review and revisions of PBGC bylaws will help delineate
the respective roles, responsibilities, and authorities of PBGC's board
and Director in the management of PBGC. The PBGC interim director
stated that PBGC management is committed to working with the board to
enhance PBGC's governance processes on issues identified in our review.
As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after its issue date. At that time, we will send copies of this report
to the Secretaries of the Treasury, Labor, and Commerce as well as the
Director of PBGC and other interested parties. We will also make copies
available to others on request. If you or your staff have any questions
concerning this report, please contact me on (202) 512-7215. Key
contributors are listed in appendix VI.
Signed by:
Barbara D. Bovbjerg:
Director, Education, Workforce, and Income Security Issues:
[End of section]
Appendix I: Scope and Methodology:
To address Pension Benefit Guaranty Corporation's (PBGC) governance
structure, we interviewed board representatives, board agency
officials, former PBGC Executive Directors, former PBGC General
Counsels, senior PBGC management officials, former and current
Executive Directors, officials from the Office of Management and
Budget, and outside experts to obtain their perspectives on the board's
governance structure and its effect on management and operations. To
encourage open communication, we met with many officials separately,
and in all cases, subordinate employees were interviewed separately
from their managers. Additionally, we spoke to PBGC's Inspector General
as well as PBGC's union representatives. We were unable to attend a
PBGC board meeting to observe what types of issues the board members
discussed during their biannual meetings, because the PBGC board does
not open its meetings to the public or others.
To identify the extent to which PBGC's governance structure provides
policy direction and oversight, we reviewed previous GAO work on the
governance of private sector and government corporations and PBGC's
single-employer and multiemployer insurance programs and management
challenges. We also identified key provisions of the Employee
Retirement and Income Security Act of 1974 (ERISA), the Pension
Protection Act of 2006 (PPA), and the Government Corporation Control
Act (GCCA) that outline the authority of PBGC's board of directors as
well as the administrative responsibilities of PBGC's Director.
Further, our review examined the governance structures of similar
federal government corporations listed in the GCCA to determine the
extent to which they had similar sizes, compositions, activities,
policy mandates, and oversight functions. In addition, we also reviewed
our reports and other available literature, such as The Conference
Board's Corporate Governance Handbook 2005, [Footnote 27]on the
characteristics of private sector boards of directors to identify
common practices. We also consulted our standards for internal control
in the federal government to determine how delegations of authority
affect an agency's internal control environment.[Footnote 28]
To understand the board of directors' role, we reviewed documentation
related to the board members' activities. We collected and reviewed
available board meeting minutes from 2000 to 2006 to identify what
types of actions the board members had considered and taken. In
addition, we requested documentation on board representative meetings,
however, we were told that no formal documentation existed. Also, we
reviewed board meeting information dating back to 1974, including
summations of board resolutions. We also collected and reviewed
memorandums from PBGC officials and other information concerning
previous efforts by PBGC staff to evaluate the issue of PBGC's
governance structure.
To assess how PBGC's governance structure affects its ability to
conduct efficient operations, we identified and reviewed key legal
interpretations of ERISA, PPA, and corresponding regulations that
outline the relationship between PBGC's board of directors, the
Secretary of Labor as Board Chair, and PBGC's Director. We reviewed
available policies and procedures regarding PBGC's interaction with the
board members' agencies, and we collected and reviewed the policies and
procedures from PBGC and DOL. Given the Secretary of Labor's role as
Board Chair, we reviewed available documentation on DOL and PBGC
protocols to determine the extent to which guidance existed on how they
should interact on specific administrative activities.
[End of section]
Appendix II: List of Selected Federal Government Corporations:
Federal government corporation: Commodity Credit Corporation; 15 U.S.C.
714, et seq;
Mission: Created to stabilize, support, and protect farm income and
prices. CCC also helps maintain balanced and adequate supplies of
agricultural commodities and aids in their orderly distribution.
Federal government corporation: Export-Import Bank of the United
States; 12 U.S.C. 635, et seq;
Mission: Assists in financing the export of goods and services between
the United States and international markets. The Export-Import Bank of
the United States is the official export credit agency of the United
States.
Federal government corporation: Federal Crop Insurance Corporation; 7
U.S.C. 1501, et seq;
Mission: Improves the economic stability of agriculture through a sound
system of crop insurance and provides the means for the research and
experience helpful in devising and establishing such insurance.
Federal government corporation: Federal Deposit Insurance Corporation;
12 U.S.C. 1811, et seq;
Mission: Preserves and promotes public confidence in the U.S. financial
system by insuring deposits in banks and thrift institutions for up to
$100,000 per depositor; by identifying, monitoring and addressing risks
to the deposit insurance funds; and by limiting the effect on the
economy and the financial system when a bank or thrift institution
fails.
Federal government corporation: Federal Financing Bank; 12 U.S.C. 2281,
et seq;
Mission: Established to centralize and reduce the cost of federal
borrowing, as well as federally assisted borrowing from the public.
Federal government corporation: Federal Prison Industries (UNICOR); 18
U.S.C. 4121, et seq;
Mission: To employ and provide skills training to the greatest
practicable number of inmates confined within the Federal Bureau of
Prisons and produce goods for sale to the federal government.
Federal government corporation: Financing Corporation; 12 U.S.C. 1441,
et seq;
Mission: The Financing Corporation (FICO) serves as a financing vehicle
for the Federal Savings and Loan Insurance Corporation (FSLIC)
Resolution Fund (formerly the Federal Savings and Loan Insurance
Corporation) by issuing debentures, bonds, and other obligations.
Federal government corporation: Government National Mortgage
Association; 12 U.S.C. 1717, et seq;
Mission: A corporation that guarantees, with the full faith and credit
of the U.S. government, full and timely payment of all monthly
principal and interest payments on the mortgage-backed securities of
registered holders.
Federal government corporation: National Railroad Passenger Corporation
(AMTRAK); 49 U.S.C. 241, et seq;
Mission: Provides passenger train service in the United States.
Federal government corporation: Overseas Private Investment
Corporation; 22 U.S.C. 2191, et seq;
Mission: Helps U.S. businesses invest overseas, fosters economic
development in new and emerging markets, assists the private sector in
managing risks associated with foreign direct investment, and supports
U.S. foreign policy.
Federal government corporation: Pension Benefit Guaranty Corporation;
29 U.S.C. 1301, et seq;
Mission: Established to encourage the continuation and maintenance of
private sector defined benefit pension plans, provide timely and
uninterrupted payment of pension benefits, and keep pension insurance
premiums at a minimum.
Federal government corporation: Presidio Trust of San Francisco; 16
U.S.C. 460bb note;
Mission: Established to protect, preserve, and enhance the Presidio as
a resource for the American public and as a national historic landmark.
Federal government corporation: Resolution Funding Corporation; 12
U.S.C. 1441b;
Mission: Established by Congress to raise funds for the activities of
the Resolution Trust Corporation.
Federal government corporation: Rural Telephone Bank[A]; 7 U.S.C. 941,
et seq;
Mission: Established in 1971 to obtain supplemental funds for use in
making loans to eligible telecommunications companies and cooperatives.
Federal government corporation: Saint Lawrence Seaway Development
Corporation; 33 U.S.C. 981, et seq;
Mission: Established to construct deep water navigation works in the
Saint Lawrence Seaway.
Federal government corporation: Tennessee Valley Authority; 16 U.S.C.
831, et seq;
Mission: Created in May 1933 to provide navigation, flood control,
electricity generation, fertilizer manufacturing, and economic
development in the Tennessee Valley.
Federal government corporation: United States Postal Service; 39 U.S.C.
101, et seq; Mission: Established to provide postal service to the
United States.
Federal government corporation: Valles Caldera Trust; 16 U.S.C. 698-v4,
et seq;
Mission: Created to manage, provide administrative services, collect
funds, and coordinate with federal and state governments on behalf of
the Valles Caldera National Preserve.
Source: GAO analysis of federal government corporations.
[A] In February 2005, the President's fiscal year 2006 budget proposed
the dissolution of the Rural Telephone Bank. After 6 months of
discussion and deliberation, the board of directors unanimously
approved resolutions to liquidate and dissolve the bank. On November
10, 2005, the liquidation and dissolution process was initiated with
the enactment of the 2006 agriculture appropriations bill.
[End of table]
[End of section]
Appendix III: Examples of Corporate Governance Practices:
Corporate practices: Board's fiduciary duties;
Corporate governance guidelines: In carrying out their duties,
directors should fulfill their fiduciary duties of care, loyalty, and
good faith, and act in the best interests of the corporation and its
shareholders. Boards usually delegate the day-to-day management of the
company to the chief executive officer (CEO) and other senior
management, but the board retains responsibilities for oversight and
monitoring of these delegated functions; A director's actions must
fulfill three fiduciary duties:
* the duty of care to make decision that are informed,;
* the duty of loyalty to act without conflict and always to put the
interests of the corporation before those of the individual director,
and;
* the duty to act in good faith in accordance with evolving corporate
governance best practices.
Corporate practices: Roles of board and management clearly defined;
Corporate governance guidelines: A strong and effective board should
have a clear view of its role in relationship to management. How a
board organizes itself and structures its processes will vary with the
nature of the business, business strategy, size and maturity of the
company, and talents and personalities of the chief executive officer
and the board. The board should focus principally on guidance and
strategic issues, choice of the CEO, other senior management, oversight
and monitoring of management and company performance, and adherence to
legal requirements.
Corporate practices: Corporate governance guidelines available;
Corporate governance guidelines: The board should have a set of written
guidelines in place to articulate corporate governance principles and
the roles and responsibilities of the board and management. These
guidelines should be reviewed at least annually and help the board and
individual directors understand their obligations and the general
boundaries within which they will operate; A constructed set of
governance guidelines will, in part,;
* delineate responsibilities of the board, management, directors, and
committees;
* be reviewed regularly, at least annually, and revised as appropriate;
and;
* be made publicly available; Guidelines should also include
information on director orientation and continuing education. Such
orientation should entail a thorough briefing on the company and its
businesses and industries, organizations, people, strategies, key
issues, and risks. Further, guidelines should include continuing
education requirements for board members, which can be fulfilled
through the use of subject matter experts or belonging to professional
organizations that offer training courses and publish information
pertaining to their industry's operating environment.
Corporate practices: Board access to information;
Corporate governance guidelines: The effectiveness of the board depends
on the quality and timeliness of the information each director
receives. The board and management should agree on the important
information needed for board oversight and monitoring and to enable the
board to make informed decisions; Directors' access to management and,
as necessary and appropriate, independent advisors. For purposes of
having information that is timely and relevant, boards need to have
both formal and informal channels of communication with the appropriate
officers and other individuals within the company that enable directors
to perform their oversight functions.
Corporate practices: Conduct of board meetings;
Corporate governance guidelines: Boards should consider the following
best practices to generally ensure effective decision making and
exchange of information and ideas:
* Directors should be able to place items on the agenda, with time for
adequate discussion and consideration;
* The lead director should take responsibility to surfacing issues that
affect the business;
* Management should provide information that effectively explains the
corporation's operating and financial status, as well as other
significant issues facing the corporation and the board; * Meetings
should be structured to encourage participation and dialogue among the
directors;
* Directors should attempt to attend all board meetings and actively
participate in the meetings, including asking hard questions of
management; Executive sessions:
* should promote open dialogue among the members and free exchange of
ideas, perspectives, and information,;
* have a 'feedback' mechanism to the CEO for important issues that may
arise, and;
* be supplemented by additional off-line informational channels to help
build trust and relationships among the directors.
Corporate practices: Board composition and size;
Corporate governance guidelines: The composition and skill set of the
board should be linked to the company's particular challenges and
strategic vision. As companies develop and experience changed
circumstances, the desired composition of the board may be different
and should be reviewed; Regardless of their mix of background and
skills, all directors should:
* possess knowledge and expertise to fulfill an appropriate role given
the mix of background and skills;
* exercise diligence, including attending board and committee meetings
and coming prepared to provide thoughtful input at the meetings and
during communications between meetings; and;
* be independent in their judgment and committed to the long-term
interests of the company;
The composition of the board should be tailored to meet the needs of
the company at its stage of development, but there should be a mix of
director knowledge and expertise in areas such as;
* accounting and finance,;
* strategic risk assessment,;
* technology,;
* management, and;
* industry knowledge;
The size of the board will vary depending on the corporation's needs
and requirements. Boards need to be large enough to accommodate the
necessary skill sets, but small enough to promote cohesion,
flexibility, and effective participation. According to a private sector
research center, in 2004, the median private sector board size ranged
from 11 to 15 total members, with the number of outside directors
ranging from 8 to 9.
Corporate practices: Board leadership;
Corporate governance guidelines: Boards should adopt a structure that
provides the nonmanagement directors with the leadership necessary for
them to act independently as well as function effectively. This
structure could include separating the positions of chairman and CEO,
creating a lead independent director, or appointing a presiding
director from among the independent directors; Any structural
alternative, a private sector board wishes to adopt should;
* strengthen the independence and oversight role of the board;
* provide the nonmanagement directors with the ultimate authority over
information flow to the board; and;
* improve the relationship and flow of information between the board,
CEO, and senior management.
Corporate practices: Board committee structure;
Corporate governance guidelines: Boards should establish committees
that will enhance the overall effectiveness of the board by ensuring
focus and oversight on matters of particular concern. Committees can
enhance board effectiveness by permitting closer focus, oversight, and
monitoring of sensitive areas. In the private sector, certain statutes
and standards require that companies maintain a number of standing
committees, such as an audit committee, a nominating committee, and a
compensation committee. In addition, boards have established
committees, such as risk, technology, pension and benefits, public
policy, and corporate governance, which focus on substantive issues or
particular concerns to the company or the board; Examples of
committees:
* Audit committee: Is responsible for the appointment, compensation,
and oversight of the work of any registered public accounting firm
employed by that issuer; and must be composed entirely of independent
directors, meaning that a director may not, other than in his or her
capacity as member of the audit committee, the board of directors, or
any other board committee, accept any consulting, advisory, or other
compensatory fee from the issuer or be an affiliated person of the
issuer or its subsidiary;
* Governance committee: Is designed for the purpose of monitoring and
implementing the governance structure of the corporation. This
committee of independent directors is charged, in part, with ensuring
that the board is informed of new and emerging governance practice
being employed.
Corporate practices: Oversight mechanisms--internal controls;
Corporate governance guidelines: Boards must play an active role in the
area of internal controls by ensuring that the company has an effective
internal control framework in place. This should include the assessment
and management of key financial and nonfinancial risks and an effective
monitoring and oversight process, supported by timely and accurate
information and clear communication channels; Internal controls are
processes designed to provide reasonable assurance that an organization
is achieving its objectives by helping to;
* protect its assets,;
* ensure it is not overly exposed to risk,;
* improve the reliability of internal and external reporting,;
* promote compliance with applicable laws and regulations, and;
* improve the effectiveness and efficiency of operations.
Source: Carolyn K. Brancato and Christian A. Plath, Corporate
Governance Handbook 2005: Developments in Best Practices, Compliance,
and Legal Standards, Special Report SR-05-02, The Conference Board (New
York, New York: 2005); Richard Steinberg, PriceWaterhouseCoopers,
Corporate Governance and the Board: What Works Best, The Institute of
Internal Auditors Research Foundation (May 1, 2000); and Scott Green,
Sarbanes-Oxley and the Board of Directors: Techniques and Best
Practices for Corporate Governance, John Wiley and Sons, Inc. (Hoboken,
New Jersey: 2005).
[End of table]
[End of section]
Appendix IV: Comments from the Pension Benefit Guaranty Corporation
Board of Directors:
Secretary Of Labor:
Washington, D.C. 20210:
Jun 2 6 2007:
Mr. David M. Walker:
Comptroller General:
United States Government Accountability Office:
Washington, DC 20548:
Dear General Walker:
As the Chair of the Board of Directors of the Pension Benefit Guaranty
Corporation (PBGC), I am responding on behalf of the Board to your
request for comments on the Government Accountability Office's (GAO)
draft report entitled "Pension Benefit Guaranty Corporation: Governance
Structure Needs Improvements to Ensure Policy Direction and Oversight"
(GAO-07-808).
The current law establishes an unusual corporate structure for the
PBGC. There are concerns about whether this statutory structure is the
best approach. A number of corporate structures are possible that take
into account the PBGC's unique purpose and its authority under the law.
If Congress considers this issue further, we will be pleased to discuss
the merits of various proposals to enable the Corporation to best
succeed in its primary mission to safeguard the pension benefits of
American workers, retirees and their families.
Within the current statutory structure, my fellow Board members and I
have been committed to improving the corporate governance of the PBGC,
and I am pleased the draft report documents our efforts in this
important area. For example, prior to my becoming Chair of the PBGC,
the Board had not met since 1995. 1 instituted twice-annual Board
Meetings and established the Board practice of meeting directly with
the PBGC Inspector General and the Corporation's outside auditors, as
well as PBGC executives, during Board meetings.
The Board Representatives and their staffs of resident experts in
pension and financial matters meet frequently throughout the year with
one another and with PBGC officials, and receive weekly reports from
the PBGC. The Board has worked together through some of the PBGC's most
financially challenging years, culminating in the most significant
revision of the nation's pension laws since the PBGC's creation.
As GAO notes, the Board previously directed an ongoing review of the
bylaws of the Corporation to determine what changes would improve the
oversight and administration of the PBGC and to adapt the bylaws to the
changes encompassed in the Pension Protection Act. The review of, and
the revisions to, the bylaws will help delineate the respective roles,
responsibilities, and authority of the Director and the Board in the
management of the PBGC.
The PBGC is dedicated to protecting the basic pension benefits of 44
million Americans covered by the PBGC's insurance programs. We
appreciate having had the opportunity to review and comment on the
draft report.
Sincerely,
Signed by:
Elaine L. Chao:
Chairman of the Board:
Pension Benefit Guaranty Corporation:
[End of section]
Appendix V: Comments from the Pension Benefit Guaranty Corporation:
Pension Benefit Guaranty Corporation:
1200 K Street, N.W.,
Washington, D.C. 20005-4026:
Office of the Director:
June 22, 2007:
Barbara D. Bovbjerg, Director:
Education, Workforce, and Income Security Issues:
U.S. Government Accountability Office:
Washington, D.C. 20548:
Dear Ms. Bovbjerg:
Thank you for the opportunity to comment on the draft version of your
report entitled "PBGC Governance Structure Needs Improvements to Ensure
Policy Direction and Oversight." Corporate governance issues have
received greater attention recently in a variety of settings, and PBGC
appreciates GAO's work in assessing whether PBGC's governance structure
could be enhanced.
With the passage of the Pension Protection Act of 2006, PBGC recognized
the need to update the Corporation's bylaws, and has been working with
the Board of Directors and their staff on this important project. We
will continue to work with our Board to enhance our governance
processes, as well as with our Board agencies on issues identified in
the report, so that the Corporation will be best positioned to address
the challenges we face in the years ahead.
Sincerely,
Signed by:
Charles E. F. Millard:
Interim Director:
[End of section]
Appendix VI: Contacts and Acknowledgments:
GAO Contact:
Barbara D. Bovbjerg, (202) 512-7215:
Acknowledgments:
The following team members made key contributions to this report: Blake
Ainsworth, Assistant Director; Jason Holsclaw; Joe Applebaum; Kisha
Clark; Monika Gomez; Jean McSween; Charles Willson; and Craig Winslow.
[End of section]
GAO Related Products:
PBGC's Legal Support: Improvement Needed to Eliminate Confusion and
Ensure Provision of Consistent Advice. GAO-07-757R. Washington, D.C.:
May 18, 2007.
Federal Deposit Insurance Corporation: Human Capital and Risk
Assessment Programs Appear Sound, but Evaluations of Their
Effectiveness Should Be Improved. GAO-07-255. Washington, D.C.:
February 2007.
High Risk Series: An Update. GAO-07-310. Washington, D.C.: January
2007.
Corporate Governance: NCUA's Controls and Related Procedures for Board
Independence and Objectivity Are Similar to Other Financial Regulators,
but Opportunities Exist to Enhance Its Governance Structure. GAO-07-
72R. Washington, D.C.: November 30, 2006.
Private Pensions: Questions Concerning the Pension Benefit Guaranty
Corporation's Practices Regarding Single-Employer Probable Claims. GAO-
05-991R. Washington, D.C.: September 9, 2005.
Private Pensions: The Pension Benefit Guaranty Corporation and Long-
Term Budgetary Challenges. GAO-05-772T. Washington, D.C.: June 9, 2005.
Government-Sponsored Enterprises: A Framework for Strengthening GSE
Governance and Oversight. GAO-04-269T. Washington, D.C.: February 10,
2004.
Pension Benefit Guaranty Corporation: Single-Employer Pension Insurance
Program Faces Significant Long-Term Risks. GAO-04-90. Washington, D.C.:
October 2003.
Pension Benefit Guaranty Corporation: Statutory Limitation on
Administrative Expenses Does Not Provide Meaningful Control. GAO-03-
301. Washington, D.C.: February 2003.
GAO Forum on Governance and Accountability: Challenges to Restore
Public Confidence in U.S. Corporate Governance and Accountability
Systems. GAO-03-419SP. Washington, D.C.: January 2003.
Pension Benefit Guaranty Corporation: Contracting Management Needs
Improvement. GAO/HEHS-00-130. Washington, D.C.: September 2000.
Government Corporations: Profiles of Existing Government Corporations.
GAO/GGD-96-14. Washington, D.C.: December 1995.
FOOTNOTES
[1] Pub. L. No. 109-280, 170 Stat. 780.
[2] GAO, High Risk Series: An Update, GAO-07-310 (Washington, D.C.:
January 2007), and GAO, Private Pensions: The Pension Benefit Guaranty
Corporation and Long-Term Budgetary Challenges, GAO-05-772T
(Washington, D.C.: June 9, 2005).
[3] ERISA is a federal law that, among other things, set certain
minimum standards for pension plans sponsored by private employers and
established PBGC. 29 U.S.C. §§1001-1461.
[4] 31 U.S.C. §§ 9101-9110.
[5] A defined benefit plan is a pension plan where the plan sponsor
provides a benefit generally expressed as a monthly benefit based on a
formula that generally combines salary and years of service to the
company. Defined benefit plans usually express benefits as an annuity,
but may offer departing participants the opportunity to receive lump
sum distributions.
[6] ERISA also established rules for funding defined benefit plans,
instituted pension insurance premiums, promulgated certain fiduciary
rules, and mandated annual reporting requirements.
[7] PBGC administers two programs: the single-employer and
multiemployer insurance programs. A single-employer plan is established
and maintained by only one employer. Single-employer plans can be
established unilaterally by the sponsor or through a collective
bargaining agreement with a labor union. 29 U.S.C. § 1002(41). A
multiemployer plan is a collectively bargained arrangement between a
labor union and a group of employers in a particular trade or industry.
Management and labor representatives must jointly govern multiemployer
plans. 29 U.S.C. § 1002 (37).
[8] 29 U.S.C. § 1302(h).
[9] 29 U.S.C. § 1302(g)(2).
[10] 29 U.S.C. § 1302(b).
[11] A government-sponsored enterprise is a federally established,
privately owned corporation. 2 U.S.C. § 622. GSEs typically receive
their financing from private investment, and the credit markets
perceive that GSEs have implied federal financial backing. In general,
GSEs do not receive government appropriations.
[12] Pub. L. No. 107-204, 116 Stat. 745.
[13] GAO, Highlights of GAO's Corporate Governance, Transparency, and
Accountability Forum, GAO-02-494SP (Washington, D.C.: March 2002), and
GAO, Corporate Governance: NCUA's Controls and Related Procedures for
Board Independence and Objectivity Are Similar to Other Financial
Regulators, but Opportunities Exist to Enhance Its Governance
Structure, GAO-07-72R (Washington, D.C. Nov. 30, 2006).
[14] The Millennium Challenge Corporation is a U.S. government
corporation designed to work with some of the poorest countries in the
world to reduce global poverty through the promotion of sustainable
economic growth. The Community Development Financial Institutions Fund
was created to expand the capacity of financial institutions to provide
credit, capital, and financial services to underserved populations and
communities in the United States. Congress established the Social
Security and Medicare trust funds in the U.S. Treasury to account for
all program income and disbursements. Social Security and Medicare
taxes, premiums, and other income are credited to the funds.
Disbursements from the funds can be made only to pay benefits and
program administrative costs. There are six trustees, four of whom
serve by virtue of their positions in the federal government, and the
other two trustees are public representatives appointed by the
President.
[15] The Export-Import Bank of the United States is the official export
credit agency of the United States and assists in financing the export
of U.S. goods and services to international markets.
[16] Holly J. Gregory, Comparison of Corporate Governance Guidelines
and Codes of Best Practice, Weil, Gotshal & Manges LLP (New York, New
York: January 2006), and Carolyn K. Brancato and Christian A. Plath,
Corporate Governance Handbook, 2005: Legal Standards and Board
Practices, Special Report SR-05-02, The Conference Board (New York, New
York: 2005). The Conference Board is a global business membership and
research organization that creates and disseminates knowledge about
management and the marketplace.
[17] Corporate Governance Handbook 2005, Special Report SR-05-02
[18] 22 U.S.C. § 2193.
[19] Corporate Governance Handbook 2005, Special Report SR-05-02
[20] Corporate Governance Handbook 2005, Special Report SR-05-02
[21] As of May 2007, the following officials within the Department of
the Treasury, Commerce, and Labor represented their respective
Secretaries: the Under Secretary of Domestic Finance (Treasury), Under
Secretary for Economic Affairs (Commerce), and Assistant Secretary of
the Employee Benefits Security Administration (DOL). The organizational
level of a PBGC board representative can vary depending upon whom each
secretary selects. Because the Secretary of Labor is the Board Chair,
the DOL Assistant Secretary typically leads the board representatives.
However, this may create a unique dynamic because the Under Secretaries
outrank the DOL Assistant Secretary.
[22] PBGC's executive management has established committees and working
groups for policy and oversight, such as its Executive Management
Committee, Internal Controls Committee, Budget and Planning Integration
Team, and Operations Integration Board. According to PBGC, the
Executive Management Committee is responsible for corporate policy
decisions and for coordination of the work of various PBGC offices. The
Internal Control Committee has oversight responsibility for PBGC's
internal controls. The Budget Planning and Integration Team provides a
standardized process to promote integrated approaches for the alignment
of budgetary resources and strategic planning. The Operations
Integration Board provides a forum for senior leadership to commission
and review corporationwide programs, projects, and internal policies.
[23] GAO, Internal Control Standards: Internal Control Management and
Evaluation Tool, GAO-01-1008G (Washington, D.C.: August 2001).
[24] Unlike most federal agencies, PBGC does not receive a general
revenue appropriation each year, because PBGC is intended to be
financially self-sustaining. However, PBGC is subject to spending
limitations imposed by Congress and must submit an annual budget
request through DOL and OMB.
[25] GAO staff did not attempt to verify the Inspector General's
findings.
[26] Pub. L. No. 110-28, § 6601.
[27] Carolyn K. Brancato and Christian A. Plath, Corporate Governance
Handbook 2005: Developments in Best Practices, Compliance, and Legal
Standards, Special Report SR-05-02, The Conference Board (New York, New
York: 2005).
[28] GAO, Internal Control Standards: Internal Control Management and
Evaluation Tool, GAO-01-1008G (Washington, D.C.: August 2001).
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