Pension Benefit Guaranty Corporation: Governance Structure Needs
Improvements to Ensure Policy Direction and Oversight (06-JUL-07,
GAO-07-808).
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.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-07-808
ACCNO: A72129
TITLE: Pension Benefit Guaranty Corporation: Governance
Structure Needs Improvements to Ensure Policy Direction and
Oversight
DATE: 07/06/2007
SUBJECT: Accountability
Executive agencies
Federal corporations
Interagency relations
Internal controls
Pensions
Program management
Protocols
Agency organizational structure
Executive agency oversight
Policies and procedures
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GAO-07-808
* [1]Results in Brief
* [2]Background
* [3]Board Structure Provides Limited Attention and Mechanisms fo
* [4]PBGC's Board Structure Limits Board Members' Ability to Dire
* [5]Board Lacks Mechanisms to Monitor and Review PBGC Operations
* [6]Lack of Protocols for Administering PBGC Can Result in Confu
* [7]Conclusions
* [8]Matter for Congressional Consideration
* [9]Recommendations for Executive Action
* [10]Agency Comments and Our Evaluation
* [11]GAO Contact
* [12]Acknowledgments
* [13]GAO's Mission
* [14]Obtaining Copies of GAO Reports and Testimony
* [15]Order by Mail or Phone
* [16]To Report Fraud, Waste, and Abuse in Federal Programs
* [17]Congressional Relations
* [18]Public Affairs
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
Contents
Letter 1
Results in Brief 3
Background 5
Board Structure Provides Limited Attention and Mechanisms for Overseeing
PBGC 11
Lack of Protocols for Administering PBGC Can Result in Confusion and
Inefficiencies 18
Conclusions 21
Matter for Congressional Consideration 22
Recommendations for Executive Action 23
Agency Comments and Our Evaluation 23
Appendix I Scope and Methodology 25
Appendix II List of Selected Federal Government Corporations 27
Appendix III Examples of Corporate Governance Practices 29
Appendix IV Comments from the Pension Benefit Guaranty Corporation Board
of Directors 32
Appendix V Comments from the Pension Benefit Guaranty Corporation 34
Appendix VI Contacts and Acknowledgments 35
GAO Related Products 36
Tables
Table 1: Examples of Corporate Governance Practices 9
Table 2: Comparison of Select Government Corporations with a Similar
Mission 13
Figures
Figure 1: Comparison of Public and Private Entities 7
Figure 2: Net Financial Position of PBGC's Single-Employer Program 10
Figure 3: Number of PBGC Board Meetings Held, 1974-May 2007 15
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
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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).^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.^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.
^1 Pub. L. No. 109-280, 170 Stat. 780.
To identify the extent to which PBGC's governance structure provides
policy direction and oversight, we reviewed the Employee Retirement Income
Security Act of 1974^3 (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).^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.
^2 GAO, High Risk Series: An Update, [19]GAO-07-310 (Washington, D.C.:
January 2007), and GAO, Private Pensions: The Pension Benefit Guaranty
Corporation and Long-Term Budgetary Challenges, [20]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. SS1001-1461.
^4 31 U.S.C. SS 9101-9110.
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,^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.^6 Through its two insurance
programs, PBGC covers certain private sector defined benefit plans.^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.^8
This committee has an advisory role but has no statutory authority to set
PBGC policy or conduct formal oversight.
^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. S 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. S 1002
(37).
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.^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
o are predominately of a business nature,
o produce revenue and potentially are self-sustaining,
o involve a large number of business-type transaction with the
public, and
o 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).^10 Figure 1 illustrates some of the differences among
traditional government departments/agencies, government corporations,
government-sponsored enterprises (GSE),^11 and private corporations.
^8 29 U.S.C. S 1302(h).
^9 29 U.S.C. S 1302(g)(2).
^10 29 U.S.C. S 1302(b).
^11 A government-sponsored enterprise is a federally established,
privately owned corporation. 2 U.S.C. S 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.
Figure 1: Comparison of Public and Private Entities
With the financial collapse of several large corporations over the past
years and the passage of the Sarbanes-Oxley Act of 2002,^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.^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.
^12 Pub. L. No. 107-204, 116 Stat. 745.
^13 GAO, Highlights of GAO's Corporate Governance, Transparency, and
Accountability Forum, [21]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,
[22]GAO-07-72R (Washington, D.C. Nov. 30, 2006).
Table 1: Examples of Corporate Governance Practices
Corporate practices Corporate governance guidelines
Board's fiduciary In carrying out their duties, directors should
duties 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.
Roles of board and A strong and effective board should have a clear
management clearly view of its role in relationship to management. How
defined 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 governance The board should have a set of written guidelines in
guidelines available 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.
Board access to The effectiveness of the board depends on the
information 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.
Board composition and The composition and skill set of the board should be
size 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.
Board committee Boards should establish committees that will enhance
structure 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).
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
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.
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.^14 The Secretary of Commerce is on the board of the
Export-Import Bank of the United States.^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.^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.
^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.
Table 2: Comparison of Select Government Corporations with a Similar
Mission
Federal government Number of
corporation board members Board composition
Commodity Credit 8 Board of directors is subject to the
Corporation general supervision and direction of
the Secretary of Agriculture, who is
15 U.S.C. S 714 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.
Export-Import Bank of 5 Board of directors consists of the
the United States bank's president and chairman, the
first vice president, as vice
12 U.S.C. S 635 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 Crop 10 Board of directors, who are appointed
Insurance Corporation by and serve at the pleasure of the
Secretary of Agriculture.
7 U.S.C. S 1505
Federal Deposit 5 Board of directors consists of the
Insurance Corporation Comptroller of the Currency, the
Director of the Office of Thrift
12 U.S.C. S 1811 Supervision, and three citizens
appointed by the President with the
advice and consent of the Senate.
Members serve 6-year terms.
Overseas Private 15 Board of directors consists of eight
Investment members from the private sector and
Corporation seven from the federal government. At
least two of the private sector
22 U.S.C. S 2191 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.
Pension Benefit 3 Board of directors consists of the
Guaranty Corporation Secretaries of Labor, Commerce, and
the Treasury, with the Secretary of
29 U.S.C S 1301 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.
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, ^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.
^17Corporate Governance Handbook 2005, Special Report SR-05-02
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.^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.^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.
^18 22 U.S.C. S 2193.
^19 Corporate Governance Handbook 2005, Special Report SR-05-02
Figure 3: Number of PBGC Board Meetings Held, 1974-May 2007
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.^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.^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.
^20Corporate Governance Handbook 2005, Special Report SR-05-02
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.
^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.
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.^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.
^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.
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,^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:
o 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.
o 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.
^23 GAO, Internal Control Standards: Internal Control Management and
Evaluation Tool, [23]GAO-01-1008G (Washington, D.C.: August 2001).
DOL and PBGC have also disagreed on management approaches to PBGC's
operations. For example:
o 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.^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.^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.^26
o 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.
o 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.
^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, S 6601.
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,
o establish policies, procedures, and mechanisms for providing
oversight of PBGC that are consistent with corporate governance
guidelines and
o 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.
Barbara D. Bovbjerg
Director, Education, Workforce, and Income Security Issues
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, ^1on
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.^2
^1 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).
^2 GAO, Internal Control Standards: Internal Control Management and
Evaluation Tool, [24]GAO-01-1008G (Washington, D.C.: August 2001).
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.
Appendix II: List of Selected Federal Government Corporations
Federal government
corporation Mission
Commodity Credit Created to stabilize, support, and protect farm
Corporation income and prices. CCC also helps maintain
balanced and adequate supplies of agricultural
15 U.S.C. 714, et seq. commodities and aids in their orderly
distribution.
Export-Import Bank of the Assists in financing the export of goods and
United States services between the United States and
international markets. The Export-Import Bank of
12 U.S.C. 635, et seq. the United States is the official export credit
agency of the United States.
Federal Crop Insurance Improves the economic stability of agriculture
Corporation through a sound system of crop insurance and
provides the means for the research and
7 U.S.C. 1501, et seq. experience helpful in devising and establishing
such insurance.
Federal Deposit Insurance Preserves and promotes public confidence in the
Corporation U.S. financial system by insuring deposits in
banks and thrift institutions for up to $100,000
12 U.S.C. 1811, et seq. 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 Financing Bank Established to centralize and reduce the cost of
federal borrowing, as well as federally assisted
12 U.S.C. 2281, et seq. borrowing from the public.
Federal Prison Industries To employ and provide skills training to the
(UNICOR) greatest practicable number of inmates confined
within the Federal Bureau of Prisons and produce
18 U.S.C. 4121, et seq. goods for sale to the federal government.
Financing Corporation The Financing Corporation (FICO) serves as a
financing vehicle for the Federal Savings and
12 U.S.C. 1441, et seq. Loan Insurance Corporation (FSLIC) Resolution
Fund (formerly the Federal Savings and Loan
Insurance Corporation) by issuing debentures,
bonds, and other obligations.
Government National A corporation that guarantees, with the full
Mortgage Association faith and credit of the U.S. government, full
and timely payment of all monthly principal and
12 U.S.C. 1717, et seq. interest payments on the mortgage-backed
securities of registered holders.
National Railroad Provides passenger train service in the United
Passenger Corporation States.
(AMTRAK)
49 U.S.C. 241, et seq.
Overseas Private Helps U.S. businesses invest overseas, fosters
Investment Corporation economic development in new and emerging
markets, assists the private sector in managing
22 U.S.C. 2191, et seq. risks associated with foreign direct investment,
and supports U.S. foreign policy.
Pension Benefit Guaranty Established to encourage the continuation and
Corporation maintenance of private sector defined benefit
pension plans, provide timely and uninterrupted
29 U.S.C. 1301, et seq. payment of pension benefits, and keep pension
insurance premiums at a minimum.
Presidio Trust of San Established to protect, preserve, and enhance
Francisco the Presidio as a resource for the American
public and as a national historic landmark.
16 U.S.C. 460bb note
Resolution Funding Established by Congress to raise funds for the
Corporation activities of the Resolution Trust Corporation .
12 U.S.C. 1441b
Rural Telephone Bank^a Established in 1971 to obtain supplemental funds
for use in making loans to eligible
7 U.S.C. 941, et seq. telecommunications companies and cooperatives.
Saint Lawrence Seaway Established to construct deep water navigation
Development Corporation works in the Saint Lawrence Seaway.
33 U.S.C. 981, et seq.
Tennessee Valley Created in May 1933 to provide navigation, flood
Authority control, electricity generation, fertilizer
manufacturing, and economic development in the
16 U.S.C. 831, et seq. [25]Tennessee Valley .
United States Postal Established to provide postal service to the
Service United States.
39 U.S.C. 101, et seq.
Valles Caldera Trust Created to manage, provide administrative
services, collect funds, and coordinate with
16 U.S.C. 698-v4, et seq. federal and state governments on behalf of the
Valles Caldera National Preserve.
Source: GAO analysis of federal government corporations.
aIn 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.
Appendix III: Examples of Corporate Governance Practices
Corporate practices Corporate governance guidelines
Board's fiduciary duties 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:
o the duty of care to make decision that
are informed,
o the duty of loyalty to act without
conflict and always to put the interests
of the corporation before those of the
individual director, and
o the duty to act in good faith in
accordance with evolving corporate
governance best practices.
Roles of board and management A strong and effective board should have a
clearly defined 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 governance The board should have a set of written
guidelines available 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,
o delineate responsibilities of the
board, management, directors, and
committees;
o be reviewed regularly, at least
annually, and revised as appropriate; and
o 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.
Board access to information 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.
Conduct of board meetings Boards should consider the following best
practices to generally ensure effective
decision making and exchange of information
and ideas:
o Directors should be able to place items
on the agenda, with time for adequate
discussion and consideration.
o The lead director should take
responsibility to surfacing issues that
affect the business.
o 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.
o Meetings should be structured to
encourage participation and dialogue
among the directors.
o Directors should attempt to attend all
board meetings and actively participate
in the meetings, including asking hard
questions of management.
Executive sessions:
o should promote open dialogue among the
members and free exchange of ideas,
perspectives, and information,
o have a `feedback' mechanism to the CEO
for important issues that may arise, and
o be supplemented by additional off-line
informational channels to help build
trust and relationships among the
directors.
Board composition and size 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:
o possess knowledge and expertise to
fulfill an appropriate role given the mix
of background and skills;
o exercise diligence, including attending
board and committee meetings and coming
prepared to provide thoughtful input at
the meetings and during communications
between meetings; and
o 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
o accounting and finance,
o strategic risk assessment,
o technology,
o management, and
o 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.
Board leadership 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
o strengthen the independence and
oversight role of the board;
o provide the nonmanagement directors
with the ultimate authority over
information flow to the board; and
o improve the relationship and flow of
information between the board, CEO, and
senior management.
Board committee structure 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:
o 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.
o 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.
Oversight Boards must play an active role in the area
mechanisms--internal controls 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
o protect its assets,
o ensure it is not overly exposed to
risk,
o improve the reliability of internal and
external reporting,
o promote compliance with applicable laws
and regulations, and
o 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).
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 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.
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Programs Appear Sound, but Evaluations of Their Effectiveness Should Be
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Budgetary Challenges. [31]GAO-05-772T . Washington, D.C.: June 9, 2005.
Government-Sponsored Enterprises: A Framework for Strengthening GSE
Governance and Oversight. [32]GAO-04-269T . Washington, D.C.: February 10,
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Pension Benefit Guaranty Corporation: Single-Employer Pension Insurance
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Pension Benefit Guaranty Corporation: Statutory Limitation on
Administrative Expenses Does Not Provide Meaningful Control.
[34]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.
[35]GAO-03-419SP . Washington, D.C.: January 2003.
Pension Benefit Guaranty Corporation: Contracting Management Needs
Improvement. [36]GAO/HEHS-00-130 . Washington, D.C.: September 2000.
Government Corporations: Profiles of Existing Government Corporations.
[37]GAO/GGD-96-14 . Washington, D.C.: December 1995.
(130623)
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Highlights of [45]GAO-07-808 , a report to congressional committees
July 2007
PENSION BENEFIT GUARANTY CORPORATION
Governance Structure Needs Improvements to Ensure Policy Direction and
Oversight
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.
[46]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.
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
managementare 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.
Number of PBGC Board Meetings Held, 1974-May 2007
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.
References
Visible links
19. http://www.gao.gov/cgi-bin/getrpt?GAO-07-310
20. http://www.gao.gov/cgi-bin/getrpt?GAO-05-772T
21. http://www.gao.gov/cgi-bin/getrpt?GAO-02-494SP
22. http://www.gao.gov/cgi-bin/getrpt?GAO-07-72R
23. http://www.gao.gov/cgi-bin/getrpt?GAO-01-1008G
24. http://www.gao.gov/cgi-bin/getrpt?GAO-01-1008G
25. http://en.wikipedia.org/wiki/Tennessee_Valley
26. http://www.gao.gov/cgi-bin/getrpt?GAO-07-757R
27. http://www.gao.gov/cgi-bin/getrpt?GAO-07-255
28. http://www.gao.gov/cgi-bin/getrpt?GAO-07-310
29. http://www.gao.gov/cgi-bin/getrpt?GAO-07-72R
30. http://www.gao.gov/cgi-bin/getrpt?GAO-05-991R
31. http://www.gao.gov/cgi-bin/getrpt?GAO-05-772T
32. http://www.gao.gov/cgi-bin/getrpt?GAO-04-269T
33. http://www.gao.gov/cgi-bin/getrpt?GAO-04-90
34. http://www.gao.gov/cgi-bin/getrpt?GAO-03-301
35. http://www.gao.gov/cgi-bin/getrpt?GAO-03-419SP
36. http://www.gao.gov/cgi-bin/getrpt?GAO/HEHS-00-130
37. http://www.gao.gov/cgi-bin/getrpt?GAO/GGD-96-14
38. http://www.gao.gov/
39. http://www.gao.gov/
40. http://www.gao.gov/fraudnet/fraudnet.htm
41. mailto:[email protected]
42. mailto:[email protected]
43. mailto:[email protected]
44. http://www.gao.gov/cgi-bin/getrpt?GAO-07-808
45. http://www.gao.gov/cgi-bin/getrpt?GAO-07-808
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