Nikkei Financial Daily, p.9, 06/25/01
Translated Article:

Pioneer of Corporate Governance
Bob Monks, A Record of Struggle (Part I)

The Myner’s Report is a plan for reform commissioned by the UK government to be written by Paul Myners, director of a British asset management company. This plan, presented to the government in March of 2001, analyzes the financial market from various viewpoints. The plan points out the need for British institutional investors to take part in the management of the companies in which they invest as shareholders.

The British government, which has decided to support the Myner’s Report, has begun the legislation reform process, and Monks is assisting the various parties involved.  He does not hesitate to point out that the policy the British are trying to adopt is actually the law that he himself wrote 15 years ago in the US.

From 1984-85, Monks was a president-appointed official in charge of the Labor Department office for pension funds. The Employee Retirement Income Security Act (ERISA), which is considered to be the constitution of pension fund management, serves as the basis for his radical view that it is the obligation of the trustee to prudently administer the vote asset for shareholders.

Monks has held various positions as a lawyer, venture capitalist, and top financial executive. His experience in Washington’s political world helped him attain his post in the US Department of Labor. “With the help of many staff we developed a line of analysis that was very sound and has been recognized as being correct ever since then. And the line was this: a trustee is responsible for enhancing the value of trust property,” says Monks. “What is trust property? The right to vote the stock is property, it’s an asset. Therefore it’s the obligation of the trustee to administer the vote asset.”

• The necessity of government participation

It is widely acknowledged that the 1974 passing of ERISA changed the world of pension fund management, but it was Monks’ relentless pursuit of trustee accountability in the mid-80’s that truly advanced corporate governance in the US. Monks points out the importance of active government involvement in propelling corporate governance. “It was a matter of having the support of the principle officers of the agency and developing a coherent and correct interpretation of the law,” he says.

During his time at the Department of Labor, Monks further attacked the lack of transparency in investment management. He began investigations into “soft dollar” services—research services offered by securities firms, free of charge to investors. There was a danger that in exchange for such free services, pension funds would buy and sell stocks from these securities firms for expensive fees. It was Monks’ belief that if a supervising government office would take an aggressive position to control such situations, that would rouse attention among the parties involved and result in the elimination of soft dollar.

Monks prepared suits against large financial institutions for violating ERISA though ultimately they were stymied by opposition from the Attorney General. But Monks was to leave the Labor Department after just one year. This was during the pro-business, republican Reagan era and Monks confesses, “if I had stayed much longer, I may well have called more attention to myself and my work might have been rejected.” He explains that he resigned because he feared harming the future of the corporate governance movement. 

• Founding ISS, leaving ISS

Even after leaving the Department of Labor, Monks’ determination to advance corporate governance did not wane. In 1985 he founded Institutional Shareholder Services (ISS), a consulting company that provides analysis and advice to institutional investors, on issues voted on at shareholder meetings. Monks explains, “you couldn’t expect a trustee to spend an enormous amount of money, informing himself about the issues involved in voting every stock held in an account. So we needed to have some way that the trustees could efficiently be voting stock.”

Unfortunately at that time, ERISA’s principle that voting the stock was an institutional investor’s duty, was not yet clearly explained and therefore ISS encountered some difficulty in acquiring clients.What changed the flow of things was a statement released by the Department of Labor in February of 1988, commonly known as the “Avon Letter.”This statement made it officially clear that pension fund trustees have an obligation to vote their stock.The man who wrote out this statement was a confidant of Monks’ who worked under him during his time at the Labor Department.

After it became officially recognized that institutional investors had an obligation to shareholders to vote, the number of ISS clients jumped dramatically. The client list came to include such big names as CalPERS, Fidelity, TIAA-CREF, and General Motors.