"American corporations today are like the great European monarchies of yore: They have the power to control the rules under which they function and to direct the allocation of public resources. This is not a prediction of what’s to come; this is a simple statement of the present state of affairs. Corporations have effectively captured the United States: its judiciary, its political system, and its national wealth, without assuming any of the responsibilities of dominion. Evidence is everywhere..."

I agree it is the best option we have so far.  That doesn't mean, however that we shouldn't make changes or continue to look for new and better ways.  Have a look at this new video and let me know what you think.  Simon Zadek made similar points in an article earlier this week, too.

Adrian Monck, Managing Director, Head of Communications: +41 (0)79 817 0315; adrian.monck@weforum.org

• While how well the business community is meeting its social responsibilities is a matter of debate, efforts are needed to ensure that capitalism is fair and better serves society
• A critical focus should be on education and promoting innovation and creativity
• The theme of the 42nd World Economic Forum Annual Meeting is The Great Transformation: Shaping New Models. For more information, visit http://wef.ch/Davos

Davos-Klosters, Switzerland, 25 January 2012 – Capitalism needs to serve society better, business, banking, labour and academic leaders agreed in a lively debate on the opening day of the World Economic Forum’s 42nd Annual Meeting in Davos-Klosters. Speaking in a session on the future of capitalism, which was hosted by Time magazine, Australian labour leader Sharan Burrow, General Secretary of the International Trade Union Confederation (ITUC) in Brussels, argued that widening income inequality and high unemployment, especially among young people, are an indication that the capitalist system has failed society. The business community “has lost its moral compass,” she reckoned. “We must redesign the model. We must reset it. Stop the greed. Unless employers and workers sit down with governments, the system will continue to fail.”

Other panellists in the session disagreed with Burrow’s view on how well businesses are meeting their social responsibilities. “The business community has not lost its moral compass,” asserted David M. Rubenstein, Co-Founder and Managing Director of the Carlyle Group, a private-equity firm and global asset manager. “Capitalism may be the worst economic system except for any of the others.” Businesses do not think about ways to reduce wealth and jobs, he added. To ensure that capitalism is fair, focus on improving laws and regulations, investing in education and promoting innovation and creativity, Rubenstein advised.

Responding to the criticism levelled at large financial institutions since the global economic crisis unfolded that they are irresponsible risk takers that focus entirely on profits, Brian T. Moynihan, Chief Executive Officer of Bank of America, said that banks do not enjoy unfair advantages because they are too big to fail. “Our power, size and capabilities come from our clients. Our revenue is representative of the economic activity taking place. We are big because our clients are [global] and we support them.”

Growing income inequality is fuelled not by bad corporate governance but by “far deeper forces,” including the development of technology, the emergence of a global market and the need for innovation, Raghuram G. Rajan, the Eric J. Gleacher Distinguished Service Professor of Finance at the Booth School of Business in the University of Chicago, explained. These forces are increasing the demand for skills and pushing pay higher. “These are not going to be affected by corporate governance,” Rajan told participants. “The right debate is about how we get the innovation and creativity we need.” Concluded Ben J. Verwaayen, Chief Executive Officer of Alcatel-Lucent: “We need to talk about innovation, real sustainability and reforms – not about corporations and greed. It’s about decision-making. We have to go for transformation. We have to talk about job creation, not job security.”

Also, a national op-ed piece appeared in the local paper today:  "Citizens United Imperils  Legitimate Elections."  Two years after the Supreme Court decision, it remains newsworthy -- and more importantly, people are still talking about in their own communities.  And it probably won't go away anytime soon.  We're seeing the impact of corporate money already this year and we've got months to go before the election.  Looking ahead, I'll be curious to hear conversations about Citizens United and corporate personhood once the elections are over.  Will it fuel further citizen and voter action regarding corporate influence in our political process?  Stay tuned...

Mark Magee's Citizen United cartoon from 2009.  Strikes a chord in this election year...

Baruch Lev is a world class thinker on accountancy and corporate operational matters.  I have long admired his work and am very much taken with his new book.  Writing from the view of corporate management, he recognizes the legitimacy of corporate governance efforts and believes in the essential role that shareholder activists can play in corporate – and societal – function.  He writes,

“It’s impossible to clarify all aspects of corporate governance. In recent years, we’ve seen a huge amount of academic research on the link between governance and performance.  And the lessons from it aren’t always clear or consistent. But ignoring the debate on corporate governance is not an option for managers. It’s constantly in their face. Highly visible commercial scorecards rank most US companies and many in Europe and Asia on governance strength, and to lag your competitors in governance quality is embarrassing. Moreover, perceived governance weaknesses invite distracting shareholder proposals and proxy contests to rectify the alleged weaknesses such as the 2008 highly publicized campaign of the Rockefeller descendents to strip Exxon’s chief of the board chairmanship. Furthermore, low governance ratings often affect the recommendations of proxy advisors to mutual funds and other institutional investors on how to vote on proxies and shareholder proposals. And they may even affect the investment decisions of some institutions. And pesky hedge funds often use governance deficiencies as a justification for intervention in company affairs and demand for board and strategic changes.”

Winning Investors Over: Surprising Truths About Honesty, Earnings, Guidance and Other Ways to Boost Your Stock Price by Baruch Lev (November 2011).

1. The Elephant in the Living Room.

The single best indicator of the state of corporate governance - a system of accountable power – is the capacity of senior management to increase their own compensation that has been going on for two decades. The metaphor of the elephant in the living room is particularly apt as, incredibly, nobody wants to talk about this problem. On the side of management, from the Chamber of Commerce, the Business Roundtable, and the “courtiers” – legal and otherwise, there is silence; there is not even pretence of justification, there is simply bland silence. None of the famous advisors even attempts a substantive defense of the realities of CEO compensation. So long as this situation prevails, one cannot even pretend that an effective system of corporate governance exists.

2. Rabbit Tracks.

There is a continuing tendency to direct governance attention toward matters of little real importance. So, we are told that governance activists have achieved most of the reforms they have sought to effectuate:

    a. Majority voting. This is the classic example of inventing a problem so that its solution can be hailed as a great victory.

    b. Annually elected boards. Again, thirty years ago companies “staggered” their boards to protect against hostile takeovers. Today, they have different defenses and have reverted to the long time status quo.

    c. Say on pay. On the extreme margin, this may have some useful impact. If a company has reason to believe that shareholder support will be low, it should consider whether to proactively commence a dialogue to encourage support. In the case of Pfizer, Johnson & Johnson and other companies, such engagement appears to have had a demonstrable impact on their say on pay vote results last year.

    d. “Super majority board independence.” As Peter Drucker put it thirty years ago: “Whenever an institution malfunctions as consistently as boards of directors have in nearly every major fiasco of the last forty or fifty years it is futile to blame men. It is the institution that malfunctions.” Independence is an oxymoron in the context of a self perpetuating institution. Nor is it possible that a board can meaningfully monitor the functioning of a CEO who, as Chairman of the Board, also acts as its sole provider of information from within the company, sets the agenda for board meetings and presides over the meetings.

So long as the energies of corporate reformers, public and private are focused on diversionary “rabbit trails” such as these, genuine reform will continue to be elusive.

3. Obsessions of the Incumbents

    a. Those in power will oppose even a scintilla of possible shareholder involvement in the nomination of directors. Reform efforts have not even broached the question of election of directors. Consider the formidable energies employed in recent years:

         i. Lobbying against any provision for shareholder access to the ballot in Dodd-Frank.
         ii. Success in diverting Congressional authorization to empowerment of the SEC.
         iii. Success in persuading the DC federal circuit court that Congress and the SEC are unable to enact a common sense provision applicable to public companies.

Exactly, what can a single director “damage” in the functioning of a board? He can raise the question of “fiduciary compliance” in the fixing of executive compensation. Once this cat is out of the bag, the whole board could well be accountable (as, by law, they should be right now) for failure to “act in good faith” or to exercise fiduciary duty. It’s all about the money!

    b. Cripple Proxy Advisory Firms

        i. Proxy advisory firms – ISS, Glass Lewis – have the distinction of being the only category of professional service providers, including lawyers and accountants, not to have been suborned by corporate management. There has been over the last thirty years not a single allegation of proxy advisory firms either accepting bribes or of acting in bad faith. Their “crime” is that they represent a threat to the autocracy of the CEO and incumbent boards.
        ii. Note well – what is the scope of activity of proxy advisory firms
            1. They give advice as to votes on company proxy statements. They have no authority to raise issues on their own--they can only advise on issues raised by others.
            2. There is no compulsion on shareholders to employ the services of proxy advisors firms.
            3. Proxy advisors have no power to vote except as expressly authorized by the legal owners.

        iii. It is an unhappy commentary on the state of public life in America today that managements have been successful in diverting Congressional and regulatory energies to proxy advisory firms.

 

This lovely view of our pond in late fall is our Christmas card for this year. I want to send out seasons greetings to you all and a big thank you for reading, commenting and contacting me this past year.  It looks like we'll continue to have plenty to discuss in 2012 and I hope to hear from you.  In the meantime, I hope we can all take a few days to focus on the beauty and happiness of the season and hopes for a new year.

As a virtual Christmas gift to everybody, I offer my recommendation for a bright and hopeful  book that comes out on January 11, 2012.  Woody Brock's new book, American Gridlock, offers specific solutions to what appear to be insoluable problems.  Give yourself a break and enjoy Woody's optimism.

Happy New Year,

Bob

In this moment of high unemployment and with so many families struggling financially, it is amazing to think that it takes the average family income ($49,445) over 3,000 families to pay for one F-22 plane.  I know -- there's nothing to be done now.  The money is spent and we are where we are.  But we have to question whether we can afford to continue to make national decisions for the benefit of corporations.  If you view this graphic in terms of the Iraq War and protecting/promoting American corporate interests in that region then you have a clear illustration of government capture.

Thanks to MilitaryEducation.org for developing and sending the graphic.

From: MilitaryEducation.org

Transript:
Judge Rakoff has performed a vast public service.  In the American order of things with the separation of powers between legislative executive, judicial and the various agencies, it is never clear where salvation is going to come from, if at all, and God bless the judicial branch and Judge Rakoff.

What’s happened is a reflection of the transcending corporate power, and particularly, the ability of the financial sector to bamboozle legislators and regulators by saying if you require us to obey the law it will make us uncompetitive, we’ll lose business to London, we’ll extend our liability to all of those dreadful private litigants, so therefore, we have to have a formula that preserves the system.  So, that’s why we have what Judge Rakoff complains of, and complains of appropriately. 

Then the next line is, well there aren’t enough staff in the SEC and these are very difficult cases to bring and what have you and what have you.  It is very insightful to remember the several occasions, and I’ve seen several clips of Eliot Spitzer who just simply says that this is baloney.  I remember Spitzer talking the Senate Banking Committee when he was attorney general of New York, I’ve seen him in more recent times on CNN tapes simply saying, look, they have better resources than I do and they simply didn’t have the will to bring the case.

And so we have to get beyond the bamboozle, as the bamboozle basically is, look, this is such an important national asset that must be preserved in the benefit of the country and we can’t do anything to disturb it because that would disturb it.  And you have to say wrong.  This is a crime, and people who commit crimes should be prosecuted.  And there is no reason why they can’t be prosecuted.

A number of the elements of crime are difficult.  People will tell you that if you need to prove intent, how do you prove intent for a corporation, how does a corporation have intent?  Well, you begin to get into flights of fancy.  You have to say, well, if this and this and this happened, they must have intent or this and this and this wouldn’t have happened.  And somebody else so no, no, that isn’t proving intent.  It just depends what the judge says.  Sloppy, miserable area.

On the other hand, look, that’s how we make a country is by facing up to real issues and slogging through miserable difficult questions.  So the general response is simply part of a large, large tendency in this country to try to organize reality as if the ultimate virtue was the preservation of the financial system in its present form.

 

I currently have a piece about the Wall Street protests online at the Washington Post as a part of their On Leadership panel.  I was asked to comment on how boards should react to the protests and whether the movement would have impact on shareholder activism.  Would appreciate your thoughts.  Read it here.

Here's another interesting thought on the protests and a broader prospective on how the protests might affect India.

Zero Emissions Conference Participation

Robert Monks makes a move toward remote participation in national & international conferences.

October 6, 2011

Portland, Maine

Corporate Governance expert and shareholder activist Robert AG Monks has made a recent commitment to travel less while continuing to participate in the world of governance and political debate.  He says, “With today’s technology I can still talk to people all over the world without leaving Maine.  It works out – I get to enjoy my life here, lessen my environmental impact and still keep up with governance issues.”

Monks is frequently asked to speak all over the world.  He recently returned from engagements in Paris and San Diego but also spoke remotely to conferences in Vancouver and The Netherlands, and spoke to a group in London today.  “More and more I see remote or recorded speeches at these conferences.  The experience is quite good as a viewer and I’ve had excellent experiences as a speaker. ”

Robert Monks spoke today before the Sarasin & Partners Responsible Investment Conference in London.  Sarasin partnered with Cisco Systems for this event and is pleased to be using Cisco TelePresence which is designed to make remote participation feel as if you’re in the same room with the other speakers.  Speaking both individually and as part of a panel allowed Monks to experience the full range of remote technology.  “It was virtually flawless,” he said.

For more information on Robert Monks and his work see www.ragm.com

Contact Stephanie Philbrick: sphilbrick@ragm.com or (207) 400-0462.

Conspicuous Failure on the role of the SEC and Fed in the financial crisis.  June 16, 2010. 

Financial Reform ..."if the answer to the question is the SEC, then you've asked the wrong question."  June 16, 2010.

Can Stewardship Help Prevent the Next Crisis?  PRI, September 15.

View a video excerpts of this speech here and here.

Read the text of the full speech here.

1. Shareholder right to call a meeting and oust directors.
2. Separating director and CEO. 
3. Trustees must take fiduciary duty seriously and be active shareholders on behalf of the beneficiaries.
   
    

1. Globalization. Federal laws, let alone state laws, are increasingly ineffective in dealing with corporate issues. Multinational corporations and international business is here to stay so we have to start looking at laws that address them. Domestic corporate domicile laws are woefully inadequate on the global stage and if we don’t lead on this issue some other country – or sovereign or corporate entity will.
2. Fiduciary duty & conflict of interest. Globalization aside, there are workable laws on the books that address a corporations duty to the shareholder.   These are not enforced. As I said in an earlier post, there has never been a fiduciary duty suit on behalf of ERISA beneficiaries. If ERISA beneficiaries can’t have confidence in their trustees, who can?
3. Lobbying and political influence. In all reality, we may already be too far down this line. And, if that’s the case then everything else is so much hot air. Dodd-Frank was fairly well stripped of any real corporate governance measures when it passed and yet, corporations are working to “reform the reform.” There is so much money and legions of staff dedicated to influencing – and even making – policy in Washington that it’s hard to think where shareholders can have impact. Still, we must try.
    

By Hugh Wheelan, July 4, 2011

By his own account, Paul Myners, former UK Financial Services Secretary and now UK Chairman at Cevian Capital, made more speeches on corporate governance during less than two years in office (October 2008 – May 2010) than any of the other combined governments before him: “Some say too many…” he says, half in jest. But it is a theme that has come to define his outlook on the financial and corporate worlds he has straddled: from asset management (Chief Executive at UK fund manager, Gartmore) to the boardroom (Chairman of Marks & Spencer) and politics, to cite but a few of his many previous offices.

In institutional investment, the Myners Report, published in 2001 as a UK review, became a de facto blueprint for much of European pension fund governance, both internally and externally. To his credit, he’s never stopped banging the governance drum, even as he moved into the UK’s House of Lords in 2010 to become Lord Myners. A former journalist with a lively turn of phrase, he coined the term ‘ownerless corporations’ to describe company ownership that prioritises short-term, risky profit over long-term value, both financial and social. Speaking to Responsible Investor, Myners says Vince Cable, the current UK government Business Secretary is broadly supportive of the position. Cable’s recently announced investigation into investor short-termism led by John Kay, a leading economist and columnist for the Financial Times, suggests as much. The parameters of the review are classic Myners: examining the systemic problems in shareholder ownership and whether the investment chain between asset owners and managers is impeding better oversight of companies by their owners.

Describing the problem again, Myners is no less colourful with a metaphor for recklessness shareholders: “When you rent a car you tend to drive it a bit hard, and you don’t worry about cleaning it up before you hand it back. That’s what the stock market has become. You wouldn’t drive your own car in the same way.” Myners, however, can’t be accused of not putting his money where his mouth is. His return to the governance fray at the age of 62 with Cevian, a below-the-radar, activist fund manager, belies his appetite for the challenge. A multi millionaire, he has taken an equity stake in the firm, although he declines to say how much. Sweden-based Cevian, founded in 2002 by Christer Gardell and Lars Förberg, is Europe’s largest activist fund manager with €3.5bn of assets under management. 
The Florida State Board of Administration and the Canada Pension Plan Investment Board number among its clients. Myners says Cevian takes a “forensic look” at a company, its suppliers and clients to identify those it believes are underperforming and where potential valuation increases are not priced into the stock. These might include potential spin-offs, capital structure issues, but frequently, he says, board leadership deficiencies. Its average stock hold period is 3-4 years. Unlike some activist funds, notably in the US, Cevian prefers quiet diplomacy strategy with the dozen or so companies in which it has stakes. Its style is akin to Hermes Equity Ownership Services, the UK activist. “We want to work with companies to improve value and wouldn’t look to talk about that publicly until all other routes have been explored. We are in that respect, I believe, less muscular than the US style of activism,” says Myners.

Having joined an activist fund manager, he describes himself as “a bit more realistic” than when in government about what might begin to actually change the market in terms of better corporate governance. He believes shareholder activism could see some of the highest growth in assets, and that a growth to about 5% of the market could start to shift the other 95% forward to better governance practices: “The presence of a small, dedicated group of shareholders can work like antibodies to cleanse the whole, unhealthy body,” he says. Cynics will argue that Myners is cutting his coat to suit his cloth. He argues in turn that box-ticking has achieved little progress. Indeed, the Statement of Investment Principles (SIP) for pension funds that was mandated post the 2001 Myners Report, was seen by many as just that. To this end, he warns against the UK Stewardship Code (a 2010 voluntary initiative on shareholder engagement and voting), proposed while he was UK Financial Services Secretary, becoming “a kind of political correctness”. He disagrees with the position of the Financial Reporting Council (FRC) that oversees the Code, which he says appears to be seeking a maximum number of sign ups: “The 5% can talk to the 95% and we’ll see managers with different styles accommodated. I’d rather see proper governance conviction. I don’t want it to become just to become a gesture like the United Nations Principles for Responsible Investment.” Asked to explain his cynicism on the UNPRI, Myners adds: “It’s hard to identify what the UNPRI has done so far outside of collecting a lot of names.” He admits he has “a certain purist view” on such initiatives: “I don’t apologise for that. But, of course the world is more complex.”

He notes that the majority of fund managers behave entirely rationally by not doing much in the way of governance: “Most institutional clients don’t expect it, so why would they? It was the major problem with oversight of the banking crisis. But it’s hard, for example, to understand what the shareholders of RBS were doing at the time of the ABN Amro merger? The short-termism issue in investment is a difficult thing to fix, and I don’t believe I really achieved a great deal in government on a subject where I made a lot of speeches. What’s certain though is that there’s too much governance power in the hands of funds houses who make the smallest contribution to the bottom line: equity managers that on the whole underperform the index over time. I believe asset owners need to step up.” The latter have been somewhat reluctant to do so, despite Myners’ overtures both in and out of government. The relationship has sometimes been tense. Some within the pension fund community accuse the former Minister of being a rich poacher turned gamekeeper that misunderstands the resource constraints and priorities of smaller and medium sized asset owners. But Myners has identified areas of self-interest for asset owners where they seem strangely reluctant to go.
   
    “It seems incredible to me that though Warren Buffet is the world’s most 
     successful investor, you don’t see many institutional investors mirroring his
     conviction for long-term buy and hold strategies.”



He has been has been particularly critical of the Institutional Shareholders’ Committee (ISC), now renamed the Institutional Investors Committee (IIC), a grouping of institutional investor associations set up at the time of the Myners Report to promote collective engagement, and re-launched during the financial crisis to promote the UK Stewardship Code. Myners says: “The pension fund community is highly rational and quite conservative. I do think, however, that it is very poor that in the two years since they said they would revitalise the ISC (nowIIC), they’ve done practically nothing. The one report that did come out was on fees for rights issues, which was an issue pushed by me. They should also be looking at issues like the voting process, which is defective at the moment because votes get lost or are not processed.” The IIC has recently named an Advisory Council of top pension fund and asset manager chiefs, which could see that agenda strengthened.

Another issue that Myners believes is holding up long-term investing is a lack of relevant, transparent and independent sell-side research. Earlier this year he announced an investment into Autonomous, the research house set up by former Merrill Lynch star banks analyst Stuart Graham, becoming a Partner and Chairman. Autonomous is paid a fixed fee per annum for research. He says: “Sell side research seems to operate on a rather short-term basis. It seems incredible to me that though Warren Buffet is the world’s most successful investor, you don’t see many institutional investors mirroring his conviction for long-term buy and hold strategies.” Despite his time in politics, Myners believes government options are somewhat limited in changing the short-termist ownership culture. Nonetheless, he points to the nominations of shareholders to the board in countries like Norway and Sweden as something that could be legislated. The stakeholder/shareholder-driven agenda, he notes, is one Michel Barnier, EU Internal Markets Commissioner is leaning towards in his forthcoming EU Corporate Governance Directive. “I’m surprised few institutional investors have seriously taken on board his views. Barnier has seen that institutional investment is producing sub-optimal governance outcomes. There may be a shift away from the pure comply or explain basis that many of our governance rules are based on, which is valid because there are some serious issues with it. For instance, many companies don’t believe in the “explain” part, and there’s no case law to deal with that. There is a sense that many corporate governance statements are just produced by lawyers. Personally, I don’t believe any shareholder should vote for a director without meeting them. There should be something like a session to ‘meet the directors’.”

In a recent speech to the Association of British Insurers, Myners suggested that three or four “owner representatives” should be added to an investee company’s Nominations Committee and be included in the responsibility for selecting non-executive candidates to be placed before shareholders for vote. He said this would give shareholders better oversight of board and committee effectiveness, including that of the Remuneration Committee. He said: “This would seem to me to address one of the key anxieties in this space – can investors trust boards and committees to make wise and sensible decisions as agents and to put the interest of the company and its owners before all others?”

It’s an incongruity he comes back to regularly; companies and investors existing in separate worlds. The Financial Times’ Lombard column has called Myners ‘Preacher Paul’, alluding to his study interest in theology but also his lofty, lecturing rhetoric. In a light-hearted parish reference, Myners is happy to don the cassock, but leaves no doubt about his zeal. He recounts that he recently met a FTSE100 chief who told him his ideas were “rubbish”. However, after discussion, he says both found their ground was much more common than had seemed: “You could say that the sermon is not getting across that well, but once we take tea and biscuits in the vestry I think you find that many people agree that we have to find some way to solve this dangerous issue of ownerless companies.”

• Features 16 case studies of corporations in crisis, including General Motors, American Express, Time Warner, IBM, and Premier Oil
• Contains an invaluable web link to The Corporate Library, the leading independent research firm dedicated to corporate governance
• Includes an Appendix with an overview of CG Guidelines and Codes of Best Practice in Emerging Markets

In the meantime here is a new video post on the topic.  I look forward to your comments.

Recently, out-of-the-blue, an article quoting Corpocracy appeared in the Glenwood Springs (CO) Post Independent.  Mary Boland's piece, "Modern corporate monsters," is about corporate power over our political process.  Monsters isn't a word that I've used but Mary's article gets at the heart of what we're dealing with: the demise of democratic capitalism and the rise of unfettered corporate power. 

You can read Corpocracy on this site -- of course, it's available from Amazon and other booksellers, too.  Let me know if you read it -- I think there's still a lot of value in there and I look forward to discussing it with you.

1. Is the management of an American company in any way inhibited from pursuing global objectives because of being chartered in an American state?
    
2. What makes a corporation American? Or British. Or French. Or Japanese…
    
3. Is there any restriction on non-American corporations lobbying US politicians?
   1. Are there laws in other countries restricting American lobbyists?
   2. Is the device of foreign chartered subsidiaries considered an adequate fig leaf?
       
4. There seems to be nothing stopping foreign corporations from having the same Constitutionally-protected right to participate in American politics. Is something is wrong with this?
   
    
5. What institutions should be initiated to provide global supervision of multinational enterprises?
   1. Or, are any existing NGOs or regulatory agencies suited for global supervision (regulation?) of global corporations?

Mine Probe Faults Massey (WSJ 5/20/11)

Upper Big Branch Report (by J. Davitt McTeer, et al, May 2011)

Capitalism without Ownership will Fail, written in 2002 with Allen Sykes.

Do Today's Powerful Institutional Investors Belong in the Boardroom?  Written in 1990 when I was president of ISS.

“It is difficult if not impossible to determine whether, or to what extent, managers seek to maintain autonomy from the state for ideological and normative reasons or because that autonomy has allowed them to enrich themselves lavishly during the past thirty years. It is reasonable to infer that both ideal and material interests inform managerial policy preferences and that they tend to reinforce each other even under crisis conditions.” (p. 122, fn 63)

With such creativity, I hope we could solve more important problems than this!

Did you read Martin's book?  What was your take on it?

The emergence of the CEO as autocrat has reduced the position of boards of directors to "parsley on fish."  If a different system is desired, boards will have to change in virtually all relevant respects:  in who is nominated; in how their service is evaluated; in their responsibilities; in whether they are effectively liable for negligence or for beach of trust.  We will know if this desired state exists when we no longer have directors and officers liability insurance and directors take full responsibility for their fiduciary relationships.

See:  Investor sues Citi board over mortgage shoddy ops in Reuters (Apr. 20)

• When the trustee is a member of a conglomerate group, pursuing beneficiary interest could put them into conflict with their parent company. If the fiduciary portfolios include tradable shares from other parts of the conglomerate, how do you proceed? On behalf of the beneficiary or the parent company?
   
• When university or foundation trustees also represent companies in the trust portfolio, which interest takes priority? Engaging such a company raises questions of comity and collegiality within the board and can make for difficult relationships.
   
• There has long been a rumored “Golden Rule” for ERISA plans: “You leave my company alone and our pension plan will leave your company alone.” Whether or not this is hyperbole, there has never been a recorded case of activism by an ERISA plan. When a trustee is serving as fiduciary for a company employee benefit plan, he might well be acting contrary to the commercial interest of the sponsor company (company whose employees join the plan) by raising questions about the management of companies in the pension portfolio. 

1. Is the involvement of informed, motivated and empowered owners essential for the protection of the ultimate beneficiaries?
    
2. Should trustees be permitted – because of lack of enforcement – to ignore their legal duties of management and acquiesce in management conduct?
    
3. Should the obligation of trustees to act be enforced? And, if so, how should they be enforced?
   1. By the judicial system
   2. By regulatory authorities – the FSA in the UK, the SEC, DOL in the US
   3. By private litigation.
       

In creating INET, I believe that George Soros deserves vast applauise for providing support, recognition and a prestigious outlet for economic thinking outside the constraints of the traditional paradigm.

It really was an amazing event and I came home with so much to reflect upon.  The conversations and presentations left me with so many ideas to sort out and I wanted to share a bit of that with you.  I expect to be working on these thoughts over the next few months but in the meantime I've put some of my thoughts and impressions on video. 

Bretton Woods Revisited: INET Conference 2011
Thoughts on the conference which focused on ways to change the field of Economics.

Sustainability
I had a great conversation about sustainability with a Dutch woman working on these issues.

Enforcing Regulation
A subtheme of the conference was how to effectively enforce corporate regulation.

Independence & Legal Independence
Effective governance of corporations requires that the board include individuals and committees independent of the management. Under the current system, in which boards of directors are essentially self perpetuating, it strains credulity that any individual board member could be considered to be “independent” of the board and the CEO. Directors chosen and endorsed by management inherently have a conflict of interest. Those entrusted with auditing and compensating management cannot be dependent on the favor of management without destroying the legitimacy of the process.

The criteria for independence is defined according to the charter of each corporation, state incorporation statutes and the various Stock Exchanges. In his recent essay on the HLS Corporate Governance Forum, Martin Lipton recently wrote: “friends can and should be independent directors. There is absolutely no basis for second-guessing a board’s reasonable determination that a friend of the CEO, or a friend of another director, is independent” (Corporate Governance Adrift).  Plainly, there is such a thing as legal independence but is it what we want or does it operate so as to legitimate a management based power structure?

Legal independence is a construction that exists outside reality. A legally independent director may or not be independent-minded. People want to be directors, it is a coveted position. If an individual is “gifted” a directorship it seems naïve to believe that he will be independent of the person who offers him the position. The only way to characterize an individual as truly independent is to have him nominated from outside the present power system – for example, as the SEC has recently proposed.

Specific criteria of independence are often painfully wrought, but does compliance with them assure quality independence – “real” independence -- essential for a system of effective governance? Can the corporate system flourish in reliance on “legally independent” compensation committees, audit committees and their creatures?

#1 – Is a system based on “legal independence” at best a charade and at worst a deception?

#2 – Can shareholders have assurance that any person selected according to the prevailing system of board self perpetuation is actually independent?

#3 – Or, is it therefore necessary that some interested parties – a percentage of long term shareholders - outside of the incumbent board and management choose those individuals whose independence is essential to the integrity of the corporate governance?

• Remarks before the Institutional Investor Annual Pension Conference, 1985.
  
  
• How Bob Monks Plans to Shake Up Pensionland, 1984.
  
  
• Interview With Pension Administrator Robert Monks, 1984.
  
  
• The Invisible Hand: Remarks by Pensions Administrator Robert Monks, 1984.
  
  
• Retirement Policy Needs Effective Private Sector Leadership – Now, 1984.
  
  
• Lack of Unity In Congress And Business Creates Crisis-To-Crisis Response To Employee Benefits, 1984.
  
  
• New Fiduciary Dilemma For Managers, 1985.
  
  

Part two of Inside Investor Relations interview with Bob Monks. 

Professor Walter Effross sent us this resource for students and we wanted to share it with you.  This list, in no special order, offers suggested methods and considerations that students in Business Associations/Corporations courses or seminars, or related courses, might find useful in identifying practical and theoretical themes; developing and refining paper topics; reviewing for for exams; and preparing for job applications, interviews, and internships. 

Professor Effross is on the faculty at American University Washington College of Law.  Some of this material is adapted from his book, Corporate Governance: Principles and Practices (Aspen 2010).  

Have other suggestions?  Please comment and let us know.

The Appearance of Reality: Elect

What do we mean when we talk about electing directors? 

2010 culminated a period of years during which the fundamental dynamics of Corporate Governance were diluted into virtual meaninglessness.  Recently, I’ve been thinking about words that that seem straightforward but whose meanings has become less and less clear to me (see Appearance of Reality post 3/13/11).  We all know what these words mean in a literal sense but in the context of governance, of business and of our post-crash world do they still mean the same thing? 

Over the next few weeks we invite your input on some core governance concepts.  We hope to better understand what is meant when we use these terms in relation to governance and business and even politics.  I look forward to your thoughts -- comment on the site or write to me at info@ragm.com. 

Elect

To start, the process by which directors are chosen is described as an election. And yet, virtually no one would describe the reality of how individuals accede to board membership as an election in the sense that word is generally understood by political scientists. Without pausing overlong to describe the actualities, it is at least clear that no individual appears on the company’s proxy statement for election to a vacancy except with the approval of the chief executive officer and the incumbent board members. It is equally clear that there are only as many individuals enumerated on the proxy card as there are vacancies.

All of this compels the conclusion that the election is a ritual without meaning in the corporate world. Why then do we insist on using a word that plainly does not describe what actually happens?  This evokes the marvelous novels describing “double think” – 1984 and Brave New World –

“This was where “doublethink” came into play, minds were trained to hold contradictory positions simultaneously and unquestioningly- for example you had to believe at one and the same time that Democracy was impossible and that the Party was the guardian of democracy.” (Orwell, Nineteen Eighty-Four)

Here are my questions:

1. What does election mean in the context of governance and corporations?
    
2. Does a corporation function optimally under democratic or autocratic leadership?  In other words, is it clear that centralized leadership is essential for maximizing corporate values and that "democratic" influence is distracting?  Can centralization be harmonized with accountability?
   
   
3. Is there some justification for the deliberate misuse of a word that is an important part of corporate governance?

                  -Discussions of several country-specific market developments that provide
                   context to underlying data

Response to FCIC Final Report: Part II

Management Risk & Negligence

There were many losers in this crisis, but there was a consistent, if small, class of winners:  the principal executives of the major financial institutions -- both those that survived and those that did not -- all walked away unscathed and uncensured. 

One can achieve nuanced understanding of the crisis by focusing on critical areas in which those principally responsible had conflicting interests, and by understanding how these conflicts were resolved.   Ben Heineman articulated the basic concern of corporate governance and conflicts of interest (HLS Corporate Governance Forum 1/31/11), “The fundamental capital allocation, risk management and integrity promoting decisions which will dictate whether a firm succumbs to a financial crisis are taken by its board of directors and its business leaders.”

We should consider the pattern of stock repurchasing undertaken by all of the major participants in the financial crisis as a major point for study.   Well before the FCIC report, The New Yorker published a piece on subprime mortgages laying out the common practice of buying back stock to increase returns. 

“Instead of setting aside money to cover possible losses, Merrill reduced its reserves of capital, in an attempt to boost returns. At the end of 2005, the company’s board approved a new incentive program for [Stanley] O’Neal and his senior colleagues, which promised them generous rewards if the firm’s return on equity exceeded certain benchmarks in the following three years. Setting targets for return on equity is common on Wall Street; nonetheless, the new incentive program gave O’Neal another reason to increase Merrill’s exposure to risk. One way a firm can boost its return on equity is to buy back some of its own stock; this reduces the size of its capital and means that its earnings get spread over a smaller base. Another option is to increase its leverage, or borrowing. Merrill did both. In 2006, it repurchased 116.6 million shares, at a cost of $9.1 billion. It also borrowed heavily….. [a former Merrill executive told me] ‘They were buying back stock to shrink the capital, so the return on equity would go up. Shrinking capital is dangerous. When you run an investment bank like Merrill, you are always going to run into problems. It looks like they have forty, fifty or sixty billion dollars of capital, so why worry? But they also have a trillion-dollar balance sheet. They are leveraged twenty to one. If the value of their assets falls four or five per cents, they are wiped out – so keeping plenty of capital on hand is crucial.”  (“Subprime Suspect” John Cassidy, The New Yorker, March 31, 2008. 78, 8) 

The story at Merrill was the pattern throughout the industry in the years just prior to the crisis.  Executives were encouraged to take huge risks in return for personal gain – but there was no accountability for failure. In the years 2005- 2007 Citigroup repurchased $20,457 billion worth of its outstanding shares; Merrill Lynch $18.01 billion; and Morgan Stanly $7.2 billion.

Then, during the crisis years, each bank struggled to raise new capital, the absence of which was a major factor in requiring the active involvement of foreign investors and subsidy by the U.S. Federal Government.  The first TARP tranche (respectively $billions, 20, 10, 10) in September 2008 was a virtual mirror of the funds management had contracted from their capital in the previous three years.  Management of capital is the single most important responsibility for a financial institution – so is it not careless, or even negligent of executives and boards to let capital fall dangerously low in a chase for quick returns?  It seems to be an incarnate indictment of the quality of corporate governance of these institutions.  “…how practices that had gone on for many years suddenly caused a worldwide financial crisis.” (FCIC Final Report, 444, page 472 digital version)  

“The lesson taught by the rescue of Bear [Stearns] was that all large financial institutions – and especially those larger than Bear … would be rescued… the critical need for more capital became less critical, the likelihood of a government bailout would reassure creditors” (FCIC Final Report, 482, digital version p. 510).  Let’s look at the fate of the top people at the bankrupt Lehman Brothers and the failed Bear Stearns:

“We find that the top-five executive teams of these firms cashed out large amounts of performance-based compensation during the 2000-2008 period. During this period, they were able to cash out large amounts of bonus compensation that was not clawed back when the firms collapsed, as well as to pocket large amounts from selling shares. Overall, we estimate that the top executive teams of Bear Stearns and Lehman Brothers derived cash flows of about $1.4 billion and $1 billion respectively from cash bonuses and equity sales during 2000-2008. These cash flows substantially exceeded the value of the executives’ initial holdings in the beginning of the period, and the executives’ net payoffs for the period were thus decidedly positive. The divergence between how the top executives and their shareholders fared implies that it is not possible to rule out, as standard narratives suggest, that the executives’ pay arrangements provided them with excessive risk-taking incentives.” (Lucian Bebchuk, et als., “The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008,” Yale Journal on Regulation, Vol. 27, 2010, pp. 257-282 Harvard Law and Economics Discussion Paper No. 657,ECGI - Finance Working Paper No. 287 )

This double barreled leveraging – borrow more, reduce equity – can hardly be explained within the vocabulary of board negligence. It is necessary to look further, beyond negligence because conflict of interest is involved.  

Follow the money.

You've probably seen some of the video commentary that Bob has put out about corporate power and Citizens United.  We've resurrected a few for you here.  And remember -- we're adding more and more older material to the Library so be sure to have a look around. 

Corporate Domination of Government

Citizens United is Changing the Country

The Difference

Supreme Court Power

1. the financial crisis was and is a failure of governance and
2. executive management took excessive risk for corporations while risking almost nothing for themselves. 

Download the table of contents for Corporate Valuation below.

• Health – concern for the well being and biological survival of human participants
• Care of Infants – Concern with the long term - of sustainability
• Fairness – inter generational, inter national, and between the various components of the corporate constellation. Sharing of risks and benefits.

For The Association of American Law Schools Annual Meeting January 2010. Speech not given and Bob did not attend.

See video interview about the book.    Become a fan on Facebook!

Bob Monks discusses the future of corporations, including issues of globaliazation and institutional ownership.  1994

"But Sears shrunk its board by eliminating three director seats, which meant that I needed 21 percent of the vote to win a seat -- virtually impossible to obtain. because 25 percent of the vote was held by Sears employees (and voted by Sears  trustees) and 37 percent  was held by individuals who I could not possibly solicit without spending millions of dollars."

1991 article by Bob Monks in the New York Times.

"Why can't U.S. corporate managment do the job alone? Because American chief cxecutives are increasingly accountable only to themselves. Contrary to the conventional wisdom that shareholders have ultimate authority, CEOs frequently get involved in choosing (or approving the selection of) hoard memhers, who then control the proxy process and involvement hy owners.  In the end, there is no effective accountability to anyone -- a status to be envied by sovereigns."  1990

"You cannot ignore the sheer volumes accounted for by pension funds. They represent something like one quarter of aU the stock in the markets, and they account for a little higher proportion than that in new issues. Sometime before the end of this century, pension funds will pass 50 percent ownership of publicly traded American corporations.  That raises a number of interesting questions. For instance, how will pension funds exercise the authority of ownership?"