Great & the Good Must Step Up

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Great & the Good Must Step UpBy Hugh Wheelan (interview with Bob Monks in Responsible Investor).

It’s testament to Bob Monks’ passion for corporate governance that as he approaches 79 years of age he’s still ready to challenge received wisdom, and with what he calls a renewed ‘sense of freedom’ now that he no longer has to rely on it to make a living. To this end, he believes that this year’s so-called Shareholder Spring, which has had commentators opining that investors have finally woken up to exercise their governance power, is a charade unless it gets support from the pillars of institutional investing such as the multi-billion endowments of Harvard and Yale, the assets of Cambridge University, the Wellcome Trust and the Church of England:

“These are the elements in society that everyone respects. And at no time have any of these ‘great and good’ institutions shown any public willingness to ally with shareholder activism. Therefore, if I was a corporate executive talking to someone who said they were acting on behalf of the shareholders on an issue such as environmental emissions, I’d think to myself, well they haven’t got the support of the people who I respect, and I’d dismiss shareholder activists as a fringe group.”

Monks, an American, who founded and later sold proxy voting firm, Institutional Shareholder Services (ISS), and created Lens Asset Management, which merged with the renowned Hermes Focus Funds, has seen his fair share of ‘new dawns’ in governance.

The historical context undoubtedly explains his scepticism towards a trend that has nonetheless seen large, mainstream asset managers such as BlackRock and Legal & General join more recognised governance peers to strong-arm boards, notably on pay issues. In the UK at least, the pressure has led to the departure of more than a handful of high profile, but poorly performing – and importantly, overpaid – chief executives. Says Monks:

“It’s always possible that this time could be different, but I think the Shareholder Spring is more of a cultural phenomenon in the UK that is less about shareholders than public outcry. Speaking as a foreigner, the UK seems to be able to manage some form of collective consciousness, rather than just follow the juridical situation of shareholder votes cast as in the US.”

He points to this year’s Citigroup AGM where 55% of shareholders either voted against the bank’s pay plan or abstained, yet nothing has changed. “In the process of fixing executive pay, all the components are in the gift of the management. So the management picks the board, the compensation committee and the compensation consultant, who is in turn paid to ‘ratchet up’ remuneration and get paid themselves.” he points out.

However, Monks says the notable public presence this year of Blackrock in corporate governance issues Link to article is interesting because of the power concentrated in the top 3-4 very large asset managers, especially in index tracking strategies: “Index funds answer investors’ need for long-termism because they are permanent shareholders, but the question is how do they act on governance? If you had 3 or 4 of the big index fund players acting strongly on governance then potentially you’d have the dominant position in many publicly traded companies.”

Monks says it won’t happen though because of what he says is an “inherent conflict of interest” between the large financial services and the corporates they invest in. This he argues has far more monetary ‘value’ than “a bunch of theoretical issues” around good corporate governance. He adds: “We won’t see a real Shareholder Spring until banks spin off their trust businesses, because the reality is that the CEO of a fund manager is not ultimately going to vote against the bank’s broader business interests.” Indeed, Monks says that without government intervention to enforce a standard of corporate governance it will be difficult to get the largest institutional shareholders to back the relatively small group of white collar and teachers’ unions and activist governance fund managers that,
he says, “seek to harmonise” corporate power with human welfare:

“The unfortunate reality is that we’ve seen relatively few new additions to the corporate governance activists in recent years. However, in the UK it would be relatively easy for the government to enforce the law of trust that says you have to act purely for your beneficiaries and forget about other conflicts.”

Monks is far less confident that the administration in his home country would countenance such steps, especially, he says, given attempts by the SEC to tighten the rules for proxy voting firms:

“The effort to regulate shareholder advisory companies is indicative of the power and lobby of the corporate advisory firms in the US. I’m writing a book now called ‘Capture’, which is what large corporations have done to the government of the US: they’ve ‘captured’ the agenda.”

He returns to the theme that one of the major problems society has is the legitimacy around CEO pay, citing studies by Professor Lucian Bebchuk at Harvard Law School that have shown that overpaid CEOs can regularly lead to underperforming share prices at companies: “The only element in this entire exercise that is free from dominion of corporate management is the proxy advisory firm. In my view the huge opposition to proxy advisory firms by the US Chamber of Commerce is based on this.”

Monks says he wouldn’t be surprised if the SEC decided to regulate proxy firms, but argues that it is preposterous to do so: “There’s no legal obligation to buy proxy advice, and the buyers can do what they want once they have bought it. It will be like regulating the daily newspapers.” In his current role as Founder and Director on the board of GMI ratings, where he acts in an ambassadorial role, Monks says the firm is trying to make “intelligent judgements” about the way different companies are run based on both written and numeric company information:

“People say corporate written information is not real, but they don’t say the same for numerical info, where much of it really isn’t that real! We disagree and believe, for example, that compensation is an area where a lot of information, both written and numerical is available, which can tell us to what extent a person is paid for adding value at a firm and what they get for just turning up for work. With care and patience we can derive the information we need: it’s a sub-set of cultural anthropology: looking at what makes organisations really work!”

(used by permission of Responsible Investor)