Professional Documents
Culture Documents
Listed|Summer 2013
Robert Monks
In The Directors Chair with David W. Anderson: Shareholder activist and avowed capitalist Robert Monks doesnt have it in for senior corporate managersjust the system that gives them all the power and too much pay
If you read Robert Monks biofounder of Institutional Shareholder Services (ISS), author of eight books, and a chair and director many times overyour first inclination is to say thats rsum enough for two. Yet the substance of his workshareholder and corporate activism against manager-kings, the loss of active ownership, the capture of government by corporations continues to drive him. Here, with governance adviser David W. Anderson, the legendary, blunt-spoken Monks shares his latest views.
Robert Monks
Primary role Publisher, www.ragm.com (news, opinion, research on corporate governance and government capture) Additional roles Owner and adviser, Trucost, an environmental research company; founder and director, GMI Ratings (formerly The Corporate Library); founder, Institutional Shareholder Services (ISS) Former board leadership Deputy chair, Hermes Lens Asset Management Co.; chair, Boston Safe Deposit & Trust Co.; chair, Boston Co. Former director/trustee United States Synthetic Fuels Corp. (appointed by President Reagan), Federal Employees Retirement System (appointed by President Reagan), Tyco, Penn Virginia, Westmoreland Coal, Esterline, Shearson, Jeffries, Lens Governance Advisors, Institutional Shareholder Services (ISS) Former roles, commissions and councils Co-chair, World Economic Forum Council on Corporate Governance (2008); administrator of the Office of Pension and Welfare Benefit Programs, U.S. Department of Labor; president, Institutional Shareholder Services; CEO, CH Sprague & Son Co.; vice-president, Gardner Associates Education BA, Harvard; Cambridge; LLB, Harvard Law School Books authored Citizens Disunited (2013); Corporate Valuation for Portfolio Investment (with Alexandra Lajoux, 2011); Corpocracy and Corporate Valuation (with Alexandra Lajoux, 2007); The New Global Investors (2001); The Emperors Nightingale (1998); Watching the Watchers (1996); Corporate Governance (with Nell Minnow, 1995); Power & Accountability (with Nell Minnow, 1991) Honours k Directorship 100 Hall of Fame Award, Directorship Magazine, 2008 k Outstanding Financial Executive Award, Financial Management Association, 2007 k Special Award for Corporate Accountability, Investor Relations Magazine, 2004 k International Corporate Governance Network Award, 2002 Current age 79 Age when first became a director 21 Years of board service 59
Summer 2013|Listed
33
Robert Monks
investor and pension expertand invented the proxy advisory and corporate governance rating industries. In the process, you became the worlds foremost authority on corporate governance and what you term democratic capitalism. Whats your view on capitalism today? Robert Monks Ownership is a fiction, governance a mirage and management reins supreme. Capitalism has become a kleptocracy, run by and for the enrichment of CEOs, or what I term manager-kings. So powerful have these manager-kings become, they now bend the will of governments, effectively capturing the power of state democratic institutions. These two factorsthe capture by management of both corporate and government agendashave allowed CEOs to remake capitalism in their image.
David W. Anderson Corporate governance has been in the spotlight
the U.S. we have different practices than elsewhere, so let me speak to the U.S. experience. For all the talk of good governance, using robust sounding words like independence and shareholder democracy, there is little evidence of such. Words and their practice are negatively correlated, it seems to me. There is no commitment in American corporate practice to having a board that functions in accordance with legal tradition and lorethat is to say, a board with independent authority, information and perspective. In fact, boards are really just another branch of the corporation that in effect reports to and is run by the CEO. Peter Drucker and other thinkers have long said this.
David W. Anderson Thats a strong critique. What are the signs of this radical makeover? Robert Monks With the decades-long abdication of leadership by owners, managers have directed the wealth of corporations to their own pockets, seeing the differential between CEO and average worker pay expand an order of magnitude, without merit. CEOs have convinced regulators and politicians that profit maximization is the highest goal of the corporation, allowing them to externalize corporate liabilities, avoid taxes and be exempt from socially responsible expectations that would seem normal to you and me. Were told that legal restraints on corporate power can be trusted to keep corporations in line, but the evidence is starkly opposite. Not only are the theoretical legal restraints on corporations largely illusory, lobbying by business has been effective at muting those remaining laws and regulations that have traction. David W. Anderson Is your objection to this philosophical or are
ownership structure itself of many of todays public companies is at the root of the problem. If that is the case, then what is the alternative? Robert Monks Thats right, weak ownership control has created a vacuum that management, over decades, has increasingly been happy to fill. This has given management the keys to the kingdom. Being human, theyve behaved accordingly. With no effective ownership check on their decisions and a total absence of long-term vision and values that true owners bring to their enterprises, our corporations have been easily taken over. The alternative to what we see today is to reimagine the corporation based on its founding principles and assumptions, most of which today are violated. Perhaps most important of these is the set of ideas that corporations exist for a social purposeto get something meaningful done through the organization of peoplefrom which the business draws its legitimacy. Owners are accountable for delivering on this purpose, and thus have important responsibilities for how the business functions in that pursuit. The just reward to owners for success in achieving the businesss social purpose is a profit, such as they are able to make by the application of their business smarts and values.
David W. Anderson You used the term drone corporations in
describing manager-controlled businessesthe majority of widely held public companies that operate without the guiding hand of their owners. What does responsible ownership look like? Robert Monks Youre right to imply that drone corporations have no real owners. In Canada, you have several examples of responsible ownership: the Westons, Thomsons, Demarais and Irvings easily come to mind. There are real peopleflesh and blood. KC Irving, whom I knew, didnt want to have dirty washrooms in his gas stations. I doubt the CEO of Exxon caresor knows. If you anthropomorphize corporate power, you then have a range of judgements about what is appropriate or not, that reflects human judgement. If not, you just have cost-benefit analysis, which means that washrooms are okay somewhat dirty. However, when a leader has a personal brand at stake, as owners do, then they behave differently. Responsible owners are accountable. Theyre vulnerable to the consequences of their companys actions and outcomes. So they care, and make corporate decisions with both the business and their conscience in mind. Thats the point.
David W. Anderson How did the ownership structure change so dramatically? What has happened to isolate ownership from control? Robert Monks U.S. Supreme Court Justice Louis Brandeis described the early stages of this process about 80 years ago. He called out two trends that, when linked, explain the course capitalism has taken. The first was that corporations very success at creating efficiency made them big and thus concentrated economic wealth and power. The second was that this power was increasingly under the control of a small elitethe managersand not the owners. Dispersed economic ownership across millions of investors diluted investor power because corporate democracy doesnt exist. That power became concentrated in the hands of management. Ownership had parted ways with control.
very much about business success. Its not inconsistent to say that business, when done right, can and should benefit society. My problem with the capitalism as practiced by manager-kings is that we actually see significantly lower average shareholder returns from these drone corporations, when compared to corporations with owners in control. Not surprisingly, drone corporations are also worse corporate citizens, hurting society as a consequence of their prioritieswhich place far more value on managerial enrichment than the welfare of their employees and communities.
Summer 2013|Listed
35
Robert Monks
particular are committed to improving the world and they are run by well-resourced staffs. Asking them to take on a constructive ownership role fits their mandate and is not threatening to their returns.
David W. Anderson Have you had encouraging responses from
trustees?
Robert Monks Most Ive spoken to are utterly disinclined to change
the status quo. The power of corporations again surfaces; universities feel that if they took on a scrutinous role within the markets, they would jeopardize their relationships with the companies that help fund the universities. The vested interests are extraordinary.
David W. Anderson Whats preventing boards of public compa-
bad system. In the U.S., most boards are chaired by the CEO, which tells you that CEOs arent interested in independent oversight. The CEO thus controls the agenda and information that gets to the board. There isnt a sense that directors are invited to air their own priorities. Its a matter of control; CEOs organize the corporation so that control over the agenda and allocation of resources are tight. They dont want to open up discussion to a general inquiry. This just represents risk to the CEO. Nonetheless, the board should be assertive. On the Tyco board, I asked the CEO to leave so that the non-executive directors could speak among themselves to refocus the agenda, and he refused. Soon after I left the board.
David W. Anderson Whats the right balance of power between a
Canadian families who own controlling interests in public companies. Yet in some cases, they rely on multiple voting shares or controlling interests to hold power. Investor advocates, yourself included, have long championed the democratic principle of one share, one vote. With todays dispersed and disengaged investors, doesnt that principle only reinforce thestatus quo? Robert Monks Yes, I was wrong. One share, one vote was one of the Ten Commandments of my governance life. The nature of ownership is so altered that it makes no sense now and is in fact counter productive. Its better to have owners who are dedicated to the business, able to sustain a long-term vision and apply their personal values to the enterprise. But family ownership or controlling interests, which can also have negative consequences, are not the solution, given the nature of the capital markets today. But they do point the way, I think.
David W. Anderson What do you see as a possible solution? Robert Monks The reality is that we, the typical investors, are not
gies and make resource allocations directed by the board. The boards job is to select, monitor and remove the CEO. Directors should focus an agenda on the tough business questions the CEO is either inclined to shy away from or just didnt think about, looking well ahead of the time horizon the CEO must contend with. There are indicators an experienced person can see as to where theres trouble in the enterprise. Its difficult for CEOs to see these things at times.
David W. Anderson Theres been a decisive shift toward boards
being engaged in strategy and risk management. Do you see the board playing a useful role there? Robert Monks The idea that boards can do strategy and risk is mostly bullshit coming from business schools and consultants. Its virtually impossible to understand these things well enough to make good decisions if youre not there full-time. Directors ought to bring their God-like wisdom and laser focus and be humble enough to know they dont know the business deeply. Its the job of the CEO and principle management to make strategy and propose it to the board for its critical reviewbringing educated, bold questions. David W. Anderson, MBA, PhD, ICD.D is president of The Anderson Governance Group in Toronto, an independent advisory firm dedicated to assisting boards and management teams enhance leadership performance. He advises directors, executives, investors and regulators based on his international research and practice. E-mail: david.anderson@taggra.com. Web: www.taggra.com
able to exercise human-scale judgement over large corporations, as family owners are able to do. We need a proxy. This takes me back to trustee ownership. While their current performance is low, trustees are the last line of defence. All other classes of owners are tainted beyond redemption. The university and foundation endowments in
Summer 2013|Listed
37