anderson in dialogue with monks (the director's chair) - listed (jun 2013)

7/28/2019 Anderson in Dialogue With Monks (the Director's Chair) - Listed (Jun 2013)

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32Listed|Summer 2013


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33Summer 2013|Listed

The Directors ChairRobert Monks

Its broke, lets fx itIn 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

Photography by Sarah Beard Buckley

I you read Robert Monks bioounder o Institutional Shareholder Services(ISS), author o eight books, and a chair and director many times overyourfrst inclination is to say thats rsum enough or two. Yet the substance ohis workshareholder and corporate activism against manager-kings, theloss o active ownership, the capture o government by corporationscontinues to drive him. Here, with governance adviser David W. Anderson,the legendary, blunt-spoken Monks shares his latest views.

Robert MonksPrimary rolePublisher, 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 councilsCo-chair, World Economic Forum Council on Corporate Governance (2008); administrator of the Ofce of Pension

and Welfare Benet 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

kDirectorship 100 Hall of Fame Award, Directorship Magazine, 2008

kOutstanding Financial Executive Award, Financial Management Association, 2007

kSpecial Award for Corporate Accountability, Investor Relations Magazine, 2004

kInternational Corporate Governance Network Award, 2002

Current age

79

Age when frst became a director

21

Years o board service

59


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David W. Anderson Youve been a lawyer, CEO, director, activist

investor and pension expertand invented the proxy advisory

and corporate governance rating industries. In the process, you

became the worlds foremost authority on corporate gover-

nance and what you term democratic capitalism. Whats your

view on capitalism today?

Robert Monks Ownership is a ction, governance a mirage and man-

agement 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

for more than a decade now. Have you seen no improvements?

Robert Monks Ive served on boards in ve countries and know that in

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 cor-

porate practice to having a board that functions in accordance with

legal tradition and lorethat is to say, a board with independent au-

thority, information and perspective. In fact, boards are really just an-

other 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 aver-

age worker pay expand an order of magnitude, without merit. CEOs

have convinced regulators and politicians that prot maximization

is the highest goal of the corporation, allowing them to externalize

corporate liabilities, avoid taxes and be exempt from socially respon-

sible expectations that would seem normal to you and me. Were told

that legal restraints on corporate power can be trusted to keep cor-

porations in line, but the evidence is starkly opposite. Not only are

the theoretical legal restraints on corporations largely illusory, lob-

bying 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

you saying its just bad business?Robert Monks Im a prot-loving capitalist and a Republican. I care

very much about business success. Its not inconsistent to say that

business, when done right, can and should benet society. My prob-

lem with the capitalism as practiced by manager-kings is that we ac-

tually see signicantly lower average shareholder returns from these

drone corporations, when compared to corporations with own-

ers in control. Not surprisingly, drone corporations are also worse

corporate citizens, hurting society as a consequence of their priori-

tieswhich place far more value on managerial enrichment than the

welfare of their employees and communities.

David W. Anderson Your central critique seems to be that the

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 hap-

py to ll. 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 corpo-

ration 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 some-

thing 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 responsibili-

ties for how the business functions in that pursuit. The just reward

to owners for success in achieving the businesss social purpose is a

prot, such as they are able to make by the application of their busi-

ness 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 peopleesh and blood. KC Irving,

whom I knew, didnt want to have dirty washrooms in his gas sta-

tions. I doubt the CEO of Exxon caresor knows. If you anthropo-

morphize corporate power, you then have a range of judgements

about what is appropriate or not, that reects human judgement.

If not, you just have cost-benet analysis, which means that wash-

rooms are okay somewhat dirty. However, when a leader has a per-

sonal brand at stake, as owners do, then they behave differently.

Responsible owners are accountable. Theyre vulnerable to the con-

sequences of their companys actions and outcomes. So they care,

and make corporate decisions with both the business and their con-

science 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

rst was that corporations very success at creating efciency made

them big and thus concentrated economic wealth and power. The sec-

ond was that this power was increasingly under the control of a small

elitethe managersand not the owners. Dispersed economic owner-

ship across millions of investors diluted investor power because corpo-

rate democracy doesnt exist. That power became concentrated in the

hands of management. Ownership had parted ways with control.


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David W. Anderson Have newer trends also emerged to further

dull the butter knife of shareholder power?

Robert Monks Three other factors are at play. The rst has to do

with the scale of our capital markets, in terms of the stock capital

and volume of trading in those shares. The ination in the capital

stock companies carry on their balance sheets is astounding. Take

GE; it has almost 11 billion shares of common stock outstanding.

There is no way for investors to participate meaningfully as own-

ers, so they dont. Add in massive trading volumes, which routinely

see more than 100% of outstanding shares turn over each year, and

you see that ownership is essentially undeterminable at any point

in time. Ownership, in any way worth talking about, has vanished.

Secondly, algorithmsmachine-based computational decision

rules, which account for half of all institutional tradeshave not

only replaced human judgement in constructing investment portfo-

lios, they have made that decision-making subject to arbitrary data

points in the market entirely unrelated to the businesses being trad-

ed. Further, more and more stock is held by index funds, which in

effect places shares in suspended animation. Algorithms and index

funds churn and freeze the markets respectively, the combined ef-

fect of which is to take an already fragmented ownership and scrub

it of any residual meaning.

One nal trend Id point to is the rise of trustee ownership. More

than 70% of all publicly traded shares are held by trustees (mostly in

pension funds of unions and universities), who are legally respon-

sible for making decisions solely in the interests of the beneciaries.

But they dont, because the near universal expectation of trustees is

that they behave passively. These trustees likely hold more than 50%

of the voting shares of each of the Fortune 500, yet their inuence is

negligible by choice. So we have a controlling percentage of public

companies in the hands of trustees who act powerlessly in the arena

of the manager-kings.

David W. Anderson You held up as positive examples a number of

Canadian families who own controlling interests in public com-

panies. Yet in some cases, they rely on multiple voting shares or

controlling interests to hold power. Investor advocates, your-

self included, have long championed the democratic principle

of one share, one vote. With todays dispersed and disengaged

investors, doesnt that principle only reinforce the status quo?

Robert Monks Yes, I was wrong. One share, one vote was one of the

Ten Commandments of my governance life. The nature of owner-

ship 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 busi-

ness, able to sustain a long-term vision and apply their personal val-

ues 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

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

particular are committed to improving the world and they are run by

well-resourced staffs. Asking them to take on a constructive owner-

ship role ts 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; universi-

ties 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-

nies from accepting a larger role in turning the tide?

Robert Monks Most directors are rst class people operating in a

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 priori-

ties. 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 repre-

sents 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

board and CEO?

Robert Monks The CEO has to have the power to carry out the strate-

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 enter-

prise. Its difcult 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 de-

cisions 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 prin-ciple 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 o The

Anderson Governance Group in Toronto, an independen

advisory frm dedicated to assisting boards and manage-

ment teams enhance leadership perormance. He advises

directors, executives, investors and regulators based

on his international research and practice. E-mail

[email protected]. Web: www.taggra.com

anderson in dialogue with monks (the director's chair) - listed (jun 2013)

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