A conversation with Bob Monks about responsible ownership as the path to corporate accountability.
A stray cat, an abandoned car, a multinational corporation: What they have in common is that they all need owners. So says Bob Monks, grandfather of the responsible corporate governance movement, who for the last 30 years has been encouraging large stockholders to act more like owners. He believes this is a key way to make corporations more accountable for their social and environmental impacts.
Monks seems to have invented the term "corporate governance." And he had a hand in creating some of the field's leading institutions. He was a founding trustee of the Federal Employees' Retirement System, appointed by Ronald Reagan in the 1980s. He served in the U.S. Department of Labor, overseeing the entire pension system. With Nell Minow he founded the Corporate Library, a research firm providing corporate governance data and analysis, including board effectiveness ratings.
CROs address the challenge of creating a unified approach to corporate responsibility.
In November 2000, I attended the annual Business for Social Responsibility Conference, where I was eager to explore whether the CSR movement could influence internal ethics and compliance programs. I looked forward to a workshop led by the Chief Ethics Officer at Merck and the head of Social Responsibility for Enron.
The credentials of the companies were top notch. In 2000, Enron received six environmental awards. It had progressive policies on climate change, human rights, and anti-corruption. Merck had an industry-leading ethics program. It had a well-written and user-friendly code of conduct and its extensive ethics program was the envy of the industry.
However, by the end of the session, as well as by the end of the conference, all I had learned was that ethics and CSR were not on the same page. CSR had its agenda and ethics had another, and there was very little room for coordination and very little talk of integration.
A leading expert on corporate governance offers some bold suggestions for making directors more accountable.
If you ask Charles Elson to assess some of this year's oversized CEO compensation packages, he'll tell you they reflect the quality of decision- making in the boardrooms of many American businesses. "Today a manager can do a poor job, get fired and end up making as much as a highly successful entrepreneur," he says. "That's bizarre."
While oftentimes critical, Elson is no corporate outsider. As a lawyer and Director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, he has a unique vantage point from which to monitor how American companies are run. Indeed, the state of Delaware is in many ways the heart of corporate governance in the U.S. Some 60 percent of all Fortune 500 companies and half the firms listed on the New York Stock Exchange are incorporated in Delaware.
The guilty verdicts were not the end of the story. Only six weeks after his conviction for conspiracy and fraud, Enron founder and former chief executive Kenneth Lay was dead, the victim of a heart attack. Jeffrey Skilling, Lay's successor at the now defunct energy giant, continues to maintain his innocence and has vowed to appeal; nonetheless, he's likely to receive a hefty prison term when sentenced. As the drama plays to its final conclusion, corporate America watches with bemusement and searches for lessons. Is the Enron case a "Verdict on an Era" gone by -- as The New York Times suggests? Or do the "Guilty Verdicts Provide 'Red Meat' to Prosecutors Chasing Companies?" -- as The Wall Street Journal speculates?
There's probable truth in both scenarios. In interviews we've conducted with executives of companies large and small, it's clear that the Enron case will influence discussions and decisions in corporate boardrooms for years to come.
More than 100 companies are reportedly under investigation for backdating stock options for senior executives, a practice characterized as “disgusting and repulsive” by Senate Finance Committee Chairman Chuck Grassley (R- IO). Here are some excerpts from prepared testimony before the committee.
Nell Minow, Editor, The Corporate Library, noted that “When the tax code was changed to prevent executive compensation of over $1 million to be deducted unless it was tied to performance, two things happened. First, everyone got a raise to $1 million. Second, everyone got boat-loads of options. The very definition of a “mega-grant” had to be changed, so it now can be as much as eight times the CEO’s base pay and bonus. Option grants only work when: 1) The executives make money based on how the company does, not on overall market gains; 2) The number of options is not so excessive that there is a mountain of pay-out for a molehill of performance; and 3) All information relating to the options is promptly, clearly, accessibly, and comprehensibly disclosed…CEOs are the only ones who pick the people who set their pay, indeed they pay the people who set their pay.
The Committee on Capital Markets Regulation, a newly-formed private-sector initiative with close ties to the Bush administration, says it will have an interim report to policy makers by the end of November regarding proposed changes to the 2002 Sarbanes-Oxley Act and other regulations affecting the “competitiveness of the U.S. capital markets.”
The committee is co-chaired by former White House economic advisor Glenn Hubbard, now Dean of the Columbia Business School, and John L. Thornton, former president of Goldman Sachs. Hal S. Scott, a Harvard Law professor, is Executive Director. Members include the CEOs of DuPont Co., Office Depot Inc., Deloitte & Touche and PricewaterhouseCoopers.
Treasury Secretary Henry Paulson signaled support for the committee’s work, saying, “This issue is important to the future of the American economy and a priority for me.”
The committee says it will focus on “liability issues affecting public companies and gatekeepers” with a focus on securities class action litigation, criminal enforcement and federal versus state authority; Sarbanes-Oxley, “with major emphasis on Section 404, which requires auditors and senior managers to certify the adequacy of internal controls”; “overall regulatory processes to allow the United States to do a better job of evaluating changes of law and regulation”; and shareholder rights.
Shareholders are using their votes to address governance and social issues.
Shareholders sent some loud and clear messages to corporations during the 2006 annual meeting season, with governance-related issues high on the list and with hedge funds emerging as a more active voice. Proposals to repeal classified boards—a once fashionable anti-takeover tactic—drew a whopping 67.6 percent average vote, reports proxy advisory service Institutional Shareholder Services (ISS), up from 63.2 percent last year. At 87 companies, proposals to require a majority vote of electors drew an average 47.8 percent, up from 43.7 percent last year.
Patrick McGurn, Executive Vice President of ISS, notes that hedge funds began flexing their muscles more aggressively this proxy season. “A significant number have adopted activism as an investment strategy, or will in a particular situation.
Glass, Lewis & Co., a San Francisco-based investment research and proxy advisory firm, has sold a 19.9 percent stake to Xinhua Finance of China. Xinhua said the acquisition would advance its efforts to bring transparency and corporate governance to China. Xinhua Finance chief executive Fredy Bush noted that China’s range of shareholding alternatives, from state-owned shares and legal person shares to free float shares, “can make the voting process for a foreign investor very complicated.”
Published in CRO Magazine, Fall 2006.
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