INTERVIEW Fig Leaf Boards

Born into wealthy New England family, Robert Monks graduated from Harvard Law School and followed well-trodden career path: partner in Boston law firm; vice president of an investment management company; board member and chairman of the board of The Boston Safe Deposit & Trust Company. During the Reagan administration he also served in the Department of Labor as Director of the Office of Pension and Welfare Benefit Programs.
Yet today Monks is not CEO of giant multinational, or US Senator. Instead he is shareholder activist and one of the world’s leading experts on corporate governance. Somewhere along the path from Harvard Law School to corporate boardroom Monks had flash of clarity. He realised that in many companies, in America and elsewhere, the custodians – senior executives – were running these companies to the shareholders’ detriment.
For the past 20 years Monks has been fighting in the shareholders’ corner. He founded Rockville, Maryland-based Institutional Shareholder Services, Inc (ISS), which with offices in North America, Europe and Asia has become the world’s leading provider of proxy voting and corporate governance services. He has also written numerous books on corporate governance including: Watching the Watchers (1996), Corporate Governance (2001), and The New Global Investors (2001).
Heeded by boardrooms and politicians alike, Monk’s views have gained considerable resonance around the world, particularly in light of the spate of corporate scandals from Enron to Parmalat.
He talked to Stuart Crainer for The Director about abuse of power and reinventing the corporation.

You don’t fit the stereotype of an anti-capitalist protestor.
I am corporate reformer, not anti-capitalist. My views are radical but I am not preaching revolution. I am talking about making the system work more efficiently and more fairly.

You describe the American president as the ultimate CEO. Is this compliment?
Not at all. It is bad thing in the context of the United States. One of our founding principles, since the Declaration of Independence, has been the distribution of accountable power. Our constitution disperses power.
Now other sources of power have emerged – the Oprah Winfrey Show for example. The political model has been supplanted by an economic system in which authority is exercised along the lines of totalitarian system. Our president now behaves in the autocratic and unaccountable way characteristic of CEOs and contrary to our best traditions. Corporatism has won. Corporate priorities are now routinely accepted as national priorities.
But political leader needs to be more circumspect, winning the support of the public and other constituencies. It is messy and troublesome but it minimises the risk of the stupid use of power. The corporate CEO is now the closest thing we have to an absolute dictator.
There is no attempt to understand or explain where corporations fit. Instead, there is morass of misunderstanding. There can be no ‘philosophy’ of corporations. They are legal creations, pure and simple. They are amoral, impersonal and profit maximising.

But haven’t corporations long wielded power?
Yes, increasing corporate power and presence is evident on many fronts. The influence of interest groups, for example, is nothing new in US politics. What is new is the scale, how blatant it is now with the highest officials weaving between directorships and CEO jobs and high appointed and elected political office. The failure of leadership by those from whom it should be expected, combined with government entropy has created political crisis; crisis of power filled by big corporations.

When did the current nature of CEO power begin to emerge?
I’d go back to the creation of the (US) Business Roundtable in the 1970s. At the time the business community was having miserable time dealing with foreign competition, unions, regulators and so on. Then John Connelly, the former governor of Texas, came up with the roundtable idea. The Business Roundtable didn’t, initially, have big Washington presence. There were no staff, just CEOs from large companies who belonged by invitation only. The executive committee assigned projects to CEOs and they went back to their companies and had their employees work on the projects. Public issues were addressed using the best paid executive resources.
The Business Roundtable was very effective. The CEOs argued as group, purportedly for their companies but also, effectively, for themselves. They used it to bully the accounting profession which withdrew its objections to stock options being issued without reflection on the profit and loss statement. Consequently, CEOs made lot of money.

Are CEOs over-paid?
Twenty years ago, CEOs were happy to receive salaries which were 30 to 40 times those of entry-level employees. Now 1000 times multiplier is common. This is simply the result of exercising power and reflects the all dominant corporatist ethic.

How will – or should – things change?
It is difficult to see how things will change. You can’t really regulate companies from the outside. If government gets too tough with corporation, the corporation simply moves outside the country. Look at the number of German automakers building cars in the US. Look at Scandinavian companies moving to the UK. So, as it is difficult to regulate, the limitation on power must come from within.

From the board of directors?
No. Boards in the US are essentially cosmetic, existing to forestall concerns about the absolute power of CEOs. They give the impression of acting like monitors. Boards are basically fig leaves. Look at the pattern of CEOs acting as presiding officers of the board. It doesn’t matter who they are, it is impossible for someone to monitor their own conduct.
The real owners of corporate America are the institutions which represent 100 million mutual fund holders and pensioners and who own most of the voting equity in publicly-held companies. They have an obligation to act as owners, to preserve and enhance value. They have been ignored, but increasingly they are activist owners. Now that’s real legitimate lever. The owners, after all, aren’t beholden to anyone.
However, these institutional funds are financial conglomerates in their own right, holding massive equity stakes in many companies. Conflict of interest is the cancer that has immobilised the real owners of corporations. So, CEOs have become more powerful and all too often destroyed teamwork in companies. It is the American way to ignore something then ignore it some more.

Don’t shareholders already have forum?
Only the annual meeting. That’s when companies must listen to their owners. Indeed, it is the only time they are required to do so.
I was given four minutes to speak when I attended the ExxonMobil annual general meeting. This was timed. After four minutes that was it. Considering that my family has few million dollars invested in the company I thought that was an impertinence. I was very polite but referred to the CEO as an emperor. CEOs have empires and entourages so they are deserving of the title. They’re not bad people – though some are just Darwinian species.

Would changing the title CEO be useful?
Semantics are important. You hear intelligent people talking about things that are simply wrong. They talk, for example, of directors being elected. That’s simply not true. If they are elected it is in elections akin to those in Eastern Europe in the Cold War years. Then we have leaders from some of the world’s most respected institutions who simply don’t and won’t lead and government which doesn’t enforce laws.The term “independent director” is contradiction because they are group of self-selecting people. Having the status of director is important to people. They are loyal to the rules of the club rather than to the shareholders. If any independent directors are headstron

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