Robert A.G. Monks has a long history of pioneering work on corporate accountability. From his tenure as first Department of Labor pension administrator (ERISA) during the Reagan administration, to his controversial 1991 campaign for a seat on the board of Sears, Roebuck, to co-founding (with Nell Minow) Institutional Shareholder Services (ISS) in 1985, to co-founding LENS (1991), The Corporate Library (1999), and co-authorship (with Minow) of the foundation text, Corporate Governance (1985, with 5th edition forthcoming), as well as many related books, Monks has helped elevate corporate governance to the level of a profession.
We checked in with him about recent regulatory changes, and their implications.
Marcy Murninghan: What’s your perspective on the corporate governance reforms enacted at the Federal level?
Bob Monks: The year 2010 has been a very confusing one for corporate governance because it started in a very auspicious way. The White House was talking about “no good crisis should be wasted”. For people who wanted to see reform steps made in corporate governance, this gave the impression that it was going to be a year of massive change and hopefully to fulfill the wishes that we’d had for really many years.…
My surmise is, that [in April] the business community came to the conclusion that the recovery was not going to be as strong as everyone was trumpeting, that there were going to be real problems with unemployment, and a continuation of a recession. Therefore, attention to any reform had to take second place to the real problems in the economy. The business community took the opportunity, then, to turn on corporate governance, and to abort most of the [proposed] changes. I think that the, at the moment, you’d have to say that the [corporate governance reform] effort of the last 30 years has been aborted
MM: Why do you say that?
BM: Because the business community appears to feel quite comfortable about its ability to influence legislation, to influence the drafting of regulations, to influence enforcement. … They’re increasingly concerned by the prospect of being meaningfully accountable in a legitimate governance system to shareholders.
MM: You’re referring to proxy access – namely, shareholder rights to nominate board candidates?
BM: Yes. It’s quite difficult to understand in advance what the impact of that is. I can just tell you my experience.
MM: You’re referring to the 3 percent ownership threshold in the new SEC proxy access rule?
BM: Yes. My experience is, it is very difficult to get institutional investors to act in concert. Mainly because all trustees, with an obligation as fiduciaries to their own beneficiaries, are extremely allergic to appearing to be delegating or diminishing in any way the purity of that commitment. And for a trustee to cooperate with other trustees, and give up some sovereignty of the control, means putting themselves in a position where something may happen – that might marginally differ from what they would have done if it was entirely up to them. This creates a level of anxiety in the trustees, as to whether they’ve created liability for themselves. They subject themselves to criticism. Therefore, it’s very unlikely to be able to put together a coalition of trustees.
You have the problem of, How do you get 3 percent? A few of the index funds, who are among the least likely to be proposing directors, might have 3 percent. But very few of the “active investors” do — I don’t believe CalPERS has 3 percent of any of the top 100 companies. So, it may be that once again the apparent reasonability of a goal like 3 percent, in fact, is not [easily] met, and therefore the provision is dead on arrival.
MM: So you dispute the viability of these thresholds, and believe there’s a problem with fund collaboration – large funds, particularly – on who would be a good candidate to nominate, or what the optimal criteria might be, for board membership.
BM: You know, it’s a lot easier to get a group of institutions to agree that they want to change a board, than it is to get a group of institutions to agree on a particular individual to be selected as their candidate. … And in the public fund area, if you’re putting up a person as a nominee, you are making a political statement. … Reasonable people can disagree. The recent Supreme Court nomination hearings are an example, that people can disagree about people, even people who on their face seem to be overwhelmingly qualified. Nevertheless, reasonable people can think that they’re not appropriate for the particular position. … If you’re a public fund trustee, and you have to get reelected by the membership to your position, are you going to take that chance?
MM: That’s a pretty discouraging picture. Where are the bright spots? What about the impact of interactive technology on corporate governance and board elections?
BM: Well, this certainly is part of the good news, because it is now possible to deal with all of the theoretical conflicts of interest, and to allow for meaningful participation by all those with a beneficial interest, who represent about 70 percent of the holdings. Modern technology provides the realistic prospect that you can be in touch with the beneficial owners – who are the ultimate owners of securities – at no cost, and that they can communicate, again, at no cost, timely instructions to vote. So, the whole problem of legitimacy can be solved today. And that’s an enormous step. So, in theory, we’re in a position where it actually is possible to think of a solution that is really elegant, and that, in time, can be very good.
But, having said that, I don’t want to obscure the rather unhappy note that one shouldn’t be confused by the theoretical possibility of a correct solution, and the absolute absence of libido, by those with power to accomplish it. And indeed, it would appear worse than that because, by the middle of 2010, the business community appears to have made a decision that they would oppose advances in corporate governance and they would prefer to take their chances with governmental regulations and the courts.
EDITOR’S NOTE: This is the first in our Notable People interview series here at The Murninghan Post, featuring in-depth conversations with thought leaders and doers in the broad field of sustainability policy and practice, corporate governance, and investing.