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Issues of the Ariadne Capital Journal - Through the
Maze
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| Contrasting
Perspectives on Corporate Governance |
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| By
Bob Monks
Speaker: Robert Monks,
Founder of LENS and Deputy Chairman of Hermes LENS
Asset Management
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Bob Monks has played a pioneering
role in the development of shareholder activism both in the
US where he founded LENS and in the UK, where he is Joint
Deputy of Hermes LENS Asset Management and has played a prominent
part in the establishment of the Hermes Focus funds.
US corporate governance, according to Bob Monks,
is characterised by relatively weak boards and weak shareholder
powers. In the UK, under the 1985 Companies Act, a group of
10% of corporate shareholders may call an EGM at any time
in order to remove members of the board of directors. On the
other hand, shareholders in the US have consistently failed
to force through reforms to make the boards of corporations
subject to election and removal by shareholders. At recent
company meetings, 66% of the shareholders of Gillette and
80% of the shareholders of Ingersoll Rand failed to force
through resolutions to have shareholder votes for board elections.
While boards of both UK and US companies are
often self-selecting and self perpetuating, in America they
tend to be a cosmetic appendage and at worst a mere figleaf
to cover naked and unchecked corporate capitalism. In the
US Relatively few directors can be regarded as independent
in any meaningful sense. And an undue concentration of power
resides in the Chairman/CEO ('the biggest gun in the West'),
more often than not the same individual. No one elected the
CEO of Exxon yet he would rank #17 in a list of heads of countries
ranked by size. Insofar as the roles of Chairman and CEO are
separated in the UK, the Chairman's role equates to that of
'headboy' or even first among equals.
Given his view that US shareholders lack the
power to remove board members, what checks and balances are
there for the US shareholder? Shareholders of a business clearly
cannot run it-- they are not equipped to do so and it is the
management's job. He suggested that one way forward in the
US would be to hold directors financially liable under trust
laws. This would promote good corporate governance, since
to date, no director in the US has been assessed for money
damages for deficiencies. This would remove the conflict of
interest problems which shareholders face in raising difficult
and embarrassing issues with a company's senior executive
management while managing the company's pension funds. If
they have a statutory responsibility enshrined in trust legislation
to exercise corporate governance responsibilities this embarrassment
would be removed. Another way forward would be to develop
greater corporate conscience, exemplified by Christopher Gent's
return of his bonus at Vodafone; but Bob pointed out the absence
of the 'Shame Gene' in US: if it isn't prohibited by law then
it is considered appropriate, exemplified by Dick Grasso's
pursuit of his NYSE bonus through the courts. Business in
the UK, Bob said, is driven by principle, while in the US
it is driven by rules.
Reflecting Sarbanes-Oxley, the first Federal
Legislation in 70 years, he pointed out that the SEC had been
largely inactive for almost 20 years - since the turbulent
markets of the 1980s. There is a timeliness about the current
concern for board performance and corporate governance, the
more so because prosperous markets are bad for reforms. When
markets rise, corporate governance falls. The prolonged bear
market provided a great opportunity for corporate activists.
The current Administration's 'Skull and Bones' operator had
nonetheless turned out to be a man of principle and who had
aligned himself with the two Democrat Senators who serve on
the SEC. So we may be seeing a change in the Federal attitude
to corporate governance. However, Federal initiatives have
their limitations. Bob was sceptical about the advance of
Federal law - as opposed to attitude - in this area, saying
dryly: "If the answer is the Federal government, then you
have asked the wrong question." Moreover, US Corporation Law
depends greatly on the state where a corporation is incorporated
and on the exchange where it is listed. There is no such thing
as national company legislation in the US---exemplified by
the fact that Delaware has a highly developed legal framework
and case law for incorporation and corporate control, giving
rise to the enormous influence exercised by Leo Strine, Vice
Chancellor of the Delaware Court of Chancery.
More broadly, Bob Monks saw the current state
of corporate America as a symptom of a larger malaise. The
US has evolved into corporatist state which is effectively
unaccountable and undemocratic. Business provides the models
by which social and political discourse is conducted, and
the people to implement those social and political policies.
And business is trusted above all other stakeholders by the
current US Administration. The first meeting post 9/11 at
the White House was with the Round Table of heads of corporate
America--a move to reassure America that normality was returning.
From: Gow & Partners Breakfast Briefing at
the Cavalry & Guards Club.
Robert A. G. Monks is the founder and president
of LENS, Inc., an activist money manager that invests in underperforming
companies and uses shareholder rights to increase value. He
is internationally known for his work in corporate governance,
shareholder activism, executive compensation, and institutional
investor fiduciary responsibility. He brings to his current
work a wealth of experience (in both the private and public
sectors), pedigree, and financial reserves, and he freely
draws upon all three to advance his cause. After graduating
from Harvard Law School, his career path has occupied many
shades of the business vocational spectrum, particularly with
respect to large institutional investors. In the private sector,
he has been a partner in an established Boston corporate firm,
a partner of several investment management organizations,
CEO of a substantial energy company and, eventually, in 1979,
chairman of both the Boston Company and the Boston Safe Deposit
and Trust Company. (In 1981, Monks spearheaded the negotiations
leading to the merger and sale of the Boston Company and Boston
Safe Deposit and Trust to Shearson/American Express; the two
companies subsequently were purchased by Mellon Bank Corporation
in 1993). He has served as a director of a dozen public companies,
including, most recently, Tyco International and the Jeffries
Group. |
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Ariadne Capital Journal - Through the Maze Volume
4, Edition 2
