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The Director’s Chair

Robert Monks

It’s broke, let’s fix it
Photography by Sarah Beard Buckley

In The Director’s Chair with David W. Anderson: Shareholder activist and avowed capitalist Robert Monks doesn’t have it in for senior corporate managers—just the system that gives them all the power and too much pay

If you read Robert Monks’ bio—founder of Institutional Shareholder Services (ISS), author of eight books, and a chair and director many times over—your first inclination is to say that’s résumé enough for two. Yet the substance of his work—shareholder and corporate activism against “manager-kings,” the loss of active ownership, the “capture” of government by corporations— continues to drive him. Here, with governance adviser David W. Anderson, the legendary, blunt-spoken Monks shares his latest views.

Robert Monks
Primary role Publisher, 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 councils Co-chair, World Economic Forum Council on Corporate Governance (2008); administrator of the Office of Pension and Welfare Benefit 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 Emperor’s Nightingale (1998); Watching the Watchers (1996); Corporate Governance (with Nell Minnow, 1995); Power & Accountability (with Nell Minnow, 1991) Honours k Directorship 100 Hall of Fame Award, Directorship Magazine, 2008 k Outstanding Financial Executive Award, Financial Management Association, 2007 k Special Award for Corporate Accountability, Investor Relations Magazine, 2004 k International Corporate Governance Network Award, 2002 Current age 79 Age when first became a director 21 Years of board service 59

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The Director’s Chair
David W. Anderson You’ve been a lawyer, CEO, director, activist

Robert Monks

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

investor and pension expert—and invented the proxy advisory and corporate governance rating industries. In the process, you became the world’s foremost authority on corporate governance and what you term “democratic capitalism.” What’s your view on capitalism today? Robert Monks Ownership is a fiction, governance a mirage and management 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 factors—the capture by management of both corporate and government agendas—have 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 I’ve served on boards in five 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 corporate practice to having a board that functions in accordance with legal tradition and lore—that is to say, a board with independent authority, information and perspective. In fact, boards are really just another 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 That’s 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 average worker pay expand an order of magnitude, without merit. CEOs have convinced regulators and politicians that profit maximization is the highest goal of the corporation, allowing them to externalize corporate liabilities, avoid taxes and be exempt from socially responsible expectations that would seem normal to you and me. We’re told that legal restraints on corporate power can be trusted to keep corporations in line, but the evidence is starkly opposite. Not only are the theoretical legal restraints on corporations largely illusory, lobbying 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

ownership structure itself of many of today’s public companies is at the root of the problem. If that is the case, then what is the alternative? Robert Monks That’s right, weak ownership control has created a vacuum that management, over decades, has increasingly been happy to fill. This has given management the keys to the kingdom. Being human, they’ve 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 corporation 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 purpose—to get something meaningful done through the organization of people—from which the business draws its legitimacy. Owners are accountable for delivering on this purpose, and thus have important responsibilities for how the business functions in that pursuit. The just reward to owners for success in achieving the business’s social purpose is a profit, such as they are able to make by the application of their business smarts and values.
David W. Anderson You used the term “drone” corporations in

describing manager-controlled businesses—the majority of widely held public companies that operate without the guiding hand of their owners. What does responsible ownership look like? Robert Monks You’re 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 people—flesh and blood. KC Irving, whom I knew, didn’t want to have dirty washrooms in his gas stations. I doubt the CEO of Exxon cares—or knows. If you anthropomorphize corporate power, you then have a range of judgements about what is appropriate or not, that reflects human judgement. If not, you just have cost-benefit analysis, which means that washrooms are okay somewhat dirty. However, when a leader has a personal brand at stake, as owners do, then they behave differently. Responsible owners are accountable. They’re vulnerable to the consequences of their company’s actions and outcomes. So they care, and make corporate decisions with both the business and their conscience in mind. That’s 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 first was that corporations’ very success at creating efficiency made them big and thus concentrated economic wealth and power. The second was that this power was increasingly under the control of a small elite—the managers—and not the owners. Dispersed economic ownership across millions of investors diluted investor power because corporate democracy doesn’t exist. That power became concentrated in the hands of management. Ownership had parted ways with control.

you saying it’s just bad business?
Robert Monks I’m a profit-loving capitalist and a Republican. I care

very much about business success. It’s not inconsistent to say that business, when done right, can and should benefit society. My problem with the capitalism as practiced by manager-kings is that we actually see significantly lower average shareholder returns from these “drone” corporations, when compared to corporations with owners in control. Not surprisingly, drone corporations are also worse corporate citizens, hurting society as a consequence of their priorities—which place far more value on managerial enrichment than the welfare of their employees and communities.

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The Director’s Chair
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 first has to do with the scale of our capital markets, in terms of the stock capital and volume of trading in those shares. The inflation 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 owners, so they don’t. 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, algorithms—machine-based computational decision rules, which account for half of all institutional trades—have not only replaced human judgement in constructing investment portfolios, they have made that decision-making subject to arbitrary data points in the market entirely unrelated to the businesses being traded. 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 effect of which is to take an already fragmented ownership and scrub it of any residual meaning. One final trend I’d 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 responsible for making decisions solely in the interests of the beneficiaries. But they don’t, 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 influence 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

Robert Monks

particular are committed to improving the world and they are run by well-resourced staffs. Asking them to take on a constructive ownership role fits their mandate and is not threatening to their returns.
David W. Anderson Have you had encouraging responses from

trustees?
Robert Monks Most I’ve spoken to are utterly disinclined to change

the status quo. The power of corporations again surfaces; universities 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 What’s preventing boards of public compa-

nies from accepting a larger role in turning the tide?
Robert Monks Most directors are first class people operating in a

bad system. In the U.S., most boards are chaired by the CEO, which tells you that CEOs aren’t interested in independent oversight. The CEO thus controls the agenda and information that gets to the board. There isn’t a sense that directors are invited to air their own priorities. It’s a matter of control; CEOs organize the corporation so that control over the agenda and allocation of resources are tight. They don’t want to open up discussion to a general inquiry. This just represents 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 What’s the right balance of power between a

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

Canadian families who own controlling interests in public companies. Yet in some cases, they rely on multiple voting shares or controlling interests to hold power. Investor advocates, yourself included, have long championed the democratic principle of “one share, one vote.” With today’s dispersed and disengaged investors, doesn’t 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 ownership is so altered that it makes no sense now and is in fact counter productive. It’s better to have owners who are dedicated to the business, able to sustain a long-term vision and apply their personal values 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

gies and make resource allocations directed by the board. The board’s 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 didn’t 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 there’s trouble in the enterprise. It’s difficult for CEOs to see these things at times.
David W. Anderson There’s 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. It’s virtually impossible to understand these things well enough to make good decisions if you’re not there full-time. Directors ought to bring their God-like wisdom and laser focus and be humble enough to know they don’t know the business deeply. It’s the job of the CEO and principle management to make strategy and propose it to the board for its critical review—bringing educated, bold questions. David W. Anderson, MBA, PhD, ICD.D is president of The Anderson Governance Group in Toronto, an independent advisory firm dedicated to assisting boards and management teams enhance leadership performance. He advises directors, executives, investors and regulators based on his international research and practice. E-mail: david.anderson@taggra.com. Web: www.taggra.com

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

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