eviews by the editor of Corporate Governance and a few others; those by other reviewers are linked only by book author name within the author's list. Corporate Governance is working in association with Amazon.com Books (the world's largest bookstore) to bring you a selection of the best books on the subject. Please, buy your books using the hyperlinks on the Corporate Governance site. When you do, you support our efforts to keep you informed. We welcome recommendations for additional reviews.
Margaret M. Blair ~Scott R. Bowman ~Carolyn Kay Brancato ~John A. Byrne ~Jonathan Charkham ~Donald H. Chew ~Betty Jane Dunn ~Neil Fligstein ~Howard M. Friedman ~James P. Hawley ~Doug Henwood ~Michael T. Jacobs ~Art Kleiner ~Alexandra Reed Lajoux ~E. Doyle McCarthy ~Robert A. G. Monks ~Michael Novak ~N. E. Renton ~Scott Rodrick ~Bob Tricker ~Susan F. Shultz ~Michael Useem ~Ralph D. Ward
James P. Hawley and Andrew T. Williams
Hawley, James P. and Andrew T. Williams, The Rise of Fiduciary Capitalism: How Institutional Investors Can Make Corporate America More Democratic, University of Pennsylvania Press, 2000.
Many have chronicled the shift from owner-founders to managerial capitalism and on to fiduciary capitalism but Hawley and Williams are among the first to spend the majority of a book on the implications of fiduciary capitalism and where this recent development might lead. In 1945 corporate equity was valued at slightly less than $120 billion; more than 90% was owned by individuals and about 4% by institutions. The value of corporate equity has grown enormously to $7.8 trillion in 1998. While the share of individuals has fallen to 44%, the proportion owned by institutions has risen to 48%. State and local pension funds owned about 1% of outstanding corporate equity in 1969; by 1998 they owned more than 10%.
Ironically, although the Employment Retirement Income Security Act has been interpreted by the Department of Labor to require proxy voting by ERISA funds on behalf of beneficiaries, the authors point out that the Employment Retirement System Act (FERSA), established for federal employees, provides that voting rights are delegated to the administrator, appointed by the trustees. We don’t trust our federal trustees to vote the shares of what is likely to become the world’s largest institutional investor. Fortunately, other funds, such as the California Public Employees Retirement System (CalPERS), are not under the same restrictions and have become effective owners whose monitoring has added value.
Hawley and Williams review the record of corporate governance interventions. A few of their observations are as follows:
- Board independence does matter for some tasks such as replacing poorly performing CEOs and not overpaying for acquisitions.
- Visible and aggressive activism results in substantial increases to shareholder wealth but quieter activism doesn’t yield the same results.
- Binding bylaw amendments are potentially one of the most important new tools for institutional investors.
- Tying director compensation closely to firm performance may have the unintended consequence of making the board more risk adverse and deferential to the CEO because, unlike the typical diversified shareholder, board members will be subject to the fortunes of one firm.
So, where are we headed? Ideas include:
- Institutions could slim down their portfolios. Holding larger proportions in each firm would encourage further monitoring and a sharing of such responsibilities.
- Shareholders could encourage corporations to purchase the services of monitoring firms to provide an independent analysis of proxy issues (see the Corporate Monitoring Project).
- Split chair and CEO positions.
- Include suppliers, employees and other key stakeholders more directly as shareholder and on boards.
- Revise SEC rules to loosen barriers to collective action.
- SEC, banking and state insurance regulators should impose a "statement of obligations" with respect to proxy voting similar to the Department of Labor’s Avon letter and subsequent guidance.
- Ban broker voting. Non-votes would not be counted.
- Guarantee full proxy-voting rights to employees in ESOPs by amending ERISA.
Hawley and Williams argue that many large funds have become "universal owners," since 1/3 of the assets of the 200 largest defined benefit funds are invested in indexed portfolios. As such, they should not only be concerned with monitoring individual firms but also with portfolio-wide effects. Universal owners will still need to pay attention to the alignment of manager and shareholder incentives but that won’t be enough.
For example, the authors argue that universal owners have a responsibility, derived from the duty of care, to oppose policies that create negative externalities, like pollution, and support policies that produce positive externalities, such as corporate education and training programs. In contrast to single firms who may find it advantageous to throw off the costs of pollution to society, universal owners will suffer the costs of cleanup through deteriorating infrastructures, higher taxes and other costs to their other holdings.
At the same time, universal owners are able to capture nearly the full benefit of positive externalities, like corporate training programs, because even if trained employees subsequently leave the firm where training occurred, they are likely to find new employment with another universally owned firm. Since the size and breadth of universal owner portfolios expose them to economy-wide risks and rewards, their programs must increasingly be concerned with the long-term growth and economic efficiency of national and world economies.
Universal owners who want to maximize shareholder value will need to develop "public policy" positions to ensure a well-trained labor force, effective infrastructure, legal and regulatory environment, as well as monetary and fiscal policy. They want to ensure the corporate environment encourages efficiency and doesn’t externalize costs.
The authors provide several examples of such public policy activities, most of which appear to be drawn from CalPERS. These include:
- policy guidelines on issues such as the environment;
- surveys of firms on particular policies, such as high-performance workplace issues;
- monitoring the lobbying efforts to ensure one firm doesn’t put others at a competitive disadvantage;
- grading portfolios on particular issues, such as adherence to corporate governance guidelines;
- targeting firms on specific issues, such as the controversy surrounding logging ancient forests or producing defective products.
They envision that institutional investors will develop areas of expertise and "coat tail" off each other to create a more efficient division of labor.
Of course any volume on the cutting edge is bound to raise as many questions as it resolves and The Rise of Fiduciary Capitalism is no exception. Their troubling conclusion discusses the problem of who will watch the watchers. While a growing professionalism at corporate boards and institutional investors may prevent the most egregious abuses, the authors believe that trustees holding tremendous power and wealth may soon face a tremendous backlash from the public if such power is perceived as being abused.
They end with a series of unanswered questions concerning the growing concentration of wealth in the hands of a relative few professional owners. Who will monitor the monitors? Government? The market? How do we protect beneficiaries from institutional abuse? Is fiduciary duty enough to assure appropriate behavior?
These are important issues that we are likely to grapple with for the foreseeable future. While government certainly has a role in monitoring the monitors, it is too often a captive of the very interests it is monitoring. As for the market, it doesn’t respect ecological and other needs ignored by current pricing structures.
While some, like myself, believe the impetus to act as universal owners will probably come from the ultimate beneficiaries, Hawley and Williams have their doubts. They see beneficiaries rising up and demanding more input as unlikely, since beneficiaries are "even more diffuse, disinterested, and disenfranchised" than the traditional Berle-Means shareholder. "Thus it is unlikely that beneficiaries as a group will ever be able to effectively ‘watch’ the fiduciary institutions." Our "best hope for effective monitoring is transparency coupled with competition between the institutions."
Visionaries, such as Robert Monks and Mark Latham, have proposed a heightened role for proxy monitoring firms to monitor and provide guidance to the management of portfolio firms. Maybe the rise of such institutions will provide the competitive core that Hawley and Williams see as the best hope for effective monitoring.
My own assessment is that such new institutions will play an important role but that we also need to rebuild our fiduciary institutions so they are more democratic.
CalPERS provides an excellent model of an institution that legitimates the enormous power of its fiduciaries by holding them accountable to members and stakeholders. Six of its 13 board members are nominated and elected directly by its members and beneficiaries. Four others serve as ex officio members based on their position as State Treasurer, Controller, Director of the Department of Personnel Administration and a designee of the State Personnel Board (SPB). Two members are appointed by the Governor, an elected official of a contracting public agency and an official of a life insurer. One is appointed jointly by the Speaker of the Assembly and the Senate Rules Committee.
CalPERS is far from perfect in providing mechanisms to let its members hold the board accountable – incumbents have several advantages over challengers, such as use of CalPERS funds for traveling to meet constituents while campaigning, and members have no initiative or referendum process. However, it is far more democratic and participatory than most institutional investors…and more successful. While many large institutional investors have become universal owners, CalPERS is one of the few to begin to look at the larger policy issues that Hawley and Williams argue will make corporations more democratic.
The Rise of Fiduciary Capitalism provides perhaps the best synopsis to date of how fiduciary capitalism developed but less of a guide concerning the difficult subject of "how institutional investors can make corporate America more democratic" than its title might imply. Still, the book is important as one of the first to recognize that fiduciaries, acting on behalf of universal owners, have a duty of care that extends to influencing public policies in order to generate both wealth and a healthy environment. Wide circulation of The Rise of Fiduciary Capitalism could accelerate that recognition and the ultimate shift towards more democratic corporations.
Back to the top
Doug Henwood
Henwood, Wall Street Verso, New York,1997. You know its not your usual investment book when the jacket quotes include the following from Norman Pearlstine, former editor of the Wall Street Journal: "You are scum...it's tragic that you exist." The author demonstrates an excellent grasp of the facts and a sense of humor as well. Buy Wall Street in hardback now from Amazon.com and save.
Henwood, editor of the Left Business Observer, first dispels "myths" and dishes up a number of interesting facts concerning the operations of financial markets. The turnover of capital is enormous: average holding period for U.S. Treasuries is a month; currency markets turn over a daily amount equal to the U.S. annual GDP. Wealth is not distributed equitably: the top 5% owns 94.5% of all stock held by individuals. The vast majority (90%) of corporate investment is internally generated. Corporate insiders are able to buy and sell with better-than-average market timing (even while acting within the legal limits of insider trading). Initial public offerings greatly underperform the market for years. Most money managers can't beat the averages, yet security and commodity brokers earned an average of $92,807 in 1994 (three times the average worker).
His most interesting chapters are the final two which deal with governance and Henwood's recommendations. He points out that markets aren't as perfect as its adherents say, otherwise shareholders wouldn't worry about "their" corporations; "rewards and punishments would be administered by the market." He raises the problem articulated by Berle and Means concerning the growth of dispersed ownership and managerial control. Since the mid-1990s Henwood sees that "shareholders are far less passive, boards less rubber-stampish, and managements less autonomous that any time since Berle and Means." During the 1980's there was a liquid market for corporate control typified by the leveraged buyout firm. However, soon unmanageable debt burdens brought the demise of the LBO as the major corporate governance force.
Shareholder activists, such as CalPERS, have risen to increase shareholder wealth by increasing shareholder control. Henwood points out that private pension funds, mutual funds and insurance companies have take a back seat role to public pension funds because of conflicts of interest. Yet, even if conflict of interest weren't a problem, Henwood believes that rather than solving the agency problem, activist shareholding simply adds another layer of potential irresponsibility. The best periods of U.S. economic growth have occurred when managers ran corporations and shareholders kept their mouths shut." "Shareholders should be vestigial; they have no useful role. Instead, they have grown increasingly assertive over the last 15 or 20 years, disguising themselves behind a rhetoric of democracy, independence, and accountability." Henwood doesn't buy into the "them are us" argument because even the pension fund portion of the market is concentrated. Under 40% of the workforce is covered and the richest 10% control 62% of the pension fund assets. "The point of 'shareholder activism' is to increase the profit share for rentiers. Any gains to people of modest means are accidental." He concludes his argument with the thought that since shareholders serve no useful purpose, firms should be turned over to their workers. That may be happening in Russia and China but I don't see that on the horizon in the U.S. unless current owners can be convinced that a gradual shift in that direction would be in their interests as well.
In looking for solutions, Henwood sees lessons to be learned from the Swedish wage-earner funds which were to eventually buyout corporate interests on behalf of workers. Business saw it as a direct challenge to capitalist ownership and because it didn't effect the shop floor, workers never gave it popular support. Henwood finds that socially responsible investing is, all too often, a marketing gimmick, with little impact on how businesses are controlled or profits distributed. He sees cooperatives and community land trusts as more promising but essentially marginal. In the end, he appears to advocate taxing wealth, restoring welfare and placing corporations under "a combination of worker, community, customer, supplier, and public control." "The need for outside stockholders, who provide little or no capital and less good advice, would be eliminated." How the reader is supposed to bring about such a grandiose vision is left unaswered.
Henwood has put a great deal more thought into critique than in providing anything like an inspiring vision of where society should go or how to get there. He is too ready to dismiss shareholder activists who he believes are not working for a worker's utopia but a managerial aristocracy. Yes, shareholders and workers have different interests but recently unions have become the most aggressive and successful of all institutional shareholders. The future of the American worker and of the American dream lies in a gradual shift. The empirical evidence shows that, overall, unions lower the profits of shareholders. However, there is also considerable evidence that unions enhance productivity. Just as unions often grow the pie and help workers take a larger slice, unions as pension fund fiduciaries might do the same. Workers around the world shouldn't be competing on the basis of wages but on productivity. Pension fund activists should be using their voting clout to shift more stock and decision-making authority to workers. Such a shift would both "grow the pie" and reduce the social inequities which appear to be Mr. Henwood's primary concern.
Michael T. Jacobs
Jacobs, Michael T., Break the Wall Street Rule: Outperform the Stock Market with Relationship Investing Addison-Wesley, 1993. Buy Break the Wall Street Rule in paperback now from Amazon.com or in hardback. (also see How U.S. Financial Regulations Reduce the Time Horizons for U.S. Investment)
Most investment books are written for speculators. They focus on a strategy for picking stocks though market timing, technical analysis, finding value stocks that are under priced, or growth stocks with good prospects. The problem is that over time, none of these methodologies achieve returns superior to the market average. As more and more investors realize this, they have chosen to invest in index funds. Yet, the more we do so, the less efficient our markets become since capital is no longer allocated to companies that produce the greatest wealth for each dollar invested.
Jacobs identifies our most common fallacy; treating stocks like commodities. Each share of stock represents ownership and a vote in what is to be done with corporate assets. Index investors spread their stock holdings so thinly, they minimize any influence they can have on each company. Break the Wall Street Rule is about how to be an effective owner, how to focus your attention on factors over which you can have some control, rather than the market. It is the first book written specifically for intelligent individual investors.
Jacobs supports his theory with facts. For example, he cites a study by Mark Cunningham which tracked "effective owner firms," those where substantial shareholders sat on the board. From 1980 to 1991 these 127 public companies outperformed the S? 500 by over 200%. Value investing is based on the notion that inefficiencies in the market eventually get corrected. But, "unless someone does something, the unattained value may never be achieved." Ineffective corporate managers are not self-correcting. Jacobs describes how the world of money managers is built around turnover and "soft dollar" commissions. The rules even pressure pension fund managers to churn and over diversify. According to Jacobs, "corporate governance" has gotten a bad reputation because many involved shareholders have used their holdings for social activism rather than to improve the value of shares.
Three overall strategies are identified for building a portfolio based on effective ownership.
Carefully pick 15 stock and serve as an effective owner.
Build your portfolio around the stocks of companies that already have effective owners.
Invest through a professional money manager who uses an ownership strategy.
Jacobs provides tips for each strategy and explains the basics of monitoring and governing, with additional focus on how to evaluate executive pay packages and initiate effective shareholder proposals.
The weakest link in this excellent book is that most individual investors will want to take the easiest route by letting a professional do the work. Unfortunately, few "corporate governance" funds exist. Mutual fund managers are trained in picking stocks, not in corporate strategy and corporate governance. The closest to an effective ownership fund is probably the LENS fund. They have done well but the minimum investment is $10 million and most of us fall a little short.
Equus II is another possibility. It invests in a small number of privately-owned companies. Criteria being used to determine whether to make an investment include "willingness of the company to permit the fund and its co-investors, if any, to take a substantial position in the company and have representation on its board of directors, so as to enable the Fund to influence the selection of management and basic policies of the company." Another possibility are the Mutual Series funds managed by Michael Price who recently succeeded in getting an independent director, Martin Solomon, elected to the board of Telephone and Data Systems. While few corporate governance funds exist now, this is an area where rapid growth can be expected within a few years.
Art Kleiner
Kleiner, Art art@well.com, The Age of Heretics: Heroes, Outlaws, and the Forerunners of Corporate Change, Doubleday, New York, 1996. Buy The Age of Heretics now from Amazon.com at a discount for $26.96 !
. Much of the work in the field of corporate governance has to do with the top levels of the corporate hierarchy, such as the problem of reducing "agency costs" by providing incentives to better align the interests of the board and CEO with those of shareholders. The heroes of Kleiner's book are, instead, concerned with reducing the psychic costs of work by better aligning the personal hopes and dreams of employees and the corporations they work for through organizational development (OD). Kleiner's subject matter ties in well with those, such as Blair, who emphasize the contribution to wealth creation of firm specific human capital. While Blair appears primarily concerned with enhancing the ability of corporations to create wealth, Kleiner acknowledges they are already good at that task; the issues he raises are in some way more fundamental...how can we reorganize corporate systems so that they reinforce democracy and other cherished human values?
For students of OD, or anyone who has been a process facilitator, the book is full of fascinating insights into the people we have tried to emulate...people like Douglas McGregor, Kurt Lewin, Chris Argyris, Saul Alinsky and Warren Bennis. I learned, for example that Charlie Krone's leaks to David Jenkins for the book Job Power resulted in Charlie's virtual "house arrest" at Procter and Gamble and I learned the semi-autonomous work groups didn't really have as much authority as Jenkins reported. Kleiner's heroes recognized that institutions, such as corporations, are social constructs (see Introduction for more discussion in that area). They became masters in group dynamics and building trust so that more effective communication took place, especially around team building. These heroic figures helped many corporations go through a process of fundamental reexamination... leading to a shift away from the bureaucratic military model to the more dynamic matrix, self-managed, and participatory models of today.
Most of the book chronicles the history of the National Training Laboratories (NTL) and Stanford Research Institute with the primary business examples being Shell Oil, General Foods and Procter & Gamble. Kleiner is at his best in explaining the history of NTL and how the youth culture of the 1960's impacted OD consultants. He focuses more on the psychological changes, which often resulted from group self-examination, rather than on shifts in actual power which have resulted from the growth of employee ownership and the rise of fiduciary capitalism. He does describe and provide interesting insights to some of the earliest shareholder rights battles, such as Alinsky's revolutionary FIGHT campaign with Kodak and the later adoption of similar tactics by antiwar activists at Dow Chemical as well as by social activists with Campaign GM. However, he never introduces the impact of pension fund involvement in corporate governance.
One of the fundamental purposes of the Corporate Governance site is to show how these movements converge and are complimentary. Perhaps Kleiner will steer his considerable talent in that direction by including an examination of these other movements in his next book, The Hour of Reconstruction which promises to examine the period beginning with 1976. Since the wake up call for pension funds didn't really come until 1984, when Texaco paid $137 million in "greenmail" to the Bass brothers, Kleiner's The Age of Heretics must be considered largely on target for the period covered.
Alexandra Reed Lajoux
Lajoux, Alexandra Reed The Art of M&A Integration: A Guide to Merging Resources, Processes, and Responsibilities McGraw-Hill, 1997. Buy it through our partnership with Amazon.com and get a discount. Lajoux authored the forthcoming The Art Of M & A: Due Diligence and coauthored the bestselling classic The Art of M&A: A Merger Acquisition Buyout Guide. She also edits Director's Monthly, a publication of the National Association of Corporate Directors.
The merger and acquisition market was "white hot" in 1997 and is expected to remain so in 1998. There are nearly 500 books in print on M&A but less than a dozen on the postmerger period. Those concerned with what to do after the papers have been signed will find a well researched volume. Lajoux not only fills a vacuum in the field but does so with an instant classic which is sure to see future updated editions.
Written in an easily understood question and answer format, Lajoux uses the knowledge she has gained though years of experience and through interviews with some of the top leaders in the field (profiled in the back of the book) to outline everything from integrating resources and processes to fulfilling stakeholder commitments. The book explodes some common myths by pointing out there is no correlation between size and growth, there is greater growth variation within industries than between them, and most cost-cutters continue to cut costs rather than grow.
Want to know what to tell your shareholders about the merger? Lajoux includes a sample letter. How do you explain the dilution that may result from issuing shares to pay for a merger? Read the sample language. When does a transaction qualify for pooling vs purchase for accounting purposes? What proportion of firms keep their names, blend names, adopt the seller's name or create an entirely new name and what are the pros and cons of these approaches? What proportion of mergers involve foreign firms? The Art of M&A Integration answers these questions and hundreds more.
There are dos and don'ts on compensation, advise on the year 2000 problem, and lists of checkpoints on everything from commitments to customers, suppliers and employees to building shareholder value. The author builds on the Caux Round Table's Principles for Business and expands on this consensus document, drawn up by leading global business executives, by providing useful checkpoints on many items. A practical guide for anyone planning M&A activity.
Lajoux, Alexandra Reed and J. Fred Weston The Art of M&A Financing and Refinancing: Sources and Instruments for Growth, McGraw-Hill, 1999. Almost a third of companies with sales between $75 and $500 million expect to be involved in a merger or acquisition in the near future. Defaults in the junk-bond market are expected to top 4.5% of outstanding issues in 1999, compared with 3.4% in 1998. Surging defaults in a strong economy point to the need for a comprehensive book on how to use "other people's money," while making something for ourselves in the process.
The Art of M&A Financing and Refinancing uses a reader friendly question and answer format to easily explain lofty global concepts such as currency exchange rates and fluctuations that can affect your M&A financing, as well as the gritty details of how to calculate the cost of your proposed debt. Want to know where to obtain financing online or the tax consequences of postacquisition debt? What are the going percentages on various types of collateral? What covenants do junk bonds normally contain? What are the advantages of a private equity placement? Here you will find the answers from two well known experts in the field. While only half of all corporate mergers live up to their promise, your chances of success will greatly improve by utilizing the information contained in this comprehensive handbook.
E. Dolye McCarthy
McCarthy, E. Dolye, MCCARTHY@murray.fordham.edu, Knowledge As Culture: The New Sociology of Knowledge, Routledge, New York, 1996. Buy Knowledge As Culture in hardback or paperback.
No, Prof. Doyle's book is not aimed at practitioners or theorists in the field of corporate governance. However, with mentions of "knowledge management" and "intellectual capital" in the press raising fivefold in the last three years it seemed appropriate to turn to someone who might have a little deeper insight into the study of knowledge. Margaret Blair has pointed to the fact that the wealth generating capacity of most modern firms is no longer based on capital, physical plant and equipment. Instead it is in patent rights, brand reputation, service capabilities, and the ability to innovate. Ikujiro Nonaka, the first professor of knowledge, has noted that much of a company's knowledge has nothing to do with its computerized databases but is stored in the brains of middle managers whose jobs are being eliminated with reengineering and downsizing. He notes that companies need slack to remain creative. Forcing employees to account for every minute will result in only routine products. But what is this elusive "thing" called knowledge?
Doyle's slim volume takes the reader back to Marx and Durkheim who recognized that knowledge develops out of and changes with social and material conditions. "Knowledge," according to Berger and Luckmann, "refers to any and every set of ideas accepted by a social group or society of people, ideas pertaining to what they accept as real for them." We have moved from the idea of knowledge as a representation and the mind as a mirror reflecting reality. It is no longer the study of knowledge but knowledges, in recognition of the disappearance of a unified mental world.
The new sociology of knowledge has turned away from materialist explanations toward semiotic theories focused on "the ways a society's multifarious meanings are communicated and reproduced." "The recent turn in social science probably corresponds to the contemporary phase of capitalism's history, a phase whereby the commodity form is as much a material production as it is a semiotic one...the production of signs dominates the production of goods." (p. 22) "Culture no longer refers to shared meanings that reflect a people's way of life. Instead cultural practices refer to the many institutions, classes, and groups that compete in the articulation of the social meaning of things." (p. 26)
Central to McCarthy's book is the notion that "society is something produced" and that, increasingly, we consume products that "say something" about us as much as they serve a practical need. Those of us who engage in knowledge production are not outside of culture but are producers of culture. The ramifications of where we might be headed as a culture can be seen in another recent book, Kinderculture, which begins to explore the effects of the media on children and society.
Robert A. G. Monks
Monks, Robert A.G., The Emperor's Nightingale; Restoring the Integrity of the Corporation in the Age of Shareholder Activism, Addison-Wesley, 1998. Buy it through our partnership with Amazon.com and support the work of the Corporate Governance network.
If widely read, The Emperor's Nightingale could be one of the most significant contributions to reuniting the corporation, our most powerful disembodied force, with the spirit of humankind in nature. Monks blends the new science of complexity with the insights he and Nell Minow have developed on corporate governance to arrive at fresh insights on the future of capitalism. The call for minimizing corporate involvement in politics and for special purpose trust funds are bold innovations to remove conflicts of interest which plague our current system and reduce its wealth creating capacity.
Monks is asking the right questions and his answers, while imaginative, draw on wealth of practical experience in the field. He sets out the problem using the familiar Hans Christian Andersen fable and he works the reader toward less familiar territory, using complexity and automata theories to critique corporate governance. Monks is concerned that mechanistic corporations will dominate the human essence. He points to terrible mistakes: the "stealth" compensation provided CEOs by options which fail to be charged because the FASB capitulated to pressure from the BRT; the Supreme Court decision declaring that corporations have a right to political expression as "persons;" and the difficulty of punishing a corporation for a long list of crimes, to name just a few of the topics covered so well.
Butchering what I see as the essence of this elegant book into a few sentences: Corporations seek unlimited life, size and power, externalizing risks to governments, citizens and nature. They are complex adaptive systems which evolve in a way which leaves them no longer accountable to their creators and which threatens human welfare. Monks believes corporations must obey the law, inform the public about their impact on society, and minimize their involvement in politics. Institutional shareholders, especially private pension funds (because of size, the long-term nature of their investments and a spectrum of beneficiaries closely resembling the public at-large), show the most promise in making corporations accountable. However, they don't have the necessary specialized experience to monitor corporations and they have conflicts of interest which leave them afraid to antagonize potential customers. Monks would resolve this dilemma by creating "special purpose trust companies," whose sole function is to act as owner with respect to the securities held in portfolio companies.
The critique is brilliant and full of rare insights which only "the world's most prominent and feared shareholder activist" (from the inside cover) could provide. His fictional character, "Ruth," and her special purpose trust company (SPTC) known as "PRISM," bear a striking resemblance to Robert A. G. Monks and LENS. The rise of the fictional SPTCs is premised on a finding by the Supreme Court that banks, insurance companies and other fiduciaries would have to prove that their other relationships do not work to the detriment of plan participants. "Those who violated their fiduciary duties under the statute would be prohibited subsequently from exercising any other fiduciary roles."
While I have the greatest respect for Robert Monks, I'm cynical about the prospect that shareholders or the courts will suddenly take the actions he so eloquently outlines to make corporations more accountable. If they did, I'm not sure SPTC's would be the right vehicle. Plato resolved questions of politics through philosopher kings. Sociologist Karl Mannheim sought an objective-like relational-based knowledge through an unattached intellegentsia. Professor Michael Useem sees disputes between investors and CEOs being moderated through a shared education, obtaining an MBA. Monks' model won't surprise anyone familiar with the LENS fund. Like those who criticize B. F. Skinner's Walden II, one might ask; Yes, but who holds them accountable?
Another approach toward greater accountability to shareholders is that of Mark Latham's The Corporate Monitoring Firm. Latham's model proposes that corporate monitoring firms take the place of board nominating committees and that they be directly elected by shareholders. Latham's approach has at least one advantage, it's resolution of the free-rider problem. In addition, since monitoring firms would be voted on by shareholders, they would be directly accountable.
Both authors are advancing the discussion. Another voice in the debate is that of Charles Handy. Like Margaret Blair (who we have reported on frequently) Handy notes that much of the wealth of advanced industrial societies is now derived from the knowledge that workers bring to the job. "If anyone buys the business, they are buying a customer list, some product brands, and maybe some research, but, mainly, the hope that the best of the people working there will stay with the new owners for the ride." Handy believes the influence of shareholders has become too dominate, that individuals will "begin to expect from their work communities the same collection of freedoms, rights, and responsibilities that they have in the wider society. People are property no more."
As businesses realize their best people are really volunteers, there because they want to be and not because they have to, Handy expects models will be created which will provide them with a more democratic workplace. (see interview and A Better Capitalism, Across the Board, 4/98). His The Hungry Spirit: Beyond Capitalism: A Quest for Purpose in the Modern World calls for voting and nonvoting shares. Voting shares would be confined to and traded among core employees, long-term investors, and others with a long-term relationship with the business, such as large suppliers. This would differentiate among those who are merely betting on the company and those who have a real stake in its future.
Accountability may converge from several sources, including funds like LENS, efforts to reform the corporate election process, the broadening of employee ownership and political reforms aimed at reducing the influence of corporations on politics. In California we are now facing Proposition 226, which would make it more difficult for unions to make political contributions. The measure is popular with voters but with corporations already outspending unions 11 to 1, if Proposition 226 passes, the next call may be to make it more difficult for corporations to make political contributions without first seeking shareholder approval. At the same time, partial privatization of the social security system can be expected to increase interest in corporate governance as more Americans have a direct stake in their activities. Our hope is that a broader constituency will result in increased debate over the issues which authors like Robert Monks cover so well.
Monks, Robert A.G. and Nell Minow, Watching the Watchers: Corporate Governance in the 21st Century, Blackwell Publishers, 1996. Buy Watching the Watchers now from Amazon.com at a discount!. Monks and Minow update and expand on their previous books Power and Accountability and Corporate Governance.
Monks and Minow are probably the world's most prolific writers in the field (see LENS Resources). As practitioners and theorists they provide dozens of examples from personal experience which enable the reader to quickly grasp the importance of corporate governance to wealth creation and social progress. In a few short hours of reading they cover the evolution of the corporation as a social construct, as well as the developing roles of shareholders, directors, and management. The book concludes with concrete recommendations which deserve thoughtful consideration.
Early in the book the authors cite Carl Kaysen's three alternatives for containing corporate power. Promote competitive markets, implement government controls or institutionalize mechanisms for accountability within the firm. This book is primarily aimed at the third alternative by addressing those most directly involved in the firm- shareholders, employees as shareholders, managers and directors. The book is full of, what in another context, would be controversial statements. For example, "the power of corporations has advanced to the point of domination of the political process."(p. 31) However, in their opinion "only owners have the motive to inform themselves and to enforce standards that arguably are a proxy for the public interest." (p. 38) In that context, the sometimes inflammatory language of Watching the Watchers should be seen as a wake up call to those operating within the current framework, rather than a call for populist intervention.
Monks and Minow trace the evolution of corporate governance and note that "there was no conscious choice in favor of treating shares of stock as though they were betting slips for races that were over at the end of each day." "Every 'improvement' in the system for owning stock was designed to make it easier to trade. No one seemed to notice or care that each of these 'improvements' also made it harder to exercise classic ownership rights." (p. 91) "During the takeover era, it became clear that, though the system was designed to promote transferability above all, there was one kind of transfer that the system would not tolerate: the transfer of power from one group to another."(p. 101)
The authors are concerned with increasing corporate accountability. They argue that any attempt to do so through chartering restraints is doomed to failure because the company's managers can move virtually any place in the world. In addition, "the political process is too dependent on money to make it possible for the government to be the ultimate guardian of accountability." (p. 267) "The only answer is a system of governance that originates from within the corporation itself and that includes the participation of an informed and effectively manifested broad class of owners." (p. 269) They point out that the tax cost of pensions is in excess of $50 billion per year, the largest item in the budget after defense. Because pension funds are subsidized by public funds it is, therefore, "appropriate for government to define broadly how pension fund trustees should function in their capacity as owners of the country's industrial establishment." (p. 270)
They call for a "Federal Law of Ownership" to coordinate the action of relevant agencies. For example, "the government must set the standard for interpreting and enforcing the 'exclusive benefit' rule or ERISA to provide guidance for private sector fiduciaries." (p. 272) However, the prime responsibility falls not to the government but to the pension funds and corporations themselves. The authors name several possible options including the following: assigned monitors report to groups such as the Council of Institutional Investors, shareholder committees, relationship investing, shareholder directors, lead directors, and ownership shares vs trading shares, to name a few.
In the end, "whether ERISA trustees will ultimately become effective monitors depends on two factors - DOL's willingness and capacity to enforce its regulation and, more importantly, the conclusion by corporate management that an ownership-based governance system is ultimately in their best interest." (pp. 281-82) Government needs to draw a "bright line" on conflict of interest; management needs to acknowledge that "creative tension" between themselves and owners is preferable to the current system of unaccountable "phony governance." Pension funds would then create a market for new institutions offering "ownership services" and companies with effective governance performance would realize the benefit of lower capital costs.
Michael Novak
Novak, Michael The Future of the Corporation, The Fire of Invention, the Fuel of Interest, and On Corporate Governance, The AEI Press, Washington, DC, 1996, 1996 and 1997. (see Novak)
In The Future of the Corporation, the first of three Pfizer lectures, Novak argues that business leaders "underestimate the size, intensity, intelligence and commitment of the forces determined to undermine corporate independence." The Achilles' heel of the American corporation is a "lack of ideological self-consciousness." For Novak, the institutions of "civil society" must be preeminent over those of the state. The corporation has become central in building "the chief alternative to government: civil society."
Commerce inherently cries out for law and teaches respect for law; benefits by pease and is destroyed by war; teaches prudence and attention to small losses and small gains; softens manners; diverts attention from issues of glory and spiritual divisiveness to seek modest progress on humble but useful matters; and distributes the practical interests of people, even in the same families, among different industries and different firms.
Those who clamor for a "stakeholder" society, where citizens make claims of entitlement against the corporation, threaten to dampen ambition, imagination and personal independence.
The Fire of Invention, the Fuel of Interest presents Novak's observation that intellect and know-how have now become the most important source of wealth rather than capital, land or labor. By giving patent and copyright laws constitutional status, America added the fuel of interest, in the form of property rights, to the fire of invention.
The third book in the series, On Corporate Governance: The Corporation as it Ought to Be, argues that "the governance of a business corporation requires focused unity; there is little room within it for checks and balances."
Within a corporation, no one should even desire "separation of powers," for the whole point is to create something new, to achieve something, whereas in government the whole point is to prevent leaders from achieving anything beyond the already stated powers and purposes of the union.
Novak argues that appeasement to progressives, who want to socialize corporations through environmentalism, children's rights, feminism and gay rights, is intellectual cowardice. Appeasement would, in effect, kill the goose that lays the golden eggs. Novak tips his hat, instead, to corporate raiders who create efficiencies and money managers who watch corporate managers "like hawks." Mutual funds and pension funds "have gained the upper hand over corporate managers" through the use of computers and votes. External checks and balances abound. "The real problem is how to govern corporations internally to overcome the great cultural tide of envy and 'political correctness' that bids fair to swamp them in syrupy, corrosive sentiment."
Novak advises corporations to adopt unpretentious and open styles at every level so as to not awaken resentments in a democratic populace. "Wrongly signaled status is socially destructive. You cannot build community, teamwork, or a sense of family across fissures of rigid class consciousness." Executive pay should, in part depend on how lower-paid employees are being compensated. "At the very least, the direction of compensation levels should be comparable." In the final analysis Novak urges corporate leaders to recognize that the corporation, not the state, is today's leading revolutionary force. Whatever new steps are to be taken in corporate governance must protect that freedom, creativity and flexibility in creating wealth for the whole of society.
with the Corporate Governance NETwork!
Contact: 
jm@corpgov.net
All material on the Corporate Governance site is copyright © 1995-1999 by Corporate Governance and James McRitchie except where otherwise indicated. All rights reserved.