Active on governance
Robert Monks tells Nina Röhrbein that institutional investors must get more active in corporate governance
Nina Röhrbein: What are the pressing corporate governance issues at the moment?
Bob Monks: The most important issue is the unwillingness of the most respected and trusted organisations – such as foundations, universities and private wealth funds – to associate themselves with corporate governance. Until there is a full involvement by the whole spectrum of owners, company managers will not take shareholder activism seriously. This is going to limit the capacity of corporate governance to be universally accepted, and therefore corporate governance is always going to be in a position of being confrontational. But confrontation does not get the best results.
NR: Has corporate governance gained momentum in the US?
BM: Having been involved in corporate governance for a long time, I look for evidence of change. I went to Exxon Mobil’s AGM for about 10 years and, each time, I filed a resolution that the company should separate their CEO and chairman. Over the years, I managed to gain 40% of the vote but, still, nothing changed. I finally came to the conclusion that, even if I got 80% support, nothing would change because in the US votes are only advisory, they are not binding.
However, while mandatory say-on-pay sounds great, over time companies would find a legal loophole to avoid it, such as deferred retirement policies. The US system has proven in practice that a government attempt to mandate pay has the tendency of creating exactly the opposite response.
NR: How does executive remuneration need to change?
BM: The only thing you want to think about in terms of pay is transparency, and in that area a lot of work still has to be done. We devote a great deal of energy to compensation because we wonder whether people are being paid for adding value or for showing up for work, when contracts include terms such as guaranteed bonus. Compensation incentives should be based on compliance with law. There has been so much trouble with banks breaking every imaginable kind of law. If they wanted to restore credibility, they should meet objective standards and law compliance.
Compensation arrangements include too many different plans, such as long-term value, short-term value and other supplemental plans. There needs to be a limit on the number of plans and the incentive structure needs to be simplified. The CEO tends to dominate the board, which creates the compensation committee, which, in turn, hires the compensation consultant. No one in that chain will call for him to be paid less. Therefore, there needs to be some kind of credible independence in the process, maybe more external directors. And if the shareholders do not like the remuneration package disclosed they should sell their stock.
NR: Can legislation help the advance of corporate governance?
BM: After every scandal we seem to have a new law. The Sarbanes-Oxley Act emerged as a response to Enron and scandals at other companies, while the Dodd-Frank Act came into force in the wake of the banking scandal.
Sarbanes-Oxley had one good provision, the whistleblower provision, and Dodd-Frank tries to legislate all manner of things. But it is hard to have a positive reaction towards their impact because every significant corporate governance provision was diluted when it became law.
Last year the Dodd-Frank Act mandated the US Securities and Exchange Commission (SEC) to produce a regulation that would allow shareholders to nominate directors. However, the new regulation was overruled by the Washington DC Court of Appeals – in other words, unlike in Europe, shareholders in the US do not have the right to nominate or remove directors. The most useful way in which government could become involved would be through the enforcement of existing laws that require trustees to act exclusively in the interest of the beneficiaries and not in the interests of the companies they come from. If trustees did not perform their duty under the ERISA statute, the assistant secretary of labour would be allowed to dis-eligibilise them so they that they could no longer accept any trust business. If this law were enforced, it would quickly lead to a vast change in trustee behaviour.
NR: Is there a shift towards the long term?
BM: The real long-term problem is executive pay. Companies have a pattern of pay that is supposed to create incentives for conduct but if the pay criteria are short-term, the results will be short-term. The short term is as much about the corporate side as it is about the shareholders. Only about 1% of the outstanding stock turns over every 10 seconds, whereas half of the stock is held in index funds, which is almost permanent ownership. So the real challenge is to enliven the index funds because they have tended to be rather passive. Index fund managers are trustees and they, too, can be forced into assuming a stewardship role although, to date, there has been no inclination in the UK or the US to enforce that change of conduct.
NR: What is your take on other global governance standards?
BM: The assumption that the Anglo-American mode of corporate governance is a universal virtue was wrong. The fact that the review commission in Japan recently turned down the notion of one independent director being required on company boards exemplifies this. The Olympus scandal should have demonstrated to everyone that there are two games going on – a polite game in English and the real game in Japanese.
Germany is a place where corporate governance is highly idiosyncratic to the country. No other country has as similar corporate governance structure, but it appears to be one of the most satisfactory models in the world, due to the explicit recognition of the rights of workers to participate in processes, an involvement by the government both at the local and the federal level, and substantial rights in the banks. In other words, overall German managers are accountable in a very real way. And governance is all about being accountable. However, the German version of corporate governance would not work anywhere else – the Anglo-Saxon countries, for example, culturally have not managed a level of sufficient harmony with trade unions. Indeed they have almost ceased to exist in the US.
NR: How does good governance benefit companies?
BM: A recent report by Deutsche Bank on enhanced value through good governance has not been given enough attention. But there is an increasing amount of hard data available. We have published the results of its accounting and governance risk (AGR) index, which indicates that, over 10 years, the top 10% of companies in terms of governance outperform the bottom 10% by 59%. However, in general, the financial benefits of corporate governance are difficult to assess. Causation is almost impossible to prove. We have had some success with numerical documentation over a long period of time and a lot of it is the problem of trying to find good indicators, such as compensation and accounting. But numbers are still only an approximation and can be manipulated. Information that is communicated by words is every bit as valuable as the information communicated by numbers.
NR: What is going to happen with US corporate governance after the November presidential elections?
BM: President George W Bush virtually shut down the enforcement of the SEC and they cut back the funding. Since this discontinued government regulation, there has been a hostile atmosphere towards corporate governance. And President Obama has not changed Bush’s policies to everyone’s liking. He decided to try to settle the chaos before turning to matters like this, so it has been a very difficult 10 years for US governments.
Candidates who have aspirations for the second term of president always disappoint. They are considered lame-duck presidents who pursue issues that nobody else is interested in and spend all their political energy on that. However, if Obama is not re-elected, we will go back to the days of George W Bush and worse.