Responsible Investor What are the lessons of 35 years in corporate governance activism?
Bob Monks: I have the perspective of a long period of time in this area and I can recommend it. I feel that what I have been doing is worthwhile and I look forward to getting up each morning and continuing it. That said, I have to say that the record of accomplishment is very slender and there have been many apparent successes that have turned out to be just that: apparent.
Many of the difficulties have occurred in the United States. I think that in the United Kingdom a great deal has been done and I am very encouraged by trends in Europe also. Many of the problems I put at the door of the current administration of the United States, which has perceived the idea of governance as being hostile to the governance of companies. As long as progress in this area is defined as a battle between management and everybody else, success is going to be elusive. If you win such a battle you are going to cause huge damage. This can’t be fought as a battle. It has to be seen as something in which all the parties have an interest and astake in trying to create what people in the UK would call sustainable corporations.
Responsible Investor: Is the problem trying to persuade shareholders to have a vested interest in the long-term health of companies?
Bob Monks: The real problem is that the culture is vastly different between here and the US. In America it is a question of power and in the US there is the idea of autocratic power in the chief executive. For example, I go every year to the Exxon shareholder’s meeting and a number of years ago, I pointed out to the chairman that while we were meeting the G8 heads of state were also meeting in St Petersburg. I told him that all the heads of state present at the G8 did not have as much power as he did. I referred to him as ‘emperor’, not to be rude, but to make the board understand that this was the model of the successful US company.
So I said to the ‘emperor’: I’ve got a whole heap of things that I would like to put before the board that I think would be of advantage to the company, and his first reaction was: who the hell is this guy? His second
reaction was: I’ve already thought about it.
The third reaction was: if I haven’t thought about it then I’ve already hired a lot of people to think about it.
By then, your time is up. For a variety of reasons, US shareholders have no power, which is not the case in Europe. So, having no power it is quite difficult to get responsibly involved. In the UK where shareholders do have power they have become responsibly involved and have done some fine things. The lack of constitutional power of US shareholders makes it one of public confrontation with little scope for change.
Responsible Investor: But US shareholders have the power of the AGM?
Bob Monks: At the AGM you are allowed to introduce the resolutions that the Securities and Exchange Commission (SEC) says you can and the SEC is a very unhappy organisation in terms of its susceptibility to pressure from the corporate community.
For example, I had 40% of the vote behind me at the Exxon AGM in support of a resolution that they should have an independent chairman. It’s the sixth year that I’ve had the resolution on the ballot and I get more support every year. When I get to 50% they’ll probably start ignoring me more seriously!
The feeling in US corporations is that corporate governance and responsible investing is just a lot of high falutin language that takes up a great deal of time and removes power from the chairman.
Responsible Investor: Is litigation the only sanction available to investors then?
Bob Monks: Yes, I do see this as the only tool for shareholders. There are so many laws of unintendedconsequences unfortunately. It was never intended by the lawmakers of the US that there would be a few very talented class action lawyers that would be able to command the attention of the top executives in US companies through legal action. But, in light of the seriousness of the cases that have come up and the fact that it has been proved that they can get the attention of the top management, we’ve been able to make a lot of changes.
“the SEC is a very unhappy organisation in terms of its susceptibility to pressure from the corporate community.”
It’s one of the reasons that I am here in the Europe at the moment.
I am a consultant to the law firm that is consulting with investors on the beginning of the settlement of the case in Alaska regarding BP. (Note: In February this year a group of investors in BP launched a class action in Alaska against the £70m severance package offered by BP to John Browne, its former chief executive.)
Responsible Investor: What has been the influence of foreign pension funds on corporate governance in the US?
Bob Monks: Their role is critical and they are punching way above their weight. For a variety of reasons, institutions in the US of the quality of the Universities Superannuation Scheme or the Shell pension fund won’t associate themselves with shareholder activism.
When we bring forward cases in the US with institutions of their quality it very much changes the cast which otherwise looks like the usual suspects of US trade unions or public sector pension funds – the known shareholder activists.
Responsible Investor: Are they proving successful at getting heard in the US?
Bob Monks: It really depends on the competency of the individuals involved at the funds. Unfortunately sometimes the most influential individuals are at the pension fund for three or four years and then leave.
But I think overall there is a trend that it is considered best practice to be active shareholders and there is a larger coterie of people involved.
In the area of the environment, the fact that in the UK the standards are much higher than in the US means it has bought credible people to the US saying: not only can we live with improvements in environmental management, but we have to live with this! There is a good flow of leadership going from east to west.
Responsible Investor: Some of your comments suggest you are discouraged by the amount of progress that has been made:
Bob Monks: This is not a line of work for people who have the word ‘discouraged’ in their vocabulary. I see a lot of evidence that there is some improvement and I feel very comfortable about that. Sometimes these issues get solved in ways that none of us understand. One of the best ways is a virtually universal agreement on transparency, the kind of thing you see in the work done by the Carbon Disclosure Project; again a UK initiative.If you’re living in a world of information then you are able to make good policy. Once you have the information, you then have to see if you can get consensus behind your initiatives. In the US, the President is opposed to initiatives of this kind, and has been for the last six years. It’s not an efficient administration from this point of view.
“This is not a line of work for people who have the word ‘discouraged’ in their vocabulary.”
What will happen in the election in a year and a half’s time I think we can be more optimistic about.
Responsible Investor: What do you think about recent criticism of the Sarbanes Oxley legislation as being anti-competitive for the US.
Bob Monks: There’s an old expression of people from the state of Maine where I’m from, which goes: what you see depends on where you sit. When Elliot Spitzer was sitting as a prosecutor he saw one thing and now he’s sitting as a Governor of a state whose tax revenues derive from the enterprises in his state he sees a slightly different thing. But he’s an honest man who’s not going to compromise his principles. I think the reaction on Sarbanes Oxley is overblown. It is almost like a red flag of rebellion that the corporate community is waving to indicate how government is destroying jobs and getting in the way of business. Most of this is very unfair.
One result of Sarbanes Oxley was to examine closely what turned out to be the most despicable industry in terms of the US corporate scandals: the accountancy
firms selling tax shelters.
The irony is that they’ve actually prospered because of Sarbanes Oxley and you could hate the bill for that reason alone! It’s very difficult to understand that when the history of this time is written someone could say a dreadful harm was caused by obliging companies to account clearly for what they do.
Responsible Investor: What is your appraisal of the recent proliferation of hedge fund activists?
Bob Monks: What you gain in the straight, you lose on the roundabout! That the most intelligent, greedy people in the world are now committed to shareholder activism legitimates our category. It used to be thought that we were just a bunch of high-minded idiots asking for things that didn’t make any economic sense.
So we’ve gained that in the straight. On the roundabout, the fact is that the characteristics of many hedge fund activists are very short term, not all of them, but many of them are, and that would tend to have a negative effect. I think you’ll have spectrum of consequences and inevitably life works out this way. On the one hand you will have a manager whose greed destroys the enterprise and on the other hand you will have a hedge fund whose greed destroys the enterprise. Hopefully in the middle you will have a substantial mass of accountable enterprises that create a sustainable wealth for society.
Responsible Investor: What about the argument that hedge funds create market liquidity?
Bob Monks: I have to say I would not associate with that characterisation. I think that clearly there is a point atwhich market volatility and the volume of shares being traded in the market does artificially create a problem inthe market, the extent of which we won’t know until it is too late.
Common sense would say that you can’t simply keep your foot on the accelerator for ever and not expect the car to go out of control.
“It used to be thought that we were just a bunch of high-minded idiots asking for things that didn’t make any economic sense.”
Responsible Investor: Does the growth of private equity pose problems for corporate governance?
Bob Monks: Taking a company private is a clear validation of the concerns of myself and others like me who believe that public companies are run by a system of bad governance that artificially reduces the value. We now have very bright people taking companies private because they presumably believe they can pay an attractive price on the public markets and get the company for less than it is worth. I see that as a healthy working of the market. If shareholders want to sell out then private equity companies will take out the agency costs and aim to refloat the company.
The excessive use of debt is more worrying. This happens in periods of great excess and low interest rates.
I think the question of employment is much more serious. I think what you as an employer owe your employees is an atmosphere in which they can develop their talents and their own market ability. Employers looking after these employee values have discharged
their obligations because no-one wants to work for a failing company.
I think the question of employment is much more serious. We are passing through a serious change and life will ever be the same again. When I graduated you were expected to work for the same company for much of your working life. That is no longer the case. That being the case, I think what you as an employer owe your employees is an atmosphere in which they can develop their talents and their own market ability. In that kind of world, people successfully have three or four successful jobs in their lifetime. Employers looking after these employee values have discharged their obligations because no-one wants to work for a failing company. Like it or not capitalism is a dynamic process, what someone once called: creative destruction.
Responsible Investor: Has the growth of derivative products been good for investors?
Bob Monks: I think they provide a wonderful opportunity because they enable you to make a very specific risk/reward bet, whereas in the old day all you do was buy stocks or bonds or preferred stock.
Suppose you want to buy a stock in a company because you like the company but you don’t trust the market. Well, by using a derivative you can make a precise bet on that company alone and take out the market risk.
Responsible Investor: What about the parcelling up of debt risk into so-called ‘toxic waste’. Is there a danger pension funds are buying debt risk they don’t fully understand?Bob Monks: It’s not a question, it’s a very good statement. If men were angels it would work out well, but men aren’t so we know that it will work out in disaster in a given number of places. The trouble is that by fractioning out the different portions of a debt instrument you’ve taken away accountability. If I owe you, it’s pretty simple. If I owe a million people who are participating in a Thai hedge fund, then there is enormous propensity for accountability to be lost.
Responsible Investor: Do current pension trends such as the shift from defined benefit to defined contribution plans bode well for governance?
Bob Monks: What bothers me is that in a time of great prosperity, America has destroyed its pensions system. That is vile. Here we have the highest corporate profits on record, the highest CEO pay on record and yet we are too poor to continue a pension system that started with Otto van Bismarck 150 years ago. That’s obscene and that’s what has happened without anyone really saying it. What’s been said is that: you’re a real person, you ought to be able to invest your own money, by god that’s the American way, well what they’re actually saying is that if you lose, you lose. With a defined benefit system you have the company as the guarantor and the government as guarantor, and we have transferred the risk from companies and governments to individuals, and that is a sin.”
The second part of the Bob Monks interview will follow in the September edition of Responsible Investor.