This is the second of a two-part series with corporate governance pioneer Bob Monks. The first part is available here.
Returning to CEO pay, Monks reminded RI of the rationale for founding ISS.
“When we started ISS,” he said, “it was not a red-hot product and we were doing it because we thought it was the right thing and we weren’t going to make any progress on making corporations more accountable until you could empower shareholders and give them a meaningful voice.”
But he did not feel that they had made much progress on, potentially, the most important issue of accountability.
“Nobody has enough of an economic interest in changing the way CEOs are paid. You need someone with a principled objection. And since most fiduciaries have got their lawyers to tell them that making such an objection would be a breach of their fiduciary duty because if a company actually lost a vote on pay there wouldn’t be any benefit to the beneficiaries. And, as [Vanguard founder] Jack Bogle always said, money managers have enormous conflicts of interest when they vote proxies in portfolio companies they want to get or keep as clients. If none of the people at Harvard, at the Ford Foundation, the Gates Foundation can be induced to take on a leadership role, who is going to do it?
“If the SEC squelches the sole source of independent research and makes it near-impossible to file even non-binding resolutions, how can anyone effectively question CEO pay?”
Was there any way to break through this impasse? “If you want to create a shareholder right you have to have something like shareholder litigation where a class action enables very intelligent people to pursue the public interest. But there’s nobody who wins when a Say on Pay vote is lost.”
While he offered a potential solution other than litigation, he was not hopeful that anyone would take it up. “If you’re going to do something about it, you’re going to have to spend a lot of money. CalPERS votes against a lot of pay proposals but for practical and political reasons we cannot expect them to put together an active coalition to make significant the ‘no’ vote.
“We used to work like hell to get a coalition and we once got three funds together against Honeywell on a motion to change their bylaws. And that was almost impossible. It was the first time shareholders got a majority of the votes contrary to management without a proxy contest.”
Who today is taking this route? “If you want to make changes, you have to get the votes. [Activist investor] Carl Icahn does it all the time and he’s happy to take the profits on the shares that he owns and much of the rest of the benefits go to the rest of the shareholders. It’s all about changing the management and the board to add value to the company. And Carl’s done a better job at that than anyone else, maybe better than [Warren] Buffett.”
Monk’s involvement with Trucost, where his is still an advisor, led to a discussion about ESG.
“All of ESG is externalities and we can do a better job [valuing it] than is possible with GAAP [US Generally Acceptable Accounting Practice].
“SASB [Sustainability Accounting Standards Board] is doing very good work, very impressive. We [at Lens and TCL] did a pretty good job at valuing G, and we could prove that you could add value by improving G and we certainly did as good a job as any other stock analyst using financial data.
“It isn’t as if the financial statements you’re looking at are sacrosanct and it’s a little ridiculous that they use it to try to disprove the value of ESG.”
So there was a value for ‘G’, but what about ‘E’ and ‘S’?
“I think Trucost did a good job at valuing the ‘E’ area, but the ‘S’ piece is harder. First of all, you have to agree what the ‘S’ piece is, and I don’t think anyone does. I had my own formulation that it is about compliance with the law.
“This makes the question of how many women you have on your board of directors one of compliance, with resulting fines and damages: it’s a metric. By saying you have to comply with the law, you recognise that a corporation is not by nature an ethical vehicle and must be forced to comply. Therefore, non-compliance with the law as the quantified cost of ‘S’ is pretty good.”
Returning to a comment Monks had made in the series of emails leading to the interview, RI asked Monks what he meant when he complained of directors not directing.
“What we need is directors who direct, not just react to what management hands them. To go back to CEO pay, directors have total authority over what senior management is paid. They have an obligation to demonstrate that what they are paying is reasonable, but they have not yet been able to demonstrate any correlation between top management compensation and accepted measures of increased corporate value.
Their side has the corporate bar, led by Marty Lipton, and our side has a growing cadre of proxy and ESG specialists. We are grateful for the integrity and persistence of Harvard Law School Professor Lucian [Bebchuk] in dominating the professional literature.”
And, again, returning to an email comment that there were no independent directors, Monks said: “By using words that have a legitimized, codified meaning and using them in a seemingly appropriate context it leads to the predicted result. But the fact is that shareholders do not elect independent directors because none ever get nominated. I was an independent director of a number of public companies and I was, on occasion, asked to leave, which gave me real insight as to the actual role of directors. I was asked to leave because I was asking questions, urging board evaluation, in other words, acting independently.”
Then, back to where he started: “Shareholders do not participate reliably in the public interest,” said Monks, before launching into Harvard. “I have a particular villain, and that is Harvard University, which I argue as a leader should be held to a high standard of fiduciary conduct.”
He said its “unwillingness to face up to its ownership of companies using hydrocarbons” was a “disappointment”.
“My first letter to them on the subject was when I was a chairman of a trust bank, The Boston Company, in 1979 and I’ve been writing letters to the presidents of Harvard, even a recent book, Trusting Harvard, ever since. I am left with no explanation as to why they won’t act. But there are plenty of others like them, including the mutual funds and other institutional trustees. And on the other side there are only a few that act with integrity as fiduciaries.”
His final broadside, of course, was reserved for the SEC.
“But we keep using the word fiduciary even though it no longer has much meaning. The most recent judicial opinion enforcing fiduciary duty of which I am aware, [Donovan v. Bierworth, (1982)] was by Judge Friendly of the 2nd Circuit.
“Of all the absurdities of the SEC's current proposal on proxy advisors, the most outrageous is that even if there was a problem of [fund] managers failing to vote as fiduciaries, the failure of the SEC to investigate and enforce the fiduciary standard would be the obvious way to address it.”