Corporate Governance

Robert A.G. Monks and Nell Minow are founders of GovernanceMetrics International, the leading independent research firm dedicated to corporate governance. Formerly principals of the Lens Fund and officers of Institutional Shareholder Services, Monks & Minow have also collaborated on two other books: Power and Accountability and Watching the Watchers.

• Cases in Point xiiiPreface xviiAcknowledgments xxviiIntroduction – How to Use this Book 11. What is a Corporation? 3Defining the Corporate Structure, Purpose, and Powers 5Evolution of the Corporate Structure 6The Purpose of a Corporation 9Satisfying the human need for ambition, creativity, and meaning 9Social structure 10Efficiency and efficacy 10Ubiquity and flexibility 11Identity 11Metaphor 1: The Corporation as a “Person” 12Metaphor 2: The Corporation as a Complex Adaptive System 12Are Corporate Decisions “Moral”? 14Are Corporations Accountable? 16Three Key External Mechanisms for Directing Corporate Behavior: Law, the Market, and Performance Measurement 18Government: legislation, regulation, enforcement 18What Does “Within the Limits of the Law” Mean? 20When and how do you punish a corporation? 28Probation of corporations 29The problem of serial offenders 31Securities analyst settlement 32What is the role of shareholders in making this system work? 33The market: too big to fail 36The corporation and elections 40Citizens united 41The corporation and the law 45A Market Test: Measuring Performance 47Long term versus short term 50Corporate decision making: whose interests does this “person”/adaptive creature serve? 55Another (failed) market test: NGOs 61Measuring value enhancement 62Gaap 62Market value 69Earnings per share 70EVA ® : economic value added 71Human capital: “It’s not what you own but what you know” 72The “value chain” 73Knowledge capital 74The value of cash 74Corporate “externalities” 79Equilibrium: The Cadbury Paradigm 79ESG: Environment, Social Governance – A New Way to Analyze Investment Risk and Value 83Quantifying Nontraditional Assets and Liabilities 87Future Directions 92Summary and Discussion Questions 93Notes 952. Shareholders: Ownership 101Definitions 105Early Concepts of Ownership 106Early Concepts of the Corporation 107A Dual Heritage: Individual and Corporate “Rights” 108The Reinvention of the Corporation: Eastern Europe in the 1990s 110The Evolution of the American Corporation 111The Essential Elements of the Corporate Structure 115The Mechanics of Shareholder Rights 117The Separation of Ownership and Control, Part 1: Berle and Means 118Fractionated Ownership 125The Separation of Ownership and Control, Part 2: The Takeover Era 129Waking the Sleeping Giant 134A Framework for Shareholder Monitoring and Response 140Ownership and Responsibility 141No innocent shareholder 141To Sell or Not to Sell: The Prisoner’s Dilemma 143Who the Institutional Investors Are 144Bank trusts 145Mutual funds 146Insurance companies 149Universities and foundations 149Executive pay from the consumer side – a leading indicator of risk 150Pension plans 154The Biggest Pool of Money in the World 154Pension plans as investors 164Pension plans as owners 166Public Pension Funds 169Divestment initiatives 188Economically targeted investments 189Afscme 195Federal Employees’ Retirement System 197Tiaa–cref 199Private Pension Funds 201The Sleeping Giant Awakens: Shareholder Proxy Proposals on Governance Issues 206Focus on the Board 212Hedge Funds 220Synthesis: Hermes 221Investing in Activism 222New Models and New Paradigms 223The “Ideal Owner” 228Pension Funds as “Ideal Owners” 233Is the “Ideal Owner” Enough? 234Summary and Discussion Questions 236Notes 2383. Directors: Monitoring 251A Brief History of Anglo-American Boards 255Who Are They? 256Size 256Term 256Inside/outside mix 257Qualifications 261Who Leads the Board? Splitting the Chairman and CEO and the Rise of the Lead Director 261Agenda 263Minutes 263Diversity 264Meetings 264Communicating with Shareholders 264Special Obligations of Audit Committees 265Ownership/Compensation 266Post-Sarbanes–Oxley Changes 266Board Duties: The Legal Framework 267The Board’s Agenda 281The Evolution of Board Responsibilities: The Takeover Era 283The Fiduciary Standard and the Delaware Factor 284How did boards respond? 287Greenmail 287“Poison pills” 288Other anti-takeover devices 290The Director’s Role in Crisis 291Limits and Obstacles to Board Oversight of Managers 295Information Flow 295Practical Limits: Time and Money 301The Years of Corporate Scandals – Boards Begin to Ask for More 302Director Information Checklist 303Who Runs the Board? 304Catch 22: The Ex-CEO as Director 306Director Resignation 308CEO Succession 308Director Nomination 309Limits and Obstacles to Effective Board Oversight by Shareholders 318Carrots: Director Compensation and Incentives 319Sticks, Part 1: Can Investors Ensure or Improve Board Independence by Replacing Directors who Perform Badly or Suing Directors who Fail to Act as Fiduciaries? 324Can Directors be Held Accountable through the Election Process? 324Staggered boards 327Confidential voting 328Sticks, Part 2: Suing for Failure to Protect the Interests of Shareholders – Are the Duties of Care and Loyalty Enforceable? 331Future Directions 331Majority voting and proxy access 331Improving director compensation 333Increasing the authority of independent directors 333“A market for independent directors” 335“Designated director” 336Board evaluation 336Executive session meetings 336Succession planning and strategic planning 337Making directors genuinely “independent” 337Involvement by the federal government 338Involvement by shareholders 339Summary and Discussion Questions 339Notes 3404. Management: Performance 347Introduction 348What Do We Want from the CEO? 354The Biggest Challenge 359Risk Management 363Executive Compensation 363The pay Czar 370Post-meltdown pay 370The Council of Institutional Investors 371Stock Options 374Restricted Stock 379Yes, We Have Good Examples 380Shareholder Concerns: Several Ways to Pay Day 380The “guaranteed bonus” – the ultimate oxymoron 380Deliberate obfuscation 381The Christmas tree 382Compensation plans that are all upside and no downside 382Loans 382Accelerated vesting of options 383Manipulation of earnings to support bonuses 383Manipulation of peer groups 384Huge disparity between CEO and other top executives 384Imputed years of service 384Excessive departure packages 384Backdating, bullet-dodging, and spring-loading options 385Phony cuts 386Golden hellos 386Transaction bonuses 386Gross-ups and other perquisites 387Retirement benefits 387Obstacles to restitution when CEOs are overpaid 387Future Directions for Executive Compensation 388CEO Employment Contracts 389Cause 390Change of control 391Half now, half later 391CEO Succession Planning 391Sarbanes–Oxley 392Creation of the Public Company Accounting Oversight Board 392Section 404 393Other changes 394Dodd–Frank 394Employees: Compensation and Ownership 395Employee Stock Ownership Plans 399Mondragón and Symmetry: Integration of Employees, Owners, and Directors 403Conclusion 409Summary and Discussion Questions 410Notes 4115. International Corporate Governance 415The Institutional Investor as Proxy for the Public Interest 429Norway in the driver’s seat 431The International Corporate Governance Network 433ICGN: Statement of Principles on Institutional Shareholder Responsibilities 433The Global Corporate Governance Forum 435Sweden 435Canada 437Singapore 438Russia 441Germany 442China 443Japan 444GovernanceMetrics International (GMI) 445World Bank and G7 Response 458Azerbaijan 459Slovakia 460Jordan 460Thailand 461Poland 461The Global Carbon Project (GCP) 464A Common Framework for Sustainability Reporting 465Towards a Common Language 468Vision 470Summary And Discussion Questions 471Notes 4736. Afterword: Final Thoughts and Future Directions 475Beyond the Nation State 477Government as Shareholder: The Institutional Investor as Proxy for the Public Interest 484Notes 486Index 489