Advice from our Advisory Board member, Robert A.G. Monks

Ethical MarketsTrendspotting

These are most interesting times in the United States as many tectonic plates are moving simultaneously if not in coordinated patterns.

The hegemony of the CEO in the United States, which I have chronicled most recently in CORPOCRACY, has elicited sharp confrontation due to the collapse of financial institutions and the pendency of a Presidential election. The violence of value destruction in the financial sector has focused attention on the amounts of money that those who were responsible for failure have managed to pay themselves. The approaching national election has created a forum in which the candidates need to reveal understanding of the cause and nature of the problems and credible notions as to restitution and correction. Little of this is evident in the Congressional debates.


As I reflect on the bill passed ultimately by the Congress earlier this afternoon, I reflect on the Russian proverb: “Those who forget the past are doomed to repeat its mistakes.” Legalized cheating may be a bit strong for the accounting provisions, but just think. We had Enron as a result of which Arthur Andersen was dragged down. The accounting profession got the message, keep books that do not mislead the public. Unfortunately, this imperative pails in front of the national compulsion to keep the markets – and fees – flowing. So now, we are back to – value? Chose a number!

With these thoughts in mind, I have cobbled together a private OD-ED piece:

FAIRNESS

The money didn’t lose itself. It was lost by the negligence of people working in a faulty structure. More than money was lost. The negligence and the fault replicated across the whole industry threatened the survival of the national economy. Government acts appropriately to protect the national interest.

Excessive compensation to senior officers is the symptom, it is not the disease. There is no precise “cookie cutter” formula for good governance. There is, however, a technology of governance. Firms, such as The Corporate Library – of which I am a co founder – have for many years evaluated companies such as AIG, Merrill Lynch, Lehman Brothers and Bear Stearns – and have publicly proclaimed that their governance is defective. There are plain indicators of bad governance. There have been warnings. They have been ignored.

Good Governance requires certain fundamentals. Here are two.

· Directors must be meaningfully accountable to shareholders. If our system is to work as advertised, shareholders must have the absolute right to remove directors with or without cause. This right exists throughout the world outside of the United States.

· If an institution elects to sell its “toxic assets” to the government, it should make the effort to recoup its own assets that have been wrongfully taken. Any company asking for government assistance must help itself – there must be provision that such company pursue all rights against former officers and directors for recoupment of funds wrongly taken.

· The public can be persuaded that it is in the national interest to extend support to flawed institutions and personnel, but it strains common sense and fundamental fairness not to require that any institutions requesting such support take appropriate steps so as to provide reasonable assurance of commitment to cure known faults going forward.

· Support must be conditioned on the willingness of those seeking it to conform to a broad framework of good governance – as determined by an independent body created for the purpose (hopefully for a brief period, like three years) – which will include, among other agenda items, the right of shareholders to remove directors and the obligation of the ongoing management to pursue misconduct by its predecessors.

Any decent and effective solution to the present crisis requires addressing the “moral hazard” of public subsidy for excessive risk taking which benefits the few top officers. Along with the general public, the shareholders of affected companies are losers from this misconduct by executives. It is only fair that the shareholders should be assured from the terms of this settlement of their real capacity to pursue recovery from those who have personally benefitted. This places the ongoing responsibility for remedial action on the corporation, its shareholders and directors and not on the government. Both in cases of bankruptcy, notably Richard Breeden’s report (2003) as Corporate Monitor on Corporate Governance for the Future of MCI, Inc., and in the case of judicial approval of class action law suits as for example the recent judgment involving British Petroleum, improved corporate governance for the on going enterprise has been held essential to final settlement of the matter. This involvement by owners and independent directors in corporate problems should result in improved governance for the shareholders of all publicly owned companies in the future.

*************************

A final nasty question lingers: “Who would loan 33/34th of the purchase price against the collateral of unmarketable complicated contracts? Why would they loan it? Mere interest would hardly compensate for the business risk. What is really going on?

I am hopeful that the “worst of times” may provide opportunity for public recognition of fundamental problems that cannot be addressed in times of prosperity. Hopefully, there are energies in the successful Presidential candidate that will be manifest following November success.

Also of interest:

“Corpocracy – Failures of Trust”/Robert A.G. Monks on
“The Paula Gordon Show:
Conversations with People at the Leading Edge”(sm)

Atlanta, GA/October 22, 2008 CEOs and Business Roundtable companies so dominate the U.S. government that democracy and capitalism both are threatened, says Robert A.G. Monks, a venture capitalist, businessman, corporate attorney and the world’s most feared shareholder activist. “We must reverse the trend before it’s too late,” he says in conversation and in Corpocracy. The good news is that the solution is already at hand.

“You don’t need any new laws,. You don’t need any new bureaucracy. And you don’t need any new taxes,” he says. “The laws are already in place. We have the Security and Exchange Commission (for mutual funds), the Department of Labor (for pension funds) and the Federal Reserve (for bank trusts). They’re already charged with requiring trusts to act solely on behalf of their beneficiaries.

“Pair the legal concept of ‘trust’ with shareholder activism. The majority of shares of American companies are owned in trust for a hundred million Americans. About two-thirds of the public’s outstanding investments are held by banks, mutual funds and pension funds, trustees all.

“Yet, the notion of ‘trust’ has been superceded by an economic notion: cost-effectiveness, a doctrine in economics. And now, there are courts that have said in a sense, ‘Obey the law if it’s cost-effective.’ Can a trust be ‘cost-effective’? It has nothing to do with being cost-effective!

“Economics has a beguiling characteristic that if you suspend disbelief and assume you can make a number out of values, you can put them into formula, run them into computers and out with a good answer. Well, wrong! All the important questions — things like ‘Is it the right thing to do? On balance, is it fair?’ — are not susceptible of being quantified. Having ‘cost-effective economics’ dominate the very very necessary soul of trust has gotten us where we are and we have to take it back!”

Instead of being co-opted by corporations and self-serving CEOs, trustees acting on behalf of their beneficiaries could also vastly improve everyone’s future.

“If I’m going to be a good Trustee for a pensioner who has 20 more years to work, I’m not doing the job if I just make him money. I have to run the trust properly so that he retires into a clean world, into a law abiding world, into a civil world. So I have a fiduciary duty that you can describe quite accurately — I have the obligation to manage the assets of the trust so that they are sustainable.”

Is there a role for the citizens who are currently shut out of the process?

“The people who run corporations are not bad people. It’s just that they make up rules that are most in their self-interests. It’s up to us to get those rules changed, and you can, if you start to convince the Trustees that they must be responsive to their beneficiaries.

“What can you do? The mind boggles! Go to any organization of which you’re a member — the university you attended, churches of which you’re a member — there are probably four or five groups you’re associated with. Talk to the Trustees. Find out about the endowment. Who runs it? They can go to the people who run corporations and say, ‘Do something about inappropriate actions and CEO greed.'”