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Management in Practice

Who owns the crisis?

Much of the public anger over the economic crisis has been directed at the CEOs of companies receiving public funds. Ultimately though, CEOs of public corporations are answerable to shareholders. Robert A.G. Monks talks about the role of shareholders in the crisis as well as the effectiveness of policy and regulatory frameworks governing corporations.

Q: You have written that a headline of "Ineffective Shareholding Root of Corporate Tumble" might not grab most people's attention, but that it is the story that needs to be told. Could you explain that?
In the United States and the United Kingdom, we moved from the post-World War II pattern of millions of shareholders down to maybe 50 large institutional owners controlling various companies. The basis of capitalism has been the assumption that owners would look after their own interests, and when you got down to 50 owners, the logistical problems of dispersed ownership could have been reduced to a point where you might expect positive results. Unhappily, the 50 owners were fiduciaries rather than direct owners. With the best will in the world, government policies created these large pension and mutual funds without anyone understanding that in the absence of a rigid enforcement of fiduciary law, the institutional agents would act in their own interest and not in the interest of the shareholders. So, we've had this pattern over the last ten years of the institutional shareholders — the majority shareholders — essentially being silent because, in their capacity as banks, they had commercial relationships with the companies that were more valuable to them than the shareholder interests they represent, and there was no enforcement mechanism to require them to perform their legal fiduciary duty.

Q: Where can we go from here?
That is the question, and, of course, it's being played out every day in the United States. It follows closely on Qn's interview with Larry Summers, because while he was talking in that interview about government ownership in terms of sovereign wealth funds, that has, ironically enough, turned out to be the informing energy behind recent events. We find ourselves asking how the United States government, as owner, is going to vote for AIG directors, for example.

At the moment the government hasn't settled on a policy as to how they're going to exercise their ownership. Their concern is simply to get out of the problem, and then, when they get out, they'll have a little more time to think. But I worry that if the government continues the way it is now, understandably and opportunistically, that we will end up with government-directed enterprises, and that the wealth-creating potential of the private corporation will be largely lost.

An alternative could start with a model that the UK has tried, which is United Kingdom Financial Instruments (UKFI), a special purpose corporation created in November 2008. Chancellor Darling assured Parliament that the corporation would exercise its powers so as “maximize sustainable value for the taxpayer." If the government entity that is the stockholder works under the traditional driving force of private ownership, I believe that we could preserve the profit-making genius of the public corporation.

Q: It's typical to come out of a crisis with a whole new set of regulations. Do you think that is warranted here?
We have existing laws that, if enforced intelligently, could create a changed climate. I've worked quite a lot in the government, and I am sensible to its limitations. But I think one lawsuit brought by the Department of Labor could change the culture. The Department of Labor enforces the laws respecting retirement income plans — the so-called ERISA companies, which are in effect the largest single shareholder of American companies. Just bringing a lawsuit against those companies saying, “Listen, your beneficiaries have lost 30 % of their assets. What did you do affirmatively as an owner of these companies that have lost so much value to diminish the loss? What steps did you take? Did you act prudently as an owner?" would have a profound impact.

Q: Are there examples of engaged, informed ownership internationally that we could look to?
The best-articulated model is that of the Norwegians' Norges Bank Investment Management Company which manages the Norwegian Pension Fund-Global. Many aspects of being a global activist/owner are probably more fully expressed in documents on the NBIM website than anywhere else of which I'm aware. They have begun the process of actually being activists, but they're doing it quite slowly and patiently, trying to see how they can best become involved. So, their activism has been largely theoretic, to date.

Q: Do you have concerns about the unintended consequences of activism, especially when shareholders are in a global forum, where the ripples can spread quite far?
There's no reason to think that shareholders have any particular virtue. Certainly, shareholders as a class are no more worthy than employees, or customers, or suppliers, or communities in which companies live. It is simply that they are positioned to have money and to be able to take on a role. The aspect of shareholder activism that would be most difficult would be if shareholders were to be allowed to get together, and to act in a way that does not take a spacious view of the interests of the other constituents of the corporate constellation.

Q: Finally, what is the role of the board of directors?
I am of the opinion that we do not have a real commitment to boards of directors. I say that as someone who has served on perhaps 10 New York Stock Exchange-listed boards over the last 50 years. Unhappily, it seems to have accommodated almost everyone to maintain the pretense that boards are performing the obligations and discharging the responsibilities that are set forth in the statutes and the various learned treatises, while, in our heart of hearts, we know that they're not doing it.