Why companies need owners
Today's CEOs are accountable to no one, says shareholder activist Bob Monks.
NEW YORK (Fortune) -- "What this company needs is an owner," declared Sam Zell, after completing the $8.2 billion deal that put him in charge of the Tribune Co., which owns newspapers including the Chicago Tribune, the Los Angeles Times and Newsday. "It needs someone who accepts the responsibility for what this company does."
How true. Whether Zell, as a committed owner, will help save newspapers is an open question. But the fact that the real estate billionaire has a lot of skin in the game - $315 million of his money, plus the right to buy up to 40 percent of the company down the line - means that he, and his people, will be very focused on getting the job done.
All companies need owners who are engaged, committed and, ideally, thinking about long term. So argues Robert A.G. Monks, the shareholder activist, author, lawyer, entrepreneur and corporate director in a new book, called "Corpocracy: How CEOs and the Business Roundtable Hijacked the World's Greatest Wealth Machine - and How to Get It Back" (Wiley, 2007, $29.95).
Corporacy is not a pretty word, but this is not a pretty story. Shareholders of most Fortune 500 companies are so dispersed and unorganized and disempowered that CEOs are accountable to no one but themselves, Monks argues.
"A venture with one million shareholders ultimately has no real owner," he says.
The result, he argues, are the by-now familiar horror stories about excessive CEO pay, lavish severance payments for failed leaders, rejiggering of stock options and the like.
Monks writes: "History will look back on the 1990s and early 2000s as a time when the principal officers of public American corporations transferred from shareholders to themselves approximately $1 trillion - or 10 percent of the market value of public exchanges. This must be the largest peacetime movement of wealth ever recorded, and it was accomplished through stealth that amounted to theft and in a spirit of regulatory permissiveness that certainly rises near to the level of criminal neglect."
Such rhetoric aside, Bob Monks is no wild-eyed left-winger. He believes that capitalism and corporations "provide the best chance for humankind to improve its lot on earth." But like Franklin D. Roosevelt, whose administration created the Securities and Exchange Commission and modern-day securities law, Monks is a product of the world of the well born, the WASP establishment and Harvard University who wants to save capitalism from its own excesses. A biography of Monks published a few years back was called "A Traitor to His Class."
At 74, Monks has toiled for decades in the field dryly known as corporate governance, which, in fact, is all about power and accountability. He is a founder of Institutional Shareholder Services, a company formed to advise shareholders on proxy votes; of the LENS Fund, a successful activist investment fund; and of The Corporate Library, which analyzes corporate governance and ranks boards of directors. All these enterprises aim to shift the balance of power away from hired managers and toward active owners.
Surveying the landscape of corporate governance today, Monks is outraged. He skewers familiar targets - the Home Depot (XOM, Fortune 500) shareholder meeting where most of the directors didn't bother to show up, the imperial leadership of former ExxonMobil (XOM, Fortune 500) CEO Lee Raymond, the $198 million payout to former Pfizer (PFE, Fortune 500) CEO Hank McKinnell after five years of sub-par performance. Recent SEC rulings that make it all but impossible for shareholders to nominate their own candidates for corporate boards mean that shareholder democracy remains an oxymoron.
Monks finds a few heroes, as well. He's a fan of Warren Buffett, the model of an active owner, and of Jeff Immelt, the General Electric (GE, Fortune 500) CEO who works without an employment contract and for a modest wage, by today's standards. He praises institutional investors like Hermes Investment Management Co., a British pension fund, and the Norwegian Government Pension Fund because they make long-term capital investments and actively exercise their ownership rights. He calls on public-purpose organizations like Harvard and the Gates Foundation, which owns billions of dollars of equities, to do the same.
At the heart of his life's work is Monks' belief that engaged owners (as opposed to speculators or short-term shareholders) are more likely to guide corporations in ways that align with the common good. This, he says, is because owners who take a long-term view want more than a return on their investments; they want to live in a healthy, just and peaceful world, and so they want corporations to be a force for good.
This argument is hard, if not impossible, to prove, but there's logic to it. Homeowners, after all, are more apt than renters to take care of their property, invest in their neighborhoods and exercise their duty as citizens.
But even if corporations with engaged owners act no more responsibly than others, there's little doubt that CEOs, like the rest of us, benefit from strong oversight. Just the fact that Sam Zell is minding the store should bring new energy to Tribune.