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Corpocracy: How CEOs and the Business Roundtable Hijacked the World's Greatest Wealth Machine -- And How to Get It Back

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Corpocracy is an ugly word, not just because of its mixed roots, but because of the governance situation in the United States which it has been coined to describe. In this compelling book, Bob Monks has summarised the means by which American business interests have conspired to suborn the state. No-one else has his authority or breadth of experience in this field of corporate governance. A corporate lawyer and banker by calling, he headed the division in charge of ERISA in the political field and he helped launch Institutional Shareholder Services and LENS to prove that active investors create value. He has distilled his remarkable range of experience into a brief and highly readable polemic. In doing so, he argues that the balance of power between corporations, those who own their shares and those charged with regulating their conduct has to be redressed.

It might, at first sight, seem that the situation which he analyses so penetratingly is peculiar to the United States and that the wider world need not actively concern itself with the author's message. This would be to underestimate the importance of this book. The lessons to be drawn from the consequences of the rise of the political power of American business, which it chronicles, are universal. In addition, given the global reach of American corporations, the need to restore their accountability to their investors within an effective regulatory framework has global implications.

Corpocracy is not a lament, though it describes much that is lamentable. It is a sober and arresting account of the manner in which the author's personal efforts to persuade the appropriate authorities, regulators and major investing institutions to do their duty, morally and juridically, has met with little effective response. The book's impact is all the greater for the restrained manner in which Bob Monks describes how those appointed to discharge their statutory and fiduciary duties repeatedly failed to do so. Inaction by the gatekeepers, left the field open to the untrammelled rapacity of imperial CEOs.

The balance of power between boards and CEOs in the United States remains a paradox, given the country's regulatory history of preventing accretions of power in relation to trusts and to banking. Nowhere else would it be possible to elect a director on a single vote, nowhere else could shareholder votes be invalidated by "ballot stuffing", nowhere else are shareholders so limited in their ability to raise issues at AGMs, which some directors may not even bother to attend. The prevailing concept of CEO/chairmen selecting their outside board members, thus compromising their independence, strengthens the hand of the CEO at the expense of that of the board.

The response to this imbalance in governance terms is the financial track record of US corporations, but at whose expense has it been achieved? Bob Monks' answer is:

"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." In addition, there is the extra 5 percent of profitability that the Corporate Library metric tells us is lost through bad practice, plus the opportunity cost of boards focusing on short term personal aggrandisement at the expense of sustainable profitable growth. As the one member of the SEC, who opposed the Committee's recent decision to limit the ability of shareholders to put forward resolutions, said: "Corporate governance in the United States is not well served by inattentive boards that are effectively unaccountable to shareholders."

Inevitably one of the headline manifestations of this lack of accountability has been the grossness of the rewards, which some of these principal officers have arrogated to themselves, for failure as well as success. There are attempts to justify these excesses by analogy with the earnings of stars of sport, stage and screen or by claiming that they are market determined. The analogy with the stars is manifestly spurious. The stars earn what their individual talent commands in the hotly contested market for entertainment. The profits of a corporation are earned collectively and represent the sum of the efforts of everyone in an enterprise. The issue therefore is how they should be distributed in a form that would be generally perceived to be fair and in accordance with the concept of natural justice.

A corporation's pay structure should meet the test of equity, rewarding those working for it, from top to bottom, in relation to their contribution to its performance. Ignoring equity in rewards sows the seeds of social division and dissension with its longer term consequences. What seems to have set the bounds to the multiple by which the earnings of the principal officers of companies exceed those of the average employee in most countries is a sense of social cohesion. The multiple varies by country and through time, but it represents a social constraint or discipline, which carries with it economic advantages not to be ignored.

The fact that shareholders are outraged by the grosser excesses of the pay packages of the principal officers of some corporations is no more than a symptom of the lack of accountability of US boards to those who own their stock, hence the theme of the book. It is a cause which Bob Monks has espoused and pursued with a determination and energy that is wholly admirable and selfless. In spite of setbacks, he believes that this essential accountability can be restored. He sees no cause for new laws, agencies or fiscal measures, though the existing statutory and regulatory framework should be effectively enforced. He argues that it is the major investing institutions that carry the obligation to themselves and to society to restore trust in the capitalistic system.

They have the power to reform the governance of corporations and they have a straightforward economic incentive to do so. The obligation, however, of the great foundations, among the investing institutions, to play their part in bringing about reform goes beyond the calculus of financial gain. It lies at the heart of their creation. They directly assist their chosen causes, but that is within the wider context of a market system which provides them with the ability to do this. They have a responsibility to maintain the means by which they fulfil the aims for which they were founded.

The book's message is therefore optimistic, provided that it is heeded in time. Trust and accountability can be restored, but it will take courage and above all leadership to do so. What is needed is enlightened leadership by those in a position to exercise it in the investing institutions and in corporations themselves. In Bob Monks' words:

"It demands that those with a majority stake in the corpocracy - its principal owners and beneficiaries - lead the way back to the broad light of day. The hour is late. The sun won't always be waiting."

Read Corpocracy and judge for yourself!

Robert Monks begins by informing readers that he is a strong supporter of for-profit corporate enterprise. He then goes on to recite how the leaders of these enterprises have recently run amok in the U.S.

"Efficiency," without regard for externalities (eg. pollution, off-shoring American jobs), using "GWAP" reporting (Gee, Whatever Accounting Principles), surrounded by board member, accounting firm, pay, board-evaluation consultant, and stock analyst conflicts of interest, fortified by think-tanks funded by corporations, and beyond accountability via ending the "one share, one vote" rule - their top leaders enjoy scandalous pay and retirement packages, without regard to organizational performance.

At they same time today's corporations are expanding their realms by privatizing government roads, health care, and warfare functions, in the supposed name of efficiency - while actually usually costing more, providing lower service levels, and/or even less accountability. (Helping vitiate a key Democrat-party base of government workers, and gaining increased lobbying influence are additional benefits.) Other government "benefits" today's organizations enjoy include toothless law and regulation enforcement (eg. SEC, DOL), and the ability to shed expensive pension obligations through bankruptcy or simply walking away.

Monks sees pension funds as having a key role in taming today's out of control corporations. Specifically, he touts Hermes Investment Management Company (a London pension fund for phone workers) as an example of what could be done. Monks also praises Elliott Spitzer for accomplishing far more than the SEC or DOL with fewer staff, CEOs Gary Immelt of G.E. and Frank Blake of Home Depot (replaced Robert Nardelli) as examples of principled leaders.

One final comment: Late in his book Monks almost off-handedly remarks that 10% of market value ($1 trillion) was transferred from investors to corporate principal offers. He also asserts that about 95% of all stock options go to the top 15 or so officers. I don't for a moment question his conclusions - Monks' reputation is quite solid. However, I do wish he spent more time elaborating and emphasizing these points.

Robert Monks is a true visionary, and this assessment of corporate control of every institution set up to provide oversight or assure accountability will provoke a series of "aha" moments from anyone who has wondered why we permit corporations to determine everything from pollution levels to the outcome of elections. With mastery of the languages of finance, economics, business, politics, culture, and values (in all senses of the word), Monks ties together the Babel of vocabularies with analysis that is utterly clear-eyed and recommendations that are creative but utterly rational.

We seem increasingly to be living in an America where the big and little decisions are being made by those who run large corporations. All but invisible, the average American now receives her news from media owned by big business. We are inundated by advertising and marketing offensives -- both explicit and disguised -- to distraction, and we are represented in government -- national and local -- by individuals who serve mainly the objectives of corporations, having made it to office largely through the assistance of those very same corporations. Robert A.G. Monks has pulled away the covers, revealing who is in bed with whom, and very clearly articulating how we got to the unbalanced and unhealthy state we find ourselves in.

This well-written book made it very clear to me -- someone with little interest in business or economics -- how our current cultural decline and the coinciding lack of any kind of central (spiritual) values beyond quantity and wealth have led to where we are. It gave me hope. Robert Monks has followed the path of the hero, hearing the call and pursuing his quest, though it makes him an outsider (see "Traitor to His Class"). From that somewhat isolated vantage point, he has something of great value to show us.

Corpocracy both delights and informs in a way only Bob Monks can. His lifework has been delineating the underlying dynamics of corporate power to devise a system that combines wealth creation with societal interest. No one else can write as well about "How CEOs and the Business Roundtable Hijacked the World's Greatest Wealth Machine" because no one else has been as engaged as Bob Monks from so many angles. His insights into pivotal points of view and decisions are enlightening.

For example, he points to the role of Douglas Ginsburg, a leader in the field of law and economics, in instilling a belief that it is okay for corporations to violate environmental laws, as long as they account for possible sanctions in their budget. Under Ginsburg's view, according to Monks, people aren't motivated by moral or social obligation but by simple desire and cost-benefit analysis.

Then there is Bob's analysis of Lewis Powell's court decisions. His finding of a constitutionally protected right to "corporate speech" provided the judicial framework for management "to commit untold corporate resources to influence public opinion and public votes - resources so huge and unmatchable that individual contributions are now all but meaningless in state and nationals elections."

And, of course, the Business Roundtable holds a special place in Bob's heart. The "BRT has come to function in significant part as an agent for the CEOs...who have established themselves as a new and separate class in the governance of American corporations, answerable to virtually no one, accountable only to themselves."

Monks appears to be a believer in the forces of markets but regulated to ensure a level playing field. Without that, the overall effect has been to turn the stock market into "a gigantic, round-the-clock casino that runs the biggest game the world has ever seen." Market values and goals have become national goals. Corpocracy is another top-notch effort from the individual who continues to have greater lasting impact on the field than anyone else. Still, I would have placed a different emphasis in the "How to Get it Back" portion of the book.

Monks may be A Traitor to His Class, but he is also a gentleman, reluctant to force change. In his flights of fantasy, Bob dreams of a president who will use his/her powers to end conflicts of interest and compel good governance in contractors. "The framework is in place. The laws exist," he insists. Yet, two pages later he notes the need for legal changes. He reminds us the First Amendment "was not meant to protect the Church from government intrusion, but rather to protect the government... We need similar protection today from the dominant institution of our own time, the corporation."

How can we get shareowners to think of themselves as long-term owners rather than as betters at what Bob calls the biggest casino the world has ever seen? If they know they are owners, what tools can we make available so that voting is not only easier but also more intelligent?

While Bob's focus has been on institutional investors, retail investors also deserve attention. There are dozens of efforts underway. Here are four worthy of further attention:

* Facilitate the ability of proxy assignments, so that retail investors can vote by brand...like CalPERS, Domini, TIAA-CREF, or Fidelity.
* Andy Eggers' Proxy Democracy system would allow retail investors to discover how trusted institutions are voting.
* Glyn Holton's idea of a proxy exchange would allow retail investors to assign proxies to an intermediary that would find like-minded voters.
* Collectively Paid Proxy Research, based on the ideas Mark Latham laid out in Proxy Voting Brand Competition builds off Monks' ISS idea but eliminates the "free rider" issue.

When, on some future date, the Mount Rushmore of Corporate Governance is carved into some mountainside, Bob Monks' profile should be chiseled into the stoneface in a position roughly corresponding to that of Washington's or Jefferson's. Present at the creation, Bob Monks has had a career in corporate governance that spans the transition from the early era when governance activists were seen as gadflies, tilting at windmills, to the current era when Institutional Shareholder Services (his creation) wields enormous power. Been there, done that - you name it and Bob Monks has done it because he has done everything in corporate governance.

So what does Bob Monks have to tell us at a time when the conventional wisdom is that corporate governance activists have triumphed and managerial discretion has been constrained? As usual, his views are counter-intuitive: Corporations are today beyond shareholder control and dominate the political process, emasculating meaningful regulation. Many of his assessments are tart, pungent and disenchanted: "the SEC has become an advertisement for the mandatory sunset of government agencies" (p. 167); today, "we are . . . under the thumb of a corporate oligarchy, bent on plundering and unchecked by any effective ownership," (p. 191); "without effective regulation . . . and without institutional pressure to reform, most corporations - and the largest among them - will loot their own resources to enrich the very few at their helm" (p.186). Basically, he views corporations as self-perpetuating hierarchies in which boards are manipulated by senior executives.

These assessments will seem unduly harsh to many of us, but this is a work of advocacy. Like Emile Zola writing "J'Accuse" in defense of Captain Dreyfus, Monks is not worried about overstatement. Still, if Bob Monks is not always fair, he is often fascinating. The strength of this book is not the nuanced subtlety of its judgments, but its description of life on the cutting edge of corporate governance - how it is actually practiced.

Prescriptively, Bob Monks focuses more on shareholders than boards. He seems most annoyed with his own alma mater, Harvard, and similar foundations for their passivity as investors, and he is similarly critical of "socially responsible investors" who have strong prophylactic rules for what corporations may not do, but exercise little oversight over how they do what they may do.

Monk's greatest concern is the sheer power of the "corpocracy." The danger is clear and present in his view that corporations, organized through groups such as The Business Roundtable, can dominate the political process and thwart the democratic majority. This book was written before the SEC in late 2007 rejected proposals for greater shareholder access to the proxy statement - a decision which he would no doubt cite as proof of his hypothesis. In truth, fear of corporate power is a recurrent theme in the classic literature of corporate governance. As he well knows, seventy five years ago, Adolf Berle and Gardiner Means concluded their book, The Modern Corporate and Private Property, with a warning that the power of the corporation was coming to rival that of the state. But then came the New Deal, and a wave of regulation.

Writing at the end of the Bush Administration, Bob Monks is similarly positioned to Berle and Means, who wrote in 1932; each warned about excessive corporate power after an era of rampant deregulation. But will the world look the same in five more years? Who knows? Ironically, the latest development may be the appearance of major corporations in China, Russia and elsewhere that are clearly puppets of the state. Sovereign wealth funds similarly show that globally the balance of power between the state and the private corporation may be shifting towards the state.

Still, if Bob Monks has not charted the future in all its complexity, he describes the excesses of the present with passion and anger. "Corpocracy" is a call to arms to investors to forego passivity and protect themselves. In essence, he is saying: "Shareholders, arise; you have nothing to lose but your chains."

What Sir Adrian Cadbury and others have written on the importance of this book, its incisiveness and the impact of the issue cannot be stressed enough. For anyone insterested in what's going on in the US this is the best bbook I've read from one of the foremost authorities on the subject. Buy it and read it: it will get you mad as hell.

The author has given a great expose' on the problems of abuse that exist in corporate America. The expectation that corporate boards are serving as a watch dog in their duties is a myth that is propigated by the illusion of proxy voting and "independant" directors. I would love to hear more about solutions that are available to small shareholders to counter this movement. A listing of websites and ideas on how shareholders can consult other experts on issues of the day when corporate boards are meeting is important and could have helped in this book as well. Still a great read for all shareholders to understand the landscape of corporate governance. dls