Customer Reviews

The Emperor's Nightingale: Restoring The Integrity Of The Corporation In The Age Of Shareholder Activism

5 star:		(5)
4 star:		(0)
3 star:		(0)
2 star:		(0)
1 star:		(1)

 

 

One of the cover reviews of Monks 'Nightingale"' lauds the books as an "intellectual tour de force". While there are certainly high brow aspects to the content (specifically the discussion of corporations as complex adaptive systems), the author's basic premise is simple: shareholders - particularly private pension funds - must force their corporate managers not only to maximize profit, but also to adhere to David Engel's 'triad' of obeying the law, informing the public about the corporations impact on society (both good and bad), and minimizing corporate involvement in politics. Overall, Monks analogy to Hans Christian Andersen's story of the Emporer and the Nightingale is clever and appropriate. I began the book by reading Chapter One (the original story) to my children and saved the rest for contemplation of the growing need for corporate accountability. Who will deny that short-term corporate profit-making is unacceptable capitalism in a world that, as Monks points out, now must insist on "long-term economic value rooted in the social good"?

This was a stimulating and thoughtful analysis by someone who has been a successful capitalist with experience in the innermost sanctum of coporate America. It is amusing to see right wing academics (such as one of the reviewers of this book) stretch to condemn this author (a Republican businessman) for his "liberal agenda." Those who retain some sense of intellectual curiosity will find much to reflect upon here. Those who are comitted apologists for the status quo need not bother with this book.

Monks uses the science of complexity to examine the nature of organizational change. He posits that enterprises are undergoing a phase transition into a living, complex adaptive system for creating wealth for owners and society. He sees this corporate restoration process as a natural way to order the elements of corporate governance, increasing accountability to long-term owners. End notes, a glossary and an annotated presentation of articles and books on complexity science add to the value of this work. The book opens a window for the reader to discover many unique insights and perspectives about the living nature of organization. Its focus on owners (shareholders) is refreshing and important.

Great book. Gives great insight on how to create a system that uses corporations to serve people rather than a system that uses people to serve corporations.

Monks uses the science of complexity to examine the nature of organizational change. He posits that enterprises are undergoing a phase transition into a system for creating wealth for owners and society. He sees this corporate restoration process as a natural way to order the elements of corporate governance, increasing accountability to long-term owners. The book draws heavily on the new sciences (complexity science, chaos theory, complex adaptive systems) to shed light on the realities of the corporation. The bottom line in these pages is that corporate power is checked and held accountable, not by government or governance, but by the active involvement of institutional investors-pension funds and the like. The author's optimism is considerable in this regard; one only hopes he is right. There is a lot in this book worthy of your time. Overall, this work offers many unique insights and perspectives. Recommended. Reviewed by Gerry Stern, founder, Stern & Associates, author of Stern's Sourcefinder: The Master Directory to HR and Business Management Information & Resources, Stern's CyberSpace SourceFinder, and Stern's Compensation and Benefits SourceFinder.

As with Robert Monk's other books, "The Emperor's Nightingale" tries to make the case for increased shareholder activism, especially by institutional investors. In his earlier works, Monks typically linked shareholder activism to corporate profitability. His earlier works, however, also touched on a broader social agenda. In "The Emperor's Nightingale," that broader social agenda takes center stage. It is a distinctly left-liberal agenda: corporate law compliance, corporate self-flagellation through mandatory disclosure of allegedly improper conduct, environmental protection, workers' rights, etc.

The trouble is that the root claim - that shareholder activism is a good thing - is both positively and normatively flawed. There is some anecdotal evidence that institutions are becoming more active, using the proxy system to defend their interests and influencing policy through negotiations with management. Yet, there is little concrete evidence that shareholder activism matters. Even the most active institutions devote little effort to monitoring management. They rarely conduct proxy solicitations or put forward shareholder proposals. They do not to try to elect representatives to boards of directors.

U.S. public corporations are characterized by a separation of ownership and control: the firm's nominal owners, the shareholders, exercise virtually no control over either day to day operations or long-term policy. Instead, control is vested in the hands of professional managers, who typically own only a small portion of the firm's shares. This separation has costs, the most significant of which are referred to as agency costs, incurred to prevent shirking by managers. The agency cost model forces one to confront the question: who will monitor the monitors? In any team organization, one must have some ultimate monitor who has sufficient incentives to ensure firm productivity without himself having to be monitored. Institutional investors, in Monks' theory, function as such ultimate monitors. Because they own large blocks, and have an incentive to develop specialized expertise in making and monitoring investments, they could hold management accountable for actions that do not promote shareholder welfare, which should lead to a reduction in agency costs.

The benefits of institutional control, however, may come at too high a cost. There is good evidence that bank control of the securities markets has harmed that Japanese and German economies by impeding the development of new businesses. More importantly, there is a risk that institutional investors will abuse their control by self-dealing and other forms of over-reaching. If management becomes more beholden to the interests of large shareholders, it may become less concerned with the welfare of smaller investors. The U.S. experience with social investing by public pension funds, moreover, suggests that politicization of stockownership will be an economic drag. In general, the greater the extent to which a public pension fund is subject to direct political control, the worse its investment returns.

In my view, moreover, the separation of ownership and control is a highly efficient solution to the decisionmaking problems faced by large corporations. Separating ownership and control by vesting decisionmaking authority in a centralized entity distinct from the shareholders is what makes the large public corporation feasible. To be sure, this separation results in the agency cost problem described above. A narrow focus on agency costs, however, easily can distort one's understanding. Corporate managers operate within a pervasive web of accountability mechanisms that substitute for monitoring by residual claimants. Agency costs, in any event, are the inevitable consequence of vesting discretion in someone other than the residual claimant. We could substantially reduce, if not eliminate, agency costs by eliminating discretion; that we do not do so suggests that discretion has substantial virtues.

The root economic argument against shareholder activism thus becomes apparent. Large-scale institutional involvement in corporate decisionmaking seems likely to disrupt the very mechanism that makes the modern public corporation practicable; namely, the centralization of essentially nonreviewable decisionmaking authority in the board of directors. Given the significant virtues of discretion, one ought not lightly interfere with management or the board's decisionmaking authority in the name of accountability. Preservation of managerial discretion should always be the null hypothesis. The separation of ownership and control mandated by U.S. corporate law has precisely that effect.