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Beware all corpocratic conspirators
T he founding fathers, with a nod to the French political theorist Montesquieu, firmly embedded a system of checks and balances in the US constitution. Yet this central feature of the American polity is curiously absent from the corporate sector, where the imperial chief executive holds sway. For the British, whose tradition of shareholder activism goes back to the mid-1950s when Prudential Assurance ousted the free-spending Sir Bernard Docker from the Birmingham Small Arms Company, the lack of management accountability to shareholders in the US system is striking. As Robert Monks points out, shareholders in most other jurisdictions in the western world have the absolute right to call a meeting at which any or all of the directors can be removed by a majority vote. Not only is it more difficult to remove directors in the US, the absurd plurality voting system ensures that a slate of directors nominated by the board can be elected at the annual meeting on the basis of a single vote. Monks's strictures are not confined to the undemocratic nature of what he calls the "corpocracy". He argues that corporate power has become dominant in the US while chief executive power has become dominant in the company. Institutional investors, he argues, have failed to fulfil their fiduciary obligations and have helped entrench the corporate power structure. There has, in addition, been little or no enforcement of the legal obligation of trustees to look after their beneficiaries' interests. These are longstanding themes of Monks, who has done more than most, as a shareholder activist, to try to redress the imbalance of power. What is new in his latest book is the degree of excess to which the abuse of corporate power has recently led and the crudeness of the power play involved. This is most apparent in the grotesque rewards for failure accorded to the likes of Henry McKinnell and Robert Nardelli, late, respectively, of Pfizer and Home Depot. Nothing better illustrates the arrogance of power and lack of accountability among chief executives than the Home Depot annual meeting where Mr Nardelli's board did not bother to turn up and Mr Nardelli himself, accompanied only by the company's lawyer and a sign language interpreter, stonewalled shareholder questions for 30 minutes. It was, as Monks rightly says, a depressing commentary on the state of corporate governance in the US. He is also exercised about the nefarious practices of the fund management industry, which he correctly sees as legal theft at the expense of investors and beneficiaries. He is concerned that business has been hijacked by a narrowly economic and financial focus that neglects the public realm. This is a formidable polemic, which contains no mealy-mouthed commentary on good men and women being trapped by a bad system and the law of unintended consequences. Blame is attributed to greedy executives who have shown an extraordinary failure of leadership. Lewis Powell's judgments in the Supreme Court come in for critical attention, as do the activities of the Business Roundtable, the top chief executives' club. While Monks will no doubt be criticised for leaning too much towards the conspiracy rather than the cock-up school of history, there is no escaping the conspiracy theory when it comes to the Business Roundtable's role in subverting the Financial Accounting Standards Board's attempt to introduce realistic accounting for stock options. Other, similarly unedifying lobbying episodes are documented in the book. Nor does he hesitate to throw down the gauntlet before such investors as the Gates Foundations and Harvard University who show little interest in the governance agenda. Monks believes that out-of-control executive pay, neutered boards and ownership, an unwillingness to exercise fiduciary responsibility and the absence of an effective counterforce to corporate power are an indication of revolutionary change in governance. He fears that a loss of trust in companies, the stock market and finance generally poses a threat to the wealthcreating capacity of the US company. I suspect he may underestimate the robustness of US capitalism. Even if governance fails, the forces of the global market in goods and services are a managerial discipline far greater than any chain of accountability from management to shareholder. That said, his thesis is right in a broader sense. If business ceases to enjoy legitimacy in the public perception, there is a risk that wealth creation will be damaged by bad law, ill-considered regulation and the rest. This book will make no converts in the Business Roundtable or the US Chamber of Commerce. But its unarguable point about unaccountable corporate power cannot be ignored. http://www.ft.com/cms/s/0/9c6c32e6-cd41-11dc-9b2b-000077 |
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