The following interview appeared as part of GovernanceMetrics International’sFounders’ Forum. GMI is the leading independent provider of global corporate governance and ESG ratings and research. Corporate stakeholders – including leading investors, insurers, auditors, regulators and others – use GovernanceMetrics services to identify and monitor risks related to non-financial measures covering key environmental, social, governance and accounting risk factors.
This is Part 2 of a conversation Research Associate Michelle Lamb had with Bob Monks, co-founder of GovernanceMetrics International. (Part 1 is posted here.) The topics discussed in this half of the interview relate to Bob’s experience in the social, or “S”, component of the ESG research that GovernanceMetrics International explores. Topics range from disparity in benefits of CEOs vs. the average worker, to the issue of the “disinvolvement of ownership” of corporations, and Bob’s predictions for both areas in the future.
I understand that another issue that is very close to your heart is retirement security. [Bob worked on this issue extensively during his time leading ERISA, and has followed it since.] You had raised this idea of not just having mandated disclosure of pay disparity (between the CEO and average workers) but also benefit disparity, particularly related to pensions. Can you explain what you meant by that?
In the last 30 years, there has been a lot of attention paid to the increasing gap between the highest compensated people in our society and the rest. And one element that has never, as far as I know, been included in that calculation is the complete change in the American system for providing for retirement income. Thirty years ago we had a system in which by and large the workers in big companies were offered what I will call “real pensions.”This meant a promise of an amount of money that would reflect inflation and that would provide an adequate revenue for people to live on after they have retired from the company. At that time, the promise to pay the pension was made by the company, and if the company’s promise failed, the government – through the Pension Benefit Guaranty Corporation – would make good on that. Now that promise has been eroded to the point of virtually ceasing to exist for private employees.
The difference isn’t only a matter of money; the difference is most importantly a matter of risk. Whereas the risk of the pension promise in past times was borne by the company and then by the government, under the present system the risk is entirely borne by the individual. So we haven’t just shifted a money commitment, we have also shifted a risk element. This started with IBM about 15 years ago. They were the company in America that had perhaps the best relations with their professional staff: if you took a poll of the 10 best corporate managers in the 20th century you’d probably get Lou Gerstner on the list. So the best manager of the best company in America set about changing the pension system from one where the company guaranteed an amount of money related to the cost of living to one in which all risks were run by the employee. Now, that in real terms was a transfer of wealth far greater than the numerical transfers that people usually talk about.
Believe me, the chief executive officers of these companies kept the traditional pensions. So this, to me, is perhaps the most unacceptable aspect of the transfer of wealth, and it is particularly irritating to me because nobody talks about it, thinks about it, or understands it.
So do you think this is just a social justice issue, or is it something investors would be impacted by?
I think the problem for investors is one of trying to understand what are going to be future costs for the company. There has to be a question, with something as unfair as the present arrangement, whether in the future companies will be asked to do more, will be required to do more…. I think an investor would have to feel that a company that had aggressively cut back on the entitlements of employees to a real pension might well be a company that would face future liabilities. These would be numerical liabilities; I think there is also a reputational question, and certainly a problem of hiring new, first-class people. There is also the possibility that they will be forced, either by employees or by a future government action, to incur expenses they’re not presently incurring.
What other social or environmental issues do you think are most important today, from an investment perspective specifically?
I think the most important other question is what I would call the “sterilization” of the ownership characteristics of equity stock. For one reason or another, the capacity of owners to hold managers accountable has progressively diluted… but, in most respects, shareholders of American companies have what could be taken as no rights. In fact, they have the capacity to be involved with resolutions that are approved by the SEC but in almost all cases those resolutions are just advisory, or precatory. As a real matter, owners have not been able to retain or to create for themselves real rights. In the American case, you can illumine this problem with reference to one simple phenomenon: American shareholders, by and large, do not have an absolute right to call a meeting of shareholders. In states like Delaware, for example, they say, “oh, well you can get rid of directors. Here’s our statute that says you can get rid of directors at a meeting.” But then you push a little further and you say, “Well, can I have a meeting?” “Oh! No, of course not.” This is what has made corporation lawyers rich for years – being able to present seemingly responsible actions that, in fact, preserve full authority for their clients.
The difficulty of the disinvolvement of ownership is particularly serious because the current environment has made chief executive officers virtually autocrats without any effective accountability to anybody. When you combine that with the Supreme Court saying companies can spend as much as they want to in the political system, you begin finding yourself in a very bizarre place where the CEO of a company really is the person who is the principal player in the political life of the country. Well, the trouble with that is, corporations are creatures of law, of the state, and when you come to the point where the creature controls the state, you have a level of power that is utterly unacceptable under any kind of democratic tradition. Yet that seems to be where we’re inclined at the present time.
Whether the Supreme Court can be persuaded to cut back on the license it has given corporations to dominate the political process, we really have no confidence in that subject yet. The idea of a Constitutional amendment isn’t promising, both because it is rare that such a thing passes, and because of the funding of such an undertaking. Instead, I think the real hope, if there is one, is for the institutional shareholders to understand that they must collectively begin to assert the ownership rights of their beneficiaries. They lost so much money in the stock market crash that they’ve got to understand that most people correlate some of that loss with the failure of the owners to hold management responsible. Institutional investors, either through litigation or through just common sense, are going to have to understand that they really cannot conduct their business in a tolerable way unless they do assert the ownership rights of demanding accountability and having oversight.
Having founded (GMI predecessor firm) The Corporate Library more than a decade ago, and looking forward to the next decade, what role do you think our kind of research can serve?
I think we really have our best days ahead of us, which is very encouraging because we’ve had a good time so far. What I see as being really important is the recognition that the non-financial factors – corporate governance and impact on the environment, just to take two of them – are essential elements in evaluating the quality of an equity investment. They’re essential from the point of view of risk, and they’re essential from the point of view of cost analysis. I think that The Corporate Library, particularly in governance – what we’ve been most expert on up to this point – has conscientiously grounded all of our work not in something we do because it intuitively feels right, but because we’ve been quite rigorous in requiring correlation between our recommendations and long-term value in the market. I think that by continuing that practice, and with the merger with Audit Integrity and GovernanceMetrics International, we will gradually be able to expand what we’ve done in governance through the whole spectrum of the environment and the social factors.