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For the shareholder activist, these have been both the best and the worst of times.
A CFO Interview, CFO Magazine
March 1, 2003
For most of the past 16 years, shareholder activist Nell Minow has felt like a cross between Chicken Little and the Little Red Hen. Her calls for reforming corporate governance have often been spurned by companies and ignored by shareholders. "It's been like crying, 'The sky is falling — and who will help me bake my pie?' " she says.
No longer. Between the numerous financial frauds of the past year and the reform proposals, corporate governance has become topic A. The 51-year-old Minow has become a hot commodity, appearing on every program from Nightline to National Public Radio to relay her message to an audience more ready to listen than ever before.
Minow's message is twofold: boards of directors must be improved, and shareholders must take more responsibility for seeing that they are. In her view, boards that have complete access to corporate financial information and are not controlled by CEOs are the best defense against corruption. The meltdowns at Enron, Tyco, and WorldCom, she says, point to the need for a "board that can exercise oversight over the CEO and not just sit there and applaud politely through PowerPoint pep-rally presentations."
While Minow, who currently serves as editor of The Corporate Library — an online repository for corporate-governance information — is pleased with many of the reform efforts, she worries that most have ignored the duties to shareholders. Instead, she says, the proposals have "focused only on the supply side of corporate governance — what managers must do, what accountants must do, what boards must do. There's been no focus on the demand side." She explains, "You can have all the disclosures in the world, all the rights. But if you don't have a shareholder community that is willing and able to exercise those rights and act on those disclosures, you aren't going to see a change."
The University of Chicago-educated lawyer thinks this may be the year for "dramatic improvement" in shareholder involvement. Obviously, shareholders are angry about the scandals, she says, but that anger has been compounded by the silence in the business community and its members' failure to "separate themselves from the bad guys." Her advice to companies: take the lead in changing their own governance policies. "You don't want to be in the middle of the pack on this," she says. "You want to be at the front."
Minow has never had a problem being out front in her previous incarnations, first as general counsel and president (alongside founder, governance activist, and longtime collaborator Robert Monks) of Institutional Shareholder Services, which advises large institutions on corporate-governance and proxy-voting issues; then as president of LENS, a fund that invested in troubled companies and pressured them to change their governance and improve their performance.
Corporations aren't the only object of her scrutiny. A passionate movie critic, she wrote The Movie Mom's Guide to Family Movies, which she recently moved online. By the end of the year, she'll help launch a Web site for parents to give feedback to the movie industry. "So if you think a movie is particularly offensive," she explains, "it will say, 'Click here to send an E-mail to the board of directors or the company that produced it.'"
Recently, Minow sat down with CFO deputy editor Lori Calabro to discuss her hopes for reform. How will she know if governance is really improving? "I will look to see whether there are major changes in boards, whether compensation improves, whether nominating committees improve, and whether shareholders step up to bat and speak out. I'm very hopeful all of this will happen — at least until the next bull market arrives."
You've been at this for the past 16 years. Did you ever think you'd see a year like we just had?
Never. I actually got to quote one of my favorite lines from literature: "[Her] face bore the triumphant look peculiar to those who, suspected of hyperbole, are found to have been employing meiosis [rhetorical understatement]." It's from Mrs. Miniver, a novel by Jan Struther. That's how I felt all year. We'd expressed mild concern about some of the companies that melted down. But even in my wildest and most-paranoid fantasies, it never occurred to me that there would be this level of corruption and neglect.
Many people still say the cause of the meltdowns was a few bad apples as opposed to a systemic problem.
It's fair to say it was a systemic problem. But there are some good apples, and one of my strongest criticisms of the corporate community is that they have not done an adequate job of distinguishing themselves from the people who are corrupt.
I've spoken to many CFOs who voice that view individually.
Not good enough. Let's talk about the person who was generally considered to be the best CEO of the last 30 years — Jack Welch. The fact that when he announced he might leave the company, [he demanded that] his lifetime dry cleaning, apartment, Knicks tickets, and catering bills be covered — and that the board went along — shows me that the problem was not just a few corrupt or neglectful individuals, but a failure to understand what the role of the board should be in those kinds of negotiations. That had a huge ripple effect. Because when Welch got his board to agree to that kind of retirement plan, then [IBM CEO] Lou Gerstner, who was on the GE board, got the IBM board to agree to a similar plan. The fact is, we haven't seen widespread corruption on the level of Tyco or accounting fraud on the level of Enron and WorldCom. We have seen widespread excessive executive pay, widespread poor financial reporting, and widespread neglectful boards.
Do shareholders bear any responsibility?
Shareholders were the enablers. They voted in favor of a lot of bad pay plans, they voted to reelect a lot of poor boards, and they failed to pay attention to many, many red flags. Furthermore, shareholders themselves have been corrupt at times. In the Hewlett-Packard/Compaq merger last year, one of HP's largest investors, Deutsche Asset Management, voted against the merger. Then, after receiving a call from the investment-banking side of Deutsche, they agreed to reconsider. Carly Fiorina went to visit, gave them a check for $1 million, and they changed their vote. That kind of behavior is inexcusable.
What were the lessons of the past year for the shareholder community?
The single most important thing I can say to you is that while both the Sarbanes-Oxley Act and the New York Stock Exchange reforms will make a difference, the most important change will come from the market itself, when shareholders insist on better corporate governance.
There have been egregious governance violations in recent years. Why has it been so hard to get shareholders to act?
When The Corporate Library first started, we picked Global Crossing as the worst [CEO employment] contract in America. I had read through about 20 contracts, which were fairly identical, before I got to this company. It said the CEO had a $10 million signing bonus, which was OK, but he also got 2 million options at $10 a share below market. Furthermore, the contract provided the make and model of the Mercedes the company would buy for him, and specified that once a month Global Crossing would fly his family, including his mother, first class to visit him.
So, from that contract I concluded that (a) the CEO thought the stock was going to decline in value and (b) the board was incapable of saying no to him.
But no one really took it very seriously. People said, "Isn't that cute that he wants his mother to come out and visit?" I got E-mails saying, "This is the fastest-growing stock in the history of the NYSE, and if I am willing to spend a quarter of a cent a share to fly his mother out so he doesn't have to worry about her, it's not your business." I just felt that there was what I would now call governance risk.
You've said you consider yourself to be "an anthropologist of boards." What do you mean?
My training is in law, and lawyers tend to think in terms of structural solutions. But in the boardroom, there's no structural solution that can't be subverted in some way. So when you're trying to figure out what's wrong in the boardroom, you have to look at it more as an anthropologist — what is it about the human interaction and the culture in this little world that makes it so ineffective? I've met a lot of corporate directors, and almost without exception they are intelligent, honorable, and dedicated, and bring a tremendous set of experiences into the boardroom. For that reason, it's really endlessly fascinating why they do such a bad job.
What is it about the culture that breeds ineffectiveness?
One thing is that the people who are invited on boards are consensus-builders. They are brilliant at sizing up the norms of whatever situation they're in and adapting to them. But unfortunately, it creates a culture that makes it difficult to ask questions.
Why are you so convinced that a better board could have made all the difference in last year's cases — or in others?
Who is in the best position to identify and mitigate damages when you do have a bad apple? Obviously, there are always going to be crooks. But let's talk about some of these companies for a minute. At Tyco, Dennis Kozlowski did not ask for a contract until 2001. The contract he gave to his board, which they signed, provided that conviction of a felony was not grounds for termination. A better board might have said, "Dennis, we're sorry: Are you planning to knock over a bank? Is there something you want to tell us?"
The Conference Board recently recommended a structural change — separating the roles of CEO and chairman--although it gave multiple methods for doing it. Why should that work?
Splitting the roles is inconsistent with the cowboy culture, and it's certainly inconsistent with the popular notion of the CEO as superstar. But my concern is the same as The Conference Board's — I don't care how you do it, but you have got to pry the CEO's fingers off the control of the agenda and the information. And if their egos are so sensitive that they can't withstand a sharing of a title, then perhaps they should not be in the job.
There have also been calls for boards to meet without the CEO present. How significant is that?
When I testified before the New York Stock Exchange, I told them that that rule was the most important requirement they could impose. There again, you have to get this overpowering presence out of the room and allow for candid exchange. The problem is that the CEOs still pretty much control the nomination process [for board members] and will always say, "I'm looking for someone who has XYZ credentials and is a consensus-builder." You don't want people throwing things at each other in the boardroom, but when you have 11 consensus-builders and one visionary, dynamic leader who bosses people around all day, it becomes almost impossible to achieve anything but the lowest-common-denominator sort of performance.
What about independence? It seems to be the common denominator among all the reform proposals.
That's gone a little too far. Independence does not guarantee competence or commitment, and those are more important than independence. Moreover, it is hard to judge who is or is not independent from the disclosures that we currently have. I once went to an annual meeting and stood up and said, "You've got five members on the board of directors: the CEO, a full-time employee, the company's investment banker, the company's lawyer, and another guy. Hey, other guy: stand up and tell everybody here what your connection is, because I don't believe that you are independent." We found out afterward that he and the CEO played jazz clarinet together. That's why you can only judge independence by looking at what board members do.
The Corporate Library's Interlock Tool analyzes the interconnectedness of board members. Just how many degrees of separation are there?
It makes the [six degrees of separation from] Kevin Bacon game look like nothing. Out of the 20,000 directors in our database, you can get from any one to almost any other one in no more than two or three steps. We consider first degree to be their corporate connections; second is their noncorporate connections, which include nonprofits, trade associations, and golf clubs; and the third degree is interlockings among them. If you are on two boards with people who are on a third board together, that's a third-degree interlock. So they are all pretty connected.
How would you empower board members to stand up to management?
You need a carrot and a stick. The stick was the year 2002, which scared the heck out of all of them. The carrot is good ratings and pay that reflects board members' performance. I have always said that boards are like subatomic particles — they behave differently when they are being observed, and knowing they are being observed will make a difference [going forward]. I think too that we'll see more turnover on boards in the next 2 years than we've seen in the last 10. People who are not comfortable asking tough questions are going to leave, and people who are not uncomfortable asking tough questions will be more willing to serve.
How much should directors be paid?
A lot more than they're getting paid. Pay them more because we have very high expectations: we want them to devote at least two days of background work for every day they spend in a board meeting. If that amounts to three or four weeks out of the year, we should pay them a commensurate rate. That pay should be in stock, and we should require them to hold the stock for three years after leaving the company.
What about their own equity stakes?
The first thing you should do after agreeing to go on a board is to buy a lot of stock. What's a lot depends on who you are. But the academic studies tend to show that if people have at least $100,000 invested in a company, it seems to affect the stock performance.
And what would you do as far as changing the mechanism of the nominating process for the board?
If I ruled the world, I would allow shareholders to nominate one or two candidates on the management's proxy slate every year. But understanding that my idea would require some very big changes, my backup is a very independent nominating committee working with a search firm. Obviously, we don't want anybody the CEO doesn't feel he can get along with. But there's a strong human impulse to dance with the one who brung you to the party, and I want the new directors to know that the one who brung them was the nominating committee and not the CEO.
Do you think this might be the year when we actually see shareholders demanding pay cuts for executives in nonperforming companies?
I think so, and I think companies that are out in front announcing pay cuts will get a lot of support from shareholders. I worry that we're going to see less of a tie between pay and performance, because of the overall market slowdown.
Is there any ideal way of linking performance to pay?
No; it depends on the company — whether you're talking about an emerging company or an established one. What's important is for the compensation committee to state very clearly what its goals are and how this compensation is in furtherance of those goals. If they want to say that market share is their number-one goal, then by all means, pay the guy for market share. But if the main goal is increasing the dividend, then pay him for that. Just say what your goals are, and let me judge if that's something I want to invest in.
CFOs are understandably concerned about how much they are going to have to invest in all this additional regulation. Is there a point where oversight or regulation adds costs that could undermine shareholder value?
On behalf of the shareholders, for whom I've been working for 16 years, it is an investment we are happy to make. So spend the money, but spend it wisely. Don't spend it for bureaucratic checklist minutiae. Spend it to get the best possible directors, and give them the best possible information.
As The Movie Mom, you warn parents about inappropriate material in movies. Are there any parallels between your day job and your night job?
I once got a question: "Dear Movie Mom, I tell my two-and-a-half-year-old that she shouldn't watch videos, but she knows how to work the VCR, so she watches them anyway. What should I do?" So I wrote back: "OK, somebody has to be the grown-up, and you lose. And if you can't make a rule about videos in your house, I guarantee that you are going to have a much bigger problem than movies." That same day, I went to the office and read this Global Crossing contract, and it was like getting a letter from the board of directors: "Dear Corporate Governance Mom, I tell the CEO that pay and performance should be linked, but he says no. What should I do?" I felt like writing back, "Somebody has to be the grown-up, and you lose."
Do you expect to be combining the jobs even more once the inevitable slew of movies about the scandals debut?
You know, my husband asked if I wanted to watch the recent TV movie about Enron. "No," I told him, "I saw the play."