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25For25 | Page I Table of Contents Table of Contents for Observations on the Past, Present, and Future 25of Corporate25 Governance In Celebration of ISS’ 25th Anniversary Category table of Contents Category table of Contents foreword iv Investor PersPeCtIves������������������������������� on CorPorate�������������������������������� governanCe ����������������� These essaysfromthreenotableshareholdercorporategovernancepioneersexploretherisein influenceofinstitutionalinvestors,thecycleofcorporatefailuresandregulatoryresponses,and theCorporateimperative Governance:forinvestors toPast,assert Present,theirrights and andFutureutilizethemconstructively� By Robert A. G. Monks . 1 The Corporate Governance Movement: 25 Years Past and Hence By Ralph V. Whitworth . 3 The Financial Crisis, Asset Ownership, and Risk Management By Knut N. Kjaer . 5 shareholder rIghts and resPonsIbIlItIes SincetheU�S�DepartmentofLabor’s“AvonLetter”directedERISAfundmanagerstotreat proxyvotingasafiduciaryresponsibility,investorsworldwidehavecometorecognizeproxy votesasanassetandameansofsafeguardingtheirownershipinterests�Thearticlesthat followdiscussinstitutionalinvestors’effortstodischargethisresponsibilityandthechal- Thelengestheyface� Ascendency of Corporate Governance By Michael McCauley . 8 Persistent Concerns in Corporate Governance By Jaap Winter . 10 The Evolution of Proxy Voting Policies By John D. Phillips Jr. 12 Asset Owners Cannot Be Passive By Rod June . 15 Quo Vadis Corporate Governance? By André Baladi . 16 © 2011 Institutional Shareholder Services Inc. 25for25 | page i table of Contents table of Contents Market-sPeCIfIC Challenges Governanceconcernsandregulatoryresponsesvaryfrommarkettomarket�Thefollowing essaysexaminetheUnitedKingdom’screativeapproachtoregulationandareaswhereJapan Theisripe Combinedforreform� Code in the United Kingdom By Lindsay Tomlinson . 18 Governance Challenges in the Next Quarter Century in Japan By Yuji Kage . 19 PersPeCtIves on board leadershIP Theboardofdirectorsisthefocalpointofcorporategovernance�Thesearticlesfromrepre- sentativesofinvestors,issuers,andacademiaexaminetheevolutionofboardsandcommit- Thetees overRisethepast25yearsandalongwithgrowinginvestorexpectations� of Shareholder Voice and the Increased Role of Boards An Interview with Ken Bertsch ..............................................................21 Achieving the Board of the Future, Today By Zach Oleksiuk and Robert Zivnuska . 23 The Three Elements of Effective Governance Reform By Charles M. Elson . 24 The Changes Wrought by Executive Sessions By Ira M. Millstein and Holly J. Gregory . 26 The Rise of Audit Committees By Dennis R. Beresford . 27 The Case for Independent Board Chairs By Gary Wilson . 29 Meeting the Challenges of Tomorrow Today By Margaret M. (Peggy) Foran . 31 page ii | 25for25 © 2011 Institutional Shareholder Services Inc. table of Contents table of Contents PersPeCtIves on exeCutIve CoMPensatIon Theglobalfinancialcrisishighlightedtheimportanceofaligningthemanagement’sinterests withthoseofshareholders�Inthearticlesthatfollow,prominentgovernanceexpertsexamine theriseofexecutivecompensationasagovernanceconcernandinvestors’responsesinthe TheU�S�andCanada� Rise of Equity-Based Compensation: The Bright and The Dark By Lemma W. Senbet . 32 Who Controls the Executive Compensation Program? By Frederic W. Cook . 35 ‘Say on Pay’ Arrives in Canada By Stephen Griggs and Judy Cotte . 37 the next 25 years Ourcolleaguesleaveuswiththoughtsastowhatthenext25yearswillbring,includingthe needforbettercooperationbetweenissuersandinvestors,theroleofacademicresearchin votingdecisions,theunintendedconsequencesofregulation,andthemainstreamingofcor- Keysporatesocialresponsibilityissues� to Reform Over the Next 25 Years By Hye-Won Choi . 39 The Future of Corporate Governance and the Board of Directors By Martin Lipton . 41 The Federalization of Corporate Governance and its Unintended Consequences By Bonnie Hill . 44 The Past and Future of Corporate Governance Research By Reena Aggarwal . 46 Corporate Commitment to Sustainability and CSR Reporting: An Enduring Trend By Tim Smith and Carly Greenberg . 48 A Look Ahead at the Next 25 Years in Governance An Interview with Nell Minow ...............................................................50 © 2011 Institutional Shareholder Services Inc. 25for25 | page iii Category Investor PersPeCtIves on CorPorate governanCe By Martha Carter and Patrick McGurn Foreword heyearwas1985,declaredthe“International Asyou’llsoonsee,theresponsesareasvariedand YouthYear”bytheUnitedNations�Careless engagingastheindividualswhowerekindenough WhisperbyWham!toppedtheBillboard toofferthem�Answerstothecentralquestion 100Chart,andthewildlypopularvideogameTetris coverabroadrangeoftopics—fromtheincreas- wasfirstreleased�MikhailGorbachevbecamethe ingprevalenceofindependentauditcommitteesto leaderoftheSovietUnion,asRonaldReaganbegan holdingexecutivesessionsoftheoutsidedirectors hissecondtermasU�S�president�TheDowJones tothespreadofadvisoryvotesonremuneration� IndustrialAveragebegantheyearjustshortof1200 Marketperspectivesspantheglobe—including andendedaround1550,withGeneralMotorsstand- theUnitedStates,Canada,Japan,theU�K�,and ingTnearthetopoftheFortune500�Commodore ContinentalEurope� introducedthefirstmodelofitsrevolutionaryAmiga personalcomputerline,whileSteveJobswasfired Somecommonthreadsweavethroughoutthese25 bytheboardatAppleComputer� variedviewpoints:❙❙ 1985alsomarkedtheunofficialstartofthe First,institutionalinvestorshavebecomemean- moderneraofcorporategovernance�Inresponse ingfulplayersinthegovernancedebate,butiden- togreenmailpayouts,ahandfulofpublicemployee ❙❙ tifyingtherealshareownershasbecomedifficult� pensionfundsbandedtogethertoformthe Moran v. Second,boardmembers’mandateshave CouncilofInstitutionalInvestors�TheDelaware Household, Revlon, Unocal, Van Gorkom increasedatanexponentialrateandnow courtsdecidedaquartetofkeycases— ❙❙ threatentoreachoverload� and —that laidthefoundationfor21stcenturycorporatelaw� Third,enhancedcorporatetransparencyhasben- efitedinvestors,butshareholdersfacenewchal- Alsoin1985,RobertA�G�Monksfounded ❙❙ lengesinhandlingthisinformationavalanche� InstitutionalShareholderServices�BobopenedISS’ Fourth,executivecompensationremainsacon- doors25yearsagowithonesimplegoal:tohelp ❙❙ tentioustopic� assetowners,andbyextension,assetmanagers,to carryouttheirfiduciaryobligationstovotetheir Finally,communicationandengagementarea sharesinathoughtfulandinformedfashion� necessity� Aquartercenturylater,ISSstillperformsitscore Wetakethisfinalpointtoheart�ISShaschanged missionbyprovidingresearch,votingtools,and itspracticesovertheyearstotapintothewealth governanceexpertisetoinstitutionalshareholders� ofdivergentviewpoints�Ourannualpolicy-setting Overthissametimeperiod,however,seachangesin processbeginswithasurveyofinstitutional institutionalownership,regulation,andgovernance investorsandissuersandconcludeswithanopen haveoverhauledtheshareowner-director-manager commentperiod�Movingfarfromtheone-policy- enginethatdrivespublicmarketcapitalism�Tohigh- fits-allapproachof1985,ISSworkswithourclients lightourSilverAnniversary,wewantedtoofferour todevelopandadministermorethan400custom clientsaglobalperspectiveonthesechangesfrom policies� manyconstituentsinthegovernancecommunity� Thegovernanceenvironmentremainsdynamicfor Weinvited25experts—drawnfromallsidesofthe issuers,investors,andforus�Welookforwardto governancedebateandfromeverycornerofthe beingonthesceneasthenexteraintheevolution globe—tooffertheirperspectives�Weaskedeachof ofthepubliccompanyunfolds�Wearehappyto themoneshortquestion:“What,toyou,isthemost haveencounteredsomanypassionateandengaged significantdevelopmentincorporategovernance professionalsalongtheway—includingthosewho overthelast25years?”Fromtheirresponses, havegenerouslytakentheirtimetowriteforour wecompiledthecollectionofessaysthatyouare compendium�Enjoy. preparingtoread� page iv | 25for25 © 2011 Institutional Shareholder Services Inc. Category Investor PersPeCtIves on CorPorate governanCe By Robert A. G. Monks Corporate Governance: Past, Present, and Future “ The modern business corporation “ Corporate failures emerged as the first institutional claimant DemocracyAct(which,infact,didnotpass);inthe have repeated of significant unregulated power since the earlyyearsofthiscentury,Sarbanes-Oxley;andmost recently,Dodd-Frank� themselves with nation state established its title in the almost metronomic 16th and 17th centuries.” Whateverthesupposedcure-of-the-moment,the regularity. Every resultishighlypredictable:Publicconcerndimin- —Abe Chayes ishes,thelobbiesflourish,andthecyclestarts decade, it seems, again�Criminalmalefactionsdotalmostevery government decade—GeneralElectricandWestinghouseinthe predictably considers electriccompanyconspiracies;ArmandHammer beChayes,aformerKennedyadministration andGeorgeSteinbrennerforviolationofelection and often passes officialandlong-timeHarvardLawprofes- contributionlaws;CharlesKeatingandtheS&L legislation: in the late sor,wrotethosewordsattheoutsetof crisis;IvanBoeskyandMichaelMilkeninthe‘80s; whatmightbethoughtofasAmerica’sown“Thirty WorldComandEnronintheearlyyearsofthis ‘70s, the Foreign GloriousYears”—thatthree-decadespanfromthe decade;andthefinancesectorasawholeinthe Corrupt Practices Act; late‘70sthrough2008whenitseemedpossiblethat newcentury�Outrageinvariablyfollows�Thetalk- in the ‘80s, the privateenterprisecouldoperateonaglobalstage, ingheadsbecomescreamingones,butintheend, freefromtheconstraintsofgovernmentalregulation humannatureappearstotriumphoverallmanner Corporate Democracy andoversight�Thevisionwassimpleandstirring, ofcontrols�
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