CORPORATE GOVERNANCE Robert A.G. Monks Nell Minow

LACKWELL Contents

list of cases in point xii Foreword by B. Minoru Makihara xiv Acknowledgements xvi Introduction , 1 1 What is a Corporation? 7 Definitions 7 Evolution of the Corporate Structure 9 The Purpose of a Corporation 14 Human satisfaction 14 Social structure 14 Efficiency and efficacy 15 Ubiquity and flexibility 15 Identity 16 The Corporation as a "Person" 16 The Corporation as a "Moral Person" 17 The Corporation in Society 20 The marketplace 21 A Proposal for Change 22 Corporate Power and Corporate Performance 22 Corporate Crime: "Within the Limits of the Law" .26 Probation of corporations ~ 28 Corporations and Government: Co-opting the Market 33 Measuring Performance 35 Balancing Interests 37

vii Contents Good and Bad Corporations? 42 Equilibrium: The Cadbury Paradigm 45 Measuring Value Enhancement 47 GAAP 48 Market Value . 55 Franchise 56 EVA™: Economic Value Added 57 Human Capital: "It's not what you own but what you know" 58 The Value of Cash 59 Corporate "Externalities" 64 Non-Economic Considerations in Corporate Management 74

2 Shareholders: Ownership "~"""Definitions Early Concepts of Ownership Early Concepts of the Corporation A Dual Heritage: Individual and Corporate "Rights" The Re-invention of the Corporation: Eastern Europe in the 1990s The Evolution of the American Corporation The Essential Elements of the Corporate Structure The Separation of Ownership and Control, Part 1: Berle and Means Fractionated Ownership The Separation of Ownership and Control, Part 2: The Takeover Era A Framework for Participation Ownership and Responsibility No Innocent Shareholder To Sell or Not To Sell: The Prisoner's Dilemma Who the Institutional Investors Are The Biggest Pool of Money in the World Pension Plans as Investors Pension Plans as Owners Public Pension Funds Economically Targeted Investments Federal Employee Retirement System TIAA-CREF Private Pension Funds The Sleeping Giant Awakens: Shareholder Proxy Proposals on Governance Issues Focus on the Board SEC's Proxy Reform Investing in Activism New Models and New Paradigms The "Ideal Owner" Pension Funds as "Ideal Owners" Is the "Ideal Owner" Enough? viii Corporate Governance 3 Directors: Monitoring 178 Introduction 178 A Brief History of Anglo-American Boards 180 Today's Typical Board 181 Board Duties: The Legal Framework 182 The Board-Management Relationship 184 Information Flow 185 The CEO-Chairman 189 Catch 22: The Ex-CEO as Director 191 Director Nomination 193 Director Compensation 197 Interlocks 198 Time and Money 198 The Director's Role in Crisis 200 "Independent" Outside Directors 202 Director Election 206 Staggered Boards 207 Confidential Voting 207 Impact of the Takeover Era on the Role of the Board 209 The Delaware Factor 209 How Did Boards Respond? 212 Recommendations for the future • 215 The Future of Director Compensation 216 Increasing Independent Directors' Authority 217 Martin Lipton's "Quinquennium" proposal .' 218 "A market for independent directors" 218 "Designated director" . 220 "Just vote no" 220 "Compact for Owners and Directors" 221 Board evaluation 221 Lipton/Lorsch's "Modest Proposal" 221 Making Directors Genuinely Independent 223 Involvement by Shareholders 224

4 Management: Performance 230 Introduction 230 What Do We Want from the CEO? 232 Quality: The Value of TQM 232 "Dinosaurs" 234 Executive Compensation 238 Stock Options ' 242 Restricted Stock ~ 244 Shareholder Concerns: Several Ways to Pay Day 244 Future Directions 246 Employees: Compensation and Ownership 247

ix Contents Employee Stock Ownership Plans 253 Mondragon and Symmetry: Integration of Employees, Owners, and Directors 257 Conclusion 264 5 International Governance 268 The Global Picture 268 Japan 271 Corporate governance in Japan: A report by Oxford Analytica 272 The coming of reform? A report by Institutional Shareholder Services Inc., Global Services 278 Germany 287 Corporate governance in Germany: A report by Oxford Analytica 287 Signs of change 296 France 299 United King