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�