In part one of a new CSRwire series based on the book "Citizens Disunited," the author proposes that those who own shares in corporations need to assert their governance responsibilities.
By Bob Monks
I have a very simple thing to say. It’s within the framework of our present institutional structure to tame the impact of corporations on our society. Corporations must have involved owners and ownership is both a right and a responsibility.
We’ve heard a lot about the ownership rights in corporate governance but much less about the responsibilities. We know that the greater the involvement by owners in corporate affairs, the greater the value of the enterprise. Corporate managers have spent a fortune in legal fees and time trying to deny that because -- let’s face it -- if corporate managers wanted to have good corporate governance we’d have good corporate governance. We don’t have it because chief executives view it as an impediment to their ability to utterly dominate the affairs of the corporation and its function.
The Ownership Class
Throughout the 20th century, we saw some very well-intended federal statutes that had the unintended effect of creating an ownership class. By ownership class, I mean that through retirement plans like IRAs and 401(k)s, mutual funds, Taft-Hartley plans, public employee plans, bank trusts, insurance companies, and private company pension plans and nonprofit/university endowment funds, it’s estimated that nearly half of Americans own stock.
Most of us don’t know what we own or even when we own it because trustees manage these funds for us. But when you represent these funds you represent a significant portion of the national interest. The result is that the fiduciary owners, who represent our mutual funds, retirement funds, endowments, etc., are the responsible owners.
And they represent millions of people.
So, the question is, if they are owners and they represent such a huge swathe of society, why haven’t they articulated an agenda that takes into account the needs and the interests of society? The answer is quite simple: the trustees who were appointed under these statutes have interests that are different from those of their beneficiaries.
Trustees Have Different Interests from Owners
If Company X is acting trustee of an employee benefit plan that owns stock in Company Y, and there is a proposal for a resolution that Company Y management doesn’t like, Company X won’t vote for that because they want Company Y to hire them to be their master trustee bank. They are unlikely to vote for changes that management doesn’t support.
Simply put, it’s a conflict of interest.
And if you repeat this quandary a hundred times over a hundred times, you have the current state of share ownership in the U.S.
Owners: To Be, Or Not To Be, Activists
There is a remedy for this problem. There are existing federal laws that dictate the scope of responsibility for these beneficial owners. And since so much of stock of public corporations in America is owned by trusts, these trustees have enormous power and impact.
But the shameful truth is only the public employee plans and the union plans are activists – fulfilling their fiduciary responsibility to actively work on behalf of what’s best for the beneficiaries. The rest of the spectrum of owners has been virtually neutered by a conflict of interest.
Here’s the thing: if only the unions and public pensions are actively acting as owners, those actions can be perceived as a very narrow representation of owner interests. These groups have done incredible work over the past 30 or 35 years but you have to be realistic about this what this says in our current political climate. Activism of this sort can be seen as a union issue and then the broader message is marginalized or trivialized as the desire of a few on the fringe.
There are very significant, big-name funds that don’t get involved and their non-involvement is treated as the standard. The Bill and Melinda Gates Foundation, or Harvard University endowment -- these are very large owners of securities, and very recently in the case of the Gates Foundation, and for many, many years in the case of Harvard University, they have said that they choose not to be involved owners.
Now, you don’t have to be a scholar of trust law to know that if you have a legal responsibility you just can’t say I choose not to exercise it - but that’s what these organizations have done.
Why is it that the people who are responsible for educating young people on ethical matters or who are spending billions of dollars trying to solve societal problems are unwilling to ensure that the asset base that makes their good works possible is handled responsibly?
I can only conclude that it would be inconvenient and upset their friends. They don’t want to get involved. And that really is the ultimate failure of leadership. It is the critical thing that has to be dealt with before we do anything else.
What we need is political leadership.
We have the laws and yet, the laws are not recognized as required. Most trustees are very risk averse but things would change once they got evidence that laws were enforced. But for now, why go out on a limb to comply with a law that isn’t enforced? If you don’t have enforcement, even the people who want to be activist owners can only do good at the risk of jeopardizing their business.
In the meantime, here is what I would urge you to do: think about the institutions you are associated with, what college you went to, what union you are in -- and then get in contact with the people that manage investments for that institution.
Or, maybe you have interests in a mutual fund or IRA or 401(k) plan. You’re the beneficiary. Make them understand that they can’t ignore your rights any longer and tell them you want them to be an active and responsible owner on your behalf.
There’s nothing intrinsically wrong with corporations.
A corporation is only a creature of the state. Therefore, the state is capable of defining the rules under which the corporation should operate, but these rules must be enforced in order to be effective. Remember, these are our corporations so it’s up to us to put pressure on the trustees to be responsible owners and on government to enforce the laws that protect us.