Your comment on the goal of "restoring investor confidence" reminds me of one of my favorite stories about my dad (an exemplary corporate director, by the way). In a talk to a group of young lawyers, he said that the most important thing was to get the client to trust you. An eager young man who had probably never had anything less than an A in his life raised his hand. "Mr. Minow, how do you do that?" My dad peered down at him. "Well, you can start by being trustworthy."
There are some people out there in the corporate world who could benefit from my dad's advice right now. You've been justly tough on anyone who thought they could get something for nothing during the high-tech bubble years, Holman, but it's our last day, and I feel revolution rising in my blood—it's time to talk about what to do about the crooks. We're not talking about a stock market correction. We're talking about lying, cheating, stealing; and yes, in answer to the question we were asked, I think that there has been more of it lately than we have seen in a long while. So let's hear what you think we should do about it, and don't make me quote Edmund Burke by telling me how you will stay happily indexed so that little red hens like George Soros and me can do all the hard work of providing that all-important market response for you and for the unnamed pension fund you criticize for taking the very same free ride.
By the way, I think you missed the point on the pension fund indexers. I'm on my way next week to a meeting in Milan of the largest institutional investors in the world, about 300 people representing $10 trillion of investment capital. When you have that kind of money to invest, the transaction costs are staggering, and your investment horizon is nearly infinite. So why not index? Then you have a permanent relationship with the portfolio companies and can provide some real oversight. You don't do that by selling, which has no effect on management—they are delighted to have the stock in the hands of passive investors. You do that by voting proxies and, when necessary, filing lawsuits and running dissident directors.
Institutional investors, who first became active during the abuses of the takeover era, are ready to become more involved. Just yesterday, the state treasurers of California, North Carolina, and New York announced a new initiative to insist that the money managers they retain eliminate conflicts of interest and do a better job of monitoring the corporate governance of portfolio companies. Legg Mason has announced that corporate governance is now the second most important investment screen it uses to evaluate companies. McKinsey found even before these scandals that shareholders are willing to pay up to an 18 percent premium for stocks in companies that have good corporate governance. I'll bet it's even higher now.
I did sue Waste Management, opting out of the lawsuit filed by the usual suspects and filing on my own, and negotiated a very fine settlement. It was one of the best returns on investment I ever got in 10 years of managing money, and I would recommend it to anyone for its financial and emotional rewards. So there is a lot that the market can do to respond to abuse. But it doesn't seem to have stopped this latest crowd of bad guys from lying and stealing, so it is time for us to think up something better.
I'd like to see reforms that remove the current impediments to shareholder oversight. If we are going to cling to the notion of leaving corporate governance of national, even global, companies to the states instead of the federal government, let's allow shareholders to choose the state of incorporation. That way, instead of having every company domiciled in Delaware because it panders to corporate managers and directors, we could encourage some states to come up with some laws that favor shareholders. I'd love to make it easier for shareholders to nominate just one director, too. Although we use the word "election" to describe the way corporate directors get on boards, it hardly seems apt since the CEO picks the candidates, no one runs against them, and management counts the votes. If we put some meaning into the selection of directors, they will do a much better job of making sure that CEOs stay on the straight and narrow.
I like the New York Stock Exchange's proposed reforms very much (especially compared to the disgracefully paltry proposal from Nasdaq). NYSE will require all listed companies to develop and publish corporate governance guidelines, and they can give shareholders a clearer idea of each company's views on these matters. Here are some comments from a CEO who has thought a great deal about corporate governance:
[A] strong, independent, and knowledgeable board can make a significant difference in the performance of any company. … [O]ur corporate governance guidelines emphasize "the qualities of strength of character, an inquiring and independent mind, practical wisdom and mature judgment." It is no accident that we put "strength of character" first. Like any successful company, we must have directors who start with what is right, who do not have hidden agendas, and who strive to make judgments about what is best for the company, and not about what is best for themselves or some other constituency.
The responsibility of our board—a responsibility which I expect them to fulfill—is to ensure legal and ethical conduct by the company and by everyone in the company. … What a CEO really expects from a board is good advice and counsel, both of which will make the company stronger and more successful; support for those investments and decisions that serve the interests of the company and its stakeholders; and warnings in those cases in which investments and decisions are not beneficial to the company and its stakeholders.
OK, that was from the comments of then-Enron CEO Kenneth Lay, back in April 1999, at—love the irony—the Center for Business Ethics at Houston's University of St. Thomas. Enron met most of the corporate governance best practices on paper. The company's code of ethics is similarly impressive. You can buy a copy on eBay, probably stolen by a laid-off employee.
So we have to have some humility about corporate corruption and our ability to prevent or even reveal it. The best we can do is learn what we can from this group of crooks (and punish them as painfully as possible) and try not to be so easy to fool the next time.
Thanks, Holman! Enjoy the fireworks!
Holman W. Jenkins Jr. is a columnist and member of the editorial board at the Wall Street Journal. Nell Minow is the editor of the Corporate Library, which covers corporate governance and performance. This week they discuss whether—given WorldCom, Enron, Global Crossing, Tyco, ImClone, Arthur Andersen, etc.—corporate America is more dishonest than it used to be.