Watching the Watchers: Corporate Goverance for the 21st Century Review

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Watching the Watchers: Corporate Goverance for the 21st Century ReviewMonks and Minow update and expand on their previous books Power and Accountabilityand Corporate Governance. As practitioners and theorists they providedozens of examples from personal experience which enable the reader to quickly grasp the importance of corporate governance to wealth creation and social progress. In a few short hours of reading they cover the evolution of the corporation as a social construct, as well as the developing roles of shareholders, directors, and management. The book concludes with concrete recommendations which deserve thoughtful consideration.
Monks and Minow trace the evolution of corporate governance and note that "there was no conscious choice in favor of treating shares of stock as though they were betting slips for races that were over at the end of each day." "Every 'improvement' in the system for owning stock was designed to make it easier to trade. No one seemed to notice or care that each of these 'improvements' also made it harder to exercise classic ownership rights." "During the takeover era, it became clear that, though the system was designed to promote transferability above all, there was one kind of transfer that the system would not tolerate: the transfer of power from one group to another."
Monks and Minow are concerned with increasing corporate accountability. They argue that any attempt to do so through chartering restraints is doomed to failure because the company's managers can move virtually any place in the world. In addition, "the political process is too dependent on money to make it possible for the government to be the ultimate guardian of accountability." "The only answer is a system of governance that originates from within the corporation itself and that includes the participation of an informed and effectively manifested broad class of owners." They point out that the tax cost of pensions is in excess of $50 billion per year, the largest item in the budget after defense. Because pension funds are subsidized by public funds it is, therefore, "appropriate for government to define broadly how pension fund trustees should function in their capacity as owners of the country's industrial establishment."
They call for a "Federal Law of Ownership" to coordinate the action of relevant agencies. For example, "the government must set the standard for interpreting and enforcing the 'exclusive benefit' rule or ERISA to provide guidance for private sector fiduciaries." However, the prime responsibility falls not to government but to the pension funds and corporations.
In the end, "whether ERISA trustees will ultimately become effective monitors depends on two factors - DOL's willingness and capacity to enforce its regulation and, more importantly, the conclusion by corporate management that an ownership-based governance system is ultimately in their best interest." Government needs to draw a "bright line" on conflict of interest; management needs to acknowledge that "creative tension" between themselves and owners is preferable to the current system of unaccountable "phony governance." Pension funds would then create a market for new institutions offering "ownership services" and companies with effective governance performance would realize the benefit of lower capital costs.
reviewed by James McRitchie, editor of the Corporate Governance site at
http:/www.wp.com/CORPGOVWatching the Watchers: Corporate Goverance for the 21st Century Overview

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