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Corpocracy: How CEOs and the Business Roundtable Hijacked the World's Greatest Wealth Machine -- And How to Get It Back ReviewCorpocracy is an ugly word, not just because of its mixed roots, but because of the governance situation in the United States which it has been coined to describe. In this compelling book, Bob Monks has summarised the means by which American business interests have conspired to suborn the state. No-one else has his authority or breadth of experience in this field of corporate governance. A corporate lawyer and banker by calling, he headed the division in charge of ERISA in the political field and he helped launch Institutional Shareholder Services and LENS to prove that active investors create value. He has distilled his remarkable range of experience into a brief and highly readable polemic. In doing so, he argues that the balance of power between corporations, those who own their shares and those charged with regulating their conduct has to be redressed.
It might, at first sight, seem that the situation which he analyses so penetratingly is peculiar to the United States and that the wider world need not actively concern itself with the author's message. This would be to underestimate the importance of this book. The lessons to be drawn from the consequences of the rise of the political power of American business, which it chronicles, are universal. In addition, given the global reach of American corporations, the need to restore their accountability to their investors within an effective regulatory framework has global implications.
Corpocracy is not a lament, though it describes much that is lamentable. It is a sober and arresting account of the manner in which the author's personal efforts to persuade the appropriate authorities, regulators and major investing institutions to do their duty, morally and juridically, has met with little effective response. The book's impact is all the greater for the restrained manner in which Bob Monks describes how those appointed to discharge their statutory and fiduciary duties repeatedly failed to do so. Inaction by the gatekeepers, left the field open to the untrammelled rapacity of imperial CEOs.
The balance of power between boards and CEOs in the United States remains a paradox, given the country's regulatory history of preventing accretions of power in relation to trusts and to banking. Nowhere else would it be possible to elect a director on a single vote, nowhere else could shareholder votes be invalidated by "ballot stuffing", nowhere else are shareholders so limited in their ability to raise issues at AGMs, which some directors may not even bother to attend. The prevailing concept of CEO/chairmen selecting their outside board members, thus compromising their independence, strengthens the hand of the CEO at the expense of that of the board.
The response to this imbalance in governance terms is the financial track record of US corporations, but at whose expense has it been achieved? Bob Monks' answer is:
"History will look back on the 1990s and early 2000s as a time when the principal officers of public American corporations transferred from shareholders to themselves approximately $1 trillion - or 10 percent of the market value of public exchanges. This must be the largest peacetime movement of wealth ever recorded, and it was accomplished through stealth that amounted to theft and in a spirit of regulatory permissiveness that certainly rises near to the level of criminal neglect." In addition, there is the extra 5 percent of profitability that the Corporate Library metric tells us is lost through bad practice, plus the opportunity cost of boards focusing on short term personal aggrandisement at the expense of sustainable profitable growth. As the one member of the SEC, who opposed the Committee's recent decision to limit the ability of shareholders to put forward resolutions, said: "Corporate governance in the United States is not well served by inattentive boards that are effectively unaccountable to shareholders."
Inevitably one of the headline manifestations of this lack of accountability has been the grossness of the rewards, which some of these principal officers have arrogated to themselves, for failure as well as success. There are attempts to justify these excesses by analogy with the earnings of stars of sport, stage and screen or by claiming that they are market determined. The analogy with the stars is manifestly spurious. The stars earn what their individual talent commands in the hotly contested market for entertainment. The profits of a corporation are earned collectively and represent the sum of the efforts of everyone in an enterprise. The issue therefore is how they should be distributed in a form that would be generally perceived to be fair and in accordance with the concept of natural justice.
A corporation's pay structure should meet the test of equity, rewarding those working for it, from top to bottom, in relation to their contribution to its performance. Ignoring equity in rewards sows the seeds of social division and dissension with its longer term consequences. What seems to have set the bounds to the multiple by which the earnings of the principal officers of companies exceed those of the average employee in most countries is a sense of social cohesion. The multiple varies by country and through time, but it represents a social constraint or discipline, which carries with it economic advantages not to be ignored.
The fact that shareholders are outraged by the grosser excesses of the pay packages of the principal officers of some corporations is no more than a symptom of the lack of accountability of US boards to those who own their stock, hence the theme of the book. It is a cause which Bob Monks has espoused and pursued with a determination and energy that is wholly admirable and selfless. In spite of setbacks, he believes that this essential accountability can be restored. He sees no cause for new laws, agencies or fiscal measures, though the existing statutory and regulatory framework should be effectively enforced. He argues that it is the major investing institutions that carry the obligation to themselves and to society to restore trust in the capitalistic system.
They have the power to reform the governance of corporations and they have a straightforward economic incentive to do so. The obligation, however, of the great foundations, among the investing institutions, to play their part in bringing about reform goes beyond the calculus of financial gain. It lies at the heart of their creation. They directly assist their chosen causes, but that is within the wider context of a market system which provides them with the ability to do this. They have a responsibility to maintain the means by which they fulfil the aims for which they were founded.
The book's message is therefore optimistic, provided that it is heeded in time. Trust and accountability can be restored, but it will take courage and above all leadership to do so. What is needed is enlightened leadership by those in a position to exercise it in the investing institutions and in corporations themselves. In Bob Monks' words:
"It demands that those with a majority stake in the corpocracy - its principal owners and beneficiaries - lead the way back to the broad light of day. The hour is late. The sun won't always be waiting."
Read Corpocracy and judge for yourself!
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