Ira M. Millstein
THE
ACTIVIST DIRECTOR Lessons from the Boardroom and The Future of the Corporation
CONCLUSION In Search of the Activist Director
“We cannot solve our problems with the same thinking we used when we created them.” —Albert Einstein
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n this, the concluding chapter, I offer my prescriptions to halt backsliding corporate governance, a regress enabled by a mutated capital markets structure, where too many push their own short-term agendas and imperil the growth of corporations and individual portfolios. These agendas are not in the best interest of shareholders or the economy. The prescriptions I lay out in this chapter focus on a new type of director—a director who recognizes the imperative need for change. Directors, and value-driven shareholders who invest in the long-term future of the corporation, accept responsibility for selecting, retaining, and motivating management through the right incentives, and they want to, and are able to, partner with management to do what is in the best interests of the future of the corporation. That focus is missing today. I will urge that directors be chosen with the same care and diligence as is the case with choosing the CEO.
CONCLUSION
Throughout this book, we have charted the history of corporate governance in America to discover how we ended up where we are today. A relatively simple capital market structure evolved to one of extraordinary complexity. More often than not, I found that boards of directors didn’t change their thinking to stay in step with the changing capital market structure. Boards have the same mindset they did decades ago, when the American economy was flourishing and there was little foreign competition. Back then, boards could remain relatively passive and entrust their managers to grow the corporation. Today the mantra most common in corporate America is still this: “Boards don’t manage, they just oversee.” Far too many directors take that hands-off approach; they check the legal compliance boxes and otherwise limit their involvement. The future of the corporation—strategy—is left to management. This mantra must change. Some argue that change is unnecessary—that developed capital market systems, including corporations, will adjust and eventually correct themselves. I disagree. Yes, markets may self-correct, but only in the long term. In the meantime, the livelihoods of shareholders, employees, customers, and so many others are at risk. A director—one who recognizes the need for change and accepts my recipe in this chapter for active partnership with management—is not a cure-all for everything wrong in our economy. There is no single solution to the myopia of shortterm capital markets. Economists like Joseph Stiglitz, in Rewriting the Rules of the American Economy, have theorized Q
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how we can incent long-term corporate growth, perhaps through the issuance of loyalty shares or new financial transaction taxes. But boards must face the capital market for what it is today, not what it was, and think about what it may become. The corporation is the key organizational structure that forms the core of our economy. I believe in boards that safeguard the best interests of the corporation as a whole, and recognize that they are operating in, and confronting, the new capital market. My prescription is straightforward. It requires a reset of basic values and responsibilities in corporate America. Those whose short-term wealth gains are threatened will ridicule it. But it will be welcomed, I believe, by directors and shareholders who want to ensure the future of their corporate wards. I don’t suggest more intervention by regulators or socalled experts. The solution I propose is more difficult. It is to create a new breed of activist director, one who is conscious of the effects of decision-making, who will drill deeply into a corporation’s financials and culture, who will not shrink from confrontation, who will ask tough questions of the CEO when he or she veers off course or when the numbers include unexpected special write-downs. We need directors who do not miss board meetings and who, on their own time, visit the factory floors to ask workers what could be done to improve morale and productivity. We need directors on the all-important compensation committee who make sure the boss is paid well but not too well; and who listen but resist pressure from shareholders Q
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with self-serving agendas, or from proxy advisors, the media, and the gratuitous advice of those who impose onesize-fits-all compliance solutions to governance practice. Most important, we need directors who reject the “nose in, fingers out” (NIFO) attitude that prevails in too many boards—the idea that it is only the CEO who is in charge of the corporation’s future. This director template holds the best hope for leaving short-termism behind. This director serves as an aspirational model for all those who care about their corporation. This template includes guidelines for the performance of directors themselves, and for adding to or replacing board members. Institutional investors and hedge fund shareholders who want to add future value to their holdings through proxy voting for directors should strive to fill boards with activist directors. Academics and the rest of us who depend on corporations should be vocal supporters. I am proposing that the whole corporate community adopt the mindset of an activist director who knows his legal mandate and has no qualms executing it aggressively.
EXISTING LAW AND THE ACTIVIST DIRECTOR More public companies are incorporated in Delaware than in any other state. That’s because Delaware’s statutory and case law is more predictable and settled. In Delaware, the corporation can conduct its business in any way it so chooses, as long as directors act on an informed basis, in good faith, Q
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Praise for
THE ACTIVIST DIRECTOR
“No one has more experience with corporate boards and insight into what makes them work than Ira M. Millstein. The Activist Director reveals the good, the bad, and the ugly from some of the biggest management failures—and successes—in recent history.”
— MICHAEL BLOOMBERG, FOUNDER OF BLOOMBERG LP AND FORMER MAYOR OF NEW YORK CITY “Far too many corporate directors have failed to honor their responsibility to manage the corporations they serve for the benefit of the firm’s shareholders. In this powerful and articulate book, attorney and board consultant Ira M. Millstein aims to drive a stake into director passivity and create a new model for the activist director. It is a grand and important vision.”
— JOHN C. BOGLE , FOUNDER AND FORMER CEO, THE VANGUARD GROUP “For more than six decades, Ira M. Millstein has had an important seat in the boardrooms at some of our world’s most iconic corporations. The Activist Director is a fascinating and must-read book for anyone associated with a for-profit or not-for-profit board.”
— SANFORD I. WEILL , CHAIRMAN EMERITUS, CITIGROUP “The Activist Director is a must-read. By examining real-world examples based on his firsthand experience counseling boards, Ira M. Millstein offers unique and imaginative solutions to the problems corporations face in today’s rapidly changing global marketplace.”
— RICHARD PARSONS , FORMER CHAIRMAN AND CEO, TIME WARNER, INC “For more than half a century, Ira M. Millstein has been a leading authority on corporate governance. His new book, The Activist Director, provides a probing analysis of corporate governance, an inside-theboardroom view, and is sure to serve as an essential guide to directors in today’s transforming environment.”
— JOSEPH PERELLA , COFOUNDER AND CHAIRMAN, PERELLA WEINBERG PARTNERS $27.95
