Ira Millstein: Why governance is our best defence

In The Director's Chair with David W. Anderson: Ira Millstein, a man whose name is practically synonymous with corporate governance, issues a passionate reminder: it’s the people’s money that funds corporations and governance exists to protect it

If you’re looking to build a list of the giants of corporate governance, you’d be hard pressed not to put Ira Millstein at the top. A lawyer, professor at Columbia law and business schools, and chair of the epynonymous Millstein Center for Global Markets and Corporate Ownership, Millstein has had an illustrious and influential career. As the bio below the interview indicates, he’s lent his ideas, opinions and authority on governance to many top U.S. corporations, commissions and non-profit organizations. Here, in conversation with governance and leadership adviser David W. Anderson, Millstein explains why he believes governance is so fundamental to business integrity and corporate success.

David W. Anderson Your name is synonymous with corporate governance around the world. It’s defined your career as much as you’ve defined it. Why does governance mean so much to you?

Ira Millstein: "Governance is a necessary defence against entrenched interests, greed, corruption, incompetence and indifference."

Ira Millstein Let me say up front, I respect and admire the corporation and oppose anything that interferes with the productive exercise of capitalism. Corporations are the best means we’ve invented to provide value to everyone—goods and services for all of us as consumers, returns to investors, taxes to the government and jobs for people—which provide them with money to invest, pay taxes and spend in the economy. Not only do corporations provide such value now, they hold our future welfare in their share capital—the wealth we will rely on to sustain us. It’s not hyperbole to say everything is a stake here. I think corporations protect us, so we have to protect them. The mechanism of governance offers the best protection for us all—employees, consumers, investors and government.

David W. Anderson What does governance protect us from?

Ira Millstein Governance is a necessary defence against entrenched interests, greed, corruption, incompetence and indifference. With so much money in play in our remarkable capitalist system, there’s an open invitation for abuse. I see significant risks to our future well-being, a future made possible by our money that’s invested in corporations. This is the key insight I want to share—that it is our money that powers the corporate world and which corporate governance must protect. That money doesn’t belong to the banks or the hedge funds or the pension funds; it belongs to the people it comes from—working people. The appalling thing is that most interested parties forget that—the institutional investors, the intermediaries, the proxy advisers, the directors and the executives all seem to have forgotten whose money it really is. They have grown accustomed to using our money for their benefit. Most troubling, though, is that the public forgets that it’s their money. Consequently, there’s little sense of ownership, stewardship and accountability because most people aren’t sufficiently aware enough to care.

David W. Anderson What is the message you want people to understand about the nature of capitalism and corporate governance?

Ira Millstein It’s simple. Corporations and our system of capitalism exist for our benefit. It’s through our investments that we provide the fuel for the whole system. Whatever happens after we invest our money, we will be forced to live with the outcome, because we are the intended beneficiaries of this system. This is so important for our population to understand that I’m writing a book on it now. We can’t lose sight of the fact that working people are the actual owners of capital and the very people who are relying on corporations to create value for the long run. I think this is the critical link in the story of capitalism and corporate governance.

David W. Anderson What’s your assessment of how well working people currently understand the system?

Ira Millstein The public isn’t sufficiently aware. People don’t truly understand what’s at stake. They don’t understand what corporate governance is supposed to do, nor the capitalist system of which corporate governance is a part. The public’s view of the issues is clouded by self-serving intermediaries. While the working people are in fact supposed to be the intended beneficiaries of the system, too few of the intermediaries in the system treat working people as the prime beneficiaries. How is it that so many people invest so much in mutual funds, with their huge fees and lacklustre results? Not everyone is going to read John Bogle—though they should because he’s got it right. Moreover, do these mutual and hedge funds all care about the corporations in which they invest, or are some simply playing with stock certificates? The public should understand enough to make bet- ter decisions themselves and support corporate governance practices that exist for their protection. A lot of people get hurt when corporate governance doesn’t work right.

David W. Anderson How then does corporate governance offer protection?

Ira Millstein I want people to understand this in personal terms. The fundamental purpose of corporate governance is to see to it that my money is handled properly—that it flows to the right place. We have to get this right because if we screw it up, we’re in big trouble. Corporate governance is the machinery that protects me. I don’t know in every sense where my money is going, but I expect that the people who handle my money will keep in mind that it’s mine, not theirs. To put a human face on this accountability, corporate governance provides the means by which shareholders pick boards who pick managers who provide value. I’m relying on governance decisions to get money to the corporations on whom I’m going to depend for my security down the road, and that my money within those corporations is being used to invest wisely for the future. I need that money to grow if I’m going to get a benefit. So I need corporate governance to funnel my money into the hands of corporations that are investing for the future growth of stocks and bonds, by producing goods and services. The only way I will benefit in the future is if those companies use my money to create long-term growth. This means I need to be sure the corporation has a board that knows it’s my money they are using. That’s how the whole system is intended to work—for us to be the long-term beneficiaries of growth through the investment of our capital. Anyone who interferes with this, I have to question.

David W. Anderson Over the decades, in your role as counsel to hundreds of corporations and adviser to governments and regulators, what are some of the failures of governance or interference you’ve seen?

Ira Millstein A few things really frustrate me. Pension funds should be the bulwark of society; most working people look to their pension fund for accumulation of capital over time. So why does a pension fund invest in a hedge fund? Yes, their goal is to increase its return so the state doesn’t have to contribute as much, but what the pension fund is often doing is investing in something that doesn’t match the S&P. This is counter-productive to what the pension fund wants to achieve. Certainly some hedge funds are value investors but others are playing the market. I don’t understand why pension funds don’t see this and pick out the right hedge funds. I think a pension fund ought to be able to discern what the hedge fund is doing and invest only in those that are using money to improve the board and management, not just gambling.

On the other side of the equation, I’d also hope that corporations would be able to discern who, as investors, are coming in to upset them or improve their management. I don’t like seeing corporations throw up walls and unnecessarily create staggered boards or poison pills to keep ideas and people away. I can see that a corporation may want some leverage in dealing with investors, but more often these tools are used to block genuine performance improvement.

Finally, I’m tired of seeing boards be so frightened of missing a quarterly earnings expectation that they won’t invest in the future. We’ve got to get past the mantra of quarterly returns. Why don’t boards stand up for a long-term, growth-oriented model and convince shareholders of what is right? I’ve known large companies such as IBM and Verizon that missed many quarters to change themselves into something that would endure. It cost them during the transition but they had share- holders who believed in their strategy and were patient through the transition. Those boards and their shareholders prioritized long-term over short-term considerations. I fault corporations that are fearful of doing this. I see it as a message when they can’t demonstrate they’re on the right tack.

David W. Anderson You’ve been legal counsel to major boards as they’ve charted new courses in corporate governance and reshaped the field. What contributions to the evolution in corporate governance are you most proud of ?

Ira Millstein I’d choose two: the practice of independent directors meeting alone in executive sessions and the establishment of board leadership independent of the CEO. When John Smale and Harry Pearce turned GM around years ago, the idea of independent directors meeting alone was unheard of. It was seen as treason against the CEO. GM’s board had never met alone as just the independent directors to discuss GM’s business performance and its leadership, as they were afraid of what management would say. Smale recognized that the directors were not open and candid with management present and said we’re not going to be an effective board unless we meet without management. I helped him craft the rules for meetings of the independent directors. Similarly, we created independent board leadership—either in the form of the board chair or lead director—to run the business of the board. The person who runs the board should sit at the head of the table separate from the CEO and set the agenda. These initiatives, which transformed the practice of governance, were not invented in a law school. They came from inside a boardroom created by business people who understood what they had to do to get it right. Business people came up with these ideas and they spread like wildfire.

David W. Anderson The professional basis of your work with business people is the practice of law. What’s the unique contribution to corporate governance that legal minds bring?

Ira Millstein Nothing unique. You are highlighting one of the problems with the system. Very few business schools teach corporate governance, but many law schools do. How did corporate governance wind up in the hands of those who don’t run corporations? Corporate governance should be controlled by business people, not lawyers. Directors tell me all the mega rules that today are “corporate governance” have little to do with a good board. Quality governance has to do with the quality of directors: Do they know the business? Do they work together to take risks and operate transparently?

When I look at a board, I ask myself, “Is this a group that will work together to make the corporation better?” I don’t like outsiders interfering in business decisions. Who knows better than the directors and executives? Boards shouldn’t get caught up in rules and external dictates. Let the directors talk to their management and get on with the business of business—understanding their business model and market, managing finances and raising capital. Would you have to give business people a rulebook to run their company? Of course not. Yet we have detailed rules and regulations that proxy advisers focus on that are too often inventions of the legal community. Lawyers aren’t trained to understand the essence of how business works. Their focus should be on human qualities, because that’s what matters.

Now let me be fair to the legal community. There are borders that ought to be created by the legal community for directors to work within—defining concepts like loyalty and care. The legal rules ought to assure the application of these concepts makes sense. But as a lawyer, I’m not going to tell you anything about how to run your board.

David W. Anderson What do you tell boards, then?

Ira Millstein Recently I was before a well-qualified board that wanted me to talk about good governance and remind them of what rules to follow. I said, “No, you don’t need to hear that from me because you’re a really good board. I can see it. You are talking and arguing the points and you know this business. By virtue of the fact you asked me to come in and you take minutes you are exercising due care, and you are not operating for your own interest, so you are doing exactly what you should be doing.” They had a staggered board and it’s working fine for them. My advice was that if some proxy adviser says vote against this practice, say “no” and explain why you do what you do. Similarly, a poison pill isn’t always bad, especially if the wrong guy comes knocking. My only advice would be to keep it as simple as possible, so it’s not a dead hand. The bottom line is this: legal advice is good if directed at the principles involved. Duty of care and loyalty are about what’s happening in the market, and I have confidence that business people know that.

David W. Anderson, MBA, PhD, ICD.D is president of The Anderson Governance Group in Toronto, an independent advisory firm dedicated to assisting boards and manage- ment teams enhance leadership performance. He advises directors, executives, investors and regulators based on his international research and practice. E-mail: Web:

Ira Millstein — Biography

Primary role Senior partner, Weil, Gotshal & Manges LLP

Additional roles Adjunct professor, Columbia Law School and Columbia Business School; chair, Millstein Center for Global Markets and Corporate Ownership; chair, Governor’s Task Force on the implementation of the Public Authorities Reform Act (New York State); member of the bar, U.S. Supreme Court, U.S. Court of Appeals (1st, 2nd, 3rd, 4th, 9th and Federal Circuits) and New York State

Former counsel on corporate governance to the board General Motors Corp., Westinghouse, Bethlehem Steel, CalPERS, Tyco International, The Walt Disney Co., The Ford Foundation, The Nature Conservancy and Planned Parenthood Federation of America

Former roles Senior associate dean for corporate governance, Yale School of Management; co-chair, Governor’s NYS Ready Commission (New York State); chair, New York State Commission on Public Authority Reform; chair, Private Sector Advisory Group to the Global Corporate Governance Forum; chair, OECD Business Sector Advisory Group on Corporate Governance; chair, New York State Pension Investment Task Force; chair, Central Park Conservancy; adjunct professor, New York University School of Law; fellow of the Faculty of Government, JFK School of Government, Harvard University

Education B.S. (Engineering), Columbia University (1947); J.D., Columbia Law School (1949)

Honours > Named “Best Lawyer” for antitrust, corporate compliance, corporate governance, corporate and securities/capital markets law (Best Lawyers in America) > 2012 International Who’s Who of corporate governance lawyers > New Yorkers for Parks 2012 Legacy Award for role in revitalizing Central Park > Elected fellow, American Academy of Arts & Sciences > Inaugural recipient, Award for Excellence in Corporate Governance, ICGN > Named to the list of 100 Most Influential Lawyers in America, National Law Journal

Current age 88

Photography: Joe Leavenworth

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