The Governance Revolution

Part I: The System and How It Came To Be  1 Chapter 1: How Our Governance System Began  3 The First Limited Liability Corporation  3 Amsterdam Stock Exchange Established to List VOC Securities  4 VOC Completes Initial Public Offering, Possibly World’s First  4 The Governance of VOC Establishes the Model  5 The Lords Seventeen Governance Structure Drawn from Guild System  5 VOC Confronts a Large Activist Shareholder  6 . . . And a Bear Syndicate  6 The Corporate Form Advances and Spreads—And with It, the Board  7 Corporations Arrived in the New World  8 And Bubbles Burst  9 Chapter 2: The Emergence of the Corporation in United States  11 New York Pioneers Simple Incorporation Procedure  11 Boston Manufacturing Company is First Private Corporation in United States  12 Corporations Gain Power Under State Control  13 Economic Opportunity Expands; Farmers and Artisans Suffer Disruption  14 Corporate Control is Concentrated  15 How J.D. Rockefeller Went from Rags to Riches  15 The Government Fights Back, Kind Of  16 Early Days of the New York Stock Exchange  17 Teddy Busts the Trusts  19 Government Power Takes on Commercial Power: Teddy v J.P.  19 Unintended Consequences Lead to More Antitrust Laws  20 Chapter 3: Post–World War I Developments  23 The Stock Market Crashes  23 The Great Depression and FDR’s New Deal  23 Safety Net for Banks Created  24 Regulation of Securities and Securities Markets Takes Root  25 Safety Net Extended to Citizens as Social Security is Born  25 Frustration Sets in as Unemployment Persists  26 Government and Business Mobilize for World War II  27 Roosevelt and Business Create Formidable Alliance  27 Solidarity Works Miracles  28 Wartime Success Reaches Far Beyond Battlefields  29 Chapter 4: The Glow Following World War II  31 The 1950s Board Role  31 Stock Market Investing is Patriotic Duty  32 The Nifty Fifty Catches On  33 Investor Relations Become a Corporate Function  34 Chapter 5: Shifting Dynamics from 1970 to 2000  35 Agency Theory is Born  35 The Stock Market Corrects  36 Outrage over the Wreck of Penn Central Fuels New Focus on Board Role  36 Broad Corruption Revealed Leads to Focus on Governance Per Se  37 The Board as Overseer Takes Root as Independent Directors Become Desirable  38 The Definition of Independence Proves Elusive; We Know It When We See It  38 The 1980s Board Role: The Board Becomes Important  39 Mighty Institutional Investors Weigh In  40 The Courts Recognize Independent Judgment of the Board as Mission Critical  41 Economic Uncertainty and Social Unrest Reduce American Confidence  42 Market Crashes on Black Monday  42 Changing Market Forces Become Visible  43 NYSE Establishes Safeguards  43 The 1990s Board: Independence Criteria Tighten as Equity Linked Compensation Grows  44 True Independence Grows in Value  45 Equity Linked Compensation Creates Moral Hazard  46 Independence of Mind Needs Help from Independence of Process  46 Revolving CEOs  47 Chapter 6: Post 2000 Intensification of Focus on the Board  49 Corruption Eruption Leads to Sarbanes Oxley and Growing Focus on Board  50 The Functioning of the Board of Directors Gains Attention  52 Sarbanes-Oxley Act  54 Part II: The Players and Capital Market Forces  59 Chapter 7: The Rise of Independent/Disinterested Directors  61 Considering Independent Director Effectiveness  61 Dueling Definitions  62 New York Stock Exchange Listing Requirements Stress Independence of Directors  62 Independent Directors Fill a Structural and Legal Need  66 Chapter 8: The Rise of Institutional Investors  69 Mutual Fund Development  69 Comments from Mutual Fund Leader John C. Bogle  71 The Growth of Passive Investing  74 The Defined Benefit Pension Plan Grows  75 Employee Retirement Income Security Act of 1974 (ERISA) Strengthens Pension Rules  76 The Defined Benefit Pension Plan Declines  77 Retirement Assets Shift into Mutual Funds  78 Public Sector Pension Plans  78 The Growing Pension Crisis  79 Investing by Public and Private Plan Fiduciaries  80 Shifting Patterns of Share Ownership in United States  82 The Perils and Possibilities of Concentrated Share Ownership  83 The Rise of Proxy Advisor Power  84 Proxy Advisors Helped Interpret High Volume of Information  85 Responsible Voting of Proxies in Best Interests of Clients Required  85 Proxy Advisors Take Heed: Physician, Heal Thyself  86 Chapter 9: The Impact of The Great Inflation  89 The Seeds of the Great Inflation Are Sown by the Fateful Phillips Curve  89 Our Economy Fights Another War, on Several Fronts  91 Employment v. Inflation  91 Federal Reserve Chairman Volcker Toughs It Out  92 Impact of Prolonged Inflation on Capital Market Innovation  94 Securitization Solves a Genuine Problem, and Turns the World Upside Down  94 Not Your Daddy’s Trading Floor  95 Interest Rate Arbitrage Comes of Age with the Swap Market  96 Chapter 10: Mortgage Backed Securities and Structured Products Conundrums  99 Using Securitization Techniques, the Sky Was the Limit—Or Maybe Not  100 The Mortgage Derivative Market Implodes  101 Hark, Securitization of Sub Prime Mortgages Begins  101 Earnings as Defined by Generally Accepted Accounting Principles May Not Create Cash  102 Sub Prime Industry Almost Died in 1998  103 Public Policy Starts the Subprime Cycle Again  103 Repeal of Glass Steagall Act Allows Commercial Banks and Investment Banks to Compete  104 And We Pushed Ourselves into the Abyss  105 Low Interest Rates Fuel Frenzies in Multiple Arenas  105 Collateralized Debt Obligations Explode, In More Ways Than One  106 The Abyss Itself  106 Multiple Financial Institutions Fail  107 And WaMu, Too, Bites the Dust  108 Chapter 11: The Aftermath of the Abyss  111 Chapter 12: The Rise of Leveraged Buyouts, High Yield Bonds, and Private Equity Investment  113 No Longer Your Granddaddy’s Way to Buy a Company  113 The Venture Capital Firm is Born  114 The Private Equity Fund is Born  114 The Leveraged Buy Out Arrives  115 Pension Plans Buy in to Private Equity Investing  116 The Hostile Takeover Epidemic  117 The Role of Michael Milken  117 Milken Flexes His Funding Muscles  118 Corporate Titans Are Shaken by an Upstart  119 The Government Fights Back—For Real  119 Giuliani Plays Hardball with RICO Threat  120 Milken Pleads, and NOT to Engaging in Insider Trading  121 And Drexel Fails  122 And Restructures Its Own Board of Directors  122 Lasting Impact of Milken and Drexel Burnham  123 Private Equity Goes Public  123 Chapter 13: The Rise of Hedge Funds and Emergence of Aggressive Activism  125 Hedge Funds Remain Largely Opaque and Unregulated  125 Hedge Funds Emerge as Activists  126 Traditional Institutional Investors Join the Fray  127 The Current Impact of Activism  128 Voting Results on Shareholder Proposals  129 Chapter 14: The Evolution of the New York Stock Exchange  131 Part III: The Role of The Board  133 Chapter 15: Clarifying the Rights and Roles of the Board and the Shareholders  137 The Board Serves the Corporation as Its Agent  138 The Powers of the Board  139 Public Company Ownership  140 Functional Principles of the Board  141 Accountability of the Board  143 Defining Board Success  143 The Purpose of the Corporation Project  145 Short Termism Really Is a Problem  146 Chapter 16: Assessing the Proliferating Policies and Principles  149 OECD Encourages Adoption of National Codes of Governance  150 Other Voices Join in  150 Chapter 17: Considering the Proposed New Paradigm  153 Summary Roadmap for the New Paradigm  153 The New Paradigm Attempts a Synthesis of Good Corporate Governance Concepts  155 Proposed Investor Behavior  158 New Paradigm Proposes Integrated Long-Term Investment Approach  159 Proposed Integration of Citizenship Matters into Investment Strategy  159 Proposed Disclosure of Investor Policies and Preference  160 And Now Comes CIRCA, Council for Investor Rights and Corporate Accountability  161 Activist Playbook  162 Proxy Fights and Shareholder Candidates  163 The Bower and Paine Analysis of Maximizing Shareholder Value as Corporate Goal  163 The Dangers of Agency Theory  165 Part IV: Doing the Job  169 Boards Must Protect Corporation Regardless of Conflicting Agendas  169 Chapter 18: Review Issues for Boards to Address Highlighted by NYSE  171 Executing the Work of the Board  173 Chapter 19: Establish the Appropriate “Tone at the Top”  175 Relentless Focus on Ethical Behavior and Discerning the Right Thing to Do  178 Training as to What Ethical Behavior Means is Important in Our Changing World  179 Ensure Reports on Compliance are Made Directly to the Board Periodically  179 Chapter 20: Choose the CEO Wisely and Actively Plan for Succession  181 Keep the Emergency Succession Plan Current  181 Build a Future View of Company Needs into Longer Term Succession Planning  182 Setting Criteria and Developing Possible Candidates  182 Work with the Incumbent  183 Know Your Senior Management Team  184 Chapter 21: Develop a Strong Organizational Framework  187 Chapter 22: Tailor Board Work to the Company  189 Board Leadership  189 Committee Structure  190 Audit Committee  192 Compensation Committee  194 Nominating and Corporate Governance Committee  195 Other Committees  196 Special Committees  196 Special Negotiation Committee  196 Special Litigation Committee  197 Special Investigation Committee  197 Board Information  198 Information Security  198 Collegiality  199 Manage Communication Mindfully  199 Executive Session  201 Meeting with Management  201 Setting the Agenda  202 Facilitate Candid Communication and Trusting Relationships  202 In Crisis the Buck Stops with the Board  203 No Time to Resign  204 Chapter 23: Focus Intently on Compensation  205 Executive Compensation  205 Fairly Compensate Directors  205 Chapter 24: Seek Wisdom, Courage and Breadth of Experience in Director Recruitment  207 Get the Right Mix of Directors in the Boardroom  208 Value Tempered Judgment over Technical Expertise  2108 Chapter 25: Actively Evaluate Board Performance to Constantly Improve  213 Developing the Process  213 Chapter 26: Manage Risk Effectively  217 Further Comments on the Board and Cybersecurity  220 Never Underestimate the Impact of Human Error  221 Importance of Plans  221 Chapter 27: Independently Evaluate the Impact and Execution of Transactions  223 Chapter 28: Communicate Clearly, Consistently and Constantly  225 Part V: Hazards and Their Navigation  229 Chapter 29: Address Individual Hazards and Personal Fear  231 Liability Concerns  231 Efforts to Insulate Directors  232 Directors and Candidates Should Understand the Protections They Have  234 Beware the Responsible Corporate Officer Doctrine  234 Chapter 30: Navigate Corporate Hazards and Distressed Situations  237 Liquidity: What to Do When Cash Runs Low  238 Form a Board Committee to Focus Closely on the Emergency  238 Is This Really a Role for the Board?  240 The Corporation Is Counsel’s Client; The Board Retains Counsel  241 The Next Step: Assess Viability  241 Bringing in Help  244 Assessing Leadership Resources  245 Structuring the Leadership Role  245 Communicate the Plan, and the Progress  246 Just Do It  247 Appreciation of the Effort Put in Goes a Long Way  248 Yes, Virginia, You Did Sign Up for This  248 Becoming the Debtor in Possession  248 Chapter 31: Recognize and Rectify Hazards of Board Process  251 Continuing Confusion as to Responsibility and Authority  251 Group Think  252 Faulty Filters  252 Corporate Myths  253 Conformity Pressure  253 The State Dinner  254 Bullying  254 Chapter 32: Know that Steady, Purposeful Work is the Antidote  255 Reading the Room  255 Preparing  256 Owning Your Style  256 Finding Your Point of View—and Theirs  256 Leading with Your Ears  257 Addressing Biases  257 Overconfidence  258 Confirmation Bias  258 Survival Bias  259 Attribution Bias  259 Building a Championship Team  260 Dissent is Not Disloyalty  261 Building a Portfolio of Roles  261 Chapter 33: Survive Success and Relentlessly Build Resilience  263 Conclusion: Own the Role and Build the Future  267 Index 269