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Corporate Governance, 5th Edition



Corporate Governance, 5th Edition

Robert A. G. Monks, Nell Minow

ISBN: 978-0-470-97274-8 December 2011 512 Pages


In the wake of the recent global financial collapse the timely new edition of this successful text provides students and business professionals with a welcome update of the key issues facing managers, boards of directors, investors, and shareholders.

In addition to its authoritative overview of the history, the myth and the reality of corporate governance, this new edition has been updated to include:

  • analysis of the financial crisis;
  • the reasons for the global scale of the recession
  • the failure of international risk management
  • An overview of corporate governance guidelines and codes of practice;
  • new cases.

Once again in the new edition of their textbook, Robert A. G. Monks and Nell Minow show clearly the role of corporate governance in making sure the right questions are asked and the necessary checks and balances in place to protect the long-term, sustainable value of the enterprise.

Features 18 case studies of institutions and corporations in crisis, and analyses the reasons for their fall (Cases include Lehman Brothers, General Motors, American Express, Time Warner, IBM and Premier Oil.)

Cases in Point xiii

Preface xvii

Acknowledgments xxvii

Introduction – How to Use this Book 1

1. What is a Corporation? 3

Defining the Corporate Structure, Purpose, and Powers 5

Evolution of the Corporate Structure 6

The Purpose of a Corporation 9

Satisfying the human need for ambition, creativity, and meaning 9

Social structure 10

Efficiency and efficacy 10

Ubiquity and flexibility 11

Identity 11

Metaphor 1: The Corporation as a "Person" 12

Metaphor 2: The Corporation as a Complex Adaptive System 12

Are Corporate Decisions "Moral"? 14

Are Corporations Accountable? 16

Three Key External Mechanisms for Directing Corporate Behavior: Law, the Market, and Performance Measurement 18

Government: legislation, regulation, enforcement 18

What Does "Within the Limits of the Law" Mean? 20

When and how do you punish a corporation? 28

Probation of corporations 29

The problem of serial offenders 31

Securities analyst settlement 32

What is the role of shareholders in making this system work? 33

The market: too big to fail 36

The corporation and elections 40

Citizens united 41

The corporation and the law 45

A Market Test: Measuring Performance 47

Long term versus short term 50

Corporate decision making: whose interests does this "person"/adaptive creature serve? 55

Another (failed) market test: NGOs 61

Measuring value enhancement 62


Market value 69

Earnings per share 70

EVA®: economic value added 71

Human capital: "It’s not what you own but what you know" 72

The "value chain" 73

Knowledge capital 74

The value of cash 74

Corporate "externalities" 79

Equilibrium: The Cadbury Paradigm 79

ESG: Environment, Social Governance – A New Way to Analyze Investment Risk and Value 83

Quantifying Nontraditional Assets and Liabilities 87

Future Directions 92

Summary and Discussion Questions 93

Notes 95

2. Shareholders: Ownership 101

Definitions 105

Early Concepts of Ownership 106

Early Concepts of the Corporation 107

A Dual Heritage: Individual and Corporate "Rights" 108

The Reinvention of the Corporation: Eastern Europe in the 1990s 110

The Evolution of the American Corporation 111

The Essential Elements of the Corporate Structure 115

The Mechanics of Shareholder Rights 117

The Separation of Ownership and Control, Part 1: Berle and Means 118

Fractionated Ownership 125

The Separation of Ownership and Control, Part 2: The Takeover Era 129

Waking the Sleeping Giant 134

A Framework for Shareholder Monitoring and Response 140

Ownership and Responsibility 141

No innocent shareholder 141

To Sell or Not to Sell: The Prisoner’s Dilemma 143

Who the Institutional Investors Are 144

Bank trusts 145

Mutual funds 146

Insurance companies 149

Universities and foundations 149

Executive pay from the consumer side – a leading indicator of risk 150

Pension plans 154

The Biggest Pool of Money in the World 154

Pension plans as investors 164

Pension plans as owners 166

Public Pension Funds 169

Divestment initiatives 188

Economically targeted investments 189


Federal Employees’ Retirement System 197


Private Pension Funds 201

The Sleeping Giant Awakens: Shareholder Proxy Proposals on Governance Issues 206

Focus on the Board 212

Hedge Funds 220

Synthesis: Hermes 221

Investing in Activism 222

New Models and New Paradigms 223

The "Ideal Owner" 228

Pension Funds as "Ideal Owners" 233

Is the "Ideal Owner" Enough? 234

Summary and Discussion Questions 236

Notes 238

3. Directors: Monitoring 251

A Brief History of Anglo-American Boards 255

Who Are They? 256

Size 256

Term 256

Inside/outside mix 257

Qualifications 261

Who Leads the Board? Splitting the Chairman and CEO and the Rise of the Lead Director 261

Agenda 263

Minutes 263

Diversity 264

Meetings 264

Communicating with Shareholders 264

Special Obligations of Audit Committees 265

Ownership/Compensation 266

Post-Sarbanes–Oxley Changes 266

Board Duties: The Legal Framework 267

The Board’s Agenda 281

The Evolution of Board Responsibilities: The Takeover Era 283

The Fiduciary Standard and the Delaware Factor 284

How did boards respond? 287

Greenmail 287

"Poison pills" 288

Other anti-takeover devices 290

The Director’s Role in Crisis 291

Limits and Obstacles to Board Oversight of Managers 295

Information Flow 295

Practical Limits: Time and Money 301

The Years of Corporate Scandals – Boards Begin to Ask for More 302

Director Information Checklist 303

Who Runs the Board? 304

Catch 22: The Ex-CEO as Director 306

Director Resignation 308

CEO Succession 308

Director Nomination 309

Limits and Obstacles to Effective Board Oversight by Shareholders 318

Carrots: Director Compensation and Incentives 319

Sticks, Part 1: Can Investors Ensure or Improve Board Independence by Replacing Directors who Perform Badly or Suing Directors who Fail to Act as Fiduciaries? 324

Can Directors be Held Accountable through the Election Process? 324

Staggered boards 327

Confidential voting 328

Sticks, Part 2: Suing for Failure to Protect the Interests of Shareholders – Are the Duties of Care and Loyalty Enforceable? 331

Future Directions 331

Majority voting and proxy access 331

Improving director compensation 333

Increasing the authority of independent directors 333

"A market for independent directors" 335

"Designated director" 336

Board evaluation 336

Executive session meetings 336

Succession planning and strategic planning 337

Making directors genuinely "independent" 337

Involvement by the federal government 338

Involvement by shareholders 339

Summary and Discussion Questions 339

Notes 340

4. Management: Performance 347

Introduction 348

What Do We Want from the CEO? 354

The Biggest Challenge 359

Risk Management 363

Executive Compensation 363

The pay Czar 370

Post-meltdown pay 370

The Council of Institutional Investors 371

Stock Options 374

Restricted Stock 379

Yes, We Have Good Examples 380

Shareholder Concerns: Several Ways to Pay Day 380

The "guaranteed bonus" – the ultimate oxymoron 380

Deliberate obfuscation 381

The Christmas tree 382

Compensation plans that are all upside and no downside 382

Loans 382

Accelerated vesting of options 383

Manipulation of earnings to support bonuses 383

Manipulation of peer groups 384

Huge disparity between CEO and other top executives 384

Imputed years of service 384

Excessive departure packages 384

Backdating, bullet-dodging, and spring-loading options 385

Phony cuts 386

Golden hellos 386

Transaction bonuses 386

Gross-ups and other perquisites 387

Retirement benefits 387

Obstacles to restitution when CEOs are overpaid 387

Future Directions for Executive Compensation 388

CEO Employment Contracts 389

Cause 390

Change of control 391

Half now, half later 391

CEO Succession Planning 391

Sarbanes–Oxley 392

Creation of the Public Company Accounting Oversight Board 392

Section 404 393

Other changes 394

Dodd–Frank 394

Employees: Compensation and Ownership 395

Employee Stock Ownership Plans 399

Mondragón and Symmetry: Integration of Employees, Owners, and Directors 403

Conclusion 409

Summary and Discussion Questions 410

Notes 411

5. International Corporate Governance 415

The Institutional Investor as Proxy for the Public Interest 429

Norway in the driver’s seat 431

The International Corporate Governance Network 433

ICGN: Statement of Principles on Institutional Shareholder Responsibilities 433

The Global Corporate Governance Forum 435

Sweden 435

Canada 437

Singapore 438

Russia 441

Germany 442

China 443

Japan 444

Governance Metrics International (GMI) 445

World Bank and G7 Response 458

Azerbaijan 459

Slovakia 460

Jordan 460

Thailand 461

Poland 461

The Global Carbon Project (GCP) 464

A Common Framework for Sustainability Reporting 465

Towards a Common Language 468

Vision 470

Summary And Discussion Questions 471

Notes 473

6. Afterword: Final Thoughts and Future Directions 475

Beyond the Nation State 477

Government as Shareholder: The Institutional Investor as Proxy for the Public Interest 484

Notes 486

Index 489