The Isolated Board: A Perspective on Governance Today

Boston College Law School & The Boston College Carroll School of Management’s Center for Corporate Citizenship

Directors’ Intensive Program on Corporate Governance

Panel:  Beyond the Quarterly Report:  Managing Risk and Creating Long-Term Value through Corporate Responsibility

 June 23, 2011

Note: This expanded revision of my remarks incorporates responses to questions asked from the floor.

Disclosures:  Risk Metrics Group acquired the rating agency I co-founded, KLD Research & Analytics, Inc., and was, in turn, acquired by MSCI Inc.  I now have no affiliation with any of these entities and do not speak on their behalf.  I am, however, a non-executive director of the Center for Political Accountability. 

Glandorf, Ohio: Catholic Church 5/25/10

           On Monday, your panelists and Dana Gold – Thank you Dana for organizing everything! – had a last conversation about this panel.  My assignment was to offer a context for the panel’s discussion of the board and corporate social responsibility from a rating agency’s perspective.


           I described what I planned to say about the threat boards and senior managers will become increasingly isolated.

           A comment made me realise you lack important information about me:  I have never attended a board meeting of a publicly traded company.  And as long as I was president of a rating agency, KLD Research & Analytics, Inc., I wouldn’t have, if invited.

           Almost 40 years ago as a newly minted Assistant Attorney General in Ohio I learned the human instinct to like and trust people can cloud one’s judgment of what the record says they’ve done.  It was not an error I wanted KLD to repeat.

           So, my perspective on the corporate boardroom is that of an outsider by choice.


           As a rating agency, KLD was, first, an observer/reporter and, second, an intermediary, a communications link between our clients – over 400 institutional investors – and the companies whose stock they owned – and most importantly, the public.

           KLD rated companies on environmental, governance and social issues.  We focused on companies’ past performance in these areas as the best indicator of their future.  And, we kept a close eye on corporate culture.

           A critical part of KLD’s job was identifying rising issues and offering research ahead of demand.  For instance, we and our rating agency peers were well ahead on diversity in the 90s and climate in the late 90s and the Naughts.

           Before publishing a report, the subject received the final draft and was given time to comment and talk to us.  Before that stage, in many instances, our researchers had talked with the subject to verify information.  Then we’d publish our report to our clients.

           In short, we ran a dialogue on environmental, social and governance issues among corporations, their investors, those serving investors and the public who were constituents of all three.

           There was never any question as to what we were researching, for whom we were researching and who would learn about our results and how.  There were plenty of questions over 21 years about how companies stacked up against those criteria.

           That’s how MSCI and ISS continue to operate, as do its better competitors, EIRIS and Jantzi/Sustainalytics.


           Now, there’s a word for that process.  Berkeley professor David Vogel used it 35 years ago to describe shareholder activism.  He called it ‘lobbying the corporation’.

           The investors we represented wanted the companies whose shares they owned to move in certain directions.  When we started in 1988, our clients were very small money managers and banks whose clients demanded our services.  Our constituents were individual investors.

           Now, consider today’s UN Principles for Responsible Investment. It’s a declaration signed since 2006 by more than 850 institutional investors – pensions, insurance companies, investment banks, money managers – $25 trillion-worth. Here are the PRI’s first two sentences:

 As institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In this fiduciary role, we believe that environmental, social, and corporate governance (ESG) issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, asset classes and through time).

 The PRI marks a huge change in how institutions and their service providers look at the issues responsible investors care about.

           But from a corporate board members’ standpoint, even more significant are the millions of  mutual fund investors ESG rating agencies represent.


           So, here is my first take away:

           Historically, corporations are quasi-governmental organizations.  That’s right.  Quasi-governmental.  That’s why the structure of a modern Anglo-American corporation is a pretty close likeness of a 1600s government unit.  Boards, like today’s corporate boards, are at least 400 years older yet.

           Most people think in terms of private enterprise versus government.  That frame guarantees they will misunderstand how a company interacts with the world around it and an important way the world influences it.

           Today’s mantra of the Right is that anything that the states or preferably the private sector can do – anything you can Google – they should do.

           Imagine that comes true.  (And, it’s closer than you might think.)  Consider your company’s contributions to society – and its corruptions.  How would your purchasing compare to a county government?  How do your CFO’s percs and comp aline with the NY State Treasurer or the US Secretary of the Treasury.

           The biggest risk you face by far is that you will lose touch with the lobbyists of our stripe.  Yet, strong political and legal forces propelling you in the wrong direction.


           My second take away:

           You are in uncharted waters.  On one side of the channel, you have ratings agencies and the PRI.  On the other, you have ideologues and the Courts – not just the Supreme Court.  And the winds are coming every which way.

          No one alive today can share experience with you of how corporations act in a Citizens United world.  That experience ended in 1913.  What does it mean to have the raw political power – and with it social power – the Court has given quasi-governmental organizations?  For years to come, that question will be resolved in board rooms.

           You may not like trial lawyers, but their threat has served companies well. The new Wal-Mart Stores v. Dukes and Janus Capital Group v. First Derivative Traders cases decided this week add breadth to the impact of 20 years of ‘tort reform’.  Plaintiffs lawyers as a corporate accountability check are history.  So, too, is the era when reams of corporate information became public through litigation.

           Wal-Mart appears to bar class actions where a company has a policy against discrimination.  Individual plaintiffs will have to show particularized discrimination.  Such cases are rarely worth litigating one by one.  Corporations will now be free from liability in all but the most blatant and egregious cases.

           And then there’s Janus.  As I understand Justice Thomas, so long as you use a well-insulated subsidiary and observe corporate formalities, you are free to deceive the public.  I wish I were exaggerating.

          The conservative majority on the Supreme Court and in Congress are not breaking new ground.  They are returning to the political economy that existed before the Progressives in the early 20th century elevated facts and realities over political dogma.  We have returned to the world before Louis Brandeis.

           I knew the last surviving financier who flourished under pre-New Deal rules.  His name was Cyrus Eaton, and he died in 1979 at 95.

           The political and social risks – leave aside financial – of these decisions for corporations are literally incalculable.  We are applying 19th century political philosophy to 21st century realities. 


           My third takeaway:

           Traditional activist shareholders and investors concerned about social and environmental issues for guidance – and the quality rating agencies that serve both – have been solid guides on many – but not all – of the issues buffeting you today.  They’ve been more right than wrong. 

           But the political and legal counter-impetuses are enveloping corporations in Maxwell Smart’s cone of silence.  Increasingly, the only voice you’ll hear is that on your shoe-phone – unless you act.

          And one of the risks to a company no one is talking about:  It is the risk of not conforming and contributing to the new corporatism.  Think about the climate debate.  You have companies with strong policies on the environment, supporting the American Enterprise Institute and the U.S. Chamber of Commerce’s efforts to minimize climate regulations.

           It is no accident that the Center for Political Accountability and the Interfaith Center on Corporate Responsibility have launched shareholder actions directed at this inconsistency.

           Ernst & Young, the FT tells us, report 2010 saw 191 environmental or social-issue proxy resolutions, up from 150 in 2009.

           ‘Tort reform’, the Supreme Court’s insulation of corporations from accountability, and a Congress determined to shrink government regulation:  You are being cut off from people and mechanisms that hold you accountable.

          Now you will have to become responsible as never before.