Future of the Corporation 2020


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Paper from the second summit on Corporation 2020. What would a corporation look like that was designed to seamlessly integrate both social and financial purpose? Corporation 20/20 is a new multi-stakeholder initiative that seeks to answer this question. Its goal is to develop and disseminate corporate designs where social purpose moves from the periphery.

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Future of the Corporation 2020

  1. 1. Paper Series on Restoring the Primacy of the Real Economy JUNE 2009 AllEN WhitE, EditoR
  2. 2. New Principles for Corporate design 1. The purpose of the corporation is to 4. Corporations shall distribute their harness private interests to serve the wealth equitably among those who public interest. contribute to wealth creation. 2. Corporations shall accrue fair returns 5. Corporations shall be governed for shareholders, but not at the expense in a manner that is participatory, of the legitimate interests of other transparent, ethical, and accountable. stakeholders. 6. Corporations shall not infringe on 3. Corporations shall operate sustainably, the right of natural persons to govern meeting the needs of the present themselves, nor infringe on other generation without compromising the universal human rights. ability of future generations to meet their needs. For information on the development and context of these principles, www.corporation2020.org 2009 SUMMIT ON THE FUTURE OF THE CORPORATION | ii
  3. 3. JUNE 2009 Dear Colleague: It is my pleasure to present you with a copy of this Paper Series in conjunction with the 2nd Summit on the Future of the Corporation: Restoring the Primacy of the Real Economy, Boston, June 9-10, 2009. The Paper Series and Summit mark the fifth anniversary of the launch of Corporation 20/20. The small core group that began this journey, comprising individuals from business, civil society, finance, labor, law and the media has grown into an international network of nearly 400 participants with a shared commitment to rethinking the fundamentals of the modern corporation. Through convenings, e-dialogues and research, Corporation 20/20 has continued to challenge the conventional notions regarding the design of the modern corporation, including its purpose, ownership, control, governance, capitalization and other components of the corporate form. Few of us involved in this journey could have imagined how relevant our work would be in light of the bubbles, busts and crises that have emerged in recent years. The topic of corporate purpose and structure has shifted from relative obscurity to front page headlines as all stakeholders grapple with the worst economic recession in decades. In particular, the role of the financial sector, a comparatively minor concern of Corporation 20/20 in its early years, has assumed a position of equal standing to the non-financial (“real economy”) sector on the agenda of the initiative. Reflecting this shift, the papers in this document and the 2nd Summit itself pay special attention to the purpose, regulation and restructuring of the financial sector at both the global and national levels. In the spirit of all Corporation 20/20 activities, paper authors challenge us to think “outside the box” and to open our minds to new ways of thinking about the nexus of capital and corporations. There is no issue of greater importance to achieving a just and sustainable economy in the decades ahead. We offer our sincerest appreciation to all authors for their contributions. Thanks also to the editorial team of David Wood, Faye Camardo and Nina Smolyar, and to Christina Williams for design of this document. We hope participants in the 2nd Summit as well as readers worldwide will find these papers both informative and provocative. Cordially, Allen L.White Director, Corporation 20/20 Senior Fellow, Tellus Institute 2009 SUMMIT ON THE FUTURE OF THE CORPORATION | iii
  4. 4. table of Contents 1. Beyond the Crisis: Policies to Foster Long-Termism in Financial Markets . . . . . . . . . . . .1 Rebecca Darr and Judith Samuelson If a group of leaders with diverse perspectives but a common concern for reintroducing long-term orientation in business and markets were to brainstorm about public policy, what kind of recommendations would they make? This paper examines the range of public policy ideas that have emerged through dozens of conversations over several years that The Aspen Institute has facilitated among its Corporate Values Strategy Group—a network of business, investor, labor, and governance experts who are concerned about the problem of destructive short-termism. The paper lays out some of these policy suggestions toward the goal of getting to a better system. These ideas are particularly timely in the current moment of renewed interest in the regulation of the financial services sector in particular, and busi- ness in general. 2. Toward a Bretton Woods II: Aligning a New Global Financial Architecture with Sustainable Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Paul Epstein International efforts to reorder rules of engagement have often followed periods of social turbulence, pandemics, revolutions, depressions, and wars. The current global economic crisis presents such a moment for international finance. A new paradigm is urgent, one that shifts focus from protecting and enhancing capital interests to one geared to addressing the great challenges of sustainable development. Existing international finance institutions are ill-equipped to do this. New rules, incentives, funding mechanisms and governance that advance ecological protection and social well-being await invention, with a new climate regime arguably the most urgent among many pressing priorities. 3. Tomorrow’s Owners: Stewardship of Tomorrow’s Company . . . . . . . . . . . . . . . . . . . . . . 16 Mark Goyder Capitalism is in trouble because stewardship is failing. The world needs shareholders whose priorities and behaviors are aligned with the long-term interests of the company, and with the health of the soil in which it is being nourished. It needs boards and investors who exhibit a deeper understanding of the ingredients of success, and who have the tools of analysis by which they can advance this understanding. Shareholder value is a good measure but a bad master. No business will continue for long if it fails to meet a human need. We need investors, boards, rule-makers and civil society to combine in developing an agenda which puts stewardship and an inclusive approach at the heart of corporate life. This paper is intended to start the process of describing that agenda, with recommenda- tions for: defined stewardship mandates for asset managers; changed independence criteria for board members; a cultural revolution in the management of behavioral risk; mandatory ethical audit and reporting; professional codes and disciplines covering the role of directors and capital market participants; changes in company law and governance codes to underpin the changes. 2009 SUMMIT ON THE FUTURE OF THE CORPORATION | iv
  5. 5. 4. The Origins and Costs of Short-Term Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Kent Greenfield It is widely acknowledged that one problem facing American business is the fixation on the short term. Yet there is a puzzle: why does the capital market not punish companies for such short-termism? If short-termism truly hurts companies, why does the share price of those companies not go down, and the managers not get thrown out? It ought to be irratio- nal for Wall Street analysts to require—and company management to make—decisions by the company that hurt the company in the long run but allow the companies to meet short- term earnings projections. Share price is a reflection of the company’s value. If decisions are being made to decrease the true value of the firm then the share price should reflect that. That is not what we observe, which is puzzling. This essay will provide some possible answers to this puzzle. 5. Not Just for Profit: Emerging Alternatives to the Shareholder-Centric Model . . . . . . . 34 Marjorie Kelly We introduce the concept of For-Benefit design, a new organizational archetype that is a hybrid that combines the traditional for-profit archetype, which has profit at its nucleus, and the non-profit archetype, which has social mission at its nucleus. For-Benefit designs have a blended purpose at their core: serving a living mission and making a profit in the process. These emerging designs represent an alternative to the shareholder-centric model that could help companies avoid ethical mishaps and elevate their contribution to meeting societal needs and expectations. The paper discusses various examples of such companies within a three-part typology: Stakeholder-Owned Companies, Mission-Controlled Companies, and Public-Private Hybrids. 6. Markets at Risk: The Limits of Modern Portfolio Theory . . . . . . . . . . . . . . . . . . . . . . . . . 42 Steve Lydenberg Modern Portfolio Theory (MPT) has done much to improve risk management at the port- folio level for institutional investors. Its emphasis on risk control within portfolios, however, has increased the demand for risky products in the broader marketplace and, ironically, made financial markets more risky and volatile as a whole. It has focused investors on “beating the market” and promoted the use of hedging and diversification techniques that, as more investors use them, can ultimately prove ineffective in extreme market condi- tions. Moreover, MPT ignores many of the social and environmental risks inherent in the investment process. The current economic crisis presents a rare opportunity to rethink the fundamental purpose of investing and to invent the tools that serve that purpose. The key to such rethinking is to define investments in each asset class as a means to socially purposeful outcomes, rather than a numbers game built on a narrow financial theory. 2009 SUMMIT ON THE FUTURE OF THE CORPORATION | v
  6. 6. 7. How Should the Economy be Regulated?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Richard Rosen The current economic crisis provides a rare opportunity to re-think how the economy should be regulated in the coming decades. A key issue usually completely absent in such debates is how to democratize decisions pertaining to capital investments in basic industrial and service sectors. Achieving key social goals should be a criterion deeply embedded in such decisions. Two such goals are climate change mitigation and alignment of investments with sustainable development in general. Regulatory processes pertaining to capital invest- ments in basic sectors should empower stakeholders whose lives are affected by such invest- ments. Beyond capital allocation, future regulation should allow for stakeholder input in determining what kinds of products should be produced and what their prices should be in cases where markets are substantively non-competitive. U.S. Public Utility Commissions illustrate a powerful but underappreciated model of a proven regulatory approach that can and should be expanded to key sectors of the economy as a means to democratize decision- making. This would help correct the regulatory failures exposed during the economic crisis and enable a balance of public and private interests in shaping a form of managed capital- ism for the future. 8. Work and Well-Being . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 John Stutz The principles of corporate redesign make clear the need to enhance the well-being of workers. Today this is addressed through increases in compensation made possible by growth. However, research on the determinants of physical and subjective (psychological) well-being shows that gains from growth will be marginal at best. What is needed are im- provements in working conditions. For the U.S., long hours and job insecurity are critical areas. While there are ways to address these concerns, the turbulent, competitive nature of the economy makes progress difficult. Fortunately, the current major economic disruption provides an opening for significant progressive change. Author Biographies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 2009 SUMMIT ON THE FUTURE OF THE CORPORATION | vi
  7. 7. Beyond the commit to endeavors that may take years and, in some industries, decades, in order to realize both societal benefits and to make profits for their financial investors. The Crisis: unmitigated growth in short-term financial pressures that we have observed over the last several decades can greatly limit this potential to benefit society; indeed, it causes great harm.3 Policies to Foster Long-Termism A new administration in Washington and unprecedented public attention to business in Financial Markets1 and financial markets offers a unique oppor- tunity for public-policy recommendations in pursuit of long-term wealth creation to gain visibility and, possibly, to obtain real traction. Rebecca DaRR aND JuDith SamuelSoN Given this direct link between the potential aSpeN iNStitute ceNteR foR of business to create value and the need for i buSiNeSS aND Society long-term perspective, CVSG takes the con- sequences of short-termism as the point of departure for its deliberations. Short-termism If a group of leaders wIth dIverse constrains the ability of business to do what perspectives but a common concern for it does best—create valuable goods and ser- reintroducing long-term orientation in vices, invest in innovation, take prudent risks, business and markets were to brainstorm develop human capital, and address issues of about public policy, what kind of social and environmental significance. Short- recommendations would they make? Since term financial metrics encourage companies 2004, The Aspen Institute’s Corporate Values to externalize costs on wider society. The Strategy Group (CVSG) has been facilitating internal incentives and market signals that dialogue among corporations, organized follow from short-termism drive the kind of labor and public pensions, with the hope of dysfunctional, value-destroying behavior we influencing federal and state policy when the have witnessed since the fall of Enron and, on window of opportunity opens. Organized a much grander scale, in the current financial around the pervasive and destructive crisis. Short-termism is not limited to the be- problem of market short-termism, CVSG havior of misguided individuals; it is system- aims to promote business and market wide, with contributions by and interdepen- practices that curb short-termism and dencies among companies, asset owners, asset refocus the relevant players on creating long- managers, and government. term value for all stakeholders, with special focus on augmenting the voice of long-term ASPEN PRINCIPlES AS THE PlATFORM oriented investors.2 The Aspen Principles on Long-Term Value The purpose of this paper is to explore Creation, released to the public in June 2007, a range of public policy prescriptions that served as a starting place for this dialogue on have emerged over dozens of conversations public policy. Drafted under the leadership and several years time, at a moment of of CVSG members including senior-level renewed interest in the regulation of the representatives from business, corporate financial services sector in particular, and governance, public pensions, and organized business in general. labor, the Principles represent a consensus FOUNdINg ASSUMPTIONS of “strange bedfellows” on actions that are The Aspen CVSG starts from the assump- aimed at counteracting short-term focus tion that corporations represent a vital and at the company level, and that may have influential institution in society. In order for broader ripple effects throughout the wider corporations to perform at their best, they market. The Principles urge companies to 2009 SUMMIT ON THE FUTURE OF THE CORPORATION | PAPER NO. 1 | 1
  8. 8. define firm-specific metrics of long-term val- deeply concerned with the consequences of ue, and then use these metrics both to com- short-term thinking and acting, and who municate with investors around long-term thought change possible. This included people measures and activities, and to better align who were closely engaged with our work on executive compensation with the creation of short-termism and, thus, enjoyed a degree of long-term value.4 mutual trust, forged through the development Voluntary actions undertaken by indi- of the Aspen Principles of practice. We also vidual companies and boards are an excel- included participants who had a Washington lent starting place to make positive changes insider’s perspective on what was possible in in the market. But even before the economic the political sphere. In a search for common crisis became front-page news, it became ground, we began from the assumption that clear that in order to succeed in influenc- all input to the dialogue process was useful, ing the behavior of business and markets on regardless of political viewpoint or role.5 a wide scale, the principles of practice for long-term orientation must be bolstered by PRINCIPAl gOAlS system-wide incentives; that is, mandates The ideas we present below were developed and rules that comprise an integrated rede- through a series of five meetings held between sign of financial markets regulation. mid-2008 and March 2009, and have roots in conversation that began two years prior.6 APPROACH TO dIAlOgUE The June 2006 CVSG summit was based As Election Day 2008 approached, partici- around the idea of envisioning a better sys- pants in the CVSG acknowledged the poten- tem by the year 2015; participants identified tial for public-policy discussion aligned with characteristics of capital markets in which a the work on curbing short- better balance between short- and long-term THE BETTER SySTEM: 2015 termism. A working group horizons is achieved. (See box, “The Better convened around the follow- System: 2015” at right.)  Appropriate and trusted balance between ing assumptions and operating The recommendations that emerged from and alignment among government, principles: this visioning process largely prefigured business, investors, and society at large. Focus on the system and not those that would eventually comprise The  Greater understanding of how the just the corporation, recogniz- Aspen Principles, released in June 2007. different participants in the market (e.g., ing that a “complex dance,” In July 2008, CVSG defined its policy business, investors, and policy) relate to the system; and greater lines of sight involving both companies and discussion goal as follows: “Identify and regarding consequences of decisions and investors, drives the results we test constructs that provide an approach to behavior. have now. policy action that creates a more supportive  Businesses with clarity of purpose, Work toward developing a environment for companies and investors focusing on delivering excellent goods coherent package of ideas rath- concerned with creating long-term value and services, and creating sustainable er than a piecemeal approach, that is in the interest of the common good.” long-term value. and embrace all links in the Compared to two years prior, the July 2008  Transparency on issues that matter– investment chain. summit focused specifically on how public businesses providing information Seek the common ground policy could encourage long-term oriented that offers appropriate insight into among different market actors business and investor behavior. Recom- past performance, compensation and incentives, and indicators of future health. with an interest in extending mendations centered around five goals, with time horizons in the business accompanying suggestions about how those  Better sharing of wealth, based on more equitable evaluation of contributions. system, with the hope of creat- goals might be accomplished: ing a common platform. Encourage more patient capital and dis-  Public policy characterized by an appropriate balance between short-term As a result, rather than start courage investor churning: For example, in- and long-term business and investment the policy discussion with a stitute minimum holding or vesting periods incentives. re-examination of the corpora- as a prerequisite to the exercise of certain  Business leaders actively engaged in tion and its purpose, the focus shareholder rights; change capital gains and addressing long-term societal challenges of the dialogue was to work tax policy to reward long-term investment; that affect the business environment. with individuals and influen- and develop new long-term investment tial organizations who were products with restricted access to invested 2009 SUMMIT ON THE FUTURE OF THE CORPORATION | PAPER NO. 1 | 2
  9. 9. capital for individual investors in retirement troversial/ difficult to achieve? and other long-term contributory schemes.  Are there any logical linkages between Discussants called for additional research by ideas? experts to test these ideas. Four of the five policy goals outlined dur- ing CVSG’s July 2008 summit ultimately Promote greater investor transparency: For were reflected in the final set of “building example, require more and better disclosure blocks” developed by this working group that of holdings by investors, intermediaries, and focused on policy outcomes from October agents on record dates and when acquiring 2008-March 2009.7 The policy discussion significant positions (short and long) in order and subsequent ideas (see Appendix) were to illuminate conflicts, discourage “empty” significantly clarified and galvanized by voting, and enable operating companies the growing financial and economic crisis. working to amplify the voice of long-term While the headlines have remained similar holders to know who owns their shares, and from July 2008 to now, what changed was an in what quantities. articulation of how the policy goals would be achieved—more specifics were included in Hold financial intermediaries to a higher some areas and a change in scope modified degree of accountability: Increase disclo- other goals. Two new areas for policy focus sures on compensation, incentives, trading, were discussed and were added to the mix: (1) and other such matters that would indicate the role of excessive risk-taking; and (2) the compatibility, or lack thereof, with the stated role of leverage in the current economic crisis. goals of the ultimate investors, such as pen- The building blocks outlined below rep- sioners and those saving for college. resent concepts that participants believed were critical to restoring trust and confidence Encourage corporate use of compensation in financial markets, the foundation of any and incentives that better align employee sustainable recovery.8 They believed these interests with the long-term health of concepts are also necessary to move the U.S. the company: For example, modify tax toward a smarter financial system, one that is treatment of options and tax rules on the focused on long-term societal health, not just deductibility of executive compensation as a until the next bonus is banked. These building corporate expense. blocks are supported by specific examples of actions (to be implemented by the U.S. De-emphasize the quarter: Refocus manag- government, state governments, and stock ers on long-term value creation and produc- exchanges), some of which are described in tive activity by encouraging the release of the next section and in the Appendix. broader performance metrics and strategies as a target for management discussion, and Create revenue and pricing incentives move the statutory requirement for U.S. to encourage more patient capital and company filings from quarterly to semi- discourage investor churning. In collabo- annually, as is done in other countries. ration with other OECD countries, the U.S. In October 2008, we began to facilitate a should develop tax-based mechanisms with small working group interested in public- a market-wide reach to encourage investors policy ideas and representative of diverse to hold stock over longer periods. These perspectives and organizational affiliations. could include a trading tax to discourage The following criteria were applied to the churning, changes in the capital gains tax search for the best ideas, and in order to to re-define “long term” and to reinstate triage a longer list of proposals presented for Clinton-era rates on holdings of between consideration by this small group: one and five years, and end the “2 and 20”  What is mission critical versus less critical loophole that allows fund managers to (higher versus lower priority)? claim capital gains tax treatment for their  What is less controversial/easier to do cut of the carried interest of their investors, (technically, politically) versus more con- thus avoiding paying income tax. 2009 SUMMIT ON THE FUTURE OF THE CORPORATION | PAPER NO. 1 | 3
  10. 10. Strengthen investor disclosures to promote disclosure requirements that are currently greater transparency about who owns what. applicable to operating companies. The current economic crisis has shown that a  Ensure that LT fund and index fund man- number of actors whose roles in the market agers are taking fundamental risk into ac- have far-reaching effects have been flying un- count when they invest their clients’ funds, der the radar of existing reporting and disclo- and are voicing concerns and engaging in sure requirements, often obscuring potential activism about risk in stocks within their interests and motivations. Greater disclosure portfolios assuming they cannot sell. about these entities’ transactions will lead to a  Ensure that LT fund managers vote and clarification of their roles in the market. This invest in ways that will promote prudent may be achieved by requiring more and better growth and that index fund managers also disclosure of holdings by investors, inter- vote their shares in a manner that reflects mediaries, and agents on record dates and the long-term orientation and actual hold- when acquiring significant positions (short, ings of the portfolio. long, and derivatives) in order to illuminate  Ensure that LT fund managers disclose conflicts and to enable operating companies, and explain excessive annual portfolio focused on the long-term, to know who owns turnover. their shares, and in what quantities. In ad-  Require public disclosure of proxy advi- dition, pension funds should be required to sors’ criteria for making voting recommen- disclose their share-lending policies and all dations to mutual and pension funds, and should be banned from voting by use of bor- prohibit pension, college savings, index, rowed shares. or 401(k) funds from relying on a proxy advisory service for voting advice unless Hold financial intermediaries to a higher that service gave voting advice based on degree of accountability—ensuring their the perspective of a long-term investor in interests are aligned with their ultimate the corporate issuer. investor—by requiring increased disclo-  Require public disclosure of the revenues sures on compensation, incentives, trading proxy advisors receive from public com- and other such matters that would indicate panies and institutional investors, and the compatibility, or lack thereof, with the stated nature of the work that generates those goals of the ultimate investors. In many revenues. ways, financial intermediaries, such as asset managers and portfolio managers, have De-emphasize the focus on the next quar- become divorced from the interests of those ter and refocus managers on long-term value who provided the capital in the first place; creation and productive activity by requiring these ultimate investors are often invest- that quarterly guidance may be given only in ing for long-term goals such as college and the context of a clear long-term growth plan. retirement, while the intermediaries manage In the past, the SEC has deemed information this money with a quarterly or annual hori- misleading when it is not placed in appropri- zon. As such, financial intermediaries should ate context. Only if short-term guidance is be held to a higher level of fiduciary duty, actually placed within this larger context is it taking greater care in their role as agents meaningful to a long-term investor, and even and acting in ways that are beneficial to the then it is of minimal utility to investors who ultimate investor. Through creation of new are invested for 10 to 15 years or longer. or clarification of existing federal laws or regulations, the following might be required: Better focus corporations on real risk and  Compensate the managers of long-term opportunity. To create a corporate culture oriented, tax-advantaged funds, such where greater attention is paid to the real as 401 (k) and college savings (a.k.a. LT risks and opportunities facing the com- funds), based upon the fund’s long-term pany, corporations should assign explicit performance. responsibility for such risk management to  Extend to mutual funds the compensation their boards and senior-level staff; specific 2009 SUMMIT ON THE FUTURE OF THE CORPORATION | PAPER NO. 1 | 4
  11. 11. changes might be mandated through new passed by the “building blocks” described or revised federal legislation, regulation, above. Participants in the discussion prod- or stock exchange rules. Boards should be ded each other to think big, while simulta- encouraged to create a committee specifi- neously remaining aware of the little things cally focused on non-accounting risk, and that could improve matters incrementally. to rethink their operating models to set Nevertheless, there were several ideas that aside necessary time to devote to strate- dialogue participants considered, but which gic planning, management oversight, and failed to move forward due to insufficient compliance. Policymakers should consider support. These ideas may be relevant to those building on Sarbanes-Oxley requirements who are interested in creating a more just to mandate certification of companies’ risk and sustainable world, and for this reason management processes by top executives we share these ideas, in particular, and with and an outside auditor. greater specificity in the following pages.9 To address the goals of more patient capital Limit opportunities for excessive risk- and better investor transparency, two ad- taking that can translate into extensive ditional ideas emerged: value destruction. The current economic crisis shows the widespread destructive ef- Reform the use of rule 14a-8 to strike a fects that can result from investors’ efforts to balance more useful to long-term share- make short-term profits through excessive holders risk-taking or leverage. While these actions  The current challenge: Rule 14a-8 in may make profits for a handful of firms and the Securities Exchange Act of 1934 has individuals, they may ultimately inhibit real produced stockholder activism that is economic growth. These speculative prac- beneficial to investors.10 Nevertheless, the tices may give clout to short-timers with in- volume of activism also has substantial terests often adverse to long-term investors, costs: while filers bear a small filing cost, and may create excess volatility and risk in the number of proposals has mushroomed, the equity markets. Following are some ac- increasing the time that management tions that might begin to remedy the current devotes to proposals (and not to managing situation (see Appendix for additional ideas): the company). In addition, these propos-  Implement a leverage limit that should als may be brought by people who have include, at a minimum, investment funds not owned company stock for any period subject to the Investment Company Act of time, who only own a very small stake, of 1940 and any hedge fund that accepts and/or may be net short the company. At investments from pension funds, states, the same time, the SEC has kept Rule 14a- counties or other municipalities, and uni- 8 from being a tool for investors to have a versities. stronger voice and to be able to address, on  Regulate hedge funds as financial inter- a company-by-company basis, issues such mediaries. Up to 70% of securities trading as proxy access. is conducted through hedge funds whose  The proposed changes: The changes actions are not regulated; therefore, hedge described below would allow shareholders funds should be regulated and particular concerned about a company’s social and focus should be placed on their approach environmental practices to register their to risk, their use of leverage, and their concerns with relative ease, but would keep potential conflicts of interest. short-term investors and/or those with  Increase the reporting threshold for off- short positions from impacting company balance-sheet entities. behavior through the proxy process. •L eaveinplacethecurrentlowthresholds OFF THE TABlE BUT NOT FORgOTTEN for social proposals dealing with issues The policy discussions we facilitated began such as the environment, labor, and hu- with many wide-ranging ideas that were man rights, but require that the propo- gradually winnowed down to those encom- nent have owned shares at least a year. 2009 SUMMIT ON THE FUTURE OF THE CORPORATION | PAPER NO. 1 | 5
  12. 12. •R aisetheeligibilitycriteriaforusingRule a bylaw or seek books and records, to eq- 14a-8 to submit non-social proposals uity holders based on how long they have by requiring that proponents hold a sig- owned shares, and require those exercising nificant, net long stake for at least a year certain rights to have a net long position. before making a proposal and establish a To address the goal of focusing corporations reasonable filing fee for submitting non- more on the long-term creation of wealth social proposals. and real risks and opportunities, two addi- In order to address the concerns expressed tional disclosure-related ideas were proposed. by shareholders of all sizes about their in- Shareholders are not granted the protections ability to meaningfully push back against a of the corporation as a societal aim, in and board and its management when actions are of itself. Limited liability encourages share- taken which are contrary to the wishes of the holders to hand over their capital to corpora- shareholders: tions, which will engage in risky, but possibly •E liminatetheexclusionthatkeepselection profitable ventures. The desired, aggregate reform proposals from being presented outcome of this corporate risk-taking is the under Rule 14a-8 [Rule 14a-8(i)(8)]. This generation of financial profits and an increase would promote a private ordering solution in societal wealth. In the process of generating to issues like proxy access, “majority vot- financial profits, corporations have multiple ing,” and electoral expense reimbursement. incentives to employ and train workers, to •I naddition,stateslikeDelawareshould develop innovative products and services, and pass a statute, clarifying that bylaws allow- to engage in other activities that increase— ing for reimbursement of proxy expenses, not diminish—societal wealth. One might proxy access, and non-binding votes on expect to find an accounting of a company’s executive compensation (“say on pay”) are contribution to society in its voluntary ESG valid. States might require a form of proxy or CSR report; nevertheless, such reporting is access and expense reimbursement annual- voluntary and is limited in comparability even ly at companies with classified boards and by those using the Global Reporting Initia- every three years for board slates receiving tive’s G3 framework.11 more than 30% of votes. Improve corporate compensation disclo- Permit corporations to grant shareholder sure with context on societal impact voting and rights based on duration of  The current challenge: Over the last 25 holding years, executive compensation has grown  The current challenge: Shareholders who significantly, while the real income growth propose long-lasting corporate governance of the average U.S. worker has stagnated. changes or other fundamental alterations The SEC has a rather new Compensation in business strategy should have a substan- and Disclosure requirement; nevertheless, tial, long-term interest that signals their this requirement focuses only on the top motivation in wanting the corporation to executives and provides no context. prosper over the long haul. Currently, this  The proposed change: To give the public is not the case. One way of ensuring this is a better sense of companies’ impact on to allow only true “owners” of stock, and society via their workers, corporations not transient “renters,” to have a substan- should be required to disclose informa- tive voice in a company. tion about the growth in pay and benefits  The proposed changes: Through a state to top executives over time in comparison law modification, corporations could grant to the median wage and benefits package voting and other rights through changes paid to other employees in the company. in their corporate charter. For example, Other useful information might include corporations could give more weight to the size of the corporation’s workforce; a the votes of long-term equity holders. In breakdown of full-time, part-time, and the same vein, corporations could grant temporary employees; the percentage of certain rights, such as the right to present employees provided with health insur- 2009 SUMMIT ON THE FUTURE OF THE CORPORATION | PAPER NO. 1 | 6
  13. 13. ance; and a breakdown, by country, of the policy actions must look clearly and boldly at number of workers and revenues where a redefining fiduciary duty from a shareholder- company operates. centric orientation to broader, multi-stake- holder orientation. Companies that manage Mandate key disclosures on environmental to a single, financial objective will continue and social issues to miss important risks and fail to capture  The current challenge: A corporation is important opportunities to bring the talent of not merely an instrument of private wealth business to bear on problems that matter. creation; thus the public has a vested inter- A sustainable company must be one that est in the way in which such wealth is cre- not only achieves longevity, but longevity by ated. However, little disclosure is expected virtue of its attentiveness to the legitimate of U.S.-based or traded companies on the interests of those who both influence and are human impact of their operations, beyond influenced by its decisions and investments. specifics such as release of air pollutants. In this vein, one policy idea is to redefine Some European nations are now requiring the “license to operate” through a corporate corporations to make comprehensive dis- charter that must be renewed every 20 or so closures about the effect their policies have years. The renewal process would include on the nation, such as the environmental multiple voices answering such questions as: impact of their operations. One might 1) Is the company producing useful, valuable expect some of these data points to be in- products and services?; 2) Is the company a cluded in a company’s ESG or CSR report; good employer?; 3) Is the company a good however, the disclosure is voluntary. neighbor to its local community?; and 4) Is  The proposed change: Require publicly the company a good corporate citizen in the traded corporations in the U.S. to disclose eyes of government? information regarding their environmen- Second, more research is needed to under- tal and labor practices. This would give stand the corporate structures of companies the public and shareholders alike a better that have succeeded at long-term focus. understanding of companies’ real human Though not a new public policy prescription, impacts, and its effects on the environ- we believe that state laws already may offer ment. It would also help policymakers sufficient opportunity to structure ownership, identify industry participants who are ex- control, and voting rights in ways that could ternalizing costs to competitors or society advantage long-term orientation; yet, those at large, and policy areas where further examples are not well understood. Many ad- regulation is needed.12 vocates and academics are interested in new forms of corporate structure such as the For REFlECTIONS Benefit Corporation (“B Corp”) discussed in Our role in the ongoing dialogue has been complementary initiatives; it would be useful one of secretariat, facilitator, and process to build knowledge of commonplace voting cheerleader. The ideas shared above were not and ownership structures that advantage a developed by us. They emerged in multiple long-term view, and that can be accomplished meetings and have varying degrees of cur- under existing law.13 rency among participants; although there The process we have been facilitating strives is no consensus, and in the current envi- to offer a new vision for policy and regulation ronment of crisis and public distrust said which will vastly diminish the forces of short- consensus is increasingly hard to achieve. termism and drive behaviors that refocus on Given this opportunity offered by Corpora- the long term. We hope that these ideas— tion 20/20, we thought we would advance those that “survived” the autumn 2008-spring two policy-related ideas that have not been 2009 facilitation process, those that were voiced in any forum we’ve organized. discarded, and new ideas we suggest above— First, if companies are to focus on creat- can play a constructive role in the valuable ing and sustaining value into the long term dialogue on corporate design that Corpora- and fully account for their societal impacts, tion 20/20 continues to facilitate. n 2009 SUMMIT ON THE FUTURE OF THE CORPORATION | PAPER NO. 1 | 7
  14. 14. APPENdIx: SUMMARy TABlE OF PUBlIC POlICy IdEAS MOdE OF ACTION Existing Rules legislation Regulation State law Exchange IdEA Federal Federal Action Clarify Rules Still on the Table for Discussion Implement a trading tax X* Modify capital gains rates X* End the “2 and 20” loophole X* X* Enforcement of fiduciary duty of fund managers to take into account fundamental risk when X investing Extend the compensation disclosure principles to mutual funds X X Create accountability on the part of proxy advisors X X Special rules for LT tax favored investments [college savings, 401(k)] X X Special voting rules for index funds X X X Enhance make more timely the disclosure of economic interests of activist investors X X Limit leverage by funds/regulate hedge funds X X Ban voting of borrowed shares X X X Require investment funds to disclose share lending policies X X Limit certain rights to long-term, net holders X X Consider requiring issuers to disclose and update a long-term plan for the growth of corporate X X earnings if they wish to give quarterly earnings guidance Consider requiring that boards have a separate risk management committee to address non- X accounting risks Give boards more time to focus on the company’s business plan, the oversight of management X X and its performance, and the management of risk Consider requiring that an officer-level risk management process be the subject of certifications X X by the CEO, chief legal and financial officers, and outside auditor Increase reporting threshold for Off-Balance Sheet Entities X* X Permanently reinstate the uptick rule and outlaw naked short-selling X* Institute leverage limits and reinstate sensible margin limitations for financial institutions X* X investment funds Regulate credit default swaps as securities X* X Impose capital and disclosure requirements on all parties writing credit insurance contracts and X* X credit default swaps Off the Table but Not Forgotten Reform the use of Rule 14a-8 to strike a balance more favorable to genuine, long-term investors X Clarify that long-term investors may pass bypass laws requiring reimbursement of proxy expenses, X proxy access, and a non-binding vote on executive compensation Improve disclosure of executive compensation by placing it in the context of other corporate X X policies and their effects on other corporate constituencies and societal interests Require corporations to disclose information regarding their environmental, labor, ethical, and X X worker safety practices * International coordination would be highly desirable 2009 SUMMIT ON THE FUTURE OF THE CORPORATION | PAPER NO. 1 | 8
  15. 15. ENdNOTES substantive bases for exclusion.” Accessed 26 March 1 We wish to acknowledge David Langstaff, Damon 2009 from: http://sec.gov/interps/legal/cfslb14.htm Silvers, and Leo Strine, Jr. for their energy and 11 Developments in various countries suggest that intellectual contributions that shaped many of the ideas mandatory reporting is gradually emerging and may presented in this paper. Any error in representation is become far more common than it is today. For example: inadvertent, but it is ours. Sweden has mandated GRI reporting for state enterprises. 2 CVSG is a program of the Aspen Institute Business Denmark mandates CSR information in the annual and Society Program (Aspen BSP), which is dedicated reports of 1100 largest companies. The Johannesburg to developing leaders for a sustainable global society. Stock Exchange requires listed companies to comply with Aspen BSP engages with business leaders and business the King III Report on Corporate Governance which educators alike to help create a new vision of business includes sustainability reporting a key component of that incorporates stewardship of the environment and good governance. And China encourages state-owned society. companies to report on CSR activities. 3 CVSG’s focus on short-termism is rooted in the work 12 See COST-US (Consultation on Sustainability of The Conference Board’s Blue Ribbon Commission on and Transparency), a network of practitioners and Public Trust Private Enterprise, formed in response academics advocating a major enhancement of non- to the fall of Enron. More at: http://www.conference- financial disclosure in U.S. financial markets. http:// board.org/knowledge/governCommission.cfm groups.google.com/group/cost-us/subscribe?note=1 4 Aspen Institute Business Society Program, “Guiding 13 A teaching module, “What the Law Allows,” is Principles for Long-Term Value Creation,” June 2007. available from Aspen’s CasePlace.org. http://www. Accessible at: http://www.aspeninstitute.org/sites/ caseplace.org/d.asp?d=2811 (CasePlace.org registration is default/files/content/docs/pubs/Aspen_Principles_ required to access this module, but registration is free.) with_signers_April_09.pdf 5 The focus of the CVSG and policy dialogue has tended to avoid fundamental rethinking of the purpose of the firm; however, Aspen BSP believes that these fundamen- tal questions are timely and relevant. Over the last de- cade, and more recently through our Center for Business Education, we have convened and supported the work of dozens of academics and others pursuing significant change in theory and business practice in pursuit of busi- ness’ contribution to society and sustainability. 6 A list of participants for the June 2006 and July 2008 summits can be found on http://www.aspeninstitute. org/policy-work/business-society/corporate-programs/ corporate-values-strategy-group/participant-list 7 Others expressing their opinions in mainstream publications in recent months have called attention to the many policy goals and related ideas, including compensation and quarterly reporting that were articulated during the July 2008 summit. 8 Aspen CVSG public policy working group papers, December 2008-March 2009. 9 Aspen CVSG public policy working group papers, December 2008 and February 2009. 10 What is rule 14a-8? Per the SEC: “Rule 14a-8 provides an opportunity for a shareholder owning a relatively small amount of a company’s securities to have his or her proposal placed alongside management’s proposals in that company’s proxy materials for presentation to a vote at an annual or special meeting of shareholders. It has become increasingly popular because it provides an avenue for communication between shareholders and companies, as well as among shareholders themselves. The rule generally requires the company to include the proposal unless the shareholder has not complied with the rule’s procedural requirements or the proposal falls within one of the 13 2009 SUMMIT ON THE FUTURE OF THE CORPORATION | PAPER NO. 1 | 9
  16. 16. toward a Bretton output—global GDP or real wealth—is ~$40 trillion.) The paper money was lost in a game of limitless risk transfer; “securitization” that turned out to be anything but. Woods ii: With some wagering the bundles would fall ‘short’ and others betting stocks and bonds and currencies would rise, we may come to view this as one grand Ponzi scheme (decentralized and unwitting, perhaps, save Aligning a New Global Financial for the predatory lenders) that has left a trail of hardships, foreclosures, bankruptcies, Architecture with Sustainable layoffs and—the worst—the near collapse of whole economies such as Iceland, Ireland, Development and Spain. In the U.S., with housing values dropping and Detroit in its self-made sorry state, two major pillars of the U.S. economy have witnessed a precipitous paul R. epSteiN decline in output and market capitalization. t haRvaRD meDical School Today’s financial market disruption is mirrored by mounting climate instability and accelerating melt of the Earth’s ice cover. they say there are no atheIsts In a Meanwhile, plateauing crop yields and eco- foxhole; it seems there are no ‘free market’ nomic sinkholes threaten to drag asunder a fundamentalists in a recession. Yet, amidst growing list of nation states. Sometime soon, the most severe economic crisis since the the disharmonic convergence of economic, Great Depression, we are clinging to market energy, environmental, and political instabil- forces to bring about a recovery. Meanwhile, ities will drive us into a new world order. The the world faces escalating climate, food, and mantras of the Washington Consensus—de- water crises. A perfect storm on the one regulation, liberalization, privatization—led hand; a rare opportunity for integrated inter- us inexorably into the 2008 downward spiral, ventions and systemic change on the other. the end of an era of seemingly endless but On November 15, 2008 the leaders of 20 na- ultimately unsustainable growth. We need tions met in Washington, D.C., to address the a vision for the financial architecture and international financial crisis. France’s Presi- mechanisms that drive less and very differ- dent Sarkozy has called for another summit ent patterns of consumption. soon, and the 20 nations met in April 2009, The old rules of engagement are inad- with the Obama administration in place. equate for the task we face. We need a new With the financial collapse and rapidly set of regulations, performance and effi- devolving worldwide economy, calls for a ciency standards that oblige the economy, new Bretton Woods Agreement are be- once primed, to move steadily in the right coming audible. So much has happened in direction. Complementing the stimuli such a short time, the sense of urgency to needed for developed nations, UN Secretary restructure global finance has never been General Ban Ki-moon, this winter called greater. upon the G20 to establish a $1 trillion fund First, the financial mess: the abrupt to help developing nations deal with the evaporation of liquidity and lines of credit contraction in global investments and cope that has reverberated across the globe. with the social, environmental and political It wasn’t hard to see it coming, as ‘exotic fall-out. But realigning rules and rewards is derivatives’—speculative ‘side-bets’ on not sufficient: we also need an institution to highly-leveraged, bundled stocks and administer the funds and assure compliance bonds and swaps—rose from $900 billion with a new standards regime. A look back at in 2001 to $45.5 trillion in 2007! (World the evolution of the extant financial architec- 2009 SUMMIT ON THE FUTURE OF THE CORPORATION | PAPER NO. 2 | 10
  17. 17. ture is instructive in relation to charting the accumulation (derived from colonies) and pathway forward toward meeting the great concentration of wealth were accompanied sustainability challenges of the 21st century. by large migrations, populist and labor movements, a failed revolution in 1905, the A BRIEF HISTORy OF WORld ORdERS First World War, the Russian Revolution of Conscious international efforts to reorder 1917, and the 1919 pandemic of influenza rules of engagement have often followed (killing an estimated 20 to 100 million), periods of social turbulence, pandemics, which together precipitated another attempt revolutions, depressions, and wars. In the to restructure international relations. late 18th and early 19th century, revolutions The victorious powers from World against the old order exploded in the War I—led by the U.S., U.K., and France Americas and France, and back to the (Woodrow Wilson, Lloyd George, and Americas. After his defeat in Haiti (which Georges Clemenceau)—met in Paris for a led to his capitulation of American territory peace conference in January 1919 that would with the Louisiana Purchase in 1803), last until June. The Treaty of Versailles and Napoleon marched across Europe and his the League of Nations (following Wilson’s ultimate defeat there led to the momentous “Fourteen Points” and principles of “self- Vienna Peace Conference of 1814. And determination”) kindled new hopes for a while international relations continued to be new order and a lasting peace. dominated by colonial pursuits, and internal But many critical problems were left conflicts between labor and business caught unsolved. Women’s participation and fire, the 1815 Treaty of Vienna marked women’s suffrage were rejected, reparations the beginning of prolonged peace among were exacted from the vanquished, and European nations. colonies were reshuffled into League By mid-19th century, urban crowding of Nation “mandates.” Without funds (the population of London rose sevenfold to reignite the global economy, it took from 1790 to 1850) overwhelmed water and six years for Europe to recover, and the sanitation systems. In the 1830s outbreaks cinders of future conflict smoldered. Rapid, of cholera, tuberculosis, and smallpox uncoordinated growth led to spirals of in London, New York and Boston (and speculation and, following the 1929 stock many other industrializing cities) affected market crash, the Bank for International city dwellers and sparked protests and Settlements (established in 1930) served as a revolutionary involvements demanding hint of what was to come following the Great change. Public health jumped to center stage Depression and yet another world war, more in national development agendas during devastating than the first. this period, and the resulting sanitary and environmental reforms had stemmed the BRETTON WOOdS tide of the infections by the 1870s, years In the summer of 1944, as the second of two before Robert Koch (1883) and Louis devastating world wars, interspersed by the Pasteur (1890s) isolated bacteria. While roaring ‘20s and Great Depression of the no concerted international developmental 30s, drew to a close, Western leaders met effort emerged during this period, the at the White Mountain resort in Bretton first international funds to coordinate Woods, New Hampshire to form a new communications were established to support world order. The old one was broke and the International Telegraph Union (1865) broken. John Maynard Keynes—a Lord, a and the Universal Postal System (1874). financial market trader (Bloomsbury group The next turning point came in 1884, when member with Virginia Woolf and Lytton colonial powers met in Berlin to consolidate Strachey, among others) and designer of the a new world order. After centuries of Lend Lease Agreement (by which the U.S. extracting gold, ivory, and slaves, colonial supported Great Britain in WWII)—was powers divided Africa into new dominions. the designated chair. Keynes’ 1936 salient During the subsequent decades, primary book had pointed towards a Third Way of 2009 SUMMIT ON THE FUTURE OF THE CORPORATION | PAPER NO. 2 | 11
  18. 18. development, combining full employment tacked by others. The WTO has provided the and a market economy. umbrella for huge agricultural subsidies in Keynes figured out that you didn’t have to developed nations, while disallowing protec- figure it all out: you had to change the rules tive tariffs. The combination —swords al- that shape the system. The rules shape lowed, but shields denied—has undermined the body—the morphology of the global and, in many cases, eliminated profitable economy—and changes in it emerge from agriculture in many developing nations. changing the underlying rules. This complimentary combination of At Bretton Woods, western nations agreed a) sticks, b) carrots, and c) institutional to three rules: 1. free trade in goods, but infrastructure catapulted the post-war 2. fixed exchange rates, and 3. constraints recovery into several decades of prosperity on the international flow of capital. (The for some. In that post-war period, the third of these, whose violation in today’s Universal Declaration of Human Rights, capital markets can only be described as framed by Eleanor Roosevelt, was signed, “over-the-top,” followed Adam Smith’s and the United Nations was born out of admonition that healthy competition and the ashes of Wilson’s League of Nations. comparative advantage among nations It was truly a time of conscious transfor- would not hold if capital flowed freely and mation of world values and the world or- speculatively across borders.) der—new institutions followed a recognition Soon after, economic stimuli came in the that the destiny of the world’s nations and form of the Marshall Plan for European peoples were inextricably linked and that reconstruction and, in the U.S., the GI new governance mechanisms must be put Bill (priming housing, jobs, schools, and in place to both foster shared, core values as industries). And the international frame- well as to manage a globalizing economy. work to ensure stability was housed in the A major detour from this evolution newly-formed World Bank, the International occurred in 1971. With U.S. debt mounting Monetary Fund, and what was to become from Vietnam War expenditures, President the World Trade Organization (WTO). Nixon abandoned the Bretton Woods rules. Free trade in goods was now matched by THE WTO unhinged exchange rates and deregulation of The WTO, an international organization the international flow of investment capital. that deals with the rules of trade among The upward spirals soon began. In the nations, was established in 1995 to replace 1970s gold jumped from $38 an ounce to the General Agreement on Tariffs and Trade $300 (to $900 today); oil rose ten-fold, (GATT). It extended trade policy from goods from $3 to $30 a barrel; and nations went to service industries through the General hat-in-hand to the World Bank to borrow Agreement on Trade in Services (GATS). The money to fuel their economies. By 1983, WTO was formed to ensure that internation- money flowing out of the developing al trade “flows as smoothly, predictably and world surpassed that entering in aid and freely as possible” and to “help producers of investment, and the debt crisis was born. goods and services, exporters, and importers By the end of the 1980s, unheard of conduct their business.” interest rates (18-19%) drove money Unlike the GATT, the WTO is backed by a into British banks and away from dispute settlement mechanism, or trade court, their productive economy, creating a wedge and compliance, based on the court’s find- between finance and industry. (This was ings, is mandatory for member governments. corrected in the early ‘90s with a transfer in Through the court, the WTO acts as an Great Britain from finance into industry— arbiter when members’ non-trade objectives and the British economy rebounded.) conflict with their free-trade undertakings. But the ‘90s saw the unbridled transfer The effectiveness of the WTO has been of speculative, ‘hot money’ (e.g., moving questioned by some, and the impacts of its quickly in and out of one Asian capital to policies on those most in need roundly at- another, not stopping to invest in long- 2009 SUMMIT ON THE FUTURE OF THE CORPORATION | PAPER NO. 2 | 12
  19. 19. term projects). Currency transactions also Debt is the means by which some nations skyrocketed. In 1972, they amounted to exert control over others. Unpayable debts $16 billion daily. Today they are close to $2 must be forgiven. Debt forgiveness would trillion per day And today we witness the be a compensation for past inequities driven cliff over which the runaway split between by unequal terms of trade and centuries of the interests of finance and industry have wealth extraction. For example, debt-driven carried us. timber extraction and land clearing for mon- ocultures and biofuels will overwhelm even TOWARd A BRETTON WOOdS II well-funded measures for forest preservation. If global institutions are to be reconstructed But debt would re-accumulate rapidly to support inclusive, equitable, and unless the conditions that gave rise to it sustainable development, the deliberations are also changed. The most challenging must bring all nations to the table (not just issue is, thus, the terms of trade (TOTs): 20 chosen ones). And on the table are the the difference between the prices poor rules (the “sticks”), the financial incentives nations receive for their exports (e.g., (the “carrots”), and the international food) vs. the prices they pay for imports financial institutions: The World Bank, (e.g., tractors). Since the 1960s TOTs have the IMF and—of utmost importance—the steadily widened. Equalizing TOTs is most WTO. A new institution may be necessary— challenging because it means distributing the Global Environmental Facility is global wealth more equitably. TOTs must one possible model, being a granting (not a become more balanced, even from a banking and lending) agency, and includes Western, self-enlightened perspective, to the United Nations (UNEP and the UNDP). maintain purchasing power and global The GEF, which remains financially tethered markets. Equity is a prerequisite for trade in to the World Bank, must be democratized. goods that is free and fair, and for addressing A new global compact must realign international divisions among workers. the monetary rules, the regulations, and rewards that determine the shape of the Incentives and Funds. Perverse subsi- global economy in a way that aligns with the dies—such as those encouraging deforesta- higher purpose of sustainable development. tion and the extraction, mining, refining We will need a substantial fund to prime and combustion of coal and oil—must be the recovery, spark manufacture and eliminated. Subsidies and tax incentives international trade in new technologies and must be switched to stimulate producers and practices, and transform the international consumers of clean energy and energy-effi- finance institutions into bodies with a new cient technologies. New enterprises for solar, ethical foundation and new values that wind, geothermal, and other renewables will position finance into its appropriate role as generate jobs, enterprises, and trade. servant to the higher purpose of building a International agreements—such as sustainable future. the Kyoto Protocol and the (pending) Copenhagen Agreement, and the A NEW FINANCIAl ARCHITECTURE Biodiversity Convention—are hindered by In addressing a framework for a new 21st the lack of adequate financial resources. Century global financial architecture, we Instructive is the universal acceptance of can divide the components of financial the 1987 Montreal Protocol to phase out architecture into three sets: rules, incentives, stratospheric ozone-depleting chemicals and institutions. which was achieved when funds were allocated to technology transfer to poor Rules. New rules are needed to constrain nations (China, primarily; at the time poor). capital flows a) in order to prevent the Funds are needed to “jump-start” clean, volatile, destabilizing, speculative movement infant industries and to sustain them in of capital and b) to direct funds towards developed and developing nations. healthy development. A vast scaling up of funds is needed to sup- 2009 SUMMIT ON THE FUTURE OF THE CORPORATION | PAPER NO. 2 | 13
  20. 20. port stewardship of what the private sector revisit Keynes’ proposal for an international will not protect—forests, wetlands, water- clearing house to international governance sheds, climate stability—in the face of the of transactions of goods and services. short-termism and relentless cost competi- tion associated with a globalized economy. CONClUSION Potential sources for such Global Fund Our current mode of exhausting finite for Adaptation, for the program for resources and generating wastes beyond Reduced Emissions from Deforestation the capacity of biogeochemical systems to and Degradation, and Mitigation include recycle them is not sustainable. Worldviews, taxes on carbon, airline traffic, and like physical systems, are beginning to shift. Internet “cyberdollars.” A tax on currency And once things start to change, they can transactions—the “Tobin Tax” named after change fast. the Noble-prize winning Yale economist, The international tasks that lie ahead James Tobin—delivers a “two-fer”: it would loom large, for corporations must ultimately a) dampen the destabilizing influence of “hot realize rewards for promoting less, not money” transfers and b) generate significant more; a 180-degree turn away from the funds for stewardship of both non-renewable conventional model of driving unending and renewable resources. A quarter of a levels of consumption as the foundation cent levy on each of the $1.9 trillion traded for measuring success. The misalignment daily—far less than one pays a broker to buy of financial systems and new models of stocks—would not discourage long-term business is a disconnect that must be investments while yielding hundreds of rectified if timely, affordable, and patient billions of dollars annually. capital is to flow into sustainable enterprise. In all respects, we appear to be at the junc- Institutions. Formed in an era when ture of a packet of waves of different wave- resources were seemingly infinite and lengths, where the 30-year cycles and the modern environmentalism had yet to 60-year Kondratieff boom-and-bust cycles take shape, existing international financial have crashed along with a 500-year wave institutions are inadequate to the tasks we of western civilization. Suddenly, we face face today. critical turning points in social and natural A look at the Global Environmental systems. It is a critical moment to rethink Facility provides some guidelines for the and repurpose international finance institu- type of institution needed for enhanced tions such that they become the vanguard global governance. Established to coincide of the next wave of global change—change with the 1992 Rio Earth Summit and targeted at building sustainable societies of support both UN Climate and Biodiversity which finance shifts from an exercise risk Conventions, the GEF makes grants, gaming to one in which it becomes a core not loans, and involves two UN bodies driver of positive social change. (UNEP and UNDP). It has increased NGO A test of the political will and vision of participation. Though its funding is grossly world leaders for spurring such change will inadequate, its organizational model is far occur in December, 2009 when nations will better aligned with the critical sustainability meet in Copenhagen to create the post-Kyoto challenges than is the World Bank—by climate regime. These deliberations will in- definition, a lending institution. clude representatives from civil society, busi- Beyond funding a new form of ness, and the scientific sectors. This gathering development, a new global institution would of the global community to meet this global also have to absorb the functions of the challenge can be the vehicle that sets us on a WTO, forging new rules and enforcement path to reshape the financial architecture. mechanisms to redirect development We cannot afford to balk. In this nation toward more equitable outcomes than the we will need a Manhattan Project to study current pressures toward unfettered trade new technologies, a Marshall Plan to finance liberalization. In this context, we must them, an Apollo Plan to launch them and, a 2009 SUMMIT ON THE FUTURE OF THE CORPORATION | PAPER NO. 2 | 14
  21. 21. new New Deal to sustain the transformation. Constructing a new economic order built on equity and conservation shaped by a regulatory, institutional, and financial frame- work, will require a “Bretton Woods II,” this time with government, corporate, scientist, labor, NGO, and civil society participation. Creating new governance architecture with adequate levels of funding and financial regulatory power can provide the scaffolding on which to construct and sustain healthy, ecologically-sound, and equitable global systems in the centuries before us. n 2009 SUMMIT ON THE FUTURE OF THE CORPORATION | PAPER NO. 2 | 15
  22. 22. tomorrow’s and then according them deference that is usually reserved for magicians and rock stars. In RBS, dealmaking and expansion by acquisition were richly rewarded: owners: teamwork, loyalty and long-termism were not. Boards and investors failed to understand how large culture looms in the risk profile of a company. In Halifax Bank of Scotland (HBOS)—the other U.K. Stewardship solutions for a better bank that failed—one dominant corporate banker, Peter Cummings, took an equity- capitalism with-loans approach that left it with debts of over £7billion. In RBS no one on the board or among senior colleagues was strong enough to challenge Sir Fred Goodwin. In maRk GoyDeR HBOS Cummings was, we are told, held tomoRRow’S compaNy in awe and promoted to the board whose t job it was to challenge his strategy. Moving outside the U.K., the culture at UBS was so dysfunctional that senior sales-driven THE CASINO ECONOMy ANd THE executives simply overrode established FAIlURE OF STEWARdSHIP internal control policies forbidding them to flirt with further U.S. tax schemes London. 8 October 2008. It was a day of The London Financial Times of 8 October reckoning for the casino economy. On that contained another news item on the theme day, the U.K. government announced that of ownership and stewardship. This was the it had taken ownership stakes in the major denouement of a long-running involvement banks, Lloyds TSB and Royal Bank of Scot- of the activist speculative investor, Robert land. This led to the resignation of Sir Fred Tchenguiz, and the pubs and hotel company, Goodwin, CEO of RBS, who had led them MB. For some time Tchenguiz (a well- through a number of successful acquisitions known client of Peter Cummings of HBOS) before becoming one of the most energetic had been trying to use his investment collectors of toxic assets. in the company to force it to sell off its It was only some months later that the property into a joint venture with one of his British public, who are now paying for the companies. This in itself was not unusual. bank’s misjudgements, learned that the RBS What did seem strange was that he was board had used its discretion to protect his able to get the company to treat him like a pre-retirement pension with the effect of major shareholder—to the extent that he was giving him a taxpayer-funded pension of granted the right to nominate two directors £700,000 a year from the age of 48. to the board—when he did not actually The original failure to challenge a powerful hold any shares at all. What he had was an CEO, and thereby manage the banks’ risk, option to purchase shares called a contract is an obvious failure of stewardship. The for difference (CFD)—a derivative—that board’s positive decision to reward failure in meant that at any time he could convert a this way suggests a staggering insensitivity to derivative into a holding worth 25 percent of the expectations that society has of business. the company. Shareholders were expressing unease about The company eventually acceded to his Sir Fred’s management style and acquisitive demands; but then, because of the credit habits as early as 2005. The scale and nature crunch, the funding for the deal fell away of Sir Fred’s remuneration reflects flawed and the company was left with a loss of over thinking about the whole nature of success £300m on hedging arrangements it had and reward in business—appointing stars made in conjunction with the deal. 2009 SUMMIT ON THE FUTURE OF THE CORPORATION | PAPER NO. 3 | 16
  23. 23. As the market continued to fall Tchenguiz While it impossible and undesirable to roll then found himself being cornered by back many of the forces that have created traders who were now short-selling MB the casino economy, we can reinforce and driving down the value of his potential stewardship, and we can also rediscover holding. In order to short-sell you have to the ingredients of success to which good borrow the shares. Tchenguiz decided to stewards must always turn their attention. convert his derivative holding into a real Which brings us to the third news item for holding, not so much because he wanted 8 October—the publication of a new report to be a real shareholder as to prevent other on the nature of ownership. (Tomorrow’s people short-selling the stock on which he Company 2008) had bet! This report starts by making a distinction Now he was a real owner: at least he fully between the real economy—producing owned the shares he had paid for. But that goods and services that meet human needs was still not the end of the story! The end and the banks and investors that support the came on 8 October when it was revealed real economy—and the casino economy— that, because Tchenguiz had borrowed the activities which are removed from the money to buy these shares from an Icelandic production of goods and services and bank, he had now been forced to sell his where prices may have little relation to the holding at a discount. MB were at least free underlying value of what is being traded. from the attentions of an “owner” who had The report dissects the concept of little interest in its long-term success, and the ownership. Companies are separate legal company is now trying to find its way back entities which own their own assets. to its previous course, nursing hedging losses Ownership consists of a ”bundle of caused by this deal which exceed £300m. rights” which are exercised to a degree by Meanwhile, Tchenguiz is now embroiled in shareholders and to a degree by directors legal disputes with his Icelandic bankers. and by others. This is a parable of the casino economy. The report argues that shareholders have An investor who is not interested in the four main ownership-related roles, of which long-term health of the company can, stewardship is the most important: effectively, use a derivative to put his tanks  Member—setting the rules, voting , at- on the company’s lawn without formally tending the AGM; owning shares in the company. It prompts  Analyst, or scrutineer—assessing the the question: should a company have to treat company’s potential and ability to de- all investors the same, even where some liver; of those investors are less interested in its  Financier—providing equity funding in long-term health than in forcing break-up or an IPO or rights issue; disposal for their speculative gain?  Steward—promoting sustainable, long- term, performance. WHy STEWARdSHIP MATTERS The rights and duties of shareholders give Capitalism is in trouble because them a stewardship role alongside that of stewardship is failing. Some of the reasons directors in protecting the long-term health for this failure are global: they relate of the company and promoting the long-term to the depersonalization of ownership, value of the investment. Directors are en- the explosion of derivatives, and the trusted by shareholders with the management introduction into financial services of of the company on a day-to-day basis and are new layers of intermediation which erode accountable to—and can be influenced by— personal responsibility. But, as will be shareholders. Thus, the core responsibility for argued later in this paper, stewardship is also stewardship is shared between shareholders failing because of a flawed understanding and directors—a vital point. of the relationships and dependencies that The report goes on to define stewardship: underpin corporate success. “In Tomorrow’s Company we see stewardship as the process through which 2009 SUMMIT ON THE FUTURE OF THE CORPORATION | PAPER NO. 3 | 17