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![INTRODUCTION 3
The court ruled against the shareholders. As long as the decision was made
“without an element of fraud, illegality, or conflict of interest, and if there was no
showing of damage to the corporation, then such questions of policy and man-
agement are within the limits of director discretion as a matter of business judg-
ment,” the court ruled (emphasis added).
Do you agree with this result? Should the management of a public corporation (a
company receiving capital from the public) be able to forgo additional returns to
shareholders on the basis of a CEO’s personal opinions about the company’s prod-
uct? How relevant are concerns about whether baseball should be played at night
and the impact on the neighborhood? More important, who is in the best posi-
tion to decide how relevant those concerns are? Does it affect your answer to
know that every other major league playing field had night games? Does it affect
your answer that Mr. Wrigley, at the time of this case, held 80 percent of the
company’s stock? If it does change your answer, how? And why?
Case in point: Should AT&T owners
pay for propaganda?
Is a corporation entitled to free speech? A Massachusetts statute prohibited cor-
porations from making expenditures to influence the vote on “any questions sub-
mitted to the voters, other than one materially affecting any of the property, business,
or assets of the corporation.” The law made it clear that this prohibition extended
to all tax issues, even those that did “materially affect” the company. The statute
was declared unconstitutional because it infringed the First Amendment rights of
the company to freedom of speech.2
Two justices of the Supreme Court who heard
a case raising some similar issues had opposite reactions.
Justice William Brennan did not want corporate management to use the
shareholders’ money to promote their ideas: “The State surely has a compelling
interest in preventing a corporation it has chartered from exploiting those who do
not wish to contribute to the Chamber’s political message. ‘A’s right to receive
information does not require the state to permit B to steal from C the funds that
alone will enable B to make the communication.’”3
Justice Anton Scalia thought it was worthwhile to bring ideas to the marketplace,
and he did not worry that the extra support for those ideas from the corporate
bank account would sway anyone otherwise unwilling to buy them: “The advocacy
of [AT&T or General Motors] will be effective only to the extent that it brings to
the people’s attention ideas which – despite the invariably self-interested and prob-
ably uncongenial source – strike them as true.”4
Do you agree with this result? What do you think was the rationale for such a
statute in the first place? Should the management of a public corporation be able
to use the shareholders’ money to express its views (or further its political agenda)
when those views may not be shared by the people who are paying the bill?
A corporation is an entity created by law that has some of the same rights as
individuals – does that include all of the freedom of speech rights granted to
individuals by the Constitution?
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![There is one theme to all three of these cases, and indeed to all problems of corporate
governance, and that is the issue of agency costs. The price we all pay for the benefits of
the corporate structure is our loss of control. Investors lose control over the use of their
capital. Managers lose control over their sources of funding. Other participants in the cor-
porate structure – employees, creditors, and so forth – also lose some measure of control.
The board has the oversight responsibility. It monitors the extent to which the various
corporate participants retain control, the costs and benefits of their attempts to do so, and
the resulting balance of powers among them.
INTRODUCTION 5
Case in point: A CEO’s perspective
These excerpts are from a speech by a leading CEO at a 1999 conference on
ethics and corporate boards:
[A] strong, independent, and knowledgeable board can make a significant differ-
ence in the performance of any company. . . . [O]ur corporate governance guide-
lines emphasize “the qualities of strength of character, an inquiring and
independent mind, practical wisdom and mature judgment . . .”. It is no accident
that we put “strength of character” first. Like any successful company, we must
have directors who start with what is right, who do not have hidden agendas,
and who strive to make judgments about what is best for the company, and not
about what is best for themselves or some other constituency . . .
[W]e look first and foremost for principle-centered leaders. That includes
principle-centered directors. The second thing we look for are independent and
inquiring minds. We are always thinking about the company’s business and
what we are trying to do. . . . We want board members whose active par-
ticipation improves the quality of our decisions.
Finally, we look for individuals who have mature judgment – individuals who are
thoughtful and rigorous in what they say and decide. They should be people whom
other directors and management will respect and listen to very carefully, and who
can mentor CEOs and other senior managers. . . . The responsibility of our board
– a responsibility which I expect them to fulfill – is to ensure legal and ethical
conduct by the company and by everyone in the company. That requirement does
not exist by happenstance. It is the most important thing we expect from board
members . . .
What a CEO really expects from a board is good advice and counsel, both of
which will make the company stronger and more successful; support for those
investments and decisions that serve the interests of the company and its stake-
holders; and warnings in those cases in which investments and decisions are not
beneficial to the company and its stakeholders.
That speech, “What a CEO Expects from a Board,” was delivered by then Enron CEO
Kenneth Lay. The company’s code of ethics is similarly impressive. The company got high
marks from just about everyone for best corporate governance practices.
The board looked good on paper: the former dean of the Stanford business school was
chairman of the audit committee. Another director was formerly a member of the British
House of Lords and House of Commons, as well as Energy Minister. In addition, the
board included one of the most prominent business leaders in Hong Kong, the co-founder
and former president of Gulf and Western, two sitting CEOs of large U.S. corporations,
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![NOTES
1. Shlensky v. Wrigley, 95 Ill. App. 2d 173, 237 (1968).
2. First National Bank of Boston v. Bellotti, 435 US 765 (1978).
3. Austin, Michigan Secretary of State, et al. v. Michigan State Chamber of Commerce, Brennan’s
concurring opinion, p. 7.
4. Ibid., Scalia’s dissent, p. 5.
5. “The Final Call,” Sept. 24, 2002. <http://www.finalcall.com/perspectives/free_speech09-
24-2002.htm>.
INTRODUCTION 7
Ideas about corporations
Concentration of economic power in all-embracing corporations represents a kind
of private government which is a power unto itself – a regimentation of other
people’s money and other people’s lives. Franklin Roosevelt
The myth that holds that the great corporation is a puppet of the market, the
powerless servant of the consumer, is, in fact, one of the services by which its
power is perpetuated. John Kenneth Galbraith
Merchants have no country. The mere spot they stand on does not constitute so
strong an attachment as that from which they draw their gains. Thomas Jefferson
By making ordinary business decisions [corporate] managers now have more power
than most sovereign governments to determine where people will live; what work
they will do, if any; what they will eat, drink, and wear: what sorts of knowledge,
schools, and universities they will encourage; and what kinds of society their chil-
dren will inherit. Richard J. Barnet and Ronald Mueller
Corporations, especially the large and complex ones with which we have to live,
now appear to possess some of the qualities of nation states including, perhaps,
an alarming capacity to insulate their members from the moral consequences of
their actions. Paul Eddy, Elaine Potter, and Bruce Page
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![WHAT IS A CORPORATION? 9
“When they [the individuals composing a corporation] are consolidated and united into
a corporation, they and their successors are then considered as one person in law . . . for
all the individual members that have existed from the foundation to the present time,
or that shall ever hereafter exist, are but one person in law – a person that never dies:
in like manner as the river Thames is still the same river, though the parts which com-
pose it are changing every instant.” Blackstone
“An ingenious device for obtaining individual profit without individual responsibility.”
Ambrose Bierce, The Devil’s Dictionary
What do these definitions tell you about the corporation? Are any of them incompatible, or
do they differ only in their emphasis? Can you think of a better definition?
All of these definitions have some validity, and all, including the one from The Devil’s
Dictionary, reflect the corporation’s key feature – its ability to draw its resources from a
variety of groups and establish and maintain its own persona separate from all of them. As
Henry Ford once said, “A great business is really too big to be human.”
In our view, a corporation is a mechanism established to allow different parties to con-
tribute capital, expertise, and labor, for the maximum benefit of all of them. The investor
gets the chance to participate in the profits of the enterprise without taking responsibility
for the operations. The management gets the chance to run the company without taking
the responsibility of personally providing the funds. In order to make both of these pos-
sible, the shareholders have limited liability and limited involvement in the company’s affairs.
That involvement includes, at least in theory, the right to elect directors and the fiduciary
obligation of directors and management to protect their interests.
This independent entity must still relate to a wide variety of “constituents,” including
its directors, managers, employees, shareholders, customers, creditors and suppliers, as well
as the members of the community and the government. Each of these relationships itself
has a variety of constituents. The corporation’s relationship to its employees varies, for
example, depending on the circumstances: whether or not they are members of a union,
whether or not they are pension plan participants. And each of these relationships affects
the direction and focus of the corporation. The study of corporate governance is the study
of the connection of those relationships to the corporation and to one another.
EVOLUTION OF THE CORPORATE STRUCTURE
While, in law, a corporation is, at least for some purposes, considered to be a fictional
“person,” at its core each corporation is in fact a structure. The corporate structure was
developed to meet particular needs that were not being met by earlier forms available to
business. It evolved through a Darwinian process in which each development made it stronger,
more resilient, and more impervious to control by outsiders.
As we examine that evolutionary pattern, it will become clear that every change the
corporate form has undergone has been directed toward the corporation’s own perpetuation
and growth. The advantages and disadvantages of this fact of business life are discussed
throughout this book.
In their earliest Anglo-Saxon form, municipal and educational corporations were
granted perpetual existence and control over their own functions as a way of insuring
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![16 CORPORATE GOVERNANCE
Corporations are “persons” within the meaning of the United States Federal Constitution
and Bill of Rights. They are entitled to protection against the taking of their property
without due process of law. They are entitled (at least to some extent) to freedom of speech.
They can contribute money to political causes and campaigns, though some restrictions
apply, due to post-Watergate reforms.
As the source of jobs, and therefore of the livelihood for people who vote, they have
significant political capital. Corporations, therefore, are powerful participants in the delib-
erations of our lawmakers.
Corporations also decide what products and services will be available. This applies not
just to laundry soap and toothpaste, but also to medications and safety equipment. They
decide investment priorities. They establish workplace conditions. They set prices.
THE CORPORATION AS A “PERSON”
Author and reporter William Greider describes the development of corporate “personalities”:
The great project of corporate lawyers, extending over generations, has been to estab-
lish full citizenship for their business organizations. They argue that their companies
are entitled to the same political rights, save voting, that the Constitution guarantees to
people. In 1886 the Supreme Court declared, without hearing arguments, that corpora-
tions would henceforth be considered “persons” for purposes of the 14th Amendment
– the “due process” amendment that was established to protect the newly emancipated
black slaves after the Civil War. Fifty years later, justice Hugo Black reviewed the Supreme
Court’s many decisions applying the 14th Amendment and observed that less than one
half of one percent invoked it in protection of the Negro race, and more than 50 percent
asked that its benefits be extended to corporations . . .
In the modem era of regulation [corporate lawyers] are invoking the Bill of Rights
to protect their organizations from federal laws . . . Corporations, in other words, claim
to be “citizens” of the Republic, not simply for propaganda or good public relations, but
in the actual legal sense of claiming constitutional rights and protections . . . Whatever
legal theories may eventually develop around this question, the political implications
are profound. If corporations are citizens, then other citizens – the living, breathing kind
– necessarily become less important to the processes of self-government.11
THE CORPORATION AS A COMPLEX ADAPTIVE SYSTEM
In the authors’ first book, we said that the corporate structure was designed to be so vital
and robust that it was like an “externalizing machine.” There is no malice involved – it
is just the flip side of its purpose of wealth generation. Therefore, it will do whatever it
can to hang on to its earnings and push its costs off of its balance sheet. This can be done,
for example, through legislation that increases barriers to entry for its competitors or
limits its liabilities. The self-perpetuating life force built into the corporate structure fights
the systems intended to impose accountability, and through that, legitimacy.
“Externality” is the vocabulary of economics. Another way to think about this is to use
the vocabulary of science and call it a “complex adaptive system.”
These systems, whether in physics, biology or economics, can be analyzed as patterns
and modes of behavior that can inform activity in other fields. One cannot literally find
in corporate behavior a repetition of the interaction of subatomic particles; one can, how-
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![WHAT IS A CORPORATION? 17
ever, notice living patterns that seem to replicate in corporate experience – tendencies
towards immortality, for unlimited size, unlimited power, unlimited license.
Only when one understands that corporations have adaptive characteristics does it become
clear that modification of their behavior must come from within the organizations. It has
not been convenient for society to recognize the general ineffectiveness of external
restraints on corporate activity. Neither government nor marketplace has the capacity to
require corporate functioning to conform to society’s interests. Large corporations retain
the services of the most talented professionals, the most persuasive lobbyists: former Senator
George Mitchell, “hero” of the Irish peace talks, is the principal lobbyist for the tobacco
industry. They control the most influential newspapers, TV (all three American networks
are owned by diversified conglomerates – GE, Disney, and Westinghouse) and magazine
outlets, and the best lawyers. With such competitive strength, it is difficult for the widely
dispersed elements that comprise society to effectively assert a contrary view. They even
control their own shareholders; the corporations themselves are the largest investors
through their pension funds, often the greatest asset and liability even a major corpora-
tion has on its balance sheet. For example, in 2001, General Motor’s pension assets of $74
billion were worth 271 percent of the company’s market capitalization. And in 2003 the
Washington Post reported that the $19 billion under-funding of GM’s pension fund was
driving the company to slash car prices to raise money quickly. This astonishing devel-
opment – a pension deficit as the driver of corporate strategy – had a predictable result.
GM’s competitors also discounted prices, resulting in reduced margins and earnings for
the entire sector. The only way in which to attempt societal harmony with corporations
is to understand that they are complex adaptive systems and change must come from within.
THE CORPORATION AS A “MORAL PERSON”
Thomas Donaldson provides an analytical structure to consider how a corporation can be
structured to make “moral” decisions:
In order to qualify as a moral agent, a corporation would need to embody a process of
moral decision making. On the basis of our previous discussion, this process seems to
require at a minimum:
1. The capacity to use moral reasons in decision-making.
2. The capacity of the decision-making process to control not only overt corporate
acts, but also the structure of policies and rules.
[The first] is necessary to raise the corporation above the level of a mere machine. To
be a moral agent, something must have reasons for what it does, not simply causes for
what it does, and for something to be a moral agent, some of those reasons must be
moral ones. Obviously, corporations are unable to think as humans, but they can employ
reasons of a sort, and this is shown by the fact that they can be morally accountable.
That is, with the proper internal structure, corporations, like humans, can be liable to
give an account of their behavior where the account stipulates which moral reasons prompted
their behavior.12
Can business “do well by doing good?” This is a perennial question. On one end of the
scale, companies such as Body Shop and Ben and Jerry’s have made social responsibility
(or, at least, their view of social responsibility) part of their marketing strategy. Consumers
can feel less guilty about buying arguably decadent products like make-up and ice cream
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![WHAT IS A CORPORATION? 29
The Law Commission thus concluded that the chances of ever convicting a large,
complex corporation for manslaughter were minimal – even if, as in the P&O Ferries
example, the manslaughter was the result not just of individual errors but of a cor-
porate culture or management failure.
Thus, the Commission proposed a new offence of corporate killing, broadly cor-
responding to the individual offence of killing by gross carelessness. “For the pur-
poses of the corporate offence,” they wrote, “a death should be regarded as having
been caused by the conduct of a corporation if it is caused by a failure in the way
in which the corporation’s activities are managed or organized.” They suggested
that “It should be possible for a management failure on the part of a corporation
to be a cause of a person’s death even if the immediate cause is the act or omis-
sion of an individual.” (In the US, corporate homicide charges are equally rare. One
successful prosecution involved a worker who was killed through on-the-job expo-
sure to hazardous chemicals. The boss had actually removed the warning labels.)
Let us look again at the Herald of Free Enterprise example. “If circumstances
such as these were to occur again,” explained the Law Commission “we think it
would probably be open to a jury to conclude that, even if the immediate cause of
the deaths was the conduct of the assistant bosun, the Chief Officer, or both, another
of the causes was the failure of the company to devise a safe system for the
operation of its ferries; and that that failure fell far below what could reasonably
have been expected. In these circumstances the company could be convicted of
our proposed new offence.”
On conviction, the court would have the power to order the cause of the offence
to be remedied.
All the stakeholders in these companies lost as a result of these actions. Corporations are sup-
posed to be governed by a system of checks and balances to make sure that these disasters do
not happen. Who failed? Who paid the price? If it is not the same people, why not?
If the system of checks and balances failed, why? Who was in the best position to deter
this kind of mistake, and why didn’t they do so? What changes would make these mistakes
less likely? What changes would catch and address them sooner?
The American Law Institute, Principles of Corporate Governance: Analysis and
Recommendations (Proposed Final Draft, March 31, 1992)
Sec. 2.01 The Objective and Conduct of the Corporation
(a) Subject to the provisions of Subsection (b) and section 6.02 (Action to
Directors That Has the Foreseeable Effect of Blocking Unsolicited Tender Offers),
a [business] corporation should have as its objective the conduct of business
activities with a view to enhancing corporate profit and shareholder gain.
(b) Even if corporate profit and shareholder gain are not thereby enhanced,
the corporation, in the conduct of its business:
(1) Is obliged, to the same extent as a natural person, to act within the bound-
aries set by law:
(2) May take into account ethical considerations that are reasonably
regarded as appropriate to the responsible conduct of business;
(3) May devote a reasonable amount of resources to public welfare, human-
itarian, educational and philanthropic purposes.
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Corporate Governance 3rd Edition Robert A.G. Monks
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- 6. CORPORATE GOVERNANCE CGA01 08/09/20053:20 PM Page i
- 7. Corporate Governance Robert A.G.Monks and Nell Minow The most comprehensive examination and commentary on corporate governance that I have yet seen . . . If I had to choose one book among the dozens available to explain and illumi- nate the complexities of corporate governance, this definitive treatise would be it. Hugh Parker Corporate Governance is a lucid and comprehensive introduction to a subject that is of critical importance to anyone interested in business. Everyone, from student, to scholar, to corporate employee, officer, director, or shareholder, will find it valuable. Donald Jacobs, Dean, Kellogg School of Business, Northwestern University This is what we’ve needed – a solid text on corporate governance written by two of the real stars in the field. D. Jeanne Patterson, former Associate Professor of Public and Environmental Affairs, Indiana University . . . a fresh, thoughtful, and timely look at the problem of corporate governance . . . a little gem. Joseph A. Grundfest, Professor of Law, Stanford Law School Exactly what’s needed for MBA students and management professionals. Gordon Clark, Dean, Faculty of Arts, Monash University The MBA student seeking real world examples will be well satisfied with this material . . . a major strength of the book is the practitioner perspective that the authors bring to the area. Stuart L. Gillan, The University of Texas at Austin . . . authoritative and informative, with some fascinating case vignettes . . . A monumental work. Bob Tricker, Editor, Corporate Governance . . . carefully blends economic and legal aspects of corporate governance. Highly recommended for use in seminars on board practices, MBA programs, and corporate governance forums. Cornelis A. de Kluyver, former Dean, School of Business Administration, George Mason University Highly useful . . . illuminates the current issues facing managers, boards of directors, and share- holders, as well as explaining their respective roles in the corporation. Ira M. Millstein, Weil, Gotshal & Manges; Lester Crown Visiting Faculty Fellow, Yale School of Management Provides a strong theoretical framework for the subject. It gives meaning to the important pub- lic policy issues by numerous examples, case studies, and policy statements. Professor J. Fred Weston, UCLA (Praise for the first edition) CGA01 08/09/2005 3:20 PM Page ii
- 8. CORPORATE GOVERNANCE Third Edition RobertA.G. Monks Nell Minow CGA01 08/09/2005 3:20 PM Page iii
- 9. © 2004 byRobert A.G. Monks and Nell Minow 350 Main Street, Malden, MA 02148-5020, USA 108 Cowley Road, Oxford OX4 1JF, UK 550 Swanston Street, Carlton, Victoria 3053, Australia The right of Robert A.G. Monks and Nell Minow to be identified as the Authors of this Work has been asserted in accordance with the UK Copyright, Designs, and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs, and Patents Act 1988, without the prior permission of the publisher. First published 1995 by Blackwell Publishing Ltd Second edition published 2001, reprinted 2002 (twice), 2003 (twice) Third edition published 2004 Library of Congress Cataloging-in-Publication Data Monks, Robert A. G., 1933– Corporate governance / Robert A.G. Monks and Nell Minow. – 3rd ed. p. cm. Includes bibliographical references and index. ISBN 1–4051–1698–6 (pbk. : alk. paper) 1. Corporate governance – United States. I. Minow, Nell. II. Title. HD2745.M66 2003 658.4–dc21 2003007769 A catalogue record for this title is available from the British Library. Set in 10/11.5pt Bembo by Graphicraft Limited, Hong Kong Printed and bound in the United Kingdom by T J International, Padstow, Cornwall For further information on Blackwell Publishing, visit our website: http://www.blackwellpublishing.com CGA01 08/09/2005 3:20 PM Page iv
- 10. To the future:Max, Mariah, and Megan R.A.G.M. To David, Benjamin, and Rachel N.M. CGA01 08/09/2005 3:20 PM Page v
- 11. CGA01 08/09/2005 3:20PM Page vi
- 12. Contents Cases in Pointxiii Acknowledgments xv Introduction 1 1 What Is a Corporation? 8 Definitions 8 Evolution of the Corporate Structure 9 The Purpose of a Corporation 14 Human satisfaction 14 Social structure 14 Efficiency and efficacy 14 Ubiquity and flexibility 15 Identity 15 The Corporation as a “Person” 16 The Corporation as a Complex Adaptive System 16 The Corporation as a “Moral Person” 17 The Corporation in Society 21 The marketplace 22 Future Directions 23 Corporate Power and Corporate Performance 24 Corporate Crime: “Within the Limits of the Law” 31 Probation of corporations 32 Corporations and Government: Co-opting the Market 37 Measuring Performance 42 Balancing Interests 49 Good and Bad Corporations? 54 Equilibrium: The Cadbury Paradigm 58 Measuring Value Enhancement 60 GAAP 60 Market value 67 Earnings per share 68 EVA® : economic value added 69 CGA01 08/09/2005 3:20 PM Page vii
- 13. Human capital: “It’snot what you own but what you know” 70 Knowledge capital 71 The value of cash 71 Corporate “externalities” 76 Non-economic Considerations in Corporate Management 89 2 Shareholders: Ownership 98 Definitions 98 Early Concepts of Ownership 100 Early Concepts of the Corporation 101 A Dual Heritage: Individual and Corporate “Rights” 102 The Reinvention of the Corporation: Eastern Europe in the 1990s 103 The Evolution of the American Corporation 104 The Essential Elements of the Corporate Structure 107 The Separation of Ownership and Control, Part 1: Berle and Means 110 Fractionated Ownership 115 The Separation of Ownership and Control, Part 2: The Takeover Era 119 Waking the Sleeping Giant 122 A Framework for Participation 126 Ownership and Responsibility 126 No innocent shareholder 127 To Sell or Not To Sell: The Prisoner’s Dilemma 129 Who the Institutional Investors Are 129 Bank trusts 130 Mutual funds 131 Insurance companies 132 Universities and foundations 133 Pension plans 135 The Biggest Pool of Money in the World 135 Pension plans as investors 142 Pension plans as owners 142 Public Pension Funds 144 Economically targeted investments 151 Federal Employee Retirement System 153 TIAA–CREF 155 Private Pension Funds 157 The Sleeping Giant Awakens: Shareholder Proxy Proposals on Governance Issues 161 Focus on the Board 167 SEC’s Proxy Reform 167 Synthesis: Hermes 173 Investing in Activism 174 New Models and New Paradigms 175 The “Ideal Owner” 180 Pension Funds as “Ideal Owners” 184 Is the “Ideal Owner” Enough? 185 3 Directors: Monitoring 195 A Brief History of Anglo-American Boards 197 viii CONTENTS CGA01 08/09/2005 3:20 PM Page viii
- 14. Today’s Typical Board197 Size 198 Inside/Outside mix 198 Diversity 198 Meeting frequency 198 Ownership 199 Governance 199 Board Duties: The Legal Framework 200 The Board–Management Relationship 202 Information Flow 203 The year of the corporate scandal 206 The CEO–Chairman 208 Catch 22: The Ex-CEO as Director 210 CEO Succession 211 Director Nomination 212 Director Compensation 221 Interlocks 223 Time and money 224 The Director’s Role in Crisis 225 “Independent” Outside Directors 227 Director Election 230 Staggered boards 231 Confidential voting 231 Impact of the Takeover Era on the Role of the Board 232 The Fiduciary Standard and the Delaware Factor 233 How did boards respond? 235 Greenmail 236 “Poison pills” 236 Other anti-takeover devices 238 Recommendations for the Future 239 Improving director compensation 239 Increasing the authority of independent directors 240 “A market for independent directors” 241 “Designated director” 242 Splitting the chairman and CEO positions 242 “Just vote no” 242 Audit committees 243 Board evaluation 243 Executive session meetings 244 Succession planning and strategic planning 244 Lipton/Lorsch’s “Modest Proposal” 244 Making directors genuinely “independent” 246 Involvement by the federal government 247 Involvement by shareholders 247 The Sarbanes-Oxley Legislation 248 4 Management: Performance 254 Introduction 254 What Do We Want from the CEO? 257 CONTENTS ix CGA01 08/09/2005 3:20 PM Page ix
- 15. The Biggest Challenge258 Executive Compensation 262 Stock Options 266 Restricted Stock 270 Shareholder Concerns: Several Ways to Pay Day 271 The “guaranteed bonus” – the ultimate oxymoron 271 Deliberate obfuscation 271 The Christmas tree 272 Compensation plans that are upside and no downside 272 Loans 272 Phony cuts 273 Golden Hellos 273 Transaction bonuses 273 Retirement benefits 273 Future Directions for Executive Compensation 274 CEO Employment Contracts 275 Gross-ups 276 “Deemed” years of service 276 Cause 277 Change of control 277 Half now, half later 278 Employees: Compensation and Ownership 278 Employee Stock Ownership Plans 283 Mondragón and Symmetry: Integration of Employees, Owners, and Directors 286 Conclusion 292 5 International Governance 295 Corporate Governance has Gone Global 295 The triumph of the corporation 295 The global company 296 The global investor 296 The demands of capital 297 The triumph of the code 297 Universal codes 298 An investor perspective 299 Limits to Convergence 304 The Asian Financial Crisis, the World Bank and Governance in Emerging Markets 305 World Bank and G7 Response 306 Global Corporate Governance Forum 310 The Developed World 312 The European Union 312 Japan 313 Corporate Governance Forum of Japan 318 Germany 321 German governance code 322 Earthquake 324 Future perfect? 326 x CONTENTS CGA01 08/09/2005 3:20 PM Page x
- 16. CONTENTS xi France 333 Frenchownership 333 Management and boards: Non-state-owned companies 334 Viénot I and II 334 Corporate Governance and Foreign Policy 338 A Race to the Bottom? 339 Convergence? 340 6 Case Studies: Corporations in Crisis 343 General Motors 344 General Motors and Pierre du Pont 344 General Motors: What Went Wrong? 347 General Motors and Ross Perot 366 General Motors after Perot: Smith and Stempel 371 General Motors: A Postscript 378 American Express 383 Time Warner 395 Sears, Roebuck & Co. 407 Diversification Strategy: The Fate of Retail 407 Sears: A Postscript 416 Armand Hammer and Occidental Petroleum 418 Polaroid 422 Polaroid’s ESOP: Delaware Sits in Judgment 424 Carter Hawley Hale 433 Hostile Takeover 433 After the Restructuring 441 Eastman Kodak 444 Waste Management Corp. 448 Gold into Garbage 449 Lens and Soros 450 The Soros Effect 454 Restructuring 455 What Went Wrong? 463 How Was It Solved? 463 Waste Management: A Postscript 464 Stone & Webster 467 Stone & Webster: The Company that Built America 467 Postscript 479 Mirror Group/Trinity Mirror 480 January 1999 482 July 1999 483 September 2000 484 June 2001 485 February 2002 485 September 2002 486 Adelphia 489 What happened? 492 Arthur Andersen 494 Andersen Consulting 495 CGA01 08/09/2005 3:20 PM Page xi
- 17. A Conformist Culture497 Who Watches the Watchers? 497 Corporate Governance 498 Hubris 499 Tyco (by Robert A.G. Monks) 501 WorldCom (by Beth Young) 507 Growth By Acquisition 508 WorldCom’s Board of Directors 509 WorldCom’s Auditor 510 Gerstner’s Pay Package at IBM (by Paul Hodgson) 512 The Anatomy of a Contract 512 Premier Oil: Shareholder Value, Governance, and Social Issues 524 Appendix: Overview of Corporate Governance Guidelines and Codes of Best Practice in Developing and Emerging Markets by Holly J. Gregory 530 Overview 531 The Corporate Objective 532 Board Responsibilities and Job Description 533 Board Composition 533 Board Committees 536 Disclosure Issues 537 Summary 537 Index 539 xii CONTENTS CGA01 08/09/2005 3:20 PM Page xii
- 18. Cases in Point Shouldthe Chicago Cubs play night games? 2 Should AT&T owners pay for propaganda? 3 Who pays the penalty when babies drink sugar water? 4 A CEO’s perspective 5 Union Carbide and Bhopal – what happens when the company is bought out? 18 Imperial Chemical Industries plc 20 Some instances of corporate crime 25 A UK attempt to redefine corporate manslaughter 27 Chrysler 37 Corporate political donations in the UK 40 “Delaware puts out” 42 The years of accounting dangerously 43 Mr. Biggs testifies 45 Protection, Pennsylvania-style 51 The “good,” the “bad,” and the real 54 Johnson & Johnson 59 Sears Automotive 62 Green Tree Financial 63 FASB’s treatment of stock options 64 The battle of the theme parks 67 Daimler-Benz and the New York Stock Exchange 74 Socially responsible investing 77 Prototype plc 78 Price-fixing 89 Standard Oil and the arrival of big business 105 Partnership vs. corporation 108 The voluntary restraint agreement in the auto industry 109 The conflicted owner 113 When is the employee stock plan obligated to step in or sell? 113 Who owns Hershey? 114 Junior invests in Boothbay Harbor 116 One share, one vote 122 R.P. Scherer and Citicorp 131 CGA01 08/09/2005 3:20 PM Page xiii
- 19. T. Rowe Priceand Texaco 132 Interlocking directors 133 The Corporate Library’s Interlock Tool 134 The Rose Foundation takes on Maxxam 135 Maine State Retirement System 138 Public fund activism 147 Myners shifts the burden of proof on activism 149 The Institutional Shareholders Committee 149 Can a fiduciary invest in Volkswagen? 151 Socially responsible investing 152 Campbell’s Soup, General Motors 158 “Universal Widget” 160 Honeywell and Furr’s 164 SWIB and CellStar 169 Revolt of the Yahoos: United Companies Financial and Luby’s 170 DAM changes its vote 171 From DuPont to relationship investing 175 A&P, Paramount, K-Mart 182 Hermes 183 Warren Buffett on boards 196 RJR Nabisco, Lone Star Industries, Tambrands, Enron 204 A director’s departure 213 A director demands more from the board 214 Two directors depart at Emap 216 Sears 228 Compaq Computers 229 Trans Union 233 Unocal and Revlon 234 Compaq and Salomon Inc. 247 AT&T & NCR 257 Exxon, AT&T and General Electric 259 ICGN on compensation 266 The chairman speaks 267 Borden 269 United Airlines and employee ownership 284 The “temping” of the workplace 285 Mondragón and “cooperative entrepreneurship” or “cooperation instead of competition” 286 Institutional reform in emerging markets 306 Indian governance 311 Ripplewood Holdings 315 Aspects of Japanese governance reform 318 Comments on the governance code 322 Metallgesellschaft and Holzmann 323 DaimlerChrysler and the perils of globalization 327 Awkward options for SAP 330 Rhône-Poulenc 336 Eramet 337 xiv CASES IN POINT CGA01 08/09/2005 3:20 PM Page xiv
- 20. ACKNOWLEDGMENTS First and foremost,we want to thank Kit Bingham, former editor of the indispensable magazine Corporate Governance, without whom this book would still be just a dream. His tireless, thorough, creative, and even cheerful diligence provided most of the case studies and supporting material, and he made even the more tedious aspects of research and writing a genuine pleasure. Professor Emerita D. Jeanne Patterson did a masterful job of reading through hundreds of academic papers and assembling the material for the Enron supplement. Holly Gregory of Weil, Gotshal, and Manges LLP created the incomparable materials on corporate governance in emerging and established economies, and we are immeasurably grateful to her for allowing us to share them with our readers. We are also very grateful to the heroic scholars whose work instructed and inspired us, especially Jonathan Charkham, Sir Adrian Cadbury, David Walker, Robert Clark, Alfred Conard, Peter Drucker, Melvin Eisenberg, Shann Turnbull, Betty Krikorian, Margaret Blair, Jeffrey Sonnenfeld, Adolf Berle and Gardiner Means, and James Willard Hurst. We have also learned a great deal from our colleagues, clients, and friends, including the widely disparate group of institutional investors all joined together by their commit- ment to the beneficial owners they serve as fiduciaries and the corporate managers they monitor as shareholders. It also includes the corporate managers, lawyers, regulators, com- mentators, and individual shareholders who care enough about making things work better to make a difference. These are also our heroes. They include Kayla Gillan, Linda Crompton, Carol Bowie, Peter Clapman, Stephen Davis, Olena Berg, Tom Horton, Dale Hanson, Rich Koppes, Ned Regan, Tom Pandick, Harrison J. Goldin, Carol O’Cleireacain, Patricia Lipton, Nancy Williams, Ned Johnson, Dean LeBaron, Dick Schleffer, Janice Hester-Amey, Phil Lochner, the late Al Sommer, Cathy Dixon, Martin Lipton, Ira Millstein and Holly Gregory, Luther Jones, Roland Machold, Michael Jacobs, the late John and Lewis Gilbert, Peg O’Hara, Mort Kleven, Alan Lebowitz, Karla Scherer, Kurt Schacht, Beth Young, Abbot Leban, Bill Steiner, Bob Massie, Tom Flanagan, Bill McEwen, David Greene, Alan Towers, Ann Yerger, Anne Simpson, Alyssa Machold, Roger Raber, Peter Gleason, Deborah Davidson, and Alan Kahn. We are also especially grateful to our dear friends Sarah A.B. Teslik, Executive Director of the Council of Institutional Investors, and Ralph Whitworth, of Relational Investors, who provided the leadership, support, and intellectual foundation for most of the develop- ments in this area over the past few years. We have also learned a great deal from scholars, including Joe Grundfest, Charles Elson, Bernie Black, Mark Roe, and Jack Coffee. John CGA01 08/09/2005 3:20 PM Page xv
- 21. M. Nash andthe late Jean Head Sisco, former Director and Chair of the National Association of Corporate Directors, deserve special thanks for their labors in the field of governance. We are grateful to those who permitted us to use their material in this book, which added inestimably to its value. Thanks to Holly Gregory, Chancellor William Allen, Ira Millstein, Shann Tumbull (apologies for failing to provide an appropriate credit in the first edition), Martin Lipton, Jay Lorsch, Cyrus F. Freidheim, Hugh Parker, Oxford Analytica, Jeanne Patterson, Paul Hodgson, Aaron Brown, Joe Grundfest, Jamie Heard, Sophie L’Helias, Howard Sherman, Bruce Babcock, and Geoff Mazullo. Dave Wakelin was most generous with his time in bring- ing us up to date on the Maine State Retirement System. Cathy Dixon guided us through the thorny securities law issues with patience, good humor, and unbounded expertise. Beth Young contributed the superb WorldCom case study and Paul Lee of Hermes allowed us to use his equally superb case studies of Premier Oil and Trinity Mirror. We are deeply grateful. Becky Lawler, Jessica Thomas, Michelle Gayton, Beth Young, Jackie Cook, and Paul Hodgson of the Corporate Library were generous, knowledgeable, and completely indispensable in giving us the latest data and analyses. Carol Bowie of IRRC gave us important statistics about shareholder votes on compensation proposals. Ric Marshall, our trusted colleague, developed the website that has made it possible for us to include and update the book’s supporting materials. Manpower CEO Mitchell Fromstein was most generous not only with useful material but also his own time. Newton Minow and the late Stanley Frankel constantly sent us clippings and gave us thoughtful advice. There is a special section of heaven for those who are willing to trudge through early drafts and provide comments. Thanks very much to Margaret Blair, Alfred Conard, Wayne Marr, Jane Zanglein, and Stu Gillan. We want to thank our colleagues, including everyone at the three companies we have worked at together: Institutional Shareholder Services, Lens, and the Corporate Library. Barbara Sleasman is the finest professional with whom we have ever worked. Cheri Gaudet was wonderfully diligent on updating and organizing the manuscript. We would also like to thank the people at Blackwell’s, including Linda Auld, Rhonda Pearce, and Rosemary Nixon. Alexandra Lajoux was a brilliant (and tactful) editor. Note from Bob Monks: I sometimes feel like Samuel Taylor Coleridge’s famed wedding guest “who stoppeth one of three” and proceeds to regale each with his memorable tale. In view of my utter preoccupation with this book and its subject matter, I am profoundly grateful for the civility and forbearance of friends and family and the love and understanding of my wife – Milly – and partners – Barbara and Nell. Note from Nell Minow: Thanks and love to my extended family, including all of the Minows and Apatoffs; my friends Kathy and Andrew Stephen, Kristie Miller, Patty Marx, Jeff Sonnenfeld, Jesse Norman, Tom Dunkel, Judy Viorst, Sarah Teslik, Adam Frankel, Judy Pomeranz, Cynthea Riesenberg, the Klein and Marlette families, Nadine Prosperi, Deborah Baughman, Jon Friedman, Desson Howe, Deborah Davidson, John Adams, Shannon Hackett, David Drew, Beth Young, Ann Yerger, Terry Savage, Bill Pedersen, Gary Waxman, Sarah Kavenaugh, Jane Leavy, Isabel Contreras, Steve Wallman, Sam Natapoff, Toby Kent, Michael Kinsley, Parvané Hashemi, Ken Suslick, Ellen and Sandy Twaddell, Steve Friess, Duncan Clark, Ellen Burka, Jim Richter, Michael Deal, and Stuart Brotman. Very special thanks to two very special girls, Lauren Webster and Alison Anthes. Thanks, as ever, to Bob Monks, the perfect partner. Most of all, I want to thank my family – my children, Benjamin and Rachel, and my husband, David, still the best person I know. xvi ACKNOWLEDGMENTS CGA01 08/09/2005 3:20 PM Page xvi
- 22. The importance ofcorporate governance became dramatically clear in 2002 as a series of corporate meltdowns, frauds, and other catastrophes led to the destruction of billions of dollars of shareholder wealth, the loss of thousands of jobs, the criminal investigation of dozens of executives, and record-breaking bankruptcy filings. Seven of the 12 largest bankrupt- cies in American history were filed in 2002 alone. The names Enron, Tyco, Adelphia, WorldCom, and Global Crossing have eclipsed past great scandals like National Student Marketing, Equity Funding, and ZZZZ Best. Part of what made them so arresting was how much money was involved. The six-figure fraud at National Student Marketing seems almost endearingly modest by today’s standards. Part was the colorful characters, from those who were already well known, like Martha Stewart and Jack Welch, to those who became well known when their businesses collapsed, like Ken Lay at Enron and the Rigas family at Adelphia. Part was the breathtaking hubris – as John Plender says in his 2003 book, Going Off the Rails, “Bubbles and hubris go hand in hand.” And then there were the unforgettable details, from the $6,000 shower curtain the shareholders unknowingly bought for Tyco CEO Dennis Kozlowski to the swap of admission to a tony pre-school in exchange for a favorable analyst recommendation on ATT at Citigroup. Another reason for the impact of these stories was that they occurred in the context of a falling market, a drop off from the longest, strongest bull market in US history. In the 1990s we saw billions of dollars of fraudulently overstated books at Cendant, Livent, Rite Aid, and Waste Management, but those were trivial distractions in a bull market fueled by dot.com companies. Those days were so heady and optimistic that you didn’t need to lie. Why create fake earnings when an honest disclosure that you had no idea when you were going to make a profit wouldn’t stop the avalanche of investors ready to give Palm a bigger market cap than Apple on the day of its IPO? But the most important reason these scandals became the most widely reported dom- estic story of the year was the sense that every one of the mechanisms set up to provide checks and balances failed at the same time. All of a sudden, everyone was interested in corporate governance. The term was even mentioned for the first time in the president’s annual State of the Union address. Massive new legislation, the Sarbanes-Oxley Act, was quickly passed by Congress and the SEC had its busiest rulemaking season in 70 years as it developed the regulations to implement it. The New York Stock Exchange and NASDAQ proposed new listing standards that would require companies to improve their corporate governance or no longer be able to INTRODUCTION CGA02 08/09/2005 3:21 PM Page 1
- 23. trade their securities.The rating agencies, S&P and Moody’s, who had failed to issue early warnings on the bankrupt companies, announced that they would factor in governance in their future analyses. Corporate governance is now and forever will be properly under- stood as a element of risk – risk for investors, whose interests may not be protected by ineffectual or corrupt managers and directors, and risk for employees, communities, lenders, suppliers, and customers as well. Just as people will always be imaginative and aggressive in creating new ways to make money legally, there will be some who will devote that same talent to doing it illegally, and there will always be people who are naive or avaricious enough to fall for it. Scam artists used to use faxes to entice suckers into Ponzi schemes and Nigerian fortunes. Now, they use e-mail. Or, sometimes, they use audited financial reports. Were the scandals of 2002 any worse in scope or magnitude than they have ever been before? Most of the focus has been on less than a dozen of the thousands of publicly traded companies, and the overwhelming majority of executives, directors, and auditors are on the level. If the rising tide of a bull market lifts all the boats, then when the tide goes out some of those boats are going to founder on the rocks. That’s just the market doing its inex- orable job of sorting. Some companies (and their managers and shareholders) got a free ride during the 1990s due to overall market buoyancy. If the directors and executives were smart, they recognized what was going on and used the access to capital to fund their next steps. If they were not as smart, they thought they deserved their success. If they were really dumb, they thought it would go on for ever. One factor that can make the difference between smart and dumb choices is corporate governance. In essence, corporate governance is the structure that is intended to make sure that the right questions get asked and that checks and balances are in place to make sure that the answers reflect what is best for the creation of long-term, sustainable value. When that structure gets subverted, it becomes too easy to succumb to the temptation to engage in self-dealing. 2 INTRODUCTION Case in point: Should the Chicago Cubs play night games? Can CEOs decide not to pursue opportunities that will increase revenues? In 1968, some shareholders of the Wrigley Corporation sued the company and its directors for failing to install lights in Chicago’s Wrigley Field. The shareholders claimed that the company’s operating losses for four years were the result of its negligence and mismanagement. If the field had lights, the Cubs could play at night, when revenues from attendance, concessions, and radio and television broadcasts were the greatest. The shareholders argued that the sole reason for failing to install the lights was the personal opinion of William Wrigley, the president of the com- pany, that baseball was a daytime sport, and that night games would lead to a deterioration of the neighborhood. “Thus,” the complaint concluded, “Wrigley and the directors who acquiesced in this policy were acting against the financial welfare of the Cubs in an arbitrary and capricious manner, causing waste of corporate assets. They were not exercising reasonable care or prudence in the management of the corporation’s affairs.”1 CGA02 08/09/2005 3:21 PM Page 2
- 24. INTRODUCTION 3 The courtruled against the shareholders. As long as the decision was made “without an element of fraud, illegality, or conflict of interest, and if there was no showing of damage to the corporation, then such questions of policy and man- agement are within the limits of director discretion as a matter of business judg- ment,” the court ruled (emphasis added). Do you agree with this result? Should the management of a public corporation (a company receiving capital from the public) be able to forgo additional returns to shareholders on the basis of a CEO’s personal opinions about the company’s prod- uct? How relevant are concerns about whether baseball should be played at night and the impact on the neighborhood? More important, who is in the best posi- tion to decide how relevant those concerns are? Does it affect your answer to know that every other major league playing field had night games? Does it affect your answer that Mr. Wrigley, at the time of this case, held 80 percent of the company’s stock? If it does change your answer, how? And why? Case in point: Should AT&T owners pay for propaganda? Is a corporation entitled to free speech? A Massachusetts statute prohibited cor- porations from making expenditures to influence the vote on “any questions sub- mitted to the voters, other than one materially affecting any of the property, business, or assets of the corporation.” The law made it clear that this prohibition extended to all tax issues, even those that did “materially affect” the company. The statute was declared unconstitutional because it infringed the First Amendment rights of the company to freedom of speech.2 Two justices of the Supreme Court who heard a case raising some similar issues had opposite reactions. Justice William Brennan did not want corporate management to use the shareholders’ money to promote their ideas: “The State surely has a compelling interest in preventing a corporation it has chartered from exploiting those who do not wish to contribute to the Chamber’s political message. ‘A’s right to receive information does not require the state to permit B to steal from C the funds that alone will enable B to make the communication.’”3 Justice Anton Scalia thought it was worthwhile to bring ideas to the marketplace, and he did not worry that the extra support for those ideas from the corporate bank account would sway anyone otherwise unwilling to buy them: “The advocacy of [AT&T or General Motors] will be effective only to the extent that it brings to the people’s attention ideas which – despite the invariably self-interested and prob- ably uncongenial source – strike them as true.”4 Do you agree with this result? What do you think was the rationale for such a statute in the first place? Should the management of a public corporation be able to use the shareholders’ money to express its views (or further its political agenda) when those views may not be shared by the people who are paying the bill? A corporation is an entity created by law that has some of the same rights as individuals – does that include all of the freedom of speech rights granted to individuals by the Constitution? CGA02 08/09/2005 3:21 PM Page 3
- 25. The Supreme Courthas expanded the protections for the oxymoronic “commercial free speech” since this ruling. In a 2002 case called Thompson v. Western States Medical Center, the court invalidated a statute that prohibited the advertising of “compounded” drugs, medications created for specific patients by combining two approved drugs. Because the combined form of the drugs had not received FDA approval, the law permitting their manufacture prohibited their being advertised. But the court found that the government cannot legitimately deny the public truthful commercial information to prevent the public from making bad decisions with the information. Why not? How does this fit with the traditional justification for freedom of speech? Authors Russel Mokhiber and Robert Weissman argue, “If the Court is going to jus- tify commercial speech protections based on the public’s right to know, as opposed to the speaker’s right to speak, it makes sense for the government to make determinations about whether the commercial information actually will educate the public to advance public policy goals. It is hardly a revelation that advertising contains promotional elements that may drown out its educational benefits.”5 But the California Supreme Court found that Nike’s inaccurate reports about pay and working conditions in its overseas factories were not protected as commercial speech, even though they addressed what might be considered political matters rather than just advertising its products. The intention of the statement was to encourage people to buy sneakers, so the court ruled that they were entitled only to the narrower protection given to advertising and other forms of commercial speech. The United States Supreme Court has deferred its ruling pending further fact finding. 4 INTRODUCTION Case in point: Who pays the penalty when babies drink sugar water? How do you punish a corporation? The president and vice-president of Beech-Nut admitted that they knowingly permitted adulterated apple juice to be sold for babies. The babies who drank the juice, of course, had no way of knowing that the juice was not right, and no way of communicating it if they did. The company pled guilty to 215 counts of violating federal food and drug laws, and paid a $2 million fine. According to the New York Times, its market share dropped 15 percent. The pres- ident and vice-president were not fired. On the contrary – the company paid all of their legal fees and their salaries until their appeals ran out. No one from the com- pany ever went to jail or paid a fine out of his own pocket. On the witness stand, one of the executives explained his decision to continue to market the adulterated juice: “What was I supposed to do? Close down the factory?” Is this the right result? What would be the result if the men involved had sold adulterated apple juice from a street corner or a local store, without the pro- tection of the corporate structure? Is it fair for the shareholders to pay the fine in addition to suffering the reduction in share value? What was the executive sup- posed to do? Once he found out that the juice was adulterated, should he have closed down the factory? What reporting structure or incentive structure or set of guidelines for employees would be most likely to achieve the best result? Who will or should go to jail because of the frauds at Enron, Global Crossing, WorldCom, Adelphia, and the others? CGA02 08/09/2005 3:21 PM Page 4
- 26. There is onetheme to all three of these cases, and indeed to all problems of corporate governance, and that is the issue of agency costs. The price we all pay for the benefits of the corporate structure is our loss of control. Investors lose control over the use of their capital. Managers lose control over their sources of funding. Other participants in the cor- porate structure – employees, creditors, and so forth – also lose some measure of control. The board has the oversight responsibility. It monitors the extent to which the various corporate participants retain control, the costs and benefits of their attempts to do so, and the resulting balance of powers among them. INTRODUCTION 5 Case in point: A CEO’s perspective These excerpts are from a speech by a leading CEO at a 1999 conference on ethics and corporate boards: [A] strong, independent, and knowledgeable board can make a significant differ- ence in the performance of any company. . . . [O]ur corporate governance guide- lines emphasize “the qualities of strength of character, an inquiring and independent mind, practical wisdom and mature judgment . . .”. It is no accident that we put “strength of character” first. Like any successful company, we must have directors who start with what is right, who do not have hidden agendas, and who strive to make judgments about what is best for the company, and not about what is best for themselves or some other constituency . . . [W]e look first and foremost for principle-centered leaders. That includes principle-centered directors. The second thing we look for are independent and inquiring minds. We are always thinking about the company’s business and what we are trying to do. . . . We want board members whose active par- ticipation improves the quality of our decisions. Finally, we look for individuals who have mature judgment – individuals who are thoughtful and rigorous in what they say and decide. They should be people whom other directors and management will respect and listen to very carefully, and who can mentor CEOs and other senior managers. . . . The responsibility of our board – a responsibility which I expect them to fulfill – is to ensure legal and ethical conduct by the company and by everyone in the company. That requirement does not exist by happenstance. It is the most important thing we expect from board members . . . What a CEO really expects from a board is good advice and counsel, both of which will make the company stronger and more successful; support for those investments and decisions that serve the interests of the company and its stake- holders; and warnings in those cases in which investments and decisions are not beneficial to the company and its stakeholders. That speech, “What a CEO Expects from a Board,” was delivered by then Enron CEO Kenneth Lay. The company’s code of ethics is similarly impressive. The company got high marks from just about everyone for best corporate governance practices. The board looked good on paper: the former dean of the Stanford business school was chairman of the audit committee. Another director was formerly a member of the British House of Lords and House of Commons, as well as Energy Minister. In addition, the board included one of the most prominent business leaders in Hong Kong, the co-founder and former president of Gulf and Western, two sitting CEOs of large U.S. corporations, CGA02 08/09/2005 3:21 PM Page 5
- 27. and the formerhead of the Commodities Futures Trading Corporation, who was an Asian woman with an economics Ph.D., and married to a prominent Republican congressman. There was also a former professor of economics and a former head of General Electric’s Power Division worldwide, a senior executive of an investment fund with a Ph.D. in mathematics, the former president of Houston Natural Gas, the former head of M. D. Anderson, the former head of a major energy and petroleum company, and a former Deputy Secretary of the Treasury and Ph.D. economist. That shows that it is easy to achieve the letter of good corporate governance without achieving the spirit or the reality. While it is tempting to engage in checklists of struc- tural indicators, there is no evidence that intuitively appealing provisions like independent outside directors rather than people whose commercial or social ties might create conflicts of interest, or annual election of directors rather than staggered terms have any correla- tion to the creation of shareholder value or the prevention of self-dealing. Therefore, it is important to keep in mind throughout this book that corporate governance is about making sure that the right questions get asked and the right checks and balances are in place, and not about some superficial or theoretical construct. William Donaldson, Chairman of the Securities and Exchange Commission, made this point in a 2003 speech at the Washington Economic Policy Conference: a “check the box” approach to good corporate governance will not inspire a true sense of ethical obligation. It could merely lead to an array of inhibiting, “politically correct” dictates. If this was the case, ultimately corporations would not strive to meet higher standards, they would only strain under new costs associated with fulfilling a mandated process that could produce little of the desired effect. They would lose the freedom to make innovative decisions that an ethically sound entrepreneurial culture requires. As the board properly exercises its power, representing all stakeholders, I would sug- gest that the board members define the culture of ethics that they expect all aspects of the company to embrace. The philosophy that they articulate must pertain not only the board’s selection of a chief executive officer, but also the spirit and very DNA of the corporate body itself – from top to bottom and from bottom to top. Only after the board meets this fundamental obligation to define the culture and ethics of the corporation – and for that matter of the board itself – can it go on and make its own decisions about the implementation of this culture. In this book we will focus on the three most significant players in the corporate pro- cess: shareholders, managers, and directors. Together, these forces shape a corporation’s focus, its direction, its productivity and competitiveness, and ultimately, its viability and legitimacy. First, however, we will begin with an inquiry into the nature of the corpora- tion itself. 6 INTRODUCTION CGA02 08/09/2005 3:21 PM Page 6
- 28. NOTES 1. Shlensky v.Wrigley, 95 Ill. App. 2d 173, 237 (1968). 2. First National Bank of Boston v. Bellotti, 435 US 765 (1978). 3. Austin, Michigan Secretary of State, et al. v. Michigan State Chamber of Commerce, Brennan’s concurring opinion, p. 7. 4. Ibid., Scalia’s dissent, p. 5. 5. “The Final Call,” Sept. 24, 2002. <http://www.finalcall.com/perspectives/free_speech09- 24-2002.htm>. INTRODUCTION 7 Ideas about corporations Concentration of economic power in all-embracing corporations represents a kind of private government which is a power unto itself – a regimentation of other people’s money and other people’s lives. Franklin Roosevelt The myth that holds that the great corporation is a puppet of the market, the powerless servant of the consumer, is, in fact, one of the services by which its power is perpetuated. John Kenneth Galbraith Merchants have no country. The mere spot they stand on does not constitute so strong an attachment as that from which they draw their gains. Thomas Jefferson By making ordinary business decisions [corporate] managers now have more power than most sovereign governments to determine where people will live; what work they will do, if any; what they will eat, drink, and wear: what sorts of knowledge, schools, and universities they will encourage; and what kinds of society their chil- dren will inherit. Richard J. Barnet and Ronald Mueller Corporations, especially the large and complex ones with which we have to live, now appear to possess some of the qualities of nation states including, perhaps, an alarming capacity to insulate their members from the moral consequences of their actions. Paul Eddy, Elaine Potter, and Bruce Page CGA02 08/09/2005 3:21 PM Page 7
- 29. Definitions of theterm corporation reflect the perspectives (and the biases) of the people writing the definitions. Anyone who tries to come up with a definition is like the blind men who tried to describe an elephant – one feeling the tail and calling it a snake, one feeling the leg and calling it a tree, one feeling the side and calling it a wall. Similarly, some lawyers and economists describe the corporation as simply “a nexus (bundle) of con- tracts,” arguing that the corporation is nothing more than the sum of all of the agree- ments leading to its creation.1 Here are some other attempts to describe or define the corporation: DEFINITIONS “The business corporation is an instrument through which capital is assembled for the activities of producing and distributing goods and services and making investments. Accordingly, a basic premise of corporation law is that a business corporation should have as its objective the conduct of such activities with a view to enhancing the cor- poration’s profit and the gains of the corporation’s owners, that is, the shareholders.” Melvin Aron Eisenberg2 “A corporation is an artificial being, invisible, intangible, and existing only in the con- templation of the law. Being the mere creature of the law, it possesses only those prop- erties which the charter of its creation confers on it, either expressly or as incidental to its very existence. These are such as are supposed best calculated to effect the object for which it was created. Among the most important are immortality, and, if the expression be allowed, individuality; properties by which a perpetual succession of many persons are considered the same, and may act as a single individual.” Chief Justice John Marshall “A body of persons granted a charter legally recognizing them as a separate entity hav- ing its own rights, privileges, and liabilities distinct from those of its members.” American Heritage Dictionary “An artificial person or legal entity created by, or under the authority of, the laws of a state . . . The corporation is distinct from the individuals who comprise it.” Black’s Law Dictionary, 6th edition, 1990 1 WHAT IS A CORPORATION? CGC01 08/09/2005 3:21 PM Page 8
- 30. WHAT IS ACORPORATION? 9 “When they [the individuals composing a corporation] are consolidated and united into a corporation, they and their successors are then considered as one person in law . . . for all the individual members that have existed from the foundation to the present time, or that shall ever hereafter exist, are but one person in law – a person that never dies: in like manner as the river Thames is still the same river, though the parts which com- pose it are changing every instant.” Blackstone “An ingenious device for obtaining individual profit without individual responsibility.” Ambrose Bierce, The Devil’s Dictionary What do these definitions tell you about the corporation? Are any of them incompatible, or do they differ only in their emphasis? Can you think of a better definition? All of these definitions have some validity, and all, including the one from The Devil’s Dictionary, reflect the corporation’s key feature – its ability to draw its resources from a variety of groups and establish and maintain its own persona separate from all of them. As Henry Ford once said, “A great business is really too big to be human.” In our view, a corporation is a mechanism established to allow different parties to con- tribute capital, expertise, and labor, for the maximum benefit of all of them. The investor gets the chance to participate in the profits of the enterprise without taking responsibility for the operations. The management gets the chance to run the company without taking the responsibility of personally providing the funds. In order to make both of these pos- sible, the shareholders have limited liability and limited involvement in the company’s affairs. That involvement includes, at least in theory, the right to elect directors and the fiduciary obligation of directors and management to protect their interests. This independent entity must still relate to a wide variety of “constituents,” including its directors, managers, employees, shareholders, customers, creditors and suppliers, as well as the members of the community and the government. Each of these relationships itself has a variety of constituents. The corporation’s relationship to its employees varies, for example, depending on the circumstances: whether or not they are members of a union, whether or not they are pension plan participants. And each of these relationships affects the direction and focus of the corporation. The study of corporate governance is the study of the connection of those relationships to the corporation and to one another. EVOLUTION OF THE CORPORATE STRUCTURE While, in law, a corporation is, at least for some purposes, considered to be a fictional “person,” at its core each corporation is in fact a structure. The corporate structure was developed to meet particular needs that were not being met by earlier forms available to business. It evolved through a Darwinian process in which each development made it stronger, more resilient, and more impervious to control by outsiders. As we examine that evolutionary pattern, it will become clear that every change the corporate form has undergone has been directed toward the corporation’s own perpetuation and growth. The advantages and disadvantages of this fact of business life are discussed throughout this book. In their earliest Anglo-Saxon form, municipal and educational corporations were granted perpetual existence and control over their own functions as a way of insuring CGC01 08/09/2005 3:21 PM Page 9
- 31. 10 CORPORATE GOVERNANCE Figure1.1 The Company Corporation advertisement Reproduced with permission from The Company Corporation independence from the otherwise all-encompassing power of the king. By the seventeenth century, corporations were created by the state for specific purposes, like the settlement of India and the American colonies. Their effectiveness is credited as one of the principal explanations for Europe’s half-millennium domination of the globe. Limiting investors’ liability to the amount they actually invested was a critical factor in attracting the necess- ary capital for this unprecedented achievement.3 Even as recently as 1932, US Supreme Court Justice Louis Brandeis argued that “The privilege of engaging in such commerce in corporate form is one which the state may confer or may withhold as it sees fit.”4 He emphasized the importance of making sure that states conferred the privilege of the corporate structure only in those cases where it was consistent with public policy and welfare, as, for example, “as a means of raising revenue; or, in order to procure for the community a public utility, a bank, or a desired CGC01 08/09/2005 3:21 PM Page 10
- 32. WHAT IS ACORPORATION? 11 industry not otherwise attainable; or . . . an instrumentality of business which will facilitate the establishment and conduct of new and large enterprises deemed of public benefit.”5 He noted that: The prevalence of the corporation in America has led men of this generation to act, at times, as if the privilege of doing business in corporate form were inherent in the citizen, and has led them to accept the evils attendant upon the free and unrestricted use of the corporate mechanism as if these evils were the inescapable price of civilized life, and hence, to be borne with resignation. Throughout the greater part of our history, a different view prevailed. Although the value of this instrumentality in commerce and industry was fully recognized, incorporation for business was commonly denied long after it had been freely granted for religious, educational, and charitable purposes. It was denied because of fear. Fear of encroachment upon the liberties and opportunities of the individual. Fear of the subjugation of labor to capital. Fear of monopoly. Fear that the absorption of capital by corporations, and their perpetual life, might bring evils similar to those which attended mortmain.6 There was a sense of some insidious menace inherent in large aggregations of capital, particularly when held by corporations. So at first the corporate privilege was granted sparingly; and only when the grant seemed necessary in order to procure for the community some specific benefit otherwise unattainable. The later enactment of general corporation laws does not signify that the apprehension of cor- porate domination had been overcome.7 Brandeis points out that the decision to remove the strict requirements imposed on corporations was not based on the legislators’ “conviction that maintenance of these restric- tions was undesirable in itself, but to the conviction that it was futile to insist on them; because local restriction would be circumvented by foreign incorporation.”8 In other words, the characteristics of the corporate form were so important to people in business that leg- islators recognized that they could not beat them, and therefore might as well join them, or at least permit and then tax them. What made the corporate form so appealing, so essential? According to Dean Robert Clark of Harvard Law School, the four characteristics essential to the vitality and appeal of the corporate form are: 1. limited liability for investors; 2. free transferability of investor interests; 3. legal personality (entity-attributable powers, life span, and purpose); and 4. centralized management.9 He adds that three developments, starting in the late nineteenth century, made these attributes particularly important. The first was the need for firms far larger than had previously been the norm. Technological advances led to new economies of scale. For the first time it made sense to have firms of more than a dozen people, and suddenly there were com- panies employing hundreds, then thousands. The second was the accompanying need for capital from a range of sources broader than in the past, when the only game in town was a small group of wealthy individuals who had previously invested by private negotiation. The third condition was that private ownership of investment property had to be “accepted as a social norm.” The concept hardly seems revolutionary now, but it was radical, even a century ago, when it was widely assumed that most property would belong to the state, the church, or a select number of wealthy people. While CGC01 08/09/2005 3:21 PM Page 11
- 33. 12 CORPORATE GOVERNANCE thistradition was challenged from time to time, as, for example, during the Colonial and Revolutionary period of US history, the idea of widespread private property is essentially a modern one. Let’s look at Clark’s four characteristics. 1. Limited liability. The notion of limited liability goes back to at least 2000 BC, when merchants provided the financing for seagoing vessels. But the English courts first spelled it out during the fifteenth century. It means that the corporation is separate from its owners and employees; what is owed to the corporation is not owed to the individuals in the group that make up the corporation; and what the group owes is not owed by the indi- viduals that make it up. Hence, if a corporation goes bankrupt and is sued by its creditors for recovery of debts, the individual members of the corporation are not individually liable. If a dozen people pool their funds to create a partnership, they risk losing not just their stakes, but everything they have. Partners who operate a restaurant are personally liable for debts to unpaid creditors and employees, for any injuries to a patron who sues after falling down the restaurant stairs, and for the misconduct of fellow partners, even of which they had no knowledge or control. Investors in a corporation that operates a restaurant have no such risk. If Beech-Nut (see case in point in the introduction) had been a partner- ship, all of the partners could have been liable to pay the fine as well as for any damages the court might award to the consumers who purchased the adulterated juice. This kind of shared liability may work well when the partnership is small enough to enable everyone to keep an eye on everyone else and share in all decisions, and when the personal investment of each partner is big enough to give each one the same incentive for low risk and high returns.10 But this oversight and incentive would be impossible in a setting of not just dozens, but millions of “partners” investing in a company. No one would buy stock in a large corporation if the risk of loss were unlimited. One of the primary advantages of investing in stock is the certainty that whatever happens, the risk of loss is limited to the amount of the investment. There is a catch here, however. With limited liability comes limited authority. A partner has a co-equal right to run the company with all of the other partners (unless the parties have agreed to another arrangement by contract). It is the partner’s high level of control that makes the high level of liability acceptable. And it is the shareholder’s low level of risk that makes the low level of control acceptable. One other note on limited liability. During the 1980s, another form of limited liabil- ity became popular, as a result of revisions in the bankruptcy law, giving shareholders a second chance to profit from failing enterprises. Airline companies were able to avoid union contracts and asbestos companies were able to avoid tort liability. Most prominently of all, Texaco was able to negotiate down the damages assessed against it arising out of the Pennzoil acquisition. It became expedient even for companies with substantial assets to declare bankruptcy because of the protections – and the extra time – it gave them. Ultimately, many of these companies emerged from bankruptcy with their liabilities better organized, and the shareholders – whose downside liability was always limited – were given a second chance to profit. 2. Transferability. Just as important as limited liability in achieving an acceptable level of risk is the ability to transfer one’s holding freely. A partnership interest is complicated and difficult to value, and there is no stock exchange where partnership interests can be traded. By contrast, stock is almost as liquid as cash. A shareholder who is concerned that the stock may be losing value can sell almost immediately. CGC01 08/09/2005 3:21 PM Page 12
- 34. WHAT IS ACORPORATION? 13 Transferability is also a function of limited authority. It is as though the shareholder says, “I will put my money at risk, with little authority to control the enterprise, as long as I can control my own risk by selling out any time I want to.” 3. Legal personality. A partnership dies with its partners. Or it dies when one partner decides to quit (unless there are explicit contractual provisions to the contrary). Con- tinuing after the death or resignation of the partners can be complicated and expensive. A corporation lives on for as long as it has capital. This is a fairly recent development. Business corporations in the United States during the nineteenth century usually had a life limited to a term of years. As Justice Brandeis wrote in Liggett v. Lee, only in the most recent times have people assumed that perpetual existence was a necessary – to say nothing of a desirable – attribute of corporations. Legal personality has other benefits as well. One is demonstrated by the Beech-Nut example in the introduction, where actions that would result in a penalty for an indi- vidual, perhaps even a jail sentence, have no such result when the individual commits them as part of a corporation. Another is in the First Amendment example in the intro- duction, where corporate management is allowed to use investors’ money to promote a political agenda with which they may not agree. Another is ownership. It is because corporations are defined as legal persons that they may own property, including real estate, copyrights, and other assets. This aspect, too, depends on limited authority by investors. To the extent the investors do have authority, they jeopardize the company when they are unavailable to exercise it. Legal personality allows the corporation to act, to own, and to continue past the life span of any individual or group. 4. Centralized management. Partnerships are managed by consensus or majority vote (unless partners explicitly agree otherwise). The point is that every partner has, if he wants it, a co-equal say in the affairs of the company. In a corporation, the power to determine the company’s overall direction is given to the directors and the power to control its day-to- day operations is given to the managers. This is another aspect of the limited authority given to investors. In order to allow the company to operate with maximum efficiency, the shareholders give up the right to make decisions on all but the most general issues facing the company. Initially, a corporation was not permitted to engage in any activity unless it was specifically approved by the state in granting its charter. The original rule was based on the state’s presumption against corporate activity; every undertaking had to be explicitly justified and approved. But as the corporate form became increasingly popular, the presumption shifted. By the late nineteenth century, business corporations were permitted to organize for any lawful purpose, without requiring the prior approval of the government. Just as dramatic – and just as important – as this shift in the relationship between the corporation and the government was the shift in the relationship between the corpora- tion and its shareholders. As corporations grew in size and age, their ownership became increasingly fractionated and markets developed to assure almost total immediate liquid- ity. This increased their strength and scope, but it reduced their accountability. In the early days, when the directors sat around a real board, they represented the shareholders because they were the shareholders. As corporations grew in size and complexity, the law tried to develop a standard of performance for directors that would encourage the same sense of duty and care that they would naturally use when they were representing themselves. CGC01 08/09/2005 3:21 PM Page 13
- 35. 14 CORPORATE GOVERNANCE THEPURPOSE OF A CORPORATION Corporations are such a pervasive element in everyday life that it is difficult to step back far enough to see them clearly. Corporations do not just determine what goods and services are available in the marketplace, but, more than any other institution, corporations deter- mine the quality of the air we breathe and the water we drink, and even where we live. It helps to spend some time talking about the purposes that corporations serve. Human satisfaction Business corporations provide an outlet for the satisfaction of essential human drives – quests for fulfilment, success, and security, for creative expression and for the competitive spirit. The corporate structure allows value to be placed on differing contributions that combine together so that the whole is greater than the sum of its parts. Through corporations, skills and experience can be competitively marketed and rewarded according to their contribution to value. Corporations have provided a means for the ambitious to achieve, the enterprising to prosper, and the ingenious to be enriched beyond their fondest expectations – the role played by the church or the military or the crown at other times and in other cultures. Ideally, money invested buys perpetual ownership in a cornucopia of self-renewing abundance. Only the amount invested is at risk, and, if an investor buys ownership in several companies, that risk can be spread, and a portfolio corporation can be divested at any time to reduce significantly the possibility of loss. Above all else, creating a structure for the agglomeration of talent and capital has permitted an increasing number of individuals the opportunity to create wealth for them- selves and their descendants. Social structure Human beings have created social structures since their cave days, in order to foster co- operation and specialization. Corporations offer lasting and resilient social structures. For centuries, these structures were devoted to goals that were not (necessarily) financial. For example, during the Dark Ages and the Middle Ages, Western man was organized under the single church. Toward the end of the medieval era, signs of this “church triumphant” system abounded. Under its banner, whole populations committed themselves for decades to the Crusades. The gross national product of the continent was devoted to the construction of magnificent houses of worship. Then, in a remarkable turn of events aided by religious protest, Henry VIII abruptly asserted the primacy of civil authority. For several centuries, up to the end of World War I, civil order based on hereditary rulers dominated the West. At about this time, power in the form of ability to create wealth through goods and services desired by a population willing to pay passed to an entirely new type of entity, the huge worldwide corporations (see the Standard Oil case study in chapter 2). Efficiency and efficacy Corporations enable people to get things done. The words “businesslike,” “professional,” and “enterprise” are synonymous with beneficial efficiency and efficacy. The translation of an idea into a product; human ingenuity into bricks, mortar, and equipment; and savings into “growth stocks,” has materially enhanced the lives of many people in democratic capitalist societies. CGC01 08/09/2005 3:21 PM Page 14
- 36. WHAT IS ACORPORATION? 15 The challenge has been to adapt the corporate form to the needs of society. To this end, the state has maintained the original corporate model, chartering special-purpose corporations to achieve a particular objective. For example, in order to assure better con- trol by America of its fuel needs, the US Congress created the United States Synthetic Fuels Corporation in 1980 and attempted to use private sector personnel and techniques to solve a public problem. Similarly, organizations such as the Federal National Mortgage Association show the government’s recognition that if it is going to compete with Wall Street, it must be through a private, for-profit organization. That organizations own cor- porate governance problems in 2003 – the abrupt departure of the top three executives amid accusations of accounting problems – shows that this public–private combination is no better at preventing abuse than one that is strictly government or strictly private. This works both ways, of course. It is an understatement to say that the government does not hesitate to regulate corporations for a variety of reasons, some tangential to the corporation’s activities. Society can induce or restrain particular corporate activities through tax and regulatory “fine-tuning.” For example, much New Deal legislation attempted to achieve social goals while pursuing economic ones. The Davis–Bacon Act of 1931 is one of three labor statutes passed in the 1930s to protect workers employed on govern- ment contracts. Davis–Bacon provides minimum wage requirements and fringe benefits for government-employed construction workers. More recent examples include laws and regulations designed to promote safety in the workplace and prohibiting discrimination on the basis of age, race, gender, and disability, rules requiring employers to grant “family leave” to those who required it, and rules enlisting private companies to help gather information on suspected terrorists. Ubiquity and flexibility Corporations give individuals a greater and more lasting sphere of action. Corporations have no boundaries in time or space. A corporation continues despite the death or retire- ment of its highest officers. A corporation that is chartered in Delaware can do business anywhere in the world. Corporations can be moved. They can be transformed by a revi- sion to their legal or financial structure. A corporation’s officers and directors can change its place of incorporation, close existing places of business and open new ones virtually without restraint, and reallocate investment capital. American companies change their state of incor- poration to receive the benefits of favorable laws, or reincorporate offshore for tax reasons. The free trade agreements in Europe and Northern America are creating a “borderless world” in which a company’s legal domicile relates to nothing but its own convenience. An individual may decide to refrain from certain risky actions for several reasons. He may fear blame, shame, liability, even prison. But corporations, though they may be fined, cannot be jailed. This makes the corporate form a way of transferring enterprise liabilities to society as a whole. With their ability to provide jobs, corporations are aggressively courted by competing locations and states and countries, who “race to the bottom,” imposing fewer and fewer constraints on profit potential. The state anti-takeover laws enacted hastily to pro- tect local companies from the prospect of a contest for control (even, as in Massachusetts, signed by the governor in the headquarters of the company in question) are just one example. Identity Indeed, corporations have a life, and even citizenship, of their own, with attendant rights and powers. They appear to have personalities. We speak of “Ma Bell” and “Big Blue.” CGC01 08/09/2005 3:21 PM Page 15
- 37. 16 CORPORATE GOVERNANCE Corporationsare “persons” within the meaning of the United States Federal Constitution and Bill of Rights. They are entitled to protection against the taking of their property without due process of law. They are entitled (at least to some extent) to freedom of speech. They can contribute money to political causes and campaigns, though some restrictions apply, due to post-Watergate reforms. As the source of jobs, and therefore of the livelihood for people who vote, they have significant political capital. Corporations, therefore, are powerful participants in the delib- erations of our lawmakers. Corporations also decide what products and services will be available. This applies not just to laundry soap and toothpaste, but also to medications and safety equipment. They decide investment priorities. They establish workplace conditions. They set prices. THE CORPORATION AS A “PERSON” Author and reporter William Greider describes the development of corporate “personalities”: The great project of corporate lawyers, extending over generations, has been to estab- lish full citizenship for their business organizations. They argue that their companies are entitled to the same political rights, save voting, that the Constitution guarantees to people. In 1886 the Supreme Court declared, without hearing arguments, that corpora- tions would henceforth be considered “persons” for purposes of the 14th Amendment – the “due process” amendment that was established to protect the newly emancipated black slaves after the Civil War. Fifty years later, justice Hugo Black reviewed the Supreme Court’s many decisions applying the 14th Amendment and observed that less than one half of one percent invoked it in protection of the Negro race, and more than 50 percent asked that its benefits be extended to corporations . . . In the modem era of regulation [corporate lawyers] are invoking the Bill of Rights to protect their organizations from federal laws . . . Corporations, in other words, claim to be “citizens” of the Republic, not simply for propaganda or good public relations, but in the actual legal sense of claiming constitutional rights and protections . . . Whatever legal theories may eventually develop around this question, the political implications are profound. If corporations are citizens, then other citizens – the living, breathing kind – necessarily become less important to the processes of self-government.11 THE CORPORATION AS A COMPLEX ADAPTIVE SYSTEM In the authors’ first book, we said that the corporate structure was designed to be so vital and robust that it was like an “externalizing machine.” There is no malice involved – it is just the flip side of its purpose of wealth generation. Therefore, it will do whatever it can to hang on to its earnings and push its costs off of its balance sheet. This can be done, for example, through legislation that increases barriers to entry for its competitors or limits its liabilities. The self-perpetuating life force built into the corporate structure fights the systems intended to impose accountability, and through that, legitimacy. “Externality” is the vocabulary of economics. Another way to think about this is to use the vocabulary of science and call it a “complex adaptive system.” These systems, whether in physics, biology or economics, can be analyzed as patterns and modes of behavior that can inform activity in other fields. One cannot literally find in corporate behavior a repetition of the interaction of subatomic particles; one can, how- CGC01 08/09/2005 3:21 PM Page 16
- 38. WHAT IS ACORPORATION? 17 ever, notice living patterns that seem to replicate in corporate experience – tendencies towards immortality, for unlimited size, unlimited power, unlimited license. Only when one understands that corporations have adaptive characteristics does it become clear that modification of their behavior must come from within the organizations. It has not been convenient for society to recognize the general ineffectiveness of external restraints on corporate activity. Neither government nor marketplace has the capacity to require corporate functioning to conform to society’s interests. Large corporations retain the services of the most talented professionals, the most persuasive lobbyists: former Senator George Mitchell, “hero” of the Irish peace talks, is the principal lobbyist for the tobacco industry. They control the most influential newspapers, TV (all three American networks are owned by diversified conglomerates – GE, Disney, and Westinghouse) and magazine outlets, and the best lawyers. With such competitive strength, it is difficult for the widely dispersed elements that comprise society to effectively assert a contrary view. They even control their own shareholders; the corporations themselves are the largest investors through their pension funds, often the greatest asset and liability even a major corpora- tion has on its balance sheet. For example, in 2001, General Motor’s pension assets of $74 billion were worth 271 percent of the company’s market capitalization. And in 2003 the Washington Post reported that the $19 billion under-funding of GM’s pension fund was driving the company to slash car prices to raise money quickly. This astonishing devel- opment – a pension deficit as the driver of corporate strategy – had a predictable result. GM’s competitors also discounted prices, resulting in reduced margins and earnings for the entire sector. The only way in which to attempt societal harmony with corporations is to understand that they are complex adaptive systems and change must come from within. THE CORPORATION AS A “MORAL PERSON” Thomas Donaldson provides an analytical structure to consider how a corporation can be structured to make “moral” decisions: In order to qualify as a moral agent, a corporation would need to embody a process of moral decision making. On the basis of our previous discussion, this process seems to require at a minimum: 1. The capacity to use moral reasons in decision-making. 2. The capacity of the decision-making process to control not only overt corporate acts, but also the structure of policies and rules. [The first] is necessary to raise the corporation above the level of a mere machine. To be a moral agent, something must have reasons for what it does, not simply causes for what it does, and for something to be a moral agent, some of those reasons must be moral ones. Obviously, corporations are unable to think as humans, but they can employ reasons of a sort, and this is shown by the fact that they can be morally accountable. That is, with the proper internal structure, corporations, like humans, can be liable to give an account of their behavior where the account stipulates which moral reasons prompted their behavior.12 Can business “do well by doing good?” This is a perennial question. On one end of the scale, companies such as Body Shop and Ben and Jerry’s have made social responsibility (or, at least, their view of social responsibility) part of their marketing strategy. Consumers can feel less guilty about buying arguably decadent products like make-up and ice cream CGC01 08/09/2005 3:21 PM Page 17
- 39. 18 CORPORATE GOVERNANCE ifthey know that by doing so they are supporting good causes. But can companies thrive when the cost of social responsibility raises prices too high, instead of making the prod- ucts more marketable making them less so? Clearly, there is some point past which the company’s goods and services will become too expensive.13 At one end of the scale are the most basic aspects of social responsibility, like com- pliance with the law. At the other end of the scale are activities so unrelated to the goods and services sold that pursuing them is considered by the marketplace to be irrelevant, even detrimental, to the company’s productivity. Look again at the very first example in this book – the lawsuit challenging the decision not to put lights in Wrigley Field. This decision, which deprived the fans of night games and the investors of a substantial source of revenue, was made on the basis of management’s notion of social responsibility. Later we will consider the example of Stride Rite, which profited from its (well-deserved) reputation for commitment to the community, while it was making the (economically necessary) decision to move jobs out of the community. The key question here, one of the core issues of corporate governance, is “Who decides?” A CEO can decide that the company’s social responsibility is best met by making a sub- stantial charitable donation to his or her alma mater, which then shows its gratitude by giving the CEO an honorary degree and a box at the school’s football games. There is also a very happy and congenial member of the board of directors when the university’s president is invited to the board. But is this “social responsibility?” Who is in the best position to make sure that any expenses not directly associated with identifiable and quantifiable returns are at least related closely enough to have a cost-effective impact on long-term value maximization? Who is in the best position to make sure that the company’s definition of social responsibility is an accurate reflection of the definition of the owners? Of the community? Case in point: Union Carbide and Bhopal – what happens when the company is bought out? This is how a successor/purchaser corporation characterized a devastating chem- ical spill, acknowledging the tragic consequences, absolving itself of responsibility, but portraying itself as a generous and concerned entity. From the Dow Chemical website <http://www.bhopal.com/position.htm>: What happened in Bhopal 18 years ago was a tragedy of unprecedented gravity and human cost, which no one in industry will ever forget. During the early hours of December 3, 1984, methyl isocyanate gas (known as MIC) leaked from a storage tank sited at a pesticide manufacturing facility in Bhopal. As it escaped, the gas drifted across the neighboring communities with devastating consequences. According to the Indian government, some 3,800 people died and thousands more were injured as a direct result of exposure to the lethal fumes. CGC01 08/09/2005 3:21 PM Page 18
- 40. WHAT IS ACORPORATION? 19 When the disaster occurred, the Bhopal plant was operated by Union Carbide India Limited (UCIL), a 51 percent affiliate of Union Carbide Corporation. At that time, Dow had absolutely no connection with either the facility or any of the com- panies linked to the incident. But 16 years after the tragedy, on February 6, 2001, Dow acquired Union Carbide’s shares. Before doing so, as you might expect, the company conducted an exhaustive assessment to ensure there was absolutely no outstanding liability in relation to Bhopal. There was none; the company Dow acquired retained abso- lutely no responsibility for either the tragedy or for the Bhopal site. That conclusion was based on a number of key facts: • On February 14, 1989, a settlement agreement was reached between Union Carbide, Union Carbide India Limited and the Indian government through which Union Carbide paid $470 million in compensation, covering all claims relating to the incident. • On October 3, 1991, the Supreme Court of India announced the findings of its review of the settlement agreement. They upheld the settlement – concluding that the amount was just, equitable and reasonable. • Within those same findings, the Supreme Court also directed that the Government of India make up any shortfall which might in the future arise in the settlement fund and ordered it to purchase a group medical insurance policy to cover 100,000 citizens of Bhopal in case of future illnesses. These measures were specifically put in place to address any potential future issues arising from the tragedy. • Two years later, on October 4, 1993, the US Supreme Court reaffirmed earl- ier US Court rulings that the only State with jurisdiction in the case against Union Carbide on matters relating to the Bhopal tragedy was India. They based this decision on the fact that UCIL was a separate and independent legal entity, managed and operated exclusively by Indian citizens in India. • In November 1994 – more than six years before Dow acquired Union Carbide – Union Carbide sold its interest in Union Carbide India Limited to MacLeod Russel (India) Ltd. of Calcutta (later renamed Eveready Industries India Ltd. – or EIIL). As a consequence of that sale, Union Carbide retained no interest in or liability for the Bhopal site. EIIL took exclusive possession of the land under lease from the government of Madhya Pradesh. The money from this trans- action was used to fund a hospital in Bhopal which now provides specialist care to victims of the tragedy. • In 1998, the government of Madhya Pradesh revoked the EIIL lease for the Bhopal site, reclaiming the property “as is” and stating it would take respons- ibility for managing any cleanup or remediation work required on the site. All of this means that when Dow completed its stock acquisition in February 2001, Union Carbide retained no responsibility whatsoever in relation to the tragedy. But of course there is also an entirely separate humanitarian question – that is: can Dow, in its role as a corporate citizen, help to address any of the pre- sent day needs which are apparent in Bhopal? That is why, for some time, Dow has been exploring various initiatives which might address some of those needs – just as we do in other parts of the world where we have business interests. This work continues and we remain hopeful that we can find an appropriate initiative in the not too distant future. The issues surrounding Bhopal are extremely emotive. It is a tragedy that should never have happened. Like the rest of industry, Dow has an obligation to learn from what took place that terrible night and to take whatever measures are necessary to prevent anything like it from ever happening again. CGC01 08/09/2005 3:21 PM Page 19
- 41. 20 CORPORATE GOVERNANCE Casein point: Imperial Chemical Industries plc In 1993, Sir Denys Hendersen explained to his shareholders why he was propos- ing to downsize Imperial Chemical Industries (ICI), a dominant company in one of the most important worldwide industries – the chemical and pharmaceutical busi- ness. ICI had sales in the tens of billions of dollars, earnings in the billions and employees in the hundreds of thousands. Yet in 1993 it proposed a “demerger” of a major unit, Zeneca. A detailed proposal was sent to shareholders to explain the move. The company cited “important, broader trends,” including “intensified competition in industrial chemicals, most notably from the Middle East and Asia Pacific, increased costs of maintaining and developing new technology, especially in the bioscience areas, together with the adverse effects of the worldwide economic recession which began in 1990” as reasons for the demerger. In response to these trends, ICI pledged “to reshape its operations . . . focusing on those businesses and territories where it enjoyed strong market positions, reducing costs in order to remain competitive and disposing of non-strategic operations. These measures continue to be vigor- ously implemented, although the profit improvement benefits to date have been more than offset by the impact of the economic recession.” Henderson continued in the traditional language of business and finance, explain- ing, “In recent years, ICI’s bioscience activities have expanded rapidly and have become increasingly distinct from its traditional chemical operations, and both face very different opportunities and challenges in the years ahead. The bioscience activities employ different technologies, are more R&D intensive and serve a largely separate customer base. The Chemicals businesses are, in contrast, for the most part capital intensive, volume driven and based on large scale process technology.” What was more important, however, was what Henderson left out. He did not mention Hanson Industries, whose purchase of a significant stock position in ICI was widely credited with being the prime cause of the demerger. ICI had performed poorly for some years, and its stock price had become heavily discounted as a result. Hanson was a known raider, and when the company announced its sub- stantial holding in ICI, commentators asked when, not if, Hanson would attempt to take over the chemical giant. The ICI demerger pre-empted the possible bid. Hanson, had he taken over ICI, would almost certainly have completed a similar break-up. The fact that ICI restruc- tured on its own volition made the company a far less tempting target, since the company was able to realize the kinds of values that a raider would look to achieve. Thus, the threat of takeover forced ICI to split itself into two smaller, leaner, more competitive companies. Not that Hanson Industries applauded the demerger. As Lord White, Hanson’s chairman said: “If ICI had not spent so much time during the last year fighting a bid that was never made and spent it on seeing how it could improve shareholder value it might have come up with a better, solution a lot earlier.”14 (See also the Sears case study.) CGC01 08/09/2005 3:21 PM Page 20
- 42. WHAT IS ACORPORATION? 21 Lords Hanson and White were the bearers of the new wisdom. Even the largest and richest of corporations needs to assess its position constantly and to make whatever changes are necessary to be competitive. The basis of a corporation’s existence is wealth maximization – this is its reason for being. There is no such thing as a “good” corpora- tion that is not competitively profitable. Corporations live in a world where the market determines what people will buy and what they will pay. A corporation that does not produce goods that people want at a price they are willing to pay has no reason to exist. THE CORPORATION IN SOCIETY Before we evaluate the effectiveness of the major players in corporate governance, we should look at corporations from the perspective of what our society wants and needs from them. We want jobs that pay a decent wage and goods and services that meet our needs. We want challenges to our creativity and ingenuity, and when we meet those challenges, we want to feel proud of the results, and we want to be rewarded. We want corporations to work with us to keep the workplace and the environment safe. We want a continual sense of progress and growth from our corporations. We want our interest in the company – whether as employee, shareholder, customer, supplier, creditor, or neighbor – to be designed for the long term. Two connected sets of laws govern the relationships of these constituent groups to the corporation. One is comprised of the laws imposed by the legislature and the other is private law established in agreements between the corporation and its employees, customers, suppliers, investors, and community. Ideally, the public laws would exist only as a kind of floor or backstop to establish minimum standards, permitting maximum flexibility for the corporation and its constituents to devise optimal arrangements between them. In other words, the government should step in only when the system of corporate governance cannot be assured of producing a result that is beneficial to society as a whole. To go back to our original criteria for determining who is in the best position to make a particular decision, the government should set the standards when it has better information and fewer conflicts of interest than any (or all) of the other parties who play a role in setting the course for the corporation. In practice, however, corporations have influenced government at least as much as gov- ernment has influenced business. The corporate “citizen,” with the right to political speech (and political contributions) has had a powerful impact on the laws that affect it. In theory, corporations support the free market, with as little interference from government as pos- sible. In reality, whenever corporations can persuade the government to protect them from the free market, by legislating barriers to competition or limiting their liability, they do so. People of the same trade seldom meet together but the conversation ends in a conspiracy against the public, or in some diversion to raise prices. Adam Smith To the extent that corporate governance standards are established by public law, one could argue that these provisions’ greatest value is in providing the illusion of accountability. For example, an article written by two thoughtful observers of corporate governance, one a law professor, one a judge, points to mandatory corporate governance provisions to CGC01 08/09/2005 3:21 PM Page 21
- 43. 22 CORPORATE GOVERNANCE supporttheir argument that these rules provide a solid foundation for real (and informed) freedom of choice for investors. The rules that inspire this confidence are: States almost uniformly forbid perpetual directorships; they set quorum rules, which typically require a third of the board and sometimes half of the investors to participate on critical decisions; they require “major” transactions to be presented to the board (occa- sionally shareholders too) rather than stand approved by managers or a committee; they forbid the sale of votes divorced from the investment interest and the accumulation of votes in a corporate treasury; they require managers to live up to a duty of loyalty to investors. Federal law requires firms to reveal certain things when they issue securities, and public firms to make annual disclosures.15 The authors go on to acknowledge that, “Determined investors and managers can get ‘round’ many of these rules, but accommodation is a sidelight.”16 Throughout this book, there are examples of getting “round” these rules. It does not mean much to “forbid perpetual directorships” if management continues to re-nominate the same people. The General Motors case study reveals that the GM board, in the middle of the company’s troubles in 1992, had one member who had been on the board for 20 years, and two who had served for 15. Requiring the approval of a third of the board or half the shareholders does not mean much if the board is entirely selected by and beholden to management, and the share- holders do not have the ability to overcome the obstacle of collective choice to make informed decisions. (See chapters 2 and 3 for further discussion of these issues, as well as the “duty of loyalty”, the one-share, one-vote issue, and the relevance of required disclosures.) Many of the laws that govern corporations are designed to make it possible for them to externalize their costs. These laws vary tremendously from state to state and country to country. The tendency for states to try to outdo each other in accommodating business has been called a “race to the bottom” competition because of the way that the states compete for corporate chartering business through increasingly diluted provisions for oversight.17 In the US, most corporations that operate nationwide or even worldwide are incorporated in Delaware, famous for its extensive and management-friendly laws and judicial decisions governing corporations. Globalization may expand the “race to the bottom,” resulting in most of the world’s major corporations incorporating in the world equivalent of Delaware, perhaps the Cayman Islands. Or, if providers of capital are able to communicate their concerns by directing their funds to enterprises governed by more investor-friendly laws, competition for capital could turn the race to the bottom into a race to the top. The marketplace Corporations also operate under the laws of the marketplace. While these laws can be influenced to some extent by the legislature, the marketplace is the ultimate arbiter of corporate performance. No matter where a company is located and what it produces, these laws affect, even determine, every decision made by its directors and officers. We would call this the law of economics, if we could use that term without then limiting ourselves to the narrow vocabulary and assumptions of that academic specialty, so we will just call them the laws of capitalism. This set of laws reacts to and influences the first set. When a company changes its state of incorporation for tax reasons, for example, that is a function of economics. So too is a CGC01 08/09/2005 3:21 PM Page 22
- 44. WHAT IS ACORPORATION? 23 company’s consideration of the differing social laws of states and nations, such as varying regulations governing occupational safety and environmental standards. Like a consumer selecting a car, the corporation’s choice of domicile is based on an evaluation of the costs and benefits of all of the options. The same kind of evaluation applies to decisions about whether to invest in research and development or whether to update a local factory (or retrain local workers) versus reducing costs by moving the operation abroad. FUTURE DIRECTIONS As corporations expand their operations and markets into virtually all parts of the world, we must begin to develop a more consistent and coherent approach. In order to do that, we must, whenever possible, integrate the most important legislated standards with the realities of the economic laws, so that all incentives promote the five overall goals outlined above, or at least so that they do not conflict with them. The law should be process-oriented, not substantive. Its focus should be the relationships between the corporation and its constituents, to reduce conflicts of interests (agency costs) and make sure that the right people are making the decisions (or at least are able to monitor the results of the decisions) that affect them most. One of the problems that is presented by this task is finding some way to balance the need for long-term planning with the need for present-day assurances that whatever is planned for the long term is indeed likely to happen. Corporations must have as their primary and overriding goal the generation of long-term value. A commitment to the satisfaction of employees, suppliers, customers, and the community is essential for achiev- ing this goal. But calibrating that commitment to achieve maximum value in the long term is a daunting task. No one can predict the future. In the last decade alone we have seen both new and long-established corporations achieve market dominance and extra- ordinary growth and vitality, only to fall into disaster, sometimes beyond recovery. How do we know that today’s commitment to a long-term research and development project is going to produce a Dell instead of an Atari? More important, how can our laws best be designed to increase the likelihood that it will be the former instead of the latter? The World Bank has an extensive governance program for developing economies that the established economies would do well to follow. Instead of prescriptive structures, the World Bank encourages countries to develop their own systems that meet three key goals: transparency, independent oversight, and accountability. The Global Corporate Governance Forum (<http://www.gcgf.org/>), co-sponsored by the World Bank and the OECD, is a new international initiative which will bring together the leading bodies engaged with governance reform worldwide: multilateral banks active in developing countries and transition economies, international organizations, country groupings engaged with governance reform, alongside professional standard-setting bodies and the private sector. The Forum has been established to provide assistance to developing transition economies on corporate governance. It has three functions: to broaden the dialogue on corporate governance; to exchange experience and good practice; and to coordinate activities and identify and fill gaps in the provision of technical assistance. Through other international efforts, from the International Accounting Standards Board to the International Corporate Governance Network, global corporations and investors are working to develop systems that meet the needs of individual cultures and economies while making the best possible use of international capital sources. CGC01 08/09/2005 3:21 PM Page 23
- 45. 24 CORPORATE GOVERNANCE CORPORATEPOWER AND CORPORATE PERFORMANCE We grant legitimacy and authority to the exercise of public (government) power through accountability. We are willing to defer to the authority of elected officials because we put them there, and if we do not like what they do we can replace them. In the US, the checks and balances of the three branches of government add to the credibility and legit- imacy of the government. Any of the three branches that goes too far can be curbed by one of the others. In theory, the legitimacy and authority of corporate power is also based on account- ability. Corporate governance also has its checks and balances (including the government). In order to maintain legitimacy and credibility, corporate management needs to be effect- ively accountable to some independent, competent, and motivated representative. That is what the board of directors is designed to be. Corporations exercise vast power in a democratic society. In a thoughtful and endur- ing essay, “The Corporation; How Much Power? What Scope?”,18 Carl Kaysen outlines the various alternative modes for containing corporate power, asking whether and how corporate power can be “limited or controlled.” Broadly, there are three alternative possibilities. The first is limitation of business power through promoting more competitive markets; the second is broader control of business power by agencies external to business; the third, institutionalization within the firm of responsibility for the exercise of power. Traditionally, we have purported to place major reliance on the first of these alternatives, in the shape of antitrust policy, without in prac- tice pushing very hard any effort to restrict market power to the maximum feasible extent. I have argued elsewhere that it is in fact possible to move much further than we have in this direction, without either significant loss in the overall effectiveness of business performance or the erection of an elaborate apparatus of control. While this, in my judg- ment, remains the most desirable path of policy, I do not in fact consider it the one which we will tend to follow. To embark on a determined policy of the reduction of business size and growth in order to limit market power requires a commitment of faith in the desirability of the outcome and the feasibility of the process which I think is not widespread. What I consider more likely is some mixture of the second and third types of control.19 Kaysen is pessimistic about the prospects for corporate self-regulation. “The development of mechanisms which will change the internal organization of the corporation, and define more closely and represent more presently the interest to which corporate management should respond and the goals toward which they should strive is yet to begin, if it is to come at all.”20 But, as the scandals of 2002 have shown us again, the theory is often far from the practice. While the details of each of those failures differed, each was above all a failure of accountability, that cornerstone of the markets that permits one group to provide the capital and another to put it to use. How do we make sure that corporate power is exercised in the best interests of society? How do we measure corporate performance? How should society measure corporate per- formance? Those two questions are closely related, but their answers are worlds apart. For example, imagine a company that has record-breaking earnings and excellent shareholder returns. This is in part made possible by a rigorous cost-cutting campaign that includes CGC01 08/09/2005 3:21 PM Page 24
- 46. WHAT IS ACORPORATION? 25 illegal dumping of toxic waste materials, thereby saving the money that had been used to meet environmental standards for disposal. The company’s balance sheet and other financials will look very good. But the cost to society, in damage to the health and property of those affected by the illegal dumping, will not be factored in. Neither will the cost of investigat- ing and prosecuting the company, which will be borne by the taxpayers. The cost of defend- ing the company, and any fines imposed, will of course be borne by the shareholders. Cases in point: Some instances of corporate crime – Enron, Global Crossing, Tyco, Adelphia, and WorldCom In 2002 and 2003, allegations about negligence and abuse, from accounting fraud to embezzlement, led to a new focus on corporate crime. We do not know at this writing whether any of those executives will go to jail. According to Corporate Crime Reporter, the top corporate crimes of the 1990s were very different from those we saw in the early twenty-first century: The top ten corporate criminals of the 1990s 1. F. Hoffmann-La Roche Ltd. Type of crime: Antitrust (price-fixing for vitamins) Criminal fine: $500 million 2. Daiwa Bank Ltd. Type of crime: Financial (falsification of records to cover up trading losses) Criminal fine: $340 million 3. BASF Aktiengesellschaft Type of crime: Antitrust (price-fixing for vitamins) Criminal fine: $225 million 4. SGL Carbon Aktiengesellschaft (SGL AG) Type of crime: Antitrust (price-fixing) Criminal fine: $135 million 5. Exxon Corporation and Exxon Shipping Type of crime: Environmental (Valdez oil spill in Alaska) Criminal fine: $125 million 6. UCAR International Inc. Type of crime: Antitrust (price-fixing) Criminal fine: $110 million 7. Archer Daniels Midland Type of crime: Antitrust (price-fixing) Criminal fine: $100 million CGC01 08/09/2005 3:21 PM Page 25
- 47. 26 CORPORATE GOVERNANCE 8.(tie) Banker’s Trust Type of crime: Financial (appropriation of client funds) Criminal fine: $60 million 9. (tie) Sears Bankruptcy Recovery Management Services Type of crime: Fraud (widespread misrepresentation to bankrupt debtors) Criminal fine: $60 million 10. Haarman & Reimer Corp. Type of crime: Antitrust (price-fixing) Criminal fine: $50 million When the companies paid these fines, who bore the cost? How many of the respon- sible parties served time in jail? Some additional examples Alleco. The company’s CEO, Morton M. Lapides, was convicted of a price-fixing scheme that resulted in record-breaking fines. The judge found the facts of the case so disturbing that he took the unprecedented step of issuing a prison sen- tence to the corporation. The judge said, “I cannot imagine any company being more tied up with illegal activity.” Four of its top managers were directed to spend up to two years in community service. The conviction notwithstanding, Lapides was permitted to take the company private at substantial personal profit. General Electric. In 1992, GE settled with the government over charges that the company had been falsely billing the federal government for military sales to Israel during the 1980s. Company employees had conspired with an Israeli air force gen- eral to divert the money to their own pockets. GE’s jet engine division was sus- pended from bidding for future Pentagon contracts, and the company agreed to pay fines of $69 million. GE’s shares dipped $0.87 on the news.21 Drexel Burnham Lambert. In December 1988, the securities house pleaded guilty to six felony charges alleging widespread securities fraud and inside dealing. Drexel agreed to pay a fine of $650 million. The following March, the US Attorney’s office in New York issued a 98-page indictment charging Michael Milken with similar crimes. Milken had single-handedly made Drexel successful via his aggressive hawking of junk-bonds, a security that financed most of the takeovers of the 1980s. So central was Milken to Drexel’s success that the firm paid Milken compensation of as much as $550 million in one year alone. Roiled by the charges of fraud, and damaged by the increasing collapse of junk-bond-financed firms, Drexel filed for bankruptcy pro- tection in February 1990. Just two months later, Milken agreed to plead guilty. In November 1990, he was sentenced to a prison term of ten years. The sentence was later reduced, and Milken was eventually released in the summer of 1993. He subsequently taught a finance course at the University of California at Los Angeles. A.H. Robins. The company marketed an intra-uterine contraceptive device called the Dalkon Shield, despite the fact that the company had over 400 unfavorable reports from physicians. The device was eventually recalled after the deaths of 17 women. By mid-1985, over 14,000 product liability suits had been filed against the company, forcing it into bankruptcy. In 1987, a court ordered the company to set aside $2.4 billion in a trust fund to compensate women injured by the shield. Later, the company also agreed to pay out nearly $7 million to stockholders.22 CGC01 08/09/2005 3:21 PM Page 26
- 48. WHAT IS ACORPORATION? 27 Gitano Group. In December 1993, three Gitano executives pleaded guilty to charges that they had sought to circumvent customs duties on imported clothes. Following the charges, Gitano’s largest customer – Wal-Mart Stores – announced that it would cease to do business with Gitano, adhering to strict company stan- dards regarding vendor partners. In January 1994, Gitano’s board of directors concluded that it was unlikely that the company could continue to operate without Wal-Mart’s support, and the board voted to put the company up for sale. Waste Management. In December 1996, Federal Judge Odell Horton in the Western District of Tennessee issued an opinion ordering a WMI subsidiary to pay a $91.5 million fraud judgment. The judge’s ruling held that the officers in Chemical Waste Management had engaged in a scheme to “cheat the plaintiffs out of money” by keeping two sets of books to hide the amount of royalty payments due to the plain- tiffs. The judge added, “What is troubling about this case is that fraud, misrep- resentation and dishonesty apparently became part of the operating culture of the Defendant corporation.” PG&E. In 1997, PG&E agreed to pay $333 million dollars to settle claims from 648 residents of Hinkley, California, who had suffered a range of illnesses and injuries from chromium in their groundwater that came from a PG&E plant. Case in point: A UK attempt to redefine corporate manslaughter In March 1987, a car and passenger ferry called the Herald of Free Enterprise, departed from the Belgian port of Zeebrugge for Dover. The ferry was owned by P&O European Ferries, a subsidiary of a large and venerable UK shipping line, P&O. The Herald of Free Enterprise cleared the Zeebrugge harbor with its bow doors still open – it transpired that this was common practice by crews seeking to clear the hold of exhaust fumes. On this occasion, waves flooded the bow doors and the Herald of Free Enterprise capsized with the loss of 187 lives. Who was to blame? Clearly, on an immediate level, the disaster was caused by those who failed to close the bow doors, and those who instructed the vessel to sail while the doors were still open. But the judicial inquiry identified deeper causes – a corporate cul- ture at P&O European Ferries that ignored basic safety. The inquiry concluded that: “All concerned in management, from the members of the board of directors down to the junior superintendents, were guilty of fault in that all must be regarded as sharing responsibility for the failure of management. From top to bottom the body corporate was infected with the disease of sloppiness.” But how do you punish the body corporate? As we have discussed, you cannot put it in jail, and any fines will ultimately be paid by those who were not respons- ible (the shareholders). In the UK, corporations may be prosecuted for manslaughter. But, in reality, successful prosecutions are all but impossible to achieve. In English legal history, there have been four prosecutions of corporations for manslaughter, and only one conviction. CGC01 08/09/2005 3:21 PM Page 27
- 49. 28 CORPORATE GOVERNANCE Theproblems of securing a conviction were vividly highlighted by the Herald of Free Enterprise tragedy. Following the coroner’s inquest into the disaster, the jury returned verdicts of unlawful killing in all 187 cases. P&O European Ferries was charged with manslaughter, as were seven high-ranking company officers. But the judge threw the case out, directing the jury to acquit the company and the five most senior defendants. The judge gave this direction because English law requires that, to find a com- pany guilty of manslaughter, the illegal acts must be committed by those “identified as the embodiment of the company itself.” In a famous passage Lord Justice Denning said that, to convict a company, one must identify as guilty the person who repres- ents “the directing mind” of the corporation. A company cannot be considered guilty of manslaughter simply because its employees have recklessly caused death. Rather, as one British judge has written, “it is required that manslaughter should be established not against those who acted for or in the name of the company but against those who were to be identified as the embodiment of the company itself.” In the P&O Ferries example, the judge directed that in order to convict the company of manslaughter “one of the individual defendants who could be ‘identified’ with the company would have himself to be guilty of manslaughter.” There was insufficient evidence against the individuals to meet this standard, hence the direc- tion to acquit. And yet disasters such as that of the Herald of Free Enterprise give rise to widespread public concern that the law does not do enough to hold companies to account. For this reason, the UK’s Law Commission (a government-funded body that studies law reform) proposed a new law of corporate killing to replace the current, inadequate provisions for corporate manslaughter. The Commission argued that “a number of recent cases have evoked demands for the use of the law of manslaughter following public disasters, and there appears to be a widespread feeling among the public that in such cases it would be wrong if the criminal law placed all the blame on junior employees who may be held individually responsible, and also did not fix responsibility in appropriate cases on their employers, who are operating, and profiting from, the service they provide to the public, and may be at least as culpable.” Under the “directing mind” standard discussed above, it is all but impossible to convict the large modern corporation of manslaughter. As the Commission wrote, “the more diffuse the company structure and the more devolved the powers that are given to semi-autonomous managers, the easier it will be to avoid liability.” The study notes “the increasing tendency of many organisations to decentralise safety services in particular.” Indeed, “it is in the interests of shrewd and unscrupulous management to do so.” The inquiry into the Herald of Free Enterprise disaster, according to the Com- mission, found that “no single individual had responsibility for safety matters.” The Commission comments that “if responsibility for the development of safety monitor- ing is not vested in a particular group or individual, it becomes almost impossible to identify the ‘directing mind’ for whose shortcomings the company can be liable.” The only successful prosecution for manslaughter in English legal history highlights the difficulties. In 1994, a jury convicted the owner-operator of an adventure com- pany, in whose care some children had died while canoeing. The Commission com- ments: “Since the company was a one-man concern whose ‘directing mind’ was plainly its managing director, the company’s liability was established automatically by his conviction.” CGC01 08/09/2005 3:21 PM Page 28
- 50. WHAT IS ACORPORATION? 29 The Law Commission thus concluded that the chances of ever convicting a large, complex corporation for manslaughter were minimal – even if, as in the P&O Ferries example, the manslaughter was the result not just of individual errors but of a cor- porate culture or management failure. Thus, the Commission proposed a new offence of corporate killing, broadly cor- responding to the individual offence of killing by gross carelessness. “For the pur- poses of the corporate offence,” they wrote, “a death should be regarded as having been caused by the conduct of a corporation if it is caused by a failure in the way in which the corporation’s activities are managed or organized.” They suggested that “It should be possible for a management failure on the part of a corporation to be a cause of a person’s death even if the immediate cause is the act or omis- sion of an individual.” (In the US, corporate homicide charges are equally rare. One successful prosecution involved a worker who was killed through on-the-job expo- sure to hazardous chemicals. The boss had actually removed the warning labels.) Let us look again at the Herald of Free Enterprise example. “If circumstances such as these were to occur again,” explained the Law Commission “we think it would probably be open to a jury to conclude that, even if the immediate cause of the deaths was the conduct of the assistant bosun, the Chief Officer, or both, another of the causes was the failure of the company to devise a safe system for the operation of its ferries; and that that failure fell far below what could reasonably have been expected. In these circumstances the company could be convicted of our proposed new offence.” On conviction, the court would have the power to order the cause of the offence to be remedied. All the stakeholders in these companies lost as a result of these actions. Corporations are sup- posed to be governed by a system of checks and balances to make sure that these disasters do not happen. Who failed? Who paid the price? If it is not the same people, why not? If the system of checks and balances failed, why? Who was in the best position to deter this kind of mistake, and why didn’t they do so? What changes would make these mistakes less likely? What changes would catch and address them sooner? The American Law Institute, Principles of Corporate Governance: Analysis and Recommendations (Proposed Final Draft, March 31, 1992) Sec. 2.01 The Objective and Conduct of the Corporation (a) Subject to the provisions of Subsection (b) and section 6.02 (Action to Directors That Has the Foreseeable Effect of Blocking Unsolicited Tender Offers), a [business] corporation should have as its objective the conduct of business activities with a view to enhancing corporate profit and shareholder gain. (b) Even if corporate profit and shareholder gain are not thereby enhanced, the corporation, in the conduct of its business: (1) Is obliged, to the same extent as a natural person, to act within the bound- aries set by law: (2) May take into account ethical considerations that are reasonably regarded as appropriate to the responsible conduct of business; (3) May devote a reasonable amount of resources to public welfare, human- itarian, educational and philanthropic purposes. CGC01 08/09/2005 3:21 PM Page 29
- 51. Another Random ScribdDocument with Unrelated Content
- 52. imposture, till theEarth did blush with the blood of Honesty, that the Sun for shame did hide himself, from so monstrous sight of a cowardly Calamity. It was a most brave sight to see the Banners and Ensigns streaming in the Air, the glittering of Armour, the variety of Colours, the motion of Plumes, the forests of Lances, and the thickness of shorter Weapons, till the silent Expedition of the bloody blast from the murdering Ordnance, whose roaring Voice is not so soon heard, as felt by the aimed at Object, which made among them a most lamentable slaughter. CHAP. XI. The names of the English that were slain in the Battel of Rottenton; and how Captain Smith was taken Prisoner, and sold for a Slave. In the valley of Veristhorne, betwixt the River of Altus, and the Mountain of Rottenton, was this bloody Encounter, where the most of the dearest Friends of the noble Prince Sigismundus perished. Meldritch having ordered his Eleven thousand in the best manner he could, at the Foot of the Mountain upon his Flanks, and before his front, he had pitched sharp Stakes, their Heads hardned in the fire, and bent against the Enemy, as three Battalion of Pikes, amongst the which also, there was digged many small holes. {MN-1} Amongst those Stakes was ranged his foot-men, that upon the charge was to retire, as there was occasion. The Tartar having ordered his 40000 for his best advantage, appointed Mustapha Bashaw to begin the Battel, with a general Shout, all their Ensigns displaying, Drums beating, Trumpets and Haut-boys sounding. Nederspolt and Mavazo with their Regiments of Horse most valiantly encountred, and forced them to retire; the Tartar Begoli with his Squadrons, darkning the Skies with their flights of numberless Arrows, who was as bravely encountred by Veltus and Oberwin, which bloody slaughter continued more than an hour, till the
- 53. matchless multitude ofthe Tartars so increased, that they retired within their Squadrons of Stakes, as was directed. The bloody Tartar, as scorning he should stay so long for the Victory, with his massie Troops prosecuted the Charge: But it was a wonder to see how Horse and Man came to the Ground among the Stakes, whose disordered Troops were there so mangled, that the Christians with a loud Shout cried Victoria; and with five or six field Pieces, planted upon the rising of the Mountain, did much hurt to the Enemy that still continued the Battel with that fury, that Meldritch seeing there was no possibility long to prevail, joyned his small Troops in one body, resolved directly to make his passage, or die in the conclusion; and thus in gross gave a general charge, and for more than half an hour, made his way plain before him, till the main Battle of the Crim-Tartar, with two Regiments of Turks and Jaizaries so overmatched them, that they were overthrown. The night approaching, the Earl with some thirteen or fourteen hundred Horse, swam the River, some were drowned, all the rest slain or taken Prisoners: And thus in this bloody Field, near 30000 lay, some Headless, Armless and Legless, all cut and mangled; where breathing their last, they gave this knowledge to the World, that for the lives of so few, the Crim-Tartar never paid dearer. {MN-2} But now the Countries of Transilvania and Wallachia (subjected to the Emperor) and Sigismundus, that brave Prince, his Subject and Pensioner, the most of his Nobility, brave Captains and Soldiers, became a prey to the cruel devouring Turk: where, had the Emperour been as ready to have assisted him, and those three Armies led by three such worthy Captains, as Michael, Busca, and Himself, and had those three Armies joyned together against the Turk, let all Men judge, how happy it might have been for all Christendom: and have either regained Bulgaria, or at least have beat him out of Hungaria, where he hath taken much more from the Emperour, than hath the Emperour from Transilvania. {MN-1} the Battle of Rottenton. {MN-2} Extracted out of a book, instituted, the Wars of Hungaria, Wallachia, and Moldavia, written by Francisco Ferneza, a learned Italian, the Princes Secretary, and translated by Mr. Purchas.
- 54. In this dismalBattel, where Nederspolt, Veltus, Zarvana, Mavazo, Bavel, and many other Earls, Barons, Colonels, Captains, brave Gentlemen, and Soldiers were slain, give me leave to remember the names of our own Country-men, {MN} with him in those Exploits, that as resolutely as the best in the defence of Christ and his Gospel, ended their days, as Bakersfield, Hardwick, Thomas Milemer, Robert Mollineux, Thomas Bishop, Francis Compton, George Davison, Nicholas Williams and one John a Scot, did what Men could do, and when they could do no more, left there their Bodies in Testimony of their minds; only Ensign Charleton, and Sergeant Robinson escaped: But Smith, among the slaughtered dead Bodies, and many a gasping Soul, with toil and Wounds lay groaning among the rest, till being found by the Pillagers, he was able to live, and perceiving by his Armour and Habit, his ransom might be better to them than his Death, they led him Prisoner with many others; well they used him till his Wounds were cured, and at Axopolis they were all sold for Slaves, like Beasts in a Market-place, where every Merchant, viewing their Limbs and Wounds, caused other Slaves to struggle with them, to try their strength, he fell to the share of Bashaw Bogal, who sent him forthwith to Adrianopolis, so for Constantinople to his fair Mistriss for a Slave. By twenty and twenty chained by the Necks, they marched in file to this great City, where they were delivered to their several Masters, and he to the young Charaza Tragabigzanda. {MN} The English Men in this Battel. CHAP. XII. How Captain Smith was sent Prisoner thorow the Black and Dissabacca Sea in Tartaria; the Description of those seas, and his usage.
- 55. This Noble Gentlewomantook sometime occasion to shew him to some Friends, or rather to speak with him, because she could speak Italian, would feign her self sick when she should go to the Bannians, or weep over the Graves, to know how Bogal took him Prisoner; and if he were as the Bashaw writ to her, a Bohemian Lord conquered by his Hand, as he had many others, which ere long he would present her, whose Ransomes should adorn her with the glory of his Conquests. But when she heard him protest he knew no such matter, nor ever saw Bogal, till he bought him at Axopolis, and that he was an English-man, only by his Adventures made a Captain in those Countries. To try the truth, she found means to find out many who could speak English, French, Dutch, and Italian, to whom relating most part of these former Passages she thought necessary, which they so honestly reported to her, she took (as it seemed) much compassion on him; but having no use for him, lest her Mother should sell him, she sent him to her Brother, the Timor Bashaw of Nalbrits, In the Country of Cambia, a Province in Tartaria. {MN-1} Here now let us remember his passing, in this speculative course from Constantinople by Sander, Screw, Panassa, Musa, Lastilla, to Varna, an ancient City upon the Black Sea. In all which Journey, having little more liberty, than his eyes judgment, since his Captivity, he might see the Towns with their short Towers, and a most plain, fertile, and delicate Country, especially that most admired place of Greece, now called Romania, but from Varna, nothing but the Black Sea Water, till he came to the two Capes of Taur and Pergilos, where he passed the Streight of Niger, which (as he conjectured) is some ten Leagues long, and three broad, betwixt two Low-lands, the Channel is deep, {MN-2} but at the entrance of the Sea Dissabacca, there are many great Osie-shaulds, and many great black Rocks, which the Turks said were Trees, Weeds, and Mud, thrown from the In-land Countries, by the Inundations and violence of the Current, and cast there by the Eddy. They Sailed by many low Isles, and saw many more of those muddy Rocks, and nothing else, but salt Water, till they came betwixt Sufax and Curuske, only two white Towns at the entrance of the River Bruapo appeared: In six or seven days Sail, he saw four or five seeming strong Castles of Stone, with flat tops and Battlements about them, but arriving at Cambia, he was (according to their custom) well used. The
- 56. River was theremore than half a Mile broad. The Castle was of a large Circumference, fourteen or fifteen foot thick, in the Foundation some six foot from the Wall, is a Pallizado, and then a Ditch of about forty foot broad full of Water. On the West side of it, is a Town, all of low flat Houses, which as he conceived, could be of no great strength, yet it keeps all them barbarous Countreys about it in admiration and subjection. After he had stayed there three days; it was two days more before his Guides brought him to Nalbrits, where the Tymor was then resident, in a great vast Stone Castle, with many great Courts about it, invironed with high Stone Walls, where was quartered their Arms, when they first subjected those Countries, which only live to labour for those Tyrannical Turks. {MN-1} How he was sent into Tartaria. {MN-2} The Description of the Dissabacca Sea. {MN} To her unkind Brother, this kind Lady writ so much for his good usage, that he half expected, as much as she intended; for she told him, he should there but sojourn to learn the Language, and what it was to be a Turk, till time made her Master of her self. But the Tymor, her Brother, diverted all this to the worst of Cruelty; for within an hour after his arrival, he caused his Drubman to strip him naked, and shave his Head and Beard so bare as his Hand, a great Ring of Iron, with a long stalk bowed like a Sickle, revitted about his Neck, and a Coat made of Ulgries Hair, guarded about with a piece of an undrest Skin. There were many more Christian Slaves, and near an hundred Forsados of Turks and Moors, and he being the last, was slave of Slaves to them all. Among these slavish Fortunes, there was no great choice; for the best was so bad, a Dog could hardly have lived to endure, and yet for all their pains and labours, no more regarded than a Beast. {MN} Smith's usage in Tartaria.
- 57. CHAP. XIII. The Turksdiet; the Slaves diet; the attire of the Tartars; and manner of Wars and Religions, &c. {MN-1} The Tymor and his Friends fed upon Pillaw, which is, boiled Rice and Garnances with little bits of Mutton or Buckones, which is Roasted pieces of Horse, Bull, Ulgrie, or any Beasts. Samboyses and Muselbit are great Dainties, and yet but round Pies, full of all sorts of Flesh, they can get chopped with variety of Herbs. Their best Drink is Coffee, of a grain they call Coava, boiled with Water; and Sherbeck, which is only Honey and Water; Mares Milk, or the Milk of any Beast, they hold restorative: but all the Commonalty drink pure Water. {MN-2} Their Bread is made of this Coava, which is a kind of black Wheat, and Cuskus a small white Seed, like Millia in Biskay: But our common Victuals, the entrails of Horse and Ulgries; of this cut in small pieces, they will fill a great Cauldron, and being boiled with Cuskus, and put in great Bowls in the form of Chaffing-dishes, they sit round about it on the Ground, after they have raked it thorow, so oft as they please with their foul Fists, the remainder was for the Christian Slaves. Some of this Broth, they would temper with Cuskus pounded, and putting the Fire off from the Hearth, pour there a Bowl full, then cover it with Coals till it be baked, which stewed with the remainder of the Broth, and some small pieces of Flesh, was an extraordinary Dainty. {MN-1} The Tymor's Diet of Cambia, is as the Turks. {MN-2} The Slaves Diet. {MN} The better sort are attired like Turks, but the plain Tartar hath a black Sheeps-skin over his back, and two of the Legs tied about his Neck; the other two about his middle, with another over his Belly, and the Legs
- 58. tied in likemanner behind him: Then two more, made like a pair of Bases, serveth him for Breeches; with a little close Cap to his Skull of black Felt, and they use exceeding much of this Felt for Carpets, for Bedding, for Coats, and Idols. Their Houses are much worse than your Irish, but the In- land Countries have none but Carts and Tents, which they ever remove from Countrey to Countrey, as they see occasion, driving with them infinite Troops of black Sheep, Cattel and Ulgries, eating all up before them as they go. {MN} The attire of those Tartars. {MN} For the Tartars of Nagi, they have neither Town, nor House, Corn, nor Drink, but Flesh and Milk. The Milk they keep in great Skins like Burracho's, which though it be never so sower, it agreeth well with their strong Stomachs. They live all in Hordias, as doth the Crim-Tartars, three or four hundred in a Company, in great Carts fifteen or sixteen foot broad, which are covered with small Rods, wattled together in the form of a Bird's Nest, turned upwards, and with the Ashes of Bones, temper'd with Oil, Camels Hair, and a Clay they have, they loam them so well, that no Weather can pierce them, and yet very light. Each Hordia hath a Murse, which they obey as their King. Their Gods are infinite. One or two thousand of those glittering white Carts drawn with Camels, Deer, Bulls, and Ulgries, they bring round in a Ring, where they pitch their Camp; and the Murse, with his chief Alliances, are placed in the midst. They do much hurt, when they can get any Stroggs, which are great Boats used up on the River Volga, (which they call Edle) to them that dwell in the Countrey of Perolog, and would do much more, were it not for the Muscovites Garrisons that there Inhabit. {MN} The Tartars of Nagi and their manners.
- 59. CHAP. XIIII. The Descriptionof the Crim-Tartars; their Houses and Carts, their Idolatry in their Lodgings {MN-1} Now you are to understand, Tartary and Scythia are all one, but so large and spacious, few, or none, could ever perfectly describe it, nor all the several kinds of those most barbarous People that inhabit it. Those we call the Crim-Tartars, border upon Moldavia, Podolia, Lithuania, and Russia, are much more regular than the interior parts of Scythia. This Great Tartarian Prince, that hath so troubled all his Neighbours, they always call Chan, which signifieth Emperour; but we, the Crim-Tartar. He liveth for the most part in the best Champion Plains of many Provinces; and his removing Court is like a great City of Houses and Tents, drawn on Carts, all so orderly placed East and West, on the right and left hand of the Prince's House, which is always in the midst towards the South, before which, none may pitch their Houses, every one knowing their Order and Quarter, as in an Army. {MN-2} The Princes Houses are very artificially wrought, both the Foundation, Sides, and Roof of Wickers, ascending round to the top like a Dove coat; this they cover with white Salt, or white Earth, temper'd with the Powder of Bones, that it may shine the whiter; sometimes with black Felt, curiously painted with Vines, Trees, Birds, and Beasts; the breadth of the Carts are eighteen or twenty Foot, but the house stretcheth four or five Foot over each side, and is drawn with ten or twelve, or for more state, twenty Camels and Oxen. {MN-3} They have also great Baskets, made of smaller Wickers, like great Chests, with a covering of the same, all covered over with black Felt, rubbed over with Tallow and Sheep's Milk, to keep out the Rain; prettily bedecked with Painting or Feathers; in those they put their Houshold Stuff and Treasure, drawn upon other Carts for that purpose. When they take down their Houses, they set the door always towards the South, and their Carts thirty or forty Foot distant on each side, East and West, as if they were two Walls: The Women also have most curious Carts; every one of his Wives hath a great one for her self, and so many other for her Attendants, that they seem as many Courts as he hath Wives. One great Tartar or Nobleman, will have for his particular, more than an hundred of those Houses and Carts, for his several Offices and Uses, but set so far from
- 60. each other, theywill seem like a great Village. {MN-4} Having taken their Houses from the Carts, they place the Master always towards the North; over whose head is always an Image like a Puppet, made of Felt, which they call his Brother; the Women on his left hand, and over the chief Mistriss her Head, such another Brother, and between them a little one, which is the keeper of the House; at the good Wives Beds-feet is a Kids Skin, stuffed with Wooll, and near it a Puppet looking towards the Maids; next the door another, with a dried Cows Udder, for the Women that Milk the Kine, because only the Men Milk Mares; {MN-5} every Morning those Images in their orders, they besprinkle with that they drink, be it Cossmos, or whatsoever, but all the white Mares Milk is reserved for the Prince. Then without the door, thrice to the South, every one bowing his knee in honour of the Fire; then the like to the East, in honour of the Air; then to the West, in honour of the Water; and lastly to the North, in behalf of the dead. After the Servant hath done this duty to the four quarters of the World, he returns into the House, where his Fellows stand waiting, ready with two Cups, and two Basons, to give their Master, and his Wife that lay with him that Night, to wash and drink, who must keep him company all the day following, and all his other Wives come thither to drink, where he keeps his House that day; and all the Gifts presented him till night, are laid up in her Chests; and at the door a Bench full of Cups, and drink for any of them to make merry. {MN-1} The description of the Crim-Tartar's Court. {MN-2} His Houses and Carts. {MN-3} Baskets. {MN-4} Their Idolatry in their Lodgings. {MN-5} Cosmos is Mares Milk.
- 61. CHAP. XV. Their Feasts,common Diet, Princes Estate, Buildings, Tributes, Laws, Slaves, Entertainment of Ambassadors. {MN} For their Feasts, they have all sorts of Beasts, Birds, Fish, Fruits, and Herbs they can get, but the more variety of wild ones is the best; to which they have excellent Drink made of Rice, Millet, and Honey, like Wine; they have also Wine, but in Summer they drink most Cossmos, that standeth ready always at the entrance of the door, and by it a Fidler; when the Master of the House beginneth to drink, they all cry, ha, ha, and the Fidler plays, then they all clap their Hands and dance, the Men before their Masters, the Women before their Mistresses; and ever when he drinks, they cry as before; then the Fidler stayeth till they drink all round; sometimes they will drink for the Victory; and to provoke one to drink, they will pull him by the Ears, and lug and draw him, to stretch and beat him, clapping their Hands, stamping with their Feet, and dancing before the Champions, offering them Cups, then draw them back again to increase their Appetite; and thus continue till they be drunk, or their drink done, which they hold an honour, and no Infirmity. {MN} Their Feasts. {MN} Though the Ground be fertile, they sow little Corn, yet the Gentlemen have Bread and Honey-wine; Grapes they have plenty, and Wine privately, and good Flesh and Fish; but the common sort stamped Millet, mingled with Milk and Water. They call Cassa for Meat, and drink any thing; also any Beast unprofitable for service they kill, when they are like to die, or however they die, they will eat them, Guts, Liver and all; but the most fleshy parts they cut in thin slices, and hang it up in the Sun and Wind without salting, where it will dry so hard, it will not putrifie in a long time. A Ramm they esteem a great Feast among forty or fifty, which they cut in pieces boiled or roasted, puts it in a great Bowl, with Salt and Water, for other Sawce they have none; the Master of the Feast giveth every one a piece, which he eateth by himself, or carrieth away with him. {MN-2} Thus
- 62. their hard faremakes them so infinite in Cattel, and their great number of Captive Women to breed upon, makes them so populous. But near the Christian Frontiers, the baser sort make little Cottages of Wood, called Vlusi, daubed over with dirt, and Beasts dung covered with sedge; yet in Summer they leave them, beginning their Progress in April, with their Wives, Children, and Slaves, in their Carted Houses, scarce convenient for four or five Persons; driving their Flocks towards Precopia, and sometimes into Taurica, or Osow, a Town upon the River Tanais, which is great and swift, where the Turk hath a Garrison; and in October return again to their Cottages. Their Clothes are the Skins of Dogs, Goats, and Sheep, lined with Cotton Cloath, made of their finest Wooll, for of their worst they make their Felt, which they use in abundance, as well for Shooes and Caps, as Houses, Beds, and Idols; also of the coarse Wooll mingled with Horse hair, they make all their Cordage. {MN-3} Notwithstanding this wandring life, their Princes sit in great State upon Beds, or Carpets, and with great reverence are attended both by Men and Women, and richly served in Plates and great Silver Cups, delivered upon the Knee, attired in rich Furrs, lined with Plush, or Taffity, or Robes of Tissue. These Tartars possess many large and goodly Plains, wherein feed innumerable Herds of Horse and Cattel, as well wild as tame; which are Elkes, Bisons, Horses, Deer, Sheep, Goats, Swine, Bears, and divers others. {MN-1} Their common diet. {MN-2} How they become populous. {MN-3} Their Princes State. {MN-1} In those Countries are the Ruins of many fair Monasteries, Castles, and Cities, as Bacasaray, Salutium, Almassary, Precopia, Cremum, Sedacom, Capha, and divers others by the Sea, but all kept with strong Garrisons for the Great Turk, {MN-2} who yearly by Trade or Traffick, receiveth the chief Commodities those fertile Countries afford, as Bezoar, Rice, Furs, Hides, Butter, Salt, Cattel, and Slaves, yet by the spoils they get from the secure and idle Christians, they maintain themselves in this Pomp. Also their Wives, of whom they have as many as they will, very costly, yet in a constant custom with decency.
- 63. {MN-1} Ancient Buildings. {MN-2}Commodities for tribute to the Turk. {MN} They are Mahometans, as are the Turks, from whom they also have their Laws, but no Lawyers, nor Attornies, only Judges, and Justices in every Village, or Hordia; but Capital Criminals, or matters of moment, before the Chan himself, or Privy Councils, of whom they are always heard, and speedily discharged; for any may have access at any time to them, before whom they appear with great Reverence, adoring their Princes as Gods, and their Spiritual Judges as Saints; for Justice is with such integrity and Expedition Executed, without Covetousness, Bribery, Partiality, and Brawling, that in six Months they have sometimes scarce six Causes to hear. About the Princes Court, none but his Guard wear any Weapon, but abroad they go very strong, because there are many Bandittos, and Thieves. {MN} Good Laws, yet no Lawyers. {MN} They use the Hungarians, Russians, Wallachians, and Moldavian Slaves (whereof they have plenty) as Beasts to every work; and those Tartars that serve the Chan, or Noblemen, have only Victuals and Apparel, the rest are generally nastly, and idle, naturally miserable, and in their Wars better Thieves than Soldiers. {MN} Their Slaves. {MN} This Chan hath yearly a Donative from the King of Poland, the Dukes of Lithuania, Moldavia, and Nagayon Tartars; their Messengers commonly he useth bountifully, and very nobly, but sometimes most cruelly; when any of them do bring their Presents, by his Houshold Officers, they are entertained in a plain Field, with a moderate proportion of Flesh, Bread and Wine, for once; but when they come before him, the Sultans, Tuians, Vlans, Marhies, his chief Officers and Councellors attend, one Man only bringeth the Ambassadour to the Court Gate, but to the Chan he is led between two Councellors; where saluting him upon their bended knees, declaring their message, are admitted to eat with him, and presented
- 64. with a greatSilver Cup full of Mead from his own hand, but they drink it upon their Knees: when they are dispatched, he invites them again, the Feast ended, they go back a little from the Palace door, and rewarded with Silk Vestures, wrought with Gold down to their Anckles, with an Horse or two, and sometimes a Slave of their own Nation; in them Robes presently they come to him again, to give him thanks, take their leave, and so depart. {MN} His Entertainment of Ambassadours. CHAP. XVI. How he levieth an Army; their Arms and Provision; how he divideth the Spoil, and his Service to the Great Turk. {MN} When he intends any Wars, he must first have leave of the Great Turk, whom he is bound to assist when he commandeth, receiving daily for himself and chief of his Nobility, Pensions from the Turk, that holds all Kings but Slaves, that pay Tribute, or are subject to any: signifying his intent to all his Subjects, within a Month commonly he raiseth his Army, and every Man is to furnish himself for three Months Victuals, which is parched Millet, or ground to Meal, which they ordinarily mingle with Water (as is said) hard Cheese or Curds dried, and beaten to powder, a little will make much Water like Milk, and dried Flesh, this they put also up in Sacks; The Chan and his Nobles have some Bread and Aquavitæ, and quick Cattel to kill when they please, wherewith very sparingly they are contented. Being provided with expert Guides, and got into the Country he intends to Invade, he sends forth his Scouts to bring in what Prisoners they can, from whom he will wrest the utmost of their Knowledge fit for his purpose; having advised with his Council, what is most fit to be done, the Nobility,
- 65. according to theirAntiquity, doth march; then moves he with his whole Army: if he find there is no Enemy to oppose him, he adviseth how far they shall Invade, commanding every Man (upon pain of his Life) to kill all the obvious Rusticks; but not to hurt any Women, or Children. {MN} How he levieth an Army. {MN} Ten, or fifteen thousand, he commonly placeth, where he findeth most convenient for his standing Camp; the rest of his Army he divides in several Troops, bearing ten or twelve Miles square before them, and ever within three or four days return to their Camp, putting all to Fire and Sword, but that they carry with them back to their Camp; and in this scattering manner he will invade a Country, and be gone with his Prey, with an incredible Expedition. But if he understand of an Enemy, he will either fight in Ambuscado, or flie; for he will never fight any Battel if he can chuse, but upon treble advantage; yet by his innumerable flights of Arrows, I have seen flie from his flying Troops, we could not well judge, whether his fighting or flying was most dangerous, so good is his Horse, and so expert his Bow-men; but if they be so intangled they must fight, there is none can be more hardy, or resolute in their defences. {MN} The manner of his Wars. {MN} Regaining his own Borders, he takes the tenth of the principal Captives, Man, Woman, Child, or Beast (but his Captains that take them, will accept of some particular Person they best like for themselves) the rest are divided amongst the whole Army, according to every Mans Desert and Quality; that they keep them, or sell them to who will give most; but they will not forget to use all the means they can, to know their Estates, Friends, and Quality, and the better they find you, the worse they will use you, till you do agree to pay such a Ransom, as they will impose upon you; therefore many great Persons have endured much misery to conceal themselves, because their Ransoms are so intolerable: their best hope is of some Christian Agent, that many times cometh to redeem Slaves, either with Money, or Man for Man; those Agents knowing so well the extream covetousness of the Tartars, do use to bribe some Jew or Merchant, that
- 66. feigning they willsell them again to some other Nation, are oft redeemed for a very small Ransom. {MN} How he divideth the spoil. {MN} But to this Tartarian Army, when the Turk, commands, he goeth with some small Artillery; and the Nagayans, Precopens, Crims, Osovens, and Circassians, are his Tributaries; but the Perigorves, Oczaconians, Bialogordens, and Dobrucen Tartars, the Turk by Covenant commands to follow him, so that from all those Tartars he hath had an Army of an hundred and twenty thousand excellent, swift, stomackfull Tartarian Horse for foot they have none. Now the Chan, his Sultans and Nobility, use Turkiso, Caramanian, Arabian, Parthian, and other strange Tartarian Horses; the swiftest they esteem the best; seldom they feed any more at home, than they have present use for; but upon their Plains is a short Wood- like Heath, in some Countries like Gail, full of Berries, much better than any Grass. {MN} How the Chan doth serve the Great Turk. {MN} Their Arms are such, as they have surprised or got from the Christians or Persians, both Brest-plates, Swords, Scimitars, and Helmets; Bows and Arrows they make most themselves, also their Bridles and Saddles are indifferent, but the Nobility are very handsome, and well armed like the Turks, in whom consisteth their greatest Glory; the ordinary sort have little Armour, some a plain young Pole unshaven, headed with a piece of Iron for a Lance; some an old Christian Pike, or a Turks Cavarine, yet those Tattertimallions will have two or three Horses, some four or five, as well for service, as for to eat; which makes their Armies seem thrice so many as there are Soldiers. The Chan himself hath about his Person, Ten thousand chosen Tartars and Janizaries, some small Ordnance, and a white Mares Tail, with a piece of green Taffity on a great Pike, is carried before him for a Standard; because they hold no Beast so precious as a white Mare, whose Milk is only for the King and Nobility, and to Sacrifice to their Idols; but the rest have Ensigns of divers Colours.
- 67. {MN} Their Arms. Forall this miserable Knowledge, Furniture, and Equipage, the mischief they do in Christendom is wonderful, by reason of their hardness of Life and Constitution, Obedience, Agility, and their Emperours Bounty, Honours, Grace, and Dignities he ever bestoweth upon those, that have done him any memorable Service in the face of his Enemies. {MN} The Caspian Sea, most Men agree that have passed it, to be in length about 200 Leagues, and in breadth an hundred and fifty, environed to the East, with the great Desarts of the Tartars of Turkomania; to the West, by the Circasses, and the Mountain Caucasus; to the North, by the River Volga, and the Land of Nagay; and to the South, by Media, and Persia: This Sea is fresh Water in many places, in others as salt as the great Ocean; it hath many great Rivers which fall into it, as the mighty River of Volga, which is like a Sea, running near Two thousand Miles, through many great and large Countries, that send into it many other great Rivers; also out of Saberia, Yaick, and Yem, out of the great Mountain Caucasus, the River Sirus, Arash, and divers others, yet no Sea nearer it than the black Sea, which is at least an hundred Leagues distant: In which Country live the Georgians, now part Armenians, part Nestorians; it is neither found to increase or diminish, or empty it self any way, except it be under Ground, and in some places they can find no Ground at Two hundred fathom. {MN} A Description of the Caspian Sea. Many other most strange and wonderful things are in the Land of Cathay, towards the North-east, and China towards the South-east, where are many of the most famous Kingdoms in the World, where most Arts, Plenty, and Curiosities are in such abundance, as might seem incredible, which hereafter I will relate, as I have briefly gathered from such Authors as have lived there.
- 68. CHAP. XVII. How CaptainSmith escaped his Captivity; slew the Bashaw of Nalbrits in Cambia; his Passage to Russia, Transilvania, and the middest of Europe to Africa. {MN-1} All the hope he had ever to be delivered from this Thraldom, was Only the love of Tragabigzanda, who surely was ignorant of his bad usage; for although he had often debated the matter with some Christians, that had been there a long time Slaves, they could not find how to make an escape, by any reason or possibility; but God beyond Man's Expectation or Imagination helpeth his Servants, when they least think of help, as it hapned to him. So long he lived in this miserable Estate, as he became a Thresher at a grange in a great Field, more than a League from the Timor's House; the Bashaw, as he oft used to visit his Granges, visited him, and took occasion so to beat, spurn, and revile him, that forgetting all reason, he beat out the Timor's Brains with his Threshing Bat, for they have no Flails; and seeing his Estate could be no worse than it was, clothed himself in his Clothes, hid his Body under the Straw, filled his Knapsack with Corn, shut the doors, mounted his Horse, and ran into the Desart at all adventure; two or three days, thus fearfully wandring he knew not whither, and well it was, he met not any to ask the way; being even as taking leave of this miserable World, {MN-2} God did direct him to the great way or Castragan, as they call it, which doth cross these large Territories, and generally known among them by these marks. {MN-1} How Smith escaped his Captivity. {MN-2} Their Guides in those Countries. In every crossing of this great way is planted a Post, and in it so many bobs with broad ends, as there be ways, and every bob the Figure painted on it, that demonstrateth to what part that way leadeth; as that which pointeth towards the Crim's Country, is marked with a half Moon, if towards the Georgians and Persia, a black Man, full of white spots, if
- 69. towards China, thePicture of the Sun, if towards Muscovia, the Sign of a Cross, if towards the Habitation of any other Prince, the Figure whereby his Standard is known. To his dying Spirits thus God added some comfort in this melancholy Journey, wherein if he had met any of that vile Generation, they had made him their Slave, or knowing the Figure Engraven in the Iron about his Neck, (as all Slaves have) he had been sent back again to his Master; sixteen days he travelled in this fear and torment, after the Cross, till he arrived at Æcopolis, upon the River Don, a Garrison of the Muscovites. The Governour after due Examination of those his hard events, took off his Irons, and so kindly used him, he thought himself new risen from the Dead, and the good Lady Calamata, largely Supplied all his wants. {MN-1} This is as much as he could learn of those wild Countries, that the Country of Cambia is two days Journey from the Head of the great River Bruapo, which springeth from many places of the Mountains of Innagachi, that joyn themselves together in the Pool Kerkas which they account for the Head, and falleth into the Sea Dissabacca, called by some the Lake Maeotas, which receiveth also the River Tanais, and all the Rivers that fall from the great Countries of the Circassi, the Cartaches, and many from the Tauricaes, Precopes, Cummani, Cossunka, and the Crim; through which Sea he Sailed, and up the River Bruapo to Nalbrits, and thence through the Desarts of Circassi to Æcopolis, as is related; where he stayed with the Governour, till the Convoy went to Caragnaw; then with his Certificate how he found him, and had examined with his friendly Letters, sent him by Zumalack to Caragnaw, whose Governour in like manner so kindly used him, that by this means he went with a safe conduct to Lesch, and Donko, in Cologoske, and thence to Berniske, and Newgrod in Siberia, by Rezechica, upon the River Nieper, in the confines of Lithuania; from whence with as much kindness, he was convoyed in like manner by Coroski, Duberesko, Duzihell, Drohobus, and Ostroge in Volonia; Saslaw, and Lasco in Podolia; Halico and Collonia in Polonia; and so to Hermonstat in Transilvania. In all this his life, he seldom met with more Respect, Mirth, Content and Entertainment; and not any Governour where he came, but gave him somewhat as a Present, besides his Charges; seeing themselves as subject to the like Calamity. {MN-2} Through those poor continually Foraged Countries, there is no passage, but with the Caravans or Convoys; for they are Countries rather to be pitied than envied; and it is a
- 70. wonder any shouldmake Wars for them. The Villages are only here and there, a few Houses of streight Firr Trees, laid heads and points above one another, made fast by notches at the ends, more than a Man's heighth, and with broad split Boards, pinned together with woodden Pins, as thatched for coverture. In ten Villages you shall scarce find ten Iron Nails, except it be in some extraordinary Man's House. For their Towns, Æcopolis, Letch, and Donko, have Rampires made of that woodden Walled fashion, double, and betwixt them Earth and Stones, but so latched with cross Timber, they are very strong against any thing but Fire; and about them a deep Ditch, and a Palizado of young Firr Trees; but most of the rest have only a great Ditch cast about them, and the Ditches Earth, is all their Rampire; but round, well environed with Palizadoes. Some have some few small pieces of small Ordnance, and Slings, Calievers, and Muskets, but their generallest Weapons are the Russe Bows and Arrows; you shall find Pavements over Bogs, only of young Firr-Trees, laid cross one over another, for two or three hours Journey, or as the Passage requires, and yet in two days Travel, you shall scarce see six Habitations. Notwithstanding to see how their Lords, Governours, and Captains are civilized, well attired and accoutred with Jewels, Sables, and Horses, and after their manner with curious Furniture, it is wonderful; but they are all Lords or Slaves, which makes them so subject to every Invasion. {MN-1} The description of Cambia, and his passage to Russia. {MN-2} His Observations in his Journey to Transilvania, through the midst of Europe. In Transilvania, he found so many good Friends, that but to see, and rejoyce himself (after all those Encounters) in his Native Country, he would ever hardly have left them, though the mirrour of vertue their Prince was absent. Being thus glutted with content, and near drowned with Joy, he parted high Hungaria by Fileck, Tocka, Cassovia, and Underorowoay, by Ulmicht in Moravia, to Prague in Bohemia; at last he found the most gracious Prince Sigismundus, with his Colonel at Lipswick in Misenland, who gave him his Pass, intimating the service he had done, and the Honours he had received, with fifteen hundred Ducats of Gold to repair his Losses: With this he spent some time to visit the fair Cities and Countries of
- 71. Dresden in Saxony,Magdeburgh and Brunswick; Cassel in Hessen; Wittenberg, Vilum, and Minekin in Bavaria; Augsburg, and her Universities; Hama, Frankford, Mentz, the Palatinate; Worms, Spires, and Straburg; passing Nancie in Lorain, and France by Paris to Orleans, he went down the River of Loyer, to Angiers, and imbarked himself at Nantz in Britain, for Bilbao in Biskay to see Burgos-Valladolid, the admired Monastery of the Escurial, Madrid, Toledo, Corduba, Cuedyrial, Sivil, Cheries, Cales, and St. Lucas in Spain. CHAP. XVIII. The Observations of Captain Smith; Mr. Henry Archer, and others in Barbary. Being thus satisfied with Europe and Asia, understanding of the Wars in Barbary, he went from Gibralter to Ceuta and Tangier, thence to Saffee, where growing into Acquaintance with a French Man of War, the Captain and some twelve more went to Morocco, to see the ancient Monuments of that large renowned City: It was once the principal City in Barbary, situated in a goodly plain Country, 14 Miles from the great Mount Atlas, and sixty Miles from the Atlantick Sea; but now little remaining, but the King's Palace, which is like a City of it self; and the Christian Church, on whose flat, {MN-1} square Steeple is a great broach of Iron, whereon is placed the three Golden Balls of Africa: The first is near three Ells in Circumference, the next above it somewhat less, the uppermost the least over them, as it were an half Ball, and over all a pretty gilded Pyramid. Against those Golden Balls hath been shot many a shot, their Weight is recorded 700 weight of pure Gold, hollow within, yet no shot did ever hit them, nor could ever any Conspirator attain that Honour as to get them down. They report, the Prince of Morocco betrothed himself to the King's Daughter of
- 72. Æthiopia, he dyingbefore their Marriage, she caused those three Golden Balls to be set up for his Monument, and vowed Virginity all her Life. {MN-2} The Alfantica is also a place of note, because it is invironed with a great Wall, wherein lie the Goods of all the Merchants securely guarded. The Inderea is also (as it were) a City of it self, where dwell the Jews: The rest for the most part is defaced; but by the many Pinnacles and Towers, with Balls on their tops, hath much appearance of much sumptuousness and curiosity. There have been many famous Universities, which are now but Stables for Fowls, and Beasts, and the Houses in most parts lie tumbled one above another; the Walls of Earth are with the great fresh Floods washed to the ground; nor is there any Village in it, but Tents for Strangers, Larbes and Moors. Strange Tales they will tell of a great Garden, wherein were all sorts of Birds, Fishes, Beasts, Fruits, and Fountains, which for Beauty, Art and Pleasure, exceeded any place known in the World, though now nothing but Dung-hills, Pigeon-Houses, Shrubs and Bushes. There are yet many excellent Fountains, adorned with Marble, and many Arches, Pillars, Towers, Ports, and Temples; but most only reliques of lamentable Ruins and sad Desolation. {MN-1} The three Golden Balls of Africa. {MN-2} The description of Morocco. {MN} When Muly Hamet Reigned in Barbary, he had three Sons, Muly Sheck, Muly Sidan, and Muly Bufferres, he a most good and noble King, that governed well with Peace and Plenty, till his Empress, more cruel than any Beast in Africa, poisoned him, her own Daughter, Muly Sheck, his eldest Son, born of a Portugal Lady, and his Daughter, to bring Muly Sidan, to the Crown now reigning, which was the cause of all those brawls, and Wars that followed betwixt those Brothers, their Children, and a Saint that started up, but he played the Devil. {MN} A bloody Empress. {MN-1} King Muly Hamet was not black, as many suppose, but Molara, or tawny, as are the most of his Subjects; every way noble, kind
- 73. and friendly, veryrich and pompous in State and Majesty, though he sitteth not upon a Throne nor Chair of state, but cross Leg'd upon a rich Carpet, as doth the Turk, whose Religion of Mahomet, with an incredible miserable Curiosity they observe. His ordinary Guard is at least 5000, but in Progress, he goeth not with less than 20000 Horse-men, himself as rich in all his Equipage, as any Prince in Christendom, and yet a Contributor to the Turk. {MN-2} In all his Kingdom were so few good Artificers, that he entertained from England, Gold-smiths, Plummers, Carvers, and Polishers of Stone, and Watch-makers, so much he delighted in the Reformation of Workmanship, he allowed each of them ten Shillings a day standing Fee, Linen, Woollen, Silks, and what they would for Diet and Apparel, and Custom-free to transport, or import what they would; for there were scarce any of those qualities in his Kingdom, but those, of which there are divers of them, living at this present in London. Amongst the rest, one Mr. Henry Archer, a Watch-maker, walking in Morocco, from the Alfantica to the Juderea, the way being very foul, met a great Priest, or a Sante (as they call all great Clergy-men) who would have thrust him into the dirt for the way; but Archer not knowing what he was, gave him a box on the Ear, presently he was apprehended, and condemned to have his Tongue cut out, and his Hand cut off: But no sooner it was known at the King's Court, but 300 of his Guard came, and broke open the Prison, and delivered him although the Fact was next degree to Treason. {MN-1} King Muly Hamet or the Great Zeriff of Barbary. {MN-2} His great love to English Men. {MN} Concerning this Archer, there is one thing more worth noting: Not far from Mount Atlas, a great Lioness in the heat of the day, did use to bathe her self, and teach her young Puppies to swim in the River Cauzef, of a good breadth; yet she would carry, which some Moors perceiving, watched there them one after another over the River; opportunity, and when the River was between her and them, stole four of her Whelps, which she perceiving, with all the speed she could passed the River, and coming near them, they let fall a Whelp (and fled with the rest) which she took in her mouth, and so returned to the rest: A Male and a Female of those they gave Mr. Archer, who kept them in the King's Garden, till the Male killed the
- 74. Female, then hebrought it up as a Puppy-dog lying upon his Bed, till it grew so great as a Mastiff, and no dog more tame or gentle to them he knew: But being to return for England, at Saffee he gave him to a Merchant of Marseillses, that presented him to the French King, who sent him to King James, where it was kept in the Tower seven Years: After one Mr. John Bull, then Servant to Mr. Archer, with divers of his Friends, went to see the Lions, not knowing any thing at all of him; yet this rare Beast smelled him before he saw him, whining, groaning, and tumbling, with such an expression of acquaintance, that being informed by the Keepers how he came thither; Mr. Bull so prevailed, the Keeper opened the Grate, and Bull went in: But no Dog could fawn more on his Master, than the Lion on him, licking his Feet, Hands, and Face, skipping and tumbling to and fro, to the wonder of all the beholders; being satisfied with his acquaintance, he made shift to get out of the Grate: But when the Lion saw his Friend gone, no Beast by bellowing, roaring, scratching, and howling, could express more rage and sorrow, nor in four days after would he either eat or drink. {MN} The strange love of a Lion. {MN} In Morocco, the King's Lions are altogether in a Court, invironed with a great high Wall; to those they put a young Puppy-dog: The greatest Lion had a sore upon his neck, which this Dog so licked, that he was healed: The Lion defended him from the fury of all the rest, nor durst they eat till the Dog and he had fed; this Dog grew great, and lived amongst them many years after. {MN} Another kind Lion in Morocco. {MN-1} Fez also is a most large and plentiful Country, the chief City is called Fez, divided into two parts; old Fez, containing about 80 thousand Households, the other 4000 pleasantly situated upon a River in the heart of Barbary, part upon Hills, part upon Plains, full of people, and all sorts of Merchandize. The great Temple is called Carucen, in breadth seventeen Arches, in length 120, born up with 2500 white Marble Pillars: under the chief Arch, where the Tribunal is kept, hangeth a most huge Lamp, compassed with 110 lesser, under the other also hang great Lamps, and
- 75. about some, areburning fifteen hundred lights, They say, they were all made of the Bells the Arabians brought from Spain. It hath three Gates of notable heighth, Priests and Officers so many, that the Circuit of the Church, the Yard, and other Houses, is little less than a Mile and half in compass, there are in this City 200 Schools, 200 Inns, 400 Water-Mills, 600 Water-Conduits, 700 Temples and Oratories; but 50 of them most stately and richly furnished. Their Alcazer or Burse is Walled about, it hath twelve Gates, and fifteen Walks covered with Tents, to keep the Sun from the Merchants, and them that come there. The King's Palace, both for strength and beauty is excellent, and the Citizens have many great Privileges. Those two Countries of Fez and Morocco, are the best part of all Barbary, abounding with People, Cattel, and all good Necessaries for Man's use. For the rest, as the Larbs, or Mountainers, the Kingdoms of Cocow, Algier, Tripoli, Tunis, and Ægypt; there are many large Histories of them in divers Languages, especially that writ by that most excellent Statesman, John de Leo, who afterwards turned Christian. {MN-2} The unknown Countries of Guine and Binn, this six and twenty years have been frequented with a few English Ships only to Trade, especially the River of Senega, by Captain Brimstead, Captain Brockit, Mr. Crump, and divers others. Also the great River of Gambia, by Captain Johnson, who is returned in thither again, in the Year 1626, with Mr. William Grent, and thirteen or fourteen others, to stay in the Country, to discover some way to those rich Mines of Gago or Tumbatu, from whence is supposed the Moors of Barbary have their Gold, and the certainty of those supposed Descriptions and Relations of those interiour parts, which daily the more they are sought into, the more they are corrected: For surely, those interiour Parts of Africa, are little known to either English, French, or Dutch, though they use much the Coast; therefore we will make a little bold with the Observations of the Portugals. {MN-1} The description of Fez. {MN-2} A brief description of the most unknown parts of Africa.
- 76. CHAP. XIX. The strangeDiscoveries and Observations of the Portugals in Africa. {MN} The Portugals on those Parts have the glory, who first coasting along this Western Shoar of Africa, to find passage to the East- Indies, within this hundred and fifty years, even from the Streights of Gibraltar, about the Cape of Bone Esperance to the Persian Gulf, and thence all along the African Coast to the Moluccas, have subjected many great Kingdoms, erected many Common-wealths, built many great and strong Cities; and where is it they have not been by Trade or Force? No not so much as Cape de Verd, and Sermleone; but most Bays or Rivers, where there is any Trade to be had, especially Gold, or conveniency for Refreshment, but they are scattered; living so amongst those Blacks, by time and cunning, they seem to be naturalized amongst them. As for the Isles of the Canaries, they have fair Towns, many Villages, and many thousands of People rich in Commodities. {MN}How the Portugals coasted to the East Indies. {MN} Ordoardo Lopez, a noble Portuguse, Anno Dom. 1578, imbarking himself for Congo to Trade, where he found such Entertainment, finding the King much oppressed with Enemies, he found means to bring in the Portugals to assist him, whereby he planted there Christian Religion, and spent most of his life to bring those Countries to the Crown of Portugal, which he describeth in this manner. {MN} Or Edward. {MN} The Kingdom of Congo is about 600 Miles Diameter any way, the chief City called St. Savadore, seated upon an exceeding high Mountain, 150 Miles from the Sea, very fertile, and Inhabited with more than 100000 Persons, where is an excellent Prospect over all the plain
- 77. Countries about it,well watered, lying (as it were) in the Center of this Kingdom, over all which the Portugals now command, though but an handful in comparison of Negroes. They have Flesh and Fruits very plentiful of divers sorts. {MN} The Kingdom of Congo. {MN} This Kingdom is divided into five Provinces, viz. Bamba, Sundi, Pango, Batta and Pembo; but Bamba is the Principal, and can afford 400000 Men of War. Elephants are bred over all those Provinces, and of wonderful greatness; though some report, they cannot kneel, nor lie down, they can do both, and have their Joynts as other Creatures for use: With their Fore-feet they will leap upon Trees to pull down the Boughs, and are of that strength, they will shake a great Cocao Tree for the Nuts, and pull down a good Tree with their Tusks, to get the Leaves to eat, as well as Sedge and long Grass, Cocao Nuts and Berries, &c. which with their Trunk they put in their Mouth, and chew it with their smaller Teeth; in most of those Provinces, are many rich Mines, but the Negroes opposed the Portugueses for working in them. {MN} Wild Elephants. {MN} The Kingdom of Angola is wonderful populous, and rich in Mines of Silver, Copper, and most other Metals; fruitfull in all manner of Food, and sundry sorts of Cattel, but Dogs Flesh they love better than any other Meat; they use few Clothes, and no Armour; Bows, Arrows, and Clubs are their Weapons. But the Portugueses are well armed against those Engines, and do buy yearly of those Blacks more than five thousand Slaves, and many are People exceeding well proportioned. {MN} The Kingdom of Angola. {MN-1} The Anchios are a most valiant Nation, but most strange to all about them. Their Arms are Bows; short and small, wrapped about with Serpents Skins, of divers Colours, but so smooth, you would think them all one with the Wood, and it makes them very strong; their Strings little twigs,
- 78. but exceeding toughand flexible; their Arrows short, which they shoot with an incredible quickness. They have short Axes of Brass and Copper for Swords; wonderful, loyal and faithful, and exceeding simple, yet so active, they skip amongst the Rocks like Goats. {MN-2} They trade with them of Nubea, and Congo, for Lamach, which is a small kind of Shell-fish, of an excellent azure, colour, Male and Female, but the Female they hold most pure; they value them at divers prices, because they are of divers sorts, and those they use for Coin, to buy and sell, as we do Gold and Silver; nor will they have any other Money in all those Countries, for which they give Elephants Teeth; and Slaves for Salt, Silk, Linen Cloth, Glass-beads, and such like Portugal Commodities. {MN-1} The Kingdom of Anchios. {MN-2} A strange Memr'y. {MN} They circumcise themselves, and mark their Faces with sundry slashes from their Infancy. They keep a shambles of Man's Flesh, as if it were Beef, or other Victuals; for when they cannot have a good Market for their Slaves; or their Enemies they take, they kill, and sell them in this manner; some are so resolute, in shewing how much they scorn death, they will offer themselves and Slaves, to this Butchery to their Prince and Friends; and though there be many Nations will eat their Enemies, in America and Asia, yet none but those are known to be so mad, as to eat their Slaves and Friends also. {MN} A shambles of Men's Flesh. Religions and Idols they have as many, as Nations and Humours; but the Devil hath the greatest part of their Devotions, whom all those Blacks do say, is white; for there are no Saints but Blacks. {MN} But besides those great Kingdoms of Congo, Angola, and Azichi, in those unfrequented Parts are the Kingdoms of Lango, Matania, Battua, Sofola, Mozambeche, Quivola, the Isle of St. Lawrence, Mombaza, Melinda, the Empires of Monomotapa, Monemugi, and Presbyter John, with whom they have a kind of Trade, and their Rites, Customs, Climates,
- 79. Temperatures, and Commoditiesby Relation. Also of great Lakes, that deserve the Names of Seas, and huge Mountains of divers sorts, as some scorched with heat, some covered with Snow; the Mountains of the Sun, also of the Moon, some of Chrystal, some of Iron, some of Silver, and Mountains of Gold, with the Original of Nilus; likewise sundry sorts of Cattel, Fishes, Fowls, strange Beasts, and monstrous Serpents; for Africa was always noted to be a fruitful Mother of such terrible Creatures; who meeting at their watering places, which are but Ponds in desart places, in regard of the heat of the Country, and their extremities of Nature, make strange Copulations, and so ingender those extraordinary Monsters. Of all these you may read in the History, of this Edward Lopez, translated into English by Abraham Hartwel, and dedicated to John Lord Arch-bishop of Canterbury, 1597. But because the Particulars are most concerning the conversion of those Pagans, by a good poor Priest, that first converted a Noble Man, to convert the King, and the rest of the Nobility; sent for so many Priests and Ornaments into Portugal, to Solemnize their Baptisms with such Magnificence, which was performed with such strange Curiosities, that those poor Negro's adored them as gods, till the Priests grew to that Wealth, a Bishop was sent to rule over them, which they would not endure, which endangered to spoil all before they could be reconciled. But not to trouble you too long with those Rarities of uncertainties; let us return again to Barbary, where the Wars being ended, and Befferres possessed of Morocco, and his Fathers Treasure, a new bruit arose amongst them, that Muly Sidan was raising an Army against him, who after took his Brother Befferres Prisoner; but by reason of the uncertainty, and the perfidious, treacherous, bloody murthers rather than War, amongst those perfidious, barbarous Moors, Smith returned with Merham, and the rest to Saffe, and so aboard his Ship, to try some other conclusions at Sea. {MN} Divers Nations yet unknown, and the wonders of Africa.
- 80. CHAP. XX. A braveSea Fight betwixt to Spanish Men of War, and Captain Merham, with Smith. Merham, a Captain of a Man of War then in the Road, invited Captain Smith, and two or three more of them aboard with him, where he spared not any thing he had to express his kindness, to bid them welcome, till it was too late to go on Shoar, so that necessity constrained them to stay aboard; a fairer Evening could not be, yet ere Midnight, such a Storm did arise, they were forced to let slip Cable, and Anchor, and put to Sea; spooning before the Wind, till they were driven to the Canaries; in the Calms they accommodated themselves, hoping this strange accident might yet produce some good event; not long it was before they took a small Bark coming from Tenerif, loaded with Wine; three or four more they chased, two they took, but found little in them, save a few Passengers, that told them of five Dutch Men of War, about the Isles, so that they stood for Boiadora, upon the African Shoar, betwixt which and Cape Noa, they descryed two Sail. Merham intending to know what they were, hailed them; very civilly they danced their Top-sails, and desired the Man of War to come aboard them, and take what he would, for they were but two poor distressed Biskainers. But Merham the old Fox, seeing himself in the Lions paws, sprung his louf, the other tacked after him, and came close up to his nether Quarter, gave his Broad-side, and so loufed up to Windward; the Vice-Admiral did the like, and at the next bout, the Admiral with a noise of Trumpets, and all his Ordnance, Murtherers, and Muskets, boarded him on his Broad-side, the other in like manner on his ley Quarter, that it was so dark, there was little light, but fire and smoak; long he stayed not, before he, fell off, leaving 4 or 5 of his Men sprawling over the Grating; after they had battered Merham about an hour, they boarded him again as before, and threw four Kedgars or
- 81. Grapnels in IronChains, then shearing off, they thought so to have torn down the Grating; but the Admiral's Yard was so intangled in their Shrouds, Merham had time to discharge two cross barr shot amongst them, and divers Bolts of Iron made for that purpose, against his Bow, that made such a Breach, he feared they both mould have sunk for Company; so that the Spaniard was as yare in slipping his chained Grapnels, as Merham was in cutting the Tackling, kept fast their Yards in his Shrouds; the Vice-Admiral presently cleared himself, but spared neither his Ordnance nor Muskets to keep Merham from getting away, till the Admiral had repaired his Leak; from twelve at noon, till six at night, they thus interchanged one volly for another; then the Vice-Admiral fell on Stern, staying for the Admiral that came up again to him, and all that night stood after Merham, that shaped his course for Mamora, but such small way they made, the next Morning they were not three Leagues off from Cape Noa. The two Spanish Men of War, for so they were, and well appointed, taking it in scorn as it seemed, with their Chase, Broad-side, and Stern, the one after the other, within Musket shot, plying their Ordnance; and after an hours Work, commanded Merham amain for the King of Spain upon fair Quarter; Merham drank to them, and so discharged his Quarter Pieces. Which Pride the Spaniard to revenge, boarded him again, and many of them were got to the top to unsling the Main-Sail, which the Master and some others from the Round-House, caused to their cost to come tumbling down; about the Round-House the Spaniards so pestred, that they were forced to the great Cablen and blew it up; the smoak and fire was so vehement, as they thought the Ship on fire; they in the Fore-Castle were no less assaulted, that they blew up a piece of the Grating, with a great many of Spaniards more; then they cleared themselves with all speed, and Merham with as much Expedition to quench the Fire with wet Cloaths and Water, which began to grow too fast. The Spaniard still playing upon him with all the shot they could; the open Places presently they covered with old Sails, and prepared themselves to fight to the last Man. The Angry Spaniard seeing the fire quenched, hung out a Flag of truce to have but a Parley; but that desperate Merham knew there was but one way with him, and would have none, but the report of his Ordnance, which he did know well how to use for his best Advantage. Thus they spent the next Afternoon, and half the Night, when the Spaniards either lost them or left them. Seven and twenty Men Merham had slain and sixteen wounded, and could find they had received 140 great shot. A wounded
- 82. Spaniard they keptalive confessed, they had lost 100 Men in the Admiral, which they did fear would sink ere she could recover a Port. Thus Re- accommodating their Sails, they failed for Sancta Cruse, Cape Goa, and Magadore, till they came again to Safee, and then he returned into England. CHAP. XXI. The continuation of the General History of Virginia; the Summer Isles, and New England; with their present Estate from 1624. to this present 1629. Concerning these Countries, I would be sorry to trouble you with repeating one thing twice, as with their Mapps, Commodities, People, Government and Religion yet known; the beginning of these Plantations, their Numbers and Names, with the Names of the Adventures, the Yearly proceedings of every Governour both here and there. As for the Misprisions, Neglect, Grievances, and the causes of all these Rumours, losses and crosses that have happened; I refer you to the General History, where you shall find all this at large; especially to those Pages where you may read my Letter of Advice to the Councel and Company, what of necessity must be done, or lose all and leave the Country, Pag. 70. what Commodities I sent home, Pag. 163. my Opinion and offer to the Company, to feed and defend the Colonies, Pag. 150. my Account to them here of my Actions there, Pag. 163. and seven Answers to his Majesty's Commissioners: Seven Questions what hath hindered Virginia, and the remedy, Pag. 165. How those Noble Gentlemen spent near two Years in perusing all Letters came from thence; and the differences betwixt many Factions, both here and there, with their Complaints; especially about the Sallery which should have been a new Office in London, for the well ordering the sale of Tobacco, that 2500 Pounds should Yearly have been raised out of it, to pay four or five Hundred Pounds Yearly to the Governour
- 83. of that Company,two or three Hundred to his Deputy; the rest into Stipends of forty or fifty Pounds Yearly for their Clerks and other Officers which were never there, Pag. 153. but not one Hundred Pounds for all them in Virginia, nor any thing for the most part of the Adventures in England, except the undertakers for the Lotteries, Setters out of Ships, Adventures of Commodities, also their Factors and many other Officers, there imployed only by friendship to raise their Fortunes out of the Labours of the true Industrious Planters by the Title of their Office, who under the colour of sincerity, did pillage and deceive all the rest most cunningly: For more than 150000 Pounds have been spent out of the Common Stock, besides many thousands have been there Consumed, and near 7000 People that there died, only for want of good Order and Government, otherwise long ere this there would have been more than 20000 People, where after twenty Years spent only in Complement and trying new Conclusions, was remaining scarce 1500, with some few Cattel. Then the Company dissolved, but no Account of any thing; so that his Majesty appointed Commissioners to oversee, and give Order for their Proceedings. Being thus in a manner left to themselves, since then within these four Years, you shall see how wonderfully they have increased beyond expectation; but so exactly as I desired, I cannot relate unto you: For altho' I have tired my self in seeking and discoursing with those returned thence, more than would a Voyage to Virginia; few can tell me any thing, but of that Place or Places they have Inhabited, and he is a great Traveller that hath gone up and down the River of James Town, been at Pamaunk, Smith's Isles, or Accomack; wherein for the most part, they keep one tune of their now particular abundance, and their former wants having been there, some sixteen Years, some twelve, some six, some near twenty, &c. But of their general Estate, or any thing of worth, the most of them doth know very little to any purpose. {MN} Now the most I could understand in general, was from the Relation of Mr. Nathaniel Cawsey, that lived there with me, and returned Anno Dom. 1627. and some others affirm; Sir George Yerely was Governour, Captain Francis West, Doctor John Pott, Captain Roger Smith, Captain Matthews, Captain Tucker, Mr. Clabourn, and Mr. Farrer, of the Council: their Habitations many. The Governour, with two or three of the
- 84. Council, are formost part at James Town, the rest repair thither as there is occasion; but every three Months they have a general Meeting, to consider of their Publick Affairs. {MN} Their estate 1627. {MN} Their Numbers then were about 1500, some say rather 2000, divided into seventeen or eighteen several Plantations; the greatest part thereof towards the falls, are so inclosed with Pallisadoes they regard not the Salvages. and amongst those Plantations above James Town, they have now found means to take plenty of Fish, as well with Lines as Nets, and where the Waters are the largest, having Means they need not want. {MN} Their numbers. {MN} Upon this River they seldom see any Salvages, but in the Woods, many times their Fires: yet some few there are, that upon their opportunity, have slain some few straglers, which have been revenged with the Death of so many of themselves; but no other Attempt hath been made upon them this two or three Years. {MN} Their condition with the Salvages. {MN} Their Cattel, Namely, Oxen, Kine, Bulls, they imagine to be about 2000; Goats great store and great increase; the wild Hoggs, which were infinite, are destroyed and eaten by the Salvages: but no Family is so poor that hath not tame Swine sufficient; and for Poultry, he is a very bad Husband, breedeth not an Hundred in a Year, and the Richer sort doth daily feed on them. {MN} Their increase of Cattel and Poultry. {MN} For Bread they have plenty, and so good, that those that make it well, better cannot be: Divers have much English Corn, especially Mr. Abraham Perce, which prepared this Year to sow two Hundred Acres of
- 85. English Wheat, andas much with Barly, feeding daily about the number of sixty Persons at his own Charges. {MN} Plenty of Corn. {MN} For Drink, Some Malt the Indian Corn, others Barly, of which they make good Ale, both strong and small, and such plenty thereof, few of the Upper Planters drink any Water: but the better sort are well furnished with Sack, Aquavitæ, and good English Beer. {MN} Their Drink. {MN} The Servants commonly feed upon Milk Homili, which is bruised Indian Corn pounded, and boiled thick, and Milk for the sawce; but boiled with Milk, the best of all will feed oft on it, and leave their Flesh; with Milk, Butter and Cheese; with Fish, Bulls-flesh, for they seldom kill any other, &c. And every one is so applied to his labour about Tobacco and Corn, which doth yield them such Profit, they never regard any food from the Salvages, nor have they any Trade or Conference with them, but upon meer Accidents and Defiances: And now the Merchants have left it, there having gone so many voluntary Ships within these two Years, as have furnished them with Apparel, Sack, Aquavitæ, and all necessaries, much better than any before. {MN} Their Servants diet. {MN} For Arms, There is scarce any Man but he is furnished with a Piece, a Jack, a Coat of Male, a Sword or Rapier; and every Holy-day, every Plantation doth Exercise their Men in Arms, by which means Hunting and Fowling, the most part of them are most Excellent Marks-men. {MN} Their Arms and Exercise. {MN} For Discoveries they have made none, nor any other Commodity than Tobacco do they apply themselves unto, tho' never any
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