Ira M. Millstein

Corporate Governance … A Decade Later

VTR Date: April 20, 2006

Ira M. Millstein discusses corporations, corruption, and regulation.


GUEST: Ira M. Millstein
Title: Corporate Governance … a decade later
VTR: 04/20/2006

I’m Richard Heffner, your host on THE OPEN MIND.

And only once over the series half century have I picked up The New York Times, seen a distinguished Columbia classmate’s picture staring at me from a major story in which he played a major role. Called and had him here on a related program shortly there afterwards.

Well, that’s what happened just a decade ago. The Times story then was about a Blue Ribbon Commissions Report calling for the important recasting of corporate boards in America, with my guest, today, as then, Commission Chairman Ira M. Millstein, Senior partner at the New York law firm of Weil, Gotshal. And now Senior Associate Dean for Corporate Governance at the Yale School of Management.

Of course a few years earlier The Wall Street Journal had pictured, profiled, and I would say lionized my guest, characterizing him as the “eminence grise” behind a major board of directors revolt at the then, and once again, now, ailing General Motors Corporation. Of course, an angry GM Executive had called him a “snake in the grass”, but the Journal enjoyed Ira Millstein’s “sweet and spectacular triumph” in his quest to reform the American company … the way American companies are run. Too frequently, unfortunately, with rubber stamp, inside dominated boards of directors that, in his words, wait too long to respond to on-going political, social and economic change.

Yet, sometimes the more things change, the more they stay the same. And now in what one might have hoped would be a brave new century, I must ask my guest today just how things are different now in corporate governance. After all, as I continue to read his many truly brilliant speeches and articles and book chapters, I find that crusader Millstein obviously still has his work very much cut out for him; still must fight for the things he was fighting for when he was on The Open Mind a decade ago. Don’t you feel a bit tired doing battle, Ira?

MILLSTEIN: No. It’s, it’s invigorating.

HEFFNER: Well, why are things so much the same?

MILLSTEIN: Well, they’re not so much the same. They’re different. The world, the world has changed. I think it may not be visible to the naked eye. But it has changed. There will always be corruption and there’ll always be some fraud and they’ll always been CEO’s who don’t do what they’re supposed to do. No issue. And we’ll continue reading about them because the world isn’t perfect and people aren’t perfect. I don’t expect it to be absolutely perfect forever.

But if you look at board of directors today as compared to what they were when you and I first talked … and heaven knows what they were before that … it’s day and night. The board of directors today is a much different institution than it was 10 years ago and certainly than it was 25 years ago. They are no longer hand picked by the CEO in most cases; they are mostly independent. And by independent, I mean by New York Stock Exchange definitions of independence. They are forming their appropriate committees. There are audit committees with duties. There are governance committees with obligations. There are all sorts of activities going on in the boardroom that didn’t go before.

But, you know, the question is, did those changes bring about inherent change in the way boards operate, or are they box ticking? This is a question which we won’t know for a bit. They are all looking as though they are doing the right thing because they have to. Sarbanes Oxley has requirements, stock exchange, NASDAQ has requirements … people who are watching them have requirements. So they’re all doing what looks as though it’s the right thing for structuring the board. That they are doing it seems clear. Now does it make a difference?

That depends on the board itself. And you never know until you’re in the boardroom. I think in most boardrooms in which I’ve been called, they’re doing something. They’re doing something very different. They’re paying attention; they’re learning about the business, they’re watching the CEO. They’re being a good deal more careful than they were before about letting things go far, too long, before they make a change. That’s the good piece. The good piece is that I do think they are paying more attention than they did in the past. The bad piece is there may be still a little too much love going on between the CEO and the board; too much affection, a little less …

HEFFNER: You mean money?

MILLSTEIN: … I mean money. Exactly. I think that the one place I find boards to be totally and completely deficient is in compensation. I, I cannot understand why boards have not reigned in excessive competition, across the board. Every day you read stories in the Times … and they’ve been really very good at following this and bringing it to the public’s attention. Everyday you read stories about compensation about hundreds of millions of dollars, and yes, these are good … good executives, doing great jobs. But that’s what they get paid for. They were hired to do a great job, that’s why they’re the CEO. They were not hired to make hundreds of millions of dollars.

Moreover, the disturbing piece is the gap between the top and factory floor. I don’t remember exactly what the numbers are, but I think it’s going from someplace around a hundred times, or maybe fifty times to maybe two hundred times or four hundred times. And for me, as just a plain, ordinary citizen, with a little bit of morality, I just don’t think anybody is worth 400 or 500 times the factory floor. It just doesn’t seem right to me.

So I think that the boards have got to begin to tighten their belts, screw up their courage and begin to do the right thing. Nothing short of that is going to bring this under control. There’s no way to legislate this. There’s no way to issue a mandate that you must not pay more than $2.80 … it’s not possible.

Boards have to really buckle down, pay for performance, and no more. And when it gets back out of hand, cut back. That’s my biggest complaint about boards today and if I were on the inside, or on the outside looking in … I would, I would also be cynical about whether boards are doing their job.

However, I, I …the point I’m trying to make with you, Richard, is that I think they are doing their jobs except here. This is where I find them really deficient. And I can’t explain it other than the fact that they don’t do it.

I don’t know why they don’t do it. It’s … that would take some kind of a psychologist to help me understand why, when somebody goes on the board, they feel reluctant to bring it under control. I know the excuses, by the way.

HEFFNER: What are the excuses?

MILLSTEIN: The excuses are that, “Well, he’s a great guy and we can’t get him unless we pay that much.” And “He’s looking at his peer group and if we don’t pay him as much as his peer group gets, then we will lose him and he’ll go some place else.”

HEFFNER: And how valid is that?

MILLSTEIN: It’s not valid. Because I don’t think they’ve tested it out. I don’t believe that a potential CEO won’t go to work for 10 million dollars instead of 40 million dollars. I just don’t believe that. I don’t believe that every CEO needs options which will carry him into the 100 million dollar range. I think the younger CEOs coming along would like the job.

HEFFNER: Yeah, okay, but with, with all that you’ve said, about how things have changed, as I read The Times, many, many, many, many stories …


HEFFNER: I’m particularly impressed with the interlocking directorate as …

MILLSTEIN: No, I think … that may not … only in this sense, it isn’t so much that they’re all serving on each other’s boards. That’s, that’s going too.

HEFFNER: It’s not gone, Ira.

MILLSTEIN: Nothing will ever go, Richard. You and I have been around long enough to know that we’re not going to wipe the slate totally clean ever, ever, ever. There will always be hang overs from the past. I don’t believe that serving on each other’s boards is, is any more the custom and I don’t think that degree of back scratching goes on. I think The Times is great at picking out the ones which exist and they always are in the bad cases. But more often than not, the definition of independence, the definition of, of people who ought to be on the board and a critical look by the people who watch sees to it that that sort of thing is less and less and less. I really don’t believe that’s the problem.

I think the problem is, is … of compensation lies in the consultants who are called in to give advice and who are they called in by, and up to the recent past they were called in by the managers and paid by the mangers and they were not exactly going to give advice which disturbed the people who were writing the checks. And so what did they do, they would look around … pick a peer group … and say, well, now you want to pay him in connection with your peer group, and, of course, the peer group might be a peer group that you or I might not have selected, but the peer group has the way of being the basis on which the payment is made. So … if you pick the right peer group, it’s not a problem, and that’s generally what’s happened.

So you find escalating because the next CEO comes along, picks the same peer group, which by that time has elevated a notch, so the peer group keeps going up and up and nobody ever sees a peer group going down and down. I think boards have to say to themselves, “Oh, that’s fine, we’ re very interested in peer groups and paying and compensation. But we should be more interested in performance. And we should be saying, ‘We’re not going to pay unless there’s performance.’”

I don’t remember which company it was, it was just a couple of days ago, finally amended its compensation plan, and said, “here’s the performance goal, and if you don’t make it, you’re getting nothing. Forget about the peer group. Here’s what we expect you to do. We’re setting a guideline and this is what you’re expected to do and if you don’t do it, you don’t get anything, no extra compensation. No bonus.”

Now, as more and more companies begin to do that, you will find compensation beginning to get under control, I applaud The New York Times, I applaud (laughter) The Wall Street Journal … we just have to keep a spotlight on this and embarrassing everybody until they get a little more common sense about what happens here.

Another possible way of getting this under control are the institutional investors. They have a voice. And they are very important today and I suppose we can talk about that in a bit, but if they keep the pressure on in compensation, they, too, can bring about change by withholding votes from directors on compensation committees who have permitted compensation to get out of line. I think that, that, too, can make a change, if they’ll do it.

HEFFNER: How, how sanguine are you about that? The great pension plans, for instance, the outside investors.

MILLSTEIN: I … ah … not terribly. As, as you may have known from some of the things I’ve written, I’m beginning to query whether our system is really working the way it should.

HEFFNER: You mean the corporate system?


HEFFNER: Or the system of corporations?

MILLSTEIN: The system …

HEFFNER: Limited liability.

MILLSTEIN: No, no. That’s … that has to be. The system …

HEFFNER: We should talk about that.


HEFFNER: But go ahead.

MILLSTEIN: … but the system of corporations is what has made the world great. I mean I think limited liability and, and perpetual life … I believe in the corporation, I think it’s the greatest mechanism that was ever invented to create wealth and jobs and so on.

But that’s not the issue for the moment. What, what … the issue that I am concerned about is the paradigm itself. In other words … managers, boards and shareholders. I had always believed that the paradigm worked with checks and balances and that the manager had to be accountable to the board and the board had to be accountable to the shareholder. And if the board wasn’t accountable to the shareholder, shareholder got rid of the board. Right? That’s the way the system is supposed to work.

Doesn’t work really well too much today. That was a model that was fine when there were a limited number of shareholders who could meet at an annual meeting and throw out the board if that’s what they wanted to do.

But today with the huge, huge number of shareholders, the bulk of which are held by mutual funds, or pension funds or corporate pension funds or banks or insurance companies, they’re held by institutions. Some of those institutions are neutered, they don’t act.

Corporate pension funds really take forward positions for a whole variety of reasons. Up till recently mutuals didn’t do a whole lot in terms of activity. Banks don’t do a whole lot. And the reason is that there’s a certain amount of love and affection going on as amongst them …

HEFFNER: We’re back to that again.

MILLSTEIN: And we’re back to that again. And there’s no issue about the fact that they have sort of neutralized themselves. Conflict isn’t the right word, just by virtue of the fact that they don’t want to offend their customers. That’s a nicer way to put it.

And so we’ve got to break that somehow or other, well, we can’t solve that one this afternoon. John Bogle writes about this a great deal. In The Soul of Capitalism, he points out the great fault of the mutual funds … their not paying attention to what’s good for their beneficiaries.

Well, put that to one side. There are a group of, of pension funds, public pension funds which are active. So when we’re talking pension funds and active shareholders today, we’re talking about unions, TIAA/CREF, Calpers, Madison, the public pension funds, basically. Some mutuals. No corporates. And that’s about … and no banks. That’s what we’re talking about.

Now, they are active, but not very. And the problem for me is how do we motivate them to become intelligently active in voting their shares, in voting proxies. Now this is such a long story … it’s, it’s hard to do it all in two minutes, but the fact is that the voting system in the United States is not great.

In England shareholders can actually throw out directors and recommend directors. In the United States, there is no such mechanism. We have a plurality voting system where the board puts up the directors and the most the shareholders can do is withhold votes. They can’t say “no”, they can withhold votes.

But that doesn’t mean anything because under the plurality system, if you get one vote, you win. So if there are a hundred shareholders, and 99 withhold their votes because they’re angry, and one votes “yes”, that slate wins. But that’s not a good system. And it has to change.

It, it probably will. There are things happening now where people are amending their by-laws, to require a majority vote and so on and that’s beginning, that’s beginning to happen … it’s not perfect, but it’s better than it was before.

Then the question is will these shareholders, these new institutions, will they really vote intelligently, or are they going to follow the leader and are they just going to take advice from somebody as to what to do and there are now intermediaries who recommend how one should vote, depend on a variety of circumstances and many, many of these institutions follow that leader.

Well that leader is not a public utility, that leader is not a for-profit organization of its own, and one wonders how did this self-appointed leader of voting get there? And that’s another long story. I don’t see that system working very well.

HEFFNER: You know, what puzzles me …

MILLSTEIN: Isn’t this terribly complicated?

HEFFNER: It …you know what puzzles me most, Ira, as I’ve read you over the years, and particularly recently, and I note that you come back to this notion of “doing the right thing” …


HEFFNER: How does “doing the right thing” … how do you reconcile your, your reference to Hebrew prophet …

MILLSTEIN: (Laughter) Micah?

HEFFNER: Yes. And “doing the right thing”. Good men doing good things.


HEFFNER: How do you reconcile that with the impersonal rule that you maximize your profits?

MILLSTEIN: Well, I, I think it’s a … it’s hard to do. (Laughter) It’s very hard to do. What one would try to do would be to take some of the things that drive people to maximize profits out of the system.

HEFFNER: What do you mean?

MILLSTEIN: Well, obviously at someone else’s expense … for example …

HEFFNER: Human nature?

MILLSTEIN: No, we’re going to have people who want to maximize their own well-being, that’s what it’s all about. So what you do under those circumstances is try, try to circumvent, circumscribe them with rules and regulations; it sort of prevents them from doing too much of what is in their own self-interests.

HEFFNER: I gather you don’t mean government rules and regulations.

MILLSTEIN: I certainly do.

HEFFNER: You do?

MILLSTEIN: Oh, sure. I mean there’s certain, I mean certainly. I mean price fixing for example. Everybody thinks price fixing is a good thing to do, if you want to maximize your own well being, self interest.

HEFFNER: But it’s illegal.

MILLSTEIN: But everybody … but the government says “no”. So there are rules. And, and fraud. I mean fraudulent misleading shareholders is a good thing for you because you get them to buy the stock on misrepresentation. But 33 and 34 acts say, “No, you can’t do that.” So we have lots of rules which circumvent maximizing your own personal value at somebody else’s expense. There are government rules. And they’re quite right. But that’s only a box. And within that box there’s a lot of discretion for a corporate executive or a pension fund, or anybody and its within that box that I think that doing the right thing makes a difference.

An example. In the boardroom you are confronted with whether or not to run a plant which maybe on the borderline of polluting the community in which it lives. Right. There’s no law … yet …that says you’re doing the wrong thing by dumping a certain, almost toxic substance into a stream next to your plant. But you know that that’s really not healthy for the people who live there, even though it may not be strictly prohibited yet.

Now if you’re sitting in the boardroom and you’re confronted with that activity. I think a decent human being doing the right thing says, “No, I’m not going to do that.” And I believe that happens. And it happens more frequently. And it would be my … I don’t know … “mission” is the wrong word, but it would be my hope that we would be able to convince people that when they’re confronted with these borderline issues, the better practice is to do the right thing and that in the long run, the company will benefit and you’ll feel better about the whole thing.

So, at Yale for example, one of the missions that we have at the New Center for Governance and Performance is to find out what would motivate people to do the right thing. What would cause people to think about corporate actions before they take them. I, I don’t give up on that. I really don’t. I think …

HEFFNER: You haven’t discovered the answer to that question yet.

MILLSTEIN: Well, I think the answer to the question is to put a spotlight on it and tell people what their responsibilities are. I think making people aware of the fact that they have huge discretion and what they can do may well impact the society in which they live.

HEFFNER: What about liability?

MILLSTEIN: Liability is healthy, but, you know, this is … these are not the kinds of things for which I, I really think liability counts. These are the kinds of things which are borderline.


MILLSTEIN: … where you’re not going to get sued for doing it, but where you know you might not be doing the right thing.

HEFFNER: Are directors liable?

MILLSTEIN: Well, they are, yes, but …

HEFFNER: What’s the limit of their liability?

MILLSTEIN: I don’t think it’s serious. I, I really think that if you are a diligent director and you do your homework and you act in a fair and decent manner nobody’s ever going to put you in jail. I just don’t believe … and I think my, my … the Chief Justice of the Delaware Court, Norman Veasey and I have written on the subject and we feel quite comfortable that directors who behave well, do their homework are diligent, are honest and loyal and are seen to be such by a judge are never going to be held liable for anything.

HEFFNER: And, and … how do you … where do you put in this Hebrew notion of doing the right thing?

MILLSTEIN: Where do I put it …

HEFFNER: I’m fascinated by that business.

MILLSTEIN: Well, because I, I really do believe … I mean you and I, for example, we’re not such great people, but try to do the right thing most of time. I’ve been watching your programs and you encourage people to think that way. And when I go into boardrooms, I try to encourage people to think that way. And one of the reasons why I’ve devoted myself to the Center is that I think a Center which is devoted to the proposition that people just might do the right thing if they knew that it was important, it might work. I just think that one begins to preach in the boardroom the same way you would be preaching in a religious institution. I know that may sound silly, but that’s …

HEFFNER: No. I, I … let’s go back to my first statements, which you then contradicted. “You were saying, “hey, things have changed.”


HEFFNER: What do you anticipate for the future. And no, rah, rah …


HEFFNER: … speeches. Realistically. Come on, we’re too old to …

MILLSTEIN: (Laughter) What do I expect? I expect that there will be resistance to everything I’ve said. Because I think there will always be resistance to the kind of changes that might take excessive money out of people’s pockets. I just think that’s the way it is.

However, I do think that the younger generation of managers is different than the older generation of managers. I think the younger generation of managers are much more aware of the social responsibilities than the younger ones were. They’ve been brought up a bit differently. They’ve been brought up in an era where the manager was not the king of the world. You and I grew up when the CEO of our major institutions were icons. They were worshipped. They were known to be the best in the world and they were the height of society. That is not true anymore now.

HEFFNER: Ira, we’ve got a minute and a half left. But I, I need to say that I’ve been doing this for fifty years, sitting at this table and when that sort of thing was said fifty years ago, I guess I sort of nodded my head and said, “Boy, that, that must be true.” But now that younger generation is this older generation.


HEFFNER: And we’re saying the same things about them.

MILLSTEIN: No, no, no. Because I don’t begin. I don’t think things began to really change in corporate America until the eighties.


MILLSTEIN: Until the late eighties. I think life was pretty much the same from post World War until the late eighties. It was a period of, of management domination, where we all worshipped the managers who were making America great. And then suddenly found they weren’t making America great at all. That they were looking in the other direction and were much too self satisfied. And I think the dramatic changes that occurred in the eighties and nineties brought along a new generation. They’re not all wonderful, but by and large the younger men and women, I think, are much more likely to be thinking about social welfare and to be thinking about what might be good for the world, and not exclusively about what the bottom line might be. I, I am optimistic, I really am. I meet them. I see them. Is it changing fast enough for you and me? No. But, is it changing? Yeah, I think so. That’s not rah, rah.

HEFFNER: That’s as fair and optimistic note to end on that I can think of.

MILLSTEIN: (Laughter)

HEFFNER: Ira Millstein, thank you so much for joining me again.

MILLSTEIN: It’s a pleasure.

HEFFNER: And thanks, too, to you in the audience. I hope you join us again next time, and for transcripts of today’s program, please send $4.00 in check or money order to The Open Mind, P. O. Box 7977, FDR Station, New York, New York 10150.

Meanwhile, as an old friend used to say, “Good night and good luck.”

N.B. Every effort has been made to ensure the accuracy of this transcript. It may not, however, be a verbatim copy of the program.