Ira M. Millstein
VTR Date: December 4, 1996
Guest: Millstein, Ira M.
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THE OPEN MIND
Guest: Ira M. Millstein, Esq.
Title: “Director Professionalism”
I’m Richard Heffner, your host on The Open Mind.
In a front-page story on April 13, 1992, The Wall Street Journal quite enthusiastically and approvingly characterized my guest today as the “eminence grise” behind a major board of directors revolt at the then-ailing General Motors Corporation. Of course, one angry GM executive called my guest “the snake in the grass” on this. But The Wall Street Journal called all of this “a sweet and spectacular triumph in his quest to reform the way American companies are run,” too frequently with rubber-stamp, inside-dominated boards of directors that, in his words, “Wait too long to respond to ongoing political, social, and economic change.”
Indeed, about New York corporate lawyer Ira M. Millstein, The Journal wrote, “Few philosophers in the arena of corporate governance ever get a chance to translate their theories into practice. He has just done it with the largest industrial corporation in the world, which means his theories are reverberating in board-rooms everywhere. Finally, his ideas have come in from the cold.”
But even as its role in America looms larger and larger, corporate life doesn’t embrace change all that readily. And in November 1996, a New York Times story headlined, “Report calls for recasting corporate boards” told of further efforts by my guest to prescribe, though not to proscribe, what he calls “the roles and responsibilities of directors and the function of the American corporate board as it evolves towards increased independence and activism.”
Well, Mr. Millstein, who is senior partner at the New York law firm of Weil, Gotshal & Manges, was chairman of the Blue-Ribbon Commission that developed this report on “Director Professionalism,” and I would ask him first today just to tell us what this noble-sounding phrase means. Ira, what does it mean?
MILLSTEIN: “Director Professionalism?”
MILLSTEIN: Well, we were trying to describe a culture in the boardroom. Lots of people have described the dos and don’ts of boards members and what they should do and what they shouldn’t do. And our effort was to do something more than that; to try to describe what we thought board members ought to be, how they ought to be act. Not day-to-day dos and don’ts, but this culture of professionalism, the culture of being responsible, the culture of being independent, a culture of being aware that they have responsibilities to the shareholders, and, in general, a culture which provides for something separate than management, a recognition that they have a job separate than management. We use the term “professionalism” because we meant to describe people who were aware that they had a separate job to do, separate from the CEO, separate from the managers, responsible to the shareholders. And our feeling was that if the directors got a sense of who they were, namely that they really had a job, and a different job than the managers, we could be describing something that they could maybe take pride in being. And we felt that to call them professionals was a really good idea because it seemed to us that it described the attitude we wanted them to have: a professional attitude towards what they had to do. They weren’t hand-picked cronies, they weren’t rubber stamps; they were people, men and women, on their own, with a job, being independent, representing the shareholders and monitoring management. It’s this culture we were trying to create.
HEFFNER: Yes, but you use the phrase – “different job from the managers.”
HEFFNER: And that I don’t understand. How could there be a different job up at the top of a corporation?
MILLSTEIN: Well, managers manage day to day. They run the corporation. Nobody will ever take that away from them. We have in this country a wonderful group of managers. We are very good at developing managers. The rest of the world emulates what we do in developing managers. The best schools: Harvard and Yale and Stanford. We train and develop good managers up from the ranks and out of the best schools. And that’s the ultimate goal of good corporate governance: to produce the best managers that we can.
Directors don’t manage. They don’t make cars, and they don’t make trucks, and they don’t make turbine generators, and they don’t make pacemakers.
HEFFNER: What do they make?
MILLSTEIN: They make good management. That’s their role in life. The board of directors’ product is good management. They are there to hire the best managers that they can get at any specific time to run the company, monitor those managers, and then replace them when it comes time to replace them. And the job of the board is not to wait too long. The job of the board is to be monitoring steadily the management of the corporation to be sure that the board is there before the company falls off a cliff. You’re not supposed to wait until the company goes into Chapter 11 before you replace managers; you’re supposed to be monitoring it constantly to be sure that management is doing its job. So it’s a different job: it’s monitoring management.
HEFFNER: But, Ira, I must say that what I see here, in a sense, is you’re talking about a secondary function.
HEFFNER: Secondary function to the purpose of both groups, of both management and of corporate board of directors.
MILLSTEIN: Why secondary?
HEFFNER: Well, what’s the first principle? What you call the lode-stone.
MILLSTEIN: The polestar is return to the shareholder. That’s the pole-star. Well, but you can’t have a return to the shareholder unless you have a good manager and a board that’s keeping an eye on things.
HEFFNER: Well, it seemed to me that here in both the report, and particularly an article you’ve written about the responsible board, that you indicate that the pole-star, increasing the dividends, increasing …
MILLSTEIN: Not increasing … No, no, no, no, no, no, no …
HEFFNER: Let me finish. Increasing the dividends and/or the worth of the corporation for the shareholder.
MILLSTEIN: But not increasing dividends. I think that’s a very short-term view. It’s increasing the value of the corporation.
HEFFNER: Okay. All right. Now, that’s the pole-star.
HEFFNER: That’s the ultimate Thule, right?
MILLSTEIN: That’s the goal. Yes.
HEFFNER: Okay. You also indicate that there are certain “extrinsics,” as you call them, that have to do with the board of directors’ purposes different from the purposes of management. Am I misreading this?
MILLSTEIN: Yeah, a little bit. Just a little bit.
HEFFNER: Tell me how.
MILLSTEIN: Everybody has to be aware of the extrinsics. My view has been that the board is a little better place than management to worry about these. And what do we mean by “extrinsics?” First of all, the primary goal of the company is, as you say, to produce value to the shareholders over the long term. That’s the principal goal of the company. And that’s everybody’s job. That’s management’s job and the board’s job. The board’s job is to pick the managers that will do that the best, motivate them, incentivize them, and make sure that the job is done. First step. No corporation is going to survive which doesn’t make a living. There’s no question about it. You’ve got to be profitable or you don’t exist. So the first job of everybody connected with the company is profit. Whether we like it or not, that’s the way the world works. You’re not going to attract capital unless you’re profitable. You’re not going to attract the right people unless you’re profitable. So your first task is to produce a return sufficient to warrant the attraction of capital to keep your shareholders happy and so on. That’s a given.
Having said that, however, you also recognize that the corporation lives in a real world, and lives with employees and suppliers and communities, and a society. Now, all of us have certain expectations about our corporations. You have to remember, most of what we do every day is governed either by the government or by some corporation. We work for corporations, we buy from corporations, we sell to corporations. We live with them every day. They’re the centerpiece of the economy.
Now, these corporations, in my view – and this is, incidentally, my view; I’m not sure all of corporate America would agree with this – these corporations have responsibilities, in my view, which transcend just making money. Because to make money you have to have employees who are motivated; you have to have suppliers who are also motivated and willing to work with you, especially today with just-in-time kind of production and so on; and you have to have a community that’s happy with you in their midst. You must have all of those things. So that in order to make a living you have to be aware of all of the other circumstances in all the other parts of the world in which you live: employees, customers, suppliers, and so on.
Now, what does that mean? Do you sacrifice to make employees happier? A little bit. Do you sacrifice for the community in which you live? A little bit. Even the American Law Institute gives corporations their permission to sacrifice a little bit of profit to make sure that the community is well-served, that your employees are well-served, and so on.
But I go beyond that. That’s traditional thinking. That’s in the books. Everybody says you can do that. Beyond that, however, as a pluralistic society and one that is not madly in love with the government (we’re basically anti-state, most of us, the populous distrust the government, as witnessed the last election and all the discussion that went on then), we’re not terribly excited about asking the government to do everything, so we turn to our corporations and we expect them to do a lot. For example, gender, ethnicity. We expect corporations to treat women fairly, to break the glass ceiling, to make room for them. We expect corporations to treat minorities appropriately, make room for them, bring them along, certainly not denigrate them, as witness some of the current events. Certainly we expect our corporations to behave in a way which society finds responsible.
And those are the “extrinsics” I refer to. Not so much the employees and customers and suppliers; that’s traditional thinking. I’m talking about the kinds of things that society expects of corporations. And they do expect it. Witness the recent headlines when a company is found to have done something which is offensive to most of the public, they hear about it. I’ll give you a wonderful example: the layoffs, which, when we were being mean and downsizing, we were laying off 40,000 people. That was found not to be acceptable. Really not. It wasn’t found to be acceptable to American society that people all of a sudden were thrown out of work with no thought about where they were going and so on. A lot of the big companies caught the feeling in the public and didn’t do it again. They more or less tried to find ways to make life bearable for the people who were being laid off. Do it in phases. Find other ways to do it than just cutting. Sure, cutting was the right thing to do, presumably, economically, but it wasn’t found to be acceptable.
HEFFNER: Yes, but, you know, as I read you, I have the feeling you’re saying management won’t understand and deal with that. That’s why you see the board of directors as the protector of the extrinsics.
MILLSTEIN: I see the board of directors more able to step back from the day-to-day than the managers are. We expect the managers to be hard-driving and doing the necessary to create the most profitable and efficient operation they can. I see the board of directors as just a step removed. They’re not only monitoring the managers, but they are managing society’s expectations of the managers. And they can call attention to the managers when they feel that the managers are going a little too far or not paying attention, or ought to be considering some of the extrinsics. I see the board as a force for bringing the extrinsics into the corporation. Most corporations today have public-policy committees. And these public-policy committees are very much dedicated to sensing what’s happening out there and bringing it into the corporation. It’s the role of the board.
Managers, I’m not knocking managers; they worry about it too. But they’re so concerned with the immediate that they don’t have time to step back. I see the board having an opportunity to do that.
HEFFNER: You know, it’s interesting, you say that the board is authorized to, it’s possible for the board to consider, have …
HEFFNER: … a further view of the future. But you also said not everyone will agree with you.
MILLSTEIN: No, that’s true.
HEFFNER: And this Blue-Ribbon Commission, what did we have here? A chairman who is pushing …
MILLSTEIN: Yes. (Laughter)
HEFFNER: … his sense of social responsibility of the corporation?
MILLSTEIN: Well, in the last report, not that much, because in the last report we were talking about really what boards should do, who they should be, what processes they should have, and so on. We were collecting a lot of experience and putting it together. But I think there was a sense in the membership that the board was there to do this. And, by the way, all we did was suggest to boards that they think about it. We didn’t say, “You must do this,” or, “You must do that,” or, “You have to be aware of these extrinsics and take care of it.” What we said is, “Think about it, and make your own rules.” And it seems to me that if boards were to do that we would have much more successful corporations. I just, all I’m seeking is for them to think about it. I’d like boards to think about the extrinsics, and think about how they impact on the company, and think about whether or not they want to do anything about it. That would satisfy me.
HEFFNER: Don’t they rebel against the chairman here – I mean of the Blue-Ribbon Committee – and say, “This is a do-gooder, for crying out loud! What is he doing here?”
MILLSTEIN: Well, you see, I don’t think I am a … Well, I’d like to think of myself as a do-gooder, but not in corporate America. I realize that I said before the financial gain is key. You can’t do any of the good things unless you’re making a profit. So there’s a limit.
HEFFNER: Yes, but, Ira, you said you have to make a profit. That is the basis. Isn’t the question of how much profit and must it be larger and larger each year?
MILLSTEIN: Yes. That is exactly right, Richard. I buy that. And if you and I were the kings we might have things done differently. (Laughter) Here we are into the question of judgment, which is why I’m mad about the board performing, because it is a question of judgment.
For example, let’s take the prime example: layoffs. Right. You know you’re going to have to cut 40,000 people. You have to, if the company is going to survive. Well, during the Depression, different people found different ways of doing it. It was, I believe it was Sears Roebuck, for example, that found a way of putting on everybody half-time so that no one was laid off; everybody worked a little bit. A very sensible way of doing things. I’m surprised somebody didn’t come up with it this time around. But there are ways of laying off, of seeing to it that HealthCare continues long enough, of seeing to it that benefits continue long enough, of seeing to it that people are trained to go on to the next job. You can do all of those things. And frankly, is that do-good? I don’t think that’s just do-good. You have the moral of everyone that’s left. How do people feel when 40,000 people are cut? Where is their loyalty to the corporation?
HEFFNER: Wait a minute, wait a minute, wait a minute. Why do you say that you don’t feel that it’s “just do-good?” Either that ultimate objective is maximization of profit primary objective, or that it is make enough to keep the company going because that’s what you have to do to stay in business, and then serve a social purpose. And the thing I wanted to ask you is: To the degree that you are a do-gooder (and you don’t like that phrase, and I’ll get you in trouble with it) …
MILLSTEIN: (Laughter) I know you will.
HEFFNER: … the qualifications that you have listed for membership on the board, how do those qualifications, or the qualities of the board members, how do they contribute to your sense of “Let’s forget do-good,” your sense of achieving a larger goal?
MILLSTEIN: Let me first comment a little bit about the “or.” A very wonderful CEO that I know complained vigorously about the “tyranny of the or.” You either make money or do good. It isn’t “or”; you can do both. And in my view, it’s not all that complicated. You can do both.
HEFFNER: I didn’t talk about making money; I talked about maximizing, making the most money. You know that.
MILLSTEIN: Yes. I think, well, I wanted to see if I could lure you into a debate. (Laughter) It is, if you want to talk about maximizing, if you’re talking about maximizing as being ruthlessly maximizing profits, everyone in corporate America will deny that they do that. The issue is that …
HEFFNER: You mean they’ll lie.
MILLSTEIN: No, I don’t think they’re going to lie. They really believe they’re not ruthlessly maximizing profits. Only a few outlanders think that they’re ruthlessly maximizing profits. Most CEOs and most boards think that they are taking into account the “or,” the other aspects. And the question is one of judgment: How much can you take into account and still keep your shareholders happy enough to keep investing? After all, that’s the name of the game.
So I think today many corporations are … Why do corporations have gender training? Why do corporations have minority training? Why do corporations work hard, many of them very hard, to promote minorities, women and the like? Why do they do that? Why do many corporations adopt healthy pension plans? Why do many corporations adopt healthy benefits for illnesses and HealthCare? There’s no law that necessarily says they have to do that, but they do that. Now, that’s doing good, but it’s also, in my view, doing very good for your employees who in turn are going to reward you with loyalty, I believe, and more productively and efficiently.
HEFFNER: So you’re saying you have to do good to do well. I believe. I really do believe you have to do good to do well. And I believe that companies which are ruthless (whichever ones they are) don’t do well in the long run.
HEFFNER: All right.
MILLSTEIN: It just doesn’t work.
Now you wanted to talk about …
HEFFNER: The boards.
MILLSTEIN: … the individual board members.
MILLSTEIN: Yes. We were very careful to delineate the types of people, if you will, that we wanted on boards. And, by the way, we do talk about diversity. We do feel that the pool of directors is too limited. It ought not to be just CEOs or top people in various corporations. The pool could be expanded by taking account of universities, by reaching out to minority groups, to reaching out to women, to reaching out to the groups that we’ve never reached out before, provided they have the essential qualifications for board membership. Now, what are the qualifications for board … In other words, I think the pool is bigger than we think it is. The pools of good people. This country’s made up of lots of good people.
HEFFNER: Aren’t you also saying the pool should be bigger than it is?
MILLSTEIN: Absolutely. Should be bigger than it is today. And I think it’s growing bigger than it is today as we recognize that we can put many different types of people on the board who haven’t been there before. It is growing bigger and should grow bigger.
Now, what kinds of people do we want? I guess our first-and-foremost is integrity and character. We’re looking for people, if you will, who give a damn, who recognize that they’re getting a job, and that they’re not getting a present. This is not a jewel in the tiara. It is not an honorarium. It’s a job. We want people with integrity and character who are prepared to diligently do their jobs. If I were to characterize who I’m looking for, I’d take the person who is diligent, knows that he or she will have a commitment to do a lot on this board, is prepared to do it independently of management. As somebody said, “The best board member is a pain in the neck.” And in many ways he is, or she is, provided he knows the limits. So it’s integrity, character, diligence, and a willingness to recognize that you must be independent of management.
HEFFNER: You say “independent of management.”
HEFFNER: Somewhere along the line in all that I’ve been reading there was the implication of “independent of your colleagues on the board.” Someone who is ready to be a gadfly.
MILLSTEIN: Exactly right. At the same time, in a way that doesn’t get everybody cuckoo. It’s wonderful to be a gadfly, but if you’re a gadfly who irritates the whole boardroom to the point where they don’t pay attention to you anymore, that doesn’t work either. It’s good to be a gadfly, and it’s good to raise questions, and it’s good to not necessarily go along with the gang; but you have to do it in a way that doesn’t alienate you from the group. You’ve still got to work with them.
HEFFNER: To get along you have to go along.
MILLSTEIN: A little … No, not go along. But there are ways of asking questions and there are … I mean, I’ve seen board-rooms where people ask questions and just irritate the hell out of everybody. By the time they get done asking questions, nobody wants to talk to them anymore. I’ve seen other board-rooms where people ask violent, intensive questions with a smile and a nice tone of voice and the ability to listen and accept what they’re hearing and question further. It’s a way you do it. So we’re looking for people who understand that they need to ask questions and they need to be tough, but in a way which doesn’t break up the board-room into a fistfight.
HEFFNER: Ira, is it unfair for me to comment that as I read you and the various things you’ve written I have this nice, warm feeling that I’m back in the 1930s with a kind of social concern that was set aside in the 1980s in American business?
MILLSTEIN: Well, I really wish you wouldn’t keep saying that, because I really get unhappy when people tell me they have this nice, warm social feeling. I’m not selling social do-good board members. I’m not doing that at all. I’m simply saying you can’t have tunnel vision; you’ve got to be able to see the periphery and see what’s going on in the world and adjust your company to it. You know, we corporations, we live at the sufferance of the public. We’re state-created. And what the state giveth, the state can taketh away. If we don’t behave well, we can be regulated. We can be sued. We can have all sorts of things happen to us. So, you’re not to have peripheral vision.
HEFFNER: I’m glad you said that. Because it seems to me that in our time there have been fewer corporations perhaps than back in our day, the Thirties …
HEFFNER: … that have any real feeling of concern about regulation, because we live in an era of deregulation, deregulation, deregulation. Don’t you have a difficult time making your point?
MILLSTEIN: No. Because they all know very well that excess leads to further regulation. It’s been true forever. Now, the regulations that we’re talking about getting rid of at this point was sort of silly stuff that was costing a lot of money and accomplishing very little. We’re not getting rid of the SEC. And the tough laws against fraud and disclosure continue on the books and get heavier all the time. We’re not getting rid of tax incentives. They keep coming and coming and coming. We’re not getting rid of antitrust. We’re not getting rid of overseas corruption. We’re not getting rid of all the laws which sort of tell corporations how to behave. That’s not excessive regulation; that’s what society wants companies to do. And they keep coming.
Now, everytime companies trip, we get another law. For example, the overseas payments, that came from tripping in the late Sixties and Seventies. Many of the laws that came about in the Eighties came about because some of the tactics that were being used in hostile takeovers were too offensive.
HEFFNER: You know, I find a great deal of truth in what you’re saying. It seems to me though that, particularly in the area of media corporations, there’s less and less than one would want of a realization of exactly what you’re saying.
MILLSTEIN: Well, I think that’s true. And I think that one of the problems we have in the media industry is that they’re held to be sometimes above and beyond the laws that reach other people because they are media. And I don’t think that’s necessarily appropriate. I think the media companies should be absolutely constrained by the same sets of laws that the rest of us live by.
HEFFNER: Believe it or not, Ira Millstein, that’s the end of our program.
MILLSTEIN: What?! (Laughter)
HEFFNER: We’ve talked for a half-hour. Thank you so much for joining me today. I really appreciate it. I hope we can continue this.
MILLSTEIN: I hope so.
HEFFNER: Thank you.
HEFFNER: And thanks too, to you in the audience. I hope that you join us again next time. And if you would like a transcript of today’s program, please send $4 in check or money order to: The Open Mind, P.O. Box 7977, FDR Station, New York, NY 10150.
Meanwhile, as another old friend used to say, “Good night, and good luck.”