Ira Millstein on Governance

Ira Millstein is arguably the top lawyer in America in the practice of corporate governance. As a senior partner at the law firm of Weil, Gotshal & Manges, where Millstein has worked since 1951, he has been so influential on the topic that not only did he rank number eight on The Directorship 100, a listing of the most influential people in corporate governance, but Yale School of Management named its Center on Corporate Governance after him.

His client list has always included the biggest names in Corporate America: General Motors, Disney, Tyco, American Express, and Westinghouse, among others. At the age of 81, he shows no signs of slowing down. Yale has called him a principal architect of modern international corporate governance. Editor-at-Large Aaron Bernstein sat down with Millstein in his Manhattan office to talk about the evolution of corporate-governance theory.

Much of the debate about corporate governance today seems to reflect the questions of control that Berle and Means raised 75 years ago in their book, The Modern Corporation and Private Property. Do you agree?

Yes, they identified the issue and pointed out the separation of ownership and control. They said that the diffusion of ownership led to the need for the protection of shareholders, because they were too diffuse to protect themselves. This led directly to the 1933 and 1934 Securities Acts [which laid out modern securities law and established the Securities and Exchange Commission].

That was a protect-the-shareholder model, set up to defend against pillage and mayhem, so the system did not result in total control by management. But it was very different than today’s governance efforts, because it gave no power to shareholders. It was only protective.

Still, the central concept, even then, was that the board should oversee the company for shareholders. This is an idea that goes way back to 1864 and the Companies Act, which created the rights of shareholders to elect directors. Our states’ acts were modeled on that.

As ownership diffused the board became even more important. But the board really was a tool of management. Shareholders had no ability to do anything about the board. Only one person even thought about this issue early on. That was William Douglas [who later became a U.S. Supreme Court Justice], who wrote an article in the 1934 Harvard Law Review called “Directors Who Do Not Direct.” It addressed the question, “Is this the right way to run a company?” But no one noticed.

No one cared back then and for years after because U.S. companies ruled the world, all the way through the post-war period. At that point, after World War II, you had global statesman running companies, people like Thomas Murphy of General Motors, [Reginald] Jones of General Electric, and [Irving] Shapiro of DuPont. I entered the scene at that time.

Boards didn’t see any need for oversight in those days?

No, it was an era of business statesmanship. Management still dominated the scene and boards were self-perpetuating institutions that someone once likened to the Catholic Church, where the cardinals pick the pope amongst themselves. I was in anti-trust at the time and I thought that kept them under control. If the anti-trust laws kept companies from getting too big, that would control management’s power.

Then everything started to change as the cozy post-war world began to break up under competitive threat from Germany, Japan, and other countries. We were the major consumer market of the world so U.S. companies became the focus of major competition in the late 1970s and 1980s.

In this new context, anti-trust failed as a control device over management. At the same time, the new competitiveness U.S. companies faced led shareholders to question the cozy relationships between managements and boards.

When did you start to focus on the governance issues involved in that relationship between boards and management?

It really began in the late 1980s with Harvey Goldschmid [a Columbia University law professor who served as SEC commissioner from 2002 to 2005]. We set up the Institutional Investor Project at Columbia and brought together investors to talk about the subject. We pointed out the ownership agglomeration that had happened as more shares were held by institutional investors, and said that they wielded a lot more power as shareholders if they got together.