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.
But shareholders still had little capacity to elect the board. The only way they could run against the board selected by management was to mount a major proxy fight.
Then raiders like [Carl] Icahn arrived, called heroes by some, and suddenly the corporate suites were under attack. But even so, boards were still supine. Gradually we turned our attention to boards as it became clear that jawboning by shareholders did not accomplish much.
This was the beginning of a serious governance movement. The Council of Institutional Investors and other shareholder groups came about, but at first, shareholders really still did not have the power to do much or to change the board. But in the 1990s there was a lot of pressure on boards to be more responsive to shareholders. Both the Organization for Economic Co-operation and Development and the National Association of Corporate Directors issued best practices for boards, for example. As a result, the realization dawned that the job of the board was to oversee management.
At what point did it become more acceptable for boards to fire CEOs?
One tipping point came in 1992, after [GM CEO Robert] Stempel was removed. That helped make it more acceptable for boards to remove management. I started getting called in by boards to help change the CEO at a number of companies—American Express, Westinghouse, a bunch of them.
One was a major airline that I don’t want to name, which was very instructive. The board told the CEO he had to go, and he came back and said, ‘You can’t do that, you can’t fire me.’ They came back to me and said, ‘What do we do?’ I said, ‘That’s ridiculous, of course you can fire the CEO, you’re the board!’ And eventually, that is exactly what happened.
Soon shareholders started to really go after boards to adopt guidelines. So their attention turned from changing managers to changing boards. Slowly boards started to respond, mostly over the past five or six years or so. Even in the late 1990s, we were in a lot of boardrooms talking about the need for oversight of management.
Where do we stand today? How much more needs to be done in your view to improve corporate governance?
I think we’re moving into the next generation of CEOs, those who know that the board oversees them and they accept that. I recently went to two different board meetings where I found the CEOs understood the different relationship with the board and were content with it. And they also know their primary duty is to the shareholders.
This new generation has been shaped by the Sarbanes-Oxley Act and the knowledge that the corporate world has changed. The model we promoted [of board oversight] has come about.
In the last few years, the pension funds and other activists have turned their attention to putting people on boards. Majority voting in my mind gives shareholders the veto they need, and I think that’s enough. It’s just too complicated to have shareholders directly involved in the nominating process. What if five shareholders, each with 5 percent of the stock, nominate a different person? You’d get a mess if shareholders had a formal role in the process. The veto works pretty well.
The veto and “say on pay” are leading to better communication between boards and shareholders. One way to make it work is for the governance committee of the board to talk to major shareholders about different issues—who they want to nominate, for example, and executive pay. It’s informal advice and consent.
That’s how “say on pay” really works in England, and it’s a model that can work here in the United States. But we’ve still got a long way to go before we get to that stage, because U.S. boards and their lawyers are wary about talking to shareholders.
What do you think about critics, such as Robert Monks, who argue that very little has really changed in the ways companies are run?
Monks doesn’t sit on boards anymore, so he doesn’t see the change. I think there’s a real difference in attitude today, although there’s a long way to go still. There’s no comparison to where we were in the 1960s and 1970s, or even through the late 1990s. That era, of the imperial CEO, is over.
But as I get older–I’m 81–I’m more concerned than ever about the need for great CEOs, great leaders. The board’s job is to pick a great CEO and then let him operate. Monitor him and fire him if he falls off the cliff, but don’t try to run the company. I don’t want boards managing the CEO. Boards need to be able to remove the CEO, to not overpay him, and to get him to focus on performance. But those are externals to the real job of a company, which is to deliver the goods—to perform. That’s the CEO’s job, not the job of the board.
So how do you achieve the right balance of power inside the company?
The best way to do that is to separate the job of chairman and CEO. The idea of a lead director is dissembling to me. [Wachtell Lipton partner] Marty Lipton and [Harvard Business School professor] Jay Lorsch have been pushing that idea to deflect the issue and save the CEO’s power. It’s a complete play into management’s hands. The problem with the lead director idea is that he who sits at the head of the table runs the board. So if that person is the CEO, the lead director can’t lead.
You do need to have the CEO on the board though. The rest of the board needs to know what he thinks.
We’re organizing a session for separate chairs at [the Millstein Center for Corporate Governance and Performance at] Yale this fall, to bring a group of them together to exchange ideas. We hope it will lead to an ongoing program. We’ve got two sessions going, one for independent chairs of companies, which will be headed by Harry Pearce, [former vice chairman of General Motors] and another for independent chairs of mutual funds, chaired by John Hill and [former TIAA-CREF General Counsel] Peter Clapman.