Robert Augustus Gardner Monks, one of the world's best-known shareholder activists, has been called “a traitor to his class.” Born in Boston to a wealthy, powerful family whose origins in the U.S. predate the Revolution, Monks rejected a life of coupon clipping and instead launched a mission to improve corporate governance. In the early 1980s, Monks established Institutional Shareholder Services, a leading corporate governance consulting firm, and, in the early 1990s, he opened Lens Asset Management, a fund that used shareholder activism to shake up underperforming companies. But today — in the aftermath of Enron, the corporate profligacy of Tyco International management and the like — Robert A. G. Monks appears to be a man for the moment. Monks, author of the book The New Global Investors, argues that shareholders, especially large institutional investors, have become passive, essentially abandoning their responsibility of overseeing the behavior of executives who are charged to serve them, and, Monks argues, the common good.
Registered Rep.: This would seem to be a moment of vindication for you. After all the scandals, your message that rigorous corporate governance will lead to better results seems truly timely. But what happened?
Monks: Well, good times are the enemy of reform. I used to talk to people and they'd listen to me very respectfully. And they'd say, “Bob, you know, that's a hell of a good answer, but what's the question?” I'd say, it's not right. And they'd say, “Hey, listen, go away, I'm making enough money, you know, and that's the way it is.” But now that it's getting tough to make some money, people are starting to think a little bit about what can I do to make my returns better. And this is one thing everybody can do to make their returns better.
Registered Rep.: Why do you think things got so bad — that so many corporate managements wound up taking care of themselves, rather than the other shareholders?
Monks: The problem is that nobody intended that there should be no owners of corporations. They always used to be real people. And as an unintended consequence of the government passing retirement policies that have been very successful, ownership has passed out of flesh-and-blood people into institutions.
Registered Rep.: Yet we have this mass participation in the stock markets — why hasn't that made management more responsive?
Monks: Well, what ERISA [passed by Congress in 1974 to prevent abuses of corporate pensions] did was it made it more desirable for people to save their money through their pension plan than by putting it in the bank, or by buying their own accounts. So all of a sudden you didn't have Joe Jones and Bob Smith owning stock in a company. You had Citicorp as trustee for Joe Jones' and Bob's pension fund. And they owned it. So you stopped having the legal ownership in the hands of individual flesh-and-blood people, and it fell into the hands of institutions.
Registered Rep.: The bottom line, then, is the companies whose owners are paying attention and demand excellent corporate governance will perform better over the long run. Is that right?
Monks: Yeah, there's an awful lot of material that shows that if a company is perceived as having good governance it is valued higher than companies that are not perceived as having good governance. The quarterly surveys put out by McKinsey & Co. are really the best material on it. People put a premium on active involvement of something around 13 percent or 14 percent. And that's a lot of money.
Registered Rep.: You aren't just a disinterested observer. You are also a money manager. How does activism and investing work? And how did you get started?
Monks: Well, the first thing that happened to me was, I was running for office in Maine in 1972 or 1973 and I was in a motel in Bangor. I woke up in the middle of the night, and my eyes were tearing over. I looked out the window, and there was about seven-foot high mass of foam in the middle of the river. I never saw anything like it in my life.
I got up in the morning and I asked the guy in the hotel. I said, “Jesus, does this happen every night? I mean what's going on here?” And the guy said, “Well, you know, it's been going on for years. I didn't know you didn't know it.” And I said, “What is it?” And he said, “Well, you know, the paper companies upriver send their effluent down the river in the middle of the night so it doesn't bother people. Up here, this is the way it works.”
Registered Rep.: And then?
Monks: I lost the election and ended up as the chairman of a trust company in Boston. And I was sitting at my desk, and it turned out that the chairman in those days was supposed to vote on the proxies. And I got a proxy from one of the companies who was dumping the effluent in the river. And I suddenly thought to myself: You know, my god, in this new world of institutional owners, me and about 50 people like me sitting at desks like mine, we actually have control of these companies. And they are our companies, and we don't have to permit them to do something we don't want done.
And so I arrived at the idea of the power of owners — that there was such a thing as owners and that they could be made responsible, and there were few enough of them that it was feasible to contact them. Suddenly, as the English say, the penny dropped. And I began to understand it was just really a matter of getting the owners to pay attention to what was being done in their name.
Registered Rep.: That was the beginning of the Lens funds?
Monks: For many years we ran funds, the Lens Fund. And I still am involved with it in England [called Hermes Lens Asset Management].
Registered Rep.: What can our readers — brokers and advisors — do?
Monks: Well, it's very hard. There is no public vehicle or mutual fund that does this. Ralph Whitworth in La Jolla, California, has a company called Relational Investors. Ralph is very, very successful and a leader, but it's only been opened to institutions. So it's very difficult for individual clients to get access to this kind of investment capability.
Registered Rep.: So how can brokers protect their clients?
Monks: I think they've got to associate with some kind of a proxy advisory service, because it's too expensive for each individual investment advisor to inform himself on proxy issues. But there are several services that are available now. I started one of them called ISS (Institutional Shareholder Services).
Another one is IRRC, Investors Responsibility Research Center. Relatively inexpensively, people can get proxy advice and can see whether they want to go along with it or not. But I think people have got to start to think of themselves as owners — that's really the thing. You'd be amazed if you spend a little bit of time thinking of yourself as an owner, what you pick up in reading proxies and looking at things. In that regard I recommend to your readers this new book that Arthur Levitt has written, because he says much of the same thing. He says, if you're going to have stock, you'd better start to think of yourself as an owner of a company and not just of a piece of paper. Because you can't really count on anybody else to look after you as well as you can look after yourself. And if you don't read the stuff you're never going to know what's going on.
Registered Rep.: Even though you've made your reputation as something of a thorn in the side of corporations, it seems from your writing that you remain a believer in corporate capitalism.
Monks: Yes. I think the modern corporation is the key to continued prosperity. And it is a way in which we're able to convert human drive into wealth and into jobs, and into products, and into increased living standards. And the challenge is to be sure that the corporations function in a way that is harmonious with human needs. And this relates to environment standards and to things like global warming, and it relates to their impact on politics, that they not totally dominate the political situation. And this is an ongoing need for everybody to pay attention to. But the corporation is the key to the prosperity of tomorrow.
