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June 30, 2008

Bob Monks: ExxonMobil Exemplifies Corpocracy
    by Bill Baue and Francesca Rheannon

SocialFunds writers Bill Baue and Francesca Rheannon interview corporate governance advocate Bob Monks about his shareholder activism at ExxonMobil and his new book, Corpocracy. -- The ExxonMobil annual shareholder meeting this year carried high expectations from shareholder activists, who filed almost 20 resolutions on climate change, greenhouse gas emissions reductions targets, renewable energy policy, political contributions transparency, and sexual orientation nondiscrimination, among other issues. Members of the Rockefeller family, descending from the founder of the Standard Oil monopoly that splintered into Exxon and Mobil, attended the meeting to support four different shareholder resolutions on corporate governance and climate change. Of these four, the resolution supported by most Rockefellers asked the company to split the CEO and Board Chair positions.

Visit the
Prospectus Ordering CenterBob Monks has filed this resolution at ExxonMobil since the early 2000s. Despite the support of the Rockefellers, the resolution received just under 40 percent support, a shade less than it received last year. Monks' struggle to hold ExxonMobil accountable exemplifies the broader struggle to hold corporations accountable described in his new book, Corpocracy. Monks is co-founder of Institutional Shareholder Services, The Corporate Library, Lens Governance Advisors, and a former Labor Department official in the Reagan Administration.

SocialFunds writers Bill Baue and Francesca Rheannon recently chatted with Monks from his home in Maine.

Bill Baue: Bob, you introduce your book using the 2003 ExxonMobil shareholder meeting to exemplify the dynamic of what you define as ďcorpocracy.Ē Now you just returned from the 2008 ExxonMobil shareholder meeting. In what ways does ExxonMobil still illustrate your concept of corpocracy and, how do you define that term?

Bob Monks: Coming back from Dallas, I sat down and I began to write, ďShareholder Democracy, R-I-PĒ which is inscribed on tombstones for Requiescat in Pace, or ďRest in Peace.Ē Unhappily, the bold experiment that came out of the 1930s and some very idealistic people who tried to repair some of the damage of the Depression has now been thoroughly thwarted by people like Exxon, who view shareholder involvement as being at best a tax and at worst a crime.

Rather than the blatant adversity that we had in the earlier meetings, theyíve now refined it to the point of making it just irrelevant. So you no longer have a dialogue back and forth. They have it choreographed so each person who has a resolution speaks, and then at the end of the time the chair recognizes anybody they want to speak on any subject. So pretty soon you get the idea that this is not an interchange of ideas, this is not a dialogue. This is simply a recitation. Everybody has their set lines, they recite them, and they sit down, and the meeting is over, and thatís all until 2009.

So it really is in behalf of Exxon a real denial of the basic concept of corporate governance Ė namely, that the directors work for the owners and the CEO is picked by the directors. In the case of Exxon, quite clearly, the CEO picks the directors, who are simply there as a parsley in the fish. And the shareholders essentially are tolerated but donít materially interface with the functioning of the company.

I think the difference between democracy and corpocracy is that corpocracy takes this pattern of CEO control that I outline in my book, and moves it to the various governmental levels through lobbyists, through gifts to political campaign, and through the movement of public policy dialogue, to the language of economics. And it begins to have almost every kind of public policy decision made as a matter of a cost/benefit ratio. And if youíre talking cost/benefit ratios, thatís the language of corporations. If youíre talking, is it the right thing to do? Is it a long term interest of society? Thatís more of a holistic point of view. And what corpocracy says is that the dominance of the values of the corporate system have infested our body politic, and we really are administering government for the benefit of the corporation -- and that this is a wide departure from what the country was basically founded on.

BB: Bob, you seem to suggest in the book that capitalism could work in concert with democracy were it not for the development of corpocracy. Can you explain how corporate democracy might work hand-in-hand with political democracy in a way where capitalism would actually be beneficial?

BM: First of all, the people who run corporations are just like everybody else. There are good people and bad people and most of them are good. They donít have a personal investment in doing harmful things. The problems comes in the language of accountability. And we are told until weíre sick to death that what matters is the bottom line. Well, who defines what the bottom line is?

It turns out that the bottom line is defined according to accounting principles that are misfounded and lead to the wrong conclusions. In several respects they are really very harmful. Companies like Exxon are allowed to present financial reports without any indication of the cost of their functioning on a society. For example, TruCost, a UK-based environmental research firm that Iím substantially invested in and that I advise, has estimated that the cost of Exxonís carbon emissions every year is $10 billion. At the moment, that $10 billion cost is borne entirely by society -- in terms of a diminished quality of living, in terms of global warming.

In order to have a corporation function in a way that is consonant with democracy, the accounting system ought to allocate that $10 billion in some way that elected officials, who are the only people to whom we cede sovereignty, have considered to be appropriate. Should it be fifty-fifty between a company and society? Should it be seventy-five/twenty-five? It should be something.

The example of carbon emissions is simply the most dramatic of the externalities. There are many others of them. And a lot of work is being done by people to try and raise consciousness about non-balance-sheet corporate statistics. And I donít know how far weíre getting. Weíre asking the right question. We havenít yet begun to get good answers.

Francesca Rheannon: Thatís very interesting what you just said: ďWe donít know how far weíre getting.Ē I wonder how far you can actually take that? I mean letís say for the sake of argument that companies did follow what some call the triple bottom line. In other words, that they took into account some of these externalities, they took into account people, profits and planet. Which one trumps the others when it comes to a conflict in the benefit to both? In other words, if itís going to erode profits to serve the people and the planet, are people and the planet going to trump profits in this case? Is there a model of capitalism that could allow that?

BM: If you have a general accounting system that is followed by all companies, the reluctance that companies have to moderate plainly harmful conduct largely is eliminated, because as long as the competitors have to do the same thing that they do people who are not evil people have no objection to running their companies in a way that is societally congenial. And so the important thing is a set of accounting standards that are applicable to all companies and that are enforced in which case the redefinition of profits really doesnít cost any company anything. It simply redefines the dynamics pursuant to which they operate.

FR: Because you leveled the playing field.

BM: Yes -- it makes it equal for everybody.

BB: Now that is something that weíre certainly in some ways heading towards with things like the Global Reporting Initiative gaining steam. But in your book, you also point out a countervailing force: that the Business Roundtable, the industry association of CEOs, does its utmost to obfuscate and oppose any sort of playing field leveling. So what do you see as a realistic promise of being able to level the playing field given the powers that be of the Business Roundtable and others?

BM: Iím a card-carrying Republican. I used to be the Chairman of the Republican Party in Massachusetts years ago, and Iíve been the Chairman of the Republican Party in Maine. So Iím speaking as someone who is a product of the capitalist system and someone who has benefited from it and believes in it.

A problem has been in the last eight years that the political administration of the country has very much been the Business Roundtable. And to an extent that is not often pointed out, the President has seen fit to turn the country over to the Business Roundtableís priorities. And this takes place in the EPA. It takes place in the SEC. And so based on what youíve seen in the last eight years, thereís almost no basis to conclude optimistically about the ability of government to set standards that will be holistic.

I think there is likelihood of change of political priorities in the fall. And itís hard to tell how far that will go. In the past -- for example, 1932 when there was a major change of this kind, and after the change in political administration, there was a huge change in how government interacted with business. So at the moment, all people like me can do is to take solace in the notion that if theyíre patient and if theyíre somewhat wise, it may be that weíll have a chance to make some decent proposals in the new year.

FR: But it sounds like you are depending on government to be able to do what government has traditionally done, and that is level the playing field through regulation. Yet in your book, you really put it into the lap of shareholders, saying they are the ones who can take power. So could you talk a little bit about what it is that shareholders can do? What is it that government can do? And then what is it that the public can do -- that is, say, communities themselves and other stakeholders who may not be represented very well by government?

BM: Iíve probably misspoken because if government is ever thought of as the answer, youíve asked the wrong question. What I think a government can do, and probably the only thing that government should do, is to set standards.

FR: Not regulation?

BM: No, not regulation. The government is a very poor regulator. And in the corporate sphere, itís virtually counter productive. It may sound cynical, but Iíve been involved with this for a long time, and basically, corporations hire better lawyers than the government. There arenít any laws that are self-executing.

I remember when I got out of law school, which is exactly fifty years ago, the smartest guy in my class went to work for the best law firm in the country, which has been in Washington D.C. And I saw him five years later and I asked what heíd done, and he said, ďIíve just had a huge success -- I managed to convince the Federal Trade Commission that my client could make peanut butter that had no peanuts in it.Ē

Well, thatís what happens. The ablest people of the country go to work for people who hire them to argue things that are plainly defeating of the intent of the law if they can somehow manage to bring them within the letter of the law.

FR: But isnít that because our democracy doesnít work? Because it is the corporations, as you write in your book Corpocracy, that have hijacked the government? Are you saying that corporations can be self-regulating? That they will be able to regulate themselves better than if the government sets some standards?

BM: What Iíve been trying to suggest is that the political pattern that the founding fathers had is quite well applicable to the corporate sector and that is, to set up countervailing points of power. And currently, power is exercised almost uniquely by the executive branch, by the CEO. And what Iím talk about for shareholders is that they should have countervailing power. And after all, the shareholders in todayís world are a wonderful proxy for the country as a whole. There are about a hundred and fifty million Americans who own beneficial shares of common stock in American companies. The concern by trustees for people is a long-term concern because in many cases theyíre administering employee benefit plans and the employees are going to work for a number of years before they retire and they want to retire into a clean world.

So there is a logic to empowered owners. And the corporate system in theory provides for empowered owners. Whatís happened is is that the theory has been defeated by a number of years of excess power of the executives and the restoration of that, which I say at the end of the book, is relatively straightforward. Itís a matter of the President calling in about five federal officials into the Roosevelt Room and telling them to enforce existing laws. You donít need any new laws. You donít need any new taxes.

FR: I came out of the Occupational Health and Safety movement. I was an advocate for workers having better health and safety. And I think itís really an example there, very akin to what weíre talking about climate change, when we had the passage of the OSHA Act, which did come out of many stakeholders including workers, not just shareholders in particular, workers and environmentalists who pushed for the passage of a regulation. That regulation depended on a number of things. It depended on scientists who worked for the government and were independent, more or less, in setting the standards. It depended on enforcers in OSHA being able to inspect companies and to back those inspections up with fines and sanctions if, if companies violated the standards. And then the government enforcement was hijacked by the Business Roundtable. And so those things are no longer being put into effect. But I canít imagine, even if shareholders were pushing for better health and safety, that they would have the science or the enforcement capacity that government has.

BM: I used to work in the Labor Department in Washington, so I have some sense of frustration with how difficult it is for government to translate good intentions into helpful activity. If you stop and think that the largest shareholder in American companies are employee benefit plans, and by-and-large employee benefit plans are informed by the concerns of unions. And the ability of this group of shareholders to articulate a message having to do with the health care and welfare of workers is very real, very strong. Now, it has not been done, but it could be done. The most articulate and effective shareholders working today are the public employee retirement systems in California. They have a very wide ranging agenda. They could press these issues.

What Iím talking about is a dynamic in which you have owners like that pressing issues. And here we have a huge constituency for workfare conditions. At that point several things have to happen. You have to have private sector institutions, youíve got to have government setting standards, youíve got to have at least some theoretical capacity for government to enforce the standard, although thatís been quite disappointing in practice, but even if you have to use criminal law, which is a fairly violent act. For example, how do you get people to operate mines safely? Ultimately, you may have to make a crime out of out of operating mines unsafely because people die in mines. So government at a certain point is the last resort. But most of the work has got to be done by the pressure between informed owners and the managers.

BB: In your book and also in this conversation I hear you saying two things. One is that many owners are not fulfilling their fiduciary duty. And the other thing I hear you saying is that the playing field is not conducive to shareowners exerting their full capacity of power. And I would say the best example of that is the blockage of shareholders being able to even nominate a director. Could you speak on those two conditions: of neutered shareholders and a playing field that is completely tilted?

BM: Iím very pleased if, if someone reading my book has come to those conclusions because that was what I was trying to suggest is the situation. The smoking gun is the pay of the chief executive. The clearer it is that people have just abused every imaginable notion of fairness in the pay of CEOs, the higher the CEO pay goes. People sit and moan about it. And they donít do anything about it. And everybody pretends as if they couldnít do anything about it. Do you know how much the last CEO of Exxon retired with?

BB: An obscene amount.

BM: $500 million -- itís beyond obscene. You should have a revolution over that.

BB: Well, Bob, the vote on your resolution -- which seems to me to be common sense or a no-brainer, where you suggested that the CEO and the board chair role be separated, a simple separation of the executive and judicial branch -- but that resolution only got forty percent of the vote, as it did last year. A very high vote, but there is still sixty percent of owners who donít see that basic logic. So, my final question for you, Bob, is what can be done right now to shake up, to empower, to create a situation where that sixty percent of fiduciaries to actually exert the influence they could on corporations towards more responsibility?

BM: What you can do is to put it on the political agenda for the congressional elections. One of the problems weíve had is, no matter how unfair things are, we have not been successful in getting this range of issues on the political agenda. If anybody getting elected to office has the sense that their constituents felt that fairer corporate governance had something to do with why theyíre getting less return on their investments and why their earnings are being depleted by inflation, if they had any sense that there was an act that could be taken by the government, I think that it would become a genuinely politically important issue. If itís a genuinely important political issu,e we would begin to get enforcement and people would see this as very attractive. They donít have to have taxes, they donít have to pass new laws. They just have to be conscientious about enforcing existing laws.

BB: So Bob, what I hear you saying is that our populace doesnít understand the degree to which the way that corporations are run actually impacts their lives. And if they understood that and if they took up arms, so to speak, in terms of their voting, to demand fair corporate governance, to demand that CEO pay be reigned in, that that would go a long way toward solving the problem of corpocracy in America.

BM: Yes, I do.

You can lis ten to the complete interview by Corporate Watchdog Radio co-hosts Bill Baue and Francesca Rheannon with Bob Monks at the Corporate Watchdog Radio website, where you can subscribe to the CWR podcast or listserve. The show also features a commentary by longtime shareholder activist Steve Viederman presenting the statement he read at the ExxonMobil meeting introducing the resolution he filed asking the company to adopt a renewable energy policy.

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