Bob Monks: A Life in Corporate Governance

Robert A.G. Monks, HLS ’58, passed away earlier this spring at the age of 91.  Bob, a lifelong friend of both of us, was a remarkable figure who left a lasting mark on the world of corporate governance. His passing is a moment to reflect on his legacy.

But before proceeding to discuss various contributions that he made to the field in general, we wish to acknowledge his contributions to the Harvard Law School Program at Harvard Law School, with which we are both associated. Bob was an early member of the Program’s Advisory Board, and his advice and encouragement significantly helped the development of the Program.

He also actively participated in some of the Program’s roundtables, and he visited Lucian’s courses several times for presentations that students found both inspiring and intriguing. Program projects that he closely and supportively followed were its Shareholder Rights Project, a clinical program that during three academic years (2011-2012 through 2013-2014) contributed to board declassification at about 100 S&P 500 and Fortune 500 companies, and the Program’s research projects on shareholder rights and on executive compensation.

Robert A.G. Monks would begin his life as a transformer of markets in the unlikely role of a government official in the Reagan administration. In 1984, US institutional investors considered proxy voting to be all but meaningless. Most, according to an IRRC study at the time, routinely either trashed ballots or cast them automatically in favor of corporate management at portfolio companies. So, when retirement savings plan administrators met at a conference dinner that April 5 in Washington, DC, they could hardly have been prepared for the speech that the then-little-known Monks was about to deliver. Bob was the US Department of Labor’s newly-installed pension regulator, giving his first public remarks. The vision he set out from the podium can in retrospect be seen as the foundational manifesto for modern corporate governance and investor stewardship.

That night 41 years ago, Bob defined the share vote as an asset, not a bothersome technicality. He argued that, under a fiduciary duty standard, it must be deployed solely in the interests of plan beneficiaries rather than the sponsoring corporation. And he unveiled the Reagan administration’s new expectation that retirement funds covered by the Employee Retirement Income Security Act of 1974 (ERISA) should not only be casting virtually all ballots with independent judgement and analysis, but that they should actively be opposing corporate management when it suppressed shareholder rights or overpaid executives. He further stunned his audience by implying that ERISA funds would have to comply with these new principles—or face enforcement action.

Bob may have been bluffing. His staff was small, the regulatory grounds thin, and his deregulating, CEO-friendly bosses at the Reagan White House might have balked at the initiative. But, undaunted, he gambled that the mere threat of DOL policing would trigger reform. And his diagnosis of market deficiencies was on target. As another IRRC study at the time revealed, fund managers then routinely voted shares—if they voted at all—to win gratitude from client companies rather than to safeguard the interests of savers. The result: even the worst-performing CEOs in America were protected against ouster, while investors in those companies were not only paying the price, but actually enabling the enterprises to fail. No wonder the decade was rife with corporate raiders and hostile takeovers fueled by junk bonds and accompanied by widespread fear that US companies would soon be overtaken by Japanese industry.

Bob envisaged investors becoming a countervailing power, one that could compel companies to be better by making them more accountable. Later, memorably, he put it this way: “Capitalism without owners will fail.” He kindled behavior change while at the DOL, but then left after a year to start Institutional Shareholder Services. He designed ISS to equip asset owners and managers with tools to apply an ownership discipline alongside their traditional buy and sell skills. ISS began to recommend votes to defend investor interests, thus helping initiate the discipline of stewardship. Then, on February 23, 1988, Bob’s former DOL deputy and successor Alan Lebowitz signed a now-famous letter to the Avon corporation formally spelling out the fiduciary expectations the department would apply to funds, and which Bob had first outlined in his dinner speech four years before. With the Avon letter, the Reagan administration was seemingly calling time on conflicts of interest in proxy voting, kick-starting investor stewardship, and prompting higher-performance corporate governance. Moreover, the guidance helped ISS become an advisory powerhouse. It now advises funds accounting for more than USD1 trillion.

The Avon letter, and the Monks insights on which it rested, catalyzed market transformation in the US. But it also helped ignite reform worldwide. In Europe and Japan, despite large pools of shareholder capital, stock voting was typically subject to dysfunctional procedures (no counts of proxies, unworkable voting deadlines, barriers to voting against management, sparse information) and was neglected. So investor passivity commonly abetted poor corporate governance and performance. But as US funds ramped up stewardship at home, they began to apply the same techniques abroad. That caused a knock-on effect.

Take Federated Hermes, then PosTel, one of Britain’s major fund managers. Now known for professional stewardship, it had, in 1988, not seen a need to vote any of its share ballots. But visits by Bob to London and voting attempts by funds such as CalPERS at UK companies quickly converted PosTel’s leaders into practitioners of exercising the vote as an asset. Soon after, the Irish Association of Investment Managers in Ireland and, later, Sir Adrian Cadbury in the UK, produced the world’s first corporate governance codes. Cadbury, in particular, echoed Bob in identifying the vote as an “asset”, and his report urged investors to engage in dialogue with corporate boards to produce more successful companies. Similar framing soon emerged in France, the Netherlands, Germany, Japan, South Africa, India, and other jurisdictions.

By this time Bob, born into New England aristocracy, a former partner in a white-shoe law firm, an ex-corporate CEO, board director at 10 firms, and chair of a big investment company, was beginning to earn the moniker that later stuck: “A traitor to his class”. But his ‘treason’ wasn’t about overturning the system; it was about making the system work as advertised. In 1991, he used activism on governance to target one of America’s most famous brands—Sears—to draw attention to shoddy board practices that were dragging the company down, and its shareholders along with it. He ran for a board seat on a platform calling for an independent chair and offloading non-core businesses. What drew national attention, though, was the cheeky full-page ad he took out in the Wall Street Journal tagging Sears’ board directors as “non-performing assets”. Bob didn’t win. But the fight persuaded Sears to overhaul its strategy while putting CEOs across the country on notice that they would now be watched. In the words of Bob’s longtime partner Nell Minow, it “awoke the sleeping giant” of institutional shareholder capital. It also stoked Bob’s inner happy warrior against what he’d later term “corpocracy”. His life crusade would now be dedicated to challenging emperor-CEOs and advocating for responsible corporate citizenship.

One year later, in 1992, he took a further innovative step in building out an infrastructure of market accountability. He launched LENS, a fund dedicated to investing in a handful of enterprises where investor activism could engineer governance improvement—and induce rising value. The gamble sought to prove the case that Bob’s assumptions on governance would pay off. It worked. In the six years before LENS folded into Hermes, the fund earned an average annual return of 25.1% compared to 20.5% for the Standard & Poor’s index. In doing so, LENS became the progenitor of a vast new market of funds deploying what later became known as environmental, social, and governance (ESG) criteria as part of the investment process. By one count, at Bob’s passing, there were at least 14,500 funds worldwide touting ESG criteria in their prospectuses, with about USD $7 trillion in assets under management.

Bob would go on to found or co-found other key institutions including The Corporate Library, GMI Ratings (also co-founded by Stephen), Governance for Owners, ValueEdge Advisors, and a director training program at Cambridge’s Judge Business School. Moreover, he worked to evangelize his convictions by writing ten books, including with Nell. One of his perennial targets in these texts would be Harvard, his alma mater, whose endowment, he long argued, should have exercised a more intense level of stewardship than was its practice.

Bob leaves a rich personal legacy. The generation of architects that built today’s ecosystem of corporate governance and stewardship is filled with people he mentored and befriended. His energy, warmth, charisma, generosity, cheerful combat, and the twinkle in his eyes, are hard to forget.

But there’s a concrete legacy too. Corporate boards worldwide today feature more attentive directors, more independent chairs, and more transparency, leaving economies and shareholders better off. Institutional investors have learned to apply stewardship to protect the interests of savers. Global policymaking bodies have recognized the materiality of governance and the legitimacy of shareholder rights—each is now a pillar of today’s capital market. These developments bring to life the vision Bob introduced to the market at that April dinner in 1984.

Advances, of course, still come nowhere near the mark Bob demanded. Moreover, the current tide in politics and regulation is pushing to reverse change, and may even in the end overturn standards in the Avon letter, place curbs on proxy advisors such as ISS, and execute U-turns on other measures Bob supported. This backlash demonstrates that interests Bob always targeted remain deeply fearful of the reformation he set in motion long ago. But that is precisely where his legacy is most evident. Even if US lawmakers and agencies erase the legal instruments that propelled change, the infrastructure Bob instigated and foresaw as necessary—a vast industry of ESG data providers, legions of practitioners of governance and stewardship, and the paradigm shift in recognizing the materiality of accountability—will almost certainly keep momentum in train. Prophets, as we know, don’t always make it to the Promised Land. But, like Bob, they make it possible for others to make the journey.