Ira M. Millstein is a senior partner in the international law firm Weil, Gotshal & Manges LLP, where in addition to practicing in the areas of government regulation and antitrust law, he has counseled numerous boards on issues of corporate governance. He is an adjunct professor and founding chair of the Ira M. Millstein Center for Global Markets and Corporate Ownership at Columbia Law School. His many books include The Activist Director: Lessons from the Boardroom and the Future of the Corporation (2016) and The Recurrent Crisis in Corporate Governance (2003).
A graduate of Columbia Law School, Mr. Millstein is a Life Trustee and former Chairman of the Board of the Central Park Conservancy and is currently Chairman of the Central Park Conservancy Institute for Urban Parks. He also is a dedicated member of the board of directors of the National September 11 Memorial & Museum, where he is the Co-Chair of the Nominating, Governance & Compensation Committee.
An increasingly common mantra in corporate governance implores directors to “think like an activist.” While the message is clear, the steps to take action are less obvious, and they vary from company to company. While it’s no secret that the corporate landscape is undergoing a sharp change at an unprecedented pace, how boards choose to deal with these market challenges and react to and interact with their investors will determine the future success of their companies decades down the road.
C-Suite had the opportunity to speak with Ira Millstein, a renowned corporate lawyer and founding chair of his namesake Center for Global Markets and Corporate Ownership at Columbia Law School. His new book, The Activist Director, provides pragmatic suggestions for directors on building boards that can, and will, put the welfare of the corporation first. The edited conversation below pinpoints key highlights from the text to provide historical perspective on corporate governance as well as strategies on how to take a proactive approach to working with management, shareholder engagement, and board recruiting and succession.
Ira Millstein: The impetus started with my desire to tell the story of how corporate governance originated. I think some people are under the impression it was invented one day and came from a single mind that said “ah, we need to have corporate governance and here it is.” Of course, no such thing happened, and it took 30 or 40 years to gestate. I thought telling the story of how it evolved would contribute to the understanding that corporate governance is dynamic and will continue to change when circumstances change.
In addition, we are at a point where a short-term mentality has permeated our whole system, and corporations and boards are more responsive to outside pressures than they have ever been before. The pressures of capital markets on boards have often impeded the board’s efforts to act on behalf of the whole corporation, with far too many boards and management increasingly focused on meeting short-term projections to not disappoint the market. My concern is that the C-suite is being impeded from doing what they want to do—namely grow and innovate—in order to produce short-term gains.
Millstein: Exactly right. During the presidential election, it occurred to me that life was changing all around us, and not just inside the corporation. The election made clear that there is a wave of populism in the U.S., in particular marked by a sweeping discontent among those who have been displaced or dispossessed through no fault of their own by things like global competition, the need to become more efficient and outsourcing. Mr. Trump seemed to sense that and saw something that the so-called elite—namely bankers and lawyers and others involved with corporations and boards—did not see. Very few people in Corporate America saw this happening when it was happening, or if they did see it happening they weren’t recognizing its significance. Now boards have to pay attention to it and ask what the private sector can do to meet this growing discontent—because it’s in our best interest to do that.
During the election, it occurred to me that life was changing all around us, and not just inside the corporation.
Millstein: The board-centric model is the recognition that the board has the last and most important word in overseeing the affairs of the corporation, and in particular strategy. Fiduciary duties mean that you have the welfare of the corporation on your shoulders. It’s important to know, and give thoughtful consideration to, what investors and the corporation’s community think, but you have to realize that you’re it.
The primary thing that gets in the way is capital markets. When you’re in the boardroom, you may be looking out at a big variety of shareholders and you can’t conceivably please them all. It’s not possible because they all have different agendas, with different interests, some directly and some indirectly, and some may not care about the long-term future of the corporation at all. So if you’re sitting in the boardroom, and you see this going on, what do you have to do? Balance it. No matter what is happening, no matter what people are doing with their shares, the responsibility is to select the course that is in the best interests of the corporation and hopefully most of its shareholders.
Millstein: Some. There will be some directors that feel this new role is not for them, and would rather just go along with the proxy advisors and stay out of trouble, rather than do the hard work. That’s one of the things I attack. Boards today need someone who is not a traditional director bound by “nose in, fingers out,” but who is going to take an active role and partner with management to devise a strategy for the corporation.
Millstein: The most important thing, first of all, is that this is a job for the nominating and corporate governance committee of each corporation. The committee members have to sit down and recognize this isn’t going to happen marvelously. You’re not going to say we have four people on the board and no one pays attention so let’s fire them all and make this happen. You have to have a governance committee and hopefully a separate chair or at least a lead director who is going to look at the situation and decide to change the board’s attitude about how to search for directors.
From there, the committee has to say “what do we need on the board?” And instead of exclusively looking at people they know, they should think of it in terms of how they would vet the next CEO. When a new CEO is interviewed it’s a very laborious process—they don’t just pick someone without conducting intensive diligence. The same effort ought to be involved in selecting a new director. Asking “who do we know who would fill this job?” and then maybe going to the country club or the church or to friends who all get along with the rest of the board is not the answer. Sure, boards should get along, but that’s not the imperative need.
If boards would only think about vetting a new director as they do a CEO, we would make a big step forward.
Millstein: As a model, and as an idea, I turn to private equity. They, for the most part, put on the board of companies they’re investing in people who know what that company’s mission is, and who can work effectively with management. If it’s a financial company, if it’s an engineering company, they get experts in those fields. That board should know enough about the company to make a contribution and partner with the CEO to devise a successful strategy.
I use private equity as a model not to say every board should be like PE firms, but to illustrate an effective way to vet. Know what you want substantively, be clear on what you want, and then go look for what you want. I’d start with the following questions:
Of course there are plenty of other issues like that, but I would want to be sure the director is someone who wants to effect change, understands he or she is not the CEO, and will work with the CEO as a partner to develop the strategy necessary to meet these very different times.
The most important thing I would like to emphasize and reiterate is the vetting process—if boards would only think about vetting a new director as they do a CEO, we would make a big step forward. I don’t want that to get lost.
Asking, “who do we know who would fill this job?” and then maybe going to the country club or the church or to friends who all get along with the rest of the board is not the answer.
Millstein: The lesson we learned, and it’s in every one of the stories I tell from GM to Drexel to Con Ed and on, is that part of oversight is knowing what’s going on around you. The necessity is for directors to have a broad horizon of the corporation—what’s it trying to accomplish, who are the shareholders, what’s the public and the media going to say. It’s a big job—it’s very different than when I started, it’s very different than it was 10 years ago, and it keeps getting more complicated. Directors have to be renaissance people in addition to knowing the company. We’re in an unprecedented era because of the pace at which change is occurring.
Millstein: These past few years have seen so much change and growth in the investor base—pension funds became only one and maybe not even the majority of the institutional investors, mutual funds, hedge funds, program traders and the traditional mom and pop retail investors are all part of the mix. Everything grew, and boards had to change to meet that. Those changes brought about the need to modernize, and a new crop of intermediaries also popped up with new pressures on boards to act in a different way. These intermediaries are advising boards on how they should act and what they should do in terms of meeting changing circumstances at the time, all with the effect of micromanaging the boards. There were all sorts of rules and best practices set up to the point where today boards have not much to do but comply with everything that’s going on and these recommendations.
So I thought—we ought not to be micromanaging boards, boards should be managing themselves. They are responsible for directing the affairs of the corporation and seem to forget that at times. Even with the ever-growing list of rules, regulations and best practices, directors don’t have to spend their entire time checking the boxes. The ultimate goal of this book is for every corporate director to read it and see if there is anything in there that tells him or her to activate. Yes, I’d like the public to read the book, and I think it’s useful for them, but I hope to move the needle in terms of getting boards to think about the real implications of their job as a director.