Editor: Until you encouraged us to tell our readers about the National Association of Corporate Directors (NACD), I hadn't realized it played such an important role. Please describe your involvement.
Millstein: I became involved with the NACD at least 30 years ago - and I've watched it evolve. For a long time, I was counsel to the board; I've participated in many of NACD's Blue Ribbon Commissions (BRC), one of which is the popular BRC on Director Professionalism, which NACD considers a seminal best seller.
Subsequently, I was asked to join the board. During this period, I co-authored multiple BRC reports and helped shape the programs NACD offered. At one point, I became dean of the faculty for NACD's educational programs.
All in all, I've been involved with NACD throughout its development. About a year ago, they asked me to become the chairman of the Center for Board Leadership (CBL), which we organized with ten outstanding directors. The function of the CBL is to articulate the ground-breaking, cutting-edge issues in governance for the NACD to address and, perhaps, for which to create new BRC reports. I am a close advisor to Ken Daly, NACD's president and CEO, and was to his predecessors.
In short, I've been involved in almost everything NACD does, and I support its mission to advance exemplary board leadership.
Editor: Describe why directors who have been exposed to NACD's educational programs are more likely to be receptive to counsel's advice.
Millstein: One of the important functions of the board is compliance. Directors who have been involved with the NACD understand that compliance with the law and with best practices is critical for the welfare and reputation of the corporation. NACD trains directors to be conscious of the very significant role that counsel plays in compliance matters. Though this should be obvious, NACD members recognize it better than others because NACD places heavy emphasis on compliance.
Compliance is an important part of a director's duty, and it encompasses all relevant laws and regulations that affect corporations. It's counsel's job to distill and present this information to the directors in a digestible fashion, and NACD directors have been trained to ask probing questions and to recognize the importance of the issues.
While issues such as strategy and compensation may be more significant in the long run, you can't focus on them if the corporation is not in compliance with the law and does not understand and employ best practices.
Moreover, counsel has become more important to the board, not just in the area of compliance, but also in staying abreast of issues ranging from the corporation's global reputation to social and environmental issues to policy and legislative developments at the SEC and on the Hill. As such, directors depend on counsel to be a primary source for information regarding future developments in a host of areas which can bear on governance of the corporation.
For example, during the Dodd-Frank era, counsel were advising boards on what was developing - generating ideas for how Dodd-Frank might be improved or where it is too burdensome. Directors did not have a chance to read Dodd-Frank legislation in its entirety; thus, counsel was very helpful in digesting the information and getting the board to focus on the right issues. In this way, if corporations wanted to become more active on the issue, they had the tools and information to do it. As Dodd-Frank goes into effect, counsel is playing a critical role informing directors on the impact of Dodd-Frank and directors changing roles and responsibilities.
Since counsel can be extraordinarily important in establishing compliance and discerning governance issues and strategies, the NACD is an important source of information to counsel and to the board.
Editor: The Yale School of Management Millstein Center for Corporate Governance and Performance (the Center) also focuses on governance issues. Does its role and that of the NACD supplement each other?
Millstein: Yes. The Center is a means for convening meetings, engaging in discussions and producing roundtable papers about current issues. For example, we have published papers on risk management, rating agencies, and the role of the chairperson and lead directors, among many others.
The Center brings together knowledgeable people - academics and practitioners, including NACD directors - to create a comprehensive body of research. In turn, NACD can use the Center's research to develop and support programs for its membership. In that sense, we support one another.
Editor: The Center has scheduled a program entitled "Governance Fit for the Long-Term" on June 16-17.
Millstein: The forum is a place where academics and practitioners come together and serves as a networking opportunity for the people who really make corporate governance work.
This year, as in prior years, we will assemble a group of approximately 200 - consisting of leading institutional investors, corporate directors and executives, regulators, academics, corporate governance advisors, rating agencies, executive search firms and other experts from around the world - to exchange ideas and participate in the programs. This year's program will encourage participants to consider issues relating to the short-term/long-term debate. We start off with a plenary session, in which I will be involved, called "What is Short-Term?" We are looking to retest assumptions and determine if there is a consistent perception of this concept. The session will go on to explore whether investors, management and boards can behave long-term. These are brainstorming sessions that allow everyone in the governance world to weigh in a big policy question. The results form the basis for the research by academics and practitioners, sponsored by the Center and hopefully many others.
Another forum session is called "Governance Lessons from the Crisis: What Works? What Doesn't?" which will focus on Dodd-Frank. We wind up with a session called "Next Frontiers in Board Effectiveness" to talk about the future. During these sessions, the Center uncovers the issues and determines where we should focus our research efforts. NACD members participate in the sessions, and, once the information is crystallized, it helps the NACD further develop its own programs.
The Center and the forum have become fixtures in the governance world. We also have some fun presenting awards to rising stars, which encourages younger people to stay active in the field. We pick 10 people under the age of 40 and have received over 100 nominations this year. As I have traveled, I have been gratified to see that past recipients from all over the world have our certificates hanging on their walls.
Editor: Corporations often find themselves enmeshed in compliance issues. In many cases, compliance failures are attributed to the failure to have the proper "tone at the top," at least from the prosecutor's standpoint. Do the NACD and the Center have programs designed to emphasize the importance of that principle?
Millstein: Not only is it part of our programs, it's a central issue for both the Center and NACD. Corporate governance initiatives cannot take hold unless those at the top believe in them.
Our position is that without support from the top, the rules of corporate governance are meaningless. There are so many discretionary elements in running a corporation, it is critical that people at the top make a commitment to good governance, including credibility, disclosure, ethics and best practices. Lack of commitment is quickly communicated down the line, causing people to seek and exploit loopholes that invariably lead to trouble for the corporation.
It's a sine qua non. Without the appropriate tone at the top, none of this means anything.
Editor: How do the Center and the NACD mesh with management students, not only at Yale but throughout the country?
Millstein: That's a difficult question because the business schools have to want to be involved. It's only in recent years that the business schools have begun to talk about ethics, best practices and the tone at the top. When I first started at the Yale School of Management, there weren't courses on corporate governance.
Now, almost every business school offers these courses, and I am aware they use materials produced by the Center and NACD, such as a book I co-authored with Paul MacAvoy titled The Recurrent Crisis in Corporate Governance and the NACD's Blue Ribbon Commission reports, data and teaching materials. In effect, we are producing raw materials for business schools, and we encourage their use.
Editor: Should the independent directors insist on meeting privately with the general counsel without other members of management being present? What is gained through such meetings?
Millstein: Personally, I am not in favor of that. General counsel (GC) has a dual responsibility in reporting to the board and the CEO, and reporting to the board alone places counsel in an awkward position. This is unnecessary because counsel knows very well - under Section 307 of Sarbanes-Oxley and in accordance with ABA studies - that there's a duty to report serious mismanagement up the line.
If a situation significantly deteriorates, counsel might have to go to the SEC. A responsible GC knows when it's time to go to the board, and it's a tough job to assess when a situation justifies circumventing management. I don't see the need to place GCs in the difficult position of reporting to independent directors privately on a regular basis.
Editor: Please discuss whether there is a governance advantage in having the functions of chairman of the board and lead director handled by different persons.
Millstein: I don't think there's another way to do it because the person who sits at the head of the table runs the board meeting and controls the disposition of the agenda. While you can create the same obligations on the lead director as on a separate chair, when it comes to the board meeting, the chairperson is running the meeting. The chairperson can guide the discussion with broad perspective, and unless the lead director wants to take an aggressive approach, he or she is not in a position to exert the direction needed to keep the focus on key issues.
Thus, the ideal arrangement, if possible, is to have a separate chairperson who has the same authority as the lead director but who also can provide independent leadership during board meetings.
Editor: Given the diminishing role of retail shareholders, how can companies remain focused on creating long-term value if the major players - including institutional investors and proxy advisors like ISS - are mainly interested in the short-term?
Millstein: You are referring to a general perception regarding the disappearance of the retail market and the advent of institutional investors, who many believe are interested primarily in shorter-term gains.
There isn't much question, for example, that mutual funds compete with one another over short-term gains. Investors will switch from one fund to another based on quarterly performance; moreover, most funds offer incentives on a short-term basis. Many don't have the in-house ability to do governance analysis and, therefore, have to depend on a proxy advisor, such as ISS.
While it is safe to say that the whole market is perceived to be pushing management and boards in the direction of the short-term, I don't know how much evidence there is to support this conclusion. The Millstein Center, with the Committee for Economic Development, is preparing to fill the vacuum created by the lack of organized and empirical information about the various types of institutional investors in the market.
Today's market is heterogeneous, with private equity, pension, corporate and private funds and hedge funds (which break down to dozens of categories) - all having their own agendas. The market no longer comprises just the retail stockholder, and the as yet unanswered question is, how much of that market is actually pushing short-term? Research is required to determine the strategies, processes and practices - including fiduciary duties - of these various types of investors. When we know that, we'll be better able to determine if it's true that the market is pushing toward the short-term and that there are very few long-term investors.
The Center is soliciting help to get this important study underway. It will be a big job trying to lay the statistical, empirical basis for determining what constitutes the market itself, the prevailing strategies and the breakdown of short-term and long-term investors.
When we know all of this, we'll be in a much better position to make policy decisions, assuming that there is a problem, and that we all want corporations to be working toward creating long-term sustainability and value for their shareholders.
Editor: When we spoke last, you expressed hope that the SEC would look into this issue.
Millstein: It would be nice, but I doubt that will happen. The SEC can't control the attitude and agendas of everyone in the market. It's a free market (which I support), and investors make their own decisions; however, you can create incentives, such as tax incentives, for investors to think long-term.
I hope our research will illuminate the need for tax incentives and other measures to encourage short-term investors to go long-term. As our research develops, I am certain we will call on the NACD for participation by directors.
Editor: What is the basis for your statement in one of our previous interviews that "better corporate boards do result in better results for shareholders?"
Millstein: I consider this to be a self-supporting statement, demonstrated by the fact that bad corporate governance results in bad corporations. It's as simple as that.
Of course, this is why the NACD is devoted to promoting good corporate governance - being the voice of directors - through its active membership as well as through research. Some things cannot be proved empirically because there are too many extrinsic factors, beyond governance, that determine the outcome of performance, so we are left with the broad statement that bad governance makes bad corporations. The fact that we may not be able to prove it via statistical regression cannot disprove what common sense demands.