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Corporate Governance [Rush Transcript; Federal News Service, Inc.]

Panelists: Ira M. Millstein, Senior Partner, Weil, Gotshal & Manges; Senior Associate Dean for Corporate Governance, Yale School of Management, John H. Biggs, Executive-in-Residence, Stern School of Business, New York University; Chairman Emeritus, TIAA-CREF, and Patrick Bolton, Barbara and David Zalaznick Professor of Business, Columbia University
Author: Guy Wyser-Pratte, President, Wyser-Pratte & Co., Inc.
February 1, 2006
Council on Foreign Relations

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Council on Foreign Relations
New York, NY

GUY WYSER-PRATTE: Good evening, ladies and gentlemen, and welcome to the Council on Foreign Relations corporate program meeting. My name is Guy Wyser-Pratte. We have an obviously very eminent panel this evening. Remember to turn off your cell phones, BlackBerrys and all wireless devices. We are on the record this evening.

Tonight's discussion will be centered around a recent book by Peter Gourevitch and James Shinn, "Political Power and Corporate Control: The New Global Politics of Corporate Governance." In 2001-2002, Jim and Peter ran a Council workshop which resulted in the publication of a Council report entitled "How Shareholder Reforms Can Pay Foreign Policy Dividends," which they then developed into a book examining the forces that shape corporate governing practices around the world.

Now, you'll have an opportunity to ask questions at a certain point in time in the meeting. We always at the council close our meetings punctually at 7:00. The pumpkin rolls up at that point. And I do keep a tight ship here.

What I'd like to do is have each of our fine panelists make some opening remarks. But before they do that, I'd like to sort of set the theme with some possible questions that I'll throw out that might be considered by the panelists or by the audience.

What accounts for the variance we observe around the world in corporate governance practices?

Many countries have adopted codes of good conduct following ideas in TIAA-CREF or OECD or others. Do firms actually follow these codes? Have they changed behavior, or just adopting words?

Many codes are voluntary. Is that enough? Do we need laws, enforcement, or more?

What do other countries think of Sarbanes-Oxley? Not much, probably. (Laughter.) Is this still a source of friction, as it was earlier, when it was passed?

Many countries lack the vigorous law enforcement mechanism that a minority-shareholder model requires. Should we be pushing them down the minority-shareholder protection path or rely on block-holding instead?

What do foreigners think of the U.S. model, following the many scandals we have read about? Does the (few?) stock ownership produce broad political support for corporate governance reforms? And lastly, can institutional investors provide solutions to collective action problems of the (few?) shareholding, or do they have a conflict of interest regarding the principal agent? Does the (few?) stock ownership induce broad political support for corporate governance? Do they have a conflict of interest of principal agent type? In complaining about regulations and costs, is the battle too much regulation versus too little, or is it about which regulations you like and which ones not?

These are some of the themes. And I would like to ask our very redoubtable Dr. Ira Millstein to start off with his comments. You ought to cover those in five minutes. (Laughs.)

IRA M. MILLSTEIN: I have to admit, I read the book. And it's all marked up. What I'd like to talk about is two books instead of one. One is "The Anatomy of Corporate Law," which everybody ought to get, and the other one which everybody ought to get is "Political Power and Corporate Control."

These are bookends for anybody who's a serious student of corporate governance. They go together. And why do they go together? Because "The Anatomy" is by a group of lawyers, and the "Political Power" is, of course, by non-lawyers. But just as important in every sense of the word, because corporate governance, where it came from and where it's going, is a combination of the law and just good practical advice from political economists.

I think they come at it differently, and it's important they come at it differently, because it frames the debate which is going to the next century, and that is this. Lawyers take a look at it and say, well, they do agree with the political economists on this; they think corporate governance is very important. Why? For the very same reasons that Gourevitch and Shinn do; namely, who's going to get the spoils of the corporation? It's a monster organization and a monster vehicle for organizing wealth.

But there are contestants for who gets what. Managers, directors and the labor people, as well as the constituents, are all struggling for a piece of the action. The need for corporate governance is very, very important because it's a division of the spoils, to put it crudely. And it's worth competing for, and managers do compete with the rest in order to get their share, as do the shareholders, as does labor.

Now, at that point the lawyers and Shinn and Gourevitch depart. The lawyers' position is -- (inaudible) -- very easy. If you look around the world, which they do in this book, it's all coming together. There's a convergence. What's causing the convergence? Why is everything going to be the same around the world? It's because capital flowing around the world is a glacier. It's going to wipe all the differences out, and eventually there will be a convergence around a set of principles which capital will dictate, and it doesn't make any difference too much as to what's happening in the various regions of the world.

Sooner or later, they'll all come to their senses. If they want capital, if they want to grow, this glacier of global capital will wipe everything out. They see convergence in the forest of corporate governance. As far as the trees are concerned -- namely, what grows in the local area -- they're not too concerned.

However, as lawyers do every now and then, they called on some help, and they said, you know: "We really ought to do some research as to why all of this happens. They're just describing what happened, but we ought to find out what are the historical roots. Why did this all happen?" There was no such book that I knew of until Shinn and Gourevitch came along and did what I consider to be groundbreaking work.

Their groundbreaking work, to summarize the book a little bit -- it's hard to do, but what I got out of it was this: You can't assume that the glacier is going to do it. There are too many contestants. There are too many people. There are too many things going on in every country, political and otherwise, to assume that voluntarily this convergence is going to take place. It will not take place voluntarily.

Their position is that the only way it's going to happen is by law and regulation. It needs law and regulation to bring about the conditions that will in turn attract capital to a country, and so they say, "We don't believe in the glacier all together." They think it does have a certain effect, but not enough. The law and regulation is going to be required to bring about the changes that are necessary to attract capital. It's not going to happen that fast.

Now, there may be a contribution -- and I would urge everybody to read this, because this is groundbreaking -- is to analyze a group of countries to determine how those countries changed their law in order to bring about the convergence, in order to attract the capital. And in reading it, you get a sense of how managers and directors and stockholders and constituents like labor aligned sometimes, disaligned other times, came together to work together for certain things, work against each other for certain things. And out of these alliances and disalliances emerged the law of the country, and which brought about these changes, which I think is a very good explanation.

Now, on top of that they layer politics and they say, great, they have these alliances and they work together sometimes and they don't. But on top of it all, they have politics. And they have to have whatever it is -- (inaudible) -- whatever it is that's going on in the country to determine whether the alliances will work.

I think this is right, and I think it's an excellent study and it's really worth reading, because it's true. I think it's exactly the way it happened. The problem I saw was they didn't tell me how these alliances and disalliances were going to be put together. And that bothered me a little bit, because I said to myself, "That's the way it happened, but if these countries are going to come into the fold, what's going to create the alliances and disalliances?"

And there I think the -- (inaudible) -- is too complex to try to figure out for now. My feeling is it isn't too complex, because I'm a glacier person. I believe that the glacier will wipe out the differences. And I say to myself, what's really needed in the country? What's needed in the country is everybody coming to understand, all the parties coming to understand, that if they want the capital, they're going to have to get together and cause the law to change to bring it about. It's not that complicated.

And it seems to me that people will come to understand that they do need the capital, and in order to get it, they're going to have to change. And in order to get that change, they're going to have to create alliances. And to create the alliances, they're going to have to overcome the politics, and it's going to happen.

Now, the great contribution I find in the book is that, in the end, it became perfectly clear to me that this can't be force-fed. You can't lead the U.S., the U.K., the U.N., whoever -- you can't stand on the outside and tell them to do it. The alliances have to be formed in the country. They have to be formed the way the country's culture dictates. And those alliances have to overcome the politics of each country. And we outside can't make it happen. All we can do is tell them about it, tell them what's needed, and hope that they do the rest.

My missionary work has been in the last 10 years to go around the world and say, "If you want the money, you've got to play the game, and here's the kind of things you have to do." After that, I leave it to them to try to figure out what to do. I don't think I would know enough about India or Afghanistan or any of the other countries to tell them how to do it. They have to do it themselves.

But I think the genius of the book is to demonstrate that they have to do it themselves and it is a local issue, and that it takes a lot of work for these alliances to form. That's my take on the book -- (inaudible). I hope I got it right, or at least a little bit.

WYSER-PRATTE: Thank you, Dr. Millstein. I just wanted to ask you a question. Being myself considered one of the locusts in Germany, how do you think that this plays out? How does it affect the thinking in political circles in Germany? Do you think they're more prone now, with that having sort of blown up in their faces --

MILLSTEIN: I think it's very simple. They ran out of money. And it happens. What happened in Germany is that the local banks and the local sources of capital weren't sufficient to drive the growth that the Germans needed. And so they had to look for another way. And in order to raise the capital that they needed -- this may be an oversimplification, but in order to raise the capital they needed, they had to open up the system. The banks had to let go. They had to make these companies more public. They had to create a board that worked. They had to allow their companies to list on other exchanges, because they needed the capital.

I think it's the driving force in Germany. It's not the driving force in France, because the French don't need anything. This is their basic problem. They do very well on their own, and they'll stay the way they are. But the Germans, I think, are doing just fine. The system is opening up to public investment, which is what they wanted. And they did it.

WYSER-PRATTE: Thank you.

Peter?

John. John, I'm sorry. I was waiting for Peter. Peter wrote the book.

JOHN H. BIGGS: I really enjoyed the book, mainly because they gave a framework to something I have sort of been clumsily thinking about and working for in the 15 years that I was at TIAA-CREF, but also most of my career has been spent on the pension side. And if you have read the book, you'll find out that pensions play a much bigger role in the dynamic of this than they're ordinarily thought of.

I have always been intrigued by Peter Drucker's book -- well, Peter Drucker's writings since the 1950s, where he saw this major development as pension funds own equity in all the companies, and eventually the workers all own the equity and therefore were the shareowners of American business, and therefore socialism was going to come to America via that mechanism.

Drucker always made lots of predictions when he wrote, and he made various points. For instance, he assumed that the asset management business of all the banks would have to be divested. This was his prediction in 1950, and we're still waiting to see that prediction work out. And frankly, I'm not quite sure it ever will. But he did -- he was right, I think, and the book rightly goes after the institutional structure in countries, so very influential in determining whatever model works out.

I thought the description of the six models -- if you haven't read the book yet, there are six, and there are various ways that management, owners and employees divide up that relationship -- but the one that receives the most attention is the one that I think may be the model to which the glacier needs to move, and that's the so-called transparency model, where the pension-holders and the workers align politically against management and win out.

Now, if management wins out, then you have a manager (risk ?) model where they capture all the -- (word inaudible) -- and run off with the results. And it seems to me the model where the workers and the shareholders -- excuse me, where the workers and the shareholders form the alliance is the more legitimate one in terms of that's where the results should go.

There's a lot of evidence -- it's quite interesting in the book -- about countries where there are very substantial pension assets. There are movements towards that model. That model, I think, will be characterized -- the word "transparency" suggests that the accounting statements are honest and clear and audited appropriately by someone independent of management, that the boards are independent, that they can figure out what the executive compensation is in the company -- hopefully we're making some progress on that in the U.S. -- that you can get information about the company available to the pension-holders, the workers -- in that sense the pension-holders. It's not the workers in the individual companies but the workers in the macro sense, in society, and the shareholders, and that they want that information, and therefore you have that kind of control over management.

It seems to me to be a desirable direction for us to take, and it seems to me we've moved a long way toward that in the U.S. In countries where there is very little in the way of private pension accumulation, you get different kinds of models resulting; there's a tendency, at least. None of this is absolutely clear-cut as to which way it goes, but there is certainly a tendency -- and the data they show in the book shows that.

I was always intrigued by these issues when I was at TIAA-CREF, because I wondered: how would the people who are relying on pension accumulations, how would they influence the outcomes? And we took a lot of strong positions throughout the '90s, which I go back and look at where we were; an awful lot of those things have come to pass.

For instance, we were very lonely in testifying in Congress that there is a problem with the auditing firms and they're being conflicted by all their other business activities. It took Bernie Ebbers to make the point, finally, and I think Ken Lay did it even more, because I think what was happening at Enron was really, truly outrageous.

But it's significant that the outrage occurred, because after the pricking of the bubble and the collapse, 50 percent of Americans had money in mutual funds and took big losses and cared about it. And an awful lot of that -- I'm not sure of the exact percentages, but of that high percentage, many of them had that money in 401(k) plans -- namely in pension accumulations or IRAs or any other form. They probably didn't care much about the corporate pension funds, for defined benefit plans, in terms of the general population, though they should have, because those plans were generally overfunded through 1999, and now we have a very different world with serious concerns.

In 1929, only 10 percent of American families had money in the stock market, and so you didn't see quite as extreme a position then. What has always interested me about the institutional -- I've spoken out about this; I've met with banks and talked about it -- is the fact that there are so few institutional financial institutions which are representing the pension clients that they have. What are the reasons for this? Drucker identified them in the 1950s -- if they had major corporate business as well. If you had a bank with a huge book of commercial loans, are they really going to want to offend many of their clients by going after them on corporate governance issues?

I always felt that obviously they had a difficulty. We used to file 30 to 40 resolutions a year at TIAA-CREF which were opposed by management. I am not aware of a single resolution to ever have been filed by any life insurance company in the United States that was (opposed?) by management. I'll leave that as the starting point of evidence. No bank has ever done it. No mutual fund company has ever done it. Now, thanks to the Department of Labor, they at least vote their proxies now and they try to vote them independently. But that is not taking an activist position for your pension customers.

A final point is I think the state pension systems have been good -- I mean, if we had any allies at all at TIAA-CREF, we worked with them and we tended to support many of the same issues. But at least by perception, they are dominated by political forces, political ambitions of many of the people involved. They do not have the kind of know-how that I think most of these financial institutions who invest pension money -- the asset-management firms have tremendous knowledge of the individual companies, have the capacity to give really good advice on corporate governance issues. But they don't do it. They don't take a stand.

So I'm not optimistic that we're going to see a lot of aggressive movement in the transparency model that Gourevitch and Shinn have proposed. If there is a glacier, it's going to move to a common converged element. I would hope it's that model rather than one where the managers control the wealth of the company or that labor does or the state. But there are a lot of issues in those approaches, which in many countries is still the dominant approach.

WYSER-PRATTE: Thank you, John.

I agree with the position in the book about the importance of pension assets and how that's moving things along. What I would like to offer is that, where there aren't pension assets, particularly in Europe, who owns the shares? The Anglo-Saxon portfolio managers -- 30 to 40 to 50 percent of shares in France, Germany, Italy and so on, where they don't have corporate pension plans, are owned by Anglo-Saxons. So what happens? This is what creates the pressure from the activist side.

And when you add to that the fact that you have blocking procedures for voting shares in Europe, which means that if you want to vote at an annual meeting, you immobilize your shares -- that immediately means that the guy on the street is not going to vote, so you have a very low turnout. The guy on the street doesn't want -- (inaudible) -- of his securities. He doesn't want to not be able to sell his shares, which is required when you block your shares to vote. So you get a very low turnout.

This is why you could have the thing with the whole locust controversy in Germany, which was around the Deutsche Boerse acquisition by the Children's Fund. Very low turnout means you need a very small coalition to get resolutions passed. So in Europe, when you don't have a pension asset, you have the Anglo-Saxon guys, who are a captive audience for an activist moving in when you have a low turnout, so it's not very difficult to get resolutions passed -- which are legal, by the way, in Europe, because they're very often imprecatory in the United States.

Patrick -- (off mike). (Laughs.)

PATRICK BOLTON: It's ironic what you said, that in Europe, where you don't have large and private pension plans, you have more institutional activism; whereas in the U.S., what you have is very much reined in by various constraints and they can't make -- (inaudible). I thought that was an interesting remark.

I would like to make two points about the Gourevitch and Shinn book. Before I get to those points, let me say, as an academic working on corporate governance, this is really cutting-edge work. They're really breaking a lot of new ground. Before Gourevitch and Shinn -- I'm simplifying a little bit -- before Gourevitch and Shinn, you had economists or finance scholars writing on corporate governance, yet all those scholars, corporate law scholars writing on corporate governance, you had already seen established -- (inaudible) -- between legal rules, legal protections and investment. But what was missing was a political dimension.

Now, there had been a few attempts, most notably by Mark Rowe (sp) at Harvard, to bring in the political dimension. But that was very early ground. And I think that Gourevitch and Shinn are moving the agenda, the research agenda, by focusing on the politics as the critical part of bridging the gap between the law and corporate governance practice.

So let me get to my two points.

The first point I would like to make is to give you a little bit of background from where this all grown out of. We had this roundtable here at the council on corporate governance in 2001-2002, as Guy was mentioning. And I remember our first meetings, the mood was very much, well, there's one model. But I stated even more strongly, there is one model that works well, the U.S. model, and it's going to take over the rest of the world.

And the U.S. model at the time was, well, strong minority shareholder protection that permits wide dispersion of shareholdings. You don't need -- (inaudible). You have strong boards. You have disciplined (roles ?) of hostile takeovers. And you put those three things together and it works well. That was the mood when we started debating corporate governance at the time.

And then, of course, Enron had just broken, had just collapsed, but still, it was not seen as a watershed. It was only later on during that year that things started getting worse. And by the time WorldCom came along, they started to say there was a crisis of confidence in corporate governance in the U.S. So we had to revisit the idea that we had a perfect model that would be exported all over the world.

So there was a crisis of confidence. You know, it got the president interested. It got Alan Greenspan interested in corporate governance. Everybody was worried. It was a lack of confidence in the soundness of corporations, a potential reason why we might get a recession, get into a recession. That was the talk at the time. And then there was a debate -- is it just a few bad apples, or is it a more widespread phenomenon?

Now, in the meantime, we had Sarbanes-Oxley. And I want to say a few things about Sarbanes-Oxley, because I think it will -- at least reacting to what Ira said, it paints a slightly less optimistic view of what regulations do and how we can rely on just regulations to give investors the right protection.

But anyway, on the few bad apples, well, I expect to say that although there have been a few major scandals, there haven't been that many scandals. It hasn't been that widespread. And you could come away with an analysis saying it was just a few bad apples, and you could come away with an analysis saying, well, maybe Sarbanes-Oxley was overreaching, the legislation was overreaching, responding in the heat of the moment. And certainly a debate that we heard recently, specifically with respect to the cost of the internal auditing system, Section 404 debate, tends to suggest that the corporate world is responding, thinking, well, we have these very costly regulations being imposed on us; maybe things have gone too far.

I want to say two things about this. One is, on the bad apples -- (inaudible). So I agree that there are only a few scandals. There could have been more. That said, there is empirical research done in finance that has documented the extent to which earnings manipulation is a very widespread practice in corporations. Corporations like to manage earnings; they like to meet analysts' earnings targets, and they'll do lots of things to meet those targets.

Well, before Sarbanes-Oxley, what they were doing -- they were playing around with the accounts. They were hiding liabilities. They were bringing forward earnings and so on, and this is very widespread. So on that dimension, we can't say it's just a few bad apples.

Now, ironically, what Sarbanes-Oxley's done is it hasn't stopped the earnings management. What it's done is substituted earnings management through accounting, which might, you know -- if people see through it, you might say, well, it's reasonably benign for more costly now -- more costly earnings management.

Now, if you want to meet an earnings target, you may forgo a profitable investment temporarily. And chief financial officers are arguing that's what they're doing. That's less of a problem. They're less likely to face a lawsuit, and that's what they'll do. So there is a -- you can see here that there may be unintended consequences of regulation.

Now, the other point that I want to make about Sarbanes-Oxley is that although people have emphasized that the costs have gone up -- like auditing costs for firms more than doubled in four year, sometimes trebled, although there are a lot of complaints about Section 404. And there's evidence that there's some de-listing by the smaller firms. There's also evidence that foreign companies now tend to list more -- more likely to list in London than in New York. There was a recent article about this. So there seems to be evidence that there are substantial costs. I don't know where I'm -- I don't have enough knowledge about this. I don't know where I'm standing on this issue.

Let me just point to two counter arguments you might have to this.

One argument is, why is it likely to be de-listing as a result of the implementation of Section 404? Well, one reason could be that before you could hide something that was going on in the firm. Now you can't, so you'd rather de-list than make it come up in the open. That's a possible hypothesis. I don't know how one would deal with this empirically. And on the foreign firms moving away from New York and listing in London, for example, you might say, well, it's because now Sarbanes-Oxley's so costly.

But another element you have to bring in is that, well, London has done pretty well. Now, the London market has been booming. The West hasn't been -- New York Stock Exchange hasn't done that well the last two years and so for companies, maybe they can get a higher price by listing in London than in New York. So that could be another reason why you see moving away capitals. I just wanted to bring those to the table. I'm sure there will be debates on this point.

Let me turn to the second general point I wanted to make and that goes more to the heart of the Gourevitch-Shinn book. And that's coming back to what we were debating at the time of the roundtable, and that was, you know, is bad governance in some countries -- is that an obstacle to financial globalization? And should we understand bad governance to mean concentrated ownership, blocks and lack of minority shareholder protection? So should we so that the -- Guy was asking earlier, what explains the diversity of corporate governments around the world? But when you look at ownership patterns, it's not that diverse. We're not in such a diverse world.

The typical picture for ownership patterns is a lot of concentrated ownership outside the U.S. and outside the U.K. The U.K. and the U.S. are more (outliers ?) than representative of what's going on in the world. But the question, then, is, how shall we think about concentrated ownership? Is that a symptom of bad governance? Is it that that's the only way you can get protection as an investor? Or is it an alternative model? So that's the point I wanted to quickly debate.

I think that, you know, there are many cases you could argue it's a symptom of bad governance. And you might ask, well, how do we break that obstacle? How do we make sure we achieve more shareholder -- (word inaudible)? Do you we need to bring in minority shareholder protection? If so, how do we do it?

Well, I think here the Gourevitch-Shinn book is absolutely essential reading because it tells you that the politics I mention is absolutely crucial. You have to understand the politics in each country that supports a particular governance arrangement. And it's not as simple as just coming in, implementing regulations that protect minority shareholders better and hoping that this will then somehow lead to more diffuse ownership and breakdown the blocks.

Incidentally, in some Northern European countries, there is minority shareholder protection as strong -- on the books and the way it's implemented -- as strong as in the U.S.. You still have a lot of blocks.

So the block picture -- how do they survive? Well, I think that's where politics comes in and an analysis of alliances like John was alluding to -- what kind of alliances are behind those? Is alliances between managers and workers? Is alliances between workers and shareholders? And there, I think, the Gourevitch-Shinn book really is very enlightening.
And in particular how -- you know, it's not as simple. You can't just break down politics to the workers on one side, the capitalists on the other side and the managers in the middle. That would be far too simplistic. There are -- there are "sectoral" interests, like, for example, you may have a declining industry like steel that both the workers in that sector and the investors in that sector have an interest in maintaining.

So like we had a takeover attempt by Mittal of the Arcelor steel company -- I guess is the largest European steel company. Well, what do we see? We see a natural alliance between the workers in Arcelor and the managers and the block holders. They all have a stake in maintaining their interests, and that all works through political channels. The finance minister of France immediately spoke up against the takeover. Let me leave it at that.

WYSER-PRATTE: Thank you, Patrick.

I'd like to tie that in just to the thought of the existence of corporate governance codes in certain countries -- the fact that they've been drafted or even exist in certain areas. I was at a conference a few years ago in Berlin where Dr. Kroma (ph), who was the drafter of the German Corporate Governance Code, made a wonderful speech about the wonderful code they have in Germany. And I asked him at the end of it, "Where's the enforcement of this code?

And he said, enforcement, what's that? He said the public will enforce.

I said, "The public? That's me!"

He said, "Well, so be it."

So the Japanese don't even have a corporate governance code. They're going to see -- you're going to see a bout of greenmail occurring there, the likes of which have never been witnessed before, because they don't have a corporate governance code.

So I would ask, Ira, what do you think? Do we need teeth in these -- obviously, you do think they need teeth.

MILLSTEIN: Oh, yeah, I do. I'd like -- just preceding that, I'd like to respond to one question about the American model -- the U.S. model. I think we over complicate the issue of what is the U.S. model and whether it collapsed, Patrick. Sure, things went wrong, but the U.S. model, which we talked about exploiting -- at least I think I was at that meeting, if I recall correctly -- was a really simple one. There are three elements of corporate governance, which I'm going to pickup in a minute. One is transparency.

The key element of corporate governance around the world is transparency and disclosure. You can't have good corporate governance without knowing what's happening inside the company and having the company, by law, required to disclose. The second element is minority rights. And that goes for (stated ?) countries or any country that wants to have other than one owner. And so if there is going to public owners, you must have minority rights. And the third element is enforcement. Now in the United States, we have all three. Do they work all the time? No, but it's a piece of the book that I'm going to write that says nothing works, but some things work better than others.

Now nothing ever works perfectly in the United States and we keep changing and changing and changing, but always built around these three concepts -- transparency and disclosure. Sarbanes fixed that -- tried to. There'll be another scandal; they'll have to fix it again. And as far as minority rights are concerned -- violated all the time, but that's why we have derivative litigation and shareholder litigation.

But the most important thing we have -- and you're absolutely right -- is we have enforcement through the SEC, private parties -- as much as we hate them. It is the cleanup that makes the system work. The other countries that enact codes and enact laws and do nothing about them -- it's a waste. Look at Russia. They've got great codes, great laws, and they violate them with impunity and there are no judges with whom -- where you can go.

China is in the process -- Ann Schinenger (sp) points this out -- are in the process developing their codes, in the process of disclosure, in the process of trying to get minority rights, but no mechanism for enforcing as yet. And I think as all of you have, if you're familiar with these countries -- as you visit them and you tell them enforcement, it's tough; they don't like it. The Japanese just don't like it, and certainly the Chinese are not up to it and the Russians are clearly not up to it. And they won't have corporate governance. They won't have the American model, Patrick, which, to me, is a simple model. It's not a complicated model. And I do believe it's the model around which the glacier that Shinn and Gourevitch don't love too much and I love a lot is going to work. It's going to force disclosure, transparency, minority rights and enforcement, or you're not going to get the money.

And I think we're all learning with the Asia bust and one bust after another -- Russian bust -- that where they're not present -- even if they're in codes and even if they're in law -- they're not following the model. They talk about it, but they're not following it because they don't have the mechanism for enforcing it, which is probably the single most important missing element all over the world, because anybody can write a code.

WYSER-PRATTE: They talk the talk, but they don't walk the walk.

With that, ladies and gentlemen, I'm going to open the floor up to questions. I would remind you that if you have a question to state your name and your affiliation. Please limit yourself to one question and keep it concise to allow as many members as possible to speak. At the close of the meeting, which will be in exactly 15 minutes, we'll have a reception with Peter and Jim, who will be available to sign their books.

May I have your questions from the floor, please. Sir?

QUESTIONER: My name is -- (off mike) -- and my question is for the panel. Is there an inconsistency between U.S. executive compensation approaches and good corporate governance, and why?

WYSER-PRATTE: You want to take a crack?

MILLSTEIN: I think there's very clear relationship. When you have the kind of compensation that we have, you have sleepy boards, period. We have the model, right? We have boards who are supposed to be overseeing, compensating, et cetera, managers. When you see compensation running the way it does, there's no one else to blame but the boards, period. You're never going to pass a law -- we tried that once -- that says you can't pay more than a certain amount of money. That's not going to work.

So where you have -- and I think probably the activist funds, John, are beginning to focus in on it. There will be more resolutions on compensation this year than ever before because they're beginning to wake up to the fact that something's wrong with the board where compensation is what it is -- for example, paying somebody who's about to retire $6 million a year for the rest of his life. Who did that? How does a board do that? And if there ever was reason for voting no on a board, I would say compensation like that is a splendid reason.

BIGGS: Compensation, I think, is a major issue and a major troubling -- again, we pushed at TIAA-CREF to get the SEC to do something on disclosure compensation 10 years ago and kept pressing, and they finally have done something, which I think is quite useful. It still doesn't mean that the problem is solved.

I would give Congress some credit for the problem that we have, though. (152M ?) said that you could not pay more than $1 million if it weren't performance related, and everybody moved very quickly to raise salaries to a million and then put plans in on top of that which would make sure you get paid a lot more. And the other thing Congress did, effectively, is they blocked expensing the stock options. And we ended up with an extraordinary pattern of stock option compensation by the end of the '90s with the number -- 60 percent of the compensation of the S&P 500 CEO's was coming from stock options.

You've got this tremendous random dispersion of awards and everybody looked at the top awards and said that's what we all ought to be getting, and that's how we got here. And I mean, I think stock option practices in the '90s got us here. We're on a high plateau. Apparently, we've sort of stayed on that plateau. It's very high, but I don't see the path by which it's going to come down because I don't think the institutional shareholders care about it.

MILLSTEIN: And I do think every time you have regulations -- like the new one that we have on disclosure -- I think it's no joke that everybody can look at a regulation and say, why aren't I getting the top level? I mean, I have disclosure against which you measure yourself as to how well you're doing. So I really think it's the board. I really think that nothing could stop this except huge pressure on the boards to get it under control and it hasn't come yet. We don't have that.

BOLTON: So I would agree with what was just said about the unintended consequences -- potential unintended consequences of greater disclosure. Now what you see -- I think it's a difficult -- I would agree it's a big problem, executive compensation. That may be one of the hot, biggest problems to U.S. corporate governance.

But what you see about when these compensation plans get awarded -- when do the big pay increases occur? Invariably, they occur when a CEO changes jobs. That's when you see a huge increase. So the idea that you have a captive board that the CEO can talk to and talk into giving a large compensation package, that doesn't square well with the idea that it's when CEO's move that they get the highest pay.

So there seems to be a fairly competitive market out there that affects the standards. And that's a basic constraint that you're going to face. You can't -- a board at an individual company, there's very little they can do individually because they have set a competitive pay level. This is maybe a situation where you have to intervene more broadly at the level of the whole market. Now how you would intervene, I don't know.

WYSER-PRATTE: Gentleman in the back.

QUESTIONER: My name is Ted Sattler (ph). I'm with the -- (inaudible) -- Corporation. We are probably the largest apparel shirtmaker in the world. This question is for -- Dr. Millstein or Mr. Millstein?

MILLSTEIN: Mister Millstein. Professor -- I like that more. (Laughter.)

QUESTIONER: Professor Millstein, my son just graduated with his MBA at Yale, and I think you're somehow affiliated with that. Sitting next to me is one of our business partners from Bangladesh. His name is Mr. Azim (sp). Mr. Azim (sp) came from very modest means, and we as a corporation have been working with Mr. Azim (sp) for five years-plus on attempting to put him in compliance with our codes. We are the enforcement agency; the government is not. My question is really a simple one to Professor Millstein. When does the iceberg -- does the glacier hit Bangladesh? (Laughter.)

MILLSTEIN: John? (Laughter.)

BIGGS: I was working on it. Well, I interpreted glacier in glacier times. (Laughter.)

MILLSTEIN: You know -- when, when, when. (Laughs.) When they have a manufacturing infrastructure which begins to develop and when they need to reach out for capital and you decide whether or not you're going to put a nickel into a Bangladeshi company with no courts, no disclosure and no minority rights, maybe the lesson will come through. I think Shinn and Gourevitch make it very clear: this is a local activity. You know, we can go over and scream and say, "You people ought to be doing this," but it won't work until they need it. When they need it, they'll pay attention and they'll have to overcome divested interests in their country, the entrenched families, the entrenched government that will resist like hell because they like it the way it is. They're going to have to overcome all of those politics -- as the book points out. Even with all the desire to reach out to the capital markets, they'll still have the local politics. It's a tough job.

I have enormous sympathy for these countries which are attempting to develop. Think about the Arab countries and when will that ever happen? And think about what's happening in the ex-Russian empire with fist fights taking place over who's going to get the share of what. This is a long long-term process.

WYSER-PRATTE: The lady in the middle.

QUESTIONER: Hi, Nancy Yao Massbach, SOM, student of -- (inaudible) -- and Center for Financial Research and Analysis. I'm wondering -- and this is based on some of the other comments -- earnings, cash flows, operational health: I think those are all relatively easier to detect the quality of. And corporate governance, though, is a little bit more difficult, and also the timing of which, in terms of the impact onto the markets, is a lot more unpredictable. So how would you recommend factoring these issues to the investment community, and how should they be smarter or how should we be smarter about thinking about corporate governance since it's difficult to quantify?

BIGGS: Boy, you've been in the business. I wouldn't -- I mean, you said that the revenues and earnings and so forth are relatively easy and open. I think I disagree with that opening statement and say that we're having a lot of trouble getting that right. I don't think corporate governance is that hard to understand in a company. We found that by just doing desk audits back in our office here in New York. We had companies all over. We had interest in about 2,700 U.S. companies. And we looked at all of them. We took the position that we ought to be as aggressive an institution as the British institutions are. And so we did desk audits, and then we went and called on them and asked questions, confronted CEO's with our views.

If we didn't get anywhere on an issue, then we would file a proxy resolution and take it public. We were reluctant to do that. We had a paper done by -- well, actually, one of our board members -- on the number of initiatives we had taken, and we had a very high hit-rate of success of about 95 percent of the times we intervened. But it's not hard to figure it out.

What discourages me is investment analysts don't spend any time on the subject. I mean -- and I regularly brought it up in investment committee meetings within TIAA-CREF. Well, why did you put money into it if you really thought that corporate governance practices were off? You remember the infamous WR Grace case. We had at one point owned almost 10 percent of that company and then they did something outrageous in terms of corporate governance, so we intervened in a major way in that company. That was back in the early '90s.

But I kind of gave our people a hard time. I said, why in the world did you do that when you had a board where the youngest person on the board was 70 and most of them were in their 80s and they had been there forever and they were getting -- and this was a case where the board was capturing all the rents. It wasn't management and it wasn't the shareholders and it wasn't employees, but it was the board itself.

MILLSTEIN: To answer your question, at Yale we've just brought up these standards which George Voida (sp) developed, which is a system which analyzes countries all over the world and companies in those countries as to the very basic things -- disclosure, transparency, enforcement, et cetera. So you do have some places to go. And the World Bank also has things called -- I don't remember, Royces (sp) or Roiks (sp) -- where they analyze the same thing. There are sources now to which you can go to find out the basics about the country that you're taking a look at. Companies, that's another story.

WYSER-PRATTE: Gentleman right here.

QUESTIONER: Jon Hartzell, KWR International. I want to ask a question about ethics. I'm not quite sure how to formulate it. But in the light of what Professor Bolton said, talking about substituting one kind of earnings manipulation for a more expensive kind -- with a more expensive kind -- and what we read about the Enron trial, that the defense is apparently going to argue that a number of things that were done were legal, were acceptable, whether or not they were happy things: Is there a role in here somewhere for corporate attention to ethical standards and trying to -- a genuine commitment to ethics that can be conveyed to investors in the market that will give the corporations at least a little bit of running room? Most of the discussion seems to sort of assume that, left untended, the corporations and businesses will try to get away with whatever they can. And maybe that is a more practical approach. But I'm just wondering whether any of you thinks there's a role for serious return to ethical concerns somewhere along the way.

BIGGS: Yeah, I would comment that I think reputation of companies is important and there's a premium in the market value for that, and I think that's getting to be better understood. And people -- investors throughout the -- I'm most familiar with the U.S., but I think other countries do distinguish companies that they believe are behaving ethically or not doing a lot of things. And you have some very knotty issues about this. I have lots of examples of what do you do when you're -- how do you file your tax returns? I would say the really ultimate issues for CEOs is how far do you go near that edge? And it seems to me that companies that stay away from it become known for that. And so I think it's part of the reputation. I think companies would be smart to have a reputation requirement. We have something at JPMorgan Chase -- I think it's a reputation committee at an investment bank. It says, if you make too much money on a deal, it's got to go upstairs to have somebody look at it and say, why are you making that much money? That's something that we want to do.

WYSER-PRATTE: Lady here.

QUESTIONER: Hi, Moosh McCanna (sp), attorney here in New York. My question is to Professor Millstein. To what extent is corporate governance related to political governance? Having married into one of the entrenched business families in Bangladesh, I am amazed at how well they keep doing in an environment of, you know, political incivility.

MILLSTEIN: Well, the book is terrific. You have to -- you really do have to read it. It's absolutely tied. It's absolutely tied. In a country like Bangladesh or any similar countries all over the world, the ability to get the corporate governance in is going to be totally political, because, as they correctly point out, the law is what does it. The law has to be passed. It isn't going to happen voluntarily. It could happen voluntarily on the ground, but it isn't going to take. The only way it takes is if the country's law changes. To get the law changed, politics. To get the politics changed, enough grassroots alliances and so on to force it to happen. But absolutely tied. The politics is key and they make the point graphically.

WYSER-PRATTE: We have room for one more or two more questions. The gentleman in the front.

QUESTIONER: Roswell Perkins, retired partner at Debevoise and Plimpton. I would not want the meeting to end with a complete denigration of codes. I'm having trouble converting my comment into a question, but -- (laughter) -- I might put it this way: Don't you agree, Ira, that the glacier can be -- (laughter) -- can be pushed a little bit further and faster if there is at least a code which provides a target at which corporations feel that they should point and that courts can be educated by? Does it not have a great education value? And I will say that in Russia, I think it has.

MILLSTEIN: Yes. The answer is yes, obviously. Anything you can do in a country to bring an awareness that these changes are necessary and what good governance could be is good. And if they sit down and do a code, wonderful. Then the next step is to get the government to pass the laws and create the courts in which these things can happen, but the code is a great beginning. It's an awareness device.

WYSER-PRATTE: Ladies and gentlemen, if you would like to continue asking questions, I'm sure you'll have an opportunity with our panelists outside in the reception.

I would leave you with this thought, and it's a question for Patrick: How did the French give up with their concept of creating national champions? It just absolutely gores me.

How about a nice hand for our distinguished panel. (Applause.)

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