Nell Minow has just finished writing a book on movies, due to be published in the summer. As a founding partner of Institutional Shareholder Services and Lens Inc, with three books on corporate governance under her belt and a Robin Hood-like reputation across America’s boardrooms, Minow thought it was time to try something new. Writing about a different type of director had its appeal.
‘Movies have always been a bit of a passion for me, and my kids were insistent that I write about something interesting for once,’ says Minow, who thrives on new challenges. In fact, her whole career is built on them: ‘The thing I like best about my work is that I am constantly pushing companies to do better and improve their performance. Once they make it, my job is finished and I start all over again somewhere else.’
A lawyer by training, Minow worked for a number of years in the US government. It was there that she met Bob Monks. ‘He seemed like a really interesting guy and the only political appointee who ever came up trumps with the information I needed,’ she says of her colleague.
Monks and Minow went on to set up Institutional Shareholder Services together in 1986. ‘Originally we wanted to establish something along the lines of the present day Lens, but people were simply not ready for it at that time. They thought the idea of purposefully investing in companies that were doing badly was an outrage,’ Minow remarks.
So the indefatigable pair came up with a compromise: ‘A lot of people were frustrated with the Investor Responsibility Research Center around that time because it was so objective,’ says Minow. ‘People wanted someone to take a stand and actually say, You should vote this way or that, so that’s exactly what we did.’ ISS started by providing recommendations on ‘all important proxy votes’ at S&P 500 companies. But clients soon demanded a more comprehensive service, so ISS was expanded to cover all proxy votes at the top 6,000 American companies.
However successful a phenomenon ISS proved to be, it didn’t fulfil the role that Monks and Minow had been looking for: ‘We wanted to be a critic on the stage rather than in the audience – the kind of entity that organizations like ISS and the IRRC write about.’ And so in 1994 they founded Lens; ISS was later sold for $12mn.
Lens’ five partners and one consultant operate from a virtual office, communicating by e-mail and conference calls. All stockpicking decisions are made by consensus. According to Minow, the company carries out the same kind of analysis that any money management company does, but upside down: ‘We read the numbers from the bottom up.’
Minow and her colleagues look at companies that have been the worst performers over the last one, three and five year periods, and then they start eliminating non-starters. These might include companies in badly performing or heavily regulated industries. Then other investors in the company are evaluated to gauge how vulnerable it is to shareholder activism. If the company has just negotiated a large settlement with, say, Calpers, other shareholders are not likely to be supportive of any efforts by Lens to stir up trouble.
Once a decision has been made to invest, Lens begins to pressurize management. ‘This can take many forms, although it almost always starts with a letter of introduction to the chief executive officer before moving on to stronger measures such as shareholder proposals, talks with the press, talks with directors and eventually – if things get really bad – a proxy contest,’ describes Minow.
She is not impressed by companies which think of Lens and other shareholder activists as a nuisance: ‘Directors who don’t want to be subject to shareholder demands should keep their companies private. If you want to borrow money from the public you have to realize you are entering a system where shareholders have a right to make as much noise as they want.’
And Lens keeps on bugging management until the company starts producing the right kind of results. ‘The only investment philosophy I’ve ever really understood is to buy low and sell high. If we’ve already bought low, we’ll keep on at the company until we can sell at a good price,’ Minow adds.
The Lens strategy has delivered results in line with the partners’ expectations. The fund has consistently beaten the market, with a compounded annualized return of 25.5 per cent, compared to the S&P’s 16.3 per cent. In the process, it has grown from a fund of $10mn to one of $85mn over a five year period. During that time, Lens has only given up on one of its investment decisions: Westinghouse was not going anywhere explains Minow.
Perhaps Lens’ most important achievement has been its impact on the corporate governance debate. According to Minow, not a boardroom in America has been left untouched by the fund’s influence.
The force of that impact, she says, really hit home at a Campbell Soup roadshow presentation she attended recently. David Johnson, Campbell’s CEO, gave a slideshow demonstrating how well the company had been performing over the previous year. The last slide flicked to one of Lens’ well-known campaigns and showed a one-page advertisement in the Wall Street Journal berating Ceres and its chief non-performing assets – the board of directors. ‘This,’ said Johnson, only half in jest, ‘is what keeps me at it. It would be my worst nightmare to see our name up there.’
Minow’s insistence on good corporate governance stems not so much from a wish to instil fear into the hearts of America’s boards of directors – although she does admit to a long time dream of getting the bad guys locked up – but from a deep-seated belief that good corporate governance really works: ‘Success is all about having the right management and the right structure.’ It is important, however, that companies really think about the measures they are introducing, stresses Minow. Blindly accepting that the roles of chief executive and chairman should be separated, for example, means that they entirely miss the point of why they are actually doing it.
‘Good corporate governance differs greatly from company to company,’ says Minow. ‘One company might violate eight out of ten of my top ten governance guidelines but still be an extremely well run and successful company. The main thing is that the right questions get asked and continue to be asked.’
The biggest enemy to good corporate governance, Minow continues, is complacency. ‘It is no coincidence that the great corporate successes of the 1960s like IBM, General Motors and Sears were the corporate catastrophes of the 1980s. These companies thought what they were doing would work for ever. On the contrary they should have been continually re-inventing themselves.’ This is why Minow sees the key to good corporate governance as board evaluation. Indeed, she says that if she could change one thing at most companies it would be to require non-executive board members to meet regularly, separately from the rest of the board, to evaluate how well the directors are performing their roles.
‘Once the process starts it is very difficult to control,’ she says. ‘A board which tries to stop the implementation of an evaluation process looks pretty suspicious. Once it’s been started, they can’t say, Oh, let’s talk about how well we all get along. Someone’s going to say, Well hang on a minute, lets talk about what we’re meant to be doing here.’
As for the future of corporate governance, Minow is dismissive of critics who say that the debate has already gone too far. On the contrary, she feels that it has become a lot less shrill and a lot more constructive than in the early days. ‘There are many more instances now of directors, managers and shareholders sitting down together at the bargaining table rather than the public humiliations that were commonplace in the 1980s,’ Minow says. ‘The debate will only have gone too far when we have no more major embarrassments like the one at Archer Daniels Midland last year, and when shake-ups start to happen at companies that are actually doing really well.’
In Minow’s view the transition of the corporate governance agenda – from concentrating on takeover provisions to executive compensation and now onto the board structure and compensation – shows how much the debate has matured over the years. Minow applauds the recent publishing of lists of America’s worst directors by Calpers and Business Week among others, and sees this as the way of the future.
‘Directors are becoming more and more accountable for their actions and this is going to have a massive impact on the performance of their companies,’ Minow asserts. ‘If all this talk about privatizing social security in the US comes true, that is going to put a lot more money into the stock market and companies are going to have to compete for that money. If you were a fund manager and had to choose between investing in a company which, for example, paid its CEO by the hour or by his performance; or between a company that had an independent nominating committee and one that let its CEO pick all the directors, which would you go for?’
This may not be very sophisticated logic, but Minnow suggests it is appropriate to the IQs of some of the people running America’s largest corporations. She tells the story of one chief executive officer who, irritated by her continual pestering to implement governance changes, pointed out that making money is a difficult business. ‘I mean, does this guy know that he’s the last person in America to realize that?’ chuckles Minow.
In terms of her own career, Minow definitely sees her future aligned with that of Lens. ‘Trying to make companies more successful never stops being exciting,’ she says. And perhaps she’ll write another book. If she is switching back from the movies again, a fair number of corporate directors had better be on their toes.
