Why Corporate Boards Need Activists

Millstein is arguably the world’s leading authority on U.S. corporate governance, directors, and why they work or don’t work the way they do. With investors and the public asking “Where was the board?” at Wells Fargo, Samsung, Volkswagen, and other companies today, his expertise is in demand. I talked with him yesterday in New York at Columbia University’s Millstein Center for Global Markets and Corporate Ownership. It was named after him when he turned 80, a decade ago. Today, at 90, he speaks with energy and sharpness that would be impressive in a man of 50.

Having counseled boards at major companies including General Motors, General Electric, American Express, Macy’s, Drexel Burnham Lambert, Westinghouse, and countless others, he believes most U.S. directors still aren’t doing their job well enough. That’s why he has written a book, on sale next month, called The Activist Director: Lessons from the Boardroom and the Future of the Corporation. Directors’ central failure, he says, is failure to confront the reality that “capital markets have become the tail that wags the corporate dog.” Specifically, investors demand profits that meet expectations every quarter; most CEOs cave in to the demands “and forego innovation and growth,” and directors passively allow it. As a result, companies can’t attract long-term capital. So they become even more desperate to deliver short-term results.

“The key to breaking this unvirtuous circle,” Millstein says, is activist directors. They must supply the courage to to manage longer-term that CEOs may lack. I asked him if this is largely a matter of board culture. He agreed and said “the culture on most boards is getting along.” Companies specifically seek directors who won’t be the squeaky wheel and cause tension, when that’s exactly what most boards need – activist directors willing to say what’s uncomfortable.

Millstein acknowledges that being his kind of activist director is hard work, much harder than just spending a few hours at eight board meetings each year. How to attract directors who will do the necessary work? “Pay them,” says Millstein, and tie their pay to long-term value creation. Most directors today “have little motivation to do anything but show up.” Paying directors on long-term value could result in some of them making far more than they do now. It would be worth every penny, Millstein believes.

Fifty years ago directors were so passive that one CEO called them “the parsley on the fish.” They began to assert themselves some 25 years ago and became dramatically more aggressive after the Enron-WorldCom scandals and again after the financial crisis. Millstein has the perspective to see the revolution that has already happened; he influenced much of it. And yet, he believes, we still have a very long way to go.

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