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Why Corporate Boards Need Activists

Superlawyer Ira Millstein was appalled by yesterday’s news that former Senate Majority Leader and Republican presidential nominee Bob Dole, working for the Taiwan government, had midwifed Donald Trump’s protocol-shattering phone call with Taiwanese president Tsai Ing-wen. “It violates everything he said as a candidate about draining the swamp,” Millstein said. “Now we have to question what’s behind all his other decisions.” The larger point, he says, is the extraordinary uncertainty in the business environment, “especially populism, which corporations haven’t paid attention to.” And that, he says, is the latest issue facing the most important business leaders we don’t talk about much, corporate board members.

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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What We’re Reading Today

Insurers offer ideas for Obamacare replacement
Republican leaders, including House Speaker Paul Ryan, say repealing Obamacare will be a top priority in the next Congress, but doing so without a credible replacement would send the health care market into chaos. America’s Health Insurance Plans, the insurers’ industry association, wants larger risk payments to offset the costs of sick patients. Lobbyists for the industry’s many other players will be busy pushing their interests. CNNMoney

Wells Fargo to receive a failing grade… 
…for community lending, sources tell Reuters. The action by the Office of the Comptroller of the Currency could impede Wells’s effort to open new branches. Tim Sloan‘s bank has received an “outstanding” grade since 2008 but is under increased scrutiny following the fake account scandal. Reuters

Michigan recount suspended
A federal judge has ruled that Green Party candidate Jill Stein‘s effort to force a recount of the presidential vote will not continue in Michigan, where Donald Trump narrowly defeated Hillary Clinton. U.S. District Judge Mark Goldsmith said that since Stein could not possibly win, she’s not an “aggrieved” candidate. Stein could appeal to the Michigan Supreme Court. Fortune

Portland passes CEO pay tax
The city council has approved a 10% surtax on a city business tax if the CEO makes 100 times more than the median employee and a 25% surtax if the CEO makes 250 times more. It’s believed to be the first tax of its kind. NYT

Building Better Leaders

Activity isn’t productivity
Former Baxter International CEO Harry Kraemer says leaders must appreciate the difference, knowing their priorities and using self-reflection to determine where they can improve. Kellogg Insight

Richard Branson: Leaders must fight social ills
Virgin Group’s founder says focusing on the bottom line isn’t enough. He advocates pushing for more clean energy jobs as President-elect Trump denies climate change. Fortune

Find your inner do-gooder… 
…and your dirty capitalist. Three Twins ice cream CEO Neal Gottlieb said he used those notions to “start something that, if I did well, I’d feel really good about.” SmartBrief

Trump Picks His Battles

Trump fires back…
…after a union leader said the president-elect lied about saving the Carrier jobs. Chuck Jones, president of United Steelworkers 1999, said he was optimistic about Donald Trump‘s claim to have saved 1,100 jobs at a Carrier plant in Indiana. But when it turned out only 730 production jobs were saved, while 550 people were going to be let go, he said Trump “lied his a– off.” Trump fired back on Twitter, saying Jones “has done a terrible job representing workers. No wonder companies flee country!” Fortune

Trump is expected to keep his business stake
Trump will reportedly hand over leadership of his business empire to his sons Eric and Donald Trump Jr., but he’s fighting calls to reduce conflicts of interest by divesting his ownership of the company. Daughter Ivanka Trump has also sought to hand over day-to-day control of her brands. The Hill

Climate change skeptic picked to head the EPA
Trump has named Oklahoma AG Scott Pruitt to run the Environmental Protection Agency. Pruitt has sued the agency over its regulation of power plants and has said the science showing climate change has been caused by humans “is far from settled.” He’s expected to face a fierce confirmation process, as Democrats pledge to fight. CNN

Up or Out

Trump has named WWE co-founder Linda McMahon to head the Small Business Administration.  Fortune

Fortune Reads and Videos

Sears will likely close more stores…
…after another disastrous quarter; the company lost $748 million. Fortune

Michael Jordan wins the right…
…to control his last name written in Chinese characters. The trademark battle lasted four years. Fortune 

How does Jack Dorsey feel about Trump’s Twitter account?
It’s “complicated.” Fortune

Whole Foods sees purple asparagus…
…and black garlic puree as trendy food items next year. Fortune

Quote of the Day

“The responsibility for business is enormous…Small companies need to adopt small, local problems. Big companies need to adopt national problems, bigger companies to adopt international problems.” — Virgin Group founder Richard Branson on business leaders’ role in battling social problems.  Fortune

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Produced by Ryan Derousseau