Future of the Corporation 2020

Paper Series on
Restoring the
Primacy of the
Real Economy
JUNE 2009

AllEN WhitE, EditoR

New Principles for
Corporate design
1. The purpose of the corporation is to 4. Corporations shall distribute their
harness private interests to serve the wealth equitably among those who
public interest. contribute to wealth creation.
2. Corporations shall accrue fair returns 5. Corporations shall be governed
for shareholders, but not at the expense in a manner that is participatory,
of the legitimate interests of other transparent, ethical, and accountable.
stakeholders. 6. Corporations shall not infringe on
3. Corporations shall operate sustainably, the right of natural persons to govern
meeting the needs of the present themselves, nor infringe on other
generation without compromising the universal human rights.
ability of future generations to meet
their needs.

For information on the development and context of these principles,
www.corporation2020.org

2009 SUMMIT ON THE FUTURE OF THE CORPORATION | ii

JUNE 2009

Dear Colleague:

It is my pleasure to present you with a copy of this Paper Series in conjunction with the 2nd
Summit on the Future of the Corporation: Restoring the Primacy of the Real Economy,
Boston, June 9-10, 2009.

The Paper Series and Summit mark the fifth anniversary of the launch of Corporation 20/20.
The small core group that began this journey, comprising individuals from business, civil
society, finance, labor, law and the media has grown into an international network of nearly
400 participants with a shared commitment to rethinking the fundamentals of the modern
corporation. Through convenings, e-dialogues and research, Corporation 20/20 has continued
to challenge the conventional notions regarding the design of the modern corporation,
including its purpose, ownership, control, governance, capitalization and other components of
the corporate form.

Few of us involved in this journey could have imagined how relevant our work would be in
light of the bubbles, busts and crises that have emerged in recent years. The topic of corporate
purpose and structure has shifted from relative obscurity to front page headlines as all
stakeholders grapple with the worst economic recession in decades. In particular, the role of
the financial sector, a comparatively minor concern of Corporation 20/20 in its early years,
has assumed a position of equal standing to the non-financial (“real economy”) sector on the
agenda of the initiative.

Reflecting this shift, the papers in this document and the 2nd Summit itself pay special
attention to the purpose, regulation and restructuring of the financial sector at both the global
and national levels. In the spirit of all Corporation 20/20 activities, paper authors challenge
us to think “outside the box” and to open our minds to new ways of thinking about the nexus
of capital and corporations. There is no issue of greater importance to achieving a just and
sustainable economy in the decades ahead.

We offer our sincerest appreciation to all authors for their contributions. Thanks also to the
editorial team of David Wood, Faye Camardo and Nina Smolyar, and to Christina Williams for
design of this document. We hope participants in the 2nd Summit as well as readers worldwide
will find these papers both informative and provocative.

Cordially,

Allen L.White
Director, Corporation 20/20
Senior Fellow, Tellus Institute

2009 SUMMIT ON THE FUTURE OF THE CORPORATION | iii

table of Contents
1. Beyond the Crisis: Policies to Foster Long-Termism in Financial Markets . . . . . . . . . . . .1
Rebecca Darr and Judith Samuelson
If a group of leaders with diverse perspectives but a common concern for reintroducing
long-term orientation in business and markets were to brainstorm about public policy,
what kind of recommendations would they make? This paper examines the range of public
policy ideas that have emerged through dozens of conversations over several years that The
Aspen Institute has facilitated among its Corporate Values Strategy Group—a network of
business, investor, labor, and governance experts who are concerned about the problem of
destructive short-termism. The paper lays out some of these policy suggestions toward the
goal of getting to a better system. These ideas are particularly timely in the current moment
of renewed interest in the regulation of the financial services sector in particular, and busi-
ness in general.

2. Toward a Bretton Woods II: Aligning a New Global Financial Architecture with
Sustainable Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Paul Epstein
International efforts to reorder rules of engagement have often followed periods of social
turbulence, pandemics, revolutions, depressions, and wars. The current global economic
crisis presents such a moment for international finance. A new paradigm is urgent, one that
shifts focus from protecting and enhancing capital interests to one geared to addressing the
great challenges of sustainable development. Existing international finance institutions are
ill-equipped to do this. New rules, incentives, funding mechanisms and governance that
advance ecological protection and social well-being await invention, with a new climate
regime arguably the most urgent among many pressing priorities.

3. Tomorrow’s Owners: Stewardship of Tomorrow’s Company . . . . . . . . . . . . . . . . . . . . . . 16
Mark Goyder
Capitalism is in trouble because stewardship is failing. The world needs shareholders
whose priorities and behaviors are aligned with the long-term interests of the company,
and with the health of the soil in which it is being nourished. It needs boards and investors
who exhibit a deeper understanding of the ingredients of success, and who have the tools
of analysis by which they can advance this understanding. Shareholder value is a good
measure but a bad master. No business will continue for long if it fails to meet a human
need. We need investors, boards, rule-makers and civil society to combine in developing
an agenda which puts stewardship and an inclusive approach at the heart of corporate life.
This paper is intended to start the process of describing that agenda, with recommenda-
tions for: defined stewardship mandates for asset managers; changed independence criteria
for board members; a cultural revolution in the management of behavioral risk; mandatory
ethical audit and reporting; professional codes and disciplines covering the role of directors
and capital market participants; changes in company law and governance codes to underpin
the changes.

2009 SUMMIT ON THE FUTURE OF THE CORPORATION | iv

4. The Origins and Costs of Short-Term Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Kent Greenfield
It is widely acknowledged that one problem facing American business is the fixation on the
short term. Yet there is a puzzle: why does the capital market not punish companies for
such short-termism? If short-termism truly hurts companies, why does the share price of
those companies not go down, and the managers not get thrown out? It ought to be irratio-
nal for Wall Street analysts to require—and company management to make—decisions by
the company that hurt the company in the long run but allow the companies to meet short-
term earnings projections. Share price is a reflection of the company’s value. If decisions
are being made to decrease the true value of the firm then the share price should reflect
that. That is not what we observe, which is puzzling. This essay will provide some possible
answers to this puzzle.

5. Not Just for Profit: Emerging Alternatives to the Shareholder-Centric Model . . . . . . . 34
Marjorie Kelly
We introduce the concept of For-Benefit design, a new organizational archetype that is a
hybrid that combines the traditional for-profit archetype, which has profit at its nucleus, and
the non-profit archetype, which has social mission at its nucleus. For-Benefit designs have
a blended purpose at their core: serving a living mission and making a profit in the process.
These emerging designs represent an alternative to the shareholder-centric model that could
help companies avoid ethical mishaps and elevate their contribution to meeting societal
needs and expectations. The paper discusses various examples of such companies within a
three-part typology: Stakeholder-Owned Companies, Mission-Controlled Companies, and
Public-Private Hybrids.

6. Markets at Risk: The Limits of Modern Portfolio Theory . . . . . . . . . . . . . . . . . . . . . . . . . 42
Steve Lydenberg
Modern Portfolio Theory (MPT) has done much to improve risk management at the port-
folio level for institutional investors. Its emphasis on risk control within portfolios, however,
has increased the demand for risky products in the broader marketplace and, ironically,
made financial markets more risky and volatile as a whole. It has focused investors on
“beating the market” and promoted the use of hedging and diversification techniques that,
as more investors use them, can ultimately prove ineffective in extreme market condi-
tions. Moreover, MPT ignores many of the social and environmental risks inherent in the
investment process. The current economic crisis presents a rare opportunity to rethink the
fundamental purpose of investing and to invent the tools that serve that purpose. The key to
such rethinking is to define investments in each asset class as a means to socially purposeful
outcomes, rather than a numbers game built on a narrow financial theory.

2009 SUMMIT ON THE FUTURE OF THE CORPORATION | v

7. How Should the Economy be Regulated?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Richard Rosen
The current economic crisis provides a rare opportunity to re-think how the economy
should be regulated in the coming decades. A key issue usually completely absent in such
debates is how to democratize decisions pertaining to capital investments in basic industrial
and service sectors. Achieving key social goals should be a criterion deeply embedded in
such decisions. Two such goals are climate change mitigation and alignment of investments
with sustainable development in general. Regulatory processes pertaining to capital invest-
ments in basic sectors should empower stakeholders whose lives are affected by such invest-
ments. Beyond capital allocation, future regulation should allow for stakeholder input in
determining what kinds of products should be produced and what their prices should be in
cases where markets are substantively non-competitive. U.S. Public Utility Commissions
illustrate a powerful but underappreciated model of a proven regulatory approach that can
and should be expanded to key sectors of the economy as a means to democratize decision-
making. This would help correct the regulatory failures exposed during the economic crisis
and enable a balance of public and private interests in shaping a form of managed capital-
ism for the future.

8. Work and Well-Being . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
John Stutz
The principles of corporate redesign make clear the need to enhance the well-being of
workers. Today this is addressed through increases in compensation made possible by
growth. However, research on the determinants of physical and subjective (psychological)
well-being shows that gains from growth will be marginal at best. What is needed are im-
provements in working conditions. For the U.S., long hours and job insecurity are critical
areas. While there are ways to address these concerns, the turbulent, competitive nature of
the economy makes progress difficult. Fortunately, the current major economic disruption
provides an opening for significant progressive change.

Author Biographies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

2009 SUMMIT ON THE FUTURE OF THE CORPORATION | vi

Beyond the
commit to endeavors that may take years
and, in some industries, decades, in order
to realize both societal benefits and to make
profits for their financial investors. The

Crisis:
unmitigated growth in short-term financial
pressures that we have observed over the
last several decades can greatly limit this
potential to benefit society; indeed, it causes
great harm.3
Policies to Foster Long-Termism A new administration in Washington and
unprecedented public attention to business

in Financial Markets1 and financial markets offers a unique oppor-
tunity for public-policy recommendations in
pursuit of long-term wealth creation to gain
visibility and, possibly, to obtain real traction.
Rebecca DaRR aND JuDith SamuelSoN Given this direct link between the potential
aSpeN iNStitute ceNteR foR of business to create value and the need for

i
buSiNeSS aND Society long-term perspective, CVSG takes the con-
sequences of short-termism as the point of
departure for its deliberations. Short-termism
If a group of leaders wIth dIverse constrains the ability of business to do what
perspectives but a common concern for it does best—create valuable goods and ser-
reintroducing long-term orientation in vices, invest in innovation, take prudent risks,
business and markets were to brainstorm develop human capital, and address issues of
about public policy, what kind of social and environmental significance. Short-
recommendations would they make? Since term financial metrics encourage companies
2004, The Aspen Institute’s Corporate Values to externalize costs on wider society. The
Strategy Group (CVSG) has been facilitating internal incentives and market signals that
dialogue among corporations, organized follow from short-termism drive the kind of
labor and public pensions, with the hope of dysfunctional, value-destroying behavior we
influencing federal and state policy when the have witnessed since the fall of Enron and, on
window of opportunity opens. Organized a much grander scale, in the current financial
around the pervasive and destructive crisis. Short-termism is not limited to the be-
problem of market short-termism, CVSG havior of misguided individuals; it is system-
aims to promote business and market wide, with contributions by and interdepen-
practices that curb short-termism and dencies among companies, asset owners, asset
refocus the relevant players on creating long- managers, and government.
term value for all stakeholders, with special
focus on augmenting the voice of long-term ASPEN PRINCIPlES AS THE PlATFORM
oriented investors.2 The Aspen Principles on Long-Term Value
The purpose of this paper is to explore Creation, released to the public in June 2007,
a range of public policy prescriptions that served as a starting place for this dialogue on
have emerged over dozens of conversations public policy. Drafted under the leadership
and several years time, at a moment of of CVSG members including senior-level
renewed interest in the regulation of the representatives from business, corporate
financial services sector in particular, and governance, public pensions, and organized
business in general. labor, the Principles represent a consensus
FOUNdINg ASSUMPTIONS of “strange bedfellows” on actions that are
The Aspen CVSG starts from the assump- aimed at counteracting short-term focus
tion that corporations represent a vital and at the company level, and that may have
influential institution in society. In order for broader ripple effects throughout the wider
corporations to perform at their best, they market. The Principles urge companies to

2009 SUMMIT ON THE FUTURE OF THE CORPORATION | PAPER NO. 1 | 1

define firm-specific metrics of long-term val- deeply concerned with the consequences of
ue, and then use these metrics both to com- short-term thinking and acting, and who
municate with investors around long-term thought change possible. This included people
measures and activities, and to better align who were closely engaged with our work on
executive compensation with the creation of short-termism and, thus, enjoyed a degree of
long-term value.4 mutual trust, forged through the development
Voluntary actions undertaken by indi- of the Aspen Principles of practice. We also
vidual companies and boards are an excel- included participants who had a Washington
lent starting place to make positive changes insider’s perspective on what was possible in
in the market. But even before the economic the political sphere. In a search for common
crisis became front-page news, it became ground, we began from the assumption that
clear that in order to succeed in influenc- all input to the dialogue process was useful,
ing the behavior of business and markets on regardless of political viewpoint or role.5
a wide scale, the principles of practice for
long-term orientation must be bolstered by PRINCIPAl gOAlS
system-wide incentives; that is, mandates The ideas we present below were developed
and rules that comprise an integrated rede- through a series of five meetings held between
sign of financial markets regulation. mid-2008 and March 2009, and have roots in
conversation that began two years prior.6
APPROACH TO dIAlOgUE The June 2006 CVSG summit was based
As Election Day 2008 approached, partici- around the idea of envisioning a better sys-
pants in the CVSG acknowledged the poten- tem by the year 2015; participants identified
tial for public-policy discussion aligned with characteristics of capital markets in which a
the work on curbing short- better balance between short- and long-term
THE BETTER SySTEM: 2015 termism. A working group horizons is achieved. (See box, “The Better
convened around the follow- System: 2015” at right.)
 Appropriate and trusted balance between ing assumptions and operating The recommendations that emerged from
and alignment among government, principles: this visioning process largely prefigured
business, investors, and society at large.
Focus on the system and not those that would eventually comprise The
 Greater understanding of how the just the corporation, recogniz- Aspen Principles, released in June 2007.
different participants in the market (e.g.,
ing that a “complex dance,” In July 2008, CVSG defined its policy
business, investors, and policy) relate
to the system; and greater lines of sight involving both companies and discussion goal as follows: “Identify and
regarding consequences of decisions and investors, drives the results we test constructs that provide an approach to
behavior. have now. policy action that creates a more supportive
 Businesses with clarity of purpose, Work toward developing a environment for companies and investors
focusing on delivering excellent goods coherent package of ideas rath- concerned with creating long-term value
and services, and creating sustainable er than a piecemeal approach, that is in the interest of the common good.”
long-term value. and embrace all links in the Compared to two years prior, the July 2008
 Transparency on issues that matter– investment chain. summit focused specifically on how public
businesses providing information Seek the common ground policy could encourage long-term oriented
that offers appropriate insight into
among different market actors business and investor behavior. Recom-
past performance, compensation and
incentives, and indicators of future health. with an interest in extending mendations centered around five goals, with
time horizons in the business accompanying suggestions about how those
 Better sharing of wealth, based on more
equitable evaluation of contributions. system, with the hope of creat- goals might be accomplished:
ing a common platform. Encourage more patient capital and dis-
 Public policy characterized by an
appropriate balance between short-term
As a result, rather than start courage investor churning: For example, in-
and long-term business and investment the policy discussion with a stitute minimum holding or vesting periods
incentives. re-examination of the corpora- as a prerequisite to the exercise of certain
 Business leaders actively engaged in tion and its purpose, the focus shareholder rights; change capital gains and
addressing long-term societal challenges of the dialogue was to work tax policy to reward long-term investment;
that affect the business environment. with individuals and influen- and develop new long-term investment
tial organizations who were products with restricted access to invested


capital for individual investors in retirement troversial/ difficult to achieve?
and other long-term contributory schemes.  Are there any logical linkages between
Discussants called for additional research by ideas?
experts to test these ideas. Four of the five policy goals outlined dur-
ing CVSG’s July 2008 summit ultimately
Promote greater investor transparency: For were reflected in the final set of “building
example, require more and better disclosure blocks” developed by this working group that
of holdings by investors, intermediaries, and focused on policy outcomes from October
agents on record dates and when acquiring 2008-March 2009.7 The policy discussion
significant positions (short and long) in order and subsequent ideas (see Appendix) were
to illuminate conflicts, discourage “empty” significantly clarified and galvanized by
voting, and enable operating companies the growing financial and economic crisis.
working to amplify the voice of long-term While the headlines have remained similar
holders to know who owns their shares, and from July 2008 to now, what changed was an
in what quantities. articulation of how the policy goals would be
achieved—more specifics were included in
Hold financial intermediaries to a higher some areas and a change in scope modified
degree of accountability: Increase disclo- other goals. Two new areas for policy focus
sures on compensation, incentives, trading, were discussed and were added to the mix: (1)
and other such matters that would indicate the role of excessive risk-taking; and (2) the
compatibility, or lack thereof, with the stated role of leverage in the current economic crisis.
goals of the ultimate investors, such as pen- The building blocks outlined below rep-
sioners and those saving for college. resent concepts that participants believed
were critical to restoring trust and confidence
Encourage corporate use of compensation in financial markets, the foundation of any
and incentives that better align employee sustainable recovery.8 They believed these
interests with the long-term health of concepts are also necessary to move the U.S.
the company: For example, modify tax toward a smarter financial system, one that is
treatment of options and tax rules on the focused on long-term societal health, not just
deductibility of executive compensation as a until the next bonus is banked. These building
corporate expense. blocks are supported by specific examples
of actions (to be implemented by the U.S.
De-emphasize the quarter: Refocus manag- government, state governments, and stock
ers on long-term value creation and produc- exchanges), some of which are described in
tive activity by encouraging the release of the next section and in the Appendix.
broader performance metrics and strategies
as a target for management discussion, and Create revenue and pricing incentives
move the statutory requirement for U.S. to encourage more patient capital and
company filings from quarterly to semi- discourage investor churning. In collabo-
annually, as is done in other countries. ration with other OECD countries, the U.S.
In October 2008, we began to facilitate a should develop tax-based mechanisms with
small working group interested in public- a market-wide reach to encourage investors
policy ideas and representative of diverse to hold stock over longer periods. These
perspectives and organizational affiliations. could include a trading tax to discourage
The following criteria were applied to the churning, changes in the capital gains tax
search for the best ideas, and in order to to re-define “long term” and to reinstate
triage a longer list of proposals presented for Clinton-era rates on holdings of between
consideration by this small group: one and five years, and end the “2 and 20”
 What is mission critical versus less critical loophole that allows fund managers to
(higher versus lower priority)? claim capital gains tax treatment for their
 What is less controversial/easier to do cut of the carried interest of their investors,
(technically, politically) versus more con- thus avoiding paying income tax.


Strengthen investor disclosures to promote disclosure requirements that are currently
greater transparency about who owns what. applicable to operating companies.
The current economic crisis has shown that a  Ensure that LT fund and index fund man-
number of actors whose roles in the market agers are taking fundamental risk into ac-
have far-reaching effects have been flying un- count when they invest their clients’ funds,
der the radar of existing reporting and disclo- and are voicing concerns and engaging in
sure requirements, often obscuring potential activism about risk in stocks within their
interests and motivations. Greater disclosure portfolios assuming they cannot sell.
about these entities’ transactions will lead to a  Ensure that LT fund managers vote and
clarification of their roles in the market. This invest in ways that will promote prudent
may be achieved by requiring more and better growth and that index fund managers also
disclosure of holdings by investors, inter- vote their shares in a manner that reflects
mediaries, and agents on record dates and the long-term orientation and actual hold-
when acquiring significant positions (short, ings of the portfolio.
long, and derivatives) in order to illuminate  Ensure that LT fund managers disclose
conflicts and to enable operating companies, and explain excessive annual portfolio
focused on the long-term, to know who owns turnover.
their shares, and in what quantities. In ad-  Require public disclosure of proxy advi-
dition, pension funds should be required to sors’ criteria for making voting recommen-
disclose their share-lending policies and all dations to mutual and pension funds, and
should be banned from voting by use of bor- prohibit pension, college savings, index,
rowed shares. or 401(k) funds from relying on a proxy
advisory service for voting advice unless
Hold financial intermediaries to a higher that service gave voting advice based on
degree of accountability—ensuring their the perspective of a long-term investor in
interests are aligned with their ultimate the corporate issuer.
investor—by requiring increased disclo-  Require public disclosure of the revenues
sures on compensation, incentives, trading proxy advisors receive from public com-
and other such matters that would indicate panies and institutional investors, and the
compatibility, or lack thereof, with the stated nature of the work that generates those
goals of the ultimate investors. In many revenues.
ways, financial intermediaries, such as asset
managers and portfolio managers, have De-emphasize the focus on the next quar-
become divorced from the interests of those ter and refocus managers on long-term value
who provided the capital in the first place; creation and productive activity by requiring
these ultimate investors are often invest- that quarterly guidance may be given only in
ing for long-term goals such as college and the context of a clear long-term growth plan.
retirement, while the intermediaries manage In the past, the SEC has deemed information
this money with a quarterly or annual hori- misleading when it is not placed in appropri-
zon. As such, financial intermediaries should ate context. Only if short-term guidance is
be held to a higher level of fiduciary duty, actually placed within this larger context is it
taking greater care in their role as agents meaningful to a long-term investor, and even
and acting in ways that are beneficial to the then it is of minimal utility to investors who
ultimate investor. Through creation of new are invested for 10 to 15 years or longer.
or clarification of existing federal laws or
regulations, the following might be required: Better focus corporations on real risk and
 Compensate the managers of long-term opportunity. To create a corporate culture
oriented, tax-advantaged funds, such where greater attention is paid to the real
as 401 (k) and college savings (a.k.a. LT risks and opportunities facing the com-
funds), based upon the fund’s long-term pany, corporations should assign explicit
performance. responsibility for such risk management to
 Extend to mutual funds the compensation their boards and senior-level staff; specific


changes might be mandated through new passed by the “building blocks” described
or revised federal legislation, regulation, above. Participants in the discussion prod-
or stock exchange rules. Boards should be ded each other to think big, while simulta-
encouraged to create a committee specifi- neously remaining aware of the little things
cally focused on non-accounting risk, and that could improve matters incrementally.
to rethink their operating models to set Nevertheless, there were several ideas that
aside necessary time to devote to strate- dialogue participants considered, but which
gic planning, management oversight, and failed to move forward due to insufficient
compliance. Policymakers should consider support. These ideas may be relevant to those
building on Sarbanes-Oxley requirements who are interested in creating a more just
to mandate certification of companies’ risk and sustainable world, and for this reason
management processes by top executives we share these ideas, in particular, and with
and an outside auditor. greater specificity in the following pages.9
To address the goals of more patient capital
Limit opportunities for excessive risk- and better investor transparency, two ad-
taking that can translate into extensive ditional ideas emerged:
value destruction. The current economic
crisis shows the widespread destructive ef- Reform the use of rule 14a-8 to strike a
fects that can result from investors’ efforts to balance more useful to long-term share-
make short-term profits through excessive holders
risk-taking or leverage. While these actions  The current challenge: Rule 14a-8 in
may make profits for a handful of firms and the Securities Exchange Act of 1934 has
individuals, they may ultimately inhibit real produced stockholder activism that is
economic growth. These speculative prac- beneficial to investors.10 Nevertheless, the
tices may give clout to short-timers with in- volume of activism also has substantial
terests often adverse to long-term investors, costs: while filers bear a small filing cost,
and may create excess volatility and risk in the number of proposals has mushroomed,
the equity markets. Following are some ac- increasing the time that management
tions that might begin to remedy the current devotes to proposals (and not to managing
situation (see Appendix for additional ideas): the company). In addition, these propos-
 Implement a leverage limit that should als may be brought by people who have
include, at a minimum, investment funds not owned company stock for any period
subject to the Investment Company Act of time, who only own a very small stake,
of 1940 and any hedge fund that accepts and/or may be net short the company. At
investments from pension funds, states, the same time, the SEC has kept Rule 14a-
counties or other municipalities, and uni- 8 from being a tool for investors to have a
versities. stronger voice and to be able to address, on
 Regulate hedge funds as financial inter- a company-by-company basis, issues such
mediaries. Up to 70% of securities trading as proxy access.
is conducted through hedge funds whose  The proposed changes: The changes
actions are not regulated; therefore, hedge described below would allow shareholders
funds should be regulated and particular concerned about a company’s social and
focus should be placed on their approach environmental practices to register their
to risk, their use of leverage, and their concerns with relative ease, but would keep
potential conflicts of interest. short-term investors and/or those with
 Increase the reporting threshold for off- short positions from impacting company
balance-sheet entities. behavior through the proxy process.
•L
eaveinplacethecurrentlowthresholds
OFF THE TABlE BUT NOT FORgOTTEN for social proposals dealing with issues
The policy discussions we facilitated began such as the environment, labor, and hu-
with many wide-ranging ideas that were man rights, but require that the propo-
gradually winnowed down to those encom- nent have owned shares at least a year.


•R
aisetheeligibilitycriteriaforusingRule a bylaw or seek books and records, to eq-
14a-8 to submit non-social proposals uity holders based on how long they have
by requiring that proponents hold a sig- owned shares, and require those exercising
nificant, net long stake for at least a year certain rights to have a net long position.
before making a proposal and establish a To address the goal of focusing corporations
reasonable filing fee for submitting non- more on the long-term creation of wealth
social proposals. and real risks and opportunities, two addi-
In order to address the concerns expressed tional disclosure-related ideas were proposed.
by shareholders of all sizes about their in- Shareholders are not granted the protections
ability to meaningfully push back against a of the corporation as a societal aim, in and
board and its management when actions are of itself. Limited liability encourages share-
taken which are contrary to the wishes of the holders to hand over their capital to corpora-
shareholders: tions, which will engage in risky, but possibly
•E
liminatetheexclusionthatkeepselection profitable ventures. The desired, aggregate
reform proposals from being presented outcome of this corporate risk-taking is the
under Rule 14a-8 [Rule 14a-8(i)(8)]. This generation of financial profits and an increase
would promote a private ordering solution in societal wealth. In the process of generating
to issues like proxy access, “majority vot- financial profits, corporations have multiple
ing,” and electoral expense reimbursement. incentives to employ and train workers, to
•I
naddition,stateslikeDelawareshould develop innovative products and services, and
pass a statute, clarifying that bylaws allow- to engage in other activities that increase—
ing for reimbursement of proxy expenses, not diminish—societal wealth. One might
proxy access, and non-binding votes on expect to find an accounting of a company’s
executive compensation (“say on pay”) are contribution to society in its voluntary ESG
valid. States might require a form of proxy or CSR report; nevertheless, such reporting is
access and expense reimbursement annual- voluntary and is limited in comparability even
ly at companies with classified boards and by those using the Global Reporting Initia-
every three years for board slates receiving tive’s G3 framework.11
more than 30% of votes.
Improve corporate compensation disclo-
Permit corporations to grant shareholder sure with context on societal impact
voting and rights based on duration of  The current challenge: Over the last 25
holding years, executive compensation has grown
 The current challenge: Shareholders who significantly, while the real income growth
propose long-lasting corporate governance of the average U.S. worker has stagnated.
changes or other fundamental alterations The SEC has a rather new Compensation
in business strategy should have a substan- and Disclosure requirement; nevertheless,
tial, long-term interest that signals their this requirement focuses only on the top
motivation in wanting the corporation to executives and provides no context.
prosper over the long haul. Currently, this  The proposed change: To give the public
is not the case. One way of ensuring this is a better sense of companies’ impact on
to allow only true “owners” of stock, and society via their workers, corporations
not transient “renters,” to have a substan- should be required to disclose informa-
tive voice in a company. tion about the growth in pay and benefits
 The proposed changes: Through a state to top executives over time in comparison
law modification, corporations could grant to the median wage and benefits package
voting and other rights through changes paid to other employees in the company.
in their corporate charter. For example, Other useful information might include
corporations could give more weight to the size of the corporation’s workforce; a
the votes of long-term equity holders. In breakdown of full-time, part-time, and
the same vein, corporations could grant temporary employees; the percentage of
certain rights, such as the right to present employees provided with health insur-


ance; and a breakdown, by country, of the policy actions must look clearly and boldly at
number of workers and revenues where a redefining fiduciary duty from a shareholder-
company operates. centric orientation to broader, multi-stake-
holder orientation. Companies that manage
Mandate key disclosures on environmental to a single, financial objective will continue
and social issues to miss important risks and fail to capture
 The current challenge: A corporation is important opportunities to bring the talent of
not merely an instrument of private wealth business to bear on problems that matter.
creation; thus the public has a vested inter- A sustainable company must be one that
est in the way in which such wealth is cre- not only achieves longevity, but longevity by
ated. However, little disclosure is expected virtue of its attentiveness to the legitimate
of U.S.-based or traded companies on the interests of those who both influence and are
human impact of their operations, beyond influenced by its decisions and investments.
specifics such as release of air pollutants. In this vein, one policy idea is to redefine
Some European nations are now requiring the “license to operate” through a corporate
corporations to make comprehensive dis- charter that must be renewed every 20 or so
closures about the effect their policies have years. The renewal process would include
on the nation, such as the environmental multiple voices answering such questions as:
impact of their operations. One might 1) Is the company producing useful, valuable
expect some of these data points to be in- products and services?; 2) Is the company a
cluded in a company’s ESG or CSR report; good employer?; 3) Is the company a good
however, the disclosure is voluntary. neighbor to its local community?; and 4) Is
 The proposed change: Require publicly the company a good corporate citizen in the
traded corporations in the U.S. to disclose eyes of government?
information regarding their environmen- Second, more research is needed to under-
tal and labor practices. This would give stand the corporate structures of companies
the public and shareholders alike a better that have succeeded at long-term focus.
understanding of companies’ real human Though not a new public policy prescription,
impacts, and its effects on the environ- we believe that state laws already may offer
ment. It would also help policymakers sufficient opportunity to structure ownership,
identify industry participants who are ex- control, and voting rights in ways that could
ternalizing costs to competitors or society advantage long-term orientation; yet, those
at large, and policy areas where further examples are not well understood. Many ad-
regulation is needed.12 vocates and academics are interested in new
forms of corporate structure such as the For
REFlECTIONS Benefit Corporation (“B Corp”) discussed in
Our role in the ongoing dialogue has been complementary initiatives; it would be useful
one of secretariat, facilitator, and process to build knowledge of commonplace voting
cheerleader. The ideas shared above were not and ownership structures that advantage a
developed by us. They emerged in multiple long-term view, and that can be accomplished
meetings and have varying degrees of cur- under existing law.13
rency among participants; although there The process we have been facilitating strives
is no consensus, and in the current envi- to offer a new vision for policy and regulation
ronment of crisis and public distrust said which will vastly diminish the forces of short-
consensus is increasingly hard to achieve. termism and drive behaviors that refocus on
Given this opportunity offered by Corpora- the long term. We hope that these ideas—
tion 20/20, we thought we would advance those that “survived” the autumn 2008-spring
two policy-related ideas that have not been 2009 facilitation process, those that were
voiced in any forum we’ve organized. discarded, and new ideas we suggest above—
First, if companies are to focus on creat- can play a constructive role in the valuable
ing and sustaining value into the long term dialogue on corporate design that Corpora-
and fully account for their societal impacts, tion 20/20 continues to facilitate. n


APPENdIx: SUMMARy TABlE OF PUBlIC POlICy IdEAS
MOdE OF ACTION

Existing Rules
legislation

Regulation

State law

Exchange
IdEA

Federal

Federal

Action

Clarify
Rules
Still on the Table for Discussion

Implement a trading tax X*

Modify capital gains rates X*

End the “2 and 20” loophole X* X*

Enforcement of fiduciary duty of fund managers to take into account fundamental risk when
X
investing

Extend the compensation disclosure principles to mutual funds X X

Create accountability on the part of proxy advisors X X

Special rules for LT tax favored investments [college savings, 401(k)] X X

Special voting rules for index funds X X X

Enhance make more timely the disclosure of economic interests of activist investors X X

Limit leverage by funds/regulate hedge funds X X

Ban voting of borrowed shares X X X

Require investment funds to disclose share lending policies X X

Limit certain rights to long-term, net holders X X

Consider requiring issuers to disclose and update a long-term plan for the growth of corporate
X X
earnings if they wish to give quarterly earnings guidance

Consider requiring that boards have a separate risk management committee to address non-
X
accounting risks

Give boards more time to focus on the company’s business plan, the oversight of management
X X
and its performance, and the management of risk

Consider requiring that an officer-level risk management process be the subject of certifications
X X
by the CEO, chief legal and financial officers, and outside auditor

Increase reporting threshold for Off-Balance Sheet Entities X* X

Permanently reinstate the uptick rule and outlaw naked short-selling X*

Institute leverage limits and reinstate sensible margin limitations for financial institutions
X* X
investment funds

Regulate credit default swaps as securities X* X

Impose capital and disclosure requirements on all parties writing credit insurance contracts and
X* X
credit default swaps

Off the Table but Not Forgotten

Reform the use of Rule 14a-8 to strike a balance more favorable to genuine, long-term investors X

Clarify that long-term investors may pass bypass laws requiring reimbursement of proxy expenses,
X
proxy access, and a non-binding vote on executive compensation

Improve disclosure of executive compensation by placing it in the context of other corporate
X X
policies and their effects on other corporate constituencies and societal interests

Require corporations to disclose information regarding their environmental, labor, ethical, and
X X
worker safety practices

* International coordination would be highly desirable


ENdNOTES substantive bases for exclusion.” Accessed 26 March
1 We wish to acknowledge David Langstaff, Damon 2009 from: http://sec.gov/interps/legal/cfslb14.htm
Silvers, and Leo Strine, Jr. for their energy and 11 Developments in various countries suggest that
intellectual contributions that shaped many of the ideas mandatory reporting is gradually emerging and may
presented in this paper. Any error in representation is become far more common than it is today. For example:
inadvertent, but it is ours. Sweden has mandated GRI reporting for state enterprises.
2 CVSG is a program of the Aspen Institute Business Denmark mandates CSR information in the annual
and Society Program (Aspen BSP), which is dedicated reports of 1100 largest companies. The Johannesburg
to developing leaders for a sustainable global society. Stock Exchange requires listed companies to comply with
Aspen BSP engages with business leaders and business the King III Report on Corporate Governance which
educators alike to help create a new vision of business includes sustainability reporting a key component of
that incorporates stewardship of the environment and good governance. And China encourages state-owned
society. companies to report on CSR activities.

3 CVSG’s focus on short-termism is rooted in the work 12 See COST-US (Consultation on Sustainability
of The Conference Board’s Blue Ribbon Commission on and Transparency), a network of practitioners and
Public Trust Private Enterprise, formed in response academics advocating a major enhancement of non-
to the fall of Enron. More at: http://www.conference- financial disclosure in U.S. financial markets. http://
board.org/knowledge/governCommission.cfm groups.google.com/group/cost-us/subscribe?note=1

4 Aspen Institute Business Society Program, “Guiding 13 A teaching module, “What the Law Allows,” is
Principles for Long-Term Value Creation,” June 2007. available from Aspen’s CasePlace.org. http://www.
Accessible at: http://www.aspeninstitute.org/sites/ caseplace.org/d.asp?d=2811 (CasePlace.org registration is
default/files/content/docs/pubs/Aspen_Principles_ required to access this module, but registration is free.)
with_signers_April_09.pdf
5 The focus of the CVSG and policy dialogue has tended
to avoid fundamental rethinking of the purpose of the
firm; however, Aspen BSP believes that these fundamen-
tal questions are timely and relevant. Over the last de-
cade, and more recently through our Center for Business
Education, we have convened and supported the work
of dozens of academics and others pursuing significant
change in theory and business practice in pursuit of busi-
ness’ contribution to society and sustainability.
6 A list of participants for the June 2006 and July 2008
summits can be found on http://www.aspeninstitute.
org/policy-work/business-society/corporate-programs/
corporate-values-strategy-group/participant-list
7 Others expressing their opinions in mainstream
publications in recent months have called attention
to the many policy goals and related ideas, including
compensation and quarterly reporting that were
articulated during the July 2008 summit.
8 Aspen CVSG public policy working group papers,
December 2008-March 2009.
9 Aspen CVSG public policy working group papers,
December 2008 and February 2009.
10 What is rule 14a-8? Per the SEC: “Rule 14a-8
provides an opportunity for a shareholder owning a
relatively small amount of a company’s securities to
have his or her proposal placed alongside management’s
proposals in that company’s proxy materials for
presentation to a vote at an annual or special meeting
of shareholders. It has become increasingly popular
because it provides an avenue for communication
between shareholders and companies, as well as among
shareholders themselves. The rule generally requires
the company to include the proposal unless the
shareholder has not complied with the rule’s procedural
requirements or the proposal falls within one of the 13


toward a Bretton
output—global GDP or real wealth—is ~$40
trillion.) The paper money was lost in a game
of limitless risk transfer; “securitization” that
turned out to be anything but.

Woods ii:
With some wagering the bundles would
fall ‘short’ and others betting stocks and
bonds and currencies would rise, we may
come to view this as one grand Ponzi scheme
(decentralized and unwitting, perhaps, save
Aligning a New Global Financial for the predatory lenders) that has left a trail
of hardships, foreclosures, bankruptcies,

Architecture with Sustainable layoffs and—the worst—the near collapse of
whole economies such as Iceland, Ireland,

Development and Spain. In the U.S., with housing values
dropping and Detroit in its self-made
sorry state, two major pillars of the U.S.
economy have witnessed a precipitous
paul R. epSteiN decline in output and market capitalization.

t
haRvaRD meDical School Today’s financial market disruption is
mirrored by mounting climate instability
and accelerating melt of the Earth’s ice cover.
they say there are no atheIsts In a Meanwhile, plateauing crop yields and eco-
foxhole; it seems there are no ‘free market’ nomic sinkholes threaten to drag asunder a
fundamentalists in a recession. Yet, amidst growing list of nation states. Sometime soon,
the most severe economic crisis since the the disharmonic convergence of economic,
Great Depression, we are clinging to market energy, environmental, and political instabil-
forces to bring about a recovery. Meanwhile, ities will drive us into a new world order. The
the world faces escalating climate, food, and mantras of the Washington Consensus—de-
water crises. A perfect storm on the one regulation, liberalization, privatization—led
hand; a rare opportunity for integrated inter- us inexorably into the 2008 downward spiral,
ventions and systemic change on the other. the end of an era of seemingly endless but
On November 15, 2008 the leaders of 20 na- ultimately unsustainable growth. We need
tions met in Washington, D.C., to address the a vision for the financial architecture and
international financial crisis. France’s Presi- mechanisms that drive less and very differ-
dent Sarkozy has called for another summit ent patterns of consumption.
soon, and the 20 nations met in April 2009, The old rules of engagement are inad-
with the Obama administration in place. equate for the task we face. We need a new
With the financial collapse and rapidly set of regulations, performance and effi-
devolving worldwide economy, calls for a ciency standards that oblige the economy,
new Bretton Woods Agreement are be- once primed, to move steadily in the right
coming audible. So much has happened in direction. Complementing the stimuli
such a short time, the sense of urgency to needed for developed nations, UN Secretary
restructure global finance has never been General Ban Ki-moon, this winter called
greater. upon the G20 to establish a $1 trillion fund
First, the financial mess: the abrupt to help developing nations deal with the
evaporation of liquidity and lines of credit contraction in global investments and cope
that has reverberated across the globe. with the social, environmental and political
It wasn’t hard to see it coming, as ‘exotic fall-out. But realigning rules and rewards is
derivatives’—speculative ‘side-bets’ on not sufficient: we also need an institution to
highly-leveraged, bundled stocks and administer the funds and assure compliance
bonds and swaps—rose from $900 billion with a new standards regime. A look back at
in 2001 to $45.5 trillion in 2007! (World the evolution of the extant financial architec-


ture is instructive in relation to charting the accumulation (derived from colonies) and
pathway forward toward meeting the great concentration of wealth were accompanied
sustainability challenges of the 21st century. by large migrations, populist and labor
movements, a failed revolution in 1905, the
A BRIEF HISTORy OF WORld ORdERS First World War, the Russian Revolution of
Conscious international efforts to reorder 1917, and the 1919 pandemic of influenza
rules of engagement have often followed (killing an estimated 20 to 100 million),
periods of social turbulence, pandemics, which together precipitated another attempt
revolutions, depressions, and wars. In the to restructure international relations.
late 18th and early 19th century, revolutions The victorious powers from World
against the old order exploded in the War I—led by the U.S., U.K., and France
Americas and France, and back to the (Woodrow Wilson, Lloyd George, and
Americas. After his defeat in Haiti (which Georges Clemenceau)—met in Paris for a
led to his capitulation of American territory peace conference in January 1919 that would
with the Louisiana Purchase in 1803), last until June. The Treaty of Versailles and
Napoleon marched across Europe and his the League of Nations (following Wilson’s
ultimate defeat there led to the momentous “Fourteen Points” and principles of “self-
Vienna Peace Conference of 1814. And determination”) kindled new hopes for a
while international relations continued to be new order and a lasting peace.
dominated by colonial pursuits, and internal But many critical problems were left
conflicts between labor and business caught unsolved. Women’s participation and
fire, the 1815 Treaty of Vienna marked women’s suffrage were rejected, reparations
the beginning of prolonged peace among were exacted from the vanquished, and
European nations. colonies were reshuffled into League
By mid-19th century, urban crowding of Nation “mandates.” Without funds
(the population of London rose sevenfold to reignite the global economy, it took
from 1790 to 1850) overwhelmed water and six years for Europe to recover, and the
sanitation systems. In the 1830s outbreaks cinders of future conflict smoldered. Rapid,
of cholera, tuberculosis, and smallpox uncoordinated growth led to spirals of
in London, New York and Boston (and speculation and, following the 1929 stock
many other industrializing cities) affected market crash, the Bank for International
city dwellers and sparked protests and Settlements (established in 1930) served as a
revolutionary involvements demanding hint of what was to come following the Great
change. Public health jumped to center stage Depression and yet another world war, more
in national development agendas during devastating than the first.
this period, and the resulting sanitary and
environmental reforms had stemmed the BRETTON WOOdS
tide of the infections by the 1870s, years In the summer of 1944, as the second of two
before Robert Koch (1883) and Louis devastating world wars, interspersed by the
Pasteur (1890s) isolated bacteria. While roaring ‘20s and Great Depression of the
no concerted international developmental 30s, drew to a close, Western leaders met
effort emerged during this period, the at the White Mountain resort in Bretton
first international funds to coordinate Woods, New Hampshire to form a new
communications were established to support world order. The old one was broke and
the International Telegraph Union (1865) broken. John Maynard Keynes—a Lord, a
and the Universal Postal System (1874). financial market trader (Bloomsbury group
The next turning point came in 1884, when member with Virginia Woolf and Lytton
colonial powers met in Berlin to consolidate Strachey, among others) and designer of the
a new world order. After centuries of Lend Lease Agreement (by which the U.S.
extracting gold, ivory, and slaves, colonial supported Great Britain in WWII)—was
powers divided Africa into new dominions. the designated chair. Keynes’ 1936 salient
During the subsequent decades, primary book had pointed towards a Third Way of


development, combining full employment tacked by others. The WTO has provided the
and a market economy. umbrella for huge agricultural subsidies in
Keynes figured out that you didn’t have to developed nations, while disallowing protec-
figure it all out: you had to change the rules tive tariffs. The combination —swords al-
that shape the system. The rules shape lowed, but shields denied—has undermined
the body—the morphology of the global and, in many cases, eliminated profitable
economy—and changes in it emerge from agriculture in many developing nations.
changing the underlying rules. This complimentary combination of
At Bretton Woods, western nations agreed a) sticks, b) carrots, and c) institutional
to three rules: 1. free trade in goods, but infrastructure catapulted the post-war
2. fixed exchange rates, and 3. constraints recovery into several decades of prosperity
on the international flow of capital. (The for some. In that post-war period, the
third of these, whose violation in today’s Universal Declaration of Human Rights,
capital markets can only be described as framed by Eleanor Roosevelt, was signed,
“over-the-top,” followed Adam Smith’s and the United Nations was born out of
admonition that healthy competition and the ashes of Wilson’s League of Nations.
comparative advantage among nations It was truly a time of conscious transfor-
would not hold if capital flowed freely and mation of world values and the world or-
speculatively across borders.) der—new institutions followed a recognition
Soon after, economic stimuli came in the that the destiny of the world’s nations and
form of the Marshall Plan for European peoples were inextricably linked and that
reconstruction and, in the U.S., the GI new governance mechanisms must be put
Bill (priming housing, jobs, schools, and in place to both foster shared, core values as
industries). And the international frame- well as to manage a globalizing economy.
work to ensure stability was housed in the A major detour from this evolution
newly-formed World Bank, the International occurred in 1971. With U.S. debt mounting
Monetary Fund, and what was to become from Vietnam War expenditures, President
the World Trade Organization (WTO). Nixon abandoned the Bretton Woods rules.
Free trade in goods was now matched by
THE WTO unhinged exchange rates and deregulation of
The WTO, an international organization the international flow of investment capital.
that deals with the rules of trade among The upward spirals soon began. In the
nations, was established in 1995 to replace 1970s gold jumped from $38 an ounce to
the General Agreement on Tariffs and Trade $300 (to $900 today); oil rose ten-fold,
(GATT). It extended trade policy from goods from $3 to $30 a barrel; and nations went
to service industries through the General hat-in-hand to the World Bank to borrow
Agreement on Trade in Services (GATS). The money to fuel their economies. By 1983,
WTO was formed to ensure that internation- money flowing out of the developing
al trade “flows as smoothly, predictably and world surpassed that entering in aid and
freely as possible” and to “help producers of investment, and the debt crisis was born.
goods and services, exporters, and importers By the end of the 1980s, unheard of
conduct their business.” interest rates (18-19%) drove money
Unlike the GATT, the WTO is backed by a into British banks and away from
dispute settlement mechanism, or trade court, their productive economy, creating a wedge
and compliance, based on the court’s find- between finance and industry. (This was
ings, is mandatory for member governments. corrected in the early ‘90s with a transfer in
Through the court, the WTO acts as an Great Britain from finance into industry—
arbiter when members’ non-trade objectives and the British economy rebounded.)
conflict with their free-trade undertakings. But the ‘90s saw the unbridled transfer
The effectiveness of the WTO has been of speculative, ‘hot money’ (e.g., moving
questioned by some, and the impacts of its quickly in and out of one Asian capital to
policies on those most in need roundly at- another, not stopping to invest in long-


term projects). Currency transactions also Debt is the means by which some nations
skyrocketed. In 1972, they amounted to exert control over others. Unpayable debts
$16 billion daily. Today they are close to $2 must be forgiven. Debt forgiveness would
trillion per day And today we witness the be a compensation for past inequities driven
cliff over which the runaway split between by unequal terms of trade and centuries of
the interests of finance and industry have wealth extraction. For example, debt-driven
carried us. timber extraction and land clearing for mon-
ocultures and biofuels will overwhelm even
TOWARd A BRETTON WOOdS II well-funded measures for forest preservation.
If global institutions are to be reconstructed But debt would re-accumulate rapidly
to support inclusive, equitable, and unless the conditions that gave rise to it
sustainable development, the deliberations are also changed. The most challenging
must bring all nations to the table (not just issue is, thus, the terms of trade (TOTs):
20 chosen ones). And on the table are the the difference between the prices poor
rules (the “sticks”), the financial incentives nations receive for their exports (e.g.,
(the “carrots”), and the international food) vs. the prices they pay for imports
financial institutions: The World Bank, (e.g., tractors). Since the 1960s TOTs have
the IMF and—of utmost importance—the steadily widened. Equalizing TOTs is most
WTO. A new institution may be necessary— challenging because it means distributing
the Global Environmental Facility is global wealth more equitably. TOTs must
one possible model, being a granting (not a become more balanced, even from a
banking and lending) agency, and includes Western, self-enlightened perspective, to
the United Nations (UNEP and the UNDP). maintain purchasing power and global
The GEF, which remains financially tethered markets. Equity is a prerequisite for trade in
to the World Bank, must be democratized. goods that is free and fair, and for addressing
A new global compact must realign international divisions among workers.
the monetary rules, the regulations, and
rewards that determine the shape of the Incentives and Funds. Perverse subsi-
global economy in a way that aligns with the dies—such as those encouraging deforesta-
higher purpose of sustainable development. tion and the extraction, mining, refining
We will need a substantial fund to prime and combustion of coal and oil—must be
the recovery, spark manufacture and eliminated. Subsidies and tax incentives
international trade in new technologies and must be switched to stimulate producers and
practices, and transform the international consumers of clean energy and energy-effi-
finance institutions into bodies with a new cient technologies. New enterprises for solar,
ethical foundation and new values that wind, geothermal, and other renewables will
position finance into its appropriate role as generate jobs, enterprises, and trade.
servant to the higher purpose of building a International agreements—such as
sustainable future. the Kyoto Protocol and the (pending)
Copenhagen Agreement, and the
A NEW FINANCIAl ARCHITECTURE Biodiversity Convention—are hindered by
In addressing a framework for a new 21st the lack of adequate financial resources.
Century global financial architecture, we Instructive is the universal acceptance of
can divide the components of financial the 1987 Montreal Protocol to phase out
architecture into three sets: rules, incentives, stratospheric ozone-depleting chemicals
and institutions. which was achieved when funds were
allocated to technology transfer to poor
Rules. New rules are needed to constrain nations (China, primarily; at the time poor).
capital flows a) in order to prevent the Funds are needed to “jump-start” clean,
volatile, destabilizing, speculative movement infant industries and to sustain them in
of capital and b) to direct funds towards developed and developing nations.
healthy development. A vast scaling up of funds is needed to sup-


port stewardship of what the private sector revisit Keynes’ proposal for an international
will not protect—forests, wetlands, water- clearing house to international governance
sheds, climate stability—in the face of the of transactions of goods and services.
short-termism and relentless cost competi-
tion associated with a globalized economy. CONClUSION
Potential sources for such Global Fund Our current mode of exhausting finite
for Adaptation, for the program for resources and generating wastes beyond
Reduced Emissions from Deforestation the capacity of biogeochemical systems to
and Degradation, and Mitigation include recycle them is not sustainable. Worldviews,
taxes on carbon, airline traffic, and like physical systems, are beginning to shift.
Internet “cyberdollars.” A tax on currency And once things start to change, they can
transactions—the “Tobin Tax” named after change fast.
the Noble-prize winning Yale economist, The international tasks that lie ahead
James Tobin—delivers a “two-fer”: it would loom large, for corporations must ultimately
a) dampen the destabilizing influence of “hot realize rewards for promoting less, not
money” transfers and b) generate significant more; a 180-degree turn away from the
funds for stewardship of both non-renewable conventional model of driving unending
and renewable resources. A quarter of a levels of consumption as the foundation
cent levy on each of the $1.9 trillion traded for measuring success. The misalignment
daily—far less than one pays a broker to buy of financial systems and new models of
stocks—would not discourage long-term business is a disconnect that must be
investments while yielding hundreds of rectified if timely, affordable, and patient
billions of dollars annually. capital is to flow into sustainable enterprise.
In all respects, we appear to be at the junc-
Institutions. Formed in an era when ture of a packet of waves of different wave-
resources were seemingly infinite and lengths, where the 30-year cycles and the
modern environmentalism had yet to 60-year Kondratieff boom-and-bust cycles
take shape, existing international financial have crashed along with a 500-year wave
institutions are inadequate to the tasks we of western civilization. Suddenly, we face
face today. critical turning points in social and natural
A look at the Global Environmental systems. It is a critical moment to rethink
Facility provides some guidelines for the and repurpose international finance institu-
type of institution needed for enhanced tions such that they become the vanguard
global governance. Established to coincide of the next wave of global change—change
with the 1992 Rio Earth Summit and targeted at building sustainable societies of
support both UN Climate and Biodiversity which finance shifts from an exercise risk
Conventions, the GEF makes grants, gaming to one in which it becomes a core
not loans, and involves two UN bodies driver of positive social change.
(UNEP and UNDP). It has increased NGO A test of the political will and vision of
participation. Though its funding is grossly world leaders for spurring such change will
inadequate, its organizational model is far occur in December, 2009 when nations will
better aligned with the critical sustainability meet in Copenhagen to create the post-Kyoto
challenges than is the World Bank—by climate regime. These deliberations will in-
definition, a lending institution. clude representatives from civil society, busi-
Beyond funding a new form of ness, and the scientific sectors. This gathering
development, a new global institution would of the global community to meet this global
also have to absorb the functions of the challenge can be the vehicle that sets us on a
WTO, forging new rules and enforcement path to reshape the financial architecture.
mechanisms to redirect development We cannot afford to balk. In this nation
toward more equitable outcomes than the we will need a Manhattan Project to study
current pressures toward unfettered trade new technologies, a Marshall Plan to finance
liberalization. In this context, we must them, an Apollo Plan to launch them and, a


new New Deal to sustain the transformation.
Constructing a new economic order built
on equity and conservation shaped by a
regulatory, institutional, and financial frame-
work, will require a “Bretton Woods II,” this
time with government, corporate, scientist,
labor, NGO, and civil society participation.
Creating new governance architecture with
adequate levels of funding and financial
regulatory power can provide the scaffolding
on which to construct and sustain healthy,
ecologically-sound, and equitable global
systems in the centuries before us. n


tomorrow’s
and then according them deference that
is usually reserved for magicians and rock
stars. In RBS, dealmaking and expansion
by acquisition were richly rewarded:

owners:
teamwork, loyalty and long-termism
were not. Boards and investors failed to
understand how large culture looms in
the risk profile of a company. In Halifax
Bank of Scotland (HBOS)—the other U.K.
Stewardship solutions for a better bank that failed—one dominant corporate
banker, Peter Cummings, took an equity-

capitalism with-loans approach that left it with debts of
over £7billion. In RBS no one on the board
or among senior colleagues was strong
enough to challenge Sir Fred Goodwin. In
maRk GoyDeR HBOS Cummings was, we are told, held
tomoRRow’S compaNy in awe and promoted to the board whose

t
job it was to challenge his strategy. Moving
outside the U.K., the culture at UBS was
so dysfunctional that senior sales-driven
THE CASINO ECONOMy ANd THE executives simply overrode established
FAIlURE OF STEWARdSHIP internal control policies forbidding them to
flirt with further U.S. tax schemes
London. 8 October 2008. It was a day of The London Financial Times of 8 October
reckoning for the casino economy. On that contained another news item on the theme
day, the U.K. government announced that of ownership and stewardship. This was the
it had taken ownership stakes in the major denouement of a long-running involvement
banks, Lloyds TSB and Royal Bank of Scot- of the activist speculative investor, Robert
land. This led to the resignation of Sir Fred Tchenguiz, and the pubs and hotel company,
Goodwin, CEO of RBS, who had led them MB. For some time Tchenguiz (a well-
through a number of successful acquisitions known client of Peter Cummings of HBOS)
before becoming one of the most energetic had been trying to use his investment
collectors of toxic assets. in the company to force it to sell off its
It was only some months later that the property into a joint venture with one of his
British public, who are now paying for the companies. This in itself was not unusual.
bank’s misjudgements, learned that the RBS What did seem strange was that he was
board had used its discretion to protect his able to get the company to treat him like a
pre-retirement pension with the effect of major shareholder—to the extent that he was
giving him a taxpayer-funded pension of granted the right to nominate two directors
£700,000 a year from the age of 48. to the board—when he did not actually
The original failure to challenge a powerful hold any shares at all. What he had was an
CEO, and thereby manage the banks’ risk, option to purchase shares called a contract
is an obvious failure of stewardship. The for difference (CFD)—a derivative—that
board’s positive decision to reward failure in meant that at any time he could convert a
this way suggests a staggering insensitivity to derivative into a holding worth 25 percent of
the expectations that society has of business. the company.
Shareholders were expressing unease about The company eventually acceded to his
Sir Fred’s management style and acquisitive demands; but then, because of the credit
habits as early as 2005. The scale and nature crunch, the funding for the deal fell away
of Sir Fred’s remuneration reflects flawed and the company was left with a loss of over
thinking about the whole nature of success £300m on hedging arrangements it had
and reward in business—appointing stars made in conjunction with the deal.


As the market continued to fall Tchenguiz While it impossible and undesirable to roll
then found himself being cornered by back many of the forces that have created
traders who were now short-selling MB the casino economy, we can reinforce
and driving down the value of his potential stewardship, and we can also rediscover
holding. In order to short-sell you have to the ingredients of success to which good
borrow the shares. Tchenguiz decided to stewards must always turn their attention.
convert his derivative holding into a real Which brings us to the third news item for
holding, not so much because he wanted 8 October—the publication of a new report
to be a real shareholder as to prevent other on the nature of ownership. (Tomorrow’s
people short-selling the stock on which he Company 2008)
had bet! This report starts by making a distinction
Now he was a real owner: at least he fully between the real economy—producing
owned the shares he had paid for. But that goods and services that meet human needs
was still not the end of the story! The end and the banks and investors that support the
came on 8 October when it was revealed real economy—and the casino economy—
that, because Tchenguiz had borrowed the activities which are removed from the
money to buy these shares from an Icelandic production of goods and services and
bank, he had now been forced to sell his where prices may have little relation to the
holding at a discount. MB were at least free underlying value of what is being traded.
from the attentions of an “owner” who had The report dissects the concept of
little interest in its long-term success, and the ownership. Companies are separate legal
company is now trying to find its way back entities which own their own assets.
to its previous course, nursing hedging losses Ownership consists of a ”bundle of
caused by this deal which exceed £300m. rights” which are exercised to a degree by
Meanwhile, Tchenguiz is now embroiled in shareholders and to a degree by directors
legal disputes with his Icelandic bankers. and by others.
This is a parable of the casino economy. The report argues that shareholders have
An investor who is not interested in the four main ownership-related roles, of which
long-term health of the company can, stewardship is the most important:
effectively, use a derivative to put his tanks  Member—setting the rules, voting , at-
on the company’s lawn without formally tending the AGM;
owning shares in the company. It prompts  Analyst, or scrutineer—assessing the
the question: should a company have to treat company’s potential and ability to de-
all investors the same, even where some liver;
of those investors are less interested in its  Financier—providing equity funding in
long-term health than in forcing break-up or an IPO or rights issue;
disposal for their speculative gain?  Steward—promoting sustainable, long-
term, performance.
WHy STEWARdSHIP MATTERS The rights and duties of shareholders give
Capitalism is in trouble because them a stewardship role alongside that of
stewardship is failing. Some of the reasons directors in protecting the long-term health
for this failure are global: they relate of the company and promoting the long-term
to the depersonalization of ownership, value of the investment. Directors are en-
the explosion of derivatives, and the trusted by shareholders with the management
introduction into financial services of of the company on a day-to-day basis and are
new layers of intermediation which erode accountable to—and can be influenced by—
personal responsibility. But, as will be shareholders. Thus, the core responsibility for
argued later in this paper, stewardship is also stewardship is shared between shareholders
failing because of a flawed understanding and directors—a vital point.
of the relationships and dependencies that The report goes on to define stewardship:
underpin corporate success. “In Tomorrow’s Company we see
stewardship as the process through which


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