Professor Ira M Millstein, Senior Associate Dean for Corporate Governance at the Yale School of Management, has called for an international effort to address the problems for corporate governance created by the power and diversity of today’s capital markets and investing organisations.

“Productive corporations must no longer be the tail on the dog of the capital market,” Professor Millstein said in the second annual Charkham Memorial Lecture at the Mansion House in the City of London.

The lecture was hosted by the Financial Reporting Council, the UK’s independent regulator responsible for corporate governance and reporting. Sir Christopher Hogg, FRC Chairman, described Professor Millstein as a leading figure in the remarkable development of corporate governance thinking and practice over the last 20 years. “He brings unrivalled understanding and experience to this second Charkham Lecture, and we are honoured and delighted that he should have agreed to give it.”

Professor Millstein painted a picture of boards of companies confronted by “the explosion of organizations such as hedge funds, private equity funds, state-owned enterprises, sovereign wealth funds, pension and mutual funds of all varieties, and combinations of them all. This array has created for corporations and their boards a "zoo" of owners with different stripes, teeth, sensors, claws, vision, strength, will, and attitudes.

"Compounding the situation is the creation of a blizzard of financial instruments. Professors Goetzmann and Rouwenhorst of Yale University noted that ‘instruments spring from the mind of investment bankers almost overnight, and then are analyzed, valued, traded, saved, and hedged themselves - sometimes to be replaced by new financial instruments’.

“Today, the board of directors, sitting amidst this complex landscape, must seek to steer the corporation in a coherent direction, somehow considering the values of its owners, and being responsive to those values. Potential intra-shareholder conflicts leave the board with the delicate but critical task of mediating different shareholder concerns and objectives, and being ‘fair’ to them all. “

Prof Millstein, who is also Senior Partner of Weil, Gotshal & Manges LLP, wondered what the meaning was of the board’s ‘fiduciary’ duty when the values of the shareholders were no longer unitary. “Does the concept include “mediation”, or deliberately favouring one set of shareholder values over another?”

He said it would not be easy to correct the deficiencies of the current system, but was clear on the starting point. “We cannot continue to see financial engineering, as important and inevitable to the functioning of the market as it certainly is, wagging the tail of the dog of the real world of producing the goods and services which provide the jobs and economic growth vital to the whole world’s well being.”

He called for a global effort to address the new issues. “In my view, this needs to be done by the OECD or by a joint effort of international regulators. Only a unitary approach can help avoid the unintended consequences of regulatory action.”

1. The Financial Reporting Council (FRC) is the UK’s independent regulator responsible for promoting confidence in corporate reporting and governance.
2. The FRC’s functions are exercised principally by its operating bodies (the Accounting Standards Board, the Auditing Practices Board, the Board for Actuarial Standards, the Financial Reporting Review Panel, the Professional Oversight Board and the Accountancy and Actuarial Discipline Board) and by the Board. The Committee on Corporate Governance assists the Board in its work on corporate governance. 
3. The Charkham Lecture honours Jonathan Charkham, who was internationally recognised as one of the founding figures of corporate governance reform. His career spanned law, manufacturing, the civil service, the Bank of England and directorships of both private and publicly listed companies. He is credited with having laid the groundwork for the concept of the independent non-executive director and was an early champion of shareholder responsibility, which he argued was an unavoidable consequence of owning company shares. He died in 2006.
4. Press enquires should be directed to Ian Rodger, telephone 020 7492 2395, email i.rodger@frc.org.uk.