The Yale School of Management announced the opening of a new center for the study of corporate governance, funded by nearly $20 million in donations including a $10 million contribution from David Nierenberg ’75 LAW ’78 and his wife Patricia, which comprises the school’s greatest single donation received to date.
The Yale Center for Corporate Governance and Performance, established last Monday, will be led by director and corporate governance expert Ira Millstein, and will integrate different disciplines — including law, economics, and ethics — in the study and practice of corporate governance, which addresses how the different components of a corporation function together and manage themselves.
SOM Dean Joel Podolny said he was deeply grateful for donors David and Patricia Nierenberg’s vision and commitment to the school.
“Through the generosity of David and Patricia Nierenberg, we are able to announce both the most significant gift in the 30-year history of the Yale School of Management and the establishment of SOM’s newest interdisciplinary center,” Podolny said. The Nierenbergs were unavailable for comment.
Podolny called the founding of the center an exciting time for both the School of Management and Yale as a whole.
“The inauguration of the Yale Center for Corporate Governance and Performance represents a major initiative by the Yale School of Management to establish itself as a global academic leader in corporate governance research, policy analysis and outreach,” Podolny said in a speech at the Center’s Advisory Board Meeting. “We are in the process of defining for ourselves and for others what corporate governance can and should be.”
Millstein — whose role as director will involve leveraging his knowledge of corporate governance to shape programs and recruit researchers — said he defines corporate governance on two separate levels, one of technicality and one of social responsibility.
“Corporate governance is both technical and aspirational,” Millstein said. “Its technical side consists of knowing the legal and moral responsibilities of managers, boards of directors and shareholders. Social responsibility is a part of the functioning of the corporation along with profitability and competitiveness. Without the latter two, social responsibility could not exist, because the corporation would not exist.”
To that end, Millstein said he intends to make institutional investors the primary subject of the center’s first studies in order to lay the groundwork for further research.
“Specifically I see the center focusing much of its initial activity on the principal owners of corporate America, namely, the institutional investors,” Millstein said. “We will seek to determine how well or not well they are exercising their responsibilities as owners, and what can be done about it.”
SOM had previously endeavored to establish an International Institute for Governance which failed due to limited staffing and insufficient financial support, SOM accounting professor Rick Antle said.
“It was more tied to just a few people instead of being more broadly thought of,” Antle said. “That’s why the center got replaced, reorganized, however you want to put it. I think the view of this reorganization or this relaunch … is very positive, and we look forward to it being the base for a broad and yet deep and rigorous scholarship.”
SOM professor Shyam Sunder, who directed the center in its year of “start-up activity” prior to its formal establishment, said much of the preceding year’s effort was spent finding a context for the work of the center and a basic understanding of the corporation in society from which to develop the center’s research ideas and initiatives.
“The most important activity during the past year was to develop a vision of what Yale can contribute to problem of governance,” Sunder said in an e-mail. “We decided that the center [should] be founded on the premise that a corporation is an institution which is expected to enhance society, striving not only to improve the welfare of all its constituents but also of the broader community.”
Sunder, who is also serving as the president of the American Accounting Association, said he will not be continuing in his capacity as director at the newly established center because of competing demands on his time.
Millstein said the new center will avoid many of the problems that plagued the IIG with the help of a closer administrative staff and adequate funding. He also intends for the center to serve as the base for a course imbued with the most current thinking on corporate governance, as well as a source of research assistant jobs for students.
Robert Hallagan, chairman of the National Association of Corporate Directors, said he believes Millstein’s leadership will also provide a tremendous benefit to the center in its start-up phase.
“I’m very positive about this [center] in particular because of its focus and who is involved in it initially,” Hallagan said. “The program is there to have impact, and they have Ira Millstein overseeing it, [who] is absolutely tremendous in the field and highly respected around the world.”
Hallagan said one of Millstein’s most important tasks as the center’s director will be to restore societal confidence in the ethical operation of companies.
“Unfortunately, there has been a loss of trust in the capital markets, and we need to bring that back,” Hallagan said. “The best people to bring that back are the directors of companies, and frankly they’ve let us down and public trust is very low. That’s sort of the whole centerpiece of our capitol structure — having trust in the system. A lot of what Yale is doing is trying to bring that trust back.”
Millstein said he thinks a comprehensive understanding of corporate mechanisms is critical for students who intend to become societal leaders.
“The corporation is the principal engine for the private sector in our society,” Millstein said. “If one is going to be a leader, one will be participating in one corporation or another, be it public, private or otherwise. Accordingly, knowing how a corporation works, how it is governed and to whom it is responsible is a key part of what every leader must know.”
Antle said the issues addressed in the academic study of corporate governance are perhaps more relevant in today’s world than ever before.
“There’s just been a substantial amount of change since the Enron debacle, where we used to have an accounting profession that was self-governed and now we have more directly government-backed regulation,” Antle said. “There are a lot of research projects involved in trying to assess what are the real effects of that, what ultimate impact does it have on not only the accounting firms but their clients and the economy as a whole.”
University of British Columbia law professor Joel Bakan — whose book “The Corporation: The Pathological Pursuit of Profit and Power” was the basis for the award-winning Canadian documentary “The Corporation” — said one benefit of SOM’s new center is the focus it brings to the corporation and its role in society. But he said he had concerns over a line in the second paragraph of the center’s mission statement, which claimed that the center would be “firmly committed to market solutions.”
“What that means is that the center has already decided as a body and in terms of its mission that solutions involving more involvement of our political, governmental, and democratic institutions are not really what they’re really interested in,” Bakan said. “What this bias toward market solutions does is effectively privatizes the governance of corporations, [but] the only way we’re going to install democratic control — lose the myth that we can control it through the market — is to revitalize the public regulatory system, because that is really our means as citizens to control what corporations do.”
Millstein responded to Bakan’s criticisms by defending the inherent democracy and equalizing force of the free market and the social solutions it can potentially provide.
“The market is quite democratic,” Millstein said. “There is nothing more democratic than the market. The market is choosing what they want, and the things they want are successful and the things they don’t want are unsuccessful.”
Bakan also said he would like to see the center broaden the discussion of corporate governance to open up a dialogue about how to ensure that groups external to a corporation remain protected.
“It’s important to protect investors but it’s also important to make sure workers aren’t being exploited, [to] ensure the environment is protected,” Bakan said.
Millstein said he believes Bakan’s concerns are important but secondary to understanding how a firm actually operates.
“First and foremost [the corporation] has to exist,” Millstein said. “No corporation can be totally responsible to the other constituents if it’s not profitable enough to stay in existence. [Bakan’s point] is a major concern, and we’re interested in seeing whether or not a corporation can address all its complex constituents and still be successful.”
Hallagan said he supports the center’s mission to primarily pursue market solutions as a means of addressing tensions between the corporation’s internal and external constituencies.
“Some of the best pressures on corporate governance have come from institutional investors putting pressure on boards, so that’s a market solution,” Hallagan said. “But on the same side, when the system needs another shot in the arms, you have business regulation. I would prefer — and hopefully what the center will do — is focus on market solutions, and I don’t think they’ll be pushing for more regulation.”
At the center of the debate on corporate governance is the issue of whether or not it is possible for a firm to be both profitable and beneficial for society. Sunder said corporate governance and social responsibility are too often confused by the public.
“Social responsibility implies care for the interests of others, whereas good governance implies an efficient arrangement that creates a match between what others expect person A to do and what A finds in his or her own best interest,” Sunder said “Social responsibility discussions can get a bit preachy, telling people to put the interests of others before their own. The idea of good governance recognizes that most of us mortals have selfish tendencies and emphasizes arrangements which help all participants achieve their goals by trying to create an arrangement which matches their own incentives to the expectations others have of them.”
Millstein said he relates the question of whether a company can be simultaneously profitable and socially responsible to the simple adage of walking and chewing gum at the same time.
“Corporations can walk and chew gum,” Millstein said. “[People think] you either make money or you do good. I don’t see it as an ‘or.’ You can make money and do good.”