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Trends and Key Issues in Governance for 2023

The following is a top ten list of trends and issues for Board of Directors in 2023.

1. Attention turns to non-profit governance.

Hockey Canada’s governance was inferior (see independent report, here, and Dr. Leblanc’s media commentary, here and here) but not anomalous. Non-profits (sporting, educational and health care institutions, charities and associations) are often inferior when it comes to CEO succession; culture and conduct oversight; financial, governance and executive pay transparency; cyber-security; in camera sessions; gifts and other forms of self-dealing; term limits; size limits; insiders on committees; director competencies; auditor independence; financial literacy; risk governance; and not retaining independent advice. When a few or more of these shoddy governance practices occur, the board works for management and is a dormant risk.

The excuses for poor NFP governance are many-fold, but mainly is because there are no mandatory governance requirements for the not-for-profit sector. This gives management opportunity manage the board and the drift is too much of an uphill battle to counteract. Look for fresh regulation for the entire non-profit sector in 2023 or 2024, analogous to NP 58-201 (for-profit listed companies). There are significant public expenditures on non-profits, and poor governance wastes funding through self-dealing, mismanagement and impairment of stakeholder confidence.

2. The emperor wears no clothes.

The for-profit sector is not immune from governance infirmity either. Institutional investors such as Ontario Teachers lost $120M million dollars of teachers’ retirement money on FTX. Another firm invested $150M in a bankrupt crypto investment. Dr Leblanc called for greater regulation of crypto governance and institutional investors to protect investors and retirees (see media interview, here). There still is a tendency to be enamored by misunderstood tech and young inexperienced individuals and fraudsters. Elizabeth Holmes was sentenced to eleven years in prison in 2022, and the ceremonial hand-picked board never ensured validated of the Edison machine. FTX had no independent board and a shocking lack of internal controls (see the independent report here). Boards are present to protect investors and other stakeholders and to ensure proper books, records and controls. Boards need to say “no” if or when they do not understand or cannot assure proper governance. Like Warren Buffet said about technology, here: Do not invest if you do not understand the predictability of the economics of the business.

3. Regulators set their sights on director competency.

Regulators are focusing on cyber-security and climate expertise and financial literacy. Management should not adjust these competencies, or unduly influence the director competency matrix. If a board has any director on the audit committee who is not financially literate, this is a risk. “Expertise” normally requires 10,000 hours. It is implausible for a director to become an expert whilst on the board. This means that regulatory expertise requirements must involve director renewal and replacement. For the matrix to work, there should be independent validation of director competencies, and the competencies and attributes should be tied to a register, onboarding, and professional development. Many matrixes are manipulations to ensure that the desired director is selected or that under-performers are insulated. The universal proxy cards in late 2023 will give investors greater ability to replace directors who lack the independence and relevant competencies and attributes.

4. Boards get serious about ethics, culture and reputation.

Fraud and misconduct have increased during the pandemic. Many boards have long argued when ethical misconduct surfaces, “we missed it,” “it was a rogue employee,” or “soft” controls are difficult to implement. The reality is that there are a host of best practices and hard controls that regulators advise and good boards employ to ensure board oversight over ethics, culture and reputation, including: communicated, remedied, anti-retaliatory, anonymous whistle-blowing or safe report procedures; independent investigations; special committee of the board for CEO conduct investigation, other material reputation matters; anti-grooming policy; monitored no gift code, DEI policy, claw-back trigger, just cause, malus clause and sign off procedure; culture, wellness, spot and mystery shopper audits and reporting; exit interview data; integrity and reference checks; mandatory training and education on fair treatment, anti-discrimination and harassment, and unconscious bias; risk, ethics and behavioural gateways embedded in incentive pay for risk-takers and senior management; resume, education and employment verification; criminal record, judicial matter, sanction, offshore leak and vulnerable sector checks; and email and text analytics.

5. Boards approve playbooks over crises.

Here are crises boards experienced in 2022: encryption and exfiltration, and demand by threat actors for bitcoin payment; assassination of directors by an active shooter; CEO misconduct (all forms); leaks of workplace toxicity to the media; workplace fatalities; adverse brand effects of key employee termination; material loss of services or products; regulatory investigations; and weather-related disasters.

Significant unplanned events are not the realm of only day-to-day management. Crisis is part of risk governance, and internal controls exist prior to a crisis. If the controls are defective, this is the board’s fault for want of oversight. The crisis will be worse. Boards have an active role prior to the crisis, to approve crisis planning; and during the crisis, to oversee management’s response.

Boards in 2022 and 23 are reviewing and approving crisis protocols. This includes media training and the board’s prerogative to establish a special committee if the crisis is material and requires longer-term oversight and root cause remedy, e.g., independent investigation. See here, where Dr Leblanc talks about such a playbook in light of the Rogers outage and Suncor fatalities. Dr. Leblanc will be giving a keynote address on risk and crisis governance on January 24th and a module for CEOs and Chairs on media relations on February 2nd (slides can be provided upon request).

6. Post-COVID focus is on non-financial.

Investors and regulators continue their emphasis on non-financial strategic value drivers. This is because most of the value of a company is non-financial. And COVID-19 has shown that non-financial can kill. In Canada, codifying the Supreme Court, federal regulation changed as the pandemic began to enable boards to consider the impacts of decisions on the long-term, on the environment, and to consider stakeholder interests, including those of shareholders, employees, creditors and consumers, with no primacy towards any stakeholder. Institutional investors want transparency over the full value chain, and this means activists may and are attacking any portion of this chain. When a board approves the strategic plan without all value drivers and key performance indicators to measure their achievement, they are exposed themselves to regulatory, plaintiff, or investor scrutiny. Good boards are focusing now on the complete value chain, including stakeholders and non-financial drivers of value.

7. Changing risks require boards to act.

Boards have been operating under stable risk conditions in the aughts and teens. As risks change rapidly, boards need to keep up and insist that the controls, limitations and assurance are present and remedied. There is still immaturity and complacency by many boards in not exercising their duty of care and insisting on curing of defective controls of new, material non-financial or emerging risks. Risks include crisis, culture, interest rates, inflation, geo-political impact on the business model, safety, resiliency, redundancy, retention and ransomware. Risk-adjusted compensation, including risk-taker pay and claw-backs, are also immature, with boards not reacting to changing conditions in real time. Boards are also complacent and slow in receiving independent assurance and instructing investment in technology to monitor changing risks more continuously.

A board speaks with one voice, so all directors should keep up with science, facts and accurate information from validated sources as part of duty of care.

8. Chair and director recruitment professionalizes.

Boards in 2022 began, slowly, not tolerating top heavy entrenchment or inferior director recruitment. There has been an uptick in explicit policies on recruitment and appointment criteria; disclosing and managing conflicts of interest and pre-existing relationships; containing management funneling; full and diverse talent pool outreach; resumes to match desired competencies; attributes and proper interviews; background checks; even-handed, transparent and inclusive application; chair and director term limits; robust mandatory onboarding; off-boarding under-performing directors; and linking re-appointment to peer review. These practices will continue for effective boards.

9. Agile governance is becoming the norm.

Boards are not going back to exclusively in person board or annual meetings. Hybrid and virtual meetings offer flexibility and convenience. Investment in technology in boardrooms occurred in 2022 to enable this. Blended meetings are also shorter, more flexible, and enable less warm up time. Other agile trends include (i) strategic, shorter, responsive, deliberative and forward-looking agendas; (ii) tighter pre-reads, with greater narratives, layering and consents/appendices; (iii) emphasis on prework and preparation, with presentation time limited and discussion time enhanced; (iv) on-camera and virtual technology standardization in boardrooms and remotely; (v) removing some non-financial risks from the audit committee; (vi) more board-management inception partnering on strategy; (vii) director recruitment less anchored to geography; (viii) flexibility, emphasis on availability, and “micro” or issue meetings; and (ix) chair-director check-in calls.

10. The best cyber defense is a cyber offence.

There is an aggressiveness here that is beginning to emerge, so a company is less of a target. This includes robust ransomware policies; zero trust deployment; user, network, third party and WFH controls; penetration, back-up and restoration testing; ethical in-house hackers; prompt and effective control curing; a playbook for when the attack happens; advance discussion of payment; encryption and exfiltration tech first-responders and negotiators on the ready; most important, robust continuous testing using NIST, OSFI and Five Eyes; cyber-security expertise on the board; and a full IOF (independent oversight function) bench to provide assurance to the relevant board committee overseeing ransomware; and impenetrability assurance reporting to the full board. As digitization occurs, including companies using AI, AVR, blockchain, cloud/edge, drones, IoT/Metaverse and RPA, the risks and controls are in parity, or the technology cannot be deployed.

Board of Directors Checklist for 2022

The following are what effective Boards of Directors will be focusing on in 2022.

1. Revised Strategic Plan and KPIs

The pandemic has recut most plans, and management should be coming forward with shorter term plans that can be overseen by the board. Strategy is not “out the window” or “put on hold” during the pandemic. Good boards, especially during disruption, will ensure management brings forward a staged plan, with board input, that reflects changing circumstances. Values, purpose, vision, mission, business model, value drivers, key performance indicators, and risks, should all be reviewed, in writing, and approved by the board. It is difficult for the board to re-assert itself if it lets go of strategy. Boards should be moving from crisis to strategy and performance oversight under disruption.

2. Digitization of the Business Model

Boards should be thinking up and out, and never be in denial. I am seeing almost 50% of business models now comprising digital and data. Every organization has a business model whether management makes it explicit for the board or not. WFH has accelerated digitization, and boards should understand AI, IoT, blockchain and automation’s impact on the company’s business model. Boards that are very good will link the business model to directors’ skills.

3. Revised Risk Appetite Framework and Control Assurance

Steady state risks have been replaced with supply reliability, inflation, succession, labor costs and retention, data integrity, economic, employee safety, social expectations, climate, digitization and regulation. As the risks change, the duty of care follows, with good boards having lines of sight to internal controls and assurance that the controls are working, as a prudent director under similar circumstances. Boards that wait, or do not act when risks change (including climate, discussed next), are at risk and may become a litigation or investor target.

4. A Path To Net Zero

If a board delays action on the company’s path to net zero GHG emissions for want of more regulation and certainty, activist investors and plaintiffs’ attorneys may target (i) the company for not disclosing true climate risks; (ii) directors for breaching their duty of care by not acting as a prudent director would act under similar circumstances; and (iii) directors for not adequately considering the long-term interests of the environment under recent legal changes. Short-term steady progress to net zero carbon emissions, that is performance and industry benchmarked, using standard setters, and is accurately disclosed, will be on good boards’ agendas in 2022.

5. Data Security, Including Backup and Restoration

When exfiltration and encryption have occurred, and threat actors demand a ransom be paid in crypto currency on the dark web, the company faces significant liability. NIST- and Five Eyes-benchmarked internal controls to protect the perimeter and crown jewels, with regular back up and restoration testing, avoids becoming a target and limits liability. Weak WFH cyber-hygiene and human error are addressed by good boards. A ransomware policy should be reviewed and approved by the board in 2022 if not already done.

6. Retention and Succession Risks

Omicron variant illness (or worse if unvaccinated) and isolation is real, within key functions and sectors of at-risk employees. CEOs are unexpectedly resigning because of exhaustion. The HR committee should be reviewing contingency plans for key officer illness and emergency plans for the CEO because of health, resignation or otherwise. A similar succession plan should be reviewed by the board for key board leadership roles. Having an evergreen list and high potential talent on the internal bench should be reviewed by the committee and brought forward to the board for a full discussion in early 2022.

7. Employee Well-Being and Safety

Loneliness, anxiety, depression, substance abuse and radicalization are going up under COVID-19 and remote work. Vaccine mandates, WFH policies and practices, and safety and wellness risk are not the prerogative of management and immune from board oversight. Good boards are exercising their duty of care and fiduciary duty to review all the foregoing, ensuring consistency with COVID regulations. Wellness outreach, CEO mindset, science updates, exit interviews, culture surveys and internal controls over an airborne virus are now standard reporting in leading boardrooms.

8. Robust, Accurate and Disclosed ESG

Has the board approved which items within E, S and G will be the focus of management? Were the items strategic, peer and industry benchmarked? When the items were approved, were the performance measurements approved also, and independently audited against third party standards? Will performance by the company against the standards be full, true and plain? In 2022, boards should prepare for significant investor demands of all the above. Assume also that any self-interest, cherry-picking or sugar-coating, by management without board scrutiny, will be detected and acted upon by investors. Assume also that any competitive arguments against deep ESG disclosure will fall on deaf ears of both investors and regulators.

9. Financial Oversight and Stress-Testing

As Omicron rages, has the board requested stress-tested financial statements under prolonged adverse conditions? Director duties receive enhanced scrutiny under financial distress, and boards are obligated to act even when management does not. Boards should pay particular attention to loan covenants, fair treatment of creditors, aggressive accounting, contractual obligations, impairments, deferrals, related party transactions, compliance with conditions of receiving government aid, insurance obligations, management forecasts and disclosure obligations.

10. Saying Thank You

The last two years have been truly extraordinary. Board chairs tell me that an important item on their board’s agenda now is leading by example and saying, “thank you.” Saying thank you, authentically, to directors, to management, and to employees (and especially health care, educational and customer-facing) for their extraordinary sacrifice in the face of ongoing adversity. This gratitude should be communicated to all employees and key suppliers by senior management, for retention and goodwill purposes. See a very good example of this, here.

Dr Richard Leblanc is the Editor of The Handbook of Board Governance, published by Wiley in 2020.

Can A Harvey Weinstein Situation Happen to Your Board?

Here is a hypothetical situation that I have encountered many times.

I am invited to observe and assess a board. When I do, I immediately see the red flags. I make hard-hitting recommendations, which have included the CEO and certain directors being fired.

Why does it take me to do what the board should have been doing much earlier?

Boards can be very defensive, and even in denial to what is blindingly obvious. “We missed it” or “it was a rogue employee” is their common defense.

Boards are now asking, “Could a Harvey Weinstein situation happen to us?”

The board’s role in overseeing corporate culture, potential harassment, and other conduct risk is increasingly being turned to by boards and regulators.

Here are twelve suggestions for boards to oversee conduct risk properly within their organizations. The best boards I work with do all of this. The worst do not.

1. Act on your hunch.

If you have a question or concern, most of the board shares the same concern. Ask the question, and ask the second question. And if you don’t like what the answer is, press further. Where there is smoke, there is often fire. I have interviewed over a thousand directors over my career. The most common regret directors have is twofold: (i) I didn’t speak up when I should have; and (ii) I didn’t fire the CEO soon enough. One corporate secretary after a recent public scandal told me, “when the board does not ask questions, we have succeeded.”

2. Insist on proper whistle-blowing.

Many whistle-blowing programs are flawed. They are not anonymous, protected, independent, rewarded or remedied. That is the board’s fault. Not surprisingly, people (especially women) do not come forward for fear of retaliation and career harm. If you think conduct risk is not occurring within your organization, you are wrong. It is just a question of degree. Bad news needs to rise, and go around management and directly to boardrooms. If bad news does not rise to the board, it does not go away. It gets worse. Good boards insist on proper channels directly to them.

3. Renew your board regularly.

New directors see things that long-serving directors may not see or may be accustomed to. A fresh set of eyes can be invaluable. Have term limits for directors or regulators will impose them for you as is being done in several countries. Have a diverse board. Homogenous boards engage in group-think and do not ask tough questions.

4. Do rigorous interviews and background checks.

Ensure that employees, agents, management and directors go through thorough and ongoing background, reference, social media, personality, criminal and financial checks and testing. People’s personality will not change. If you do not know someone’s faults, you have not done your homework, and they are a risk to your reputation.

5. Remove management regularly from boardrooms.

Remove management from a portion of each board and committee meeting. Have a safe space so directors can speak confidentially. These “in camera” sessions are the main way that directors voice their concerns not within earshot of management. In camera sessions are the greatest contributor to board effectiveness, directors tell me.

6. Act immediately at the first sign of an ethical lapse.

The standard you walk by is that standard you accept. When you see discrimination, disparagement, or unfair treatment, call it out. Speak up. And when necessary, fire the CEO or senior manager at the first sign of a lack of ethics. Otherwise, you signal to the entire organization what is acceptable to you. Boards have suffered by not acting when they should have. And if your board does not act when it should, resign.

7. Receive dis-confirming information on company culture and executives.

If you get all your information from management, you are only hearing one side. Receive your own social media analytics, look at chat rooms, hear from employees, use google alerts, commission independent reviews, hear from reporters and analysts, walk around, and listen to what you hear and observe.

This does not mean that you are micro-managing, only that you are getting full information. If management tries to block you or dominate your information flow, that is a red flag.

8. Receive employee feedback.

Retain survey providers to conduct employee morale surveys that are directly provided to the board and untampered with by senior management. Ask for qualitative exit interview results, staff turnover rates and litigation compared to your peers. Consider putting an employee on your board, or having an advisory committee or a designated director to represent the employee viewpoint.

9. Look at how employees are paid.

People behave and take risks based on how they are paid, including customer-facing employees all the way to senior management and your CEO. Look at how pay incents conduct. Make sure that employee engagement forms a healthy portion of CEO incentive pay.

10. Protect yourself and the company.

Benchmark management contracts for conduct and ethics clauses. Define just cause for dismissal to include ethics. Have fair treatment form part of all employment contracts. Ensure your Code of Ethics and Diversity Policy are conditions for incentive pay to vest, and claw it back if you discover misconduct after the fact.

11. Benchmark your diversity and inclusion policy and practices.

Many human resource policies are legalistic and do not provide adequate examples and training. Train on unconscious biases. Provide examples of heterosexism, islamophobia and transphobia. Have voluntary, confidential self-identification of gender identity and LGBTTIQQ2A. Have a diversity and inclusion best practice presentation directly to the board of directors, as tone flows down from this.

12. Be vigorous in your fiduciary duty.

Management may play the trust, confidence or micromanaging card. Press on. Insist on behavioural and integrity controls, and independent auditing of these by the internal auditor, who should report directly to you, not management. Many conduct failures have happened because senior management blocked access to the auditors from the board. Have internal audit test the controls for culture and integrity (including complaints, reaction time, investigation protocols, record keeping and non-retaliation) and report directly to you on their findings.

Conclusion

Governance is changing. Board are becoming far more active and are investing significant time in their duties and responsibilities.

There are occasions where the best efforts will fail, but for the most part conduct failure happens when a board is complacent and fails to act when it should.

Dr. Richard Leblanc, Editor of The Handbook of Board Governance (Wiley, 2016), can be reached at rleblanc@boardexpert.com.

The Board’s Number One Job: CEO Succession

A board’s number one job is to hire and fire the CEO. Everything else is secondary. If a board gets CEO succession right, the company will prosper. If the board hires the wrong CEO, the company and the board will fail.

Many boards perform CEO succession poorly. According to one study, boards spend, on average, only two hours a year on CEO succession planning. When I ask directors what their number one regret is, the answer that I receive most frequently is “not firing the CEO sooner.”

Why is CEO succession so difficult for boards? I have a good idea of why boards perform poorly on this important task, and how to get it right.

Here are three recent case studies that have been heavily disguised. I will then discuss what boards should do to improve CEO succession.

First board: I was in a board meeting of a global company, where I saw the CEO in action. Then it hit me: This is the wrong CEO, and the problems that the company has been having are due to this under-performing CEO. I asked the CEO to leave the room. I advised the Board to administer an employee survey, with results directly reported to the Board. When the results were a failure, I recommended firing the CEO. The internal CEO successor bench was weak, so an existing Director was tapped to be Interim CEO, and the Board is now hiring a permanent CEO. This Board should have acted much sooner. This was a CEO hire fail because two Directors pressed for this CEO, whom the Directors knew, and the Board agreed.

Second board: I was in a board meeting of a large public company. The CEO was pushing back, interrupting directors, and interrupting me. I asked the Board Chair to instruct the CEO to leave the room in order that I may have an in-camera session with the Independent Directors. After the CEO left, I found out that a CEO-ready internal successor was still three or four years out. The incumbent CEO was resisting coaching. I told the entire Board that they have failed in CEO succession planning. Poor CEO succession planning was why the incumbent CEO was dominating the board. The Board had no options.

Third board: I was in a board meeting after a high profile risk management failure at the company. The current CEO was weak and I predicted would buckle under a crisis. Except this time, the CEO had been blocking Board access by a potential CEO successor for over a year. And another potential successor was not being given resources by the incumbent CEO to prove himself. I worked with the Board Chair to construct a “horse race” CEO succession model, like GE and CIBC did, for the top three officers. I made sure that the first officer was regularly exposed to the Board, and the second officer received responsibilities for profit and loss. I also advised the Board to do a global external search at the same time. All three officers were told that they were also competing against global talent, as well as each other. Each internal CEO candidate had six months to prove themselves to the Board. The former CEO was replaced by the highest performing officer, and the company prospered significantly.

These three companies were caught flat-footed with CEO succession. These boards should have had CEO succession right, but failed. If these companies failed, with some outstanding directors on them, other companies can fail on CEO succession.

Why does CEO succession fail? Three reasons.

1. The incumbent CEO refuses to cooperate. No CEO ever really wants to replace him- or herself. However, CEO succession is the board’s responsibility, not that of the incumbent CEO.

2. Boards do not proceed pregressively and step-by-step. Boards skip steps or, worse yet, allow emotion, preference, capture, social relationships, or bias to creep in.

3. There is no actual CEO succession plan. Every board should have an emergency CEO succession plan and a longer-term plan. The longer-term plan contains a line of sight for the Board to: the high potential talent pipeline; what grooming and development is necessary to make this talent CEO-ready; and what the time frame and resources are for this readiness. Internal CEO talent costs less than external talent and is more successful.

There should be a CEO succession planning process, which may include:

• Regular discussions and reporting on CEO succession by the Board;
• A dedicated Board Committee who reviews and recommends CEO succession planning;
• Board approval of the strategic plan;
• Prioritized attributes of the CEO who can achieve the plan;
• A recruitment strategy (internal candidates, external candidates, or both);
• Matching profiles and resumes to attributes to create the long list;
• Background, social media, reference, criminal and credit checks;
• Information packages for prospective CEOs;
• Initial interviews and ranking to a short list;
• More due diligence on top candidates, second interviews;
• Salary, incentive, and benefit pay established, and linked to the strategy;
• Terms sheet and draft employment contract;
• Invitation for Directors to meet top finalists;
• Final interviews, recommendation to full Board;
• Board approves top two candidates;
• Finalize employment contract and pay with successful candidate;
• Onboarding, CEO performance review after 6 and 12 months; and
• Updates to full Board on all of the above.

The board should discuss the longer-term succession plan in the absence of the incumbent CEO. If the incumbent CEO, whose views on potential successor are relevant but should not be determinative, does not cooperate, or blocks access, this is a warning sign. Make CEO succession worth a healthy percentage of the CEO’s pay. Then watch the CEO cooperate. CEOs behave the way CEOs are paid.

CEO succession planning should start day one of the new CEO’s hire. Do not wait. You know you have CEO planning right when you can fire the incumbent CEO at any time. Anything can happen and you want to be ready. Ethical transgressions, non-performance, accidents, or illness are regular occurrences. CEO succession is all about leverage and the board having options.

If the CEO pushes back and says that you don’t have confidence in him or her, correct the CEO. You have confidence in the CEO (or you do not), but are doing your job. If the CEO does not cooperate, the CEO should be fired. Never be beholden to a CEO. CEOs are replaceable and it is the work of the Board to do this.

Dr. Richard Leblanc, Editor of The Handbook of Board Governance (Wiley, 2016), can be reached at rleblanc@boardexpert.com.

How Tweeting by a PwC Partner During the Oscars Sullied PwC’s Reputation and Offers Lessons for Distracted Board Members

PwC partner, Brian Cullinan, evidently was tweeting backstage moments before he handed the wrong envelope to Warren Beatty, resulting in reputational damage for PwC in its assurance role over award envelopes and the announcing of the wrong award for Best Picture.

Social media use can become an addiction, and can compromise not only reputation, but decision-making as well.

The most common complaint I have during my reviews of boards of directors’ performance is distracted directors. I see distracted directors in boardrooms and distracted students in classrooms all the time. More leadership and common sense is needed by board chairs and professors.

I was auditing a graduate university class recently, and most of the students were on their laptops, typing away, apparently oblivious to the lecture occurring in front of them. Their eyes were not on the professor or their colleagues. They were not engaged in the moment. This is like directors looking at iPads and laptops during the board meeting instead of each other.

I stopped the class and asked what the point was that the professor had just made. No one could answer. I instructed all students to close their laptops and discontinue all technology for the remainder of the class. Further, students were not to consult any notes and stay in the moment for the entire class.

In another board meeting, the board chair was obsessively using his cellphone during the board meeting. When I walk around boardrooms and classrooms, I see directors and students typing, answering emails, texting, using social media – in other words, not doing their job.

The laptop creates a physical and psychological barrier. It also takes two hands to type, as opposed to one hand to write.

Certain Toronto high-schools announced a few days ago that they are banning cellphones from classrooms. Hospitals and courtrooms also ban the use of cellphones.

The answer for boardrooms and classrooms is not to ban technology, but rather to use technology to enhance individual and meeting performance, not diminish it.

You are four times as likely to be distracted when you use technology. Studies show that retention increases when notes are taken the old-fashioned way, on paper, rather than on a computer. Technology does not necessarily enhance performance; indeed, studies show it may diminish it.

If you are prepared for class or a for board meeting, there is no need for any technology, or very many notes for that matter. The use of technology, including PowerPoint slides, can be a safety blanket or used to manipulate your audience. If a person reads PowerPoint slides, chances are they are unprepared, and further, you have a weak board chair or weak professor.

A great board – management discussion or presentation can occur without any technology whatsoever. Think of twenty years ago when this technology did not exist. Some of the best discussions that I have moderated and witnessed in boardrooms and classrooms do not include any technology.

What is the answer for boards of directors and classrooms, and the use of technology?

• Resist the use of technology simply because it is available. The litmus test for technology is performance.
• Lay down the rule if you are the board chair or professor: No technology unless it is directly related to the meeting. And lead by example.
• Make sure all discussions, agendas and information are relevant, to respect your audience’s time, and resist their temptation to be distracted.
• Insist on full preparation and focus on the discussion. The discussion is where the learning and important decisions get made.
• Have students submit 2-page summaries of the readings at the start of class, to validate their preparation.
• The foregoing would be draconian for directors, but it is blindingly obvious to directors who is prepared for the meeting and who is not. Have a system to enforce preparation.
• Insist on peer assessment of directors and students.
• Make sure that you can see someone’s eyes. If you cannot see their eyes, chances are they are distracted.
• Take frequent breaks to use technology for personal purposes.
• Insist on in-person meetings to the fullest extent possible.
• Self-police any errant director or student who cannot comply with the above.
• Most of all, lead by example.

Dr. Richard Leblanc, Editor of The Handbook of Board Governance (Wiley, 2016), can be reached at rleblanc@boardexpert.com.

The Problem with Independent Directors

“The Board Chair is owned by the CEO,” directors told me after I was called in by the regulator to assess the board. The Chair owned a condo next to the CEO and was a close personal friend. I have not assessed a board when there was not at least one director, and oftentimes, after governance failure, several directors who are viewed as non-independent by their fellow directors, even though these directors are independent by regulatory standards.

Academics have never been able to show that independent directors strengthen company performance for one major reason: true independence is not being measured from the outside, and can readily be undermined by clever, self-serving management and directors themselves by allowing it to occur. Bright-line independence tests or rules can be out-smarted, and many fail to capture the underlying conflicts of interests.

In my research involving shareholder activists, activists tell me how they investigate director backgrounds to show the compromising of independence. Activists’ inherent presumption is that each director is non-independent to begin with. They are put in place by management or other directors, not shareholders.

Here are the ways directorial independence is compromised, before or after a director begins to serve: a close social or personal relationship with another director or member of management; serving on another board or in another business relationship with a director; excessive tenure on the board; excessive director pay or expenses; an office at the company for the director; the use of secretarial staff; gifts such as cigars; vacations with other directors, a significant shareholder, or management; jobs or contracts for acquaintances or referrals of the director; lunches, dinners, entertainment or sporting events with a small group of directors and management (rather than collective board dinners); informal collaborating in a decision by a board or committee chair with management in advance of the meeting; boards or committees not hiring independent advisors but are beholden exclusively on management; directors taking advantage of a corporate opportunity, resource or perquisite with full knowledge (or not) of other directors; or having a bias towards a particular stakeholder in board deliberations (including a significant shareholder).

There exists pressure on Canadian directors to allow their independence to become diluted, directors tell me, and to be collegial in this dilution. I have interviewed some of the top board chairs in Canada, and one of their major concerns was the “slippery slope” of directorial independence. I have found that directors can become less independent, but I have never found them to become more independent. Boards, in theory at least, should decide what degree, if any, of independence slippage (see all of the above real examples) they are willing to tolerate.

If one or more directors has their independence compromised, particularly a board or a committee chair, then governance failure can and does occur. Conflict-seeking directors are toxic to a board and should be removed. Directors know which director(s) has lost their independence. By the time I arrive, I am confirming what they already know and failed to act upon. A trained outside expert can readily observe captured directors during board meetings, interviews and customized questions.

Why is There a Director Independence Dis-connect?

If director independence is compromised and regulatory standards fail to detect this, then the regulators have failed. It should not be possible, if regulators are doing their job, to have a director who is not independent, inside the boardroom, and at the same time that director complies with independence guidelines outside the boardroom.

What is the Standard for Independence of Public Company Directors in Canada?

Directorial independence in Canada is presently a subjective standard (what directors believe), rather than an objective one (what is reasonable to believe). This means that if directors collectively believe that a director does not have a “material” relationship that can reasonably be “expected” to “interfere” with that director’s independent judgment, then that is the end of the analysis. The absence of an objective, reasonable or perceived point of view is anomalous when it comes to overseeing conflicts of interest in the workplace, so why should boards be any different? What should matter is what is reasonable, not what a director or a board believes. This subjective view can be unreasonable.

How Can Director Independence Be Strengthened?

Director independence is important because independent directors control management. It is important to get independence right – in theory at least – but also in practice if directors are to possess independence of mind coming onto the board and maintain it once they are on.

Here are some reforms I recommend and use to address director and board independence:

  • Regulatory reform should occur so independence of directors espoused by regulators equates with actual independence inside boardrooms. An objective, reasonable person standard should be used.
  • Boards should enact a robust conflict of interest policy, for directors, not drafted by management, and this policy should be disclosed to shareholders.
  • Independent advisors should facilitate an annual peer review of director independence, as is done in the United Kingdom. The review process should be disclosed and acted upon.
  • Codes of conduct should be drafted (not by management) to apply to a board of directors. Boards should not be using the company code because director independence issues are not captured.
  • Boards (and if not, regulators) should impose reasonable term limits on director tenure, beyond which the director is not regarded as independent, as is done in several countries.
  • Boards should require the confidential disclosure of directorial perceived conflicts (including assets and financial information relevant to the company’s business) to the audit committee, including that of family and affiliates of the director.
  • Audit committees should review and recommend to the board perceived conflicts of interest by directors, and should create a special committee of independent directors who are independent of the matter and the director, if and when required, with independent advisors retained by the audit or special committee.
  • An anonymous procedure for reporting on directors who do not disclose potential conflicts should exist, to the audit or special committee.
  • The governance committee should recommend independent board and committee chairs, and the board chair should be selected by confidential ballot without the CEO being present or unduly influencial.
  • For significant shareholder boards, independent directors should be chosen by and from minority shareholders, so a portion of directors are independent of the significant shareholder, commensurate with the significant shareholder’s portion of common shares.
  • For widely held boards, shareholders should select a portion of directors so directors are independent of each other and management.
  • Boards should disclose the origination of each director, namely how that director came to be recommended for election by shareholders.
  • Boards (and if not, regulators) should diversify themselves so directors do not come from the same homogenous pool and are independent from one another.

Dr. Richard Leblanc, Editor of The Handbook of Board Governance (Wiley, 2016), can be reached at rleblanc@boardexpert.com.

 

CEO Coaching: Lessons from the Trenches

Alcohol problems, drug use, sexual misconduct, financial misconduct, defensiveness, denial, berating of other senior management and directors, litigation, loss of key employees, toxicity and bulling. There is not much I have not seen when I am called in to coach the CEO. And CEO misbehavior happens in the highest level of corporate Canada. You may be surprised, but I am not.

Here are ten recent examples, disguised for confidentiality purposes: The CEO called a CFO a “moron” in front of the board and finance staff. Another CEO went silent, not talking to the Board Chair for a month. A CEO sat, arms folded, and did not say a word during an entire board meeting. A fourth CEO coaching regime occurred after a major failure, involving death and property destruction. A fifth CEO coaching was of a large manufacturing company, where the CEO’s effect on board colleagues was highly disruptive. In a seventh example, the CEO’s behavior was so disruptive that a major board rift occurred. An eighth example involved loss of key staff and an investigation into CEO conduct. A ninth example involved a CEO deliberately blocking board access to a potential successor and silencing of other senior management, from the board. A tenth example was a CEO of an iconic Canadian company shielding his compensation and expense arrangements from all directors, until I was called in by a regulator to investigate.

By the time I am called in, much of the damage has been done. But it doesn’t need to be this way.

The board’s most important job is hiring, paying and firing the CEO. Boards can get all of corporate governance wrong, but hire the right CEO, and be successful. Boards can hire the wrong CEO, and the company will fail even if the board has high governance scores.

The question that boards, prior to my coaching, often have for me is “Can the CEO change?” There are two things that are needed to change: awareness of the deficiency, and a willingness to change. I am optimistic, and usually have coaching success, but in a few instances, the CEO would not or could not change and I recommended firing the CEO.

Here are lessons for CEO coaching for any board:

The CEO’s coach is always hired by, and accountable to, the Board Chair and the Governance Committee, not the CEO.

For CEO coaching to work, the coach should understand board dynamics and report directly to the Board Chair, not the CEO. The Coach reports on coaching sessions, developmental plans, deliverables and progress, candidly and thoroughly, without the CEO present.

Prospective CEOs should be thoroughly vetted.

Normally, people’s personalities are stable, and the warning signs were visible long before the CEO was hired. A wrong CEO hire is always the board’s fault. Proper vetting now includes detailed resume checks, reference checks, professional background checks, social media and profile checks, personality testing against culture, exposure to all Directors, and multiple interviews in different settings, using external assistance. Put rigor and independence behind the CEO hire, base it on the strategic plan, and conduct an external search if only to test the market. Boards then make the mistake of not working closely with the new CEO after hire, and not onboarding them.

Collect your data and listen to employees.

CEO evaluation should always be 360 degrees, and include a board line of sight to views of direct reports in an anonymous fashion. Employee surveys should not be funneled by management, but should occur anonymously, reporting right into the boardroom. There are even software programs now that will collect employee meta-data for boards so bad news rises.

Link CEO behavior to pay incentives.

Frequently, I find the CEO has little incentive to change, as most of the pay metrics are financial and short-term in nature. In CEO coaching assignments, I normally restructure the CEO’s pay package to include non-financial metrics such as leadership, employee engagement, customer satisfaction, company culture, CEO succession planning, and/or board relations, or a combination of the above. Indeed, now, 75% of the value of a company are leading intangible measurements, such as the ones I mention, so pay metrics should reflect this. People behave the way you pay them. Boards often make the mistake of incentivizing aggressive, even unethical behavior. CEO pay should be tied explicitly, unambiguously, to ethical conduct.

Have the tough conversation with the CEO early on.

In two recent board meetings, I had to ask both CEOs to leave the room. The conversation completely changes when this happens. A board talks about CEO performance openly. When the CEO is called back into the meeting, there is a message delivered to the CEO by the Board Chair. The message is that the Board wants the CEO to succeed, and that behavioural and leadership issues need to be addressed. The CEO has to receive this message, the board needs to be aligned, and the executive session without management is the first step. Executive sessions should occur at each and every single board and committee meeting. To this day, remarkably, there are still CEOs who do not leave board meetings. The last thing a dominant or misbehaving CEO wants to do (and many CEOs are type As) is to leave the room.

Craft the CEO contract properly.

The person advising on the CEO contract should not be the company lawyer, nor the law firm that advises management. These people have a vested interest in not making the CEO contract hard-hitting. Firing a CEO “for cause” should be defined and broader than fraud. Just as athletes and entertainers have morals clauses in their contracts, CEOs should as well. The reputational, morale, talent and financial damage from CEO misconduct, to the company and to Directors, can be significant. Misconduct should be properly drafted to include ethical and professional conduct, with a defined process to determine whether a CEO is ever offside, with which the Board and CEO agree.

Engage in CEO succession planning and be prepared to fire the CEO.

There is a direct relationship between CEO leverage over a board and the lack of CEO succession planning by that board. CEO behaviours can get worse when the Board has no immediate or near-ready CEO successor.

In one major company, I detected defensiveness by the CEO and disrespect of certain directors. I found out that the CEO refused coaching, and that the board was four years out from an internal candidate being CEO-ready. “This is your failure as a board,” I said. The CEO is taking advantage of you because you have no options.

Conclusion

Some of the country’s best CEOs have had personal coaching, and that has contributed directly to their and the company’s success. No one is perfect, and we all benefit from one-on-one feedback, peer assessment, mentoring, and motivating coaches and trainers. Boards should see CEO coaching as a wise investment, and in the longer-term so old habits do not return.

Richard Leblanc is a governance consultant, lawyer, academic, speaker and advisor to leading boards of directors. His recent book is entitled The Handbook of Board Governance. Dr. Leblanc can be reached at rleblanc@boardexpert.com or followed on Twitter @drrleblanc.

Boards Should Not Misjudge Regulators

When a regulator advises corporate directors that progress on gender diversity is “simply not good enough,” that is code that the status quo will not continue, and that more regulation may result. And the second wave of regulation is often worse than the first.

Regulators have limited levers at their discretion. They are not going to come into boardrooms and assess performance. Thus, they are tending to land on numbers: ranging from 9-10 years for director tenure and 25% – 50% quotas for women.

Once or if this happens, directors will complain that the regulator is imposing a ‘one sized fits all’ or ‘check the box’ solution, when directors had the chance to act but chose not to. We have seen this pattern before. Paradoxically, directors may choose not to act, waiting for stronger regulation, to which they can then point and say, “now we have no choice.” Even the CEO of a major bank told regulators, “you should push us on gender targets.”

Canadian regulators have adopted a flexible and progressive ‘comply or explain’ approach to director term limits and gender diversity.

The progress recently reported is, in a word, inadequate: Only 19% of boards surveyed have term limits; only 14% disclose written diversity policies; and only 7% have targets for women on their board.

Our comply or explain regime has the disadvantage of permitting explanations that are irrelevant or spurious, such as targets for women not being adopted because candidates are selected based on merit, as if both goals are mutually exclusive. There is not an excuse for inadequate governance progress that I have not encountered.

But the real reason for the above low figures, which is not in the public domain, is self-interest. Why would any director, particularly an over-tenured male director, agree to a policy that moved him out of the boardroom? Directors speak in code publicly, but in private interviews, many open up. I had a 28-year director tear up when I recommended a 12-year term limit for his board, without grandfathering.

The academic evidence in favor of director term limits and diversity is becoming more clear: Diverse groups make better decisions. And over-tenured directors are worse for innovation and shareholder value. Regulators – in several countries – are acting. Regulators want independent directors who are the most qualified sitting in boardroom seats. As they should.

In Canada, regulators have not imposed quotas or term limits, but these should not be ruled out if inadequate progress continues. Regulators have asked boards to articulate their own numbers, and why that number works for them.

This brings us to what directors and boards should be doing to forestall further regulation. Here are my recommendations:

  • Do not misjudge the regulator, or the importance of gender diversity for the new federal and the current provincial Liberal governments. Tone-deaf boards should listen.
  • Act on conflicts of interest. If a tenure or diversity policy affects one or more of your directors, excuse these directors from the room. They should not influence the decision.
  • Do not assume director consensus. There are directors who believe that other directors have outlived their usefulness and should be replaced.
  • Land on a target. If your board has zero women, start with one woman as your target. Targets should be aspirational and dynamic.
  • If you think 9 years is too low for director tenure, choose 12 years. 15 years is on the high end, and companies are landing on 12, particularly large, complex companies. But pick a target.
  • If you do not pick a target for director tenure, then you best have a rigorous and consequential peer director assessment regime, whose output is actual director resignations. The evidence is that many boards do not have or do this.
  • Do not assume that your board can draft an inadequate tenure or diversity policy, and that this will go unnoticed. The regulator is offering guidance and examples of robust policies.
  • Own the policy. Draft the policy yourself, or have an independent advisor assist you. Management or company advisors are not independent. They work for you and have a vested interest in keeping you satisfied.
  • Watch for past practices that might bias women, including assertions that your talent pool is shallow. If your talent pool are directors whom you know, rather than the best directors available, then you best enlarge your talent pool.
  • Regulators are giving you an opportunity to craft policies that work for you. Do so. No director is irreplaceable, and directorships are not lifetime appointments. But if you believe a particular director’s tenure is advantageous, use average director tenure or have exceptions built into a policy to give you degrees of freedom.

The regulatory evidence, above, is that boards may be incapable of changing from within. As such, regulators will act when boards do not.

How should a board oversee ethics?

I recently moderated a keynote address by Andrew Fastow, the former CFO of Enron, and followed up by delivering a keynote on the role of the board in ethics, tying in aspects of Mr. Fastow’s speech. What follows is based on my speech; incorporates not only my interactions with Mr. Fastow, but also Messrs. Conrad Black and Arthur Porter; and draws on my work with boards that have succeeded and failed in their ethics oversight.

Here are ten ways a board can oversee ethics:

  1. Ask the right questions.

Good questions for boards, when faced with an ethically problematic action, are: (i) How will this action impact our reputation? (ii) How will this action impact us over the long-term? (iii) What are the aggregate effects of this action? (iv) What will the view of this action be by objective parties, especially if current circumstances change? (v) Even if this action is technically correct or permitted, does it meet the principle or spirit of applicable guidelines and rules? and (vi) Are we doing the right thing?

Management should have detailed answers to these questions. And they should leave the room so only independent directors can discuss.

  1. Have a line of sight over ethics, integrity, reputation and culture.

Many behavioural and integrity controls fail in their design and implementation, and because they do not go far enough or are subject to management override. These controls should be independently audited. Good companies are measuring and assuring reputation, integrity and risk culture for boards. It is important that this assurance reach the board un-funneled by reporting management. Good Audit and Quality Committees are reaching deep into organizations to view culture, quality and “tone in the middle.” Toxic culture or wrongdoing can bring enormous and rapid harm to brand and reputation. Bad news needs to rise, without delay, and good boards do not want surprises. The days of boards overseeing just the CEO and other senior management are gone. Management needs to accept more activist boards. This does not mean boards are running companies, but they are overseeing conduct.

  1. Use executive sessions, questions and information as your leverage touch-points.

Have the authority in your board and committee charters to obtain any information, to interview any personnel, and to obtain any outside assistance that you need to in order to fulfill your duties. If management blocks access, you now work for them. Obtain disconfirming information from the outside as well. Meet directly with auditors, consultants, the risk function, and the compliance function, including without any manager in the room. Meet also with major long-term shareholders without any manager present. Only then will you hear what others hear. Boards can live in an echo chamber otherwise. You do not want to be the last to know.

  1. Make sure your lawyer is independent.

The person drafting the above charters, including your clawback clause (see 6. below), should not be the general counsel or the external counsel who works for management, or colleagues of lawyers at the law firm. None of these parties is independent. Just like auditors and compensation consultants must be independent, so should the board’s counsel. Independent assurance on related party transactions, conflicts of interest, the code of conduct, investigations, integrity risks, and whistle-blowing cannot occur by management or their advisors. Only independent advisors will be free to recommend action that corrects and directs (and when necessary, terminates) reporting management.

  1. Address whistle-blowing defects.

Once the Ontario Securities Commission enacts a whistle-blowing reward regime like has been done by the Securities and Exchange Commission in the U.S., there will be a changeover from defective regimes currently in place. If the point of contact for a whistle-blowing program is any manager, the policy is defective. The point of contact must be an independent person or party who reports directly to the Audit Committee. Only then will anonymity be preserved and the channel be used fully. Bad news needs to rise, and investigations need to occur when warranted, and neither happens if it is management investigating management.

  1. Pay for conduct and performance.

Pay drives behavior, including ethics. Many pay committees under-utilize their executive pay toolbox and control over management.

Because pay practices can incent risk-taking and unethical conduct, good regulators and pay committees require ethical conduct to be tied to executive pay. If risk management or the Code of Conduct is breached, executive pay should not vest and be clawed back if it has vested. Conduct and risks should be evaluated every pay period before the pay committee allows equity to vest or a bonus to be received. And ethics and morals clauses should be in every executive and employee contract. And directors need to lead by example, with ethics clauses drafted into their terms of service. A good board insists on resignation in advance if an ethics clause is breached.

  1. Oversee the oversight functions.

Your eyes and ears in the company are internal audit, risk and compliance. These functions must now have reporting channels right into the boardroom and committees. Does your board directly oversee these functions? Does your company have these functions? I have recommended to numerous boards the hiring of these functions and doing so can greatly improve toxic culture, flawed risk management, and unethical conduct. Just as in the early 2000s when the audit committee began to hire, fire and pay the external auditor, now the audit and other committees and the board hire, fire and pay risk, compliance and internal audit.

  1. Speak up and recruit a board challenger.

When directors and chairs are chosen on the basis of preexisting relationships, which many or most are, this means directors are beholden to each other, or worse yet, to management. These directors will not speak up or ask tough questions, as they are owned by their extra-boardroom relationships. The board becomes accountable to management rather than the other way around. Boards where fraud has occurred often met governance guidelines, including Enron. Andy Fastow said that the Enron board not only approved but encouraged his actions (in the words of one director): “Fastow you are a —- genius!” Recruit directors who have no pre-existing relationship to any other director or manager. This includes female directors.

  1. Recruit independent, competent directors with courage.

Independence of mind is not formal independence. Smart managers can capture directors through relationships, perks and incentives. There are directors on boards are well out of their depth. They are there because of relationships, profile and glow, but know little about the actual business and cannot or will not challenge because they are captured. Seeing them ask perfunctory questions is akin to a fork trying to hold water. Only when a director is truly independent and competent, can that director then challenge. Often directors are docile because they simply do not know what to do.

  1. Set tone at the top.

Lastly, and most importantly, set the ethical tone. The actions and behaviour you observe as a director is the tone that you have just accepted. Good tone at the top is unambiguous, applies to everybody, and is consequential. And it is exercised. It is the board, not just management, that sets tone. I recall the story of the audit committee chair who saw the CFO go through customs at an airport and not declare a bottle of wine. The next morning, the CFO was fired.

Management is fond of explaining unethical conduct away by saying it was a “rogue” employee. Boards are fond of explaining unethical conduct by saying “we missed it.” If boards and management teams are truly honest, they know they should not have missed it and that it was not a rogue employee. It was an employee operating within the culture that was accepted.

In all of my interviews of directors over the years, including during ethical failure, when I ask about directors’ greatest regret, the answer is consistently, “I should have spoken up when I had the chance.” Speaking up is incredibly important when it comes to tone at the top. If you are uncomfortable, “speak up” is the best advice I could give a director. Chances are, several of your colleagues are thinking the exact same thing.

Why integrity is good for business, and the role that boards play

“We didn’t know.” “We missed it.” “It was a rogue employee.” There is not an excuse I have not heard for ethical failure. But when I investigate a company after allegations of fraud, corruption or workplace wrongdoing, almost always there is a complacent, captured or entrenched board that did not take corrective action. In a few cases, boards actually encouraged the wrongdoing.

The first myth is that the board is a “good” board. There is no relationship between the “glow” or profile of directors and whether the board is “good.” Often times, there is an inverse relationship, as trophy or legacy directors typically lack industry and risk expertise in recognizing fraud or understanding what proper compliance looks like, are not really independent, are coasting and not prepared to put in the work, or they themselves may not possess integrity.

How important is integrity? Extremely. Three factors make for a good director or manager: competence, commitment and integrity, with integrity ranking first. Otherwise, you have the first two working against you.

Integrity needs to be defined, recruited for, and enforced. “Does your colleague possess integrity?” “Yes” is an answer to this perfunctory question. Full marks. But when I define integrity to include avoiding conflicts of interest, consistency between what is said and done, ethical conduct, and trustworthiness – and guarantee anonymity, I get a spread of performance scores. Those who do not possess integrity in the eyes of their colleagues are poison and should are extracted from any board or a senior management team. They never should have been elected or hired in the first place, which is a recruitment failure.

Fraud, toxic workplaces, bullying, harassment and pressure do not occur in a vacuum. Many people in the company know. The issue will not go away, will only get worse, and is a latent legal, financial and reputation risk.

For bad news to rise, boards need to ensure that protected channels exist and are used – including for a director or executive to speak up in confidence, and for an independent consequential investigation to occur.

Ethical reporting also needs to assure anonymity to the fullest possible extent to receive reliable information. If a whistle-blowing program has any manager as the point of contact, it is not effective. Whistle blowing, culture surveys, and ethics audits should be conducted independently and reported directly to the board without management interference.

Frequently, I find ethical design and implementation failure are the culprits, with codes of conduct, conflict of interest policies, whistle-blowing procedures, culture and workplace audits, and education and communication being perfunctory at best, overridden by management at worst, and not taken seriously by employees or key suppliers, with minimal assurance and oversight by the board.

Complacent boards and executives are the last to know and deny any wrongdoing, having creating the conditions for fraud to flourish. Shockingly, lacking any pride, in full denial, and further reinforcing their entitled self-serving mindset, they refuse to resign.

After ethical failure happens, executives argue that it is a lone rogue employee or an isolated incident. Nothing could be further from the truth. It is an employee who reflects the true and actual culture, internal control environment, and practices of the organization, and who is attracted to and flourishes within them. There is no such thing as a rogue employee. It is a board that approved the conditions that management proposed within which employees operate. The board’s leverage of approval, documentation and questions went unused and unasserted. They are the very people who should not be overseeing subsequent reforms, as they are assessing their own shoddy work.

This lax control environment, where self-interest is pursued and where pressure is applied, is the heart of ethical failure.

There is a shocking lack of internal controls over employee and agent behavior that I have found in corrupt jurisdictions in which Western firms do business. This means, not only is the potential for fraud rampant, but also that costs of compliance are being borne by companies who do not bribe and have proper controls. They are penalized for doing things right.

Furthermore, there are corrupt jurisdictions whose companies and government officials offer and receive bribes and advantage themselves over Western counterparts, including in Russia, China, India and MENA. The most recent example is bribery allegations at FIFA. This unequal playing field puts Western companies – in the US, UK, Canada and elsewhere – at a disadvantage, when competing for business, opportunities and contracts.

This is why Western governments are seeking to put their countries and companies in the most competitive position possible. They are enforcing anti-corruption laws using long arms of justice to prosecute bribery. They are also debarring companies from government contracts who commit ethical breaches. This debarment is a powerful motivator to spur investment to internalize the costs of internal controls over integrity.

Western industry will mistakenly argue that integrity laws will disadvantage them or cost their industry jobs, but the reality is the opposite. Tough integrity laws will prevent substandard competitors from offering bribes, will disincent recipients from receiving bribes, and will strengthen Western companies who compete on the basis of price, quality and service.

Richard Leblanc is a governance consultant, lawyer, academic, speaker and advisor to leading boards of directors. He can be reached at rleblanc@boardexpert.com or followed on Twitter @drrleblanc.


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