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What are some best governance practices of award-winning companies?

Sep 16

Posted in Board and Committee Leadership | Comments Off on What are some best governance practices of award-winning companies? |

I recently served on a governance awards judging panel assembled by the Canadian Society of Corporate Secretaries (CSCS). Winners of the awards were announced at this organization’s annual conference in Halifax last month. I participated in a plenary discussion to discuss some of the winning practices, and governance generally.

Here are the six award-winning companies, the categories under which they won, and their governance practices and results that they have that are, in my view, exemplary, in no particular order:

Shoppers Drug Mart – Best practices in managing boardroom diversity

  • Five out of eleven Directors are female, with two of three women Committee Chairs;
  • Continuous review of a robust director competency matrix, including focusing on board dynamics and decision-making;
  • Detailed director recruiting using precise director profile output resulting from the competency matrix assessment;
  • Board does not require CEO experience, and Board recruits and appoints first-time Directors;
  • Prospective Directors includes individuals not previously known to incumbent Directors;
  • Rigorous director interviews, including assessing capacity for constructive challenge, and comprehensive, tailored onboarding process; and
  • Limits on board tenure, over-boarding and interlocks.

Bank of Montreal – Best use of technology in governance, risk and compliance

  • Board portal with encrypted materials on a secure intranet site, secure email, user friendly interface, paperless iPad, and separate Director education iPad App;
  • Global entity records and management systems, with searchability, real time accuracy and updates, customization, validation, aggregation, and comprehensive, enterprise-wide compliance monitoring and reporting;
  • Investor relations alerts, conference calls and audio webcasts;
  • Ethics, legal and compliance: interactive, tailored, training annually for select employees, and suppliers, with user guide and follow-up;
  • Specialized regulatory training for senior management, all other employees, to educate, train, strengthen risk culture, using internal website, mandatory readings and eLearning;
  • Online governance and director assessment by the Board;

BCE – Best overall governance

  • Individual annual director elections, majority voting, independent Chair, advisory vote on executive compensation, and director interlock and tenure guidelines;
  • Internal audit and Risk Manager Officer report directly to Audit Committee Chair;
  • Electronic voting at annual shareholder meetings;
  • Comprehensive ethics program, focus on audit independence, and whistle-blowing policy;
  • Full written governance mandates, board leader position descriptions, education, orientation, and comprehensive board evaluation process and governance disclosure;
  • Focus on director competencies, geography and performance;

Tarion Warranty Corporation – Best approach to board and committee support

  • Annual work plan, consent agendas, skills matrix, terms of reference, position descriptions, and board portal;
  • Third party governance review, including peer to peer review of Directors;
  • Term limits for Board Chair and Directors, and guideline limits for Committee Chairs;
  • Six Directors with board certification;
  • Balanced score card and key performance indicators (KPIs) for company and CEO performance;
  • KPIs presented to Board at each meeting in dashboard format, and reviewed in depth by Audit Committee;
  • Stakeholder relations department to enhance focus on stakeholder satisfaction, engagement and communication;

Canada Council for the Arts – Best shareholder / stakeholder engagement

  • Highly consultative culture and stakeholder engagement, exemplary annual reporting, rotating meetings geographically;
  • Strategic engagement (financial and non-financial), outreach, dialogue, surveys, consultation sessions and workgroups, with comprehensive, exemplary written shareholder and other stakeholder reporting, follow-up, and use of social media;
  • Direct Board contact with artists, arts community, partners, leaders and other stakeholders;
  • Directors as ambassadors at stakeholder outreach events, nationally and internationally;

TELUS Corporation – Best sustainability, ethics and environmental governance program

  • Board and Committee leadership to monitor corporate social responsibility (CSR), including environmental policies, enterprise energy strategy, ethics policy, whistleblower policy;
  • Employee, environment and community engagement, culture and performance (numerous examples and leadership);
  • Governance Reporting Initiative reporting on CSR performance since 2000, third party reporting verification, stakeholder solicitation, and CSR reporting recognition;
  • Environment management system since mid-1990s, carbon footprint reporting early adopter, and alignment goal of ISO 14001:2004 compliant by 2014;
  • CSR metrics integrated into strategic planning, and CEO and other executive performance objectives; and
  • Supplier code of conduct in 2011 for business partner adherence.

It was an honor to serve on this judging panel and the above Canadian companies should be celebrated – as well as their Directors – for setting the ever-rising bar for effective corporate governance.

Getting More Women on Canadian Boards, Part 1

Aug 4

Posted in Women on Boards | Comments Off on Getting More Women on Canadian Boards, Part 1 |

The Ontario Securities Commission (OSC) should be congratulated for addressing gender diversity last week. Other than Quebec, the addressing of boardroom and senior management diversity (beyond gender) has been long overdue in Canada.

However, the central thrust of the proposal is a “policy” that listed companies may – or may not – draft; and that listed companies may – or may not – disclose. Measureable objectives within the policy may – or may not – occur. These requirements are very wishy-washy. This is an overly tempered, passive and permissive approach.

The OSC’s approach was said to be modeled off of the Australian one, but it was not in several dimensions, as I read things. The Australian approach actually defined diversity, which goes beyond women, and holds companies responsible for setting measureable objectives and reporting specific progress against their achievement. There are several content suggestions Australia provided as well. The UK’s approach to diversity is also stronger than the OSC’s, as are several countries in Europe.

A “policy” approach with insufficient guidance is unwise. The Americans adopted this approach with regard to diversity and it has been an abject failure. Clever lawyers can craft well sounding polices that are so general that it is virtually impossible not to comply with them. I remember one case where a NYSE company lawyer (a white male) actually tried to convince me that eleven all-white-male directors were, indeed, diverse because all the men had a diversity of “perspective” and “opinion.” This is what happens when regulators are passive or complacent.

This is part of a larger issue with the OSC, and that is inadequate articulation of principles and practices within its overall corporate governance framework. Other than disclosure, here, which is in turn modeled off of guidelines for publicly-listed companies, the actual guidelines are a mere four pages. They have not been updated since the financial crisis and are outdated, originally drafted in 2004 and approved in 2005.

For example, the approach to risk management within this National Policy is only two lines. (See 3.4 (b) and (c) here.) This hardly captures what has happened in the field of risk governance best practice since 2008. I advised a company last week that had a massive risk management failure and the word “risk” is not even mentioned in the vast majority of its governance terms of reference documents. This is hardly surprising given the OSC’s approach to risk itself.

The superficial approach to strategic planning and value creation is similar (See 3.4 (b) here.) A TSX board must simply “adopt” a strategic planning process [what exactly is a “strategic planning process”?], and approve a strategic plan once a year that takes into account the risks of the business. It is hardly surprising that strategy gets short shrift in many boards, my research suggests.

Without guidance, any policy, approach, or plan, or even a director “competency” can mean whatever the drafter [usually management or an advisor beholden to them] wants it to mean. This is precisely where blockage, entrenchment, and ultimately decision-making failure can and does occur.

What the OSC should instead do is move towards a comprehensive framework of governance (i) principles and (ii) practices that achieve the objectives of the principles, which other jurisdictions use. A series of succinct almost binary guidelines is simply inadequate and naive. Other jurisdictions, such as the UK, South Africa and EU have far more comprehensive principle and practice approaches, which guide companies when they comply or explain. A set of recommended practices, when it comes to diversity for example, can be pointed to by progressive directors or investors. And it is not an excuse that comprehensive principles and practices cannot be crafted because of the variety of Canadian companies. South Africa has just as great a variety of companies, and its King III Code, which is one of the most comprehensive in the world, applies to all types of companies, including: listed, private, not profit and state owned. Principles and practices is a drafting exercise and require work.

Without principles and practices, other initiatives such as diversity are bootstrapped onto inadequate guidelines.

Take individual competencies and skills of directors for example, which relate to diversity. TSX companies should recruit directors on the basis of “competencies” and “skills” (see sections 3.12 – 3.14 here), but nowhere are “competencies” or “skills” defined, nor are examples of competencies or specific expertise suggested. Other Canadian regulators (including ones I have advised) are more specific in articulating what expertise directors are expected to possess, offering comprehensive frameworks and practices, including for risk management.

Otherwise, a company is free to draft fluffy guidelines, policies, charters, and so on, that are largely public relations exercises or designed to keep the power with management, rather than designed to advance the spirit of what the regulator intended. They ultimately have limited force or effect. They are designed to protect and forestall. Many of the companies I research who have failed have similar fluffy policies. Retained management lawyers perpetuate this with cut and paste precedent exercises spread amongst their clients.

Without sufficient guidance provided by a regulator, short bios occur; or it is simply stated that a director possesses a given competency, without articulating how and when the competency was acquired. What happens here is that women are short-shrifted as they are alleged not to have the experience or the qualifications when they may or do. Second, guidance can be offered on how directors should come to be selected for membership, including interviews, short-lists, advertisements and so on, as other jurisdictions are doing.

In my next blog, I will outline specific defects of the above OSC’s proposed policy, in accordance with best practices other jurisdictions have adopted.

I am pleased to be asked to assist the National Association of Corporate Directors in a social media pod at their annual Board Leadership Conference, October 11-13, to expose directors in a more in-depth and hands on way to social media (forthcoming).

Jul 29

Posted in IT Governance | Comments Off on I am pleased to be asked to assist the National Association of Corporate Directors in a social media pod at their annual Board Leadership Conference, October 11-13, to expose directors in a more in-depth and hands on way to social media (forthcoming). |

I am assisting the NACD by gathering potential readings for issue identification, etc., from my library and online, and specifically seeing things from a governance and board perspective.

Here is a listing:

July 21, 2013, updated July 29, 2013

Richard Leblanc

Associate Professor, Law, Governance & Ethics, York University

Prof Dr Richard W Leblanc

York University

4700 Keele Street

Toronto, CANADA M6S 1P3

Webpage: http://www.yorku.ca/rleblanc

Dr. Leblanc prepared this list of readings and potential issues/trends below, on IT related topics

Board’s role in Social Media “listening”

Lead or be left behind: A chairman’s perspective on social media

http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/us_chairman_LeadorLeftBehind_042213.pdf

What Do Corporate Directors and Senior Managers Know about Social Media?

http://www.gsb.stanford.edu/sites/default/files/documents/TCB_DN-V4N20-12.Social_Media.pdf

50 Top Tools for Social Media Monitoring, Analytics, and Management

http://socialmediatoday.com/node/1458746

Social Media and the Board: Why #Hashtags Matter to Directors

http://business-ethics.com/2012/04/12/1642-social-media-and-the-board-why-hashtags-should-matter-to-directors/

Seven Steps for Board Success in the Facebook Age

http://knowledge.wharton.upenn.edu/article.cfm?articleid=2940

Cameras May Open Up the Board Room to Hackers

http://www.nytimes.com/2012/01/23/technology/flaws-in-videoconferencing-systems-put-boardrooms-at-risk.html?_r=0

Nonprofit Boards and the iPad: a Good Fit?

http://nonprofit.about.com/od/boardquestions/a/Nonprofit-Boards-And-The-Ipad-A-Good-Fit.htm

Potential Issues/Trends

  • Lack of direct digital media management experience for some/many directors, even incumbent CEOs / SMT (senior management team);
  • Psychological / comfort issues as well, but this is changing as boards are going paperless (tablets, portals, etc.) and there is pressure on laggarts;
  • Concerns with Reg FD and equal treatment of investors: directors more comfortable listening;
  • Directors are listening and reading, and this should not be misunderstood for lack of appreciation or passivity: there is high awareness among good boards and directors, which usage statistics above may not reflect;

 

Social Media and Reputational Risk

Reputation Risk: A Corporate Governance Perspective

http://processunity.com/cms/wp-content/uploads/2012/05/Reputation-Risk-Conference-Board.pdf

Director: Reputations at Risk

http://www.director.co.uk/magazine/2010/6_June/social_media_63_10.html

Ten Keys to Manage Reputation Risk

http://www.knowledgeleader.com/KnowledgeLeader/Content.nsf/xsp/.ibmmodres/domino/OpenAttachment/KnowledgeLeader/Content.nsf/C3C1BFD887594D4B88257B58006610E6/body/The%20Bulletin,%20Issue%202,%20Volume%20V%20–%20Ten%20Keys%20to%20Managing%20Reputation%20Risk.pdf

Virtual world, real risks: When social media becomes a liability

http://www.grant-thornton.co.uk/PageFiles/3572/Virtual%20World_Real%20Risk.pdf

Reputational Risks & The Role Of Social Media

http://www.youtube.com/watch?v=qoTtmRgDThs

Social Media Said to Present Significant Reputational Risks

http://www.marketingcharts.com/wp/direct/social-media-said-to-present-significant-reputational-risks-22952/

Three Steps Towards Managing Reputational Risk

http://deloitte.wsj.com/riskandcompliance/2013/04/25/three-steps-toward-managing-reputational-risk/

The Board, Social Media and Liabilities

http://www.mediabadger.com/2012/12/the-board-social-media-and-liabilities/

Reputation risk management on the rise

http://www.camagazine.com/reputationrisk/

Social media reputation damage high on risk managers’ list of concerns

http://www.ferma.eu/2011/10/social-media-reputation-damage-high-on-risk-managers-list-of-concerns/

The Risks of Social Media: Self-Inflicted Reputation Damage

http://www.riskmanagementmonitor.com/the-risks-of-social-media-self-inflicted-reputation-damage/

Potential Issues/Trends

  • Speed, inter-connectedness and unpredictability of transmission;
  • Personal vs executive vs corporate reputations now merging;
  • Design and implementation of internal controls, balanced with communication and opportunity;
  • SM was junior position at outset, but now best practice is senior management oversight or member ownership;
  • Crisis planning involves digital stress testing and response plans in advance; mock runs also;
  • Reputation online background checks for directors, management, employees now; good firms will do regular reviews of current members;
  • Online analytics part of information flow to good SMTs and boards;

 

Integrating Social Media into overall strategy/questions the board should be asking management

Why boards need to adopt social media

http://blogs.reuters.com/lucy-marcus/2012/03/22/why-boards-need-to-adopt-social-media/

What Directors Think About Social Media

https://www.boardmember.com/MagazineArticle_Details.aspx?id=9128

Boards remain uneasy about social media, says women’s directors group

http://www.corporatesecretary.com/articles/technology-social-media/12487/boards-remain-uneasy-about-social-media-says-womens-directors-group/

Directors and IT: What works best?™

http://www.pwc.com/en_US/us/corporate-governance/publications/directors-and-it/assets/pwc-it-for-corporate-directors-full-report.pdf

Social Media – questions for directors to ask

http://www.cica.ca/focus-on-practice-areas/governance-strategy-and-risk/directors-series/director-alerts/item63118.pdf

20 Questions Directors Should Ask about Information Technology Security

http://www.cica.ca/focus-on-practice-areas/information-technology/publications/item46763.pdf

SOCIAL MEDIA: What Boards Need to Know

http://www.weil.com/files/upload/May2012_Opinion.pdf

Elevating technology on the boardroom agenda

http://www.mckinsey.com/insights/business_technology/elevating_technology_on_the_boardroom_agenda

10 Questions You Should Ask Your Social Media Expert, Guru or Wizard

http://www.socmedsean.com/10-questions-you-should-ask-your-social-media-expert-guru-or-wizard/

52 Questions To Ask When Hiring A Social Media Company

http://outspokenmedia.com/social-media/quesitons-hiring-a-social-media-company/

The Key to Social Media Success Within Organizations

http://sloanreview.mit.edu/article/the-key-to-social-media-success-within-organizations/

The Board’s Responsibility for Information Technology Governance

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1947283

MONITORING RISKS BEFORE THEY GO VIRAL:?IS IT TIME FOR THE BOARD TO EMBRACE SOCIAL MEDIA?

http://www.gsb.stanford.edu/sites/default/files/research/documents/CGRP25%20-%20Social%20Media.pdf

Privacy and Boards of Directors:; What You Don’t Know Can Hurt You

http://www.ipc.on.ca/images/Resources/director.pdf

Execs Not Using Social Media At Board Level Strategy

http://www.business2community.com/social-media/execs-not-using-social-media-at-board-level-strategy-0318067

Social Media — The New Business Reality for Board Directors

http://www.pwc.com/en_CA/ca/directorconnect/publications/pwc-social-media-new-reality-for-directors-2012-09-28-en.pdf

Too Many Top Executives Aren’t Taking Social Media Seriously

http://www.businessinsider.com/top-executives-dont-take-social-media-seriously-2013-5

Why 1700 CEOs Are Wrong about Social Media

http://socialmediatoday.com/thoughtreach/991031/why-1700-ceos-are-wrong-about-social-media?inf_contact_key=3791995094c307c4b1d275d00b36b16025118ec3bcf13175ef3d187c59ac45b8&goback=.gmp_4220981

How Kodak Squandered Every Single Digital Opportunity It Had

http://mashable.com/2012/01/20/kodak-digital-missteps/

Potential Issues/Trends

  • SM seen in the main as a risk (: defensive, liability), versus being seen opportunistically and strategically;
  • CIOs/CTOs may lack broad P&L experience for board membership; this may not change;
  • Technology / reputation risk may need board committee oversight, depending on sector and opportunity/threat;
  • SM advocates may have self interest (e.g., vendors, service providers): assurance and analytics are immature but evolving;

 

Big Data/ Analytics

Big data: The next frontier for innovation, competition, and productivity

http://www.mckinsey.com/insights/business_technology/big_data_the_next_frontier_for_innovation

Big data

http://en.wikipedia.org/wiki/Big_data

http://searchbusinessanalytics.techtarget.com/definition/big-data-analytics

Guide to big data analytics tools, trends and best practices

Experts share perspectives and identify best practices for big data analytics projects in this Essential Guide.

http://searchbusinessanalytics.techtarget.com/essentialguide/Guide-to-big-data-analytics-tools-trends-and-best-practices

Severe Consequences Face Big Data Analytics Without Governance, Experts Say

http://www.crn.com/news/security/240158457/severe-consequences-face-big-data-analytics-without-governance-experts-say.htm

INFORMATION TECHNOLOGY AND FIRM PROFITABILITY: MECHANISMS AND EMPIRICAL EVIDENCE

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1000732

New research suggests using big data, particularly social media data, can lead to a biased representation of the data based on societal factors.

http://sloanreview.mit.edu/article/the-pitfalls-of-using-online-and-social-data-in-big-data-analysis/

Potential Issues/Trends

  • Big Data is somewhat tangential to my area of expertise, so I will not comment; however; big data / analytics are an important area, with significant capacity and opportunity, and it is correct for this item to be on this list;

 

Social Media & CRM

Three Out of Four Social Networkers are Logging in on Company Time, Ethics Resource Center Reports

http://www.ethics.org/news/three-out-four-social-networkers-are-logging-company-time-ethics-resource-center-reports

How the Voice of the People Is Driving Corporate Social Responsibility

http://blogs.hbr.org/cs/2013/07/how_the_voice_of_the_people_is.html

Social Media in Corporate Social Responsibility (CSR)

http://blogs.cisco.com/csr/social-media-in-corporate-social-responsibility-csr/

Tying Together Social Media and Corporate Social Responsibility

http://www.convinceandconvert.com/pr-20/tying-together-social-media-and-corporate-social-responsibility/

Mashable: Corporate Social Responsibility

http://mashable.com/category/corporate-social-responsibility/

Why Social Media Is Vital to Corporate Social Responsibility

http://mashable.com/2009/11/06/social-responsibility/

A Guide To Social Media For CSR Professionals

http://www.csrwire.com/blog/posts/721-a-guide-to-social-media-for-csr-professionals

Telus Corporate Social Responsibility Report 2012

http://csr.telus.com/en/

Tying Together Social Media and Corporate Social Responsibility

http://www.convinceandconvert.com/pr-20/tying-together-social-media-and-corporate-social-responsibility/

Potential Issues/Trends

  • Digital media is the new stakeholder communication platform;
  • CSR lacks rigor of reporting that US GAPP / IFRS have; this is changing, but regulators are waiting for maturity; GRI has made good efforts, as have others (e.g., integrated reporting);
  • CSR (including Climate change/environmental) may lag because of austerity and jobs concerns since 2008;
  • Exemplary companies (see above) are communicating CSR through social media, communicating directly with stakeholders;
  • Opportunity to affect messaging and communication: needs to be genuine and two way; listening and acting; stakeholder groups are sophisticated, even activist;

 

Trends/Emerging Topics

What Do Corporate Directors and Senior Managers Know about Social Media?

http://tcbblogs.org/governance/2012/10/31/what-do-corporate-directors-and-senior-managers-know-about-social-media/

Use of board portals and social media

http://www.conference-board.org/retrievefile.cfm?filename=TCB-CoW_V2N11.pdf&type=subsite

2012 CEO, social media & leadership survey

http://www.brandfog.com/CEOSocialMediaSurvey/BRANDfog_2012_CEO_Survey.pdf

Taming Information Technology Risk:

A New Framework for Boards of Directors

http://www.oliverwyman.com/media/OW_EN_GRC_2011_PUBL_Taming_IT_Risk.pdf

IBM CEO Predicts Three Ways Technology Will Transform The Future Of Business

http://www.forbes.com/sites/jennagoudreau/2013/03/08/ibm-ceo-predicts-three-ways-technology-will-transform-the-future-of-business/?goback=.gmp_4220981.gde_4220981_member_221432830

The Next Digital Paradigm

http://www.forbes.com/sites/gregsatell/2013/02/02/the-next-digital-paradigm/?goback=.gmp_4220981

Make Social Media an Organizational Asset – Right Now!

http://www.thecmosite.com/author.asp?section_id=1237&doc_id=246605

THE FUTURE OF DIGITAL [SLIDE DECK]

http://www.businessinsider.com/future-of-digital-slides-2012-11?goback=.gmp_4220981

Ten Technology Trends that Will Change the World in the Next Ten Years

http://www.zawya.com/story/ZAWYA20120212081954/

Technology, Strategy and Shareholder Engagement Driving Corporate Governance

http://www.deloitte.com/view/en_us/us/press/ac998d5e23835310VgnVCM2000001b56f00aRCRD.htm

Potential Issues/Trends

  • Rapid change and transformation occurring: a few have said ‘revolution’, e.g., cloud, meta data, digital payment, social platforms, ease of use, direct contact with users;
  • Intermediaries in any value chain may need to transform because of technology;
  • Board should be in position to predict, press and stretch management if / when SMT is off-course or in denial;
  • Some industries/sectors will need to transform or die / be replaced: opportunities here; we are seeing transformation and complacent vs strong boards;
  • Boards should not be in denial if SMT (day to day) may be, and see up and out (what is coming) to fullest extent possible;

 

Cyber

Cyber Risk Management – A Board Level Responsibility:
http://www.bis.gov.uk/assets/biscore/business-sectors/docs/c/12-1119-cyber-risk-management-board-responsibility

10 Steps to Cyber Security – Executive Companion:

http://www.bis.gov.uk/assets/biscore/business-sectors/docs/0-9/12-1120-10-steps-to-cyber-security-executive

http://www.gchq.gov.uk/Press/Pages/10-Steps-to-Cyber-Security.aspx

Cyber risk, Guidance note

https://www.icsaglobal.com/assets/files/Guidance%20notes/gn06-2013cyberrisk.pdf

Cyber security: Considerations for the audit committee

http://www.ey.com/Publication/vwLUAssets/Cybersecurity_Considerations_for_the_audit_committee/$FILE/Cybersecurity_considerations_for_the_audit_committee_GA0001.pdf

Cyber Security and the UK’s Critical National Infrastructure

http://www.chathamhouse.org/publications/papers/view/178171

Cost of cyber attacks triples in a year

http://www.ft.com/intl/cms/s/0/bb3fcc90-ab4a-11e2-ac71-00144feabdc0.html#axzz2Zcz9iIg1

Cyber threats and security breaches forcing companies to re-evaluate risk management

http://www.canadianunderwriter.ca/news/cyber-threats-and-security-breaches-forcing-companies-to-re-evaluate-risk-management/1002271537/

The Art of Cyber War

http://www.nacdonline.org/Resources/Article.cfm?ItemNumber=6807

U.S. Outgunned in Hacker War

http://online.wsj.com/article/SB10001424052702304177104577307773326180032.html

Cybersecurity and Internet Governance

http://www.cfr.org/cybersecurity/cybersecurity-internet-governance/p30621?goback=.gmp_4220981

Time to get real over cyber security

http://www.cbronline.com/blogs/cbr-rolling-blog/time-to-get-real-over-cyber-security-230212

Cyber crime is now a booming industry

http://www.business-standard.com/article/technology/cyber-crime-is-now-a-booming-industry-112012300057_1.html

Potential Issues/Trends

  • Rogue players beyond domestic enforcement, sanctions (e.g., Al Qaeda, China, Russia, Ukraine, other);
  • Lack of full understanding of precise vulnerabilities by some/many directors;
  • Under-reporting by companies who have been hacked, and industry specific (e.g., defense, utilities, banking);
  • Government action increasing (e.g., NSA): privacy concerns;
  • Literature is still very general (some exceptions, e.g., NACD above (The Art of Cyber War), others), suggesting lack of knowledge, immaturity;
  • Multi/bi-lateral agreement to enforce within rogue states needed;
  • Good industry-specific boards will do (have done) thorough cyber review and strengthen defective controls, with expert input;
  • Some boards have IT as a desired board competency, and IT as material business risk;

 

BYOD- Security

Good Governance Guide: Issues to consider in the use of tablets for accessing board papers

http://www.csaust.com/media/365618/2012_ggg_tablets_boardroom_v2.pdf

10 steps for writing a secure BYOD policy

http://www.zdnet.com/10-steps-for-writing-a-secure-byod-policy-7000006170/

For BYOD Best Practices, Secure Data, Not Devices

http://www.cio.com/article/711258/For_BYOD_Best_Practices_Secure_Data_Not_Devices

Security Think Tank: BYOD – key tenets and best practices

http://www.computerweekly.com/opinion/Security-Think-Tank-BYOD-key-tenets-and-best-practices

Bring Your Own Devices Best Practices Guide – Dell

http://i.dell.com/sites/doccontent/business/smb/sb360/en/Documents/good-byod-best-practices-guide.pdf

Learn BYOD policy best practices from templates

http://www.techrepublic.com/blog/it-consultant/learn-byod-policy-best-practices-from-templates/

Best practices to make BYOD simple and secure

A guide to selecting technologies and developing policies for BYOD

http://www.citrix.com/content/dam/citrix/en_us/documents/oth/byod-best-practices.pdf

Dell Outlines The Death Of The PC

http://www.forbes.com/sites/adriankingsleyhughes/2013/03/30/dell-outlines-the-death-of-the-pc/?goback=.gmp_4220981

Potential Issues/Trends

  • Usage may have overtaken internal controls and policies in some companies;
  • Demographic and talent issues (e.g. education sector, younger students may: bring only a smartphone to class; not have used pen and paper);
  • Theft, loss: purging of data, passwords, signatures, controls to mitigate: policies all progressing, at differential speed;
  • Better policies available (see above); Whitehouse example: http://www.whitehouse.gov/digitalgov/bring-your-own-device
  • Devices may be opportunities, e.g., over 100K online course registrants in Harvard-MIT course: devices may be (or already are) the main channel of communication to customers, other stakeholders;

 

Executive Security

Corporate Theft? Build a barrier with access governance

http://www.kpmg.com/US/en/IssuesAndInsights/ArticlesPublications/Documents/corporate-theft-build-barrier-access-governance.pdf

Global Status Report?on the?Governance of Enterprise It (GEIt)—2011

http://www.isaca.org/Knowledge-Center/Research/Documents/Global-Status-Report-GEIT-10Jan2011-Research.pdf

Cobit: An information security survival kit

http://www.pkfavantedge.com/wp-content/uploads/2013/COBIT_Security.pdf

Potential Issues/Trends

  • See cyber;
  • There should be rigorous controls, and third party validation if possible, e.g., separation of duties, prevention of management over-ride, treatment of passwords, restricted digital areas, separation of development and approval, record retention, etc.;
  • Assume IT and executive management self interest: control environment and board oversight/reporting important to deter fraud schemes, internal cyber;

 

Social Media & Investor Relations

A Virtual Annual Meeting Approach

http://www.directorship.com/adopting-a-virtual-approach-to-the-annual-meeting/

Call to move huge annual reports online

http://www.ft.com/intl/cms/s/0/71dc17ba-19d5-11e0-b921-00144feab49a.html#axzz2Zcz9iIg1

Twitter Speaks, Markets Listen and Fears Rise

http://www.nytimes.com/2013/04/29/business/media/social-medias-effects-on-markets-concern-regulators.html?pagewanted=all

Dress rehearsal for disaster shows why Twitter has no place on Wall Street

http://opinion.financialpost.com/2013/04/26/dress-rehearsal-for-disaster-shows-why-twitter-has-no-place-on-wall-street/

SEC Says Social Media OK for Company Announcements if Investors Are Alerted http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171513574#.Uer4KFMpcvQ

New SEC Guidance on Social Media Levels Playing Field for Investors

http://blogs.cfainstitute.org/marketintegrity/2013/04/08/new-sec-guidance-on-social-media-levels-playing-field-for-investors/

How to Use Social Media for Regulation FD Compliance

https://blogs.law.harvard.edu/corpgov/2013/04/16/how-to-use-social-media-for-regulation-fd-compliance/

SEC Blesses Social Media Disclosures

http://www3.cfo.com/article/2013/4/disclosure_regulation-fair-disclosure-twitter-facebook-social-media-sec-guidelines-governance

The Push and Pull of Social Media for Investor Relations

http://blog.businesswire.com/2013/06/20/the-push-and-pull-of-social-media-for-investor-relations/

The Greatest Social Media for Investor Relations Panel Ever*

http://blog.investorrelations.com/2013/06/24/the-greatest-social-media-for-investor-relations-panel-ever/

Social Media’s Place in Investor Relations

http://thesocialmediamonthly.com/social-medias-place-in-investor-relations/

Social Media for Investor Relations

http://www.slideshare.net/IRSmartt/social-media-for-investor-relations-12976664

Survey finds social media gap between investors, companies

http://irwebreport.com/20130611/iros-vs-investors-social-media/

Crisis investor relations in the age of social media

http://irwebreport.com/20111208/crisis-investor-relations-social-media/

SEC’s social media guidance has devil in details

http://irwebreport.com/20130403/secs-social-media-guidance-has-devil-in-details/

Social Media Strategy for Investor Relations

http://www.brandchannel.com/images/papers/530_ccg_wp_social_media_strategy_ir_0911.pdf

Potential Issues/Trends

  • SEC permits investor contact using SM: significant;
  • Accuracy and fair disclosure concerns by companies and investors;
  • Regulators are reviewing proxy plumbing (shareholders) and will inevitably address SM, perhaps even (eventually) digital investor voting, fora, collaboration, communication using digital platform [think of a LI or FB group within a company investor section of a website];
  • Investor relations will use (are using) SM, including digital communication, hybrid annual meetings, Q and A, outreach, etc.: this will mature and eventually be regulated to provide structure, expectations;
  • Paper, in person meetings, email, even voting may/will be replaced with digital (text, visual, audio – multi media): the changes are starting;

 

Other:

Director skills

Recruiting the Digital Director

http://www.spencerstuart.com/research/bg/1535/

Wanted: More Directors With Digital Savvy

http://online.wsj.com/article/SB10001424127887324031404578483043683328314.html?goback=.gmp_4220981.gde_4220981_member_241245618

CIOs Say Corporate Directors Are Clueless About IT

http://www.cio.com/article/721456/CIOs_Say_Corporate_Directors_Are_Clueless_About_IT?goback=.gmp_4220981

Risk and IT intersection

Observations on Developments in Risk Appetite Frameworks and IT Infrastructure

http://www.newyorkfed.org/newsevents/news/banking/2010/an101223.pdf

Recruiting a Nonprofit Digital Board Director: Limitations & Alternatives

http://non-profit-management-dr-fram.com/2013/05/27/recruiting-a-nonprofit-digital-board-director-limitations-alternatives/

Nonprofit Board Responsibility Social Media – What Needs To Be Done? Revised & Updated

http://non-profit-management-dr-fram.com/2013/06/23/nonprofit-board-responsibility-social-media-what-needs-to-be-done-revised-updated/

 

Management suite:

Digital diaspora in the enterprise: Arrival of the CDO and CCO

http://www.zdnet.com/digital-diaspora-in-the-enterprise-arrival-of-the-cdo-and-cco-7000016193/

CIOs Can Strengthen Your Board of Directors

http://blogs.cio.com/careers/17010/cios-can-strengthen-your-board-directors?goback=.gde_4220981_member_111162885

KPMG brochure:

Risk management in an evolving world

Making the case for social media governance

http://www.kpmg.com/US/en/IssuesAndInsights/ArticlesPublications/Documents/social-media-brochure.pdf

Corporate Directors: “You Hold Much of Our Future is in Your Hands”

Jul 28

Posted in Board and Committee Leadership | Comments Off on Corporate Directors: “You Hold Much of Our Future is in Your Hands” |

In an inspirational video for the National Association of Corporate Directors’ annual conference, one speaker remarks, “Directors: You hold much of our future in your hands.” Another said “More government is not the answer: We are.”

The above are not exaggerations. Layers and layers of regulation and compliance are dragging corporate governance downward. Many boards have largely marginalized value creation and strategy, my research suggests. America is in danger of experiencing a lost decade since the financial crisis, given its debt and political intransigence. Corporations and their boards need to lead the way.

Boards should revitalize, as the American economy (and the world) is dependent on it. But they need to do so in a way that puts their own interests and reputations at risk. They need to be ruthless in recreating – and think only of the best interests of their enterprises. They need to “future proof” in other words, which is the theme of the NACD conference.

Future-proofing the boardroom means renewing and preparing for the future irrespective of present incumbents and office holders. This is extraordinarily difficult to do for any group, let alone corporate boards.

Here are some tough questions good boards should be struggling with:

Do we have the right directors?

Do we as a whole have the right competencies and skills, but more importantly do we have courage to replace those directors who do not? If we are one of those directors, do we have the courage and integrity to step down, i.e., not act in self-interest? Tough conversations need to be had with directors who refuse to go.

Do we have the right chair?

Does our Chair (or Lead Director) have the independence, attributes, experience and track record that the company and senior management needs and respects – to lead the board, hold management to account, and focus on value creation? If not, a tough conversation needs to occur.

Do we focus on strategy and value creation?

Assuming we have the right directors and Chair, do we spend enough time on the strategy and value creation of the enterprise? Is at least 50% of our time spent here? If not, why not and how do we fix this?

Do we have a long-term focus and the right metrics that drive management to focus on the long-term as well?

Do we measure and reward performance such as innovation, health, reputation, talent, culture, satisfaction and engagement, that is aligned with our product and risk cycle? These metrics are key to value creation. Or are we subsumed by the short-term? If we are (as most boards are), how do we change this?

Do we really listen and communicate with our shareholders?

Do we engage meaningfully and authentically with our major, long-term shareholders? Do we listen to and act on their concerns, or do we entrench and are we defensive? If we do not listen and act, then why not, and how can we structure ourselves differently?

Are directors sufficiently independent from each other and from management?

Do we bring on directors who are not previously known to us or to management? Are we scrupulous in not allowing directors to be compromised, and act when we see that a director is? Do all directors disclose when they are compromised?

Do we embrace and understand technology?

There is an enormous transformation afoot. See a reading list as an example of digital media’s impact on reputation, business models, big data and change. Do boards have the ability to understand and predict how their company and industry will change? If not, recruit directors who do.

Do we establish the right tone at the top?

Lastly, do we direct management to establish systems, controls and an ethical culture that rewards proper risk taking? Do we lead by example, and are we ruthless in acting at the slightest deviation from proper business conduct and integrity?

The above questions are adopted from a larger paper I authored focusing on strengthening public company boards, in which I interviewed forty activists, private equity leaders, NACD 100 members and CEOs, here.

The answers to the above questions are fundamental for corporate boards and their directors. More importantly, candid answers will have implications for the way a current board is constituted, is led, and functions.

Answering the questions truthfully, unbiasedly and void of any personal interest whatsoever will be the toughest part for any board.

Richard Leblanc is a governance lawyer, academic, speaker and independent advisor to leading Canadian and international boards of directors. He can be reached at rleblanc@boardexpert.com.

Mandatory Tendering of UK Audits – A Better Approach Was Missed

Jul 28

Posted in Uncategorized | Comments Off on Mandatory Tendering of UK Audits – A Better Approach Was Missed |

Last week, the Competition Commission in the UK issued a provisional decision requiring audit committees of large companies to tender bidding for the external audit every five years, among other reforms (see here).

Make no mistake: this is a major change and will shake up the cozy relationships some audit firms may have with their clients. Even this change is more significant than what was expected (I would have predicted 9-12 years). The Competition Commission is serious.

Here is what listed companies and the big 4 audit firms will argue: Five-year tendering is a one-sized fits all approach that does not address audit quality and imposes high switching costs. And there are unintended consequences.

They are entirely correct, and there would have been a better approach.

First, why are they correct? The academic evidence is that auditor rotation (assuming a good tendering process results more often than not in a different firm doing the audit) likely does not improve audit quality. Second, five years is therefore arbitrary. Third, a new auditor will need to climb a learning curve, and this is a costly investment for a company, not to mention the actual audit committee time in overseeing the tendering process. Fourth, a company will be forced to tender when they may be very satisfied with the auditor’s independence and quality of their work and reporting.

A far better approach would have been to address the heart of the issue: assess audit quality and act on the results.

An objective, robust annual evaluation of the external auditor, involving a 360 review by the board, the audit committee, and reporting senior and financial management of the company, with results disclosed to shareholders, would have been a much better approach.

The reluctance by boards to assess auditors in this fashion essentially forced regulation.

We see the same reluctance by boards to assess directors, act on results, and report to shareholders. Regulators in Europe and Asia are therefore imposing term limits on directors, at about 9 years. This is also arbitrary and can force a good director off a board or keep a poor director. Term limits may even come to North America. There are articles in the mainstream press about “zombie” directors and directors whose terms exceed 40 years.

Boards need to step up and address their own performance and that of their advisors. Regulators have shown they will act in the absence of self-governance and boards may not like it when they do.

CEO to Worker Pay Ratio Coming to a Company Near You ~ And Some Numbers May be Eye-Popping

Jul 28

Posted in Executive Compensation | Comments Off on CEO to Worker Pay Ratio Coming to a Company Near You ~ And Some Numbers May be Eye-Popping |

A compensation consultant who spoke to my corporate governance class at Harvard University last week said that the ratio of total CEO pay to the pay of the average worker at a company may not be what you think. Ratios of 500 or even a 1,000 to one may occur, this Boston pay advisor predicted. Embarrassment and tough questions will follow.

Next month, the Securities and Exchange Commission (SEC) is expected – at long last – to issue a draft rule outlining how US listed companies are expected to calculate this CEO to worker pay ratio. There has been fierce resistance to the ratio by corporate management, lawyers and lobbyists against the calculation and disclosure of this ratio, which was mandated in the Dodd-Frank Act of 2010.

Resistance centers on the complexity of calculation, the cost, and the usefulness, according to companies.

For example: Is total CEO compensation intended, realizable, or realized? (These numbers are all different, and is part of a larger pay debate. The regulator focuses on intended pay, which may not be what the CEO actually receives, or is entitled to receive.)

For the average employee pay, what if the company has 1000s or 10s of 1000s of employees? What about part-time employees? Contractors? People who are hired or quit during a given year? Different countries? Are bonuses, long-term incentives, and pensions and benefits calculated as well, for each employee? You would like to think that the average employee wage is easily calculated and companies should already know this information, but this is not the case. Nevertheless, the SEC should be clever enough to issue guidance in the new rule so that the average employee wage can be calculated in as cost effective a manner as possible.

Next, what is the usefulness of such a ratio, companies ask? A CEO to worker pay ratio, for example, would be very different for a bank (think Bank of America), as compared to the retail sector (think Wal-Mart), where average worker pay is different. Therefore how can there be meaningful comparison?

Likely what will happen are different ratios for different sectors, and the ratio will be relative to a company’s peers. This will be useful to corporate boards and shareholders.

For senior management and boards, a CEO to senior management ratio above 2 or 3 times can signal succession or talent management red flags (a CEO earning five times the next highest executive means there may be no internal successor). A CEO to worker ratio that is too high relative to peers within an industry could signal CEO entrenchment, a complacent board, or even low employee wage relative to the norm.

Taken as a whole, very high CEO to worker pay ratios can signal systemic wealth disparity. CEO pay has been outstripping executive and worker pay year over year by a wide margin because of structural issues related to “peer group benchmarking” (the very way CEOs are paid). This structural pay inequity is unrelated to CEO performance. There are societal costs to wealth disparity as well. Having CEO to worker pay ratio data may change the way CEOs are paid. Or not. But one thing for certain, there will be surprises.

 

Reforms to director compensation need to occur: Richard Leblanc

Jul 6

Posted in CEO, Organizational Performance and Compensation, Executive Compensation | Comments Off on Reforms to director compensation need to occur: Richard Leblanc |

Activist investors in both Canada and the US recently proposed – for Hess Corporation and Agrium Inc. – that the independent director nominees they nominated to serve on both Hess’s and Agrium’s boards should be paid incentive pay directly by the activist investor that is tied to share price appreciation.

The rationale for this incentive pay – which has been termed “golden leashes” – was to incent new directors to the board to maximize share price.

There were several arguments against this proposal (see here and here for example), but the proposal itself raises a disconnect between how current independent directors on boards are paid and incented to perform, or not.

Most independent directors on public company boards are compensated in a blend of cash and company shares. The equity component is typically restricted or deferred until the director retires from the board, thus postponing taxes and enabling the director to amass a portion of equity in the company to align his or her interests with shareholders (it is believed). The equity can be a predetermined number of restricted shares, or a set monetary amount in the form of share “units.”

The problem with paying independent directors this way is that there is little incentive for personal performance or company performance. Directors get paid the cash and equity regardless. There is little if any downside, especially when directors can ride a stock market or Fed driven increase in overall share prices.

Not surprisingly, the activists noted this lack of incentive pay.

It is hardly surprising that boards do not focus on value creation, strategic planning, or maximizing company performance, survey after survey, as much as they do on compliance. Their compensation structure does not incent them to.

Compensation incentives drive behavior, both for management and for directors.

Here is what is needed to align director pay with shareholder interests:

  1. Directors should be required to issue cheques from their personal savings accounts to purchase shares in the company. Bill Ackman of Pershing Square stated that if Canadian Pacific directors were required to cut cheques for $100,000 each, the CEO would have been fired prior to Pershing Square being involved. Mr. Ackman is right. “Skin in the game” for a director does not mean shares are given to a director in lieu of service. The motivational factor to be attuned to shareholders is greater if directors are actual investors in the company. In private equity companies, non-management directors are encouraged to “buy into” the company and invest on the same terms as other investors.
  2. For Directors’ equity to vest (the portion they did not purchase), hurdles would need to be achieved that reflect personal performance and long-term value creation of the company. Assuming you have the right directors, this sets up a situation in which Directors are forced to engage in value creation and be rewarded for doing so, similar to private equity directors. The hurdle rate provides the incentive. The vesting hurdle should be based on the underlying performance of the company, commensurate with its risk and product cycle, possibly peer based, and not simply on riding a bull market.
  3. The long-term performance metrics for value creation should also apply to senior management, and the board should lead by example. The vast majority of performance incentives are short-term, financial and quantitative. We know that the majority of company value however is now based on intangibles. Long-term leading indicators such as innovation, reputation, talent, resilience and sustainability are being completely overlooked in compensation design. You get what you pay for.

Management has proposed “passive” pay for directors and short-term pay for themselves. Boards have acquiesced.

Where the activists went wrong, above, is in proposing short-term incentives tied to stock price that applied to a sub-set of directors. However their point is excellent in that independent director compensation is flawed. The correct approach is long-term value creation and incentives that apply to all directors, and to managers, and to shareholders.

Only when this shareholder-director-manager alignment occurs will the compensation issue be solved. It makes little sense to award executives on a biased short-term basis when the effects of their actions can last for years, or to award directors on the basis of time – or, as one of my students put it, “showing up.”

Compensation consultants are using the same short-term metrics as before the financial crisis. They need to be directed by their client boards to do otherwise.

The need to establish long-term value-creation metrics, in the words of one American director, “is one of the greatest challenges in establishing long-term incentive compensation plans.”

Join me in my next blog where I will address reforms to executive compensation.

Richard Leblanc is a corporate governance lawyer, speaker and independent advisor to leading boards of directors. He is currently teaching corporate governance at Harvard University. He can be reached at rleblanc@boardexpert.com.

Combatting Political Corruption in Canada

Jun 21

Posted in Uncategorized | Comments Off on Combatting Political Corruption in Canada |

There are now two RCMP investigations of potential breach of trust and bribery allegations of a sitting politician involving Senator Mike Duffy and the Prime Minster’s former chief of staff, Nigel Wright.

Senator Pamela Wallin is accused of having taxpayers, at least partially, fund her travel to private events, speeches and board meetings. (Why are Senators even permitted to serve on boards?)

In Quebec, the Montreal mayor who replaced the former mayor has also been charged with multiple corruption counts this past week. SNC Lavalin, a Quebec company, has been charged with bribery and is banned from World Bank contracts for ten years. Arthur Porter, former director of Air Canada, McGill University Health Centre CEO, and member of Canada’s Security Intelligence Review Committee, is fighting extradition from Panama to face bribery charges. The Quebec-based sponsorship scandal is well known, and former Quebec-based Prime Minister Brian Mulroney was reputed to have received cash payments in envelopes.

See “‘Pristine Canada Mired in Scandal After Montreal Arrest.”  Two journalists yesterday called the incumbent Prime Minister incompetent and tone deaf to address it.

The Charbonneau Commission in Quebec has heard from 80 witnesses involving allegations of price fixing, collusion, cash payments to win business, influence peddling, threats and extortion. Current and former politicians have been arrested, offices have been raided, and there are likely more arrests to come.

Quebecers are understandably outraged. Potholes in Montreal are well known, and asphalt suppliers evidently colluded to inflate prices by 80% and reduce the asphalt quality. I see this when I visit Montreal. It is a feeling. It starts right with the taxis refusing to take credit cards and wanting cash only. You get a sense of deep cultural and historic embeddedness in the way business is done. A royal commission inquiry was called by the Quebec prime minister, Louis Gouin, in 1909. It lasted 115 days, had 914 witnesses and 548 pieces of evidence were presented. In the words of an executive via private email, “it took about 100 years to go from 25% to 3%, which may mean another 15 years to clean the rest.”

Canadians have been bombarded over the last few months with stunning lack of ethics, internal controls, and even the most rudimentary governance and accountability practices in government. The Senate had to issue new rules on basic concepts such as producing receipts for taxis and providing a specific purpose for travel when claiming expenses. The Senate used to proceed on the “honor” system. Imagine for a moment if an executive claimed travel on “the honor system.”

See a few examples from the new rules:

“3. Require a Senator to provide a specific purpose for travel when claiming expenses.”

“5. Require taxi receipts be provided when claiming taxi expenses.”

The Senate, in 2013, actually had to instruct Senators to provide receipts!

And the Senate, in 2013, actually had to request an independent auditor to audit its financial expenses. Imagine if a public company did not have an auditor?

And the bar for extracting a politician is not malfeasance or misfeasance, like it is in a company for an executive, but actual criminal charges and even prison. In other words, unless a politician actually goes to prison, he or she may not have to resign, or even answer allegations, and there are no other mechanisms, such as compelled public testimony or recall.

Imagine if a CEO said to a board of directors that this was the condition of succession or replacement – prison.

Anti-corruption is not rocket science. There are proven methods to corrupt and bribe. What is needed is a complete rehaul, including codes, controls, audits, assurance and reporting (including whistle-blowing).

The foregoing takes time, energy and money. The advantage I am seeing is that a judicial inquiry is afoot and there are arrests. This, I have not seen before. These are positive steps, but the recommendations from the judicial commission must be far reaching, deep and enforced. Corruption can be counteracted, but the judicial report should be rigorous, and there should be built-in time frames and personal/office accountability for implementing the recommendations, with penalties for non-implementation, reporting and follow up. This is how you do it.

In other words, government (at all levels) has to not only lead by example, but should impose the same huge overlay of regulation (and cost) that it imposes on public companies, on itself. Then, and only then, will it have the credibility, transparency and best practice accountability that the private sector now has.

Proposals to Strengthen a Board’s Role in Value Creation, Management Accountability to the Board, and Board Accountability to Shareholders

Jun 8

Posted in Board and Committee Leadership, Member Selection, Competencies and Commitment, Shareholder Accountability | Comments Off on Proposals to Strengthen a Board’s Role in Value Creation, Management Accountability to the Board, and Board Accountability to Shareholders |

There have been a handful of activist threats to Canadian companies recently.

What these engagements have drawn focus on are defects in public company governance, including the skill sets of existing directors, the board’s focus on value creation vs compliance, and the very ways boards function and operate, particularly compared to private equity boards.

What follows is a series of recommendations that could apply to any public board: to make it more focused on value creation; to strengthen real director independence, including from management; to strengthen management accountability to the board; and, perhaps most importantly, to strengthen board accountability to shareholders.

These recommendations are expected to form a journal article I am authoring, and will be incorporated into a case on Canadian Pacific I am co-authoring. I will post the journal article once it is published, but I thought I would post the recommendations below, for commentary and criticism, particularly from my LinkedIn Group “Boards and Advisors.” (I have not included the supporting rationale/commentary for each recommendation, which will appear in the journal article; however, most of the recommendations are rather self-explanatory on their own.)

The recommendations are based on, in no particular order: interviews with activist investors, private equity leaders, directors and CEOs; advisory work with regulators; assessments of leading boards; expert-witness work; academic and practitioner literature and regulations in other countries; director conferences and webinars; lectures I have delivered to the Institute of Corporate Directors and Directors College; discussions in my LinkedIn group, Board and Advisors; and a book I am writing including with Henry D. Wolfe and Frank Feather entitled “Building High Performance Boards.”

Several recommendations may result in significant restructuring and change in how a public company board operates, functions, is composed, engages and focuses.

What follows is a listing of the recommendations, organized into three groupings, as follows:

I.           Increase Board Engagement, Expertise and Incentives to Focus on Value Creation (proposals 1-19)

II.         Increase Director Independence from Management and Management Accountability to the Board (proposals 20-30)

III.       Increase Director Accountability to Shareholders (proposals 31-38)

We will now begin with grouping I.

I.          Increase Board Engagement, Expertise and Incentives to Focus on Value Creation

1.         Reduce the size of the Board.

2.         Increase the frequency of Board meetings.

3.         Limit Director overboardedness.

4.         Limit Chair of the Board overboardedness.

5.         Increase Director work time.

6.         Increase the Board Chair’s role in the value creation process.

7.         Focus the majority of Board time on value creation and company performance.

8.         Increase Director roles and responsibilities relative to value creation.

9.         Increase Director compensation, and match incentive compensation to long-term value creation and individual performance.

10.       Enable Director access to information and reporting Management.

11.       Enable Director and Board access to expertise to inform value creation as needed.

12.       Require active investing in the Company by Directors.

13.       Select Directors who can contribute directly to value creation.

14.       Revise the Board’s committee structure to address value creation.

15.       Hold Management to account.

16.       Disclose individual Director areas of expertise directly related to value creation.

17.       Increase Board engagement focused on value creation.

18.       Establish and fund an independent Office of the Chairman.

19.       Limit Board homogeneity and groupthink.

We will now continue with grouping II.

II.        Increase Director Independence from Management and Management Accountability to the Board

20.       Increase objective Director and advisory independence.

21.       Limit Director interlocks.

22.       Limit over-tenured Directors.

23.       Limit potential Management capture and social relatedness of Directors.

24.       Decrease undue Management influence on Director selection.

25.       Decrease undue Management influence on Board Chair selection.

26.       Increase objective independence of governance assurance providers.

27.       Limit management control of board protocols.

28.       Address fully perceived conflicts of interest.

29.       Establish independent oversight functions reporting directly to Committees of the Board to support compliance oversight.

30.       Match Management compensation with longer-term value creation, corporate performance and risk management.

We will now conclude with grouping III.

Increase Director Accountability to Shareholders

31.       The Board Chair and Committee Chairs shall communicate face-to-face and visit regularly with major Shareholders.

32.       Communicate the value creation plan to Shareholders.

33.       Implement integrated, longer-term reporting focused on sustained value creation that includes non-financial performance and investment.

34.       Implement independent and transparent Director performance reviews with Shareholder input linked to re-nomination.

35.       Each Director, each year, shall receive a majority of Shareholder votes cast to continue serving as a Director.

36.       Make it easier for Shareholders to propose and replace Directors.

37.       Limit any undue Management influence on Board – Shareholder communication.

38.       Limit Shareholder barriers to the governance process that can be reasonably seen to promote Board or Management entrenchment.

Conclusion

There have been significant changes to corporate governance in the last few years. Most notably, boards and regulators are now dealing with a defective legacy of independent directors who do not possess the relevant expertise. The scholarship has never supported independent board or separate chairs and the causal relationship to corporate performance. Regulators and most recently shareholders are now are focusing on competencies.

Second, there has been an under-emphasis on strategy and value creation by many boards, at the expense and crowding out of compliance obligations. Shareholders are now addressing this shortcoming.

Third, there is a movement towards shareholders exerting ownership rights to effect the governance of the company and select and remove directors who can address the earlier two points: competencies and skills, and fulfillment of the strategic and value creation role of the board.

Fourth, there is the real perception that directors are beholden to management.

I have addressed in the above recommendations all four defects in the current governance model for public companies: (i) directors selected primarily with a view to formal independence; (ii) not addressing fully the strategic and value creation role of the board; (iii) shareholders having greater say on directors and value creation; and (iv) making boards more independent of management, and management more accountable to boards.

I am happy to respond to any of the above.

Richard Leblanc, PhD

Ontario at last moving towards board diversity

May 31

Posted in Diversity | Comments Off on Ontario at last moving towards board diversity |

It took Canada’s first female and openly gay Premier, Kathleen Wynne, less than three months to express strong support for gender diversity on corporate boards (see page 291 of the Ontario budget, and a radio interview earlier this week with the Minister Responsible for Women’s Issues, Laurel Broten.

Diversity is not a priority for the Harper government. A committee has been formed to study the issue. Concrete action is needed, not committees or more talk. Numerous countries have pressed forward with diversity legislation since the financial crisis. Canada, with the exception of Quebec, is a noticeable exception. Our numbers are terrible.

Why did Wynne do this?

We have hints in her remarks after she became Premier and in her leadership speech at the Ontario Liberal Convention.

“We are a people rooted in diversity,” she said. “That’s how we came here. That’s who we are.”

“We are all capable of so much… I’ve offered myself to you as leader because of that optimism. Because of that love, that potential, and that possibility. That is what drives me.” [emphasis added].

See at 11:21 here:

“Can a gay woman win?” Wynne went on to say that the Province has changed and that “I do not believe the people of Ontario judge their leaders on the basis of race, sexual orientation, colour or religion. I don’t believe they hold that prejudice in their hearts.” [applause].

“They judge us on our merits, on our abilities, on our expertise, on our ideas. Because that is the way everyone deserves to be judged.”

You could just as easily insert directors and shareholders above:

[I do not believe shareholders judge their directors on the basis of race, sexual orientation, colour or religion…

Shareholders judge us on our merits, on our merits, abilities, and expertise. Because that is the way everyone deserved to be judged.]

For Ontario, where our largest stock exchange is located, this is a welcome breath of fresh air. I have taught and advised 100s of women who are enormously frustrated at the blockage on boards by over-tenured, over-boarded, entrenched pedigree directors. It is high time this changed and “comply or explain” using the Australian model is the best Canadian way to address diversity in my view.

See the Australian definition of diversity and broader diversity website:

“Diversity at ASX refers to all the characteristics that make individuals different from each other. It includes characteristics or factors such as religion, race, ethnicity, language, gender, sexual orientation, disability, age or any other area of potential difference. Diversity at ASX is about the commitment to equality and the treating of all individuals with respect.”

Ontario should define diversity explicitly and then have companies disclose their objectives and progress against that definition, both for boards and for senior management. It is important that diversity be interpreted as more than gender and Wynne’s background may have had a part to play in favoring the Australian model.

Business icon Warren Buffett has said women are the key to America’s prosperity. Richard Branson has weighed in on why we need more women in the boardroom.

After observing dozens of board meetings over the last fifteen years and interviewing hundreds of directors, the dialogue and behavior changes with women in boardrooms. More and different questions get asked, groupthink is avoided, and people come prepared. I have yet to see a single woman unprepared for a board meeting. I have seen dozens of men.

Directors should be selected on the basis of merit, not personal relationships.

What is needed is political leadership. We have this in the new Ontario Premier.

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