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This blog is intended to be a governance resource and source of current governance commentary, offered by a corporate governance academic engaged in research, teaching and other ongoing academic activities. There is a very public element to the governance field, and it is hoped that this blog will contribute to the public discussion of current governance issues. It is also hoped that it will address a need in the governance field by presenting a holistic online approach to the topic. There is a rapid rate of change in the field of governance (public, private, government and not-for-profit entities) and developments in internet technology move swiftly. This governance gateway offers resources for a broad variety of stakeholders including: [...more]

Collapsing Dual Class Shares and the Oppression Remedy

Aug 25

Posted in Shareholder Accountability | Comments Off on Collapsing Dual Class Shares and the Oppression Remedy |

Can a board of directors unfairly disregard the interests of one class of shareholders (e.g., voting) to the enrichment of another (e.g., non-voting)? It cannot. If it does, voting shareholders may properly claim that their interests have been unfairly disregarded or prejudiced under what is known as the “oppression remedy.” (This is a broad Canadian remedy granting a judge powers to make an order rectifying the matter complained of, which could include (according to the Supreme Court) preferring certain shareholders or “squeezing out” others.)

Telus Corp. appears to be attempting to collapse voting and non-voting shares without apparently acknowledging a relevant historical practice of around a 4-5% premium at which voting shares have been trading. The case is important as other companies with dual class shares may contemplate similar collapses. The Supreme Court of Canada, in BCE Inc. v 1976 Debentureholders, made it clear that the duty of directors is to act in the best interests of the corporation, but not by treating individual stakeholders unfairly. Indeed the duty “comprehends a duty to treat individual stakeholders affected by corporate actions fairly and equitably” (page 9). The corporation has duties as a “responsible corporate citizen,” the Court said. Directors need to have regard to “all relevant considerations.” [emphasis added.] Directors’ conduct will therefore be scrutinized as to how and why they treated certain stakeholders (including certain shareholders) the way they did.

Typically, non-shareholder stakeholders interact with the company via contract (a company is metaphorically a “nexus of contracts”). Shareholders, as residual claimants, cannot contract with the company in this fashion and therefore must rely on the board of directors to preserve and protect – and certainly not disregard – their economic interests. The board’s obligation is treat all shareholders fairly. It cannot prefer one shareholder at the expense of another.

Shareholders and other stakeholders do not have these duties and fairness obligations that directors have. They can – and do – act out of self-interest. This is their prerogative. A board, however, cannot. The Telus board and executives evidently have significant share ownership of non-voting shares, and, according to one expert report, “16 individuals on the board and in the executive office stand to benefit a total of $3,370,003.” The Ontario Securities Commission, in 2008, right before the financial crisis, proposed (but did not enact) a conflict of interest guideline governing, among other matters: divergences among shareholders; when directors cannot be considered impartial; and when an issuer enters into an arrangement that may benefit one or more of its officers and directors. The OSC went on to prescribe practices to address potential conflicts, including: directors who are not interested in the matter; terms of reference; and independent advice taken in regards to the transaction [e.g., fairness opinions in respect of shareholders’ interests]. The Supreme Court has also stated, in the BCE case, “Where conflicting interests arise, it falls to the directors of the corporation to resolve them in accordance with their fiduciary duty to act in the best interests of the corporation.”

We will see how this case plays out, but the red flags to me at least, are (i) the potential unfair treatment of one class of shareholders to the benefit of another; and (ii) the potential conflict of interest by the Telus board and certain executives. These are both legitimate questions and areas of inquiry.

OSFI moves banking governance forward in Canada

Aug 10

Posted in Governance of Financial Institutions | Comments Off on OSFI moves banking governance forward in Canada |

Canada’s federal bank regulator came out this week with proposed changes to its governance guidelines, moving Canada forward in important ways. Disclosure: I advised OSFI on how the current guideline might be improved.

See the new draft guideline here. Some important changes include that OSFI is stating that there should be reasonable representation of risk and relevant financial industry expertise on the board and committees. This is an excellent idea, as we know that director independence in and of itself will not guarantee governance quality nor predict shareholder value. OSFI-regulated companies (which exceed 400) would be wise to use a competency matrix recommended by Canadian securities commissions and disclose which directors possess risk and financial industry expertise. Of course this expertise should be defined as well.

Second, OSFI is recommending third party reviews to assess the effectiveness of board and committee practices. This is also an important development, as we know that proxy advisory firms, and even boards themselves, often measure the wrong things, simply because of availability or ignorance. A self-review has a tendency to be soft, which boards often delegate to management to administer. The UK now recommends similar third party reviews for all FTSE companies.

Third, OSFI strengthens the role of the CRO and reporting to the risk committee, and requires that the board approve an explicit risk appetite for the institution. This is another welcome development. As part of the risk appetite and control framework, boards and relevant committees should approve (and be able to recognize and direct when necessary) the internal controls of all material business risks – financial as well as non-financial – and ensure combined assurance and reporting for the controls to mitigate risks. OSFI also recommends third party reviews to assess risk systems and oversight functions, and strengthens audit committee oversight of external and internal auditors. Very leading edge.

OSFI also codifies the separation of chair and CEO, a recommended practice in Canada since 1994. We know that independence of the chair per se will not guarantee effectiveness, so OSFI goes on to provide guidance on leadership, commitment and other attributes and actions necessary to chair an effective financial services board. Boards here should select the chair and the CEO should not have undue influence. The chair should have a position description and be assessed on it. The governance committee should be charged with chair succession planning to person proof the position.

Lastly OSFI also incorporates by reference compensation and risk-aligned compensation embedded in the Financial Stability Board’s Principles for Sound Compensation.

Overall the draft guidelines are concise, flexible, pragmatic and reflect leading practices (e.g., G30, Walker and OECD reports and Basel principles). Some provisions go beyond US and UK counterparts. Canada has a very well regulated banking sector. We avoided a bailout of a financial institution pre 2008 and banks also avoided many of the complex derivative meltdowns to date. These new guidelines will help ensure that that fiscal prudence and stewardship continues.

Ornge Governance Scandal: An Ontario Pattern?

Aug 4

Posted in Uncategorized | Comments Off on Ornge Governance Scandal: An Ontario Pattern? |

The former chair of Ornge, Rainer Beltzner, alleged that former CEO Chris Mazza’s compensation included unauthorized payments made without supporting invoices and that “the board was in the dark about many components of Dr. Mazza’s compensation that company executives were paying him over and above his base salary of $500,000 and bonus pay. The board arrived at the bonus pay based on Dr. Mazza’s own evaluation of his performance, Mr. Beltzner said.” See “Ornge board in the dark about aspects of former CEO’s pay.”

If this allegation is true, this is absurd that a CEO would evaluate his own performance and the board would be ‘in the dark’ about the CEO’s pay, including by the chair. The most important thing a board does is select and pay the CEO. The CEO should not even be in the room when the pay is being discussed. This is governance failure and that it is a crown board is even more embarrassing. Ministers should receive reports on board reviews from their boards. There is no such thing as a rogue board as the Minister Deb Matthews said, if you have proper reporting and accountability. There is a pattern here in Ontario. It harks back to e-Health and the Ontario Lottery and Gaming Corporation scandals.

Ontario’s twenty-five ministers oversee dozens if not hundreds of agencies, boards and commissions. It is folly to expect that ministers can have adequate oversight over so many boards under their portfolio without proper reporting and data. Ontario should take a sheet out of the playbook of another province, Saskatchewan. The Crown Investments Corporation of Saskatchewan (CIC) has a comprehensive reporting regime in place for reporting to the Government shareholder for all crown corporations. I had recommended for CIC tough, hard-hitting governance reviews and questions, for the board, major committees, and individual directors, with reporting obligations up the chain, as well as training for all Saskatchewan directors and chairs. CIC also has company secretaries sit in on board meetings. CIC’s governance overview is best in class in Canada in my view. I doubt some of the shoddy governance practices we have witnessed in Ontario would have survived this scrutiny and reporting regime.

Governance is not government. Ministers’ goals are to get re-elected. Ontario corporations are a public trust on behalf of taxpayers. The Government of Ontario should impose the same accountability practices on itself that it imposes on regulated companies. It should lead by example.

Should Proxy Advisory Firms Be Regulated? Yes.

Jul 17

Posted in Uncategorized | Comments Off on Should Proxy Advisory Firms Be Regulated? Yes. |

The Ontario Securities Commission has asked whether proxy advisory firms should be regulated. (Proxy advisory firms, such as Institutional Shareholder Services and Glass Lewis, which is owned by Ontario Teachers Pension Plan, provide governance assessment and recommendations to institutional shareholders on their voting at annual meetings of companies.) In my view, proxy advisory firms should be regulated for three important reasons.

Conflicts of Interest

Proxy advisory firms also provide consulting services to companies to improve their governance score. This would be analogous to me as a teacher providing tutorial services for money for students to improve their grade. Or credit rating agencies receiving fees for other services other than an independent rating of creditworthiness of the company. The business model for proxy advisory firms needs to change such that there is no non-assessment services offered by them. Similar to auditors being restricted only to the audit, and compensation consultants being restricted only to compensation assurance services, any firm charged with independent assurance of governance should not have a consulting revenue stream. Having an alternative revenue stream to an assessment undermines the independence and objectivity of the assessment, and the appearance and confidence in the marketplace that the assessment is not unduly influenced by proprietary interests.

Lack of Qualitative Assessment of Governance Quality and Predictive Validity on Shareholder Value

Second, there is limited peer-reviewed evidence that proxy advisory firms actually measure governance quality, or that what they do measure predicts shareholder value. These are commercial firms whose business model is predicated on volume-based, externally measureable metrics. What is measureable, such as structural independence governance metrics, such as separate chairs and director independence, does not necessarily impact board effectiveness or shareholder performance, the research shows. What is relevant are qualitative factors like board and director qualities, culture, judgment and circumstances. These are more difficult to measure from outside a boardroom. We see the inconsistencies in proxy advisory firms’ ratings where the same company receives divergent ratings from different proxy advisor firms, or companies that experienced governance failure formerly received high ratings. Proxy advisory firms should be required to assess and incorporate qualitative and firm-specific factors into their ratings and recommendations, with a process for independent review, audit and arbitration if necessary. The personnel and sources consulted to produce a proxy advisory report should also be disclosed. See the paper by Leblanc et al., here under “The Governance of Proxy Advisors.”

Lack of Transparency

Third, the transparency of proxy firms should be increased. Proxy advisory firms’ rating methodologies and weightings to various factors are divergent. If they were measuring governance quality with rigor, we would expect to see convergence. Not surprisingly, individual companies may receive different ratings depending on the proxy advisory firm. This inconsistency needs to be addressed. Governance ratings according to Stanford researchers who study them were found to have little predictive validity among the ratings of any of the three proxy advisory firms examined. The authors go on to write (Larcker and Tayan, 2011, p. 446-447), “the study found low correlation among the ratings of the three firms, low correlation between the ratings of each firm and future performance, and low correlation between the ratings of Risk Metrics/ISS and the proxy recommendations of Risk Metrics/ISS. The authors concluded that “these governance ratings have either limited or no success in predicting firm performance or other outcomes of interest to shareholders. … Our view is that  … the commercial ratings contain a large amount of measurement error. … These results suggest that boards of directors should not implement governance changes solely for the purpose of increasing their rankings.” They further examine governance rating systems by academic researchers and conclude that predictive ability of a rating index on future firm performance has not been reached.

The use of and reliance upon ratings and proxy advisory services by institutional shareholders should also be transparent and accessible on the institutional shareholder website. (See the above paper.)

Boards of directors criticize proxy advisory firms for their ‘check the box’ and ‘one sized fits all’ approach to corporate governance; the enormous influence that they have; and their lack of transparency and accountability – in the governance field – when these firms and shareholders they serve insist on it from others. It seems to me that there is merit in concerns that boards have.

 


Diversification of Corporate Boards – Suggestions for Action

Jul 16

Posted in Diversity, Shareholder Accountability, Women on Boards | Comments Off on Diversification of Corporate Boards – Suggestions for Action |

Last week, I presented “eight traps” limiting the diversification of corporate boards. Here I present some proposed solutions.

Leadership by Shareholders

Major institutional shareholders should commit resources to develop an electronic registry of prospective directors based on skills, experience and attributes. The technology exists and doing so will begin the dialogue of shareholders proposing prospective directors. In Canada, the Canadian Coalition for Good Governance (“CCGG”) and Ontario Teachers Pension Plan Board should develop registries. See how CalSTRS and CalPERS have done it.

Investor groups should propose model diversity policies, with best practice language, for investee boards to adopt, similar to what was done for majority voting and say on pay. Women and minority groups should be explicitly mentioned in the policy.

Leadership by Companies

Companies should disclose how prospective directors are assessed for board membership. This disclosure should include the use of a competency matrix, assessment of skills and experiences, candidate origination, advertising of board vacancies, short-listing, interviews, recommendation to shareholders, and mentoring and on-boarding practices. This disclosure should be public and on the company’s website.

Companies should adopt self-objectives for diversifying their board and senior management team, and disclose to shareholders progress in this regard annually.

Leadership by Regulators

Regulators should consider imposing a tenure limit of 9 years on company boards, as is done in other countries, including the UK, Singapore and Hong Kong. Regulators should provide guidance to companies on defining diversity and its benefits, including on debate and decision-making within the boardroom.

Regulators should provide guidance to companies on the transparency and disclosure of director nomination practices (see above), and give greater consideration to the role of investors can and should play in selecting and removing directors.

Leadership by Search Firms

Search firms should develop and adopt a rigorous and readily disclosed firm- or industry-wide code of principles and practice. The code should address methods firms use for validating candidate competencies; initial selection, short-listing and recommendation practices; conflicts of interest; confidentiality; remuneration policy; client loyalty; quality of service; assurance controls; and enforcement.

Leadership by Industry Associations

The National Association of Corporate Directors (“NACD”), Institute of Corporate Directors (“ICD”) Institute of Directors, and large shareholder associations (including pension plans and unions) should disclose CEO/President succession plans (referencing the skills and experience of the next CEO); the total compensation of the incumbent CEO; and the internal pay equity ratios of other officers within the organization. This disclosure is regarded as best practice for listed companies, and director and shareholder groups should follow suit. Such disclosure would provide member information and interest prospective CEOs (internal or external). The CCGG, NACD and ICD nominating committees should give consideration to appointing a next female or minority CEO with a value creation background (e.g., investor or entrepreneurial) as opposed to a compliance one (e.g., accounting or legal).

Industry associations should develop robust competency matrixes for company boards to use in selecting directors.

Some of the above suggestions may be controversial, but different models and techniques are needed if progress is to be made.

The Enbridge Oil Spill and Role of the Board

Jul 15

Posted in Risk Governance and Combined Assurance | Comments Off on The Enbridge Oil Spill and Role of the Board |

In a scathing report by the National Transportation Safety Board (“NTSB”), Canadian company Enbridge Inc. was rebuked for its pipeline rupture on July 25, 2010, and subsequent environmental damage. The pipeline ruptured due to corrosion fatigue cracks that grew and coalesced from multiple stress cracks.

The oil flow continued for 17 hours, according to the report. The oil saturated the wetlands in Michigan. Clean up continues with costs exceeding $767 million. The total release was estimated to be 843,444 gallons.

Enbridge CEO, Patrick Daniel, said on the news on that evening that Enbridge complied with all regulations.

If this is the case, then the regulations were defective or not enforced. They were, and the NTSB is addressing this.

Some of the highlights of the NTSB’s report, so far as Enbridge is concerned, include:

–       Enbridge’s integrity management program was inadequate.

–       Enbridge failed to train staff and failed to ensure staff had adequate knowledge, skills and abilities to address pipeline leaks.

–       Enbridge’s staff placed inadequate reliance on indications of a leak, including zero pressure.

–       Enbridge had a culture that accepted not adhering to procedures, including requiring a pipeline shutdown after 10 minutes of uncertain operational status. [This is perhaps the most damning conclusion from the report.]

–       Enbridge’s review of its public awareness program was ineffective.

–       Enbridge’s emergency response demonstrated a lack of training in the use of effective containment methods.

–       Enbridge’s facility response plan did not identify and ensure resources were available to the pipeline release in this accident.

–       Enbridge’s failure in respect of the above items were organizational failures that resulted in the accident and increased its severity.

What can we learn from Enbridge, from a governance, research and risk perspective?

–       The Board Chair, Mr. David Arledge, has served on the Enbridge board for 10 years.

–       The Chair of the Corporate Social Responsibility Committee, whose mandate includes oversight of Enbridge’s risk management guidelines applicable to the environment and health and safety, Mr. James Blanchard, has served on the Enbridge board for 12 years.

–       Mr. George Petty, also a member of the CSR committee, has served on the Enbridge board for 11 years.

–       Other countries are moving towards tenure limits for directors of 9 years, because of the effect that prolonged tenure could have on director independence.

–       Mr. Dan Tutcher, also a member of the CSR committee, was formerly an employee of a subsidiary of Enbridge.

–       The final CSR committee member, Ms. Maureen Kempston Darkes, has served on the Enbridge board for almost 2 years.

–       A majority of CSR committee members (three of four members) would be regarded as “busy” directors (generally 3 or more boards).

–       Enbridge would be regarded as a “busy” board, with a majority of directors (11 of 13 directors) holding multiple board seats (generally 3 or more), including the CEO, Patrick Daniels.

–       Enbridge’s CEO, Patrick Daniels, appears to be serving on seven other private and public boards. More than half of S&P 500 companies limit outside directorships for their CEO, a policy not widely in effect a few years ago, according to Stanford researchers.

–       Companies with busy boards tend to have worst long-term performance and oversight, according to the research.

–       Enbridge is a large board (13 directors). Larger boards tend to provide worst oversight (when company size is held constant), according to the research.

–       For the Enbridge directors serving on the CSR committee who have not worked at Enbridge, environment and health and safety (or related competencies such as sustainability) are not listed as areas of expertise within their website bios, or in in regards to committee membership, it would appear. Other natural resource companies and boards in Canada are addressing director competencies specifically. For example, “Sustainable Business Practices” and “Corporate Social Responsibility” are forming main areas of expertise or are on a skills and experience matrix.

Good boards, after the BP spill, pressed management to demonstrate how BP could not happen to them, and correct any deficiencies whatsoever, such as several of the above-mentioned items as applicable (training, resources, fatigue of equipment, crisis response, etc). Good boards insist on stress testing, crisis planning, and a comprehensive and robust risk management system. And, most importantly, there is no tolerance whatsoever for deviating from a culture of integrity, health and safety.

I taught a case last week to my corporate governance class based on Hydro One’s Enterprise Risk Management program. The role of the board and CEO is critical – if not essential – to risk culture and effectiveness. Hydro One specifically mentioned in a video I showed to my students how the company factors in transmission line aging and fatigue within a comprehensive risk management system. Workshops and stress testing occurs, within a comprehensive reporting and assurance system, right up to the board of directors.

The Process of Removing Directors

Jul 15

Posted in Shareholder Accountability | Comments Off on The Process of Removing Directors |

It is exceedingly rare for a director to be removed from a board. Only 2% of directors who step down are dismissed or not reelected, according to Stanford researchers. The vast majority of directors are re-elected and continue serving, in other words. Some directors serve on boards for up to twenty or twenty-five years. About a year ago, I counted 30 directors who served on Canada’s five bank boards for more than 9 years. Nine years is the upper limit for independence now in the UK.

A board does not have the power to remove another director, even if that director is performing poorly. If the director digs in and refuses to step down, that director must be replaced at the annual meeting. It is rare for shareholders to remove a director at the meeting if he or she is re-nominated. Only 93 directors failed to win majority support, out of a total universe of some 50,000 directors, as of recent figures.

Shareholders have limited rights to propose or remove directors. A special resolution is needed, if shareholders can demonstrate cause, to remove a director, for example. HP, Yahoo, RIM, Chesapeake Energy and Bank of America – which have lost a combined $353B of shareholder value, are good examples of the difficulty of director removal.

The effect of the above entrenchment mechanisms is that shareholders are essentially shut out of the corporate governance process. They can neither propose nor remove directors without great difficulty and expense. Protracted proxy battles need to occur to force the issue. This is a structural and systemic problem with governance.

The board really polices itself but shareholders should have a greater say, through at a minimum majority voting and not having staggered boards. Approximately half of public companies have staggered boards, which may insulate or entrench management. Each director should come up for election each year and be required to obtain a majority of all votes cast to continue on.

Second, performance of directors should be much more public so shareholders can make a more informed decision when they vote. The UK is the best here (disclosure of director performance) but much more can be done, in the US and Canada for example.

Third, a tenure limit of 10-12 years at the long end makes sense. The UK, Hong Kong and Singapore have a 9-year limit. There should be an outer limit as this would help turnover, diversity and limit entrenchment. Ten years is a good number to retain institutional memory but not have a life-time appointment. The Ontario Securities Commission (OSC) in Canada should give serious consideration to the effect of prolonged tenure on independence.

Fourth, the tenure of directors should be linked by the nominating committee to the peer review. Canada started peer review of directors in 2005 and was one of the leaders here. Now other countries are following but the next step is linking the results of the peer review to continued tenure. Boards know who the non-performers are but they should receive guidance from the OSC that it is good to link peer review to re-nomination. The OSC should also consider this, as it would address non-performance. Also, the board knows the board best.

Retirement age, if needed, could be 72-75 as the population is growing older, but boards may not need retirement ages if they have all of the above. And the research doesn’t support age and effectiveness. You can be 63 and ineffective and 74 and very effective.

So, greater performance information, majority voting, no staggered boards, a greater say by shareholders, a tenure upper limit of 10 years, and linking re-nomination to peer review, are all practices that would enhance governance transparency, quality and accountability.

 

The Penn State Report and 8 Must Dos for University Boards

Jul 13

Posted in Not-for-Profit Board of Directors | Comments Off on The Penn State Report and 8 Must Dos for University Boards |

The Penn State board of trustees did not escape blame in Louis Freeh’s 162 page report released this week. See the PDF summary here and pages 97-103 of the full report here on findings for the Board of Trustees.

The board had inadequate reporting procedures and committee structure, a poor tone at the top, was criticized for being a “rubber stamp,” and did not independently inquire and investigate.

What can university boards learn from this failure? A few things.

  1. Reduce your board size to 15, maximum. Penn State’s board was 32 members. Even the largest company boards have 12 directors on average. Larger boards tend to provide worst oversight when company size is held constant, the research shows. If you have a board this large, debate and decisions cannot occur – the board becomes ‘rubber stamp’ like Penn State’s was.
  2. Disestablish the executive committee. Executive committees dominated by university executives and a few directors creates a board within a board, which obviates the very need for the board and creates two classes of directors. It is a red flag for management control over the board. Executive committees have been disbanded in the corporate sector for this very reason.
  3. Have a rigorous code of conduct and compliance oversight, with reporting directly to a board committee. Have every university employee and key supplier sign the code and receive training on it. Have an independent and anonymous whistle blowing procedure. All good companies have these now and universities need to follow suit. Press on despite faculty associations’ allegations of breach of academic freedom.
  4. Have authority within board and committee charters to compel independent assurance and investigations, when the board or committee deems it appropriate. All good companies have this and universities do not. Penn State should have as the report states.
  5. Test tone in the middle and watch for pockets of undue influence. Tenure of 20-30 years in any position (coach, dean, director etc.) should be a red flag for improper succession planning. Insist on vacations, sabbaticals, term limits and regular leadership rotation and development for all positions.
  6. Select trustees on the basis of competencies and skills, not donations or favoritism. Restrict busy directors (3 or more directorships) as companies with busy boards tend to have worse long term performance and oversight, the research shows.
  7. Ask yourself whether all material risks (including compliance and reputation) of the university are reported and assured by the board and committee structure. Meet in executive session without management to discuss. Retain independent advisors to assist you if necessary. Insist that management implement full enterprise risk management.
  8. Lastly, insist on executive sessions where management leaves the room at every board and committee meeting. Pay particular attention to internal audit. This person should have adequate staff, resources, mandate and report directly to the board and audit committee, not management.

There are many shoes left to drop in the Penn State tragedy, including ensuing civil litigation. The vast majority of universities in my experience have not adopted the above recommendations for best practice. Many or most corporations, however, have. Universities and all educational institutions should not be immune from proper governance practices.

Train wreck RIM and its dysfunctional board: Critics weigh in

Jul 10

Posted in Direction, Strategy and Planning, Shareholder Accountability | Comments Off on Train wreck RIM and its dysfunctional board: Critics weigh in |

New RIM CEO Thorsten Heins is in denial (see “RIM CEO Welcomes Critics to Happy-Fun Rainbow Land”). Investors view the company as in a death spiral. It has lost 95% of its value and is laying off 1000s of employees. RIM is expected to be sued for misrepresentation based on this denial.

A board, however, should never be in denial. Recall one of its directors, Roger Martin, stating that there was no one who could have replaced former co-CEOs Jim Balsillie and Mike Lazaridis (see also

RIM BOARD MEMBER: Our Critics Are Idiots — We Had No Choice But To Run The Company Into The Ground). Martin was also highly critical of external criticism.

Now RIM is holding its annual general meeting this week wherein many of its current directors will be eligible for re-election.

It took the RIM board years to finally accede in 2012 to a non-executive chair (see the 8 page report here), a practice recommended in Canada since 1994. What about RIM’s directors? Did, or do, they have the right skills and competencies? Could this tragedy and waste of what was once the second largest Canadian company have been prevented? If so, how? What if the board of directors was actually effective? Drawing on posts and commentary within the LinkedIn group Boards and Advisors, some commentators weigh in.

On the composition of the RIM board, by experienced non-executive chair and activist investor Henry D. Wolfe:

“What might be the situation today regarding RIM’s performance and stockholder value if the following board had been in place:

1.           A strong non-executive chairman with a stellar track record of value creation, tough but non-autocratic leadership skills and a mindset of high expectations and shareholder value maximization. This individual would be the key to ensuring that board functioned with shareholder value maximization and management accountability fully at the forefront. In other words, he or she would provide the leadership and tone that brings the specific expertise of the directors into focus for the shareholders.

2.           Two marketing executives with the track record and experience that would be in alignment with RIM’s needs. The key here is not just marketing experience and track record but the specific type of marketing experience that is directly relevant and of value to RIM.

3.           Two technology executives with the track record and experience that would be in alignment with RIM’s needs. The key is the same here as noted above for the marketing oriented directors.

4.           One or two partners from a hedge fund like ValueAct Capital. ValueAct is an activist hedge fund that takes a cooperative approach with boards and management after making an investment and usually seek one or two board seats. They focus on technology companies and bring very sophisticated and exceptional value maximization skills to the boardroom.

5.           One or two additional directors selected based on other strategic or operational needs of RIM not addressed by the marketing and technology directors.

In other words, what if the board was selected based on RELEVANT skills (including value creation skills), expertise, track record and direct ability to add to the performance and ultimate value of RIM?”

On distancing RIM from its past, by CEO and non-executive director Lucy P. Marcus:

“RIM needs revolution, not evolution, and yet it has chosen to replace its co-CEOs with a company insider, Thorsten Heins, one of RIM’s two chief operating officers. While this may provide some continuity, what RIM needs right now are fresh eyes and ideas.

RIM’s newly appointed independent chair, Barbara Stymiest, has been on the board for five years, and though she comes with strong credentials, she may be too closely associated with past failures to be truly independent.”

On RIM’s governance review report, by former Federal Cabinet Minister and Member of Parliament, the Hon. Joseph Volpe:

“…a seven month gestation to produce an eight page, pro-forma note reflecting Management’s concession to the minimum requested by the Marketplace! As I read the report, the Board implicitly accepts the very passive role in the affairs of RIM that Management has assigned it. Perhaps, sadly, both Parties are right. The Co-CEOs developed a product, marketed it and created great wealth in the process for all involved. The Board, created and dominated by the Co-CEOs basked in that credit.”

On RIM’s current weaknesses and failings, by futurist, director and advisor Frank Feather:

“RIM was and is a one-trick pony. That is okay, so long as it keeps its innovative edge. But it also needs to seek out adjacencies to build other revenue streams, as Apple has demonstrated. …

But relying on technocratic founders and like-minded COO, the company stayed with its one-trick pony and even became complacent that growth and market leadership would continue forever – the mark of arrogance or laziness.

It is easy “not” to make decisions when things are going well. But not rocking the boat can be the worst risk, as has transpired. Again, the Board is at fault here.

As well, of course, flush with money, the founders went off on tangents, aspiring to acquire a sports franchise. Even if that had been successful, I doubt it would have brought any adjacent revenue to RIM. Meanwhile, the technical focus of RIM became negligent, as eyes and minds of the CEOs went elsewhere. The Board should have reigned them in and told them to focus on business or they would replace them as CEOs. The Board failed to act on this matter, and it greatly contributed to the company floundering.

So there is a long list of Board failings.

…I suggest that RIM would be an entirely different company today, with still a leading-edge product, indeed with a stable of complementary products, also with adjacent service revenues of some major significance. It would have been a slick value-generating machine.

RIM had (still has, IMHO) two major weaknesses: a weak Boardroom team, and a weak management team, with management leading the Board by the nose, and was short-sightedly focused on tweaking existing technology rather than creating new game-changing appliances and services. It is a class is case of myopia, and poor team development.”

On implementing major change, the role of the Chair, and CEO succession, by Henry D. Wolfe:

“When major change is needed, restructuring the board should be the FIRST step. I can speak to this first hand as my business focus has been and continues to be on dealing with under-performing companies. After an initial in-depth analysis, the first step is always a restructuring of the board before any further action is taken. Although there is more complexity involved than this comment section will allow, said simply, if you get the board right and laser focused on performance and value maximization, then all else will cascade down from that level. …

The big question regarding Stymiest is whether or not she has what it takes to LEAD and all that that implies. Will she be able to lead the board, including the necessary restructuring to turn around the company and ensure value maximizing strategies are evaluated and executed? Will she be tough enough to lead the board to hold the CEO and his team accountable for results? Will she be aggressive enough to ruffle feathers among incumbent directors to the degree needed? Will she be able to reverse the management driven nature of the board? …

One major flaw jumped out in Stymiest’s comments. The “succession plan” was developed by the former co-CEO’s rather than the board. The former co-CEOs initiated the execution of this plan, not the board. Her comments about independence of the board (and again, independence is overrated) ring hollow. As I suggested in a previous post re RIM, this is nothing more than a shuffle; it is not the shakeup that was needed. With a few exceptions, board made up of “corporate” people are incapable of a real shakeup.”

What are the chances that the above changes and reforms will occur? It is highly unlikely that they will if many or most of the current RIM directors are re-elected this week. What is needed at RIM is the avoidance of denial by the board; a demonstration of leadership; and directors with the relevant skills, experience and track records to restore value for shareholders.

Eight Traps of Boardroom Diversity

Jul 9

Posted in Diversity, Women on Boards | Comments Off on Eight Traps of Boardroom Diversity |

There are myths and vested interests in the movement towards boardroom diversity now underway in several countries.

In this first of two blog posts, I consider the “traps” and embedded myths. In the second blog post to follow, in about a week’s time, I will propose solutions.

Here are the eight “traps” as I call them.

 

1.         The “Defining diversity downward” trap

“Diversity” itself as a word is used to shape the debate. Australia has a succinct definition: “‘Diversity’ includes gender, age, ethnicity and cultural background.” If diversity is undefined by a regulator (such as in the US), or there is inadequate guidance provided to companies, then companies can define diversity to suit their own agendas, such as diversity of “perspective” or “training” or “educational background.” This leads to the unintended consequence of a board of almost all white males claiming itself to be diverse when it is not. To drive this point home, I usually post a cartoon of white males sitting around a board table stating that they believe they are diverse because they attended different private schools.

“Moving the Needle,” which is the subtitle for the diversity debate favored by a few groups, is another example suggesting minimalist change.

“Competencies” and “attributes” (or qualifications for directors) also need to be defined and disclosed more fully, on a director-by-director basis, because these criteria for director selection have implications for the diversity movement. “CEO,” for example, is not a competency. (See the “We want a CEO” Trap below.)

2.         The “Business case” trap

“Show me the business case,” opponents to diversity argue, and proponents attempt to advance. The fact is that peer-reviewed empirical evidence is mixed in the effect that adding women to boards has upon corporate financial performance, as is the effect of boards themselves upon financial performance. Engaging in this debate is a distracting non-winning proposition. Perhaps the business case for men sitting on boards should also be established. The case for diversifying boards should be based on the effect on debate and decision-making within the boardroom, and on the full use of available talent and equity arguments (read: it is the right thing to do), not on downstream financial outputs.

3.         The “Be careful” trap

When women directors are advanced, a response received is “Be careful, as we need qualified directors” (or words carefully spoken or written to this effect). This assertion lacks any empirical support whatsoever. It was offered in Quebec when the Premiere mandated that women must receive parity on Quebec boards and the cultural make up must match that of communities in which the company operates. Proponents of this myth should bear the burden of establishing how women or minority directors are not “qualified” to sit on boards, and indeed what it means to be “qualified” to sit on a board.

When visible minorities as directors are advanced, such as African, Hispanic/Latinos and Asian Americans (whose proportion on boards are in the 1-3% range depending on the survey), the other “be careful” argument I receive is, to use the words of an Assistant Secretary of a large US company “corporate boards should not be designed to be all things to all people. It’s not necessarily in the best interest of a company to try to make the board look like the General Assembly of the United Nations, the U.S. Congress, or U.S. Supreme Court.”

My response to arguments like the above has been: “Listen, the numbers have flat-lined for women and minorities at 15-16% and 1-3% respectively for some time, so if and when boards look like the UN or we have too many women (which will likely never occur in my lifetime), then we can talk about hypothetical arguments. Until then, let’s confine ourselves to the evidence and the here-and-now. And, having multi-culturally diverse boards looking more like communities and emerging markets is especially important if a multinational company does business around the world.

4.         The “Entrenchment” trap

Stanford researchers content that only 2% of directors who step down are dismissed or not re-elected, out of a total universe of 50,000 directors. In other words, 98% of directors retire voluntarily. This needs to change so there is greater board renewal and turnover. Term limits of nine years are now instituted in the UK, Hong Kong, Singapore and Malaysia. North American regulators should consider the effect that prolonged tenure has on director independence. Director tenure should be based on performance and it should be easier for shareholders to nominate and remove directors. Any board policy restricting entrenchment should not contain “grandfathering” (exempting existing directors) and should be decided by disinterested directors (and preferably shareholders) unaffected by the policy and free from undue influence of other directors or management.

5.         The “We want a CEO” trap

The expressed preference for CEO-directors (current or former) is based on a myth unsupported by research that CEOs make better directors. (It may be that CEOs prefer like-minded and sympathetic supporters.) Giving primacy to CEOs also has the effect of excluding diverse directors.

According to a study, 80% of directors believe active CEOs are no better than non-CEO directors. CEOs tend to be stretched, bossy, poor collaborators, and do not listen. Research also supports tenuous advantage of CEO-directors. Also, only 46% of directors believe former CEOs are above average.

“We want a CEO” may be “code” for women or minorities need not apply.

6.         The “It’s whom you know” trap

According to course materials I am using in my Harvard corporate governance course this summer, unlike executive recruitment, where interviews occur of a short list of candidates occur prior to making a choice, in director recruitment, candidates are instead ranked (1, 2, 3 and so on), and NOT interviewed. But rather, the first candidate is approached for a board position. The second and third candidates are approached only if the preceding candidate said “no.” There is no clear rationale for this anomalous recruitment practice and it has the unfortunate effect of excluding unknown but highly qualified candidate directors. It forces women into hyper-network mode because no interactive validation of competencies exist or opportunities to meet the nominating committee. This unfortunate practice perpetuates the “it’s whom you know,” mentality towards board directorship, rather than one’s competency and skills. Everyone loses when directorship is based on patronage, favors or nepotism. The board is weaker as a result.

7.         The “Prior experience” trap

There is no evidence of which I am aware confirming that first-time directors are less effective than long-serving directors, or the that the latter are more effective. The focus should be on underlying competencies and attributes and track record of accomplishment. See “Traditional benchmarks keep many women off boards…” Governance is a learned sport, just like anything else. And it is not rocket-science. The fact of the matter is that search firms and nominating committees should focus their efforts on validating and assuring competencies and intrinsics necessary to be a good director, such as integrity, leadership, mindset, industry track record, value creation process, shareholder representation and culture of equity ownership, communication, commitment and specific functional skills needed by the board – and not on an arbitrary metric of prior experience that may or may not relate to the above. The sooner this occurs, the better.

8.         The “Pipeline” or “Shallow pool” trap

Women have not made it to senior enough levels and the director talent pool is too shallow, is the final myth. Show me the evidence that this is the case. Perhaps boards are not looking hard enough. In my experience, which includes resume and profile assessment of some of the most senior C-suite women in North America, many of these candidates are markedly superior to the lesser-qualified incumbent directors. Perhaps the “pipeline” is full with qualified director candidates, and it is a mindset recruiting issue more than anything. As Deepak Shukla writes, “From my experience, every time I have attempted to start a discussion thread on the Institute of Corporate Directors’ group (mainly comprised of sitting board directors) on the subject of diversity, I have been greeted with a cold shoulder and an utter lack of responses!”

Join my blog next week where I will propose solutions to address the eight traps above, and action that should be taken by shareholders, search firms, nominating committees, industry associations and regulators to propel boardroom diversity into action.

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