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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]

Should Barclays’ Former CEO receive £17M in Compensation After the Libor Rate-Rigging Scandal?

Jul 8

Posted in CEO, Organizational Performance and Compensation, Governance of Financial Institutions | Comments Off on Should Barclays’ Former CEO receive £17M in Compensation After the Libor Rate-Rigging Scandal? |

Compensation drives behavior. As reported in The Telegraph, the Barclays’ board of directors intends to “ask” former CEO Bob Diamond to “cut” part of his £17M pay package in the aftermath of Diamond’s role in artificially suppressing the rate at which banks lend money to each other (otherwise known as the London Interbank Offered Rate, or “Libor”). There is an ensuing parliamentary inquiry into conspiracy by other banks to rig the Libor rate. Sky News reports, in “Lawyers In Barclays Bonus Battle,” that “investors have been warned that the bank faces a battle to fully withhold bonuses owed to Bob Diamond and Jerry del Missier, two top executives who quit the bank last week.”

There should be no “battle” and no need for the board to “ask” the CEO to relinquish compensation, given what happened, if the board is doing its job. The compensation (cash and stock) should not have been awarded or vested to Bob Diamond in the first place, if the Barclays’ board (and other bank boards) is complying with the Basel Committee on Banking Supervision’s guidance.

Boards have wide leverage to align ethical conduct and internal controls with executive compensation far more aggressively than they appear to be.

There are two main tools: “clawbacks” and “malus.” Clawbacks, mandated by Dodd-Frank in the US, are more popular, but are inferior to malus. Clawbacks means the cash and equity vests to the executive, and depending on risk and performance factors, the compensation committee has an uphill battle to recover (or ‘claw back’) the compensation it already awarded to the executive. The executive no doubt will contest such efforts.

In contrast, “malus,” which is recommended by the Basel Committee on Banking Supervision (“Basel”) (see the May 2011 report here at pages 37-39), means that the awarding of cash and vesting of stock in the hands of the executive does not occur until and unless the compensation committee says it does. This type of discretion is exactly what management does not want, which is discretion in the compensation committee’s hands. Basel however maintains that malus clauses are more feasible to implement or enforce than are clawbacks. And they are right. Basically, with clawbacks (e.g., Barclays), the board has to pursue the executive for compensation already paid, whereas malus means the board has discretion to make the award in the first place. The board can wait to see if there are any “hidden” risks (e.g., Barclays’ Libor scandal, JP Morgan’s derivative loss) or performance effects that have yet to be fully realized.

Barclays is reported to have a clawback provision, as to many of the major banks, but it is unclear whether banks also have malus clauses. If not, they should.

The clawback and malus clauses should not be drafted by an internal or external legal or compensation firm or person who serves, or has or intends to serve, management. (Otherwise there is no independence and the clause will have a low bar and be management friendly.) The malus and clawback provisions should be drafted by an independent, expert service provider retained by and accountable to the board.

Basel offers guidance on provisions that leading banks have used within malus clauses, including: (i) breach of the code of conduct (this occurred with SNC Lavalin’s former CEO) and other internal rules; (ii) compliance with risk protocols and a qualitative assessment of risk by the compensation committee; and (iii) a violation of internal rules or external regulations.

If the board doesn’t have a proper clawback and malus clause, there will be no shared understanding and alignment of behavior with compensation.

In short, if the board wants an executive to focus on ethics and commit the resources necessary to have proper internal controls and prevent management override, tie his or her compensation to these outcomes – before the fact, and retain discretion at all times. Doing this – which executives will resist – will focus executives’ minds to do what is right as their money is on the line. This is exactly what regulators want in the aftermath of the financial crisis. And clawbacks and malus clauses for banks will likely migrate to non-banks as all companies will be expected to have risk-adjusted compensation in the future.

Shining a light on NHL governance and concussions

Jun 15

Posted in Uncategorized | Comments Off on Shining a light on NHL governance and concussions |

Hundreds of former players are suing the National Football League and equipment manufacturers for head injuries and other damage, saying concussion data was ignored by the league and it had a duty to protect players.

This litigation could be precedent for a similar lawsuit against the National Hockey League. Concussions and the associated neurological damage are a problem in Canada’s game – “the fastest game without an engine.” The players and equipment are bigger, faster, stronger and harder, but the rinks and rules of the game have not kept up. And we have credible medical evidence now that we didn’t have before.

For examples of concussion damage, see “Concussion numbers were staggering in NHL’s 2011 and 2012,” the YouTube video “Suffering in Silence: NHL concussion issue,” more press here and here, and USA Today’s “NHL concussion tracker” (with 100 pictures).

See just some of the medical evidence here, and Peter Mansbridge’s coverage of the “Brain Lab That Could Change Hockey.” And, as many hockey fans know, Sidney Crosby’s performance may never fully recover from hits to his head.

The question is, is the NHL’s Commissioner, Gary Bettman, listening? What about the board?

Sporting governance is shrouded in mystery. Transparency International, in “Corruption and sport: building integrity and preventing abuses,” writes,

“There is generally a low level of transparency in many sport associations when it comes to publicly sharing information and documentation. This often linked to the disclosure practices of team owners — who are often individuals or companies. This characteristic is troubling given the process for making internal decisions and conducting elections in national and international sport organisations. Board members of international federations as well as members of working committees are often expected to vote unanimously, with dissenting votes not registered in the minutes. Such practices prevent any real accountability, both for the boards and for sport in general.”

In analyzing boards, I scrutinize the governance practices of the organization, compared to best practice, and how decisions were made, or not made. Here are just some issues I see with the NHL’s governance:

  • Gary Bettman has been NHL Commissioner (which means “CEO”) since 1993. A tenure of almost 20 years for any CEO is highly anomalous. I would want to know the NHL Board’s plans for CEO succession, and whether it meets in closed session to discuss succession. I would also want to see Mr. Bettman’s position description, which is common now for CEOs.
  • Mr. Bettman’s salary was, according to the National Post, US$7.5M for the year ending June 30, 2010. It was 3.7M in the 2004-05 season. Here, I would want to know how Mr. Bettman’s salary and incentive structure is set by the Board, what the performance metrics are (e.g., expansion, relocation, revenue targets, growth rates, television and radio metrics, etc.), and whether the metrics and compensation are risk-adjusted, including health and safety. I would, in short, examine how Mr. Bettman’s compensation drives his behavior.
  • Every board has to identify and oversee risk. Here I would want to know the reporting and assurance protocols the NHL Board used and/or rejected for incorporating medical evidence for concussions in its oversight of management, rule-setting and strategy for the league.
  • Every board has to have a reporting and accountability structure independent of executive management. Here I would want to know why the Board meets only twice a year (see “NHL’s secret constitution revealed”), what independent directors sit on the board, what the reporting and decision-making structures are, how rule-setting occurs, and the independent assurance and internal controls over player safety and league reputation.
  • Lastly, I would want to know why there is minimal at best disclosure over governance on the NHL website. There are opportunities for development in this regard.

As the lawyers allege in their statement of claim suing the NFL:

“The NFL, like the sport of boxing, was aware of the health risks associated with repetitive blows producing sub-concussive and concussive results and the fact that some members of the NFL player population were at significant risk of developing long-term brain damage and cognitive decline as a result,” the complaint charges.

“Despite its knowledge and controlling role in governing player conduct on and off the field, the NFL turned a blind eye to the risk and failed to warn and/or impose safety regulations governing this well-recognized health and safety problem.”

We will see how this lawsuit plays out. In the interim, perhaps we might consider that the game might be better served by those who lead it coming to grips with advancements in medical research and what it is telling the sport about how the game is being played. Perhaps there are better governance practices in particular that could be put in place in order to help the game thrive in the future.

Labatt has a right to protect its brand and image

Jun 9

Posted in Uncategorized | Comments Off on Labatt has a right to protect its brand and image |

Let me defend Labatt for a moment. A media outlet – or anyone else – cannot as a matter of law publish a photograph containing a Labatt product or logo without permission of the trademark owner, and certainly not a photo with a Labatt product being held up by an accused killer whose picture is now recognizable all over the world.

The association and brand impairment is unambiguous when you see the picture. The accused is holding up the beer bottle tilted towards to the camera, where the Labatt label is front and center and unmistakeable. Labatt would be fully within its rights to seek an immediate injunction enjoining further publication of the photo and suing for monetary damages to its brand. I am surprised it has not done so already.

Labatt – and any other company – has the absolute right to protect the unauthorized publication of its trademark brand and image. For beer companies in particular, they spend millions of dollars in advertising and marketing. In the age of social media, where hashtags are a click away, satire and humor does not excuse the original impairment. The original publication could have been cropped or blurred out without the Labatt product appearing, or another photo could have been used. The fact is the beer, with the bright blue color and label, made the photo immediately more recognizable and viewed. It was included for this reason, with the media outlet with broad circulation trading on reputation and brand it does not own.

Shareholder Spring and A New Model of Corporate Governance

Jun 1

Posted in Shareholder Accountability | Comments Off on Shareholder Spring and A New Model of Corporate Governance |

Shareholder activism at CP Rail, Yahoo, Research in Motion, Chesapeake Energy and BMC Software continues, trying to prevent the destruction of billions of dollars of shareholder value. Shareholders rejected Citigroup’s, Aviva’s, Knight Capital’s, FirstMerit’s and Cairn Energy’s executive pay packages. Activists and hedge funds such as Bill Ackman at Pershing Square, Dan Loeb of Third Point Capital, Vic Alboini at Jaguar Financial Corp., Paul Singer at Elliot Management and Carl Icahn reveal defects in the current corporate governance system. What do they all have in common? And are boards listening?

I wrote in an earlier blog that Canada’s current governance guidelines from 1994 and 2005 are outdated. They, as well as other guidelines, underemphasize value creation, shareholder accountability and competencies of boards. My LinkedIn group, Boards and Advisors, drawing on the above shareholder activist cases, the success of private equity governance, and experiences within our group, developed over several dozen posts and other writings a ten point model of reform for public company boards. The model can be downloaded here, and will be summarized below. Boards would be wise to take note in creating value for shareholders.

1. Value Creation and Maximization: The board, led by the Chair, should set the standards for a vigorous value creation process, establish ambitious value creation criteria, and lead management to develop an optimal value creation plan. The board should approve the plan and its milestones, monitor progress regularly, and call for prompt corrective action to ensure goals are met, including increased goals as new unplanned/unanticipated opportunities arise.

2. Hold Management to Account: Reporting format and information flow should provide frequent, timely and accurate information to the Board on plan progress and any variances. Boards will need to be smaller and meet more frequently. Management must provide concrete responses on how shortfalls will be corrected, by whom and when.

3. Pay for Performance (and only performance): The Board should establish value creation plan execution to simple, straight-forward performance metrics so there is no ambiguity, as to management and shareholders, between management wealth creation and the performance and increase in equity value of company. Pay should be straight-forward: with a concrete timeframe; with substantial but reasonable/proportional-to-performance reward to the CEO; with a long term period; with high hurdles (e.g., earnings growth %, revenue growth %, return on equity %); and with one of the targets relating to performance of company to greater market. The CEO should receive a portion of grant for performance below target, but a high threshold should be in place below which CEO receives nothing.

4. Ethic of Personal Responsibility: Directors should put themselves and their personal interests and resources at risk for the ultimate good of company and collective interest of all shareholders. Conflicts of interest and related party transactions should be managed transparently and rigorously.

5. Active Investing in the Boardroom: Each Director should purchase shares directly from personal funds commensurate with his or her savings capacity. Shareholders or their designated appointees should be represented on the Board.

6. Selecting the Right Chair: The Chair should be selected, with shareholder approval, on the basis of mindset, leadership, an understanding of value creation process and the capital markets, the ability to view things holistically, an ethic of accepting personal responsibility, industry experience, and no desire for the CEO role. The Chair, next to CEO, is probably the most important decision a board makes.

7. Selecting the Right Directors: “Independence” of Directors should have an objective as well as a subjective basis (e.g., not just judged from board’s perspective, but from reasonable person standard). Directors should be selected and assessed on basis of industry experience and track record, value creation process experience and mindset, shareholder representation and a culture of equity ownership, entrepreneurial culture, and specific functional skills.

8. Board Engagement: A robust debate and review of plan execution should be a primary board meeting agenda item. Regular and robust communication between the Board and executive team, including open communication below the senior management level, in large part should not focus on “oversight” but on engaging others in the organization in regard to their role in the company’s business and value maximization plan.

9. Shareholder Accountability: Regular director-shareholder contact (in person and electronic) should occur absent management. Each director should be elected each year by a majority of votes cast. Shareholder nomination of directors, with thresholds and holding periods, should occur to enable nomination and recall of Directors by key long-term Shareholders.

10. Monitoring and Compliance: Independent assurance should be provided to the Board over all material risks and internal controls. All risks, not just financial, should be identified and assured.

When you look at each of the situations that shareholder activists involve themselves in, every one of the above 10 reforms have been inadequate by all of the boards collectively of the above companies. Further, a private equity form of governance, on which the above is based, has been shown to result in three times the enterprise value of public company peers.

There are numerous other public companies that are similar to the most acute identified above.

Governance reform will not be solved by more regulation focusing on compliance or trying to prevent failure. Governance reform needs to be shareholder-driven and focus on success.

Bribery, Cyber-Security and Derivatives: Is Internal Audit up to the Task?

May 25

Posted in Audit Committee, Risk Governance and Combined Assurance | Comments Off on Bribery, Cyber-Security and Derivatives: Is Internal Audit up to the Task? |

Do internal auditors have the resources, skills and authority necessary to do their job? I wonder. I was asked recently to be an expert witness in an alleged bribery case. Internal audit is one of the first places I look to when assessing governance failure because they are the eyes and ears of the board.

I asked a question recently at two auditing conferences I spoke at. How many auditors use Twitter? In both cases, only one hand went up. Yet we know cybercrime is widespread, is under-reported, and management may not even know it is happening. It is a top concern of boards. How can internal auditors assure internal controls – not only over cyber-security but social media – when they themselves may be technically illiterate? IT literacy and data mining were two of the top skills required by internal auditors in a recent survey.

What about derivatives used by traders? How many auditors understand the use of derivative products such that they can attest to the internal controls over their use? The responses I received from my audiences were not encouraging.

What about corruption risk? How do auditors treat working notes, delegation to foreign auditors, language barriers, and do they even understand foreign practices? Do they visit the jurisdiction or audit from an office in Canada? The OSC came out with a scathing report recently about emerging market risks, chastising not just boards but the audit and underwriting professions.

What about fraud? Evidence from the conference board is that many whistle-blowing programs don’t work and aren’t used. Now whistle-blowers can go directly to the SEC in Washington, completely by-passing possible retaliation, flawed investigations or toxic workplaces.

Auditors cannot choose which internal controls they validate. Regulatory authorities are clear: every activity of every entity should fall within the scope of the internal audit function. This includes compensation structure of risk-takers. Combined assurance over all material risks should be undertaken.

Management may have vested interest in starving internal audit or compromising their objectivity with management responsibilities. Regulators have been clear here also: auditors, both internal and external, must maintain their independence from audited activities. They cannot assess their own work.

If the internal audit function is weak, or the chief audit executive does not have the experience or stature, or management disregards internal audit findings, this is the fault of the audit committee and the board. The audit committee should approve the head of internal audit, his/her compensation structure, the budget, work-plan and most of all the independence of the internal audit function. If the audit committee and ultimately the board does not ensure this, it is not doing its job. When or if governance failure happens, scrutiny will follow.

Derivatives May be Ungovernable

May 18

Posted in Audit Committee, Integrated Reporting and Accountability, Risk Governance and Combined Assurance | Comments Off on Derivatives May be Ungovernable |

The recent loss of 2Billion dollars by JPMorgan confirms what is now a blindingly obvious governance reality. Board of directors do not understand derivatives and cannot control management’s use of them. The same may be said for regulators.

One job of a board is to identify risks and ensure a proper system of risk management. If you cannot do this, you should not be on a board. This means that a director needs to assess the adequacy of the design and effectiveness of internal controls to mitigate the risks. Of the over 300 interviews I have undertaken in my research, including directors of large banks, only one director claimed to understand complex derivatives. How can directors assess internal controls when they do not understand the very instrument itself?

Other than Jamie Dimon, CEO of JPMorgan, not a single director of the board has any experience in banking. See the roster of directors here. Even if some directors were from the sector, it is debatable whether they would still understand the complexities of these products. For a basic explanation of what derivatives are, see here. U of T Rotman professor John Hull, a derivatives expert, has stated in an email to me “There is no question in my mind that a large financial institution should have on its board people (perhaps 2 or 3) who understand derivatives and other complex financial products.” Unless bank boards that oversee derivatives are prepared to have subject matter experts on their board who can effectively question management and insist on proper risk controls, other governance or oversight structures are needed.

Not only are boards incapable of controlling derivatives, but regulators may not be any better. Warren Buffett has said “Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” See Warren Buffett on Derivatives.

The question is what have we learned from 2008? Banks are bigger than ever, with most American mortgages concentrated in only a handful of banks, yet the risky bets and use of complex derivatives continue. Harvard law professor Elizabeth Warren yesterday called for a new version of the Glass Steagall Act. Yet independent Senator Bernie Saunders pronounced that Wall Street “runs” the Senate, implying that any attempt at further regulation would be forestalled. Mitt Romney has vowed to unwind Dodd-Frank on his first day as President. Look at the long list of political donations made by JPMorgan in 2011, here. And this is just one bank.

If derivatives are going to continue, regulatory conflicts of interest need to be addressed and boards need to have the directors with the expertise to oversee them.

The Battle for CP ~ Welcome to the Great (and Cozy) White North, Mr. Ackman

May 17

Posted in CEO, Organizational Performance and Compensation, Global Corporate Governance, Member Selection, Competencies and Commitment | Comments Off on The Battle for CP ~ Welcome to the Great (and Cozy) White North, Mr. Ackman |

By now, you may have heard that Canadian Pacific CEO Fred Green, Chairman John Cleghorn, and four other CP directors have resigned or will not stand for re-election, to make way for Pershing Square’s Bill Ackman and a new slate of CP directors – and a new approach to corporate governance in Canada.

The Pershing Square bid is the perfect storm for what is wrong with Canadian corporate governance: (i) the lack of attention to strategy; (ii) the lack of shareholder accountability; and (iii) the lack of directors with domain expertise. It represents a tipping point for any board in the way it does – or should do – business in Canada.

Lack of Attention to Strategy

The “Dey” Guidelines are now almost 20 years old. They are outdated. Much has changed in corporate governance. Canada needs revised and updated guidelines to the 2005 National Policy, which incorporated many of the Dey guidelines. The Dey guidelines from 1994 contain six words on strategy: “adoption of a strategic planning process,” which is inherently ambiguous. The 2005 National Policy is not much better, adding that the board must approve a strategic plan at least annually. (Emphasis added).

This approach to strategy is wholly inadequate, and the consequences are obvious. In an Institute of Corporate Directors session I facilitated of ninety-four directors last week, when a question on the board’s role in strategy was asked, two panelists deadpanned “we do it in a superficial way” and “it doesn’t happen.” Boards have become obsessed with compliance at the expense of value creation for the company and shareholders.

The research – from Ernst and Young, Egon Zehnder and McKinsey for example – confirm that a more engaged board under a private equity governance model will outperform their public company peers, by a factor of three to one. This outperformance under a Bill Ackman model cannot be ignored by public companies. For academics who desire to show a more causal link between governance and performance, as do I, it should not be ignored either.

The deep dives and due diligence conducted by Pershing Square – over 100 pages in total – should be conducted by boards if they are doing their job, and wish to keep hedge funds from knocking at their door. But there is code like “nose in fingers out” or “micro management” used by Canadian CEOs and directors themselves that keeps directors from performing their strategic role.

The evidence of CP is a case example: Seven COOs and CFOs were replaced in the last five years; CP has consistently underperformed across its peers, including its Operating Ratio; and yet CEO Fred Green met 17 of 18 objectives set by the CP board. And the board moved those targets, resulting in the cost of management as a percentage doubling.

Public company boards need to be much more engaged in strategy, and demanding of management. As reported in the Journal of Applied Corporate Finance, value may be “left on the table” ~ which would invite sophisticated investors like Bill Ackman to come in.

I have reviewed public and private plans by activist shareholders and private equity firms and there is no comparison to the often “superficial” (to use a word from above) approach to strategy typically taken by public company boards. There is absolute clarity under private equity what management is held responsible for, and variances to be reported in advance to – and understood by – the board. Boards of this caliber are much more engaged and focused on shareholder value. No stone is left unturned.

Lack of Attention to Shareholders

Second, many public boards in Canada do not meet directly with shareholders, or if they do, it is behind closed doors – the “cozy” Canadian way. Bill Ackman did not accept this and was unwilling to compromise or go away. This cozy environment has to change, including shareholders asserting themselves much more. And lawyers cannot unduly influence this communication.

Most importantly, Canadian shareholders should have proxy access, or the right to nominate directors of their choosing and put those directors on to the proxy circular, which is another American development that makes sense. It should not take Pershing Square, a 14% shareholder of CP, CP’s largest, a long, protracted, expensive proxy battle to implement governance change. Vote counting, majority voting, plurality voting, etc., are window dressing. Shareholders should have the right to nominate directors to boards and fire directors who do not perform, with ease and transparency. The threshold should be low, or even based on the company’s largest shareholders.

In addition, Canadian directors need to have a % of their net wealth at stake in the boards on which they sit, for true shareholder accountability and alignment. This does not mean directors receiving shares for board service, but actually issuing a check from their savings. The CP board owned 0.2% of stock and it was given to them, not bought. If one director, had $100M of his or her own wealth invested, the CEO would be replaced, Pershing Square said.

Lack of Attention to Domain Expertise

Lastly, the entire board of CP, other than the CEO, did not have rail experience prior to Pershing Square’s involvement. This is a direct consequence of the Dey guidelines from 1994, even though the research does not support independent directors and firm performance. The reason is that if directors do not understand the business, or industry, they are under-engaged in strategy and even their ability to monitor is compromised. They don’t understand. Look at the board of JPMorgan, which lost $2B last week. Other than the CEO, not even a single director has banking experience. If a director does not have experience in the sector, they cannot identify the risks.

Pershing Square’s directors have been selected on the basis of railroad expertise, restructuring expertise, shareholder representation, entrepreneurial culture and a culture of equity ownership and shareholder value creation. What a breath of fresh air. Boards would be wise to take a page from the Bill Ackman playbook, or shareholders should themselves.

And, most of the above Pershing Square directors are from Canada. The notion that we have a talent shortage is a myth. If the board’s desire is for a “CEO,” then there may be a shortage, but the evidence from Stanford University is that CEOs do not make better directors. There is plenty of talent in Canada, and boards need to reach into the C-suite and into shareholder communities. And they need to diversify to mitigate groupthink. The directors exist. My own database contains hundreds.

The Need For New Guidelines

Shareholder accountability, strategic engagement, and director experience and skills, all point to shortcomings that are non-existent or short-changed in the Canadian corporate governance landscape. This is exactly what Bill Ackman brings to the table. Welcome to Canada, Mr. Ackman.

Harvard and MIT Innovate: Rest of HigherEd Should Take Note

May 4

Posted in Teaching and Education | Comments Off on Harvard and MIT Innovate: Rest of HigherEd Should Take Note |

Something happened this week in higher education that you may have missed. Harvard University and Massachusetts Institute of Technology (MIT) teamed up to announce a $60M investment in “massive online courses,” known as edX. This initiative was said by the Atlantic to be “The single biggest change in education since the printing press.” In this nonprofit venture’s pilot course on “Circuits & Electronics” developed to test the market, there were 120,000 students. 120,000! Signing up for electronics! There were more students registering for this single online course than MIT’s entire entire alumni base, it was said in a press conference attended by both university presidents and the press. See the impressive video here.

Technology has come a long way in the last five years. Platforms are not clunky, but enjoyable, robust and user-friendly. Just as boardrooms are becoming paperless, through the use of portals and tablets, so should classrooms. However, more change is coming in the delivery of learning and access to global students in emerging markets. For universities, this means competition is now global, beyond the bricks and mortar of their campuses. Of course, companies compete globally already, but boardrooms too will change. Global directors will be able to participate in board meetings without leaving their home country, and without a decline in meeting quality. Shareholders will have access to boards and companies directly through their computers or even smart phones. Technology makes interactive, instantaneous communication and voting possible in ways we may not even imagine.

Do the numbers bear out a $60M investment in online learning and digital media by Harvard and MIT? Consider this as a real sample: I am scheduled to teach Corporate Governance this summer at Harvard University. The course currently has 33 students enrolled. A governance course I taught last year at Osgoode Hall Law School also had 33 students. A course I taught to undergraduate law students had only 6. However, my LinkedIn group, Boards and Advisors, now has 2,689 members and is climbing at a rate of 7-10 new members every day. We are not constrained by class size. We have group members from the Securities and Exchange Commission, the Office of the Superintendent of Financial Institutions, and Industry Canada (in the past week). I post everything I read and interact with members on a daily basis, facilitating discussions, stimulating peer dialogue and insight, and ensuring the proper tone. This group has more members than even those of the National Association of Corporate Directors in Washington and the Institute of Corporate Directors in Toronto (at 2,043 and 1,293 members respectively). Directors thirst for content, dialogue and networking, all of which occur in this group.

Consider this too: Of the total universe of corporate directors, most do not attend in-person conferences at director associations or universities. It is too costly and not a wise use of their time. At the NACD annual conference, about 800 directors attend. But there are 10s if not 100s of thousands of directors on public, private and nonprofit boards, within the US alone. Would these directors want to have access to learning that was convenient, interactive and customized to them, at a reasonable price? Hmm, I wonder.

Harvard and MIT are banking on the fact that students in India, China (with 100s of millions of people and ~ 8% growth rates) and all over the world will use home and office computers to take their courses, without having to come to Boston as residential students. They are investing in a nonprofit venture to ensure robust platforms, customized learning to suit each student, processing of big data and tests in real time (which will assist research), and internal controls over academic integrity – all with a view to come as close as possible to the classroom experience in real time, and in some respects superior. Even instantaneous language translation may be possible. Mouse or cursor analytics tracking may tell teachers and researchers how students learn and what works and doesn’t. Courses will be free and universally accessible, but eventually users may likely pay. Certificates and degree programs are also possible.

Speaking of brand and the ability of universities to deliver online education, it is also debatable whether private companies or associations are best to deliver education. They may be conflicted with service providers who pay-to-participate in programs, which affects the curriculum. Private for-profit companies may not devote resources keep platforms or curricula current, or ensure internal controls over marking and integrity. The best programs may ultimately be academic-practitioner team-teaching where the academic brings rigor and proximity to research, and practitioners bring real world experience.

This movement by Harvard and MIT is a game changer that signals potential obsolescence of traditional educational delivery that refuses to change. But it also points to governance shortcomings of universities who are behind the curve and bloated. Technology should bring costs down to the end user, not up. However, costs to students even with technology to date continue to rise, as does class size. Students graduate with crippling debt. Witness the student demonstrations in Quebec, which have received worldwide attention. Boards of universities are too large and should be populated with more hard-hitting businesspeople with a stellar track record and mindset of innovation and value creation, who not only see the future but have helped shape it, and who can tell university presidents which way to part their hair.

Governance reform in healthcare has started, but needs to extend to education. In hospitals, for example, there was a survey that revealed that most hospital boards do not pay the CEO for performance. (This is the most important responsibility a board has.) Shortly thereafter, the Premiere of Ontario in 2010 enacted legislation (see “An Act respecting the care provided by health care organizations”) to compel boards and senior management to measure quality for stakeholders, and link these quality metrics to executive pay. (See summary slides here.) These reforms are now under way and the Ontario Hospital Association is commended for its efforts in pay for performance (see March 2012 slides here and a backgrounder here), and focus on governance (see the OHA’s Governance Centre of Excellence here). This is exactly the type of reform that is sorely needed in universities. There are layers of administration without any visible linking of pay to performance. Costs are being passed on to students, who can least afford it. Quality metrics should center on innovation and the classroom for universities, similar to wait times for hospitals. Value and cost savings are being left on the table for universities.

Just yesterday I walked by another bookstore in my neighborhood that has closed. Change is afoot and the longer higher education waits to innovate, the more compromised they – and society – will be.

Canadian Pacific is a Teachable Governance Moment

Apr 20

Posted in Board and Committee Leadership, Independence and Role Clarity | Comments Off on Canadian Pacific is a Teachable Governance Moment |

The fight for Canadian Pacific Railway (CP) by activist investor Pershing Square demonstrates several shortcomings in the public company governance model and what can be learned from private equity. CP and RIM are significantly underperforming Canadian companies. There are numerous others. The question is where is the board?

The current corporate governance model is largely focused on compliance, not on value-creation. Most regulations short shrift the board’s strategic and value creation role. Canadian guidelines address strategic planning in one sentence, at 3.4 (b). The NYSE rules do not contain the word “strategy.” Educational programs are overwhelmed by auditors, lawyers and pay consultants. Boards have become bureaucratic traffic cops and the trend is continuing after 2008. How would codes and educational programs look if they were drafted and taught by long-term active investors?

Regulators in large measure are to blame. They overemphasize structural board independence at the expense of industry knowledge and shareholder mindset. The separation of chair and CEO and having a plethora of independent directors accomplishes little unless there is a clear understanding of roles. Most chair and director position descriptions are little more than high-level one or two page compliance documents written by lawyers designed to keep directors at bay. Directors are selected for independence and profile because that’s what the regulators want. Yet scholars know research does not support independent directors and the creation of shareholder value. What is missing? What can we learn from activist investors and private equity?

Here are some facts about CP according to Pershing Square’s materials and presentation:

  • All directors own < 1% of stock and it was given to them, not bought;
  • Four COOs and three CFOs have been replaced in the last five years;
  • CP has consistently underperformed across industry peers, yet the CEO met 17 of 18 objectives set by the board;
  • The cost of management as a percentage has doubled;
  • There has been a moving of targets by the board, and these targets have been meaningfully lower than CN’s;
  • There has been a lack of rail experience on the board, shareholder representation or equity ownership; [CP did not have any railroad expertise to drive the value creation process on the board (other than the CEO) until Bill Ackman first launched his activist efforts]
  • If one director had $100M of his or her own wealth invested, the CEO would be replaced, Pershing Square said;

Deep dives such as the above by sophisticated activists such as Den Loeb and Bill Ackman need to be undertaken by boards themselves. This dive need not be overly complex. Look at Ironfire Capital’s analysis of the New York Times. How many boards have the skills to do this, I wonder? The approach Bill Ackman brings is not exclusive in its applicability to under-performers. The fundamental question is how many companies are under-performing relative to their potential, just not to the extreme extent of CP? And does this speak to a more robust corporate governance model on a wider scale?

We can learn from private equity and the nature of board engagement and shareholder value creation. According to experienced chair and activist investor, Henry Wolfe, “Numerous studies have been done of the performance and value creation results of private equity portfolio companies compared to their public company peers. At least in all that I have seen, the studies clearly demonstrate that private equity companies significantly outperform.” Wolfe goes on to say, “The implications of these comparative results for public companies is or at least should be staggering to those who serve on or advise public company boards. Adding fuel to this point Ernst & Young and other studies, including by McKinsey, found that the primary driving force for this out-performance was the PE Corporate Governance Model.” See the following link to an Egon Zehnder Private Capital Thought Leadership article regarding the work they did to learn more about a McKinsey study on Private Equity.

Michael Jensen at Harvard from his panel role in the 2007 Morgan Stanley Roundtable on Private Equity and its Import for Public Companies, said “In fact, my sense is that the due diligence process that the buyout firms go through in vetting and pricing a deal causes those principals and their managers to learn more about the business than has ever been known since it was a public company.”

This should not be the case if the public governance model worked. A key disconnect is director-shareholder accountability, which is not the case in private equity.

The nexus between public company boards and shareholders who own the company is limited at best, and this affects motivation and accountability. Boards continue to entrench themselves through staggered elections, at the expense of shareholder value. Most boards do not actually engage with shareholders directly other than at a perfunctory annual meeting. Shareholders cannot even propose directors in the proxy circular. A recent proposal by a group of Canadian investors is recommending (see the “Roxborough Initiative”) not only that shareholders select but also that shareholders – not management – compensate directors. This would address incentives and accountability. Director performance reviews should also be shared with shareholders and shareholders should have a say on board chairs. We are a long way from this type of meaningful board-shareholder accountability.

It is time to push the envelope and rethink the current model of corporate governance, in terms of how directors are selected, directors’ fundamental understanding of the business and the value creation process, the role of the non-executive chair, and director accountability to shareholders.

 

Augusta Golf Club Needs to Get Real and Admit Women Members

Apr 13

Posted in Diversity, Women on Boards | Comments Off on Augusta Golf Club Needs to Get Real and Admit Women Members |

CNN’s Piers Morgan, Masters winner, Bubba Watson, Donald Trump and National Association of Corporate Directors’ (NACD) CEO, Ken Daly, all weighed in this week on Augusta National Golf Club’s policy of excluding women members. See, if you are interested, the list of Augusta’s all-male membership roster, curated by USA TODAY, here.

Ken Daly, in an NACD webinar on ethics and capitalism, called Augusta’s policy of excluding women “DS,” which, he said, stands for “damn silly, in 2012, when women comprise 51% of the population.” Augusta’s policy was a trending issue in social media, including LinkedIn and the twitterverse, with governance leaders Sandra Rupp, Jayne Juvan, Frank Feather and Ray Williams weighing in. Even a petition has started to admit IBM’s first female CEO, Virginia Rometty, who watched on the sidelines with a pink jacket instead of a member’s green one. IBM is a major Masters sponsor and Augusta “has a history of inviting the company’s top executive to join its club.”

Why is the exclusion of women members by a private golf club a corporate governance issue?

It is an issue because all over the world now, in dozens of countries, there is a movement to the diversification of corporate boards and senior management teams in order to make better decisions. Director and executive recruitment and networking is done on golf courses. Excluding women has business consequences for them. This is also about corporate leadership and values of IBM and Augusta National.

Private clubs or associations are not islands. They pay taxes, often enjoying nonprofit tax advantages on behalf of taxpayers, and have corporate sponsors, advertisers, governing bodies (such as the PGA), customers, suppliers and local communities. Still, less than 1% of America’s golf clubs exclude women. This is a signaling issue in that it is okay to discriminate. By extension, stakeholders interacting with clubs that discriminate endorse and enable the practice.

This is also a membership issue for clubs themselves. I was asked by a new female board member last month to lunch to advise her on bringing governance reforms to a very prestigious club. As I sat in the dining room, it was almost empty. I remarked that female, minority and younger members were the future of the club, given changing demographics. And the club needed to “get real” about diversity, as well as its governance, and have transparent, inclusive policies. There is little if any substantive disclosure of how Augusta is governed on its website and how decisions are made. This is always a red flag for me and tells me an organization may not be person-proofed or have up-to-date policies.

Just in the last month, Julie Dickson, head of the Office of Superintendent of Financial Institutions (OSFI), the Canadian regulator for financial institutions, addressed in a speech the importance of boardroom diversity to avoid groupthink. (OSFI’s 2003 guidelines are expected to be updated by the summer.) The Conservative government announced in its budget an advisory council to promote women on boards, under the leadership of Minister Rona Ambrose. EU Justice Minister, Vivian Reding, also a woman, has indicated that she is prepared to use quotas if companies do not raise the number of women in senior management and on boards.

Golf is part of business. As Melisa Denis, Women’s Advisory Board member at KPMG, stated in the LinkedIn Group, Boards and Advisors, “I just came back from Augusta this weekend. If anyone doesn’t think this is business they are naïve. Business is done on the golf course – whether you are playing or not. To deny membership because the CEO is a female puts this country back 20 years (at least).”

Augusta National needs to “get real” about women members. Interestingly, the NACD is also offering events to discuss how corporate boards can “get real” about diversity too. Well done, NACD.

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