Archive for the ‘Shareholder Accountability’ Category

The Focus on Shareholder Activism, Value and Engagement: A Counterpoint

There has been a critique lately by retained advisors to management and academics about activist investors and the focus on shareholder value. See for example, here, here and here. This is a counterpoint on why shareholder activism occurs, what “shareholder value” is and is not, and what “shareholder engagement” really means.

Why do activists emerge?

There have been several recent examples of shareholder activism, at Yahoo, J.C. Penney, P&G, Chesapeake Energy, and in Canada, Research in Motion and CP Rail. As experienced non-executive chairman and activist investor Henry D. Wolfe has written, “the best activist investors play a vital role in shaking up complacent boards/managements and positioning companies to for maximum performance and value creation.”

Wolfe goes on to write, “the recent Canadian Pacific Railway situation is a classic case in point. Both the incumbent board and management had presided over multiple years of the “plan of the moment” all of which resulted in a dismal operating ratio for the railroad. Bill Ackman and his team at Pershing Square were made aware of the CP situation, took a deep dive into the industry and the company resulting in a detailed analysis of the company’s underperformance and a high level plan to maximize its performance and value which included a new CEO and a partial board slate with director candidates that all had a greater awareness of the need for the board to have performance and shareholder value maximization as the top priority.” (See also the culture shift brought to Canada because of CP, here and here.)

Wolfe concludes by saying, “What does not seem to dawn, at least not completely, on people such as the authors of this article (see “What Good Are Shareholders, Harvard Business Review”), is that if public company boards really understood and did their jobs, there would be no need for raiders, activists or “shareholder empowerment.”


What is the board’s responsibility when an activist emerges?

The board’s primary responsibility is to ensure that the company’s performance and value is maximized. Directors have a legal obligation to act in the company’s best interest, not management’s, and not their own. The question – the only question – in responding to a “concerned” shareholder (otherwise known as an activist) is what is in the best interests of the company and its shareholders? In many cases, doing so is not further entrenchment such as shareholder rights plans, staggered boards, dual class shares, restrictions on calling meetings or voting, or other restrictions on corporate control. Directors are there to control management in the interests of shareholders, not be beholden to management or hostile to shareholders.

Self interest by boards when an activist emerges?

And – this is very important – directors cannot act out of self-interest. An activist has emerged because the board was not doing its job. If the company assets and performance were being managed efficiently and effectively, there would be no need for shareholder activism. Activism occurs when voices are not heard. When the board responds, it must take a look in the mirror. Activists may have ideas that are in the best interests of the company that include addressing poor management and board performance. The board needs to address this independently and dispassionately.

This is tough to do because the right thing to do may be to step down and let other directors take over, who can do a better job. Surprisingly, sophisticated investors often know more about the business than existing directors. This is further evidence of complacent directors and the current corporate governance model being broken.

Even more surprising, apart from self interest, are views of shareholders: “Other academics, such as Roger Martin, the highly regarded dean of the Rotman School of Management at the University of Toronto, are critical of the emphasis on shareholder value.” As Henry Wolfe comments, “And if one does not believe that Roger Martin supports this, just look at the material decline in performance and total destruction of shareholder value at RIM during Martin’s tenure as an RIM board member and his non-sensical comments regarding criticism by investors of RIM’s board.” John C. Caravella added, “Jay Lorsch, also quoted in Joe Nocera’s New York Times column [see here], served on the board of Computer Associates in 2004, when CA paid $200-plus million to the U.S. Department of Justice in restitution to shareholders to settle charges of accounting fraud and obstruction of justice. Caveat emptor.”

Does a board have a “duty” to stakeholders other than shareholders?

Accountability to everyone is accountability to no one. It is simply folly to suggest – as some have – that shareholders should be treated the same as other stakeholders or even subservient to them (see my blog here as an example). Or by extension of the directors’ duty to the company that this duty extends to all stakeholders. Directors, legally, do not have duties to multiple stakeholders, any more than an agent or fiduciary can act for multiple principals. Shareholders are not the same as non-shareholders, such as customers, employees, suppliers, creditors, etc., who contract with the company for their protection. Shareholders do not have contracts with the company, contrary to what Professor Stout stated. They are residual claimants and boards must consider their interests in light of this. Shareholders are principals and they elect directors to preserve and enhance their investment. Public companies are not social institutions and investors do not risk their capital for this purpose, but by the same token, boards cannot unfairly treat its stakeholders and has to be a good corporate citizen.

Shareholder value defined

Next, the obsession with quarterly earnings has been used to mis-characterize shareholder value. This is not what shareholder value is all about. When companies do not maximize their assets or performance, from unsound diversification, complacency regarding costs, or cash in excess of capital needs, these inefficiencies – which should be addressed by boards – are addressed by activists irrespective of quarterly earnings. More often than not, activist investor activity has nothing to do with quarterly earnings.

In addition, shareholder value also does not come at the expense of stakeholder management, but rather results from it and ensures a highly disciplined approach to stakeholders. Stakeholder metrics such as customer service, employee engagement and culture are leading metrics that drive financial performance. These non-financial metrics are underutilized by boards and in executive compensation. This fault squarely rests with boards. Witness GE and Four Seasons when stakeholder management is done right. Witness BP when it is not. Accountability to shareholders cannot be fulfilled without proper stakeholder management and taking into account all the vital components of the business, including reputation and ethical conduct. The anti-shareholder rhetoric suggests that performance and value can be maximized without stakeholder management and ethical conduct. It cannot.

Shareholder engagement and shareholder democracy defined

Next we come to what it means to communicate with shareholders. Shareholder “engagement” as a concept has been co-opted by technocrats to mean voting or procedural rights (when these folk’s business model is predicated on these services). Shareholder engagement is not, in and of itself, say on pay, majority voting, broker non-votes, or technical process that lawyers and compensation consultants advise on. Shareholder engagement is about meeting, face-to-face, between directors and key shareholders, without management present. Shareholder engagement is, most importantly, listening. Board chairs should not be dissuaded by legal concerns over “Reg FD.” Regulation fair disclosure does not in any prohibit directors from meeting directly with shareholders. The SEC Chair has confirmed this. Boards should not allow management and retained advisors to dominate this process. And shareholders need to commit the time and resources to meet directly with boards of the companies they have significant ownership positions in.

Next, shareholder democracy means exactly what you think it means: the ability of shareholders to elect directors. Corporate management has fought vigorously to control the proxy statement and prevent shareholder from suggesting directors, but shareholders should have the right to compel management to put onto the proxy statement directors of their choosing. I have not seen any evidence that experienced investors will not put on top-flight directors. Indeed there has been evidence to the contrary – shareholder-nominated directors are better than many current directors.

What about advisors to boards?

Lastly, something needs to be said about professional advisors to boards and board committees, and specifically in the context of a change in control, a conflict of interest, or responding to an activist. Professionals who advise management should be prohibited from advising the board on responding to an activist, or any other matter involving independent review or oversight. (Independence of auditors and compensation consultants – serving just the board and not management, happened under S-Ox and Dodd Frank, but this needs to be extended to all advisors, including financial and legal advisors.) You cannot serve two masters, especially when their interests are adverse.

An independent advisor needs to be free to recommend to a board action adverse to management and supportive of shareholders and the company. Existing service providers have a commercial interest in supporting management. They are also assessing their own work when they advise a special committee or the board. This is evidenced by lawyers drafting entrenchment devices that protect management. We even see a negative regard to shareholders in their commentary. Observe words such as “attack,” “secretly,” “dissident,” and “activist” – even the title itself is pejorative: “Dealing with activist hedge funds” – and see here, the “risks of direct engagement.” As activist investor Henry Wolfe has said, “When lawyers provide defensive strategies and tactics to clients there is rarely a shareholder focused context; the context is largely to build a moat around the directors.”


The overall commentary of shareholder value has as an undercurrent that shareholders have too much influence and power. In my view, the opposite is true. Shareholders do not have enough impact and influence and directors are not accountable to them. The deck is far more tilted towards incumbent management, directors beholden to them, retained advisors to management, and an overall lack of accountability to shareholders. The existing model of corporate governance should address this.


Potential Regulation of Proxy Advisory Firms: CSA Consultation Paper 25-401

Here is my letter to the Canadian Securities Administrators on the potential regulation of Proxy Advisors:

Should Proxy Advisory Firms Be Regulated? Yes.

I am drawing on my own research as well as materials I consulted recently in designing and delivering a new course at Harvard University, including teaching materials provided to me by Stanford University researchers (Larcker and Tayan).

The Canadian Securities Administrators 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 the creditworthiness of the company. The business model for proxy advisory firms needs to change such that there is no non-rating services offered by them. Similar to auditors being restricted only to the audit (S-Ox), and compensation consultants now being restricted only to compensation assurance services to the board (Dodd-Frank), this practice needs to broaden such that any firm or individual providing independent assurance of governance (including governance advisory and search firms) should not have a consulting revenue stream, and should not provide any services to management or the company other than the assurance service provided to – or in respect of – the board or committee.

Having an alternate revenue stream to the provision of governance assurance services undermines the independence and objectivity of the assessment as the assurance provider is assessing his or her own work, or that of his or her colleagues within a firm. Moreover, a commercial conflict of this nature undermines the appearance and confidence in the marketplace that the assurance provider is not unduly influenced by proprietary or commercial interests. Having firewalls or separate business units within a firm does not address the reasonable perception of conflict, nor provide adequate safeguards given non-financial and personal/career influence.

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

Second, based on my review, there is limited peer-reviewed evidence at best that proxy advisory firms measure governance quality in the main, or that which they do measure predicts shareholder value. These commercial firms possess a business model predicated on volume-based, externally measureable metrics. What is measureable, such as structural independence governance variables, such as independent chairs and directors, independent committees, share ownership, etc., do not necessarily impact board effectiveness or shareholder performance.

The above quantitative Stanford researchers actually go so far as to suggest “no evidence” (at page 161 of their book) for certain of these variables. Other variables offer “mixed” or “modest” evidence, while others (such as busy or interlocked boards) offer more persuasive evidence. Indeed the academic research also has not found a systemic relationship between governance rating systems (including G and I Indexes) and the predicting of long-term shareholder performance. Indexes based on entrenchment and anti-takeover provisions arguably do not measure board effectiveness.

Unfortunately, given the above lack of predictive validity, companies change certain governance practices to improve their scores when there may be limited empirical evidence that the purported practice will have impact on board effectiveness or firm performance. This pressure to change should not be the case.

What are relevant – so far as board effectiveness is concerned – are qualitative factors such as director qualifications (competencies and skills), engagement, leadership and board dynamics. These factors are more difficult, and in some cases not possible, to measure from outside a boardroom. I note the inconsistencies in proxy advisory firms’ ratings where the same company received divergent ratings from different proxy advisor firms, or companies that experienced governance failure formerly received high ratings (and in a few cases, awards from shareholder or other groups) from proxy advisory firms.

Proxy advisory firms, if they are purporting to measure governance quality, (i) should be required to assess and incorporate qualitative and firm-specific factors into their ratings and recommendations, (ii) should have the expertise and resources to do so, and (iii) should have a process for independent review, audit, contestation 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 and search “The Governance of Proxy Advisors.”[1]

Lack of Transparency

Third, the transparency of proxy firms should be increased. Proxy advisory firms’ rating methodologies and weightings accorded to various factors are divergent. If they were measuring governance quality with rigor, we would expect to see convergence, such is the case with credit rating agencies. 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.” [footnote omitted].

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 by Leblanc et al..)


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 transparency and accountability from others. It seems to me that there is merit in concerns that boards have. More importantly however, the empirical evidence does not support many of the metrics being used by these firms, and ignores or diminishes others.

I hope this commentary is useful to your review.



Richard W. Leblanc, PhD

[1] Leblanc, Richard, et al., “General Commentary on European Union Corporate Governance Proposals,’” International Journal of Disclosure and Governance (2012) 9:1, 1-35, where transparency, influence, inaccuracy, consulting services, institutional investor regulation and increased competition are discussed in greater depth. See online version here:

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.

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 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.


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.

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.

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