Here is my CBC interview regarding Mayor Rob Ford, with two other panelists:
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Posted in Uncategorized | Comments Off
Mayor Rob Ford’s stubborn refusal to address substantively the allegations of drug use, and the reputational contagion and distraction it has caused, needs to be addressed in short order.
Councillors should take all reasonable steps to procure Mr. Ford’s addressing of the issue, and if not, escalate as appropriate, including initiating removal from office if Mr. Ford does not answer the allegations, so the City’s business can continue. Mr. Ford’s brother, Councillor Doug Ford, is in a conflict of interest and should recuse himself from any process.
In a corporate setting, a Chief Executive engaging in similar patterns of behavior would not be tolerated by any board of directors. The CEO would have been fired long ago.
There are two issues here. One is behavour. The second is the ability to operate. The behavior – ranging from alleged conflicts of interest, boozing, womanizing, and now crack cocaine use, means that the Mayor’s political influence has become toxic. His ability to reach across the aisle, procure concessions, exert influence, and come to deals – so critical in the political process, has effectively ended. Operators and CEOs in the private sector would likely exercise an abundance of caution in discussions and City investment for reputational reasons and the inability of the Mayor to broker consensus.
Any CEO who had similar patterns would be unable to lead and operate as well.
Corporations now take extremely seriously reputation risk and the corporate brand. All executives, and indeed any employee, are representative of that brand now, with social media. There are internal controls over integrity, codes of conduct, social media response teams, and crisis planning that were not present even a few years ago.
The notion that a CEO could not respond in a business setting simply would not happen. Toronto City Council needs to hold their chief executive accountable, so the more important issues before the City can be addressed.
I was interviewed by BNN where I said that what proponents for the split of CEO and Chair at JP Morgan had going against them this week was that the stock was up 50% and that the split would occur to an incumbent CEO, Jamie Dimon, as opposed to a new CEO, where the decision to split the roles by a board is easier.
Shareholders have spoken and the vote was almost a third in favor of having a separate Chair and CEO. However the risk committee directors received less than 60% support for their continued tenure on the board.
What are we to take from this, from a governance and accountability perspective?
First, the directors who received less than 60% should all be replaced. New directors should demonstrably possess solid risk and banking expertise – including a full understanding of complex derivatives – to sit on a board of this type. Management, including the Chairman, should have no say whatsoever as to who these directors are. Indeed the incumbent board should look to shareholders for suggestions.
Second, there is not a single new argument in the lead up to the chair-CEO vote that was not already mentioned in the Canadian context when Canadian banks ten years ago had combined roles, but now have separate chairs. I remember many bank chair-CEOs making impassioned arguments as to why they should keep the chair role, with the “support” of their boards. Shareholders and regulators eventually won this battle.
Share price or a threat to leave by Mr. Dimon is likely what swayed shareholders away from voting more fully for the split.
These are both troubling from a governance perspective. Directors should be free and empowered to take decisions that are best for the company and shareholders in the long term – decisions that may even result in short term share price decline. Share price also reflects multiple inputs, and it’s not certain that splitting the roles for governance purposes would affect share price irreparably.
Second, and more important, a CEO who threatens to leave is a red flag – or should be – for any board. It may signal lack of internal succession planning. No one is irreplaceable and the “leaving” card should be called by more boards – even in pay negotiations – through proper succession planning, that is to say internally ready candidates at all times.
Lastly, the decision of a separate chair vs. a lead director is vulnerable to the narrative that “it depends.” This is impenetrable and can reflect more ego, hubris and board capture. At some point, the decision on chair vs. lead director should be an objective standard, not subjective one. It is the same with standards for director independence.
There is a fundamental difference between a chair role and a lead director role. The chair role is stronger. Regulators should be more prescriptive and say the roles should be split as a matter of good governance and preventing a concentration of power absent accountability. They have done so in Canada and we have fared very well.
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In a board meeting, the military general asked the airline’s CEO, “Why is the pilot’s food being labeled?” “Because that’s the way we always do it,” the CEO responded. “Well then stop doing it,” the military director said. “If I’m a terrorist, I might have trouble getting through the cockpit door, but you’re putting a red flag for me on how to poison the pilot and take down the plane.”
In that exchange, the new military director on the airline’s board of directors I was advising proved his value.
I am currently advising another board whose company is a target for a terrorist attack. Many other companies in transportation, utilities, defense, property development and financial services could take a page from below.
Here are six areas for boards to focus on to prepare for a possible terrorist attack.
1. Military experience on the Board. Military leaders have logistics, supply chain, tactical and international theatre experience civilian directors lack. Their contacts include the intelligence community. They think differently and understand evil.
2. Intelligence gathering. Boards should commission multi-lingual analytics from terrorist websites and chat-rooms, where the company, industry or executive is mentioned. There should be governmental relations on the board’s competency matrix. Boards want to know about unknown unknowns, or emerging risks that can be catastrophic (the black swan), or interdependent risks that rapidly interact. Risk registers don’t capture this dynamism yet. Proper intelligence gives boards and management teams a heads up.
3. Scenario planning. Good boards in sensitive industries are insisting on disaster recovery, catastrophic event planning, mock dry runs, and schedules so if or when it happens, the company is ready. There is even off-site functioning if the office is blown up.
4. CEO compensation. In a disaster that happened involving property destruction and death (another board), I was called in to recut the CEO’s compensation. It went from financial short-term to include risk, relations, internal controls, and crisis management metrics. The compensation committee has enormous often unused control over behaviours and you reward what you pay for.
5. Communication. The CEO should have media training to prepare for scenarios, and respond to journalist questions. When the event happens, it is too late if you don’t have this. Opinion crystallizes in days if not hours. The CEO profile for succession planning should include communication, intelligence gathering, and political linkages.
6. Invest in enterprise risk management (ERM) and information technology (IT). Risk management is often immature, cyber threats are significant, and good ERM is bottom up to include focus groups and integrated real-time IT. There are vulnerabilities that are missed without good ERM. Without being explicit, there are vulnerabilities at universities, cities, shopping malls and events that will surface in good ERM.
The bombers in Boston capitalized on police that were not there, inadequate crowd control at the finish line, and unattended unchecked bags. New York is much better at this now. Cameras, K-9 dogs, screening, monitoring, crowd control and escorts are all about choices. Management can choose not to do something. Boards can DIRECT that they do. This deters potential targets.
This 85% of votes cast against executive compensation could have been predicted. A $17M pay package, including a $11.9M signing bonus, was awarded to Barrick senior executive John Thornton, in advance of performance, in spite of a 20-year low in Barrick’s share price. Institutional shareholders gave a strong condemnation of this payment and the director votes soon followed in Barrick Gold’s annual shareholder meeting yesterday:
Compensation Committee Chair, J. Brett Harvey: 28% withhold;
Compensation Committee Member, Gustavo Cisneros: 27% withhold;
Compensation Committee Member, Steven J. Shapiro: 28% withhold;
Director Hon. Brian Mulroney (non-independent: received $2.5M as an advisor): 24% withhold;
Chairman Peter Munk (non-independent: controlling shareholder and part of management): 17.5% withhold;
Director Anthony Munk (non-independent: familial relationship): 24% withhold.
Barrick CEO Jamie Sokalsky said the board would “carefully consider” shareholder perspectives. Founder and Chairman Peter Munk deadpanned, “Bad times bring out more people.”
I spoke out against the quantum of the above pay package for Mr. Thornton, but there are two sides to every argument. Let me make the case for Barrick Gold and what it should have done from a governance perspective.
Chairman Peter Munk said “we had to secure him” [John Thornton] “because of the competitive environment.” Munk went on to say “It is hard to have someone paid on performance if he would not have been able to join to perform.”
There is merit to Peter Munk’s position. If shareholders truly believe in pay for performance, then it is equally important to attract and motivate executive talent in a downturn as it is in an upturn. This means, paradoxically, that a compensation committee will pay out more, in spite of low stock price, and rein in executive pay during an upturn. Mr. Thornton is motivated, as his shares have declined in price.
This pay philosophy is at odds with the more common approach to pay, which is “profit sharing.” This means executives are paid higher in peaks and lower in valleys, to “share the profit” with shareholders. Many pay metrics are aligned with shareholder returns. This could hamstring a company in attracting talent when it needs it most and paying talent during a bull market, where executives get unjustly enriched.
It is quite possible Mr. Thornton had to leave unvested equity on the table somewhere else and needed to be made whole. This is the rationale for a “golden handshake” and is completely reasonable.
It is important that Barrick explain the need at this time for this executive, with these qualities, to large shareholders and receive their support. A plan for asset sales and addressing Barrick’s problematic Pascua-Lama mine, and Mr. Thornton’s role, could have been laid out better. There is a rational argument for the payment that could have been better communicated by Barrick in advance of the vote. Other corporate boards are meeting directly with institutional shareholders in advance of meetings, to explain pay and make necessary changes.
What else could or should Barrick have done, from a governance perspective?
The board is in dire need of renewal. There are directors who have served on the board for 20 and almost 30 years (Messrs. Mulroney, Beck and Birchall). Some regulators are moving to caps of 9 years on directorships. There is also no indication of outside responsibilities of directors, on Barrick’s website. There is evidence that over-boarded directors lack oversight effectiveness. Governance disclosure is rather opaque, including which directors are independent and on what basis.
Lastly, and perhaps most importantly, Mr. Munk owns less than 1% of the total equity of Barrick, yet controls the board appointments. The best governance reform would be for minority voting shareholders to have the right to nominate directors of their choosing. Canada has a large number of similar control-block companies, with dual share structures, whereby a dominant shareholder who may own a minority of total equity, has a majority of voting power. A good reform would be to have a “say on directors” that is commensurate and fair. Minority shareholders should have a say on directors.