Governance Gateway Blog

How do boards prepare for terrorism?

May 6

Posted in Risk Governance and Combined Assurance | Comments Off

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.

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Canada has its first Say on Pay Failure: Barrick Gold

Apr 25

Posted in Executive Compensation, Performance and Evaluation | Comments Off

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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.

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American Banks Should Split the Chair and CEO Roles

Apr 12

Posted in Board and Committee Leadership, Independence and Role Clarity | Comments Off

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Jamie Dimon and Lloyd Blankfein (Chairs and CEOs of J.P. Morgan and Goldman Sachs, respectively) should be relieved of their Board Chair responsibilities.

Here is why.

Consider how two hypothetical – but typical – board meetings play out: the first occurs with a Chair and CEO role combined in one person, with another director as a “Lead Director,” and another board meeting occurs with Chair and CEO roles separated into two people.

In the first board meeting, when one person occupies both the Chair and CEO roles, there is a very high concentration of power. Another director independent of management acts as a “lead” director and the counterpoint. The Lead Director may sit next to the Chair and CEO in the boardroom, but the Lead Director does not chair the actual board meeting. Nor do lead directors have final say when push comes to shove over the board agenda. Nor do they establish the information flow the board receives, as good chairs do.

The Lead Director has influence, but the Board Chair has actual authority. What gets discussed, when and how, is the purview of the chairperson of any board. The most important role a Board Chair has is to control the discussion, who speaks and in what order, and how decisions get made (or not). These meeting levers shape outcomes. If the person controlling the discussion, the information and the agenda (i.e., the chair) has a vested interest in the outcome and is the same person (i.e., the CEO), there is an inherent bias in all decisions. The board’s fundamental oversight role in controlling management is compromised.

When I observe the second type of board meetings — with non-executive, independent Chairs and separate CEOs (i.e., two separate people), the dynamics are very different. The board meeting is almost “bi-polar” in nature. There is a natural counterpoint when debate happens because the CEO is separated out of the critical proposal and approval parts of the discourse. Power is more flat. Directors feel free to speak up because the chair is one of them (independent). It is hardly surprising to see the lead director role marginalized by a strong personality who controls a board meeting. CEOs have very strong personalities. Directors are more likely to weigh in and exercise independence if they aren’t blocked by their chair.

At one point, Canadian bank boards argued – unsuccessfully – and of course their CEO and Chair incumbents were the primary proponents, that good governance could include the fundamental conflict of a combined Chair and CEO role. “Good” governance, the argument goes, could include having exclusively independent committees, an effective lead director, and an effective reporting and assurance structure. Proponents for maintaining the Chair and CEO roles also argued whether to split of not “depends on the personalities,” somehow implying an effective chair who has a good working relationship with a CEO could not be found. The real resistance to splitting the roles were the egos and hubris of the incumbents, and a captured board beholden to them.

Shareholders and regulators prevailed in Canada, the UK, Australia and New Zealand, where non-executive chairs are the norm. In the most recent set of governance reforms of 2013, for example, Canada’s financial institution regulator stated that the role of the Chair should be separate from the CEO, as this separation “is critical in maintaining the Board’s independence, as well as its ability to execute its mandate effectively.” Back in 2003, OSFI (Canada’s financial institution regulator) stated that both a non-executive chair versus a lead director could achieve board independence. The choice was up to the board, OSFI stated. Regulators have since progressed, advising that the roles can and should be split, for all federally regulated financial institutions, for the sake of good governance.

Having a non-executive chair separated from the CEO role (two different people) won’t guarantee success or prevent failure. Academics cannot prove a systemic relationship between board leadership and performance because chair effectiveness is so difficult to measure. But this can be posited: if the chair is effective, there is a much greater likelihood of better governance than relying on the effectiveness of a lead director. I have yet to see an effective lead director who approaches how effective a separate chair can be. A lead director role is institutionally more passive. Ask yourself if Jamie Dimon had to answer to a separate no-nonsense Chair who understood banking and risk whether the J.P. Morgan Chase’s risk meltdown would have occurred. (See the Senate report here.) The roles of a Lead Director and Board Chair are different. More and more American corporations are moving towards effective, non-executive chairs. Banks should not be dragging their feet.

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Political accountability and self dealing

Apr 5

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A municipal politician told my graduate class when he spoke about accountability in public office this week that politicians have the ability to make someone rich or poor by decisions that they make. When and how they make those decisions should be subject to rigorous controls and public scrutiny. Herein lies the potential for corruption in government: the awarding of contracts, the influence by the private sector, and self-dealing by public office holders.

Consider the following:

A politician from Quebec acknowledges receiving envelopes of cash from a businessman for lobbying efforts. Another Quebec politician is alleged to have profited personally from real estate deals and government policies. The Federal “sponsorship scandal” originated in Quebec. SNC Lavalin, a large construction company based in Quebec, is accused of massive bribery schemes and its former CEO has been arrested. (Its chair and three directors were replaced yesterday.) A Dr. Arthur Porter, former head of the McGill University Health Centre, in Quebec, faces fraud allegations. The mayors of Montreal and Laval, Quebec, have resigned amid corruption allegations. Quebec’s anti-corruption squad has raided corporate, political and home offices in Quebec. Last week, a high-profile Hells Angel member was arrested in Quebec.

Justice France Charbonneau needs to propose comprehensive mandatory reforms to address organized crime and corruption in Quebec, similar to Justice Denise Bellamy’s recommendations for the City of Toronto.

Corruption and bribery thrive when the very recipients of it are in power. Politicians need to be instructed by this independent judicial inquiry – the Charbonneau Commission – to implement reforms to internal controls, transparency, codes of conduct, independent audits, whistle-blowing, conflicts of interest policies, lobbying, communication, education, monitoring and enforcement. These standards and practices should be established for any political body, be it federal, provincial or municipal.

Lastly, governments need to lead by example. They need to impose the equivalent controls and expectations of accountability and transparency on themselves that they insist upon for the private sector.

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10 Questions to Determine Whether Your Board Has the Right Dynamics and Behaviors

Apr 1

Posted in Meetings and Decision-Making, Performance and Evaluation | Comments Off

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What fascinates me is what goes on inside boardrooms. Boards can have the structures, the boxes ticked, and the protocols and policies on paper, but if they are not lead properly, if they don’t behave as a team, and if they don’t have proper oversight over the CEO, they won’t be as effective as they can otherwise be.

It’s hard to determine these factors from outside the boardroom. Indeed, a reason researchers can’t find a clear causal relationship between boards and performance – even though directors tell me emphatically that boards do matter – is because what happens inside closed doors is largely invisible to outsiders. But board dynamics – including leadership, teamwork and behavior – matter greatly even if they can’t be measured from the outside.

I am interviewing several leading directors and chairs to obtain their views on boardroom dynamics. I am also observing boards in action. The data from my research is fascinating. Here are ten focal points I am focusing on. They are modified and phrased in questions I use. They represent only a fraction of what I am looking at; however, they are also ‘favorites’ of boards I assess that are leading edge.

10 Board Dynamics Questions

1. Our Board Chair conducts an effective decision-making process (i.e., ensures that, for crucial decisions, alternatives are generated, a thorough discussion and analysis ensues, relevant perspectives are brought to bear, the best decision is made, and the decision is supported).

→ Here, I am trying to understand how effective the Chair is, particularly in chairing meetings and shaping key decisions. This is a key weakness of ineffective chairs.

2. Our CEO welcomes the Board’s constructive input into our Organisation’s strategy (i.e., by being sufficiently candid, open and responsive; and encourages the same from direct reports).

→ Here, I look at the behaviour of the CEO. CEOs can easily hold back, block, or try to “manage” a board.

3. Our Non-executive Chair (or a leading or senior independent Director) has a constructive working relationship with the CEO (i.e., mentoring, supportive and collaborative, open yet independent, candid and professional).

→ Here, I look at the nature of the relationship between the Chair and CEO. I interview both, as well as other directors, trying to get a sense of whether the Chair provides a strong counterpoint or is managed by the CEO.

4. Boardroom discussions are constructive (i.e., Directors disagree without being disagreeable, assumptions are constructively challenged, views are skillfully explored, differences of opinion are appropriately acknowledged and resolved, and consent is forged).

→ Here, I look at how debate and decisions get made within the boardroom, in real time.

5. Our Management (including the CEO) do not inappropriately influence meetings (e.g., by filtering or managing the flow of information to predetermine an outcome, not providing independent data, not facilitating access to independent advisors, etc).

→ Here, I look at “undue influence” or the attempt to shape or funnel information, agendas or outcomes. If this happens, the board will miss something.

6. Our Board displays at all times a culture of diversity of views and open dissent (i.e., Members sufficiently challenge one another, differences of opinion are fully aired and accepted gracefully, no topics are “off-limits” for discussion, and Members feel free to speak out openly and honestly without fear of criticism, even when voicing a minority position or asking a probing question).

→ Here, I look at “constructive dissent” and how (or whether) it happens within the boardroom, including whether “groupthink” happens.

7. Each regular reporting member of Management has a constructive relationship (i.e., characterized by respect, responsiveness, openness, transparency, candour, professionalism and accountability) with the Board and each Committee of which I am a Member.

→ Here, I look at the interface between committees and reporting management and whether there is blockage or dysfunction. Committees are where the work gets done. If something gets missed, it often happens here.

8. The Board reacts in an appropriate fashion towards reporting Management (i.e., predictably, constructively, confidentially and deliberatively) in order to build trust on Management’s part to come forward with their real concerns in a candid manner.

→ Here, I look at the board’s behavior in shaping trust and candor with management. Trust is a two-way street and how the board behaves also matters. If the board dominates, leaks or is unpredictable, management simply closes up. Then, something can get missed or the board does not add full strategic value as management is holding back.

9. Our discussions (Boardroom and at each Committee of which I am a Member) significantly improve the quality of Management decisions (e.g., by engaging of Management in thorough and constructive sessions that stimulate, guide and enhance Management’s thinking and performance, impact outcomes and add value).

→ Here, I look at whether the board adds strategic value. A “360 degree” assessment that incorporates management’s views can bring a reality check to a board that thinks they add value when they may not.

10. We (Board and Committees) are not overly reliant on (or influenced by) a particular individual (e.g., with the most relevant skills and experience or tenure, or in a particular role or reporting relationship) given the work that we undertake.

→ Here I look for pockets of undue influence. It could be a shareholder, a director or a manager that can influence debates and outcomes, acting out of self interest.

What do you think? Can your board answer an emphatic “yes” to all 10 questions above? (Most boards cannot.)

Whether a board is effective or not, for the most part, comes down to factors inside the boardroom. The above factors are uncomfortable to ask, and data is limited, but they matter. Board dynamics is known mostly by directors themselves. The regulations and guidelines focusing on having a majority of independent directors, a certain size, a separate chair, etc., are important but are inadequate to ensure effectiveness and ultimately performance of the company. For boards to succeed, and for shareholders and other stakeholders to receive returns, more of the above factors should be focused on.

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Dr Richard Leblanc