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Archive for the ‘Diversity’ Category

Can A Harvey Weinstein Situation Happen to Your Board?

Here is a hypothetical situation that I have encountered many times.

I am invited to observe and assess a board. When I do, I immediately see the red flags. I make hard-hitting recommendations, which have included the CEO and certain directors being fired.

Why does it take me to do what the board should have been doing much earlier?

Boards can be very defensive, and even in denial to what is blindingly obvious. “We missed it” or “it was a rogue employee” is their common defense.

Boards are now asking, “Could a Harvey Weinstein situation happen to us?”

The board’s role in overseeing corporate culture, potential harassment, and other conduct risk is increasingly being turned to by boards and regulators.

Here are twelve suggestions for boards to oversee conduct risk properly within their organizations. The best boards I work with do all of this. The worst do not.

  1. Act on your hunch.

If you have a question or concern, most of the board shares the same concern. Ask the question, and ask the second question. And if you don’t like what the answer is, press further. Where there is smoke, there is often fire. I have interviewed over a thousand directors over my career. The most common regret directors have is twofold: (i) I didn’t speak up when I should have; and (ii) I didn’t fire the CEO soon enough. One corporate secretary after a recent public scandal told me, “when the board does not ask questions, we have succeeded.”

  1. Insist on proper whistle-blowing.

Many whistle-blowing programs are flawed. They are not anonymous, protected, independent, rewarded or remedied. That is the board’s fault. Not surprisingly, people (especially women) do not come forward for fear of retaliation and career harm. If you think conduct risk is not occurring within your organization, you are wrong. It is just a question of degree. Bad news needs to rise, and go around management and directly to boardrooms. If bad news does not rise to the board, it does not go away. It gets worse. Good boards insist on proper channels directly to them.

  1. Renew your board regularly.

New directors see things that long-serving directors may not see or may be accustomed to. A fresh set of eyes can be invaluable. Have term limits for directors or regulators will impose them for you as is being done in several countries. Have a diverse board. Homogenous boards engage in group-think and do not ask tough questions.

  1. Do rigorous interviews and background checks.

Ensure that employees, agents, management and directors go through thorough and ongoing background, reference, social media, personality, criminal and financial checks and testing. People’s personality will not change. If you do not know someone’s faults, you have not done your homework, and they are a risk to your reputation.

  1. Remove management regularly from boardrooms.

Remove management from a portion of each board and committee meeting. Have a safe space so directors can speak confidentially. These “in camera” sessions are the main way that directors voice their concerns not within earshot of management. In camera sessions are the greatest contributor to board effectiveness, directors tell me.

  1. Act immediately at the first sign of an ethical lapse.

The standard you walk by is that standard you accept. When you see discrimination, disparagement, or unfair treatment, call it out. Speak up. And when necessary, fire the CEO or senior manager at the first sign of a lack of ethics. Otherwise, you signal to the entire organization what is acceptable to you. Boards have suffered by not acting when they should have. And if your board does not act when it should, resign.

  1. Receive dis-confirming information on company culture and executives.

If you get all your information from management, you are only hearing one side. Receive your own social media analytics, look at chat rooms, hear from employees, use google alerts, commission independent reviews, hear from reporters and analysts, walk around, and listen to what you hear and observe.

This does not mean that you are micro-managing, only that you are getting full information. If management tries to block you or dominate your information flow, that is a red flag.

  1. Receive employee feedback.

Retain survey providers to conduct employee morale surveys that are directly provided to the board and untampered with by senior management. Ask for qualitative exit interview results, staff turnover rates and litigation compared to your peers. Consider putting an employee on your board, or having an advisory committee or a designated director to represent the employee viewpoint.

  1. Look at how employees are paid.

People behave and take risks based on how they are paid, including customer-facing employees all the way to senior management and your CEO. Look at how pay incents conduct. Make sure that employee engagement forms a healthy portion of CEO incentive pay.

  1. Protect yourself and the company.

Benchmark management contracts for conduct and ethics clauses. Define just cause for dismissal to include ethics. Have fair treatment form part of all employment contracts. Ensure your Code of Ethics and Diversity Policy are conditions for incentive pay to vest, and claw it back if you discover misconduct after the fact.

  1. Benchmark your diversity and inclusion policy and practices.

Many human resource policies are legalistic and do not provide adequate examples and training. Train on unconscious biases. Provide examples of heterosexism, islamophobia and transphobia. Have voluntary, confidential self-identification of gender identity and LGBTTIQQ2A. Have a diversity and inclusion best practice presentation directly to the board of directors, as tone flows down from this.

  1. Be vigorous in your fiduciary duty.

Management may play the trust, confidence or micromanaging card. Press on. Insist on behavioural and integrity controls, and independent auditing of these by the internal auditor, who should report directly to you, not management. Many conduct failures have happened because senior management blocked access to the auditors from the board. Have internal audit test the controls for culture and integrity (including complaints, reaction time, investigation protocols, record keeping and non-retaliation) and report directly to you on their findings.

Conclusion

Governance is changing. Board are becoming far more active and are investing significant time in their duties and responsibilities.

There are occasions where the best efforts will fail, but for the most part conduct failure happens when a board is complacent and fails to act when it should.

Dr. Richard Leblanc, Editor of The Handbook of Board Governance (Wiley, 2016), can be reached at rleblanc@yorku.ca.

 

 

Boards Should Not Misjudge Regulators

When a regulator advises corporate directors that progress on gender diversity is “simply not good enough,” that is code that the status quo will not continue, and that more regulation may result. And the second wave of regulation is often worse than the first.

Regulators have limited levers at their discretion. They are not going to come into boardrooms and assess performance. Thus, they are tending to land on numbers: ranging from 9-10 years for director tenure and 25% – 50% quotas for women.

Once or if this happens, directors will complain that the regulator is imposing a ‘one sized fits all’ or ‘check the box’ solution, when directors had the chance to act but chose not to. We have seen this pattern before. Paradoxically, directors may choose not to act, waiting for stronger regulation, to which they can then point and say, “now we have no choice.” Even the CEO of a major bank told regulators, “you should push us on gender targets.”

Canadian regulators have adopted a flexible and progressive ‘comply or explain’ approach to director term limits and gender diversity.

The progress recently reported is, in a word, inadequate: Only 19% of boards surveyed have term limits; only 14% disclose written diversity policies; and only 7% have targets for women on their board.

Our comply or explain regime has the disadvantage of permitting explanations that are irrelevant or spurious, such as targets for women not being adopted because candidates are selected based on merit, as if both goals are mutually exclusive. There is not an excuse for inadequate governance progress that I have not encountered.

But the real reason for the above low figures, which is not in the public domain, is self-interest. Why would any director, particularly an over-tenured male director, agree to a policy that moved him out of the boardroom? Directors speak in code publicly, but in private interviews, many open up. I had a 28-year director tear up when I recommended a 12-year term limit for his board, without grandfathering.

The academic evidence in favor of director term limits and diversity is becoming more clear: Diverse groups make better decisions. And over-tenured directors are worse for innovation and shareholder value. Regulators – in several countries – are acting. Regulators want independent directors who are the most qualified sitting in boardroom seats. As they should.

In Canada, regulators have not imposed quotas or term limits, but these should not be ruled out if inadequate progress continues. Regulators have asked boards to articulate their own numbers, and why that number works for them.

This brings us to what directors and boards should be doing to forestall further regulation. Here are my recommendations:

  • Do not misjudge the regulator, or the importance of gender diversity for the new federal and the current provincial Liberal governments. Tone-deaf boards should listen.
  • Act on conflicts of interest. If a tenure or diversity policy affects one or more of your directors, excuse these directors from the room. They should not influence the decision.
  • Do not assume director consensus. There are directors who believe that other directors have outlived their usefulness and should be replaced.
  • Land on a target. If your board has zero women, start with one woman as your target. Targets should be aspirational and dynamic.
  • If you think 9 years is too low for director tenure, choose 12 years. 15 years is on the high end, and companies are landing on 12, particularly large, complex companies. But pick a target.
  • If you do not pick a target for director tenure, then you best have a rigorous and consequential peer director assessment regime, whose output is actual director resignations. The evidence is that many boards do not have or do this.
  • Do not assume that your board can draft an inadequate tenure or diversity policy, and that this will go unnoticed. The regulator is offering guidance and examples of robust policies.
  • Own the policy. Draft the policy yourself, or have an independent advisor assist you. Management or company advisors are not independent. They work for you and have a vested interest in keeping you satisfied.
  • Watch for past practices that might bias women, including assertions that your talent pool is shallow. If your talent pool are directors whom you know, rather than the best directors available, then you best enlarge your talent pool.
  • Regulators are giving you an opportunity to craft policies that work for you. Do so. No director is irreplaceable, and directorships are not lifetime appointments. But if you believe a particular director’s tenure is advantageous, use average director tenure or have exceptions built into a policy to give you degrees of freedom.

The regulatory evidence, above, is that boards may be incapable of changing from within. As such, regulators will act when boards do not.

Gender diversity on boards: My discussion notes

I have been asked to serve on a panel in Toronto next week, 20 October, and in NYC on November 12, 2013, to discuss gender diversity on boards.

Here are my discussion notes for both panels if readers are interested: https://dl.dropboxusercontent.com/u/79214614/Richard%20LeblancTorNYCGenderDiversityNotesOctNov13.docx

The links to both panels are here:

https://111213newyork.eventbrite.com/

https://www.wxnetwork.com/board-diversity-a-time-for-women-to-lead/

Richard Leblanc

My submission on gender diversity to the Ontario Securities Commission

There was a consultation paper put out by the Ontario Securities Commission, Canada’s largest securities regulator. See the paper here, which calls for responses on page 20, and deadline was extended to Oct 4, 2013.

Here is my letter in Word, here.

 

Additional notes for Corporate Secretary Think Tank Canada Panel, 2 October 2013, on Gender Diversity on Boards

Additional notes for Corporate Secretary Think Tank Canada Panel, 2 October 2013

Panel: Gender Diversity on Boards, 1:45-3:00pm

Methodology

The following reflects, in no particular order, (i) my work in advising regulators (e.g., OSFI, OSC, AGCO, FiCom, others) in respect of governance (including diversity and director competencies); (ii) interviews with male and female directors concerning diversity; (iii) my advice and assessment of award winning boards known for leading diversity practices; (iv) my work with governance reforms in recommending women to all male boards, and improving director recruitment, assessment and retirement practices. The data collection has included individual director interviews and observing the board in action.

Diversity red flags include, in no particular order:

  1. Self interest by over-boarded and/or over-tenured male (and on occasion, female) Directors who wiggle or refuse to go, buttressed by unsubstantiated anecdotal belief or myth, such as CEOs make better Directors, women are not “qualified,” or there are not enough qualified women Directors to be found, typically within their own networks, etc.;
  2.  Applying industry “experience” to prospective directors and not to incumbent Directors: Blocks women, and regulator has never used word “experience” to my knowledge;
  3.  “CEO” preference, where CEO has never been used by a regulator, nor is this title determinative of director performance, nor is it a competency or a skill: Use “enterprise leadership” or “leadership” instead;
  4. A preference for CEO directors is not evidence-based, including the views of directors themselves: CEOs are seen as dominant, poor listeners, and stretched, and 80% of directors do not believe active CEOs are better directors than non-CEOs: “Are Current CEOs the Best Board Members? CGRP-18,” Stanford University, 2011). Directors who are retired CEOs are not seen as better than average board members by a majority of other directors (ibid.);
  5. Perversion of the competency matrix requirement (NP 58-201 3.12-14), focusing on “experience,” when the regulators (including whom I have advised) use “expertise” (OSFI) and “competency” and “skills” (OSC/CSA); Expertise (my view, not in regulation) = SKEET (skills, knowledge, education, experience and training), meaning experience is but one way to acquire expertise. Competency can be defined as: a cluster of related knowledge, attitudes and skills that affect a major part of one’s job; that correlates to performance; that can be measured against standards; and can be improved via training and development (S. Parry, “Just What is a Competency,” June 1998). Expertise and competency are broad concepts, in other words;
  6. Larger issue permitting self dealing and preference: There is opaqueness and regulatory temperance as to what it means to be “qualified” to be a Director, even on a public company board in Canada. The requirements are minimalist: You do not even need to be financially literate, at least initially, even to serve on an audit committee: You need to be over 18, not bankrupt, and not insane (and found to be such by a court). There are no requirements for continuing education or a code of conduct, unlike other fiduciaries;
  7. Academic evidence is that busy boards (a majority of busy directors on three or more boards) contribute to worse long-term performance and oversight, and that over-tenured directors (beyond nine years) diminish firm value [see my Activist panel notes and references];
  8. Evidence is women augment male director attendance; gender diverse boards allocate more time to monitoring; and “CEO turnover is more sensitive to stock return performance with a greater proportion of women on boards” – in other words, gender diverse boards are more likely to fire a non-performing CEO (Adams and Ferreira, 2008). Note also busy boards (see above) are less likely to fire non-performing CEOs (Fich and Shivdasani, 2006). Keep in mind: The choice of CEO is the most important decision a board makes and has the greatest affect on company performance;
  9. Not recruiting first time directors: Focus on board “experience” (rather than governance expertise) blocks women, whereas 80% of directors serve on only one board and no empirical evidence confirms multiple directorships contribute to performance and oversight (indeed the evidence is the opposite);
  10. Recruiting Directors previously known to the board may be at variance with the Board’s ability to push back (constructively challenge) against each other and Management
  11. “Boards with more directors that didn’t have prior relationships with other directors tend to address affective conflict more quickly than boards where directors had prior relationships.  I believe this is because of the deleterious impact on extra-boardroom relationships – directors with prior relationships don’t address affective conflict because they don’t want their behavior “corrections” to impact the prior business dealings (or relationship) they have outside the boardroom.” (SCharas, PhD candidate, email to the author, whom the author is supervising (disclosure));
  12. In other words, men may be “conflict-averse” (which perpetuates boardroom groupthink and management capture) because there is a greater cost due to relationships (social, economic, political, religious, other etc.) outside of the boardroom, because these Directors, in turn, were recruited because of this relationship and personal knowledge;
  13. “A prior study published in the HBR has found that teams that have women on them out-perform those that don’t for overall team effectiveness.” (ibid., Solange Charas, email to the author, 28 September, 2013) (http://hbr.org/2011/06/defend-your-research-what-makes-a-team-smarter-more-women/).
  14. Lack of robust independent director assessment, with consequences and direct link to re-nomination: perpetuates non/under performing Directors and frustrates renewal:
  15. Blockage of third party reviews of board and director effectiveness, by Manager or a Director: Regulators now are requiring regular third party (objective) reviews;
  16. Boilerplate one sentence disclosure of board effectiveness review;
  17. Lack of Canadian political leadership (until very recently in Ontario): Canada (other than Quebec) is late to boardroom diversification;
  18. Lack of agreement among provinces and stalling of corporate governance guideline development, including director recruitment, expertise and tenure (Canada is one of the few industrial countries that has not updated listed company requirements until before the financial crisis – NP 58-201);
  19. Use of largely binary regulatory guidelines [NP 58-201] governing director recruitment, rather than principles and practices that achieve the objectives of the principles [OSC proposal in 2008]: Leading practices are omitted, and undue deference / influence to those with vested interest in the status quo [read: conflicted], including stakeholders, who may be a vocal minority in the public debate or on a Board;
  20. Gamed or otherwise defective director bios (puffery, positions, roles occupied over a career), rather than disclosure of specific competencies and skills, at board and committee level, underscored by how and when the competency and skill was acquired, and how each competency contributes directly to the value creation plan and oversight of the company and its Management;
  21. Defining diversity expansively / downward to include almost anything (e.g., perspective, thought, viewpoint): Blocks women;
  22. Trade associations, funded by memberships, beholden to status quo members: undue deference to those with vested interests: Blocks women;
  23. Gaming of retirement age (69, 70, 72, now 75) and resistance to term and directorship limits by self-interested Directors;
  24. Resistance to competency matrix disclosure and transparent director nomination and selection practices: inadequate regulatory guidance;
  25. Undue influence of Management on the competency matrix (design and administration), whereas Nomination Committee must be independent (including its work);
  26. Pro forma management friendly governance documents proffered by management counsel or developed by Management (conflict in either case) vs. the Board or Committee or independent counsel, accountable to the Board, not Management;
  27. Gamed or defective director competency matrix (matrix not disclosed; competencies ill-defined, or unbalanced; scale ill-defined; no third party check): permitting fuzziness and back-dooring of preselected candidates, often known to one Director [see above study and “Friends Don’t Let Friends Join Their Board” by Amanda Gerut, Sept 30, 2013 (proprietary – see AgendaWeek.com);
  28. Pre-ranking and not interviewing prospective Directors; Not disclosing origination of a Director (how he or she came to be known to the Board);
  29. Not consulting with major long-term Shareholders on prospective Directors, and institutional shareholders, further, and perhaps more importantly, not having a roster of qualified directors and advancing proxy access;
  30. Search firm who also assists Management (executive search – conflict), or reporting to a particular Director (as opposed to a Committee), or not behaviorally validating Directors through rigorous processes: No code of conduct or industry practices for director search firms; and
  31. Matrix analysis by corporate secretary or general counsel who do not possess independence or expertise to do so.

Richard W. Leblanc, PhD

 


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