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The Mayor of Toronto’s entrenchment needs to end

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.

Political accountability and self dealing

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.

Best practices in corporate governance, gender diversity and shareholder activism

I am giving a talk this week as part of a panel discussion on the above topic. Here is the advert if people are intersted, and here are my slides.

Mayor of Toronto Rob Ford’s Errors

Rob Ford apologized yesterday, but that should have occurred months if not years ago when the letterhead to solicit donations was used. He said he did not benefit from the conflict of interest. This is not only incorrect, but also not relevant. Conflicts of interest are based on perception, not what the recipient thinks.

Ford made several strategic errors. Here they are:

  1. He did not take advice, legal or otherwise, the judgment confirms. This is remarkable. The Municipal Conflict of Interest Act is a “sledgehammer,” according to Professor David Mullan and former Integrity Commissioner. I agree. There should be graduated penalties commensurate with infractions, rather than declaring the seat vacant. A lawyer could have predicted that this conflict would end up putting a stranglehold on Ford and removing him from office. Ford was not even familiar with the above Act, he acknowledged under cross-examination. He was also alleged by the Integrity Commissioner to be in violation of the Code of Conduct at Articles IV, VI and VIII, and by requesting forgiveness of the donations, the Lobbyists’ Code of Conduct. Justice Hackland found Ford had a “dismissive and confrontational attitude” towards the Code.
  2. Ford did not act on the advice he did get. He was instructed, immediately preceding a vote, not to vote on a motion in which he had a pecuniary interest. Ford refused, and not only spoke to the motion, but also voted on it. This was a fatal flaw. It is entirely correct that Ford ought to have had the opportunity to speak as a matter of procedural fairness, as his lawyers argued in the judgment, but that was not what the Act read. (The Act really does need to change to enable a person alleged to be in conflict to speak to the issue in an open forum.)
  3. Ford stubbornly refused to acknowledge the case against him. And it was a silly, amateurish case that should have been avoided. Ford should have known better. Soliciting donations using government stationary implies the communication is official and carries credibility on which the requesting party is trading. It opens the door to expectations by lobbyists of favorable treatment resulting from the donation. This, precisely, is what the Act seeks to penalize. The recipients or cause – or even the quantum ($3,150.00) – is not the issue. Indeed the more deserving the cause, the greater the likelihood is that the conflict will be acute and unrecognized.

The Integrity Commissioner’s report, which Justice Hackman referred to as “excellent,” reads:

“In fairness to Councillor Ford, it is common for a person who has blurred their roles to have difficulty “seeing” the problem at the beginning. It often takes others to point out the problem, especially in a case where the goal (fundraising for football programs for youth) is laudable. The validity of the charitable cause is not the point. The more attractive the cause or charity, the greater the danger that other important questions will be overlooked, including who is being asked to donate, how are they being asked, who is doing the asking, and is it reasonable to conclude that a person being asked for money will take into account the position of the person asking for the donation.”

And it is not the case that Ford did not benefit.

The Integrity Commissioner goes on to write,

“Where there is an element of personal advantage (in this case, the publication of the Councillor’s good works, even beyond what they had actually achieved), it is important not to let the fact that it is “all for a good cause” justify using improper methods for financing that cause. People who are in positions of power and influence must make sure their private fundraising does not rely on the metaphorical “muscle” of perceived or actual influence in obtaining donations.”

This is the heart of the case against Ford. Justice Hackland wrote that Ford ignored the law, did not secure professional advice, and this amounted to “willful blindness.”

Regardless of one’s politics, this case was not well handled by Ford. His legal team is expected to apply for a stay of the judgment and file an appeal.

Banking Directors Need to be at the Top of Their Game

There’s an old maxim that corporations don’t fail, boards do. And when banks fail, the reason is poor management, which is the fault of a poor board.

Take the case of Lehman Brothers, the financial services firm that collapsed in 2008 and played a big role in the global economic downturn. Stanford University professors David F. Larcker and Brian Tayan noted that Lehman’s board was lacking financial services experience and current business acumen. In fact, the former CEOs on the board were, on average, 12 years into their retirement. “This raises the question of whether the professional experiences of Lehman board members were relevant for understanding the increasing complexity of financial markets,” wrote Larcker and Tayan.

Well, the job of a bank board isn’t getting any easier. Following the financial downturn, banks have been placed under greater scrutiny and new regulations, both in Canada and abroad.

That’s why, more than ever, banking board directors need to be at the top of their game.

Last week, I spoke to bank directors in Dallas, Texas, about banking governance best practices as a result of a review that I had conducted for the Office of the Superintendent of Financial Institutions. (The OFSI is Canada’s banking regulator.) Specifically, I looked at Canada’s governance guidelines and board assessment criteria and compared them with international financial regulatory practices and recent developments. I provided the OFSI with suggestions for revisions.

Some proposed board reforms to Canada’s deposit-taking institutions and insurance companies sectors under the new guidelines include:

  • Having directors who possess risk management and relevant industry experience;
  • A risk committee that oversees enterprise risks, and a chief risk officer who reports directly to this committee and the board;
  • Board approval of the internal control framework to mitigate all material risks to the financial institution, and board monitoring of internal control effectiveness;
  • Expert third party reviews of the board’s effectiveness, risk management effectiveness, and effectiveness of oversight functions (such as internal audit), with results reported to the board;
  • Enhanced director orientation and training, self assessment and external reviews;
  • A board-approved risk management statement that translates into cascading limits and thresholds for all material business risks (e.g., credit limits, loan losses, capital levels);
  • The internal audit function should report directly to the audit committee; and
  • The audit committee, not management, should approve the scope of the external auditor’s engagement and fees.

When I asked for a show of hands as to how many banking directors adopted at least some of the above best practices, about half the hands went up.

However, it’s apparent that many boards aren’t prepared for a new era of banking regulations.

Remember the JPMorgan board of directors that oversaw the derivative failure that cost the bank several billion dollars? Well, here is the current board. Last I checked, not a single director other than the CEO had banking experience. This is wrong.

In 2009 and 2010, there were a total of 297 bank failures in the U.S., according to the Federal Deposit and Insurance Corporation. In the second quarter of this year, the FDIC identified 732 “problem” banks which are at risk of failing.

At the event in Dallas, one of the speakers brought up a good point. “Don’t get involved in something you don’t understand,” said Charles G. Cooper, commissioner of the Texas Department of Banking. He added: “The duties haven’t changed, but the topic is harder.”

And he’s right. That’s why it’s vital that banking boards are well-equipped with qualified directors for this increasingly complex environment.