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Archive for the ‘Women on Boards’ Category

A rebuttal to Terence Corcoran’s “OSFI and the bureaucratization of corporate governance”

Terence Corcoran launched a scathing attack against recent regulatory announcements by the Office of Superintendent of Financial Institutions (OSFI) and the Ontario Securities Commission (OSC) on assessing and interviewing directors, and strengthening gender diversity, respectively.

OSFI announced, in a draft advisory, that it intended to ask for curricula vitae of, and interview, certain directors and senior management, who include oversight functions. The Ontario Securities Commission, in a request for comment, has proposed disclosure amendments that include addressing term limits; the representation of women on boards and in executive officer appointments; and internal targets that companies could set to achieve greater gender diversity.

Mr. Corcoran calls OSFI’s announcement a “bureaucratization” of governance; contends that the OSC will “force” women directors onto boards in a “social policy agenda”; and calls an academic study “Junk Science,” while accusing the study’s authors of “manipulating” their data: a very serious charge. All these contentions warrant a counterpoint.

Currently, financial institution and public company directors are self-selected by themselves or, worse yet, management. Shareholders may not propose their choice of, or remove incumbent, directors. They press for this right, otherwise known as “proxy access,” (e.g., shareholders who own 3% of common shares for three years can propose up to 25% of a board’s directors in an uncontested election), but boards resist. Company management has challenged proxy access in court, and has won.

Therefore, there is no third party oversight or validation of director skills, qualifications and selection. This reality enables self-interest, entrenchment, recruitment on the basis of personal relationships, discrimination, and directors who do not possess requisite expertise and background.

My own research and work with boards suggests directors can and often are conflicted through gifts, donations, offices, vacations, jobs for acquaintances, prior friendships, and other perks that management gives them. I have observed and assessed bank directors who tell me they do not understand acronyms that are being discussed. One director, emblematic of many, told me, “we don’t understand derivatives.” I have witnessed directors: arrive unprepared for meetings; fall asleep at meetings; who have “not made a single contribution in years” (according to other directors); and who do not do “any of this” (proper risk management). In one instance, a female director was proposed to a largely male OSFI regulated board, and a male director remarked “she’s attractive … since she likes skiing and sailing, she’ll be a good board member.” In another, a director asked “You want us to appoint a lady to our board?” A board chair once told me “There are only twenty women in Canada who are board ready.” (The qualification to be a director is often minimal: over 18, not bankrupt, and not insane.)

I also regularly conduct reviews of significant companies where directors are lacking in relevant industry and risk expertise. This is not true of all boards.

In short, how directors are selected, and what their qualifications are, are largely shielded from scrutiny. Investors are left to rely on fuzzy short bios, and assertions that a proper recruitment process based solely on merit has occurred.

OSFI enacted significant changes to governance, requiring: boards to have directors with risk and financial industry expertise; an explicit risk appetite framework; and oversight functions (including internal audit) reporting directly to them.

I know of at least one bank, one utility, and one university (and these were the only three organizations I checked) where the Internal Audit function reports to the CEO or CFO, which is wrong.

Corporate governance involves a legacy of “independent” directors, opaque selection, and deficient reporting, assurance and internal controls. Interviews, CV checks, and greater disclosure, which shareholders should be doing, can put the heat on boards to clean much of this up. Regulators have shown internationally that they are prepared to conduct interviews and enact competency matrixes in the absence of shareholder oversight. If boards wish to forestall regulation, the answer is to improve their practices and disclosure consistent with best practice, which now includes diversification.

Indeed, Canada is late to this global board diversity movement. The majority of peer countries around the world have already enacted diversity legislation, in many cases in a much more intrusive approach than the balanced and proportionate approach the OSC is suggesting. Mr. Corcoran states the OSC is going to “force” companies to appoint more women. This in my view is not correct because companies with no or few women on their boards are free to describe why this is the case, and why this should continue.

This is not a bureaucratization of governance, but a prudent assurance of systemically important financial institutions. Interviews are wise because simple questions, such as “To whom do you report?” “How did you come to be selected?” and “What relationships do you have with directors or management?” address what CVs can hide.

Shareholders can tell when they meet with a director whether that director is “camera ready,” and OSFI will be able to as well. If a director is camera ready, and possesses all the requisite qualifications to be fit and proper, they should have nothing to worry about. Indeed, good directors should welcome the interview.

Lastly, Mr. Corcoran derides academic studies. This past summer, a primary drafter of guidelines that had a profound effect on governance and director selection in Canada remarked publicly, “We did virtually no research.” This is unfortunate because academics bring something to the table. They adopt an independent, evidence-based approach. I have numerous studies underscoring the positive effects women on boards have. There are studies suggesting CEOs do not make better directors; tenure beyond 9 years diminishes shareholder value; and busy boards with over-boarded directors result in diminished board oversight and performance. People should not be afraid of, or deride, academic studies. On the contrary, they should welcome and learn from them.

Academic studies should be more widely consulted, not less. My own LinkedIn group, Boards and Advisors, has almost 10,000 members, attesting to the benefits of academic, practitioner – and journalist – interaction.

Richard Leblanc is an Associate Professor, Law, Governance & Ethics, at York University. He also teaches corporate governance at Harvard University, and regularly advises boards and regulators. His views are his own. Disclosure: Professor Leblanc has advised, and has been retained by, OSFI and the OSC.

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.

 

Getting More Women on Canadian Boards, Part 1

The Ontario Securities Commission (OSC) should be congratulated for addressing gender diversity last week. Other than Quebec, the addressing of boardroom and senior management diversity (beyond gender) has been long overdue in Canada.

However, the central thrust of the proposal is a “policy” that listed companies may – or may not – draft; and that listed companies may – or may not – disclose. Measureable objectives within the policy may – or may not – occur. These requirements are very wishy-washy. This is an overly tempered, passive and permissive approach.

The OSC’s approach was said to be modeled off of the Australian one, but it was not in several dimensions, as I read things. The Australian approach actually defined diversity, which goes beyond women, and holds companies responsible for setting measureable objectives and reporting specific progress against their achievement. There are several content suggestions Australia provided as well. The UK’s approach to diversity is also stronger than the OSC’s, as are several countries in Europe.

A “policy” approach with insufficient guidance is unwise. The Americans adopted this approach with regard to diversity and it has been an abject failure. Clever lawyers can craft well sounding polices that are so general that it is virtually impossible not to comply with them. I remember one case where a NYSE company lawyer (a white male) actually tried to convince me that eleven all-white-male directors were, indeed, diverse because all the men had a diversity of “perspective” and “opinion.” This is what happens when regulators are passive or complacent.

This is part of a larger issue with the OSC, and that is inadequate articulation of principles and practices within its overall corporate governance framework. Other than disclosure, here, which is in turn modeled off of guidelines for publicly-listed companies, the actual guidelines are a mere four pages. They have not been updated since the financial crisis and are outdated, originally drafted in 2004 and approved in 2005.

For example, the approach to risk management within this National Policy is only two lines. (See 3.4 (b) and (c) here.) This hardly captures what has happened in the field of risk governance best practice since 2008. I advised a company last week that had a massive risk management failure and the word “risk” is not even mentioned in the vast majority of its governance terms of reference documents. This is hardly surprising given the OSC’s approach to risk itself.

The superficial approach to strategic planning and value creation is similar (See 3.4 (b) here.) A TSX board must simply “adopt” a strategic planning process [what exactly is a “strategic planning process”?], and approve a strategic plan once a year that takes into account the risks of the business. It is hardly surprising that strategy gets short shrift in many boards, my research suggests.

Without guidance, any policy, approach, or plan, or even a director “competency” can mean whatever the drafter [usually management or an advisor beholden to them] wants it to mean. This is precisely where blockage, entrenchment, and ultimately decision-making failure can and does occur.

What the OSC should instead do is move towards a comprehensive framework of governance (i) principles and (ii) practices that achieve the objectives of the principles, which other jurisdictions use. A series of succinct almost binary guidelines is simply inadequate and naive. Other jurisdictions, such as the UK, South Africa and EU have far more comprehensive principle and practice approaches, which guide companies when they comply or explain. A set of recommended practices, when it comes to diversity for example, can be pointed to by progressive directors or investors. And it is not an excuse that comprehensive principles and practices cannot be crafted because of the variety of Canadian companies. South Africa has just as great a variety of companies, and its King III Code, which is one of the most comprehensive in the world, applies to all types of companies, including: listed, private, not profit and state owned. Principles and practices is a drafting exercise and require work.

Without principles and practices, other initiatives such as diversity are bootstrapped onto inadequate guidelines.

Take individual competencies and skills of directors for example, which relate to diversity. TSX companies should recruit directors on the basis of “competencies” and “skills” (see sections 3.12 – 3.14 here), but nowhere are “competencies” or “skills” defined, nor are examples of competencies or specific expertise suggested. Other Canadian regulators (including ones I have advised) are more specific in articulating what expertise directors are expected to possess, offering comprehensive frameworks and practices, including for risk management.

Otherwise, a company is free to draft fluffy guidelines, policies, charters, and so on, that are largely public relations exercises or designed to keep the power with management, rather than designed to advance the spirit of what the regulator intended. They ultimately have limited force or effect. They are designed to protect and forestall. Many of the companies I research who have failed have similar fluffy policies. Retained management lawyers perpetuate this with cut and paste precedent exercises spread amongst their clients.

Without sufficient guidance provided by a regulator, short bios occur; or it is simply stated that a director possesses a given competency, without articulating how and when the competency was acquired. What happens here is that women are short-shrifted as they are alleged not to have the experience or the qualifications when they may or do. Second, guidance can be offered on how directors should come to be selected for membership, including interviews, short-lists, advertisements and so on, as other jurisdictions are doing.

In my next blog, I will outline specific defects of the above OSC’s proposed policy, in accordance with best practices other jurisdictions have adopted.

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.

Eight Traps of Boardroom Diversity

There are myths and vested interests in the movement towards boardroom diversity now underway in several countries.

In this first of two blog posts, I consider the “traps” and embedded myths. In the second blog post to follow, in about a week’s time, I will propose solutions.

Here are the eight “traps” as I call them.

 

1.         The “Defining diversity downward” trap

“Diversity” itself as a word is used to shape the debate. Australia has a succinct definition: “‘Diversity’ includes gender, age, ethnicity and cultural background.” If diversity is undefined by a regulator (such as in the US), or there is inadequate guidance provided to companies, then companies can define diversity to suit their own agendas, such as diversity of “perspective” or “training” or “educational background.” This leads to the unintended consequence of a board of almost all white males claiming itself to be diverse when it is not. To drive this point home, I usually post a cartoon of white males sitting around a board table stating that they believe they are diverse because they attended different private schools.

“Moving the Needle,” which is the subtitle for the diversity debate favored by a few groups, is another example suggesting minimalist change.

“Competencies” and “attributes” (or qualifications for directors) also need to be defined and disclosed more fully, on a director-by-director basis, because these criteria for director selection have implications for the diversity movement. “CEO,” for example, is not a competency. (See the “We want a CEO” Trap below.)

2.         The “Business case” trap

“Show me the business case,” opponents to diversity argue, and proponents attempt to advance. The fact is that peer-reviewed empirical evidence is mixed in the effect that adding women to boards has upon corporate financial performance, as is the effect of boards themselves upon financial performance. Engaging in this debate is a distracting non-winning proposition. Perhaps the business case for men sitting on boards should also be established. The case for diversifying boards should be based on the effect on debate and decision-making within the boardroom, and on the full use of available talent and equity arguments (read: it is the right thing to do), not on downstream financial outputs.

3.         The “Be careful” trap

When women directors are advanced, a response received is “Be careful, as we need qualified directors” (or words carefully spoken or written to this effect). This assertion lacks any empirical support whatsoever. It was offered in Quebec when the Premiere mandated that women must receive parity on Quebec boards and the cultural make up must match that of communities in which the company operates. Proponents of this myth should bear the burden of establishing how women or minority directors are not “qualified” to sit on boards, and indeed what it means to be “qualified” to sit on a board.

When visible minorities as directors are advanced, such as African, Hispanic/Latinos and Asian Americans (whose proportion on boards are in the 1-3% range depending on the survey), the other “be careful” argument I receive is, to use the words of an Assistant Secretary of a large US company “corporate boards should not be designed to be all things to all people. It’s not necessarily in the best interest of a company to try to make the board look like the General Assembly of the United Nations, the U.S. Congress, or U.S. Supreme Court.”

My response to arguments like the above has been: “Listen, the numbers have flat-lined for women and minorities at 15-16% and 1-3% respectively for some time, so if and when boards look like the UN or we have too many women (which will likely never occur in my lifetime), then we can talk about hypothetical arguments. Until then, let’s confine ourselves to the evidence and the here-and-now. And, having multi-culturally diverse boards looking more like communities and emerging markets is especially important if a multinational company does business around the world.

4.         The “Entrenchment” trap

Stanford researchers content that only 2% of directors who step down are dismissed or not re-elected, out of a total universe of 50,000 directors. In other words, 98% of directors retire voluntarily. This needs to change so there is greater board renewal and turnover. Term limits of nine years are now instituted in the UK, Hong Kong, Singapore and Malaysia. North American regulators should consider the effect that prolonged tenure has on director independence. Director tenure should be based on performance and it should be easier for shareholders to nominate and remove directors. Any board policy restricting entrenchment should not contain “grandfathering” (exempting existing directors) and should be decided by disinterested directors (and preferably shareholders) unaffected by the policy and free from undue influence of other directors or management.

5.         The “We want a CEO” trap

The expressed preference for CEO-directors (current or former) is based on a myth unsupported by research that CEOs make better directors. (It may be that CEOs prefer like-minded and sympathetic supporters.) Giving primacy to CEOs also has the effect of excluding diverse directors.

According to a study, 80% of directors believe active CEOs are no better than non-CEO directors. CEOs tend to be stretched, bossy, poor collaborators, and do not listen. Research also supports tenuous advantage of CEO-directors. Also, only 46% of directors believe former CEOs are above average.

“We want a CEO” may be “code” for women or minorities need not apply.

6.         The “It’s whom you know” trap

According to course materials I am using in my Harvard corporate governance course this summer, unlike executive recruitment, where interviews occur of a short list of candidates occur prior to making a choice, in director recruitment, candidates are instead ranked (1, 2, 3 and so on), and NOT interviewed. But rather, the first candidate is approached for a board position. The second and third candidates are approached only if the preceding candidate said “no.” There is no clear rationale for this anomalous recruitment practice and it has the unfortunate effect of excluding unknown but highly qualified candidate directors. It forces women into hyper-network mode because no interactive validation of competencies exist or opportunities to meet the nominating committee. This unfortunate practice perpetuates the “it’s whom you know,” mentality towards board directorship, rather than one’s competency and skills. Everyone loses when directorship is based on patronage, favors or nepotism. The board is weaker as a result.

7.         The “Prior experience” trap

There is no evidence of which I am aware confirming that first-time directors are less effective than long-serving directors, or the that the latter are more effective. The focus should be on underlying competencies and attributes and track record of accomplishment. See “Traditional benchmarks keep many women off boards…” Governance is a learned sport, just like anything else. And it is not rocket-science. The fact of the matter is that search firms and nominating committees should focus their efforts on validating and assuring competencies and intrinsics necessary to be a good director, such as integrity, leadership, mindset, industry track record, value creation process, shareholder representation and culture of equity ownership, communication, commitment and specific functional skills needed by the board – and not on an arbitrary metric of prior experience that may or may not relate to the above. The sooner this occurs, the better.

8.         The “Pipeline” or “Shallow pool” trap

Women have not made it to senior enough levels and the director talent pool is too shallow, is the final myth. Show me the evidence that this is the case. Perhaps boards are not looking hard enough. In my experience, which includes resume and profile assessment of some of the most senior C-suite women in North America, many of these candidates are markedly superior to the lesser-qualified incumbent directors. Perhaps the “pipeline” is full with qualified director candidates, and it is a mindset recruiting issue more than anything. As Deepak Shukla writes, “From my experience, every time I have attempted to start a discussion thread on the Institute of Corporate Directors’ group (mainly comprised of sitting board directors) on the subject of diversity, I have been greeted with a cold shoulder and an utter lack of responses!”

Join my blog next week where I will propose solutions to address the eight traps above, and action that should be taken by shareholders, search firms, nominating committees, industry associations and regulators to propel boardroom diversity into action.


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