Governance Blog

American Banks Should Split the Chair and CEO Roles

Apr 12

Posted in Board and Committee Leadership, Independence and Role Clarity | Comments Off on American Banks Should Split the Chair and CEO Roles

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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

Posted in Uncategorized | Comments Off on Political accountability and self dealing

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

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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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The demise of the “blue chip” director

Mar 16

Posted in Member Selection, Competencies and Commitment | Comments Off on The demise of the “blue chip” director

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These are disguised but true stories.

A director who has never operated a plant or worked in the company’s industry chairs the board’s health and safety committee. Internal controls are missed and poison in the company’s products kills several customers.

A director from the food industry chairs the bank’s risk committee. The director does not understand complex derivatives. The bank loses hundreds of millions of dollars in risky trades. (This happened twice, in two different banks. In the second bank, which lost billions, the risk committee chair was from a museum that received donations from the bank.)

Many directors on this third board have no experience in the company’s industry or in the complex overseas markets in which the company operates. The company has alleged widespread bribery, for which the industry is notorious. The CEO is arrested and the company’s brand is splashed all over the news.

This director chairs a company’s strategy committee but has never worked in the industry. The company loses 75% of its stock value. It takes the company years to finally bring industry experts on to the board, but it may be too little too late.

Many directors on this board have never worked in the industry and do not understand financial reporting necessary to sit on this board. They do not recognize potential fraud and inappropriately incent management. The company goes from an iconic Canadian brand to almost nothing. Shareholders lose billions.

In Canada, prior to the arrival of a shareholder activist compelling necessary board change, this board did not even have a single director (other than the CEO) with experience in the very industry in which the company operates. The stock is now up 30%.

There are several other examples. In all of the above, the boards supposedly looked “great.” They were composed of high-profile, so called “blue chip” directors – former politicians, ambassadors, company CEOs, presidents, consultants, lawyers, academics and so on, yet there were all abject failures.

In Canada, as in several other countries, you do not have to understand the business to sit on the board. Shockingly, in Canada, a director does not even have to be financially literate (at least initially) to sit on the audit committee of a public company. Yet we expect these directors as fiduciaries to oversee shareholder investments and the company’s best interests. The requirements for being a public company director are astonishingly minimal.

The vast majority of directors are selected on the basis of formal independence, yet the academic evidence runs counter to this. I recommended to the Office of Superintendent of Financial Institutions in a study I was asked to do, that boards of financial institutions should have directors with industry and risk expertise. This is now the law in Canada – but it took until 2013. The SEC in 2009 (post financial crisis) enacted a law, citing my work, that directors had to be selected on the basis of qualifications, skills and competencies.

One reason activist directors are frustrated, they tell me, is the astonishing lack of experience directors have, from the industry that is necessary for the company’s strategy, and with solid track records of value creation. They, and the media, are now scrutinizing the background and expertise of directors. This is a welcome development. There needs to be a fundamental change in the way directors are selected, and the ability of shareholders to remove directors who do not have the background or experience.

The three most important attributes for a director are knowledge of the business, financial acumen and backbone. Most directors are not selected on this basis. If you do not have this, directors sit in meetings without any ability whatsoever to contribute meaningfully. Most of the time, they are silent, pretending to understand. They are out of their depth and taking up a valuable spot.

Contrast this with directors who are selected properly, not on profile, pedigree or prestige, but on mindset, experience and strategic track record. These directors are a pleasure to see. Management has to bring their “A” game for these directors. These directors ask question after question after question, weighing in with their enormous experience (often much more than management) and telling management what to think of, what the flaws are in their thinking, and how to perform better and recognize opportunity to add value. These directors hold management accountable and have the heft to do so. They know what questions to ask and when to act. They have “been there, done that.” When necessary, they tell the CEO which way to part his or her hair. There is no ambiguity in these boardrooms who is in charge. Management is accountable to the board and the board to shareholders.

Sadly, these latter directors and boards are in the minority.

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Does Your Board Chair and Governance and Nominating Committee Need A Reset?

Mar 8

Posted in Board and Committee Leadership, Shareholder Accountability | Comments Off on Does Your Board Chair and Governance and Nominating Committee Need A Reset?

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I am currently interviewing shareholder activists, hedge funds and private equity leaders on changes to public company boards to make them more focused on value creation and company performance. I am also interviewing leading directors and CEOs. My research reveals a disconnect between how many boards operate and how shareholder advocates believe they should operate.

For a board to operate effectively, it starts with an independent and effective Board Chair and Governance and Nominating Committee, which are the leadership and inner workings of a Board. It is here where governance accountability is established and good directors are selected, or not.

The focus since Sarbanes Oxley has been on the Audit Committee, and since Dodd-Frank on the Compensation Committee. But without an effective Board Chair and Governance and Nominating Committee, management accountability to the board, and board accountability to shareholders will be undermined.

If you want to make your Board more focused on company performance and value creation, ask yourself whether your Board Chair and Governance and Nominating Committee can answer “yes” to most of these questions, based on my interviews, in no particular order:

Has the Board set standards for a vigorous value creation process, and does its value maximization plan clearly and simply spell out key timelines, milestones, targets, and individuals accountable for each key plan component and specific results? (Is the Board’s plan as good as or better that what an activist shareholder can provide? It should be.)
Does each Director have the background into the company, the business model, the industry and markets to fully understand the value drivers and associated risks? (If not, does the Chair and Board have the backbone to replace those directors?)
Leadership goes well beyond whether the Chair is independent or not. Does the Board Chair possess the following attributes: Shareholder mindset, leadership, understanding of the value creation process and the capital markets, ability to view things holistically, an ethic of accepting personal responsibility, industry experience, and no desire for CEO role? (If not, is the Governance and Nominating Committee strong enough to recommend to the Board to replace the Chair?)
Do the Board and Board Chair have the will to hold management to account for results and the courage to act decisively when needed?
Does the Board ensure direct links to performance and value creation and the need to hit certain targets before any executive incentive compensation kicks in?
Does each Director have a meaningful portion of his or her own savings invested in the company?
Has the Governance and Nominating Committee recommended to the Board adopting shareholder accountability practices and removing entrenchment devices and other restrictions?
If or when needed, does the Board and each Board Committee utilize resources and advisors independent of management who represent the interests of shareholders?
Does the Board Chair and Governance and Nominating Committee look to shareholders for prospective directors, rather than to management?
Does the Governance and Nominating Committee ensure that all governance terms of reference been redesigned to reflect the Board’s focus on value creation and company performance? (Many times these terms of reference written by management keep the board at bay.)
Does the Board Chair and other Directors engage regularly and directly with key shareholders, without the presence of management? (The vast majority of boards do not meet with shareholders.)
At these Director-Shareholder meetings, are the following matters covered off: Value creation and company performance; status of governance initiatives; board and committee composition and renewal; risk governance; and the governance of executive compensation?

If you answered yes to all questions, or even almost all, you likely have a truly outstanding Board Chair and Governance and Nominating Committee. You may even wish to apply for a governance award, here.

If you cannot answer yes to the majority of these questions, you have work to do.

Join me in my next blog where I will discuss “What makes for a high-performance Director?” based on about 30 interviews with shareholder advocates, search firms and members of the NACD 100 and Top 100 CEO listings.

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Dr Richard Leblanc

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American Banks Should Split the Chair and CEO Roles

Political accountability and self dealing

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

The demise of the “blue chip” director

Does Your Board Chair and Governance and Nominating Committee Need A Reset?