2013-05-23T16:57:13-04:00 Richard Leblanc http://www.huffingtonpost.ca/author/index.php?author=richard-leblanc Copyright 2008, HuffingtonPost.com, Inc. HuffingtonPost Blogger Feed for Richard Leblanc Good old fashioned elbow grease. tag:www.huffingtonpost.com,2013:/theblog//3.3223576 2013-05-07T11:44:54-04:00 2013-05-07T12:26:46-04:00

Richard Leblanc http://www.huffingtonpost.com/richard-leblanc/
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 domestic 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.]]> tag:www.huffingtonpost.com,2013:/theblog//3.3155079 2013-04-26T11:47:24-04:00 2013-04-26T11:47:30-04:00

Richard Leblanc http://www.huffingtonpost.com/richard-leblanc/ 85% 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.

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 [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.

]]> tag:www.huffingtonpost.com,2013:/theblog//3.3071970 2013-04-16T19:04:03-04:00 2013-04-16T19:04:13-04:00

Richard Leblanc http://www.huffingtonpost.com/richard-leblanc/
Here is why.

Consider how two hypothetical -- but typical -- board meetings play out: the first with a chair and CEO role combined in one person, with another director as a "lead director," and another board meeting 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 as a 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. They also don't control 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 and how decisions get made (or not). If the person controlling the discussion, the information and the agenda (chair) has a vested interest in the outcome (CEO), there is an inherent bias in all decisions. The board's fundamental oversight role to control management is compromised.

When I observe second types 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 cannot be found. The real resistance to splitting the roles were the egos and hubris of the incumbents, and a captured board beholden to them at the time.

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.

The fact of the matter is that having a non-executive chair separated from the CEO roles 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 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 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.]]> tag:www.huffingtonpost.com,2013:/theblog//3.3022471 2013-04-08T11:26:47-04:00 2013-04-08T11:28:46-04:00

Richard Leblanc http://www.huffingtonpost.com/richard-leblanc/
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.]]> tag:www.huffingtonpost.com,2013:/theblog//3.2891317 2013-03-18T13:54:35-04:00 2013-05-18T05:12:01-04:00

Richard Leblanc http://www.huffingtonpost.com/richard-leblanc/
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 billions of dollars in risky trades. (This happened twice, in two different banks. In the second bank, the director 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.

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, 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 directors sitting on financial institution boards should have 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 our 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. 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.]]> tag:www.huffingtonpost.com,2013:/theblog//3.2838632 2013-03-08T14:08:07-05:00 2013-05-08T05:12:01-04:00

Richard Leblanc http://www.huffingtonpost.com/richard-leblanc/
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:

1. 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.)

2. 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?)

3. 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?)

4. Do the Board and Board Chair have the will to hold management to account for results and the courage to act decisively when needed?

5. 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?

6. Does each Director have a meaningful portion of his or her own savings invested in the company?

7. Has the Governance and Nominating Committee recommended to the Board adopting shareholder accountability practices and removing entrenchment devices and other restrictions?

8. If or when needed, does the Board and each Board Committee utilize resources and advisors independent of management who represent the interests of shareholders?

9. Does the Board Chair and Governance and Nominating Committee look to shareholders for prospective directors, rather than to management?

10. 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.)

11. 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.)

12. 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.]]> tag:www.huffingtonpost.com,2013:/theblog//3.2790304 2013-03-01T17:35:53-05:00 2013-05-01T05:12:01-04:00

Richard Leblanc http://www.huffingtonpost.com/richard-leblanc/ performance metrics for Citigroup were changed following a failed say on pay vote a year ago. Yesterday, it was reported that Apple has required executives to hold triple their salary in stock.

The heat is now on Compensation Committees -- who approve and set executive pay -- more than ever before. Academic institutions are also keeping up, training our next generation of executives and directors on the rapidly changing terrain of best compensation governance practices and shareholder accountability. See the new course I developed for York University in this area, here.

What are the top pay practices for Compensation Committees? There are fifteen, listed below.

But before you read, ask yourself if you are a Compensation Committee member (or even a Board member not on the Committee), how many questions you can answer "yes" to.

If you are an investor, who will have a say on pay this upcoming proxy season, ask yourself if Compensation Committees at your investee companies conform to the practices below. The more questions that can be answered "yes," the greater the likelihood there will be pay for performance that is directly aligned with value creation for you as a shareholder.

1. Does each Compensation Committee member fully understand the company's business model, the key value drivers, and the performance metrics arising from achieving the company's strategy?

2. Does the Compensation Committee precisely calibrate these metrics such that there is a direct line of sight and sufficient stretch for short-term bonuses and long-term performance-based equity?

3. Has the Committee or an expert third party independent of management benchmarked your Compensation Committee Charter to best practices?

4. Have you approved, and can you defend, the compensation of oversight functions (e.g., internal audit, risk, compliance) and key risk-takers within the organization? (Assume compliance failure occurs and these pay practices receive expert scrutiny.)

5. Would a third party, after diligent checks into Compensation Committee member backgrounds and relationships to management, reasonably conclude that all Committee members are fully independent? (There are several red flags that may not be captured by formal independence standards - e.g., interlocks, reciprocity and social relatedness.)

6. Do you have one female non-CEO on your Compensation Committee? Do you disclose the competencies and skills for each Compensation Committee member on your website?

7. If you use a Compensation Consultant to assure compensation, has the entire firm or the person never done work for management before, and would otherwise be objectively viewed as fully independent?

8. If you retain a lawyer to advise, negotiate or draft compensation agreements or pay plans under the Committee's direction, has that lawyer never done work for the management before, and would otherwise be objectively viewed as fully independent?

9. Do you have bonus deferral and equity vesting and hold requirements that are performance-based and risk-adjusted by the Committee?

10. Would your compensation disclosure satisfy an investor as being fully transparent, understandable, clear, and absent of obfuscation or gaming? Do all Committee members fully review the disclosure, or have an independent advisor do so under the Committee's direction?

11. Whenever CEO compensation is discussed, the CEO leaves the room.

12. Does each Committee member issue a cheque from their own savings to satisfy stock ownership requirements? (In other words, the stock is not given in lieu of board service, but they must pay for it.)

13. Does your Compensation Committee meet directly with key investors to hear their views, without Management in the room?

14. Does every Compensation Committee member have tenure on the board not exceeding nine years?

15. Are key contractual provisions, such as a "clawback" or "malus," and pay practices drafted by the Committee or an advisor independent of management who reports to the Committee, incorporating best practices?

If you answered yes to all questions, or even almost all, you likely have a truly outstanding Compensation Committee and pay for performance. 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 ask if your Nominating and Governance Committee needs a reset.]]> tag:www.huffingtonpost.com,2013:/theblog//3.2754703 2013-02-25T17:57:02-05:00 2013-04-27T05:12:01-04:00

Richard Leblanc http://www.huffingtonpost.com/richard-leblanc/ here. I was particularly critical of how audit committees and boards oversee risk. Risk systems in many companies are immature. Look at BP, Wal-Mart, JP Morgan, HSBC, News of the World, Barclays, SNC Lavalin and MF Global. These are all risk management failures, which are turn are governance failures.

There is good reason for risk management failure.

Proper risk management requires internal controls to mitigate risk. (Internal controls are processes and procedures such as segregation of duties, documentation, authorization, supervision, physical safeguards, IT security and prevention of management override.) No one likes to be controlled. Risk management is not intrinsically profit-making. Therefore there is an inherent aversion to risk management by management.

This is why regulators now are targeting boards with greater risk governance obligations because only the board has the authority to control management. Recent bank governance guidelines in Canada require much stronger risk oversight by boards and audit committees. Recent Ontario Securities Commission guidelines offer advice to boards and audit committees with operations in emerging markets, coming out of the Sino-Forest debacle.

There is a strong bias for audit committees to oversee many risks, not just financial. No regulation mandates this however. Audit committees should not oversee risks that they are not qualified to oversee.

Here are a dozen broader questions to determine whether your Audit Committee needs a reset.

1. Do your board and board committees have coordinated coverage, assurance and reporting over all material enterprise risks, both financial and non-financial?

2. For any non-financial risks that your Audit Committee may oversee, do the skills and experiences on the committee match the oversight?

3. Has the Audit Committee proposed a written risk appetite framework, approved by the board, which translates into explicit limitations and thresholds throughout the organization?

4. Are there any acute risks that you do not understand, or over which management is capable of overriding existing controls?

5. Do all Audit Committee members have tenure on the board for fewer than nine years? (Exceeding nine years is a red flag for lack of independence.)

6. Do your independent external auditors have tenure for fewer than nine years? (This is also a red flag for lack of independence.)

7. If your company operates in an emerging market, do you have one Audit Committee member with direct experience operating in this market?

8. If your company has over 300 employees and it is a financial institution, or over 600 employees for any other type of company, do you have an effective internal audit function reporting directly to the Audit Committee?

9. Has your Audit Committee benchmarked the company's risk management and internal control framework against best practices, using an independent external advisor?

10. Do you have an effective risk function that reports directly to the Audit Committee or board of directors?

11. Does your Audit Committee understand fraud implications of accounting policies, methods for making estimates, and compensation metrics?

12. At each Audit Committee meeting, do you meet separately with each of the CFO; the internal audit function; the risk function; and the independent external auditor, without any member of management present?

When I asked for a show of hands during my lecture, not a lot of hands went up for many of the above types of questions.

If you answered yes to all questions, or even almost all, you likely have a truly outstanding audit 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 ask if your Compensation Committee needs a reset.]]> tag:www.huffingtonpost.com,2013:/theblog//3.2562195 2013-01-28T16:26:37-05:00 2013-03-30T05:12:01-04:00

Richard Leblanc http://www.huffingtonpost.com/richard-leblanc/
What the Board Expects from Management

Here is what a good board is entitled to expect from management, in no particular order:

1. No Surprises or Spin

There should be no surprises for a board. CEOs and senior management need to tell the board the true state of affairs, without the "spin." Directors know when they are not getting the "real deal" from management. If the CEO manages the board, or holds cards too close to the vest, this is a problem for a board.

2. Bad News Must Rise

The board needs to be the first to know when need be, not the last. Management needs to have systems, processes and incentives that promote full transparency and reporting, right up to the board and its committees. The board needs to be assured of this.

3. Deep Expertise in the Business

The board wants to see expertise across the full management bench, with no gaps. A problem arises when the board sees a weakness with which the CEO does not agree. Some CEOs have had trouble adjusting to a "new normal" of boards opining on C-level positions and oversight functions (e.g., internal audit). If a CEO does not accede to a board preference, this will be a problem.

4. Visibility of Management Thinking

The board should see proposed options from management, including what was rejected and why. Management's thinking and assumptions need to be fully transparent to the board and open to critique. A red flag occurs when management's thinking is not visible.

5. Full Information

There should be no information funneling or blockage of any sort. The board is entitled to any piece of information or access to any personnel to do its job. Management should support full information flow, including information that does not support management's positions.

What Management Expects from the Board

Management, in turn, has expectations of the board. They are:

1. Candor

Directors need to be candid and speak their mind in board meetings, not have hidden agendas, nor speak inconsistently offline. If directors are inconsistent, it can cause a schism in board-management relations and trust. The board should speak with one voice and not send mixed messages to management.

2. Integrity and Independence

Directors cannot be self-interested, nor use their position to self-deal. If a director promotes management capture to occur by currying favor with management, this will undermine management-board relations. Management is entitled to directors preserving their independence and not placing management in compromising positions.

3. Direction

A good and smart CEO wants a strong board. A board of directors should direct management as and when necessary to prevent the CEO from making that one big mistake. The board should be in charge at all times and management should know this.

4. React in a Measured Way

If management is to be transparent, the board needs to react proportionately. If there are leaks, or the board is constantly critical, the CEO will not bring ideas or concepts, or his or her real thinking to the board, but only a polished crystal ball for board approval. This tone will cascade to senior management. This could cause governance failure as the board is shut out.

5. Trust and Confidence

Management gets demoralized when they feel the board lacks trust or confidence in them.

If a board does not have trust or confidence in its CEO, it has the wrong CEO. CEOs may react when this happens -- "either you have confidence in me or fire me" for example. If the board as a whole lacks confidence in the CEO, the CEO needs to go. If only a small minority of directors do and cause dysfunction as a result, these directors need to go.

5. Knowledge of the Business

Management expects directors to invest the time to understand the business fully, especially if they are not from the sector. Otherwise, these directors will be of limited use to management strategically and their opinions will not be taken seriously nor be credible. Management gets frustrated by dated, legacy directors who have outlived their usefulness. Boards should know when this happens.

6. Meeting Preparation

Management expects each director to arrive fully briefed and ready to discuss and should be able to rely on this. Otherwise, the engagement level degrades and gets sidetracked. The chair of the board should set these expectations and lead by example.

7. Asking Good Questions

Lastly, management knows that the best directors ask the best questions that cause them to really think. If directors have a hobbyhorse, or ask inane questions in the eyes of others around the board-table, their credibility will suffer. These directors should go.

Many of the above topics are not visible from outside a boardroom. Nor can they be, for the most part, regulated. But they all contribute to the quality of the board-management relationship, board decision-making, and whether the organization is well governed.]]> tag:www.huffingtonpost.com,2013:/theblog//3.2392788 2013-01-01T12:28:49-05:00 2013-03-03T05:12:01-05:00

Richard Leblanc http://www.huffingtonpost.com/richard-leblanc/
Here are the questions I would ask before joining a NFP board. Some or many of them can apply to other types of boards. It is important to scrutinize the organization for professionalism and fit, particularly for NFPs where resources can be stretched, as your reputation and even financial assets may be at risk. Many directors I interview, when I ask for their greatest regret, they say not firing the CEO earlier, and joining the wrong board.

These questions try to address the downside of joining the wrong board. Here they are:

1. Do you have an inner passion for what the organization does and stands for (its vision, mission and values), and whom it serves? Can you make a solid contribution to the strategy of the organization and its performance?

2. For Director & Officer insurance, ask to see the policy and have it independently reviewed, including scope and depth of coverage, exclusions and indemnities. Assume the worst-case scenario, such as fraud, accidents, harm to a beneficiary of the NFP (e.g., student, children, patients, etc.), property destruction, harassment, or a completely unanticipated risk, including injury or death. Make sure you are appropriately covered, including advancement of legal expenses.

3. Ask about donor stewardship assurance, conflicts of interest, internal policies governing self-dealing, asset treatment, ethical compliance, expense reports for staff, gift policy, and reputational risk. Specifically, ask to see these policies and reporting as part of your "ask" binder of materials.

4. Ask to see all important reporting (financial, budgets, by-laws, strategic, risk, operations, resource allocation for programs and administration, beneficiaries / stakeholders, governance) as part of your consideration. Be prepared to sign a confidentiality agreement if you are asked.

5. Talk to current and past directors if possible (including CEO/Executive Director). Talk especially to former directors, if you can. Look at the tenure of management, staff and directors too. Prolonged tenure can indicate entrenchment and undue influence. Take a tour of key facilities as talks progress, to see the culture.

6. Who chairs the board and the audit committee? What is his or her leadership style, commitment to effective governance?

7. What are the board dynamics and board-staff relations like? Are there factions or control, by a particular donor, management or other stakeholder for example? Ask to see a board meeting in action if or when it comes close to the "ask" stage.

8. What are your roles, responsibilities, and expectations, both generally (as a director), but specifically for you? Are donations or fundraising expected? If so, what are expectations, so you know what you are signing on to. Be as explicit as possible here, tactfully and diplomatically. But don't not ask.

9. What competencies, skills and contacts do you possess that would contribute to your effectiveness as a director, that this NFP board is looking to you for? What contribution to you think you could make?

10. Do you understand fully, or have a capacity to understand fully within short order, the revenue model and the financial accounting and measurement issues involved in this NFP? Staff will make choices on accounting policies for making estimates, and you need to understand how and why, and to detect potential manipulation. (Assume fraud may occur.)

11. Is your directorship tied to your professional employment at your home firm? Do you have consent from your home firm on your end, if it is needed? You should obtain this if need be, as a case can be made for your professional development and relational enhancement. Tell your firm the name of the prospective NFP, as your identify and firm name (and its reputation) may be involved. Consent however should not unreasonably be withheld. Make the case for professional development, networking, learning, brand and reputation.

12. How many board and committee meetings are there? Length? Location? Frequency? What is the tenure? What are the conditions for reappointment or resignation, if any? The average board position, even in a NFP, is 200+ hours a year, particularly if you are not from the sector, so don't take a board position lightly. (Also, you are likely not being paid, although you will receive non-financial benefit from doing so, including satisfaction, networking, fun, and making a difference.)

13. Are there any pending or past litigation? Tax arrears? Wages? Infractions? Staff difficulties? Red flags? Problems or issues? (I would even do a search of the NFP and its executives, and even fellow directors, as a precaution. Many of these searches can be done online, but if you have red flags, there are several professionals who can help you with this due diligence. I can recommend some.)

14. What are the quality and ethics of the Executive Director and the management team (including CFO, and internal audit if it exists)? This question is very important. Is there a code of conduct and it is effective and enforced? If it a large NFP, you may want to speak to the external auditor and even the internal audit function.

15. How is the Executive Director assessed? By whom? How is compensation for him/her and staff established? Does the full board consent? Is compensation transparent, including to external stakeholders? (There have been past weaknesses on the issue of compensation, setting of it, approval and disclosure. Assume self-interest on the part of executives, and know what the role and power is of the board.)

16. Are there conflicts of interest between volunteers or operational roles and director/governance roles?

17. Does the organization have a whistle-blowing procedure? Is it effective? What are the ethical reporting procedures to, and oversight by, the board?

18. Does the board assess its own performance? Including the chair?

19. What are the professional development and learning opportunities on this board? What is the orientation program?

20. Lastly, why do you want to serve as a director of this NFP board? Does this board and sector align with your long-term career and director profile and trajectory? This may be your first board, and your first board likely is a NFP or governmental board, so plan for the future. If you are not entirely confident in the above and have any red flags, say "no thanks." More directorships will come along and remember, your subsequent directorships are based on your first one, so be careful in joining the "right" board for you. Then your directorial career can flourish.

Even if you get answers to many or most of the above questions, you will be in good shape as an incoming director. Good firms and people should have no hesitation whatsoever in fully answering these questions. (I have seen all of them answered in my own experience.) They know that their own reputation and that of the NFP are involved and they want the best directors they can find. You also establish your diligence but do so in a nice and professional way.]]> tag:www.huffingtonpost.com,2012:/theblog//3.2339690 2012-12-21T17:51:53-05:00 2012-12-21T17:15:35-05:00

Richard Leblanc http://www.huffingtonpost.com/richard-leblanc/
After the financial crisis of 2008, regulators stepped in (in 2012) to ensure that compensation consultants were hired by the compensation committee of the board and not hired by or unduly influenced by the CEO or other management. What about lawyers? Should lawyers who act for management also advise the board of directors? I don't think so.

Now there are strict independence requirements for both auditors and compensation consultants. Their primary client is the board of directors and ultimately shareholders, whom the board is there to represent. It is entirely probable that if you do your job properly as an auditor or compensation consultant, that you will make recommendations that management will not like.

You are there to act on behalf of the board and shareholders, not management. You cannot have dual masters and fulfill your fiduciary duties to only one as a professional. Indeed, auditors and compensation consultants cannot provide any additional services to management without the express consent from the board or a committee of the board. This authority is -- or should be -- rarely granted now.

Lawyers are equally important in the field of corporate governance. They interpret and apply legislation and offer advice to a variety of constituencies -- shareholders, directors, managers and other stakeholders -- who have interdependent and even adverse interests in the well- being of the corporation and the competition for scarce resources. If the above reasoning is correct, so far as auditors and compensation consultants are concerned, strict independence should also apply to lawyers.

What this means is that a lawyer (or even a law firm) that has acted, or currently acts, or seeks to act, for management, should be prohibited from also acting for the board. This independence requirement is not practiced currently. There are numerous lawyers and law firms who act for both management and boards. Because most fees originate from management work. The consequences of this is a pro-management bias exhibited by lawyers who have drafted protection and entrenchment mechanisms for management such as poison pills, dual class shares, restrictions on meetings and voting, and staggered boards. Lawyers then resist pro-shareholder governance reform such as majority voting, say on pay and proxy access.

When interests between management and shareholders become adverse, even through the regular course of events, it is important for boards to have their own set of lawyers who are independent from management and seen as objective and willing to act in the interests of directors, not management, and ultimately shareholders. Management lawyers frequently exhibit an anti-shareholder bias, using words such as "attack," "dissident," and "proxy fight." Shareholders suffer when the board retains advisors who are beholden to management.

Some services this new set of "governance-only lawyers" could offer include:

• Drafting board guidelines, committee charters and position descriptions for the board [if drafted by management lawyers, as they are now, these policies are often pro forma, management friendly, and restrict the board unnecessarily];
• Board and committee reviews of effectiveness [typically these reviews are done by management or management lawyers currently];
• Advising the board on activist shareholders, institutional shareholders and overall shareholder engagement [these governance lawyers would have a shareholder not a management mindset];
• Reviewing and opining on the annual proxy circular, on behalf of the board [typically the board does not have the time to do a detailed review];
• Review of the strategic planning process and value creation by management, on behalf of the board [again, with a shareholder mindset];
• Negotiating and drafting the CEO contract and its terms, on behalf of the board and shareholders [typically a management lawyer drafts the agreement];
• Assessments of risk management and oversight functions, on behalf of the board [again, the assessment would be independent of management and lawyers would work with independent auditors as necessary];
• Ongoing coaching and development and review of implementation of policies, on behalf of the board.

All of the above activities and services are currently offered by management lawyers primarily from the point of view of management, not the board and not shareholders. This needs to change. The lawyers involved should fall into line (or camps), just like the auditors and compensation consultants have. There is room for governance lawyers who are unambiguously there to act only for directors, on behalf of shareholders.]]> tag:www.huffingtonpost.com,2012:/theblog//3.2207950 2012-11-30T17:30:37-05:00 2013-01-30T05:12:01-05:00

Richard Leblanc http://www.huffingtonpost.com/richard-leblanc/ Municipal Conflict of Interest Act. Whether one is a supporter of Ford or not, Justice Charles Hackland's decision reinforces the importance of two issues -- governance and trust. Ford failed on both these counts. One cannot use municipal stationary to solicit private donations -- whether they be for a football team or anything else.

The cause or beneficiaries of the donations are irrelevant. Using government stationery implies that the communication is official and may inappropriately carry credibility that is not there. Ford refused to acknowledge that this action was inappropriate and, further, voted on a motion involving himself, which was also a conflict of interest. Only recently did Ford apologize, an action which should have occurred at the outset.

Fortunately, Toronto does not have is a situation that mirrors that in Quebec. We do not have a politician who committed fraud. But Ford did exercise very poor judgment and handling of the issue.

One of the fundamental tenets of good governance is to ensure that those in charge respect the institution and stakeholders they serve and adhere to rules and laws. Lawyer Clayton Ruby stated (see the video) that "it is important for the courts to assert that no one is above the law, Rob Ford included." The building of trust is forged over time and over repeated examples of good governance along with honesty, transparency and integrity. When a leader fails in any of these elements, reaction is strong and swift. Our leaders serve as beacons for the rest of society. We look to them, evaluate their actions and reactions, and use that as a bell-weather for our societal values. Our governance structures are a means by which we demonstrate this.

What went wrong in this scenario?

STORY CONTINUES BELOW SLIDESHOW


1. Rob Ford is a leader who cares less about building trust and more about winning. In his world, building bridges and coalitions to work towards improving the effectiveness of the city was not a priority. His arrogance alienated many and created disharmony and divisiveness. Justice Hackland stated Ford had a "dismissive and confrontational attitude to the Integrity Commissioner," a "stubborn sense of entitlement," and his actions amounted to "willful blindness."

2. There are politicians who have brought their animosity to the political process to demonize and vilify one another. Discussions on important municipal issues are protracted, ineffective and obstructionist, as the sides gear up to fight. If this kind of behaviour were to take place on a corporate board or among senior management, the business would collapse. Shareholders would not allow it.

Politicians are supposed to set the bar for responsible governance, integrity and leadership. Their responsibility is to govern, and govern effectively through compromise and reaching across the aisle, not proroguing legislatures, or by being distracted or dysfunctional. Many politicians in Canada and the US have failed badly and citizens are the losers. Just on the municipal level, three mayors of major cities in Canada are now out of office in as many weeks.

3. The lack of trust and job fulfillment has spilled into the public sphere with important issues set aside while camps and individuals wage personal wars. The infighting, posturing and protracted bickering have wasted time and money. Important issues continue to be ignored. The politicians and the political process have lost their credibility and integrity. Citizens look at this and wonder why they bother to vote.

The situation in Toronto (but other cities as well) has provided a glaring example of what happens in our democratic process. It's not good enough that citizens have the right to vote every four years. It is what happens in between elections that is troubling. No private or public sector company would ever tolerate this level of ineffectiveness and inefficiency. Why do we allow it in our political sector? Politicians should expect as much from themselves as they do from others.]]> tag:www.huffingtonpost.com,2012:/theblog//3.2185634 2012-11-24T18:04:26-05:00 2013-01-24T05:12:02-05:00

Richard Leblanc http://www.huffingtonpost.com/richard-leblanc/ The Salvation Army has been in the news due to a massive theft of children's toys from its warehouse. It fired its executive director in response and is investigating the circumstances surrounding this crime.

While the scale is large, it is not unusual to encounter examples of theft and embezzlement in organizations. The pharmaceutical industry has had its share of problems with Pfizer having to pay over $2 billion in fines over fraudulent marketing practices and Abbott Laboratories having agreed to pay $1.5 billion to resolve allegations that it illegally promoted the drug Depakote. In 2007, PBSJ's CFO was imprisoned after his $36 million embezzlement scheme only to find them in trouble again in 2009 for illegal campaign contributions. What is going on here?

Most large organizations have loss prevention officers whose role is to protect assets through implementing security and safety programs for employees and customers. They also have internal audit functions and controls to test, monitor and prevent these types of crimes. What happens when these systems break down and crime occurs?

Theft happens when there is opportunity, incentives and lack of internal controls. A board, or lack thereof, controls and approves all of these factors -- and in particular, controls. Richard was in Calgary after the XL Foods crisis, lecturing to a room full of directors on beef association boards in Alberta.

"Do you approve the internal controls over food safety?" he asked. Not many hands went up. "Do you take tours of the plant, seeing the line, and talking to workers? Do you have an internal audit function that tests the design and effectiveness of internal controls, and reports directly to you?"

Again, not many hands went up.

A proper board will want to see validation over the internal controls over all material risks -- in the form of real-time risk registers with individual accountability and mitigating actions. Material risks are not just financial, but non-financial. This includes operational controls, such as the line in a meat plant, or the warehouse with toys in it. As the Basel Committee on Banking Supervision has advised (see Principle 9 on page 3), the "board of directors has the ultimate responsibility for ensuring that senior management establishes and maintains an adequate, effective and efficient internal control system."

What leads to this apparent lack of awareness of the need for board involvement in internal controls? Internal controls basically constrain management. No one likes to be controlled and there is the subsequent resistance to increasing pressure from the board to management to have proper controls in place. Tension exists between the desire by management to operate independently and the board's duty of oversight. In not-for-profits and charities especially, there are stretched resources, volunteers, and a tendency to trust people. However, fraudsters exploit these areas of vulnerability.

Trust is at the heart of the issue. The implicit social contract that exists between boards and senior management is essential to the effective management of any organization. It would be impossible to run any organization effectively if the board micro-managed the executives.

In charitable organizations, the level of trust is even higher. This is especially true for faith-based organizations when it seems to be anathema to the spirit and the essence of the faith to doubt its volunteers and employees.

Therefore, boards who are concerned with not appearing heavy-handed or disrespectful may err on the side of blind trust. This is a grave mistake. This leaves a large gap where fraudsters see an opportunity and take advantage. This also leaves a gap for abuse or taking advantage of beneficiaries such as children or others. We only have to think to the recent Penn State scandal to know of the tragedy that ensues.

Controls need to be person-proofed and require a diligent board with authority and competency to require adequate reporting, controls and follow up. Sadly, this was not the case at the Salvation Army and the board (or lack thereof) is at fault. Donations may suffer but more importantly, so will children at this time of year.

]]> tag:www.huffingtonpost.com,2012:/theblog//3.2162257 2012-11-20T10:11:50-05:00 2013-01-20T05:12:01-05:00

Richard Leblanc http://www.huffingtonpost.com/richard-leblanc/
The Walmart bribery probe has widened beyond Mexico to include China, Brazil and India. The RCMP is investigating the SNC Lavalin bribery allegations, on which Richard advised a law firm suing the company.

Richard blogged about Sino-Forest, a case of alleged Chinese fraud by a Canadian-listed company. In Quebec, the corruption inquiry has cost the Mayors of Montreal and Laval their jobs and this is only the beginning. There are allegations of kickbacks in cash that may reach other more senior politicians. And Ontario is not immune either. A senior Canadian director remarked that Ontario has a reputation for being "the best place to carry out a stock fraud in the industrialized world."

What is going on here? As immersed as the business community is in ethics and corporate governance, are these organizations just not getting it? Our gut reaction is to dismiss these organizations as exceptions to the rule, but then we see Walmart on the list. Walmart, whose revenue is larger than the GDP of Norway, has klout. When Walmart resorts to bribes, we wonder who else is playing that game. More importantly, how do we stop it? How did it start?

Like so much unethical behaviour, the misdeed usually starts out small. As humans, we are very good at rationalizing bad behaviour and distancing ourselves from our lies. As Dan Ariely states in his new research, as long as we can rationalize things to a higher degree, then we can lie more. The rationalization of bad corporate behaviour doesn't operate in a vacuum. It has lots of support and endorsements along the way. It requires that numbers of people either sign off or turn the other way when evidence of unethical behaviour comes to light. So, the fraud and corruption continues to grow.

What should boards do? Six things. First, boards must make it crystal clear to management that the company is not going to bribe and management must walk away from certain business. The board must support this and not have incentives that promote bribery. Second, the internal controls over financial reporting must be strong in all markets, both domestic and international. Third, if you are doing business in a market in which you know that fraudulent behaviour is the norm, you need a director with extensive on-the-ground experience at the board table, who can tell you and management what the hotspots are.

You should move a board meeting to the jurisdiction once a year so directors can get a first hand look. Fourth, boards must have their own experts to scrutinize off-balance sheet and related-party transactions and complex structures, and validate and assure internal controls. If dealing with international markets, provide foreign language document translation. Fifth, local auditors in foreign markets should have the same oversight and scrutiny. Last, a policy of zero tolerance needs to be communicated - and when necessary demonstrated - by the board to each employee and supplier.

Clearly, more work needs to be done. It starts at the board level but it is the responsibility and obligation of every employee to adhere to ethical principles and practices.]]> tag:www.huffingtonpost.com,2012:/theblog//3.2109388 2012-11-12T00:05:42-05:00 2013-01-11T05:12:01-05:00

Richard Leblanc http://www.huffingtonpost.com/richard-leblanc/
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.]]>