There is no substitute for a culture of integrity in organizations. Compliance alone with the law is not enough. History shows that those who make a practice of skating close to the edge always wind up going over the line. A higher bar of ethics performance is necessary. That bar needs to be set and monitored in the boardroom.  ~J. Richard Finlay writing in The Globe and Mail.

Sound governance is not some abstract ideal or utopian pipe dream. Nor does it occur by accident or through sudden outbreaks of altruism. It happens when leaders lead with integrity, when directors actually direct and when stakeholders demand the highest level of ethics and accountability.  ~ J. Richard Finlay in testimony before the Standing Committee on Banking, Commerce and the Economy, Senate of Canada.

The Finlay Centre for Corporate & Public Governance is the longest continuously cited voice on modern governance standards. Our work over the course of four decades helped to build the new paradigm of ethics and accountability by which many corporations and public institutions are judged today.

The Finlay Centre was founded by J. Richard Finlay, one of the world’s most prescient voices for sound boardroom practices, sanity in CEO pay and the ethical responsibilities of trusted leaders. He coined the term stakeholder capitalism in the 1980s.

We pioneered the attributes of environmental responsibility, social purposefulness and successful governance decades before the arrival of ESG. Today we are trying to rebuild the trust that many dubious ESG practices have shattered. 


We were the first to predict seismic boardroom flashpoints and downfalls and played key roles in regulatory milestones and reforms.

We’re working to advance the agenda of the new boardroom and public institution of today: diversity at the table; ethics that shine through a culture of integrity; the next chapter in stakeholder capitalism; and leadership that stands as an unrelenting champion for all stakeholders.

Our landmark work in creating what we called a culture of integrity and the ethical practices of trusted organizations has been praised, recognized and replicated around the world.


Our rich institutional memory, combined with a record of innovative thinking for tomorrow’s challenges, provide umatached resources to corporate and public sector players.

Trust is the asset that is unseen until it is shattered.  When crisis hits, we know a thing or two about how to rebuild trust— especially in turbulent times.

We’re still one of the world’s most recognized voices on CEO pay and the role of boards as compensation credibility gatekeepers. Somebody has to be.

Did You Say “Fraud,” Mr. Mozilo?

When Countrywide Financial’s Angelo Mozilo told a Congressional committee in 2007 that there was a lot of fraud in the subprime business, we thought at the time it might be a prophetic statement.   The Securities and Exchange Commission apparently agrees, as this week it laid civil charges of securities fraud against the company’s former CEO. What we sometime ago dubbed as Mr. Mozilo’s miraculously timed stock sales, the SEC thinks could be insider trading.

In 2006, Mr. Mozilo was among America’s ten highest paid CEOs, with a paycheck that topped $142 million. Between 1999 and 2008, he pocketed some $400 million in total compensation. It will be interesting to see whether this was one of those cases where the compensation was fully justified–as Countrywide’s board always maintained during this period–and an example of aligning the interests of CEOs with those of investors, or whether it was, instead, nothing more than reward founded on sands of subprime fraud and another example of CEO pay being aligned with CEO greed.

Is Countrywide Sinking Too Fast for Bank of America? | Part 2


With yet more losses and its recent credit downgrade to junk status following stunning statements by Bank of America regarding Countrywide’s debt, the question is how many icebergs will this Titanic of subprime lending need to hit before the inevitable occurs?

In a posting on Tuesday this week, we suggested that Countrywide’s sinking financial state might be a worrisome signal to Bank of America, and that the sudden 990 percent increase in bad loan provisions ($158 million for Q1 2007 vs. $1.5 billion for Q1 2008) might be something of an unanticipated iceberg for the deal. More and more, Countrywide is beginning to resemble the Titanic of modern subprime lenders: an enterprise that was based on flawed principles, that had become too large for its own good and was steered by overpaid egos who never contemplated the prospect of disaster. The question is: Will it meet a similar fate?

The record is not encouraging. Somehow Countrywide managed to strike another iceberg in a matter of days. On Friday, Standard and Poor’s cut Countrywide’s credit rating to junk status. It based its downgrade on a filing by Bank of America on May 1st that discloses it might not be taking on some $38 billion in Countywide debt. As a statement from the rating agency noted:

Until this filing it was our understanding that [B of A] would acquire all of Countrywide as stated in the January 2008 merger agreement. This new filing raises the possibility that this assumption is no longer true.

The downgrade could trigger a host of draconian actions on the part of lenders and insurers of Countrywide’s obligations that will prove very costly to that company and much more expensive and complicated for Bank of America to complete the transaction.

We have previously conjectured that in its acquisition of Countrywide, Bank of America may be trying to follow the JP Morgan Chase model for the Bear Stearns takeover. In that case, JPMorgan was able to get rid of nearly $30 billion in riskier Bear securities through a Fed-led bailout. B of A’s announcement this week that it might not be backing such a huge chunk of Countrywide’s bonds and notes was considered something of a surprise among analysts. We have been predicting for some time that the element of surprise will be Countrywide’s constant companion. So far, we’re batting 1000. The biggest surprise, however, will be if this deal actually goes through before the Countrywide ship has gone down and top managers and directors have decided to jump into the lifeboats.

A couple of weeks ago, I was interviewed by Barron’s on B of A’s plans for Countrywide. I suppose my comments were too trenchant for the folks at that magazine, since they did not run them. What I said, however, seems to have been fairly close to the mark, given recent events. Here’s part of the interview:

Bank of America may not be as smart in seeing the potential downside of this acquisition as it claims. What is at the heart of many fears about the deal is a concern that we may be witnessing the creation of another Frankenstein-like Bear Stearns monster that just causes a whole new set of problems for everybody. You have to wonder if Bank of America has a plan to get some of the poorer Countrywide assets off its books, as JPMorgan Chase did with Bear Stearns, leaving others on the hook.

Stay tuned for more surprises.

Is Countrywide Sinking Too Fast for Bank of America? | Part 1

Conventional wisdom holds that the best time to buy a ticket on a ship -or the whole ship, for that matter- is when it is not sinking. But it is not entirely clear that Bank of America, which apparently still plans to acquire the losing Countrywide Financial, understands this principle of both physics and economics. Countrywide today reported write-downs of $3.5 billion for the first quarter of this year, along with a net loss of $893 million, more than double its net loss for the fourth quarter of 2007. It was the company’s third consecutive quarterly loss.

When CEO Angelo Mozilo boasted that Countrywide would soon return to profitability following its first-ever loss in October of last year, we expressed some doubt. Evidently, it was stringing its shareholders along with the same kind of lines that got so many of its subprime customers into the mess they are in.

The numbers are large, but the biggest eye-popper was below the surface, which, as all informed followers of the Titanic saga will know, is often where the greatest danger lurks. The company set aside $1.5 billion for bad loans compared with $158 million in the comparable quarter last year -a staggering increase of 990 percent. That thud you heard might just be the iceberg.

What more surprises await next quarter? If Bank of America is still to go through with the transaction, it will likely be on the basis of the Fed’s swap-your-junk spring deal whereby weak collateral can be exchanged for Fed happy bucks, or some other form of hokus pokus, to make the mess at Countrywide easier to swallow. One has to wonder if Congress is really on top of what’s going on here, or if the Countrywide deal is another Bear Stearns in the making under a sleeping Rip Van Bernanke?

UPDATE (April 30, 2008):Perhaps we won’t have to wait for the next quarter to see if there are more suprises. The Wall Street Journal Reports today:

A federal probe of Countrywide, the nation’s largest mortgage lender, is turning up evidence that sales executives at the company deliberately overlooked inflated income figures for many borrowers, people with knowledge of the investigation say.

Outrage of the Week: When Subprime CEOs Dissemble Before Congress

Never in modern business has so much been given to so few for such colossally failed results.

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In just five years, these three CEOs made more than $460 million while leading their companies into the greatest losses in their history. One of them, Charles O. Prince of Citigroup, even got a bonus of $10 million, despite presiding over more than $20 billion in losses and write-downs. Stanley O’Neal left with $161 million after Merrill Lynch chalked up its largest losses ever. And Countrywide Financial‘s Angelo Mozilo, one of the highest compensated CEOs in America, has pocketed more than $400 million since 1999. The company has lost four times that amount over the past six months. Never in modern business has so much been given to so few for such colossally failed results.

To the average working person, who rarely receives a bonus even for doing an exemplary job, much less a bad one, this performance must have seemed like something of an out-of-body experience. Pay and accomplishment seldom have seemed more disconnected.

But to the past and current CEOs who testified before the House Committee on Oversight and Government Reform this week, there is no disconnect at all. The universe, for them, unfolded exactly as it should. It was about as we expected.

They, and the heads of the board compensation committees which approved these deals, all offered the usual bromides: The amounts were fully approved; the money was earned; the market is king; high pay is needed to attract and keep the best talent. How it is that CEOs who preside over record losses represent the best talent was never quite explained. One claimed only to want to help homeowners live out the American dream. Another cited his grandfather being born a slave. A third trumpeted his company’s ethics and corporate governance reforms.  Mr. Mozilo ventured that the subprime meltdown had a notable culprit:  “There was a lot of fraud there.” he told lawmakers.  Many will agree, but they might not be thinking about the garden variety mortgage applicants to which Mr. Mozilo was referring.  What role more lofty figures had in pushing out subprime loans, and who benefited from the resulting torrent of fees and record bonuses, will be something regulators and legislators should be looking at more closely.

The group of CEOs and directors who appeared before the comittee managed to slice and dice their compensaton decisions so much that they looked like they came out of a boardroom Veg-O-Matic: the pay wasn’t for this year, it was for last; it wasn’t severance, it was deferred compensation; it wasn’t a bonus for this year, it was payment for previous excellent performance. They said they actually lost a lot of money when the stock went down, just like all the other shareholders. Except most other shareholders did not head the company and make the wrong decisions. Most did not run up record losses and most did not receive tens or hundreds of millions in stock options and bonuses and salaries bigger than the state of Texas. One more thing: the process, they testified, is all fully in accord with the Business Roundtable guidelines on CEO compensation. Now that’s a really high bar. The Roundtable is made up of America’s top and best-paid CEOs. The ranking Republican on the Committee, Rep. Tom Davis (R-Va.), called the Business Roundtable guidelines the “gold standard” for corporate compensation. Is that because it makes sure the CEOs get all the gold?

Astonishing even for this group, when asked by Rep. Paul Kanjorski (D-Pa.) if there was any amount they would consider to be too much, there was silence, punctuated by self-serving proclamations of satisfaction with the way things are. All reassured the committee that they were not underpaid, however, and thus a sigh of relief was heard across the country.

America is experiencing one of the worst economic downturns since the Great Depression. The brokerage and mortgage lending industries played the central role in creating this contagion. But if high CEO pay is truly linked to performance and is good for the economy, people will want to know why it is, during a period that has seen the largest transfer of wealth from investors to the boardroom in history, the result is now one of falling stock values, shrinking economic growth, galloping home foreclosures and mounting job losses.

The hearing this week gave a rare opportunity for business leaders to admit that CEO compensation has gotten out of control and that it’s time for a new reality show in the boardroom. What began with the attendance of prominent CEOs and boardroom luminaries ended with the spectacle of men twisted like pretzels, having engaged in every type of contortion to show that these compensation arrangements were reasonable and had nothing to do with decisions to pump out more fee-generating subprime loans and structured investment vehicles. They also sent a veiled warning: any change to or reduction in the way CEOs are compensated, and capitalism as we know it may not survive. Here’s a bulletin for the boardroom: capitalism may not survive the kind of leadership that permits an ever increasing gap between CEO pay and everyone else’s, rewards failure with multi-million dollar bonuses and severance, and sees CEOs spinning off with a king’s ransom while leaving everybody else in the dust.

This was an opportunity for real leaders to admit that there are serious problems between the leadership class of capitalism and those who depend upon it for their well-being. To stand up and acknowledge the trend toward excess, to take the lead in stepping back and not being the first in the lifeboat when disaster strikes, to show some meaningful sacrifice at a time when so many are hurting instead of flashing five figure watches, five thousand dollar suits and a tan direct from the winter mansion at Palm Beach (or Palm Springs) -this would have been the kind of leadership that CEOs showed during two great wars and other times that tested America. This group showed none of that. One suspects they are, regrettably, an accurate reflection of the pool of CEOs and directors of which they are a part.

Excessive CEO pay has become synonymous with what is worst about American business: crony boards where one back scratches the other; compliant compensation committees made up of past and current CEOs; and an ethical value system enabling displays of greed and over indulgence that is not something parents generally want to impart to their children. It has been associated with every scandal from Enron and WorldCom to Nortel and Hollinger and countless failures in between. It is now a contributing factor to the recession that is unraveling the world’s credit markets and crippling economic well-being for millions.

What was obvious, too, from the testimony is that none of these CEOs and business leaders is possessed of superhuman ability. All seemed rather ordinary in the insights they offered and in the information they imparted, despite being recipients of extraordinary compensation and a corporate publicity machine that makes superman look like a slacker.

Despite the number of experienced CEOs and directors who appeared before Congress this week, one voice was distinguished by its absence: that was the voice of genuine leadership. America is entitled at a time of crisis to more than the spectacle of hugely paid, decidedly self-satisfied CEOs who feel that the system is working as it should. It needs leaders who recognize there is a need to restore public confidence in capitalism and the ethics of those who steer it. And that requires shared sacrifice and an understanding that, even in the great American boardroom, there are limits to what rational people both need and deserve.

Capitalism, like any household, should be governed by values, and not just who can get the most as quickly as they can. And so the actions of the CEOs and directors who appeared before Congress this week, and the failures of their boards that produced these results, is our choice for the Outrage of the Week.

The Scary Subprime Thinking of Angelo Mozilo and Other Overpaid CEOs

At what point will law makers, regulators and investors see that the so-called link between performance and high CEO pay is one of the greatest hoaxes ever perpetrated on the American public?

When the House Committee on Oversight and Government Reform meets today on the subject of CEO pay as it relates to Countrywide, Merrill Lynch and Citigroup, its attention will no doubt be turned to a stunning and illustrative example of the warped thinking that permeates too many boardrooms today. It comes in the form of a 2006 message which Countrywide CEO Angelo Mozilo wrote to his personal compensation consultant (who was paid for by the company):

Boards have been placed under enormous pressure by the left wing anti business press and the envious leaders of unions and other so called “CEO Comp Watchers” and therefore Boards are being forced to protect themselves irrespective of the potential negative long term impact on public companies. I strongly believe that a decade from now there will be a recognition that entrepreneurship has been driven out of the public sector resulting in underperforming companies and a willingness on the part of Boards to pay for performance.

(E-mail from Angelo Mozilo to John England, Oct. 20,2006)

In fact, Countrywide’s CEO and its board were obsessed with the subject of CEO pay and have devoted considerable energy to that topic. As we pointed out some months ago, Countrywide’s compensation committee met a staggering 29 times in 2006, according to the company’s 2007 proxy statement.

We’ve also observed what we have called Mr. Mozilo’s miraculously timed stock sales beginning in late 2006 and all through 2007. The exercise price for his stock was considerably lower than the trading price at the time. In 2007 alone, Mr. Mozilo received about $120 million in the form of compensation and proceeds from the sale of Countrywide stock.

So here’s a question: Since Mr. Mozilo was paid nearly a quarter of a billion dollars from 1999 to 2007 (House Committee figures), was it the “left wing anti business press” and “envious” union leaders who were responsible for the company’s losing $1.2 billion in the 3rd quarter of 2007 and a further $422 million in Q4? If he had been paid more, would the company have underperformed less?

As we noted previously in connection with our submission to the U.S. Senate banking committee in 2002 during its hearings into the Enron collapse and related scandals, in the past the lure of huge stock option packages has “tempted many CEOs to artificially push up the price of the stock in ways that cannot be sustained, and to cash out before the inevitable fall.”

When the dysfunctional state of executive compensation can produce the kind of screwy investment vehicles that were based on the wildly unrealistic subprime market, without proper consideration for their longer run hazards because CEO pay is so tied to short-term gains, and place the entire economy at risk of recession, the public at large, and not just company shareholders, has an undeniable stake in the efficacy and soundness of corporate compensation decisions.

America, and by extension much of the industrialized world, is today facing the worst credit disaster since the Great Depression. The crisis was prompted by the failures related to subprime mortgages and the myopic machinations that financial institutions engaged in to push out these toxic investment vehicles to unsuspecting clients. This took place at a time when the greatest transfer of wealth was occurring between CEOs and shareholders in the history of modern capitalism.

At what point will law makers, regulators and investors see that the so-called link between performance and high CEO pay is one of the greatest hoaxes ever perpetrated on the American public?

The Enronization of Countrywide?

Last October, when Countrywide Financial posted the first loss in its history, we expressed skepticism over the company’s claim that it would return to profitability in the fourth quarter. That quarter has come and gone and the company today announced a net loss of $421.9 million. The loss for the previous quarter was $1.2 billion. An impairment charge of $831 million related to mortgage and credit issues was also recorded for the fourth quarter.

We noted that when the company made its claim about better times ahead (to which the market responded affirmatively) CEO Angelo Mozilo was busy selling a bundle of his own shares. (more…)