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.

Would a Sensible Investor Buy into the Bush Bailout Plan?

Making bad investment decisions over risky products that people did not fully understand is what brought the United States and Wall Street to the brink. Is another terrible folly about to be repeated, even with echoes of the costs and misadventures of the Iraq war booming loudly across the land?

Investors generally like a few details before laying out their money. A knowledge of the investment’s business plan, its costs, its expected return and its risk –above all, its risk– are key to the decisions investors make. It should be no different for citizens when they are asked to put $700 billion on the line for the private sector.

In this case, however, basic rules for the informed citizen/stakeholder are being thrown out the window. How the Bush bailout plan will be managed, what assets it will buy, how it will value and how long it will hold them are all undisclosed. It is hard not to be doubtful that the compromise proposal now being discussed will offer much more information. There is considerable dispute that the plan even addresses the fundamental problems in the banking sector. A rare and impressive collection of more than 200 economists, including Nobel laureates from both the left and the right, have raised serious questions about the plan and have urged Congress to reject it and to hold hearings into alternatives.

Making bad investment decisions over risky products that people did not fully understand is what brought the United States and Wall Street to the brink. And the sums stagger the mind. When you make a decision involving this amount of money, every detail matters. Probably even the spin of the earth should be calculated in the analysis for good measure. But what utterly takes the breath away is the lack of transparency and specifics offered as they relate to the single largest expenditure by any government in the history of the world. There is no clear statement even as to the kind of weak assets the government proposes to buy, much less how they would be valued. I suspect it will soon work its way down to student loans, car loans and credit card debt. Given the desperate picture portrayed by Fed chairman Ben S. Bernanke –who claimed in testimony before Congress on Tuesday, “I believe if the credit markets are not functioning that jobs will be lost, that our credit rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover in a normal, healthy way…”– and Treasury Secretary Henry M. Paulson Jr. –who resorted to begging House Speaker Nancy Pelosi, on a bended knee, for her support– don’t be surprised to see some banks even scurrying to trade in the trashy boardroom artwork selected by the chairman’s wife for some quick government cash.

Then there is that convenient cash and carry discount window the Fed is providing on a 24/7 basis. In the course of less than a year, deposit taking and investment banking institutions have so far borrowed a record $262.34 billion. The amount doubled in just the course of one week, the Fed said in its September 25th report. Total average daily borrowing also jumped to $187 billion from $50 billion in the previous week.

This unheard of level of borrowing from the Fed has received nothing near the reporting it deserves. To some observers it suggests that bank liquidity problems may be even more serious than are being disclosed. How much more will the taxpayer be on the hook for in addition to the $700 billion now being sought by the administration, which in turn is on top of the hundreds of billions that are on the line for all the other bailouts to date? If ever there was a time when the voices of the best economic minds in the world needed to be heard by lawmakers and citizens alike, it is now. Yet there has been no organized forum for either informed debate or Congressional testimony. Not only is $700 billion at stake, but much more will be at risk if the wrong decisions are made or the wrong problem is attacked. And what does the government do if it gets it wrong? Will the administration’s massive proposal stabilize a weakening housing market, which is the driving force in the erosion of corporate balance sheets and the unraveling of debt obligations, or will it merely be a prisoner in an even faster moving express ride downwards?

Institutions are failing, to be sure. Just this week Washington Mutual became the largest failure of its kind in history. But if the $700 billion dollar fund had been up and running, it is unclear whether it would have made any difference. And no one from the administration or Congress has weighed in on that issue. Even before this deal was proposed,  Fed and U.S. government commitments and costs related to this crisis totaled more than a trillion dollars. Still, we are told a credit market calamity unlike anything since the Great Depression is possibly hours away unless taxpayers pony up hundreds of billions more.

So what exactly is the problem this bailout is supposed to be addressing and is it the right one? What if banks, having sold off their bad loans to the government, decide not to lend any money, except to other banks and their wealthiest clients? What will be the costs to the economy and to small business owners as well as ordinary Americans? Taxpayers should not be left scratching their heads for the answers. Some may recall that, as noted on these pages, just after the $21 billion takeover of AIG, the White House admitted that taxpayers may not see their money returned.

Here’s an idea: Why don’t Wall Street and the private sector take a more prominent role in cleaning up the problem that was of their creation? We are told that trillions of dollars is sitting on the sidelines and is ready for the right opportunity. But little effort is being made to corral these resources into an overall plan. It is just another inexplicable piece of a puzzle that has been turned into a masterpiece of confusion and uncertainty. Another nagging item: If the world is hanging on by the finger nails over the abyss of financial collapse which can only be averted by the steps the Congress is being asked to take, and so much anxiety centers on how the Asian markets will react on Sunday night (EDT) if the deal is not approved, why have governments around the world not proposed their own contributions to global economic salvation? Why do we not see their lawmakers meeting around the clock and over the weekend to do something to appease the markets?

Is America stumbling into a financial Iraq? The rush to attack a problem that did not exist on the basis of costs and consequences that were not anticipated have already taken their toll on America, its brave young troops, their families and the reputation of the country. The financial price tag for the Iraq misadventure is also counted in the hundreds of billions. Some estimate that it will soar into the trillions. Are we dealing here with the financial equivalent of threatened mushroom clouds and weapons of mass destruction? Another echo from that lamentable miscalculation is the idea that government cash may wind up making money for taxpayers. And the Iraq war was supposed to be self-funding from that country’s extensive oil reserves. Americans are still waiting for that windfall.

This much is clear from that costly experience: When principles that affect public confidence are sacrificed for the expectation of immediate gain, both stand at risk of being lost.

What is worrisome is that few leaders in business and government have demonstrated any grasp of the larger picture. Not only is there an apparent inability on the part of both Democrat and Republican legislators to connect the dots between the Fed’s record loans, the costs of the recent torrent of bailouts, the extent of the subprime mortgage mess, the swelling deficit and shrinking U.S. dollar and this latest government proposal, it is unclear that they even see the dots at all. The lack of leadership in providing the public with clear answers was especially apparent in Friday’s first debate among presidential hopefuls John McCain and Barack Obama.

The way Wall Street has been working is no way to run a business. The way the Bush bailout plan is being decided is no way to run a government. We are already seeing the consequences of the first fiasco. One shudders to think of what might await in the mismanagement of the second.

Outrage of the Week: The Hijacking of American Capitalism

The promise of this new era of market miracles has been shamefully betrayed by a self-serving collection of greedy CEOs, disengaged directors and regulators who, far from envisioning the new frontier of the global economy, have shown themselves unable to see even into the next week.

It was advertised as a sure path to wealth and prosperity for the world.  If only American capitalism could be left unfettered.  If only regulations would be loosened.  If only CEOs could be incentivized with huge bonuses that would be paid out when their efforts resulted in a rise in stock.   Just let the market work its magic, and the world would be changed forever.  History will record that, in September of 2008, part of that promise was fulfilled.  The world was changed, but not exactly in the way that was promoted.  Over the course of a day or so, the world actually held its breath while the financial system glided Titanic-like ever so close to the iceberg that was Wall Street’s creation.

During the years leading up to the near calamity and the tsunami of disbelief that finally overtook Wall Street this week, more wealth was transferred by shareholders to CEOs than to any similar group or at any other time in history.  Directors, too, made a huge cash grab to compensate, they claimed, for the heavy work load that was now being required of them.  And regulators, like the Federal Reserve, were willing to do whatever Wall Street and the financial sector needed to keep the fees rolling in.

Wall Street and American business had pretty much all they wanted, except for those nagging requirements of the Sarbanes-Oxley Act of 2002.  They, too, were well on the road to being blunted with the arrival on the job a couple of years ago of Henry M. Paulson, Jr. as the fresh-from-Wall Street Treasury secretary.  Loosening the clutches of regulation was his first priority.  “We must be careful not to kill the goose that lays the golden egg,” was the mantra of lobbyists, the Business Roundtable, right-wing think tanks, dark paneled boardrooms and not a few well-financed politicians.

But the promise of this new era of market miracles has been shamefully betrayed by a collection of greedy CEOs, disengaged directors and regulators who, far from envisioning the new frontier of the global economy, have shown themselves unable to see even into the next week.  A few months ago, Secretary Paulson claimed we were closer to the end of the crisis than the beginning.  Two weeks ago, he asserted that “the American people can remain confident in the soundness and resilience of the financial system.”  His opinion seems to have changed with each of the crises he was incapable of foreseeing until it struck.

Rather than seeing itself transported to the promised land of a new prosperity, Main Street America finds itself today squarely plunked at the junction of Crisis Road and Bailout Boulevard.  And those well-heeled CEOs who were trumpeted for their out-of-this-world skills with pay checks to match?  They turn out to be as authentic and respectable as a third-rate circus act.

The tax-cutting Republican administration and Treasury secretary who were the biggest boosters of American business and free market capitalism have now become the biggest interventionists, writing the biggest bailout checks in American memory.

History will have much to say about the circumstances that led to this crisis.  And it will ask with a decidedly more demanding voice than heard thus far among policy makers and commentators, how was it possible for American capitalism to have been permitted by its regulators, guardians and gatekeepers to have reached a point where decisions of CEOs and boards were so reckless that they ultimately brought the world’s financial system to the brink of collapse?

The answer will be seen, symbolically at least, through the prism of excessive CEO compensation, which some six years ago we described to the U.S. Senate Banking Committee as the most corrosive force in American business.  We said then that the lure of huge bonuses tempted CEOs to take risks that cannot be sustained.  The subprime meltdown is unsustainable risk writ large.  It is another story of greed overcoming responsibility and of boards yet again, as they have in so many scandals in the past, acting more as a combination of cheerleader and ATM machine for overreaching CEOs instead of the wary sentries they are supposed to be.

As we predicted at the beginning of the year when it became apparent that Countrywide Financial would not survive on its own:

This is only the beginning of the bailout process that is unfolding…. Main Street always pays for the wild parties Wall Street throws and the cleanup required afterwards.

Significantly, all the failures, bailouts, meltdowns and write-downs have carried with them the earmarks of high abuses in CEO pay.  Over the past five years, when the faulty, risk-oblivious decisions that led to the present crisis were being made, the CEOs of Merrill Lynch, Citigroup, AIG, Lehman Brothers and Bear Stearns received an aggregate compensation in excess of one billion dollars.  One only has to recall the antics of Bear Stearns’s James Cayne, the colossal greed of Contrywide’s Angelo Mozilo, the dissembling of Lehman’s Richard Fuld and the narcissistic actions of Merrill Lynch’s Stanley O’Neal -who waltzed off with more than $160 million after leaving investors stung with multi-billion dollar write-downs and losses- to be persuaded of the depths to which the leadership of Wall Street and the financial community has fallen.  With captains like this, and the apparently vision-blind Henry “the American people can remain confident in the soundness and resilience of the financial system” Paulson at the helm, the surprise is not that the financial system has been teetering on the abyss, but that it has not fallen in more often.

Now the $700 billion price tag for the excesses and failures of those in charge has arrived at the doorstep of every American home with a gigantic thud.  This is on top of the estimated $800 billion in federal commitments and outlays caused by the subprime debacle so far.

And a larger cost is yet to be calculated.  It is in the form of a crumbling in the pillars of confidence necessary to the functioning of free markets and a collapse in respect for those who claimed they could be trusted to do the right thing.  As we have noted before, in many cases boards could not even be trusted to meet regularly and assess the risks they were presiding over.  Another consequence of the massive sums that will require mammoth increases in foreign borrowing: the United States will be thrown further into the embrace of China, a traditional major buyer of U.S. debt.  What geopolitical ramifications may result from the U.S. becoming even more beholden to that communist regime do not appear to have found their way onto the radar of most American policy makers.

But the more lasting outcome of this crisis and the cost to extricate the financial system from it will be that American citizens will have to pay for it with their own well-being.  It is difficult to imagine how any universal health care plan will be possible in a new administration; nor will the huge sums being committed to the bailout of Wall Street’s excesses permit major outlays for job creation or infrastructure support.  Inflation and a lower dollar will be harsh taskmasters in this new American economy and will hurt most of the very citizens on Main Street the Bush/Paulson Wall Street bailout plan purports to help.

As the United States now comes to grips with this trillion-dollar-plus inflection point in its history and how close it has come once again to a Titanic-like collision with the financial system, the enormity of the betrayal will become even more painfully evident.

Part of the social covenant binding America, built up over generations of struggle, is that capitalism must serve the public good and not just the privileged few.  A stable, functioning economy and the right to prosper in it is the birthright of every American.   Both have been hijacked by the self-serving purveyors of subprime governance, leadership and regulation.

They are a fitting focus for the indignation and anger of millions of Americans who have lost so much in jobs, homes and hope, and will be called upon for still more.  We join them in their outrage.

We will examine the bailout plan, and the bankruptcy of the vision and moral leadership that produced it and are now seeking to profit from it, in a future commentary.

AIG Bailout: And Taxpayers Didn’t Get a Guarantee for their $85 Billion?

It is bad enough that an insurance company, which should know a thing or two about risk, was so badly run that it needed to have the U.S. government nationalize it to the tune of an $85 billion purchase.  But when the White House admits that taxpayers may not even see their money returned, you have to wonder if everyone has become a drunken spendthrift sailor.   In answer to the concern that taxpayers may never see the money again, White House Press Secretary Dana Perino responded yesterday: “That’s true.”

Most people are smart enough to get a warranty when they buy a new washing machine.  When it’s other people’s money that the Fed can just “print,” as many of its supporters remind those of us concerned about the now $900 billion that has been paid out or committed as a result of the subprime credit disaster, the standard of care appears to be less rigorously observed.  And Republican administrations have always claimed to own the playbook on responsible fiscal management.

I suppose they may have caught the same disease as AIG, which, even though it was one of the world’s leading assessors and insurers of risk, still allowed risk to run out of control and drive the company into the ditch.   It will be interesting to see whether this latest White House admission that the $85 billion may have just been thrown away will make its way onto the campaign trail and into Congressional hearings.

Only the hapless and accident-prone administration of George W. Bush could make the Chinese and the Russians looks like prudent stewards of the public purse.

The Government from Simbirsk*

Without a shot being fired or a ballot being cast, the United States government has been overtaken by an act of socialism on a scale that is as incomprehensible as it is shocking.   Now, in addition to being the world’s largest mortgage backer as a result of its takeover of Fannie Mae and Freddie Mac, the U. S. government is the owner of the world’s largest insurance company following yesterday’s seizure of AIG Insurance.  The implications of the $85 billion dollar bailout,  which brings the tab (so far) for U.S. government rescues and Fed loan facilties related to the current crisis to be in excess of $900 billion, have not even begun to be considered.  This much is clear:  Financed by the Federal Reserve, whose head, Ben S. Bernanke, mused last year that the subprime credit crisis would not spread to the larger economy; led by Treasury Secretary Henry M. Paulson, Jr., who proclaimed months ago that “We are closer to the end of this problem than we are to the beginning;” and approved by George W. Bush, the most disconnected and unpopular President in modern U.S. history, the judgment of these players inspires little confidence.

American capitalism has abrupty changed course and headed into waters that may prove far more harrowing than the collapse of even a giant insurance company.  Resourceful men and women can always find ways to manage disaster wrought by inattentive executives and directors such as those who drove AIG to the point of disaster.  They can rarely survive or prevail when fundamental and guiding principles themselves become the object of disregard and abuse.

*Birthplace of Vladimir llyich Ulyanov (Lenin)

What the Fed Could Learn From a Jar of Jif Peanut Butter

We have cast a skeptical eye in recent months on the Fed’s response to the subprime meltdown, and its handling of the Bear Stearns bailout. In The Wall Street Journal today, Greg Ip writes: (subscription required)

Since the credit crisis began last August, the Fed has expanded the volume and types of loans it is willing to make to banks and securities dealers — loans that are backed by a wide variety of collateral from subprime mortgages to student loans. It has so far not directly purchased such debt. It did, however, make an unprecedented loan of $29 billion to facilitate the sale of Bear Stearns Cos. to J.P. Morgan Chase & Co.

Actually, the Fed did not make a traditional $29 billion loan to JPMorgan Chase, as its official statements would have us believe. It was more of a wink-and-a-nudge deal to take on the poorer assets without going through the formality (and the barrage of questions that would follow) of actually purchasing them. How do we arrive at that conclusion?

When you take out a loan and provide collateral, the lender does not usually get to sell your collateral with the hope of making a profit. But that is precisely what Fed chairman Ben S. Bernanke plans to do, if you believe his testimony before the Senate Banking Committee last month.

If we sell these assets over time -and we have allowed ourselves up to 10 years- although we can sell these anytime we like and therefore avoid the need to sell into a distressed market- that we will recover the full amount and that, in addition, if we are fortunate, we may turn a profit…

He repeated versions of the same statement, reiterating the plan to dispose of these assets, throughout his testimony. We have previously noted the cozy relationship that many of Wall Street’s top players have with the Federal Reserve System.

This is part of what former Fed chairman Paul Volcker has described as pushing the legal limits of the central bank’s mandate. The Fed also refuses to disclose details about the Bear Stearns collateral it holds, prompting many to conclude that these assets are not entirely marketable in the first place and that only the Fed could afford to sell them off at fire sale prices over ten years. The whole process behind the bailout lacked even rudimentary transparency.

There are more details disclosed on the label of a jar of Jif peanut butter about the contents of that $2.90 product than the Fed has revealed about the contents of the Bear Stearns collateral it “bought” for $29 billion and the circumstances surrounding that transaction.

For a Fed that is likely to play a much larger role in the regulation of financial institutions, its standards of openness and candor require added scrutiny. If its own conduct in the Bear Stearns bailout is any clue to the approach it will take in the regulation of others, there is little that inspires confidence.

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.