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.

The folly of entrenched interests

Recent Fed transcripts just another sign that those in charge too often don’t get it. 

The blindness of entrenched interests to the looming forces that threaten to disrupt their legitimacy and the lives of those who depend upon it is the defining failure in the governance of major institutions today.  Some work diligently to overcome that obstacle.  Most do not.

This was, and in many ways remains, a principal cause of the near collapse of the world’s financial markets in 2008, the economic downturn that continues to play havoc with countless lives today and the growing economic divide that threatens both the existence of the middle class and longer term social stability.  But this imperviousness to the restless arc of reality did not begin with the folly of Wall Street and the subprime mortgage fiasco nor did it end when the Dow Jones hit record heights.  It is alive today in our healthcare and education systems and in the loss of privacy at the hands of over-reaching governments and corporations that alternatively demand more personal information while failing too often to protect it.  Its fingerprints are found all over the institutions of democracy that are rapidly losing public respect.  It taints the interactions of governments and businesses each day with young people, the elderly and ordinary working families and causes too many to feel weary and resentful at getting the short end of the deal from those who seem immune from any accountability for their actions.

And it will continue to see the world stumble from scandal to crisis until major corporate and public institutions are distinguished by governance standards and ethical values that place primacy on the dignity and worth of individuals and not the self-aggrandizing conveniences of their leaders.

Transcripts show Fed was out of touch, as we feared

federal-reserve-2008-transcripts-1393003908376-master495Just released transcripts from 2008 show that the U. S. Federal Reserve misjudged the extent of the looming financial crisis that was unfolding, as we feared.  In 2007, we began to express serious reservations about whether the Fed knew what it was doing.  That theme continued on these pages in a series of postings under the Fed category over the ensuing years of the worst recession since the Great Depression.  We offered a glimpse of what was ahead in November of 2008.

There will be many casualties before the full extent of the great unfolding 21st century credit debacle is over. There have already been a few CEOs who are taking a very well paid early retirement. More will follow. Some companies will not survive. The stock market will continue to experience unsettling jolts, like its more than 600 point drop this week. But, unfortunately, it will be the ordinary consumer —not the central bankers or the treasury luminaries or the credit agency raters or the boardroom directors who permitted this fiasco and were blind to its early signs— who will suffer most from the turmoil and setbacks that lie ahead.

The transcripts also show that Timothy F. Geithner, then President of the New York Federal Reserve, was also viewing the world through rose-coloured glasses, rejecting any suggestion that the big banks, whose CEOs comprised his board of directors, were under-capitalized.  We broke new ground in 2007 and 2008 in our analysis of the governance failures and weaknesses of the New York Fed. We were the first to bring these issues to public attention, and continue to view those failures as a major, and still much underreported, factor in the financial meltdown that shook the world.

Years later, these continue to be among the most popular postings at Finlay ON Governance.  This coda, of sorts, on the great economic crisis of the 21st century prompts us to make some further observations about its cause and their continuing effects.

Return of the Pharaohs of Misjudgment

Conrad Black is back at his (temporary) winter home in Palm Beach after being freed on bail pending the outcome of his appeal.  His conservative friends in their College of Cardinals-type media conclaves appear to seek his beatification for what he has gone through. If he is found to have been wrongly convicted, as countless numbers are in Canada and the United States every year without a whisper of concern from Mr. Black’s supporters — or the tens of millions at their disposal to make that case, as Mr. Black has — he is entitled to all the redress available for one of the most terrible wrongs the state can perpetrate on a person.  But, as Stephen Bainbridge points out, there is still much of the dark earth about him that stands between Mr. Black and his final elevation to sainthood.

Richard Fuld was back before another committee attesting to the fundamental strength of Lehman Brothers, which went under for every conceivable reason, except, of course, the failure of its leaders.  Follow-up question: does the Financial Crisis Inquiry Commission realize that Lehman had a board of directors who  might shed some light on the calamity?  Fed chief Ben Bernanke was also back before the Commission, after the Fed admitted, once again, that it misread the depth of the economic downturn in recent months.  A change in lyrics was also detected regarding Mr. Bernanke’s explanation as to why Lehman was not saved.  The self-serving music remains the same, however.  BP’s infamous blow out preventer made its way back to the surface; its corporate image is still submerged somewhere in an ocean of missteps and CEO blunders.  HP’s board is back in the news, and not in a good way.  It showed that you can spend tens of millions on a CEO and, for that lofty sum, still get a chief executive with a missing ethics gene.  The directors’ solution?  Spend tens of millions more to get rid of him in the face of the deception which the board claimed was the reason for his ousting.  Go figure. Canada saw a new Governor General appointed to represent the Queen as head of state.  It came on the sole recommendation of a prime minister whose Conservative Party holds a minority position in parliament.  It is a throwback to a time when most Canadians could not read or write and women did not have the vote.  Still, few Canadians seemed bothered by the quaint tradition. On the other hand, few parents teach the idea that any girl or boy can grow up to be GG someday.

President Obama is back to a freshly redecorated Oval Office, where he has hatched yet another stimulus package.  The new soft beige seating areas will provide a calming effect when yet lower approval ratings are published.  As the distancing of the President from the electorate becomes more pronounced, and the loudening canons of Republican victory signal their approach with each day, one can almost hear the mournful reprise of a love no longer to be: “We’ll always have health care.”

However timeless the Pyramids of Giza and the inscrutability of the Great Sphinx remain, they cannot for more than a few weeks distract our attention from the greater monuments of folly and misjudgment that today’s Pharaohs of business and government routinely create.

They will be pleased to know that, along with all of them, we are back, too.

The Great Sphinx and the Mystery of the Federal Reserve

Giza_Plateau_-_Great_Sphinx_-_head_side_closeupThe latest flap over taxpayer payments to Goldman Sachs confirms the culture of secrecy upon which the Fed in Washington and its New York counterpart are dependent.   They like the dark, closed-curtain life that bankers prefer, where the sunlight of public scrutiny is seldom an invited guest.  It is a culture to which Mr. Geithner adapted well.

There is a legend that the Great Sphinx once promised a young prince in a dream that he would gain a kingdom if he would clear away the sand that had almost entirely covered over the watchful guardian’s stone body.   But the mystery of the Sphinx pales in comparison with its modern equivalent, the Federal Reserve System, which is enrobed in sands of obscuration and opaque practice that hide its true meaning and actions in the world.  This is an institution that rarely seems what it is and is seldom susceptible to being seen in its true light.

The most recent evidence in this regard came from a series of emails that show officials of the New York Federal Reserve tried to keep multi-billion dollar payments to Goldman Sachs and other huge banks, made through insurance giant AIG, secret.  The mystery deepens when it is recalled that Timothy Geithner, currently U.S. Treasury Secretary, was at the time president of the New York Fed.  We were among the first to raise the propriety of these payments nearly a year ago.

It is asserted by senior New York Fed officials that Mr. Geithner had no influence in the outcome, as he had removed himself from any decision-making.  Influence comes in a variety of shapes and sizes, however.  As its CEO, Mr. Geithner set the tone and culture for the New York Fed during his five-year tenure.  If he didn’t actually hire the staff  who made the decision about the payments to AIG et al., he was involved in assessing their performance.  They were his kind of people.  It is unlikely they would have done something they knew he would disapprove of or that would have been likely to cause him trouble in his new post.  That is not the way organizations work.

Then there is the issue of the Fed’s governance, which, as we have observed on numerous occasions before this latest revelation, resembles more a committee of the Society of Freemasons than an actual supervisory body.  On this board during Mr. Geithner’s reign sat such luminaries as Jamie Dimon, CEO of JPMorgan Chase and Richard Fuld, CEO of Lehman Brothers.  Jeff Immelt, head of giant GE, was also a director.  Mr. Geithner was hired by top Wall Street players to serve Wall Street’s interests.  From that point on, the success of banks and the satisfaction of those who ran them was the center of Mr. Geithner’s universe.  He showed no discernible concern throughout his entire term over the run-up leading to the housing/mortgage bubble, the rise of unprecedented  levels of risk and leverage, or the complexity of collateral debt obligations.  When problems arose and breakdowns began, when hedge funds were collapsing, and right up to or even beyond the fall of Bear Stearns, did Mr. Geithner launch an internal examination of possible failures in oversight and regulation?  Did he urge the directors of the New York Fed to review that organization’s governance practices?  The answer on both counts is NO.

Mr. Geithner’s role at the New York Fed in many respects is no mystery at all.  The mystery is why professional regulators actually think it is credible to assert that even though he was president of the New York Fed, he had no more role in a key decision to re-channel taxpayer funds ostensibly intended for AIG to Goldman Sachs and other counterparties than the man who operates the boiler in the Fed’s basement.

The riddle people need to be looking at is how it is that, as the new Treasury Secretary, Mr. Geithner was apparently shocked at the abuses and excesses that had occurred on Wall Street and in the banking industry, but as a major regulator of that sector, the same abuses and excesses were occurring on his watch, apparently without objection.

The contradictions and unanswered questions about Mr. Geithner and the New York Fed are, of course, part of the wider mystery, as we have noted, about what happens at the 20th Street Northwest, Washington headquarters of the Federal Reserve System.

Here, details about the collateral that is accepted by the Fed, which institutions are using various Fed-sponsored programs, and what really happened to the $29 billion in Bear Stearns so-called collateral, are kept under wraps.  The Fed is desperately attempting to fight an access request under the federal Freedom of Information Act made by Bloomberg News for details surrounding the central bank’s $2 trillion loan program it launched to bail out financial institutions in the wake of the Lehman Brothers collapse.  A court hearing on the matter was held today.

Last month, Fed chief Ben Bernanke bristled at Congressional proposals to have the Government Accountability Office audit monetary policy decisions, even half a year after they have been made.  Then there is the free money that the Fed has tossed at the banking sector, with a funds rate that is lower than at any time in U.S. history.  Add to that the fact that never before have so many trillions been committed or spent to bail out, prop up, guarantee and support the banking industry.

The culture of the Fed in Washington and its New York counterpart is one that thrives, indeed, is dependant upon, secrecy.  They like the dark, closed-curtain life that bankers prefer, where the sunlight of public scrutiny is seldom an invited guest.  The Fed draws many of its staff and members from that world, and when they leave it they often return to work for banks and financial institutions as consultants and advisors.  It is the coziest of clubs, and one that many of the players are anxious not be disturbed.

Whether the Fed and all the steps it has taken will withstand the gales of turbo populism outrage (our terms) remains to be seen.  If you believe the legend carved in stone  in front of the statue nearly four millennia ago, had Tuthmosis IV not cleared away the sands from the Great Sphinx, he would have lost a desert kingdom.  If the U.S. taxpayer and all those who depend upon American capitalism do not clear away the sands of secrecy and obfuscation that the Fed has come to represent, their losses will be even greater.

Captain Bernanke and the Titanic Fed

Ben BernankeCaptain E. J. Smith

Catastrophe seems to have a more forgiving master in the Senate banking committee than in the pages of history. The captain of the Titanic was not given another chance at the wheel.  And unlike Mr. Bernanke, he had the decency to hit an iceberg only once.

The Senate banking committee voted 16 to 7 today to confirm Ben S. Bernanke for a second term as chairman of the U.S. Federal Reserve System.  It is unfortunate for E.J. Smith that he went down with the Titanic in 1912, because, if you follow the committee’s logic, it would have reappointed him to captain another ship if it had had the opportunity.

Mr. Bernanke was part of the crew who allowed the housing and liquidity bubbles to build in the first part of the 21st century.  As Fed chief, he missed the early warning signs of the impending financial collision completely, predicting that any problems would be contained and not spill over to the real economy.  Watertight compartments did not work for Captain Smith, either.  Only a few months ago, Mr. Bernanke told Congress that unemployment would not reach 10 percent in the U.S.  He was an early supporter of the TARP, the nearly trillion-dollar fund which he and others sold to Congress on the basis that its quick  passage was vital  to the survival of the economy.  Turns out it was not really about toxic assets, which the Fed never bought, but about propping up the capital of major Wall Street players -an idea that already skeptical lawmakers likely never would have bought.  Captain Smith was known to be of the view that his ship was too big to sink.  His modern financial counterpart has given new meaning to the concept that certain institutions are too big to fail.  It is worth pondering whether the philosophy, practices and vision demonstrated by Mr. Bernanke will end in a similar calamitous outcome.

At a time when opaqueness and lack of openness are widely regarded as being forceful contributors to the near economic collapse of Wall Street, Mr. Bernanke has adopted that model himself in the Fed’s anonymous transactions at the discount window and its handling of bank collateral, which is the original cash-for-clunkers program.  He was quite happy to have taxpayers kept in the dark about the AIG bailout, which fast-tracked added billions into the coffers of Goldman Sachs and other banks.  After the details became public, he offered the implausible excuse that it was not possible to negotiate a better deal and make Goldman take a “haircut.”  The world’s most powerful central banker can’t take on Goldman, but Mr. Bernanke tells the banking committee he is up to taking on a bigger role as the nation’s financial super regulator.

There is a widely held view in some circles, especially in those given to the folly of excessive public spending (which view is oddly shared by those on Wall Street and in corporate America who are driven by the vice of excessive compensation) that the Fed under its current chairman has navigated recent choppy financial waters with skill and courage.  In their view, Mr. Bernanke saved the banks, brought the economy back from the brink of a depression and performed a number of other miracles that place him somewhere between Albert Einstein and Mother Teresa–Wall Street version.  Perhaps these are less the outcome of brilliance and wonder than they are of a Fed printing press capable of producing unlimited dollars and support for a spending and debt binge that soars into cosmic frontiers where no Fed has dared to go before.  In that imaginary world, anything is possible–for a while.

Wall Street demanded, and Mr. Bernanke dutifully provided, a zero Fed rate that is the banking community’s equivalent of billion dollar bills pouring out of helicopters.  And they are making billions more from it.  New York State officials announced today that Wall Street is poised to report record profits for the first three quarters of 2009.  The $50 billion in profits is almost two-and-a-half times the previous 2000 record (another year associated with a bubble).  Bonuses will be 40 percent higher than last year.  Such numbers are a direct result of the Fed’s easy money policy.  It is not surprising that it can also buy untold support for the chairman who made it possible.

Question for the Senate:  How exactly do you go from being on the edge of the worst Wall Street crisis since the Great Depression to record bank profits in little more than a year?  Could it have happened if Mr. Bernanke had not supplied a very expensive taxpayer-bought getaway car?

The Fed and Wall Street have become an endlessly accommodating club of insiders that Mr. Bernanke has shown he is ill-disposed to disturb, especially after his collision of miscalculation last year with that other iceberg known as Lehman Brothers.  He has been willing to enter into the policy arena and indicate to Congress his disapproval of the House provision authored by Congressman Ron Paul for regular, though delayed, audits of the Fed’s monetary policy, but he has offered not a word of criticism over the New York’s Fed’s governance, for instance, which functions as a self-perpetuating clique of Wall Street bankers electing their own in furtherance of their own interests.  Another well-regarded champion of current financial reform in the Obama administration, under a President whom we admired and supported even before his nomination, seems to share the same view.  Treasury Secretary Timothy F. Geithner was president of the New York Federal Reserve Bank for several years prior to assuming his current duties.  There is no indication that he was ever troubled by the singular Wall Street view that the New York Fed personified, which accounts at least in part for the economic devastation that has ensued under its supervision over the past few years.

It is likely that the full Senate, except for a handful of members on both sides of the political spectrum, will also vote to confirm Mr. Bernanke.  Whether members of the Senate will be around when the U.S. economy collides with the mountain of inflation and another Fed-induced debt bubble that are advancing toward them, and whether the Fed under Mr. Bernanke will even see the products of its myopic policies as they approach, is uncertain.

What is clear is that catastrophe seems to have a more forgiving master in the U.S. Senate than in the pages of history.  The captain of the Titanic was not given another chance at the wheel.  And unlike Mr. Bernanke, he had the decency to hit an iceberg only once.

It’s the Fed, Not the Politburo

Even before the current crisis, the Fed was a powerful institution with few rivals for its Kremlin-like curtain of secrecy.  Now, it seems fated to acquire even more sweeping powers, with only a few followers of Jeffersonian ideals in Congress seemingly interested or capable of questioning that move.

It is widely held that some public functions are so important that they must operate at arm’s-length from the influences of government and party politics.  But, generally, the arm needs to be connected to a body that has its feet planted firmly on the ground.  When it comes to the Federal Reserve Board, this anatomical connection is not entirely clear.

Exhibit A (as famed screenwriter Rod Serling used to say about scary things to come) is the apparent rejection by the Fed of a Treasury recommended review of the central bank’s structure and governance. These pages have been advocating that for well over a year, and long before it was proposed that the Fed take on even more sweeping powers.

Exhibit B is the news that the Fed will be given a lead role in overseeing pay packages at banks and in prohibiting compensation schemes that encourage inappropriate levels of risk.  But the Fed wants the oversight to come in the form of the ultra opaque bank examination relationship it has with America’s financial institutions, which would effectively shield decisions from public scrutiny.

From its handling of the discount window and details about which banks and institutions are knocking on it to specifics about the Bear Stearns “collateral” it bought up, not to mention its role in the AIG bailout and the billions in payouts it approved to make good on credit default swaps with institutions like Goldman Sachs, the Fed is, and prefers to be, a creature of the shadows of cozy-club decision-making and not of the sunlight that affords transparent scrutiny.  It operates in a world that hangs on its every word, yet that word is often issued by fiat, with little consideration shown to notions of public accountability.  What banks and Wall Street want, however, is often a different matter.  We know little about where the lives of Wall Street titans and Fed governors intersect.  But if it is anything like what happens at the New York Fed, as we have noted before, where Wall Street titans are that institution’s governors, there is reason for Main Street to be worried.

As it has handled the crisis of the past year or so –the crisis it never saw coming– the Fed has taken interest rates to zero (for banks; not consumers, where credit card rates are proportionally higher than at any time in human history), smashed open the dams of liquidity, and created a Fed cash-for-clunkers program for broken-down financial assets that has no precedent in the annals of economic thought.  In doing so, it has created an artificial market from which Wall Street is the most significant beneficiary, even though it was the principal source of the problems.  Its moves to provide everything Wall Street wanted have permitted bonuses and huge pay days to be resumed, with barely an interruption.  Outside Wall Street, job losses continue to mount and Main Street still awaits the arrival of the famous Fed-promised trickle-down economy.

Yet for all its power and soon-to-be-added authority, it is by no means clear that the Fed possesses any better vision to see another coming storm down the road, especially one of its own concoction from a combination of zero-interest, swirling liquidity, monetized debt and a floundering U.S. dollar.   It is debatable whether it possesses the moral clarity, either.  The fact that it was in the room and permitted the outrageous compensation decisions at AIG, and allowed billions to be passed on to other institutions in what could not be a more classic redistribution of wealth had it originated from Moscow in the 1950s, gives reason to doubt the Fed’s capacity to act in any role whatever when it comes to deciding compensation issues.

Even before the current crisis, the Fed was a powerful institution with few rivals for its Kremlin-like curtain of secrecy that cannot be questioned. With the Administration’s package of sweeping financial reforms, the Fed is taking on the trappings, along with the arrogance and the influence, of a fourth branch of government, with only a few followers of Jeffersonian ideals in Congress seemingly interested or capable of questioning that move.  This is an institution, like the very bodies it regulates, where the culture needs to change dramatically; governance reforms are an important step in achieving that goal.

We think it would be a most unwise turn in public policy to seek to solve one problem, namely the risk-oblivious and compensation-obsessed Wall Street that produced the worst economic crisis since the 1930s, by creating a transparency- oblivious, secrecy-obsessed Fed with more power to shape the world as it sees it.  Its sights, as we have observed before and from these recent examples, rarely extend beyond a few blocks in lower Manhattan.