The game has changed. RIM’s management has not. Neither has its board.
Today’s latest (20 percent) plunge in the stock of Canadian based Research In Motion, this time because the company missed about every expected metric for the quarter, re-confirms that RIM needs a new operating system for its boardroom. It is the board, with a its succession of lame directors, that has permitted a culture of smugness, distraction and disconnection to cloud the judgment and performance of top management, and has too long tolerated a disingenuous streak in the way the co-founders deal with adversity. This is what has led to RIM’s fall from glory and the devastation of its stock. Management was playing its own game and setting its own rules. It thought success would continue indefinitely and the market would defer endlessly to its much-trumpeted wisdom.
The game has changed. RIM’s management has not. BlackBerrys are out. Apples are in. The kids decide what’s hip and everybody wants to be cool. Holding up a new Playbook is the definition of uncool. Launching it in the summer is the definition of stupidity. Only grandiose egos, too used to everyone genuflecting to their brilliance, could come up with this foolishness.
Long before it became popular, in the wake of the billions of dollars in company value that have been obliterated, we lamented the weaknesses of RIM’s governance practices . We predicted further casualties from a board mentality where management is effectively accountable to itself and still allows a regime involving co-this and co-that at the top that would not be tolerated in any mature, self-respecting company, let alone one that is experiencing something of a freefall in its shares. The stock is down more than 60 percent this year. No significant change in management, or the board for that matter, has been forthcoming.
RIM’s problems will not end until the board steps up, key management actors are forced to step down and a new culture of accountability is rebooted in RIM’s boardroom.
The purest treasure mortal times afford is spotless reputation.
Shakespeare, King Richard II
Two universal facts remain unchanged in the News Corporation saga of serial hacking and management misjudgments: First, a company with a weak ethical culture, no matter how successful financially, will never fully survive the winds of public outrage when it flounders upon the shoals of moral misdeeds. Secondly, it is the board of directors that must ultimately ensure that there is a culture of ethics that is unswervingly heeded and vigorously enforced in any major publicly traded corporation. Given recent events, it is doubtful that News Corp’s board fully grasps its role as an ethical steward for the company. Since eight out of 17 directors are insiders and family members, Rupert Murdoch holds the posts of CEO and board chair and the board itself met on only six occasions in 2010 (the last year for which such figures were reported) it is very unlikely that News Corp’s board understands its other duties as well.
It is no surprise, therefore, that Sir Roderick Eddington, the company’s most senior independent voice and so-called lead director, has not offered a word to shareholders or the public on the calamity facing News Corp. In this kind of family dominated operation, the surprise would be that the board might exercise some independent thinking and step up to the plate which shareholders actually expect directors to occasionally grace. No company could possibly have a genuine culture of ethics and still find itself in such a state of public odium. No serious board or senior management team could have allowed the warning signs that were evident years ago on this subject go unheeded. It is particularly troublesome that James Murdoch, the so-called heir apparent, was prominent among that senior management group. These are all signs that ethics was the missing voice in the News Corp boardroom.
This is a scene that has been played out in the great corporate fiascos of the past 100 years, from the demise of Penn Central Railroad and Barings to the collapse of Hollinger and Livent. One might have thought a lesson would have been learned from the disintegration of Robert Maxwell’s media empire some years ago, which foundered in an ocean of corruption and deceit. (Mr. Maxwell actually did drown at sea.) But the only lasting lesson to be learned from these kinds of situations is that the lessons of the past are never remembered by those who need to remember them.
For more than four decades, I have been writing, commenting and advising on what I have called the high cost of ethical folly. One of those articles from the past is reprised below. In these tragedies, which are always avoidable, the cast of actors may change but their lines of feeble defense and mock surprise at the scandals that unfold on their watch remain immutable, as does the ultimate carnage of players and others at the end. I have spent many a frustrating time over the years with skeptical boards and CEOs, trying to counsel a greater commitment to ethical issues only to see later that their blindness, indifference and arrogance has landed them in a very thick ethical soup.
What is amazing is that for all the progress there has been in the corporate world during this period, for all the sophisticated MBA programs and record levels of pay for CEOs and directors, not to mention the abundance of painful examples of moral failure, these silent ethical sentries of the boardroom are still tolerated.
Why? Some thoughts, below, of more than a decade ago may still be valid.
BUSINESS ETHICS IS NOT A ‘SOFT’ ISSUE, IT’S A MATTER OF SURVIVAL: Until boards and management become serious about ethics there will be more Barings
J. Richard Finlay
11 March 1995
The Financial Post
(Copyright J. Richard Finlay)
What several European revolutions, two world wars and numerous depressions could not do to London’s Barings Bank in more than 200 years, one28-year-old employee accomplished with a few computer key strokes. And the bank collapsed.
Such is the high cost of ethical folly in the ’90s. It is a lesson that has been demonstrated before by companies such as Drexel Burnham Lambert Inc.,which could not survive the fallout from its conviction for securities fraud and the $600-million fine levied against it in the 1980s. Prudential Securities is still reeling from the estimated $1.4 billion in penalties and restitution costs arising from wrongdoings in its limited partnerships. Kidder, Peabody & Co.recently disappeared after a scandal involving phantom profits and lax accountability. And then there are the Canadian cases of Standard Trustco and the Northland Bank that were seized by regulators, leaving a trail of questions about ethics and accountability practices in their wake. Ethical concerns also have been raised in connection with the collapse of Confederation Life last summer.
What these examples demonstrate is that ethics, far from being the esoteric ”soft” issue many in business think it to be, is about as bottom-line focused as you can get. It is a key to survival in a financial world that depends more and more upon confidence and accountability as the twin pillars of success.
There is, however, no great surprise in the fact that these kinds of disasters continue to surface with predictable regularity. The real surprise is that there aren’t more of them. The structure of many companies almost invites such catastrophe. Most organizations have very weak codes of ethics that are poorly supervised and almost never audited. If the same approach were taken to financial performance, investors would desert the company in droves.
Short-term thinking, often prompted by the lure of quick profit, is another cause of ethical folly. In the case of Barings, management was alerted months ago to the inadequacies of its oversight systems. But management chose to ignore that advice, presumably because everyone seemed to benefit from the system as it was. ”Why fix something when it’s not broken?” is a bromide that many advocates of strengthened corporate ethics systems hear time and again. Ethics also gets short shrift because it is easy to ignore. Slap the pre-packaged code of ethics into the employee manual and you create the impression of an ethically sensitive organization. Drexel Burnham Lambert, Prudential Securities and Kidder, Peabody each had a code of ethics. But without a strategy for embedding ethics into the culture of the organization, without a commitment to making it an overriding component in every decision of the organization, a code of ethics is little more than window dressing.
Ethical performance doesn’t just happen. Like product quality, customer satisfaction, competitiveness and any other important ingredient of success, the ethical performance of a company needs to be managed. It requires clear goals, the understanding and involvement of employees, continuous training, regular evaluation, periodic auditing and, most of all, the commitment of top management.
It is this latter category that is so often the missing – and fatal – component in the ethical equation of organizations. Unless senior management is fully dedicated to ensuring the highest standards of ethical performance, and incorporates compliance and supervision practices into the structure of the organization, ethics will never move from theory to reality. In this connection, the role of the board of directors is paramount.
The board is ultimately responsible for preserving the integrity and the continuation of the organization. But too few boards have ethics committees or make regular examinations of the ethics practices of their organizations. Does the company have an ethics training program and hold ethics seminars?
Should an ethics ombudsman or external ethics counsellor be hired? Is there an adequate whistle-blower policy? Can outside members of the board be reached independent of top management? Many scandals have developed because initial problems were covered up by management. As author Peter Drucker has noted, the board was always the last group to hear of trouble in the great business catastrophes of the 20th century. This latest disaster shows that many boards are still in the dark over such issues.
As the Barings saga unfolds, it will doubtless reveal the existence of warning signs that should have been heeded by management and the board, weaknesses in the bank’s accountability structure that no prudent firm should tolerate and excesses in behavior of the offending trader that should have sent up red flags everywhere. And people will say, as they always do in such cases, how could that have happened? The answer is that until boards and top management become serious about business ethics, and realize that it is survival ethics, such catastrophes cannot but continue to occur.
(Ed. note) J. Richard Finlay heads a Toronto-based management consulting firm specializing in ethics and governance issues.
Is it the good turtle soup or merely the mock?
Finally, the long legal ordeal of Conrad M. Black, at least as it concerns the U.S. criminal courts, has come to an end. There has been a trial, a jury verdict, a sentence imposed, an appeal, an appeal of an appeal, prison time served, a further appeal to the U.S. Supreme Court, another appeal hearing and a re-sentencing which will lead to more prison time to be served. There was merit in some of his contentions regarding innocence, according to the American legal system, and there have been affirmations by that same system of his guilt as a man in a position of trust who stole from shareholders, committed fraud and obstructed justice. Many of these and other points about Mr. Black have been covered here over the years. The disintegration of Mr. Black’s business assets and the demise of two once profitable and mighty empires (Argus and Hollinger) under his leadership have also been widely canvassed on these pages.
It is the human, and not legal, side of Mr. Black that is of continuing interest at this point. What his appearance in federal court for his re-sentencing on June 24th, and his statements before U.S. District Judge Amy St. Eve, revealed is a picture of two Conrad Blacks. One once mocked shareholders as a cheap form of capital and disparaged employees of his various companies, from Dominion Stores to Hollinger, while deriding modern practices of corporate governance. Then there was that weird self-comparison he made with the nobility of revolutionary France. The other quotes from Kipling and speaks of compassion and a deep love for his family. He even backtracks on his approach toward corporate governance and the effect of that hostility upon Hollinger. As the poem If teaches (and Mr. Black would not be the first to have had those verses committed to memory upon the instructions of a dutiful father) triumph and defeat are indeed imposters. But so, too, are those who clothe themselves as virtuous leaders by day, only to betray that trust in the long nights of greed and conceit.
What is more genuine and enduring is the character of an individual and how the often unexpected arrivals of success and failure are greeted. There were clearly important aspects of Mr. Black’s character that were lacking in the past, as it is generally agreed that criminal convictions, especially those sustained through such a lengthy appeal process, are not viewed as character assets. The one exception to that rule appears to rest with many Canadian elites, who often praise the U.S. system of justice — except when it involves one of their own. And in Mr. Black’s case, the common view among certain quarters of Canada’s most powerful and privileged is that American justice has inflicted unspeakable cruelty upon the former media baron. Few, including Mr. Black, have had little to say over the years about the troublingly frequent incidents of wrongful conviction in Canada that have seen innocent souls spend years in prison for crimes they did not commit.
Others in Canada have been stripped of their national medals in the face of criminal convictions. Mr. Black, however, seems still to be exempt from this precedent in the eyes of the lofty custodians of the Order of Canada, who appear to accord no legitimacy whatever to the outcome of the U.S. legal process — except for the decision of its highest court which led to some of Mr. Black’s convictions being overturned. There cannot be one standard for Conrad Black and another for the rest. Mr. Black made a major miscalculation when he thought along those lines. So, too, do Canada’s elites in continuing to allow a convicted felon to hold one of the highest honors in the land.
As to how real Mr. Black’s change is and whether he sees humanity with a deeper and more kindhearted perspective than he did before, only time will reveal. We have always acknowledged that there is an admirable side to Mr. Black. We were struck by the Conrad Black standing before Judge St. Eve, who was,by all accounts, along with others in the court, moved by his more humble bearing. Nothing illustrates the sea change in Mr. Black more than the fact that in the effort to have the judge reduce his sentence, he chose to rely upon the character references of other felons, including drug dealers and those convicted of violent crimes — a checkered cast that a few years ago Mr. Black would have been the first to condemn. Has Mr. Black truly changed? Will his transformation from a status-seeking baron of excess and vainglory to one of a more fully formed human being be permanent? As Cole Porter so aptly wondered in situations like this: “Is it the good turtle soup or merely the mock?”
The criminal justice system will soon be finished with Mr. Black. Whether he will be finished with it is another story. And new travails in the civil courts and perhaps with his own health apparently await still. His words and actions in the future will define if and how Mr. Black has really changed and whether the stained mantle of convicted felon recedes, to be succeeded by the persona of heroic champion of noble causes.
That is an outcome that will in large part be determined by the extent to which Mr. Black heeds these sound words from Kipling:
If you can wait and not be tired by waiting,
Or, being lied about, don’t deal in lies,
Or, being hated, don’t give way to hating,
And yet don’t look too good, nor talk too wise;
The crashing fall of Research In Motion’s stock from its euphoric highs where management could do no wrong (even when it did) to the current depths of shareholder odium has one explanation — and only one explanation. It is a failure of corporate governance, pure and simple. What brought RIM to this point was adumbrated on these pages some time ago. A few changes in boardroom players followed our reports, but a change in culture did not. The current crisis confirms that the board remains overly deferential to its co-founders. This, along with the fact that directors continue to permit them to head the board as co-chairs, as well as head the management team as co-CEOs, is exhibit one in the case for RIM’s governance shortcomings. Any board that would have allowed the two men who were at the center of RIM’s options backdating scandal and who displayed such sophomoric excuses as to their knowledge of corporate governance practices and basic accounting rules (Mr. Balsillie retains a professional accounting designation) is not a board that entirely understands its role in protecting shareholder interests. We were the first to call for the appointment of a non-executive chair at RIM some years ago and for the dismantling of the peculiar positions of board co-chairman and management co-CEO. Those reforms are needed now more than ever, yet the board seems both deaf and blind to their urgency.
As RIM’s shareholders have watched billions wiped out in stock value over the past several weeks, little has been heard from the board or its lead director, John E. Richardson, however. Nor has there been any indication that directors are foregoing their fees during a time when investors are losing so much. Each director is paid a minimum of $150,000 annually. That’s a reasonable fee for directors who are adding value; it is far too much for bystanders to a company’s calamity. Exactly one year ago , RIM’s stock on the NASDAQ Exchange closed at $58.84. As of this posting, the stock has fallen to $26.74. Investors are bailing in droves.
It is time for a shakeup at RIM. It starts with a board that ceases to be mesmerized by management actors who have too long dominated the corporate governance stage and brings in serious accountability reforms that raise investor confidence and restore corporate performance.
America’s brief romance with what has been the closest thing to political Camelot since the Jeffersonian era began this night exactly 50 years ago, with the narrow election of John F. Kennedy to the presidency. It would not be until early the next day before it was certain that Mr. Kennedy had actually defeated Richard M. Nixon. President Kennedy’s margin of victory was small, a mere 112,000 votes. But fate on that night had a monumental-scale drama in store for both men and the nation they eventually led.
Little on these pages can add to what has already been written about the sense of optimism that came with the Kennedy presidency, its commitment to excellence in bringing in gifted men and women to public service and a unique style of words, dress and culture that transformed the White House into a glittering showcase that inspired much of the world.
The achievements in that short 1000 days of America’s 35th president ranged from setting a goal to place a man on the moon by the end of the 1960s, (done); signing a comprehensive test ban for above ground nuclear weapons (still in force) and causing the Soviet Union to remove nuclear weapons from Cuba (which it never placed there again). It is hard not to see how the world is better off. It also brought to public service a whole range of personalities and individuals who continued to contribute for decades. The last of them, Ted Sorensen, passed away a week ago.
What was created on this night, November 8, back in 1960 seems far in the past now. But its faint echoes still ignite the hearts of millions who believe that there can and should be something ennobling in the leadership of a great land, that politics is a high calling, that doing things well and with precision is an achievable goal even in government and that the dream of a better life is something that awaits to be summoned up in all of us.
It is not whether someday Apple shareholders will wish they had a more robust corporate governance regime. It is only a matter of when this will occur, and at what price.
There is a widely held consensus, made all the more vivid as the company’s stock pushes past $300 a share, that Apple Inc. is an amazing success story whose vision has transformed the way we hear and communicate with much of the world. We share that view. But we also have long held on these pages that Apple remains an under-governed and poorly directed company that needlessly places continued success at risk.
We were the first to spotlight the absence of women on its cozy six-member board (it has one now) and the fact that its chairmanship, which is informally held by Steve Jobs, has never been properly documented. The board meets infrequently and there is no reasonable way such a small number of directors could properly discharge their duties serving on Apple’s various committees, especially on top of the other outside roles most board members have. Three of Apple’s five outside directors serve as either chairman or CEO of other companies and sit on additional boards as well. Steve Jobs remains synonymous with Apple and a key to its success. Despite much ballyhoo about having others who could fill his shoes when he took his medical leave a few years ago, this is widely viewed as wishful thinking. The board has done little to show that an active succession plan is in place.
This style of corporate governance may be suited to a fledgling business located in a garage. But when it comes to one of the most highly valued companies by shareholder capital ($278 billion by today’s count) in North America, a higher standard is surely advised.
Why is Apple reluctant to adopt the corporate governance reforms enacted by so many companies? One reason may be that it has the same mindset about the company’s own vulnerabilities that it applies to its computers. Antivirus software, it is widely asserted by Apple aficionados, is for all those other millions of computers operating on the Windows system. Few viruses ever affect Macs, so they say. That’s more than a bit of wishful thinking, too, as there are dozens of other ways in which Mac computers can be compromised, as anyone who has had an encounter with malware or phishing exercises will attest. More likely, though, it’s probably just plain old hubris — the imposter of triumphant success that has seen the demise of great leaders and mighty institutions for thousands of years. There is little that is permanent about success, except the universal principle that success is never permanent.
It is not whether someday Apple shareholders will wish they had a more robust corporate governance regime, led by a larger and more engaged group of independent directors. It is only a matter of when this will occur, and at what price. Behemoths that did not take corporate governance, among other matters, seriously, have been struck down to pitiful shells before. Some, like General Motors, rise again — but never to their previous dominance. Others, like Enron, WorldCom and Penn Central Railway, vanish altogether.
It should not take the prospect of a Titanic disaster to realize that with every surge upward to yet more dizzying heights in its stock, Apple’s investors have also begun to move into some very perilous waters.
