The old fashioned idea that the market will reward companies built upon real value seems to have eluded many of Canada’s top business leaders.
Reaction to the Canadian government’s decision to pull the plug on the income trust party is coming on strong. It is also entirely predictable. Much of it is of the “sky is falling” nature where CEOs talk about irreparable damage resulting from the announcement. The same kind of response greeted the move to create a personal and then corporate income tax regime in the early 1900s. You could hear the voices of boardroom doom when the first minimum wage was established and, before that, when child labor laws were enacted.
Income trusts took off because they were based on a very large tax loophole. I have never held any income trust units because it has been obvious to me for some time that this party could not, and likely should not, last very long. A previous government under Paul Martin (was there really one?) made a botched effort to close the loophole. Even a basic knowledge of civics would teach that governments (especially when driven substantially by bureaucracies) are seldom able to look the other way when fresh sums are within their grasp (or about to leave it) and it ought to have been apparent to even an untrained eye that change was not far off. What’s amazing is that so many huge companies, who pay millions to lobbyists and political advisors, did not seem to grasp the obvious fact that their actions in pursuing a conversion to income trust status would likely prompt the rethinking of government policy. Having said that, I must confess my boardroom experience with many corporate advisors, especially in the fields of law, public relations and government affairs, has often left me bewildered by their frequent state of insularity.
Suddenly many companies are crying that they have lost an important edge –especially important, I would imagine, to many already richly compensated CEOs who stood to gain tens of millions from the conversions alone. The old fashioned, time worn, idea that the market will reward companies that are built upon genuine value, that reinvest for the future and are managed and governed with a competitive edge seems to have eluded some of Canada’s business leaders. Along with a real world lesson in how governments operate, these CEOs would benefit from a crash course in market economics.
We’d like to have an opportunity to pound some sense into them, in a nice way.
— Bill Andrew, CEO of Penn West Energy Trust, interviewed in The Globe and Mail on the industry’s effort to change Canada’s newly announced policy to tax income trusts.
A different strategy for changing minds and winning friends, that’s for sure. Knock yourself out, Bill.
Conversions from traditionally-governed, stock-traded corporations threatened to change the landscape of the economy, the market and the boardroom in ways that few had properly anticipated.
A major step forward for Canadian taxpayers and the concept of stakeholder capitalism took place on Tuesday with the announcement by Finance Minister Jim Flaherty that the tax holiday enjoyed by income trusts is about to end. It needed to.
Income trusts are antithetical to the long-term interests of investors and everyone else who depends upon the innovation and sound governance of the modern business enterprise. No other institution is positioned to invest in the future and to address emerging social needs as is the major corporation. Income trusts demand such high payouts that any thought to research, reinvestment or innovation takes second place to the big cheques today. These creations are, for the most part, nothing more than a giant poker game where all the winnings are taken home at the end of the night. But corporations are more than casinos. They are about the lives and well being of customers and employees and communities, as well as investors. And sound governance is part of the discipline that companies need to perform over the long run and to ensure that the interests of all stakeholders –and not just those of management– are fully considered. Only a properly empowered board with an unswerving understanding of its long-term mission and an unyielding commitment to the concept of accountability can accomplish this task.
In addition to their obvious avoidance of otherwise payable income tax (a cost now measured in billions of dollars), conversion to income trust status of companies that previously sold common stock can present an opportunity to evade important corporate governance reforms that have taken place over the past number of years –reforms that came about because of a broad consensus, painfully gained by society, that when major business institutions become disjoined from proper oversight and transparency, the consequences can be catastrophic. Canadian corporate governance guidelines are already a pale imitation of the gold standard exemplified by the Sarbanes-Oxley Act of 2002. With income trusts added to the equation, any certainty of remedial protections or consistency of practices to be relied upon by Canadian investors is illusory at best. Income trusts amount to a further roll of the dice because they lack a coherent regulatory framework and employ structures that frequently compromise principles of board independence and accountability of management. What were once owners of the company are for the most part reduced to little more than coupon clipping unit holders, with significantly reduced redress and protections both in law and in corporate governance practices. These conditions threatened to dramatically change the landscape of the market and the boardroom in ways that few have properly anticipated –not the wisest situation when billions are on the line and the jobs of tens of thousands are at risk. It is disturbing how many business leaders, gate keepers and even small investors seemed unbothered by these realities.
It was a clever game concocted and promoted by a lot of whiz kids looking for fat fees and instant mansions. The game is over. Perhaps the adults can get back to work making money the old fashioned way, which includes building for tomorrow and not just joy riding today. Business needs to be managed, directed and controlled by those with a sense that the well-governed, shareholder-owned, stakeholder-driven corporation is one of the most remarkable inventions of modern society –and way too important to be just another chip on Bay Street’s blackjack table.
It’s so hard to fire a CEO for cause that many boards don’t try, even when ethical problems are involved.
—The Wall Street Journal, October 30, 2006
Scary, isn’t it? In the often courage-challenged culture of the North American boardroom (British boards are having more success in curbing runaway CEO pay, according to a recent Financial Times report)) the full extent of directors’ inability to assert common sense and protect the interests of stakeholders becomes increasingly apparent. A central problem persists. As long as boards are composed mainly of current and former CEOs who have a vested interest in perpetuating the status quo and all the trappings that go with it, as long as board membership continues to be drawn from the same overused pool of like minded people with similar backgrounds, as long as directors continue to think that all the problems of the company can be solved by doling out more and more millions to the CEO like some giddy aunt stuffs fruits and nuts in the annual Christmas cake, the disconnect among pay, performance and the board’s ability to govern will continue.
There is only one missing factor that is required to bring about the change the whole world outside the boardroom, including every directors’ mother, knows must take place. It’s called leadership. North American boardrooms need to find their modern-day Churchill. Now, there was a man who knew a thing or two about turning a dysfunctional ship around. Real leaders like this have taken on world scale tyrants and dictators with amazing success. There is no reason why they cannot set things right with a few petulant, garden-variety CEOs. No reason, except that there is no one even close to the boardroom equivalent of the man who saved civilization.
Why this is so is a question shareholders and thoughtful stakeholders might wish to ponder.
A nuclear North Korea; a superpower’s foreign policy in tatters show why sound governance really matters.
And so it comes to this. After the most colossal bungling of foreign policy in more than a century through a misguided and deceitful quest for nonexistent weapons of mass destruction in Iraq by the United States, the free and civilized world must now rely upon a totalitarian dictatorship in China to deal with a North Korea that openly displays its nuclear ability. And the West can take further note that its addiction to cheap consumer goods from China, North Korea’s most prominent sponsor, has helped to finance Kim Jong-Il’s nightmare nuclear ambitions.
Not that it was needed, but all this is just more evidence that Winston Churchill really has left the building. Where once giants strode on the world stage, we are now saddled with a collection of smaller than life actors whose reputation and soundness of judgment seem to be receding with each passing day. And so we lurch from maculation in Iraq, where there was no threat to civilization, and chaos in Afghanistan, where the blood of too many Canadians is being spilled to make that country safer for the drug lords who reap a harvest of hypocrisy from record poppy production, to the mishandling of the psychopaths in Pyongyang, who pose one of the most real and present dangers the world has ever known. Because of its ineptitude in Iraq and other manifestations of a discredited and ineffectual foreign policy elsewhere, the United States has become much smaller in influence and standing at the exact moment when its strength and credibility are desperately required. The world saw the benefits of that strength and credibility during times of crisis in the eras of Roosevelt and Kennedy. We cannot yet foresee the full extent of the damage brought on by America’s ongoing misdirected course, but a further collision with reality seems almost certain. The West’s having to delegate its peace and security to another communist dictatorship –and no amount of patio umbrellas and sneaker exports will change that fact– clearly demonstrates that some serious changes have taken place in the geopolitical landscape without much thought or discussion given to their consequences.
Entrusting power to others, which is what is meant by our system of free markets and democratic values, carries with it a duty to hold its custodians to account for its proper use. Power is provided in the form of votes, public expressions of approval or the absence of it, and in the kind of purchases we make and with whom we do business. The truth is none of us can afford to take a vacation from the stakeholder responsibilities we all have as citizens, consumers and investors, and when we do, the results can be chilling.
A short essay on why giants can be so small
At HP, a name once synonymous with business integrity and forthrightness, the company continues to reel from the backlash over an investigation turned witch-hunt that collected personal information, improperly obtained, about the telephone calls and comings and goings of certain directors and reporters. At Westjet, Air Canada’s top competitor in Canada, court records reveal that CEO Clive Beddoe made much more use of purloined e-mails, acquired when company employees hacked into Air Canada’s computers, than previously admitted. And in the House of Representatives, the fallout over Congressman Mark Foley’s dissent into the world of cyber molestation of House pages has shaken the very foundation of confidence in the Republican leadership.
There is an interesting common factor in these scandals. All of these organizations had written codes of ethical conduct. All have made a big thing about the importance of ethics and regularly trumpeted their commitment to the highest standards of integrity. And each had a governance system which was supposed to prevent these kinds of wrongdoing from occurring, but which failed to do so. Why?
I’ve given a fair bit of thought to this over the years because it is a phenomenon that recurs with stunning frequency in the worlds of business and government. I’ve seen first-hand the damage that ethical transgressions can inflict upon organizations. In many cases, I have been asked to assist in investigating the cause of the problems and in repairing the damage.
If you look at the ethical lapses at Enron, WorldCom, CIBC or Hollinger, to take just a few examples, you will see the disconnect between nice sounding words and actions which fell dramatically short in backing them up. What I once dubbed the high cost of ethical folly has seen companies descend into ruin, governments fall and political careers destroyed.
The fact is that most organizations are weak on execution when it comes to ethical matters. There is little outside monitoring of ethical compliance or independent auditing of ethical performance. There is too much reliance on lawyers whose ethical standards are often no higher than any other profession, and on many occasions have been shown to be much worse. The resources companies and governments put into ethical oversight are pitifully inadequate. It is a corporate function which seldom attracts the best and the brightest. All this sends significant signals throughout the organization which suggest the real priorities lie elsewhere.
Those at the top, including boards of directors and leaders of political parities, seem happy to have the situation continue, or they would have changed it. People in power are generally transaction-oriented types who prefer to be doing things which they think will add numeric value –whether that means bumping up the numbers on the balance sheet or in the public opinion pools. They are far less comfortable dealing with values. Their interest in ethics is usually peaked during the short life of a scandal and suddenly wanes when the newspapers stop calling. And there is a problem learning from experience. No matter how often they hear “iceberg ahead” being shouted around them, the large egos that govern and run our giant institutions (or perhaps it should be the giant egos that govern and run our large institutions) always think the warnings of reality apply to someone else and not to their own organizational Titanic.
For a number of years, many of them working directly with those at the top of business and government, I have been of the view that the ethical deficit so often evident in large organizations arises from having the wrong people running them, and that we need a different kind of person in the boardroom and in the political arena. This is all the more important in an era when the public entrusts so much of its personal information to corporations and governments and when the Internet has become so pervasive a tool for the collection and abuse of this kind of information, as these most recent incidents attest. As the HP, Westjet and Foley scandals unfold, I expect we will see evidence that more was known than previously admitted and that more could have been done by the people at the top to prevent it. The same picture has emerged with every scandal of the past 100 years, from the sinking of the Titanic and the Wall Street scams of the 20s and 30s to the disintegration of Enron and numerous smaller fiascos in Canada involving Bre-X, YBM Magnex, Livent, Nortel and Hollinger. Time and time again we have seen the gatekeepers asleep at the switch.
It is difficult to understand why, for instance, otherwise worldly and experienced people around HP’s boardroom table would not have inquired about the source of the telephone records that had been obtained. Yet not a single question on that score was raised according to all available reports. Former HP CEO Carly Fiorina paints a rather unflattering picture of the HP board. “Some board members’ behavior was amateurish and immature,” she writes in her new book Tough Choices. “Some didn’t do their homework. Some had fixed opinions on certain topics and no opinion at all on others.”
One of the most important functions of a director, after all, is to ask discerning questions. It is a task at which directors often fail and, apparently, in HP’s case, they were incapable of posing the kind of basic question that would have been asked around most kitchen tables in America. By the way, I think they probably asked too few questions about HP’s disastrous acquisition of Compaq –another business move I always had difficulty understanding and thought showed remarkable naivety and poor judgment on the part of both Ms. Fiorina and the board (apart from Walter Hewlett, whose position I applauded publicly and in the press at the time).
Ultimately, however, why there are so many ethical lapses in business and government comes down to the fact that the public appears infinitely tolerant of such betrayals and has not yet voiced its demand for change with sufficient volume. If ethics were a bridge that collapsed as often as the moral foundation of many organizations, people would be hollering for an investigation and demanding the prosecution of those responsible. Repeat performances would not be tolerated. Heads would roll and changes would be forthcoming. In our market economy and system of democratic rule, the public is supposed to determine the destiny of business and government. So it seems reasonable to conclude that until we begin to realize that bad ethics is about more than big headlines in the New York Times and that it carries serious consequences for the moral fiber of society and our own well being, we will continue to see these kinds of disasters unfold again and again.
We can and should bemoan the ethical blindness that sees so many organizations founder and the failure of those at the top to steer the straight course. But if genuine change is desired, we need to instill a better ethical compass in our institutions of business and government and demand a new kind of person to captain these great ships. We are, after all, the citizens and shareholders who own them.
