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.

Bank of America’s Record Settlement: The tsunami of wrongdoing and excess that caused barely a ripple of inconvenience at the top.

The indisputable economic (and moral) fact of our time is that America’s most wealthy, from whom capitalism’s CEOs, directors, guardians and gatekeepers  are drawn, not only allowed this torrent of financial chicanery and deception to occur, they profited handsomely from it.

These pages have voiced strong doubts over the years about the leadership and compensation practices that prevail at many of America’s corporations. Chief among the criticisms were that these plans provided incentives and rewards that caused companies to take improper risks which allowed CEOs to rack up huge gains in the short run while investors — and, ultimately, society — were left holding the costly bag of empty promises when reality came crashing down.

Take Bank of America, for example, which recently settled with the U.S. Justice Department by agreeing to pay a record $17 billion in penalties and restitution.  In the long history of American business, there has never been anything approaching this outsized penalty.  It stems from improprieties at Countrywide Financial, which B of A bought in another fit of misguided thinking, just before the onset of the Great Recession. There were also irregularities involving disclosures about its takeover of Merrill Lynch as well as with Bank of America’s own mortgage practices.

You might think that CEOs and boards are paid well for keeping companies out of trouble and avoiding these kinds of disasters.  Half of that observation is certainly true.  In the five years leading up to the crash of 2008 and the beginning of the worst recession since the Great Depression, B of A’s CEO Ken Lewis was paid more than $200 million.  Each of the bank’s directors awarded themselves a minimum of $1.5 million in the same period.  Many collected more.

When  he retired in 2009, Mr. Lewis walked away with a further $83 million in retirement benefits. Others connected with B of A, such as former Merrill Lynch CEO John Thain and Countrywide Financial’s former CEO Angelo Mozilo, also made off with huge fortunes as a result of deals made with the bank under Mr. Lewis.

And for all that, one of America’s most prominent financial institutions did not walk — it ran — into the giant propeller of U.S. government in a predictable and avoidable financial collision that resulted in this staggering record payout.

Bank of America was, as we documented over the course of several years, far from alone in practicing financial acrobatics that were more suited to a travelling carnival than an iconic institution of capitalism.  Yet in this mighty tsunami of boardroom wrongdoing and excess that nearly upended Main Street, barely a ripple of bother was felt among the first-class decks of Wall Street and America’s financial elites.  No CEO has been sent off to jail.  No director  or chief executive has been forced to return any pay.  As we noted in The Fallacy of Giantsin most cases when these kinds of eye-popping settlements are announced, the company’s stock shoots up.  Government fines, no matter how staggering, and accusations of abuse and betrayal by top management and boards, no matter how shameful, are regarded by many business insiders and much of the market as just another cost of doing business.

The indisputable economic (and moral) fact of our time is that America’s most wealthy, from whom capitalism’s CEOs, directors, guardians and gatekeepers  are drawn, not only allowed this torrent of financial chicanery and deception to occur, they profited handsomely from it.  The result is that those same elites in the period between 2007 and now managed to gain an even larger choke hold on the wealth and income of America than at any time since the 1920s.  This, despite the fact that were it not for the bailout provided by America’s taxpayers who largely live on Main Street, not only would this expansion of wealth not have occurred, but capitalism itself  might not have survived.  On that point, is it not interesting that the same voices that are generally quick to rail against government excess and demand fiscal discipline when it comes to the public purse are uncharacteristically silent when it comes to the $5 trillion the U.S. Fed paid to finance the bailout? Does that have any connection with reality, or is it just another case, like CEO compensation, for instance, where there is one set of ever accommodating rules for those at the top and another for everyone else?

What happened with Bank of America, and other prominent institutions like it, and the ease with which moral and legal improprieties can be sloughed off with little consequence for those in charge, is at the heart of the current record level of public disaffection with  capitalism and those who lead it. Having spent nearly half a century working with and around capitalism and its leaders, it is hard for me to imagine that one day it may cease to exist.  But the too often overlooked reality is that the fundamental currency that sustains modern capitalism is not capital at all — it is the consent of the public.

If present trends in income equality and  corporate immorality continue, and its leaders fail to ensure that capitalism is governed by a set of values that is consistent with the needs and dreams of Main Street, it is hard to imagine how it will survive.

The Fallacy of Giants | Part One

David and GoliathAn Essay by J. Richard Finlay

on corporate integrity in the post-bailout era

Recent multi-billion dollar settlements involving Bank of America and JPMorgan Chase show the staggering costs of ethical folly and the culture of moral hazard that places too many companies, and capitalism itself, at risk.

It is the curse of giants to believe in their own invincibility.  It is also the curse of their acolytes, as the White Star Line discovered with its “unsinkable” Titanic and the Philistines learned with the defeat of their champion Goliath at the hands of a young shepherd boy.  Yet these lessons, and countless others, over millennia have not dispelled such illusions in the world of business, where size is seen as an insulator against all manner of misadventures and the too-big-to-fail mentality shows few signs of abating.  Indeed, the extent to which America’s major banks and Wall Street icons were on the wrong track when it came to compliance with the law and standards of ethics during the great financial meltdown and even afterwards is becoming even more striking.  Recent reports involving Bank of America, Citigroup and JPMorgan Chase vividly make the point.

On these pages in the years and months leading up to the worst financial crisis since the Great Depression, and in numerous op-ed columns before that, I wrote about the dangers of relying on the myths of giants.  Until they were categorized as being too big to fail, corporate monoliths like Bank of America, Citigroup and JPMorgan Chase were viewed as being too smart to fail.  Trophy directors and fantastically compensated CEOs, with the assistance of huge PR departments that never seemed to sleep, worked overtime to present an image where success was virtually guaranteed.  The reality, however, was that too many boards were recklessly disengaged from what was happening around them.  Seeds of folly were being sewn by undersupervised employees more interested in creating clever short-term financial devices than sustainable building blocks of long-term business.  And too many investors and journalists had become prisoners of what I call cheerleader capture. First cousin to the condition of regulatory capture, this refers to the state where it is virtually impossible for any dissenting voices to penetrate the thundering chorus of cheers by insiders and their loud choir of supporters.

There were warning signs of the unwise effects of that mindset, to be sure.  Scandals involving security analysts, for instance, for which Henry Blodget became the poster-boy, revealed the dangers of a culture of cheerleader capture.  In too many cases, the analysts who were supposed to be delivering objective assessments of the financial health of companies enjoyed personal and career incentives that caused them to paint a more glowing picture than justified by the facts.  Citigroup was touched in several ways by that scandal.

There were the accounting frauds at Nortel, Enron and Worldcom that were so stunning they resulted in landmark legislation known as the Sarbanes-Oxley Act being passed.  The collapse of Hollinger and Livent provided an interesting coda to those scandals. If these events of just a few years earlier had been taken seriously, they would have produced a higher standard of boardroom oversight that might have prevented the blunders and financial chicanery that brought the world to the brink of the financial abyss in the first decade of the 21st century.

But even before the gales of that crisis rose to full force, this space questioned the governance practices of companies like JPMorgan Chase, Citigroup, Bank of America, as well as Countrywide and Merrill Lynch, two institutions which BofA bought.  We took frequent issue with the sweetheart boardroom deals that propelled their CEOs into the super-compensation stratosphere.  We felt that the excessive deference accorded many CEOs reflected a perilous level of disengagement on the part of boards which in turn were failing to exercise the independent judgment needed to fully protect investors and the public franchise of capitalism itself.

Many of the decisions these companies made were fraught with ethical failures, violations of the law and just bad business thinking.  Their consequences are coming home to roost even years later.  Bank of America recently agreed to pay $9.5 billion in fines to settle civil lawsuits with U.S. federal housing authorities.  Ken Lewis, the company’s former CEO, settled with regulators by paying $10 million personally.  All told, it has cost BofA some $50 billion to resolve a variety of claims stemming from the subprime era, including the fraudulent actions of Countrywide Financial and misleading statements made in connection with the bank’s purchase of Merrill Lynch.

Improprieties at JPMorgan Chase resulted in an astonishing $20 billion being handed over to various regulatory authorities.  The amount barely caused a ripple on Wall Street, where reaction to the announcement registered nothing untoward in respect of JPMorgan’s stock or the reputation of its CEO, Jamie Dimon.

Citigroup, which has also paid out huge amounts to settle regulatory claims, recently failed the Fed’s financial stress test — for the second time in two years.  Its stock languishes at the unconsolidated 1-for-10 equivalent of the same $5 range it was at during the bailout crisis. Were its recent history of losses, bailouts and scandals not sufficient, there are new regulatory and legal issues arising from a potential fraud involving Banamex, a Mexican subsidiary. In one day early this April, Citigroup’s shareholders were hit with a double whammy.  The company said that it was unlikely to meet a key profit expectation it had set and then announced it was paying $1.12 billion to certain investors to settle claims stemming from mortgage securities sold before the financial crisis.

Yet the level of shareholder outrage one might think would be directed at Citigroup’s board for this Job-like litany of woes has, for the most part, failed to surface, just as tolerance of years of poor boardroom practices and bad decisions earlier led to a cascade of scandals and financial losses culminating in the bank’s  liquidity crisis that prompted the U.S. government bailout in 2008.

In no case has any banking or Wall Street executive faced jail time as a result of the misdeeds that resulted in these record massive payouts or those of other companies.  By contrast, in any given day on Main Street, courts routinely hand out jail sentences to elderly seniors convicted of  shoplifting and single mothers who pass bad cheques for even small amounts.

Like the notion of billions and billions of stars in the cosmos often attributed to the late Carl Sagan (with the help of Johnny Carson), it is hard to get the mind around the scale of these fines, payouts and penalties.  And in the case of Bank of America and JPMorgan Chase, and numerous other companies from drug makers to car manufacturers along the way, it seems nobody is even trying.

What seems to be happening instead is that the wrong-headed mindset that gave birth to excessive CEO pay has infected other fields of business responsibility and decision-making.  We explore this further in Part II.

The People’s Judge Comes Through

There is much discussion about whether anything has changed in the culture of Wall Street in this period.  Maybe it has, or maybe it hasn’t.  But at least in Judge Jed Rakoff’s Manhattan courtroom today, something undeniably did.

Common sense received a well-deserved nod today in a landmark ruling from U.S. District Judge Jed S. Rakoff.  The judge rejected the overly cozy settlement struck between the Securities and Exchange Commission and Bank of America.  In making his ruling, he expressed skepticism that a public agency should allow shareholder money to be used to shield B of A’s management from more rigorous investigation over the Bank’s takeover of Merrill Lynch.  The move was stunning in its departure from the way the courts normally handle SEC settlements.

As the judge astutely noted:

The S.E.C. gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger, and the Bank’s management gets to claim that they have been coerced into an onerous settlement by overzealous regulators…. It is quite something else for the very management that is accused of having lied to its shareholders to determine how much of those victims’ money should be used to make the case against the management go away.

As we said about this case here:

The settlement process between the SEC and securities issuers is part of the old way of doing business involving weak oversight and overly permissive regulation that helped to create the recent market debacle.  Far from spurring accountability and transparency, which is generally regarded as a necessary part of financial reform, it allows companies to pay money out of shareholders’ pockets and evade any larger sense of responsibility for what they have done.  In this charade, management knows it can try to get away with as much as possible and, if caught, has only to come up with a few million, which becomes another business expense.  It is an easy way of creating the impression that the SEC is making progress toward reform and enforcement when it is nothing more than a mere slap on the wrist that perpetuates the culture of always skating close to the edge of the law.  That is a culture that needs to change dramatically if the lessons from the market’s meltdown and credit collapse mean anything.

The decision is a poetic present as Wall Street and a still-reeling, bailout-fatigued economy celebrate the first-year anniversary of the collapse of Lehman Brothers and the dramatic weekend that saw the forced Bank of America – Merrill Lynch deal.

There is much discussion about whether anything has changed in the culture of Wall Street in this period.  Maybe it has, or maybe it hasn’t.  But at least in a federal building in Manhattan today, something undeniably did.  Common sense was a rare witness in the courtroom.  Judge Rakoff preferred her testimony.

An investing public who should more than ever be interested in the truth and in the morality of how business is run should feel grateful and a little more relieved today.

The Disingenuous Fleeing to the Indefensible

Former Merrill Lynch CEO John Thain has tried to explain his spending spree of more than a million dollars on antiques for his office, in December of 2007.  He claims it was a “very different economic environment.”  How different might that be?

He was brought in to replace Stanley O’Neal –who had just presided over a $2.3 billion third-quarter loss in 2007– at the time of the worst loss in the company’s history.  Shortly after Mr. Thain took over, the company reported a staggering 9.8 billion loss for the fourth quarter, an even bigger record smasher.  But these losses were apparently not enough to cause Mr. Thain to have any doubts about the “economic environment” –or the merit, much less optics, of spending $1.2 million on carpets, drapes, antique chairs, mahogany tables and the world’s most expensive waste paper basket at $1,400.

We said recently that Mr. Thain’s actions are an example of what we have seen too often on Wall Street: the patently over-praised engaging in the unmistakably despicable.  From what we saw of Mr. Thain’s flimsy explanation, we must add to it the spectacle of the disingenuous fleeing to the indefensible.  This appears to be a growing characteristic of those who occupy double digit million dollar luxury digs on Manhattan’s Upper East Side.  Richard Fuld (of defunct Lehman Brothers), Jimmy Cayne (who once headed Bear Stearns) and Bernie Madoff (now confined mainly to house arrest while he awaits trial on charges of masterminding the largest Ponzi scheme in the world) jump to mind. 

Some neighborhood.  Penthouses and shiny Escalades on every corner, but seldom even the frailest silhouette of sound judgment ever encountered.



Outrage of the Week: The Real John Thain Revealed

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The sudden fascination on the part of the former CEO of Merrill Lynch with expensive antiques paid for by beleaguered shareholders illustrates once again that sound judgment is the most underrated and unevenly dispensed attribute among modern leaders today.

A year ago, at the beginning of 2008, investors in U.S. financial stocks had already begun to see their fortunes dwindle.  Major icons of American capitalism, including Merrill Lynch, had already lost or written down billions.  Layoffs had already begun in the financial sector, including at Merrill Lynch.  And families were losing their homes to foreclosures in record numbers.  At Merrill Lynch, a new CEO was called in to clean up the mess that the misjudgments of his predecessor, Stanley O’Neal, had caused.   Bringing in John Thain was considered a real coup for Merrill, and they paid handsomely for that privilege -to the tune of nearly $80 million.  It was, a year ago, a sobering time for Wall Street, where confidence was evaporating faster than an Irishman’s bottle of whiskey.   Many had begun to glimpse a gathering financial storm like no other imagined.

In the peculiar world of John Thain, however, it was just the right time for something else:  a spending spree of more than a million dollars to redecorate his personal office.  Evidently, investors at Merrill Lynch, who had already lost big-time, had not paid enough.  They needed to fork over more than a million dollars for things like a George IV chair at $18,000, a carpet for $85,000 and four pairs of draperies for $28,000.  (The complete list is available here.) 

Keeping Mr. Thain happy became a very expensive proposition.  And the amazing thing is, he thought he could really get away with it at a time when the world was so distracted by the implosion of Wall Street and the credit markets.  Had he been a passenger on the Titanic, he no doubt would have pulled a Bruce Ismay. (He was the head of the White Star company, owner of the Titanic, who took one of the last lifeboats off the ill-fated ship while more than 1,500 crew members and passengers were left to perish onboard.)

It has become increasingly common in recent months to discover a certain disquieting reality about America’s CEO class.  When times were good, it seemed to many that they could do no wrong.  They were lauded as superheroes and garnered celebrity status on a level with rock stars and sports giants.  But now that the economy is not proceeding ever upward with the obliging  assistance of absurd levels of leverage and a blind eye to any notion of risk, the pressure is on.  Many CEOs in this environment simply don’t cut it.  They don’t seem to possess the sea changing abilities they once did.  Problems appear more intractable.  Many have decided to pack it in rather than keep up the pretense that they really know what they are doing.

Then there are the John Thains, who rake in tens of millions just for showing up, demand a $10 million bonus even at the lowest ebb of the company’s fortunes when thousands have been sent packing, and need a more impressive office from which to preside over the company’s shrinking fortunes, its dwindling share value and, ultimately, its disappearance as a standalone entity.

This kind of conduct, in addition to his decision to award $4 billion in bonuses company-wide just days before the deal with Bank of America closed and further losses of $15 billion were reported, shows the extent to which Mr. Thain did not grasp the radically changed landscape on Wall Street. There are many CEOs, unfortunately, whose actions also illustrate a nearly complete disconnection from reality.

As we have said before, sound judgment is the most underrated and unevenly dispensed attribute among modern leaders today, in politics and in business.  Without it, even the brightest stars eventually sputter out, usually in some kind of stupid scandal quickly captured under the category “What were they thinking?”  Astrological awareness is something few leaders possess.  Believing their own press clippings and the unfailing deference of the media, politicians and boards of directors to their every action, many begin to think that the earth and all the other planets really do revolve around them.   Clever public relations people can do many things, but they cannot forever defy the laws of physics.  Sooner or later, there is a stumble involving conduct that is, at best, unacceptable and, at worst, one hundred percent weird (see Admiral Bobby Ray Inman).  Many cannot adjust to the sudden reality that a different set of laws governs the universe and that they are not the center of it.  It is generally an episode that causes others to question how these people actually got as far as they did, or whether they were just among the luckiest people in the world -for a while.

Mr. Thain’s actions, including his shameful attempt to claw back a $10 million bonus just after the company’s forced sale to Bank of America, also fall into the bizarre category.  But this is about more than the spectacle of the patently over-praised engaging in the unmistakably despicable.  Mr. Thain has brought discredit to the company he once headed, the industry of which he has been a life-long part, and Wall Street itself at a time when what they all need is genuine leadership that can regenerate lasting confidence.  He is a deserving choice for our Outrage of the Week.



Outrage of the Week: Harsh is the Tether That Does Not Bind When Shareholders Face Say on Pay

Owners of American corporations have rarely spearheaded the kind of landmark reforms the capital markets have needed to ensure public confidence or avoid the club of government regulation. They are reprising their Laodicean roles by failing to force a say on executive compensation.

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More than a decade ago, we described the growing trend of inflated CEO pay as the mad cow disease of the North American boardroom. The comment, made at a speech in Toronto, was quickly picked up by the press. The metaphor was used because the trend toward excessive compensation appeared to be galloping from company to company, rendering directors seemingly incapable of applying good judgment and common sense when it came to compensation decisions. We repeated that idea in an interview in BusinessWeek in 2002 and in submissions to committees of the U.S. Congress.

But recent events struck us with the fear that this disease has spread to the shareholder body itself. The telling symptom is the revelation this week that at Merrill Lynch, Citigroup, Morgan Stanley and JPMorgan Chase, four companies that have seen their stock plunge, on average only 37 percent of investors supported recent proxy resolutions for a non-binding say on pay. In the case of Merrill and Citigroup, record multi-billion dollar write-downs and losses have been posted. The compensation of the CEOs who headed these companies during their descent into the world of subprime folly has been a recurring theme on these pages. It, along with the wider concern over soaring executive compensation, has sparked a mounting crescendo of outrage on the part of the public that has found its way into the current U.S. presidential campaign. Even Republican presidential hopeful John McCain has chided the level of greed that is sweeping America’s boardrooms.

The larger issue that draws our attention is the perennial fecklessness of shareholders as a group. After the panic of 1907, it was not investors who demanded the creation of the Federal Reserve System, nor did they rise up and call for such now basic measures as audited financial statements, annual reports and insider trading laws after the market crash of 1929. And when the Enron-era scandals revealed systemic weaknesses in American corporate governance, it was not the mass of shareholders who stood up at annual general meetings and demanded tougher audit committees and fewer boardroom conflicts – or any other provision of Sarbanes-Oxley legislation, for that matter. They are reprising their Laodicean roles by failing to force a say on executive compensation.

For American investors, too harsh is the tether that does not even bind. It is bad enough that directors insist on treating shareholders like children while they convey the idea that a say on pay would be almost the final step in the undoing of capitalism as we know it. But for the owners of American business to act as though they can’t be trusted with such advisory powers in connection with their companies and their money boggles the mind and is a complete abrogation of the responsibilities of ownership. It is our choice for the Outrage of the Week.