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.

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.

Question for Secretary Geithner: What Does “Recuse” Mean?

New York Times

In his sworn testimony today before the House Committee on Oversight and Government Reform, U.S. Treasury Secretary Timothy Geithner reasserted that he had recused himself from making any decision in connection with AIG payments to Goldman Sachs in November 2008.  But he also testified that he was made aware by Fed officials that the payments had been made.  He knew this at a time when it was not public information and even Congress itself had been kept in the dark.

Some scepticism has been expressed on these pages before about the credibility of this scenario.

I have had some experience over the years in advising government agencies and public officials about issues related to conflict of interest and when there is a need to step aside.  When they do, they keep out of any aspect of the matter; they don’t get updates and briefings on the decision in which they did not take part.

The Committee needs to dig deeper into what the details of Mr. Geithner’s recusal were and what legal advice he had on that subject.  It also needs to look more carefully at what the mechanism was by which he became aware of the AIG counterparty decision – and why he felt he should be kept in the loop on the decision from which he says he removed himself.

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.

Outrage of the Week: Missing the Roles that Dimon, Fuld and Immelt Played as New York Fed Directors in Wall Street’s Big Bailout

The absence of any discussion concerning all the roles held by these important Wall Street figures, including in the governance of the Fed itself, does a disservice to the stakeholders who are entitled to all the facts.

outrage 12.jpgIt is widely held, even by Fed Chairman Ben S. Bernanke, that the Federal Reserve System helped to bail out Wall Street when it agreed to “loan” $29 billion to facilitate JPMorgan’s purchase of distressed investment bank Bear Stearns. We will have more on the subject of that so-called loan in an upcoming posting. What has gone unnoticed and uncommented upon by the press, analysts and members of the U.S. Senate banking committee during its hearing last week, however, is the fact that key Wall Street figures, including Jamie Dimon, chairman and CEO of JPMorgan Chase, Richard S. Fuld, Jr., chairman and CEO of Lehman Brothers and Jeffery R. Immelt, chairman and CEO of GE, are directors of the Federal Reserve Bank of New York, the institution that is putting up the money.

Mr. Dimon is a “Class A” director of the New York Fed, elected by member banks to represent member banks (i.e., Wall Street). Mr. Fuld and Mr. Immelt are elected by member banks to represent the public. One might take the view that foxes are generally elected to guard the henhouse, too. The New York Fed’s governance brings to mind the crony-stocked, self-serving boardroom of the New York Stock Exchange under Richard Grasso before it was forced to make major changes to ensure higher standards of independence and accountability. It is clearly time to look at to whom and how the New York Federal Reserve is held accountable.

We know that JPMorgan benefited handsomely from the Fed’s dramatic measures. Lehman Brothers, widely rumored a few weeks ago as the next possible Bear Stearns, got a boost from the Fed’s market soothing actions. And GE, who just today jolted the market by announcing a 5.8 per cent decline in first quarter net income, was also having problems with its financial services division. Mr. Immelt told CNBC (a unit of GE) that he began to be aware in March of a weakening company outlook. (In an interview earlier that month, he indicated the company was still on target to meet its previous positive guidance.) A less volatile capital market temperament was no doubt helpful to him as well.

More and more, the picture is emerging that this was a bailout of Wall Street, prompted by Wall Street, over problems caused by Wall Street, with terms dictated by Wall Street. The Fed’s agreement constitutes the single most significant market intervention in generations. Such a decision, which places substantial taxpayer dollars on the line and the concept of moral hazard in jeopardy, should be arrived at in a manner that is beyond reproach not only in fact but also in appearance.

The absence of any discussion by the media, the Federal Reserve or legislators concerning all the roles held by these important Wall Street figures, including in the governance of the Fed itself, does a disservice to the stakeholders who are entitled to all the facts in order to properly hold government and its agencies to account. It is our call for the Outrage of the Week.