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.

Why Canada’s Stock Markets Attracted Russian Mobsters Like a Magnet

Even a former Premier of Ontario claimed he was duped as he presided over this fraudster’s scheme.

The odd name YBM Magnex suddenly emerged from its shadowy past last week when the FBI placed Semion Mogilevich, its Russian mobster mastermind, on its “Ten Most Wanted” list. He is accused of swindling Canadian and U.S. investors out of $150 million in a complex international financial scheme.  Authorities say the fraud involved preparing bogus financial books and records, lying to Securities and Exchange Commission officials, offering bribes to accountants and inflating the share values of YBM, which was headquartered in Newtown, Pennsylvania but whose stock was traded on Canada’s top exchange, the TSE (now TSX).  The policing of potential fraud was a low priority for the TSE in those days, and the reputation of Canada’s capital markets suffered significantly during this period.  So did confidence in its corporate governance.

There continues to be an active debate as to whether Canada is  tough enough on white collar crime, and whether, without a single national securities commission, as I and others have long advocated, there can be any hope for a more robust enforcement regime.

To increase its lure to investors, the company attracted some prominent independent directors, including David Peterson, a former premier of Ontario.  In testimony some years later before the Ontario Securities Commission on the matter, Mr. Peterson admitted that he did not make notes at company board meetings and did not retain any records.  He was, for a scheme like YBM and Mogilevich, the ideal slumbering director.

I was one of the first to write about the scam and the failures that led to it, in 1998. Below is one of those articles, published in the Financial Post more than a decade ago.

Wednesday, July 15, 1998

Guest Column

YBM simply the latest example

Top securities regulators asleep at the switch again

The Financial Post

History sometimes repeats itself. In Canada’s premier securities market the failure of regulators to respond to danger signals is becoming an alarming habit: Cartaway, Timbuktu, Bre-X, Delgratia.

The latest case involves YBM Magnex International Inc., whose trading was halted on the Toronto Stock Exchange in May amid questions over the company’s 1997 audit and in the wake of police raids on its corporate headquarters in Pennsylvania. The scandal bears such eerie similarities to the Bre-X Minerals Ltd. scam of just a year earlier one is tempted to conclude it is the fickle hand of fate that is writing this drama. But it is not fate. It is the recurring folly of this country’s top securities regulators.

Both Bre-X and YBM began their journey on the Alberta Stock Exchange. Listings on the TSE and inclusion on its prestigious 300 composite index followed for both companies. In April 1997, the exchange’s president, Rowland Fleming, assured investors the Bre-X debacle had “heightened the state of alert in our market surveillance department.” But, later that same month, YBM was added to the TSE 300 index.

TSE officials have since admitted they knew then of criminal investigations on two continents into an alleged Russian crime figure with a stake in YBM. However, neither the exchange nor the Ontario Securities Commission, which was also aware of the investigations, thought it advisable to disclose these facts to investors at the time of YBM’s listing and later stock offering. It is an omission that makes Canada’s top securities regulators potentially more culpable in the YBM fiasco than they were in Bre-X.

Another Bre-X-type danger signal was the extensive insider trading occurring before the accounting firm of Deloitte & Touche Ltd. announced in May it was unable to certify YBM’s 1997 financial statements. The company’s president, Jacob Bogatin, and several officers sold more than $2 million worth of stock between late February and April.

Troubling too is the trading activity of Kenneth Davies, one of YBM’s independent directors and a member of its audit committee. He reportedly made a profit of nearly $250,000 selling YBM shares after the board learned Deloitte & Touche was suspending its audit of the 1997 figures but before that information was disclosed to the public.

Clearly, regulators need to be more alert to insider trading in companies with questionable track records. In addition to the police investigations they knew about, regulators had forced YBM to have its 1996 books re-audited, resulting in a restatement of material facts.

Directors of Bre-X also engaged in heavy insider trading before negative revelations that saw share values evaporate. For more than a year, the OSC has been investigating the Bre-X trades for possible securities law violations. Yet the regulator still hasn’t released any information, this despite its increased resources thanks to a changed funding formula — including a new chairman with an annual salary of more than $450,000 — and enormous public interest.

Also, the corporate governance practices of these two companies were well known to both the TSE and OSC, and to YBM’s legion of mutual fund and institutional investors. Bre-X had an insider-dominated board that violated exchange guidelines on good governance. YBM’s list of outside directors includes Owen Mitchell, who is also a director of First Marathon Securities Ltd., the company’s lead underwriter. Former Ontario premier David Peterson is also a director, while his law firm acts as Canadian solicitor of record for YBM. Peterson, like other directors, has also participated in the company’s generous stock option plan. TSE guidelines on corporate governance advise directors should keep themselves “free of relationships and other interests which could, or could reasonably be perceived to, materially interfere with the exercise of judgment in the best interests of the corporation.”

The parallels between Bre-X and YBM show how little the TSE and the OSC have learned — and how vulnerable the public is to regulators’ omissions that put their investments at risk. Since these issues involve the integrity of Ontario’s capital markets — a key Canadian asset in the global economy — it is time for Ontario Finance Minister Ernie Eves to order a review of what needs to be done to make the TSE and the OSC more vigilant. Neither Canada nor the investing public can afford to have such regulatory folly repeat itself another time.

J. Richard Finlay heads the Centre for Corporate & Public Governance.

Has the SEC Caught the OSC’s Disease?

The world’s most powerful securities regulator has long called itself the investor’s advocate. Given its stunning failure over the Madoff scam and the latest scandal, involving R. Allen Stanford, it may be on its way to becoming known as the investor’s nightmare.

For years, the Securities and Exchange Commission was regarded as one of the toughest securities cops in the world. The Ontario Securities Commission, North America’s second largest capital markets regulator, on the other hand, has been viewed more like the Keystone Kops –missing the red flags in the Bre-X fraud, dropping the ball on Livent, dodging the tough calls with Hollinger, and losing a number of high profile cases before the courts. In many quarters, the OSC has been dismissed as something of a joke inside Canada and an embarrassment outside.

But recently, it is the SEC that has taken quite a hit. (more…)

RIM’s $77 Million Black Eye

We said a while back that there would be more surprises coming out of Research In Motion’s options backdating scandal.  A big one came today.

Two years ago, I raised a number of concerns about Research In Motion’s corporate governance, describing it as a relic of the past.  As its backdating scandal unfolded, I expressed serious reservations about RIM’s board practices, the role of its directors in the backdating review, and, ultimately, the outcome of that internal investigation.  Simply put, there was something terribly fishy in the Waterloo-based boardroom, and in the flimsy excuses offered up by RIM’s founders and co-CEOs Jim Balsillie and Mike Lazaridis.  As I  noted in 2006:

In my view, these most recent developments at RIM are part of a larger problem involving its corporate governance practices, the structure of its board, the practice of awarding stock options to directors, the over-presence of management on a small board, the lack of an independent director as chair or even a lead director, among other concerns.

I said in an earlier posting that we have not seen the last of surprises at RIM over its stock options probe. This is one to add to the list. There will be more to follow.

A big one came today, when the company settled with the Ontario Securities Commission over allegations related to improper options backdating.   A number of officers and directors will pay $77 million in fines and penalties.  It is a record settlement for the OSC.

We will be taking a further look at the settlement and the failures that led to it in the days ahead.   Here’s a clue as to what’s at the center of it.  It comes in the words of OSC vice chair James Turner, who cited a “fundamental failure” in RIM’s corporate governance, which gave rise to the improper backdating and a host of misleading and inaccurate company disclosures.   Sound corporate governance was definitely absent at RIM.  But this costly outcome is also a lesson in the importance of ethics, transparency and integrity -three values that were more than occasionally missing in RIM’s boardroom.

Our previous postings on RIM are available here.



In the Press on the Melnyk Mess at Biovail

Biovail, Canada’s largest publicly traded drug manufacturer, has been in the news probably more than it would like lately. It has had problems with its financial performance, with securities regulators and with its former CEO, Eugene Melnyk. When Mr. Melnyk was at the helm of the company, it was not exactly known for its exemplary corporate governance practices. The board culture worked well for Mr. Melynk, however. For 2001 and 2002 alone, he took home more than $188 million.

While the company did clean up its governance act in some ways, Mr. Melnyk still managed to run afoul of securities regulators in Canada and the United States. Last year, he settled with the OSC on charges of failing to file proper insider trading reports. Since then, new enforcement actions have been taken against him (and certain other past and current Biovail employees) by the SEC and the OSC in connection with accounting statements. It will be interesting to watch whether the OSC, not known in recent years for its vigorous prosecution of securities violators, will come down harder on Mr. Melnyk because of his previous encounter with that agency. We’ve posted a few thoughts on this saga over the past year.

The current issue of Canadian Business contains some comments from an interview with me on the Biovail/Melnyk travails.

What Are Your Plans for Biovail Now, Mr. Melnyk?

Last week, we received inquiries from the press asking for a comment on Eugene Melnyk’s plans to change the board of Biovail. The published versions omitted our most important point: the SEC’s probe into Mr. Melnyk and Biovail may be the biggest factor in determining any influence he has in the future of the company. The second shoe in the investigation dropped today with the SEC bringing civil charges of accounting fraud against Mr. Melnyk and several other parties. Similar proceedings were also brought in Toronto by the Ontario Securities Commission.

We expect Mr. Melnyk will be putting his plans for the company he founded on hold for a while. He was at the helm of Biovail when the alleged improprieties occurred and his griping about the state of the company now is a little like Conrad Black lambasting the board and management of Hollinger Inc., and its Sun-Times Media Group subsidiary, from his baronial power base at the Coleman federal prison complex in Florida.

The complaints also included proceedings against Biovail’s most senior financial officials: current Controller John Miszuk and current CFO Kenneth Howling. The company has announced that they have been reassigned to other positions in the organization. Biovail needs to be more specific about how close those roles are to financial functions in the company as the market does not generally respond well when so many past and current officials are the subject of regulatory proceedings, especially those involving fraud.  (See Hollinger).

The company itself paid a $10 million penalty to the SEC for its role in the alleged accounting scheme.

Outrage of the Week: Canada’s Clueless Corporate Crime Cops (continued)

outrage 12.jpgWhen the reputation of a major securities regulator like the OSC begins to look more like the reality show The Biggest Loser, you know you have a problem that needs fixing.

The trial that began with criminal charges over the Bre-X fraud took six years and ended with the Ontario Securities Commission losing completely. The cost of the investigation and trial soared into seven figures. Charges involving another company, Atlas Cold Storage, resulted in the OSC’s abandoning its prosecution in mid-trial. More recently, the regulator’s nearly seven year stock tipping and insider trading case against Andrew Rankin, the former managing director of RBC Dominion Securities, after unraveling on appeal, yesterday came down to his paying $250,000 to settle the matter. No conviction will be recorded. The costs of that investigation and trial also mount into the millions. The OSC’s charges involving executives at Livent and Hollinger are still to be heard. They would probably move ahead faster if they were sitting on a glacier.

As The Centre for Corporate & Public Governance noted today in a statement about the Rankin settlement:

The regulator’s decision gives rise to troubling questions as to whether this is the proper outcome in light of the facts of the case and the high costs incurred by the OSC, and whether it will serve as an adequate deterrent to stock tipping and insider trading in the future. In addition, there are concerns being expressed widely within and outside Canada about the OSC’s judgment and overall competence in the enforcement field, given this and other events in the recent past.

As we have observed before on these pages and in this post more recently, the OSC’s problems fundamentally come down to an issue of governance: too many people are engaged in playing too many roles as policy makers, investigators and adjudicators with a level of oversight that lacks both transparency and efficacy.

You have to ask yourself how much more evidence and how many more embarrassments do Ontario’s lawmakers need before they get the message that the OSC is operating as a dysfunctional and underperforming institution? If they spent any time talking to investors, and especially those outside Ontario, they would have no doubt.

When the reputation of a major securities regulator begins to resemble the reality show The Biggest Loser, you know you have a problem that needs fixing.