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.

Return of the Pharaohs of Misjudgment

Conrad Black is back at his (temporary) winter home in Palm Beach after being freed on bail pending the outcome of his appeal.  His conservative friends in their College of Cardinals-type media conclaves appear to seek his beatification for what he has gone through. If he is found to have been wrongly convicted, as countless numbers are in Canada and the United States every year without a whisper of concern from Mr. Black’s supporters — or the tens of millions at their disposal to make that case, as Mr. Black has — he is entitled to all the redress available for one of the most terrible wrongs the state can perpetrate on a person.  But, as Stephen Bainbridge points out, there is still much of the dark earth about him that stands between Mr. Black and his final elevation to sainthood.

Richard Fuld was back before another committee attesting to the fundamental strength of Lehman Brothers, which went under for every conceivable reason, except, of course, the failure of its leaders.  Follow-up question: does the Financial Crisis Inquiry Commission realize that Lehman had a board of directors who  might shed some light on the calamity?  Fed chief Ben Bernanke was also back before the Commission, after the Fed admitted, once again, that it misread the depth of the economic downturn in recent months.  A change in lyrics was also detected regarding Mr. Bernanke’s explanation as to why Lehman was not saved.  The self-serving music remains the same, however.  BP’s infamous blow out preventer made its way back to the surface; its corporate image is still submerged somewhere in an ocean of missteps and CEO blunders.  HP’s board is back in the news, and not in a good way.  It showed that you can spend tens of millions on a CEO and, for that lofty sum, still get a chief executive with a missing ethics gene.  The directors’ solution?  Spend tens of millions more to get rid of him in the face of the deception which the board claimed was the reason for his ousting.  Go figure. Canada saw a new Governor General appointed to represent the Queen as head of state.  It came on the sole recommendation of a prime minister whose Conservative Party holds a minority position in parliament.  It is a throwback to a time when most Canadians could not read or write and women did not have the vote.  Still, few Canadians seemed bothered by the quaint tradition. On the other hand, few parents teach the idea that any girl or boy can grow up to be GG someday.

President Obama is back to a freshly redecorated Oval Office, where he has hatched yet another stimulus package.  The new soft beige seating areas will provide a calming effect when yet lower approval ratings are published.  As the distancing of the President from the electorate becomes more pronounced, and the loudening canons of Republican victory signal their approach with each day, one can almost hear the mournful reprise of a love no longer to be: “We’ll always have health care.”

However timeless the Pyramids of Giza and the inscrutability of the Great Sphinx remain, they cannot for more than a few weeks distract our attention from the greater monuments of folly and misjudgment that today’s Pharaohs of business and government routinely create.

They will be pleased to know that, along with all of them, we are back, too.

Outrage of the Week: Alice in Boardland and Other Fairy Tales About Lehman Brothers

Leonard Lance, (R.NJ): Mr. Cruikshank, to follow up in your remarks.   Do you believe there were corporate governance failures at Lehman?

Thomas Cruikshank, Chairman, Lehman board auit committee: No, I don’t. I think our governance procedures were really very, very good.

House Committee on Financial Services, April 20, 2010

A number of revealing facts emerged from testimony before Congress this week on the Lehman Brothers bankruptcy.  The Securities and Exchange Commission  said that, despite being aware of red flags, it did not believe it could press for any changes at the company where staff members were embedded for several months.  It appears some SEC staff had other things on their minds, however.

CEO Richard S. Fuld Jr. claimed he had no idea about the problems that were brewing and had never heard of any Repo 150 transactions.  And Thomas H. Cruikshank, chairman of the defunct investment banker’s audit committee and a Lehman director since 1996, pronounced that “(Lehman’s) governance procedures were really, very, very good.”

His statement came in response to a question from Rep. Leonard Lance (R-NJ), who accepted Mr. Cruikshank’s assurance without further question.  And that was all that was asked about board practices at Lehman.  The committee could have probed into some of the concerns we first raised on these pages nearly two years ago. It might have inquired whether it was really a good idea to concentrate so much power in Mr. Fuld, who was CEO, chairman and of the board and chairman of the board’s executive committee, or for half of Mr. Fuld’s handpicked board members to be in their seventies and eighties.  It could have looked at the executive committee, which had just two members — Mr. Fuld and John D. Macombre, who was in his eighties at the time the Lehman crisis was unfolding.  It might have cast its eyes on the risk committee of the board, which met on only two occasions in 2007, or considered whether several of the directors had been overloaded with responsibilities on other boards.  Was being an actress sufficient qualification to be a board member,or was a poor performance something that was common to all of Lehman’s directors?  The committee did not pursue any of these lines of inquiry.

In his voluminous report, Anton Valukas, the court appointed examiner for Lehman’s bankruptcy, gave the board a clean bill of health and said it did not know what was going on.   He could not point to anywhere management had actually informed the board of the extent of the risks that were being incurred or the undisclosed use of accounting tricks like Repo 150.  But he also does not cite a single case where directors asked discerning questions and where they were misled by management’s response.

However, in a scathing criticism of the SEC, Mr. Valukas told the committee:

The SEC did not ask the right questions.  It’s failure to ask about off-balance sheet transactions in the post Enron-era is hard to understand.

But it is also hard to understand why Mr. Valukas did not apply the same thinking to Lehman’s board, which he seems to exonerate because it was not told about wrong doing or alerted to red flags.  This, too, raises the ghost of the Enron board whose specter the examiner invoked.

On that point, it is unfortunate that neither Lehman investors nor legislators have had the benefit of an investigation such as the one the Enron board itself commissioned (much to its later dismay).  In an extensive and courageous probe conducted under the chairmanship of William Powers Jr., the report concluded that:

Enron’s “Board of Directors failed … in its oversight duties” with “serious consequences for Enron, its employees, and its shareholders.”  With respect to Enron’s questionable accounting practices, the Report found that “[w]hile the primary responsibility for the financial reporting abuses … lies with Management, … those abuses could and should have been prevented or detected at an earlier time had the Board been more aggressive and vigilant.

One wonders what at Lehman Brothers would have made the actions of its board so different or less deserving of scrutiny and condemnation than Enron’s. Would not a prudent board, faced with a crisis of unprecedented proportions in the capital markets, have made diligent inquiries of management that could have produced the answers needed to grasp the real extent of the company’s exposure?  What questions might it have asked of its auditors and management that would have enabled the firm to detect the unfolding disaster at an earlier time?  What steps could it have taken in its structure and composition as a board that would have made it more pro-active and less an array of Christmas lights that only work when the CEO turns them on?  Mr. Valukas’s report was unenlightening in this regard, as were Mr. Fuld and Mr. Cruikshank at the committee’s hearing.

Mr. Fuld was paid nearly half a billion dollars in salary, stock options and bonuses between 2000 and 2007.  In the same period, independent directors were paid approximately $20 million in fees and stock awards.  For that sum, shareholders saw the fabled firm that had been a Wall Street landmark for more than 150 years sink into the ground and the value of their stock plunge with it.

They can be grateful, however, that Lehman’s governance procedures were “very, very good.”  Had they not been as long-time director Thomas Cruikshank warranted and the Congressional committee accepted without challenge, instead of being faced with a calamitous outcome of historic proportions, investors would have had to deal merely with a catastrophe of unprecedented magnitude.

Such is the fantasy world that has long come to define corporate governance in America and the legislative and regulatory apparatus that permits it.

“Catch Me if You Can” and Other Fine Relics from the Lehman Boardroom

Once again, an inept board escapes culpability through a Houdini-like contrivance called the business judgment rule, one of the most anti-shareholder and destructive of legal principles ever to emerge in modern times.

Lehman Brothers made a brief return in the news today, just long enough to fall into another abyss of folly and misjudgment that will leave its former shareholders and the investing public shaking their disbelieving heads.  The appearance of the once-fabled but now bankrupt firm comes in the form of a report by the court-appointed examiner.  As The New York Times notes today:

The directors of Lehman did not breach their fiduciary duties in overseeing the firm as it acquired toxic mortgage assets that eventually sank the firm, a court-appointed examiner wrote in a lengthy report published Thursday.

The report, by Anton R. Valukas of the law firm Jenner & Block, found that while Lehman’s directors should have exercised greater caution, they did not cross the line into “gross negligence.” He instead writes: “Lehman was more the consequence than the cause of a deteriorating economic climate.”

Here’s what Mr. Valukas wrote on the Lehman board’s conduct:

The examiner concludes that the conduct of Lehman’s officers, while subject to question in retrospect, falls within the business judgment rule and does not give rise to colorable claims. The examiner concludes that Lehman’s directors did not breach their duty to monitor Lehman’s risks.

We rather strongly disagree.  As we pointed out months before the collapse of the company, Lehman Brothers was a poster child for how not to run a board. On the Lehman boardroom stage there was but one speaking part, that of CEO Richard Fuld.  He also served as board chairman, as well as chairman of the powerful two-man executive committee.  The only other member was 81-year-old John D. Macomber.  The executive committee met 16 times in 2007, more often than the board itself or any other committee. Lehman’s finance and risk committee was headed by 80-year-old Henry Kaufman.  It met on only two occasions during 2007 — the very time that Lehman’s destructive risk, debt and CDO time bomb was ticking away.

Five of Lehman’s directors were over 70.  Most were hand-picked by Mr. Fuld.  Many had no previous connection at all with Wall Street.  The 83-year-old actress Dina Merrill was a member of Lehman’s board and its compensation committee for 18 years until 2007. And we know that Mr. Fuld was compensated exceedingly well, to the tune of some $354 million between 2002 and 2007 alone.  Somehow it seems poetically symbolic for the kind of board Lehman was that Ms. Merrill (about whose acting career we were early young fans) should have appeared on What’s My Line? and starred in such movies as  A Nice Little Bank that Should Be Robbed and, a perennial favourite of many corporate directors, Catch Me if You Can (original 1959 version).

You can read more about Lehman’s antiquated and dysfunctional board here.

Once again, an inept board escapes culpability through a Houdini-like contrivance called the business judgment rule.  In our view, this doctrine has been shown time and again to be one of the most anti-shareholder and destructive of legal principles ever to emerge in modern times.  Talk about the need to stand up for capitalism.  There is no greater form of boardroom socialism than the business judgment rule.  Time and again, those who otherwise claim to have the intelligence and experience to govern giant corporations, and are paid handsomely for the privilege, suddenly appear to have been deaf, dumb and blind in the face of the disaster that was approaching.  They say they should not be held to account.  They claim they didn’t know what was really happening.  They stress that they tried their best. Sorry things didn’t work out.  Could they have a note from the court now so the besieged directors could go home early?

Lehman’s directors even managed to get away with this spiel at a time when the world was reeling from the unraveling of credit markets, when subprime mortgages and derivatives were sending off toxic alarms everywhere and when generally accepted standards of sound governance strongly signalled that the Lehman board was a train wreck just waiting to happen.

Fortunately, the judgment rule has few parallels that protect other professionals in a similar fashion, or society would be in an even more frantic state than it is today.  Unsurprisingly, this rule takes its origins from a time when the courts felt it only proper to defer to men of means and that nothing too arduous should be permitted to interfere with their avocational diversions.

Under this doctrine, you have to wonder, if Clarabell the Clown and the Marx Brothers had been kibitzing about while serving on the board of Lehman Brothers in the years before its collapse, would the examiner’s report have been any different?

On second thought, you don’t have to wonder.  You have your answer.

The Lehman CEO as Superman, and Other Myths in an Era of Underwhelming and Overpaid Leaders

When the market is going up, much of the world treats CEOs like superheroes who are worth every penny of the extraordinary sums they command. But when fate and fortune retreat and reverse direction, these CEOs suddenly claim only to be human, an attribute with which they had previously never shown much familiarity.

It was, in many ways, a script that has become all too familiar in recent months. The well-dressed CEO appears before a committee of the U.S. Congress, says he takes full responsibility for the collapse of the company he headed, and then goes on to blame short-sellers, the housing market and a run on the bank. He says there was no need for more capital, but now, as a result of that decision, there is no company either. And yes, he, too, was worth the fortune he was paid. The problem was that, although its CEO received close to half a billion dollars since 2000, the company that prevailed for 158 years through a civil war, financial panics, economic depressions and two world wars could not survive the leadership of Richard S. Fuld Jr. So Lehman Brothers is no more.

There is a way that the spotlight of Congressional investigations and live television reveal dimensions to CEOs like nothing else can. Yesterday, it was Mr. Fuld’s turn before the U.S. House Committee on Oversight and Government Reform. A familiar pattern emerged from the hearing.

When the market is going up, much of the world treats CEOs like superheroes who are worth every penny of the extraordinary sums they command. A company’s success is seen pretty much as a one-man show. This was especially true for Lehman’s Mr. Fuld, who apparently was so crucial to the bank that they needed to replicate him as chairman of the board of directors, CEO of the company and chairman of its executive committee all at the same time. No private jet is too luxurious, no pay package is too extravagant, no amount of directorial slumber too deep that otherwise might challenge the modern boardroom Caesar. As noted on these pages last month, the CEOs of Merrill Lynch, Citigroup, AIG, Bear Stearns and Lehman Brothers’ Richard Fuld received an aggregate compensation in excess of one billion dollars over the past five years.

But when fate and fortune retreat and reverse direction, these CEOs suddenly turn humble and claim only to be human, an attribute with which they had previously never shown much familiarity. They speak plaintively about the vicissitudes of life, look for empathy and understanding –and a lot of scapegoats.So much of the world they once ruled is, they admit, really beyond their control. As Mr. Fuld testified before the Committee:

In the end, despite all our efforts, we were overwhelmed… A litany of destabilizing factors: rumors, widening credit default swap spreads, naked short attacks, credit agency downgrades, a loss of confidence by clients and counterparties, and strategic buyers sitting on the sidelines waiting for an assisted deal were not only part of Lehman’s story, but an all too familiar tale for many financial institutions.

It’s a far cry from the tone struck before by executives like Mr. Fuld. In the good times, success pretty much has only one father and that’s the CEO, according to many board compensation committee reports. Failure’s paternity has many culprits, including always short-sellers and the occasional abrupt change in the weather.

We’ve heard this song before.  Conrad Black when he headed Hollinger; Enron’s Jeffrey Skilling; James Cayne, who ran the board and management of Bear Stearns for many years; and Angelo Mozilo, the subprime czar of mortgage giant Countrywide Financial all cut a swath of media adulation and investor diffidence during their reigns. But the perverse gods of markets and boardrooms insist on having their laughs. The CEOs whom they raise up to such rarified heights that they actually begin to think they are god-like themselves soon have a harsh reconnection with human frailty and imperfection when they fall back to earth with a hard thud. For some, like Conrad Black and Jeff Skilling, that sudden descent to a decidedly undeferential world comes in the form of prison time for corporate crime. For others, like Cayne, Mozilo and Fuld, a different kind of prison locks them into a sentence of personal failure and public disgrace from which there is seldom any escape, no matter how impressive their mansions and luxury condos.

If you did not know that Mr. Fuld had run one of the largest and oldest investment banking institutions in the world and that he was compensated in sums that defy human comprehension, there would be nothing in his performance yesterday to suggest that he had ever occupied such lofty office. His speech was halting, his manner often disingenuous, his memory selective, his words unevocative, his judgment unimpressive. There was no  hint of insight or foresight that was any greater than that of a million middle managers, let alone a five hundred million-dollar man. Mr. Fuld, who claimed the company was in good shape one week apparently could not see even into the next, showing his vision lacked something of the reputed prescience of the Davos clan. (Mr. Fuld is a long-time attendee at the World Economic Forum, another puffed-up institution of over-hyped CEOs and hangers-on that has become an annual fashion show for the emperor without clothes.)

One more thing that might give reason to pause and reflect about the man who presided over the largest collapse of any corporation in American history: Until a few weeks ago, Mr. Fuld was a director of the Federal Reserve Bank of New York. He was elected by other member banks –and hold onto your hats for this one– to represent the general public.

The besieged state of the world’s economy seems to be in the process of separating models of genuine leadership, which emphasize value and character, from their long-reigning impostors.  It has taken the worst threat since the Great Depression for Wall Street and Main Street to comprehend the depth of the scam that has been occurring under their beguiled eyes over the past number of years. Assurance of value was taken for granted; the skill and accomplishment (and need) of grandly compensated egos was not even to be questioned. Their word was gold, so we were told.  What we have discovered in recent months after trillions in losses and government interventions, however, is, to paraphrase Gertrude Stein, there was no there, there.

Perhaps when this unseemly procession of failed and discredited CEOs, whose arrogance, greed and misjudgments have brought Depression era fears to Main Street and necessitated the largest private sector bailout in history, is over and the extent to which the world was taken in by the myth of their excessively compensated abilities becomes inviolably clear, we can return to a time of real leaders whose attributes include some of the most paramount and uncommon abilities of all:good judgment, common sense and two feet planted squarely on the ground.

Curtain Falls on the One-Man Show at Lehman Brothers

What an American civil war, two world wars and the Great Depression could not do has now been achieved by something called the subprime credit crisis, along with the assistance of an overly deferential corporate governance system that was blind to the risks being faced and a Napoleonesque CEO who could not see the disaster that was looming.

Richard S. Fuld, Jr. has always liked to run Lehman Brothers as though it were a one-man show.  The way the company’s fortunes are shrinking, it may come to that.  Short of a miracle in the form of a last-minute white knight, as of Monday, Lehman -Wall Street’s fourth-largest, and one of its most storied, investment dealers- will in all likelihood face bankruptcy. Frantic weekend-long meetings at New York Federal Reserve headquarters involving top government officials as well as leading Wall Street bankers, and Mr. Fuld, whose teetering firm prompted the emergency Friday detours from the Hamptons, have failed to produce the solution Lehman needs to stay afloat.   There is no buyer and no massive infusion of capital.  Bankruptcy lawyers have already been called in.

Lehman’s descent into the horror world of overleveraging and sagging confidence, insufficient capital and mounting losses, like that of Bear Stearns before it, must ultimately be seen as a failure in corporate governance.  It is the duty of every board to serve as a check on management and to take care that risks to the survival of the institution are scrupulously avoided.  As we noted some time ago, all meaningful positions of corporate power and responsibility have been vested in company CEO Richard Fuld.  He heads management as well as chairs the board.  He also chairs the executive committee, whose only other member is John D. Macomber, now 81 years old.   Mr. Fuld, whom Forbes reports received more than $354 million over the past five years,  has been the driving force behind the decisions that have brought the company to its plight.   It is a fall that might have been arrested by an active and engaged board of directors, except Lehman does not appear to have one.  What it has, instead, is a Dick Fuld fan club.

This is a board where, of the 10 independent directors, three are in their seventies and two are in their eighties.  The finance and risk committee, chaired by 80-year-old Henry Kaufman, as first revealed by Finlay ON Governance,  met only twice in 2007 and in early 2008 even when risk was becoming the 800-pound gorilla in every Wall Street boardroom.  The idea that some of Mr. Fuld’s power should be shared more broadly or that an independent director should head the board is not something these directors have tackled.

After other companies have been faced with multi-billion dollar losses -Merrill Lynch, Citigroup, AIG and UBS jump to mind- the CEO has been replaced.  At Lehman, it appears that the board and Mr. Fuld are determined that the fate of the company and its driving force will be inextricably intertwined, perhaps forgetting how that approach ended for Captain E.J. Smith and the ill-starred Titanic.  Not even Mr. Fuld’s now famously shortsighted proclamation, made several billion dollars in losses ago, that “the worst of the impact of the financial markets is behind us,” was enough to prompt the ire of his hand-picked directors.

For at least half a year, there have been signs, and rumors, of distress at Lehman.  There has also been evidence that management has been in a state of denial, as the conference call remarks last June by its former CFO, Erin Callan, revealed: “We stand extremely well capitalized to take advantage of these new opportunities.  From a risk management perspective, we continued to operate in our disciplined manner we’re known for.”

Over the ensuing weeks, losses and write-downs mounted.  Lehman’s stock has drifted, and at times plunged, since February.   But there is little evidence that the board itself became seized of the issue.  No changes in the governance regime were announced.  No special committee of independent directors was formed.  The obvious need for capital infusion, which the company frequently denied, was never answered adequately.  At one point, as recorded here previously,  the company was even taking on more shaky investments in the form of Alt A loans.

The market has been giving the board and management its unequivocal and unvarnished reaction for some time.  But there was scant evidence that Lehman’s boardroom really grasped the depth of the market’s dissatisfaction, or the untenability of its own financial condition, until last week, when the company’s .share price fell even below the level of Bear Stearns after its collapse and Fed-led rescue.  On Friday, the stock closed at $3.65.   Only seven months ago, it stood at $65.00.

It is the end of the Lehman era.  What an American civil war, two world wars and the Great Depression could not do has now been achieved by something called the subprime credit crisis.  It was ably assisted, or perhaps prompted, by a widespread attack of corporate amnesia regarding the dangers of treating risk without the respect it deserves and the failings of boards that slumbered while CEOs saw only the upside of deals and the compensation rewards they would bring and never the other part of the intractable law of gravity.

As far as power and accountability are concerned, there has been really only one man at Lehman Brothers.  That’s about the way it will wind up when the lights are turned out, the sign comes down and one of Wall Street’s longest running chapters comes to an end.   It is another sad lesson in the dangers of hubris, blindness to the realities of risk and the delusion of invincible status that too long marked the direction and culture of this fabled institution.

What Shell is the CEO Bonus Under at Lehman Brothers?

It rather neatly illustrates the farce that CEO pay has largely become when Lehman Brothers chief Richard S. Fuld, Jr. announces that he will decline a bonus this year. The board compensation committee has not yet met to determine if one would even be offered to him. But that probably is just a formality because it is Mr. Fuld who is really calling the shots here in his various capacities as CEO, chairman of the board and head of the executive committee.

Of course, eschewing a bonus in a company that just posted a staggering $2.8 billion dollars loss for the second quarter is a little like the customer who breaks a Limoges vase at Tiffany and tells the clerk not to worry about the gift wrapping service. It’s hard to see why any credit is due in making such a statement. A more meaningful gesture would be to give back some of last year’s $40 million bonus that was awarded when many of Lehman’s flawed, and horrifically costly, decisions were being made. But because it would actually carry some actual sacrifice, and show genuine leadership that is sorely missing from Wall Street in recent years, Mr. Fuld will not offer to do that.

It is another example of where CEOs have gotten so far offside both reality and perception. It is that reality and perception that is today, perhaps more than Mr. Fuld, shaping the future and direction of Lehman Brothers.