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 – SEC Settlement | Problem #2 (The Houdini Effect)

Harry Houdini and the board of directors.Regulators and the investing public need to demand that boards of directors be placed on the front line of accountability and not be allowed to slip away from scrutiny like some escape artist in a circus act.

The SEC’s settlement with Bank of America, still to be approved by the court, raises another question beyond the shell game contrived to give the impression – entirely misleading in our view – of a fair financial settlement for shareholders.  Our thoughts on the $150 million “penalty”  were set out here.

The boards of both Bank of America and Merrill Lynch appeared to escape the scrutiny of regulators, as well.  While some 25 management personnel and in-house lawyers were deposed by the SEC, no independent director of either company underwent such questioning.  Though a great deal of attention was focused on emails to and from legal counsel and management, there is no evidence of any effort to look into what the board was thinking when it came to its role in the merger or in related compensation and disclosure issues.

The settlement makes reference to some rather cosmetic changes in respect of the compensation committee.  One bars members from accepting “consulting, advisory or other compensatory fees from the Bank…other than routine compensation for serving as a Board member.”  But the Commission has offered no evidence that any compensation committee director at Bank of America was receiving anything beyond normal compensation.  In any event, the idea that such ancillary compensation might have played a role in compromising the independent judgment of compensation committee members has no antecedent in any of the SEC’s supporting documentation.  It has, instead, the appearance of being included as a part of the settlement to make it look like something meaningful was done.

Finally, the settlement requires the Bank’s CEO and CFO to certify proxy statements along the lines set out under the Sarbanes-Oxley Act for quarterly and annual financial statements.  But there is no requirement that any independent director, like the chairman of the board or the chairman of the audit committee, has to certify anything along SOX standards.  This has always been a flaw in the existing SOX legislation from our perspective.  It is one that could have been addressed in the settlement, as the certification process is intended to concentrate the mind of key shareholder guardians in a way that ensures that they have done their due diligence.

It is astounding that in the recent succession of corporate disasters of Depression-era proportions – which many feared would lead to a return of Depression-era misery – the SEC has not been moved to conduct a sweeping review of the generic failings of the board of directors.  The often expressed discovery that it was the last to know of the problems, and that it had no idea what was really happening around it, is a common refrain on such occasions, as we remarked some years ago to the U.S. Senate Banking Committee when it was considering legislation in response to the Enron et al. debacle, and as we repeated in an appearance before Canada’s Senate equivalent later.  It does not assist in investor confidence or society’s faith in its giant institutions of capitalism that boards either view themselves, or are viewed by regulators, as the junior partners in corporate performance and outcomes, as if they were some 1950s suburban housewife who by custom and design tended to be sheltered from having any knowledge of or responsibility for the business affairs of the household.

Time and again, in one corporate calamity after another, the question has been posed: Where was the board?  If the world’s top securities regulator is not prepared to dig deeper to find out the answer, if it is unwilling to hold directors’ feet to the fire during major enforcement investigations like the one involving Bank of America, that question will persist like a great mystery.  But as the world has been painfully reminded on too many occasions, boards have a role beyond being viewed as a riddle or the perennial focus of ridicule.

They are the governing authority elected by company owners to operate in their interests and according to the customs and standards of society.  They are generally paid handsomely to perform their tasks, and when they fail, the consequences, in personal and financial terms, have been devastating. The only option, therefore, is for regulators and the investing public to demand that boards be placed on the front line of accountability and not be allowed to slip away from scrutiny like some escape artist in a circus act.

Risk: The Rodney Dangerfield of the Subprime Boardroom

Care about risk was not permitted to intrude upon the holiday from reality many boards chose to take in the years leading up to their subprime cataclysm, which is why the credit crisis of 2008 can be traced to a complete failure of corporate governance.

There is a common theme emerging from the subprime debacle as it relates to the banking industry: risk was not respected. A recent internal UBS report found that the bank’s approach to risk was “insufficiently robust” and that the oversight of investment banking “lacked effectiveness.” UBS has written off over $37 billion in connection with subprime shortcomings, more than any other bank. We noted earlier that the board of Bear Stearns, whose mishandling of risk nearly brought down the whole financial system, according to U.S. government officials, did not establish a risk committee until early 2007. It met only twice in all of that year. John Thain, who succeeded Stanley O’Neal as CEO after Merrill Lynch posted the largest losses in its history, said the risk committee there did not function. A failure to treat risk with the care it deserves was also central to Société Générale, where the bank lost more than $7 billion as a result of unauthorized trades by a mid-level employee.

After Enron and other scandals, legislators in the United States concluded that boards needed to take the “surprise factor” out of financial reporting and assume greater responsibility for the prudent supervision of their companies. Section 404 of the Sarbanes-Oxley Act of 2002 sets out the expectations of cautious boards and top management in their handling of risk and the safeguarding of financial controls. It was not long ago that officials in the Bush Administration and in the business community were seeking to ease Section 404 requirements. SOX went too far, they suggested, and it was hobbling the ability of American business to compete. The irony is that at the very same time these players were claiming SOX was too onerous, they were failing to monitor risk to such an extent that it would lead to the worst credit meltdown and largest write-downs and losses in modern corporate history. Millions of ordinary Americans, as well as stakeholders elsewhere, would be dramatically impacted by the recession-causing missteps that were taken by some of the most revered names in banking.

What is becoming more apparent is that directors and top management, all very well paid, were living in a fantasy land where they acted as though the era of soaring fees and uninterrupted success would continue indefinitely. They chose to see only what they wanted and never contemplated the prospect that reality might hold a more dismal scenario. It was a time of deafening party making where the voices of reason and prudence, if they were invited to the occasion at all, were completely drowned out in the giddy bonus-popping euphoria of the modern Gilded Age’s newest members. Care about risk was not permitted to intrude upon the holiday from reality many boards chose to take on Wall Street and elsewhere in the years leading up to the subprime cataclysm. Like the Enron-type upheavals and accounting frauds that produced the most comprehensive reforms in securities law since the 1930s, the subprime debacle reveals serious shortcomings in boardroom culture and in the way directors are supposed to work.

Simply put, the credit crisis of 2008 can be traced to a complete failure of corporate governance. Others contributed speaking (or non-speaking, as the case may be) parts to the calamity, including sleeping regulators and conflicted rating agencies. But it was the boardroom that played the leading role in this unsettling drama, where the consequences when directors fail to direct were reprised in high definition, even while the scandals of the past were fresh in their minds.

It was a time of excess at every level of the corporate enterprise -except in sound thinking and common sense in the oversight of risk, in vision for looming hazards, and in CEO compensation tied to reason instead of the unsustainable illusion of growing subprime fees. Once again, the safeguards and governance tools that could have protected these companies -and, ultimately, the health of the financial system- from what is fast becoming the worst economic crisis since the Great Depression were the Rodney Dangerfield of the modern banking boardroom.

They just didn’t get any respect.

Prisoners of Irony: America and the Fallout from the Bear Stearns Bailout

Americans cannot permit free enterprise to reign just when CEOs and companies are making piles of money only to have it replaced by socialism when they are teetering on disaster.

It was the kind of deal you might expect to see among business and government cronies in China. A large bank gets into trouble. Another one comes in and is given an exclusive opportunity to buy the good assets at fire sale prices with the state agreeing to take over billions in liabilities. The head of the ruling party gives his blessing to the deal on the advice of the top regime official who, 18 months earlier, headed an investment bank himself.

Except this was not China. It happened on Wall Street, ground zero for free market capitalism, or so it is claimed. JPMorgan struck a sweetheart deal with the Fed in taking over the remains of Bear Stearns. While its demise comes as no great surprise after Friday’s run on the bank, it appears that no other institution was given the opportunity to work out a competing offer or at least one that is supported by the government and the Fed. President George W. Bush and Treasury Secretary Henry M. Paulson, Jr. approved the deal.

At $2 a share and with 7,000 to be laid off, Bear Stearns employees will call it a betrayal. The firm’s top management and inside directors, after all, have made hundreds of millions in compensation and bonuses in the past few years and it would not be surprising if arrangements have been made for some to walk away with a tidy severance/change of control package.   JPMorgan will call it a good buy.  Still others will call it  a bailout that gives a level of comfort to the financial sector which otherwise might not prevail and may not be deserved. But in truth, this deal is hypocrisy on stilts.

When it comes to the wave of titanic bonuses, platinum parachutes and multimillion-dollar pensions for its CEOs that have swept across Wall Street and elsewhere in business, America is told it is the free market that sets the rates. Boards are merely responding to these larger economic forces over which they have no control. The same is said about enforcing provisions of the Sarbanes-Oxley Act, the Enron era package of reforms which corporate luminaries have argued overly restricts American capital and makes it tougher to compete. But when it comes to dealing with the mistakes and misjudgments of those CEOs and boards, it is government that Wall Street and others call on to intervene and save the day. The supreme, or perhaps subprime, irony, of course, is that the same financial institutions that created the problems with their overly complex and exotic investment vehicles which they themselves did not fully comprehend and cannot today accurately value are demanding relief from the Fed and anywhere else they can find it.

Ironic, too, is the fact that Americans, as consumers, investors and members of pension plans, are the ones who actually pay for the monster compensation that has come to symbolize the modern boardroom. And when the lure of great rewards prompts CEOs and boards to take risks that later prove calamitous, as the subprime fiasco demonstrates, it is the American taxpayer who is asked to pay again through the inflation-creating printing of money or the taking on of more public debt. There are many unanswered questions concerning the implications of what the Fed and the White House have sanctioned in the Bear Stearns bailout, and in the larger issue of exactly how much is being committed to prop up other financial institutions -and at what cost.

Americans cannot permit free enterprise to reign just when CEOs and companies are making piles of money only to have it replaced by socialism when they are teetering on disaster. They are entitled to more than being relegated to the position of prisoners of irony conveniently contrived by corporate and public leaders, while being stuck with a multibillion-dollar price tag for the privilege.

The Short-Term Memory Problems at AIG (and other Boardrooms)

Until directors actually do their jobs when it comes to risk, instead of merely boasting about them, disaster will be the inevitable intruder in the slumbering boardroom.

AIG, the giant insurance company which specializes in the assessment of risk, has accounting problems –again. This time, auditors discovered “material weaknesses in its internal controls.” The cost of that weakness comes in the form of a $4.88 billion write-down. It is nearly four times the earlier estimate given by the company. Just last year, AIG paid $1.6 billion to settle state and federal charges that it engaged in deceptive accounting practices to mislead investors and regulators. The payout set a record at the time.

You might wonder how a company that went through such a wrenching and costly experience over poor accounting practices finds itself in another accounting pickle so soon. The answer is that directors have a short-term memory problem. Merrill Lynch also went afoul of regulators in the early 21st century and had to pay out a huge amount to settle. Citigroup had to set aside millions in connection with Enron and WorldCom lawsuits. CIBC, the giant Toronto-based bank, also paid millions to settle regulatory charges that it acted improperly in its Enron dealings. All of these institutions are posting record losses and write-downs related to defective credit instruments. And once again, questions are being raised about whether management and directors are really on top of the affairs of the company.

One might have expected a prudent boardroom to be scrupulous, and more successful, in avoiding mishaps so soon after a previous embarrassment. In AIG’s case, it was required to issue an apology last February, which stated in part:

Providing incorrect information to the investing public and regulators was wrong and is against the values of our current leadership and employees.

But in the modern boardroom, where historically the preferred posture has been lateral for most of the time, there is a tendency to overstate the rejuvenating effects of reform while quickly slumping back into somnolence. The scandals of the Enron era revealed major weaknesses in the accounting and internal controls of many companies. Sarbanes-Oxley was passed in 2002 to address some of the most glaring defects, and companies responded by trumpeting how much more engaged their boards were. But in a few short years, the world has once more been forced to witness the spectacle of boards that did not properly oversee the risks their companies were incurring and ensure that adequate controls were being followed. Shortcomings in internal controls and the managment of risk were also at the heart of the $7 billion trader fraud at Société Générale. They are now featuring prominently in connection with the subprime-prompted credit crisis in many financial institutions.

Until directors actually do their jobs, instead of merely boasting about them, and remember the lessons of the past when risk became a corporate orphan for which no one would take responsibility, disaster will be the inevitable intruder in the slumbering boardroom.

Outrage of the Week: The Directors Who Slumbered While Merrill Lynch Steered into its Subprime Iceberg

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The fact that Merrill’s risk committee did not function shows that this company was governed by a board that failed utterly in its duty to investors.

The magnitude of the losses was staggering on its own: nearly $10 billion for the final quarter of 2007. That was on top of the $2.3 billion loss for the previous quarter. Write-downs have exceeded more than $20 billion. Never in the storied history of Merrill Lynch have such figures been recorded. But the admission today of John Thain, the new CEO of the world’s biggest broker, takes all the oxygen out of the room:

“Merrill had a risk committee. It just didn’t function,” he told the Wall Street Journal.

His candid statement begs the question: Where was the board? (more…)

New Posting on Harvard Law School Blog

The corporate governance blog of Harvard Law School is running another guest column by me, this time on the Countrywide Financial meltdown. I introduce some issues about the company’s decidedly subprime corporate governance and CEO compensation practices which have not been raised anywhere before, except at Finlay ON Governance, as our consistently astute readers already know. Here is an excerpt:

The lesson of Countrywide is instructive at a time when there is considerable pressure to retreat from Enron-era reforms, with many claiming they are too costly and not necessary. On the contrary, Countrywide shows that improvement is far from universal when it comes to corporate governance and that, once again, excessive CEO pay is still the Typhoid Mary of the boardroom, showing up time and again just before calamity strikes, as it did with Enron, WorldCom, Tyco, Adelphia, Nortel, and more. It also shows that a single company’s misjudgments can carry profound consequences for other corporations, public institutions and a wider community of interests, which is why society itself has a considerable stake –separate and apart from that of shareholders– in seeing CEO pay returned to reasonable levels.