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.

Disorganized money markets mask mob activity: report

June 8, 2011 | 13:24

Jessica Murphy, Parliamentary Bureau | QMI Agency

Canada’s patchwork securities regulation system gives the mob plenty of places to hide, a new report indicates.

The draft government report probing mob meddling in Canada’s financial sector, obtained by QMI Agency, suggests a patchwork of securities regulators across the country make it hard to pin down the amplitude of financial crime.

“Anyone wishing to understand the scope and seriousness of securities offences in Canada appears to be stuck with manually parsing the overlapping databases of regulators, and self-regulatory organizations,” according to the report, one of three commissioned by Public Safety Canada to shed light on how organized crime operates in Canada.

The final draft, likely be tabled late fall, will focus on the Toronto Stock Exchange and Montreal’s derivatives market.

The news doesn’t come as a surprise for J. Richard Finlay, who heads up the Centre for Corporate and Public Governance in the U.S.

He warns that due to our “weak system of balkanized securities regulators and lack of any federal focus on the matter, Canada makes an easy target for ill-intentioned players.”

Finlay recommends Canada adopt a national securities regulator, a proposal the Conservative government is currently trying to push forward.

The Supreme Court is set to rule in the coming months on the whether the proposal for a new Canadian Securities Regulatory Authority is constitutional.

Alberta, Manitoba and Quebec oppose a national regulator.

Goldman’s Exhibits of Wall Street Insincerity

Collectively, in their pivotal appearance before Congress, Goldman’s top performers could not muster the sincerity, transparency or gravitas of a used car salesman.  It is unlikely to play well on Main Street.

Nothing illustrates the folly and arrogance of Wall Street more than the appearance of the Goldman Sachs executives who testified yesterday before the Senate Permanent Subcommittee on Investigations.  Rarely has such a group of men (of Goldman’s seven past and current employees who appeared as witnesses, all were men) so graphically confirmed Main Street’s jaded image of Wall Street.  Collectively, the best Goldman had to offer in their fields could not muster the sincerity, transparency or gravitas of a used car salesman.  Their failure to give clear answers even extended to a refusal to acknowledge the duty to act in the best interests of clients.  To many watching the performance, the only conclusion is that they are so used to acting in their own interests that they are unable to understand a larger sense of duty.  This is often what happens when great wealth arrives to youth before maturity and wisdom have made an entrance.

Whatever skills these people were paid their millions for, memory did not seem to be among them, with so many constantly claiming they did not know or could not remember key facts and events. Goldman’s CEO Lloyd Blankfein offered little more in his grasp of details.  One might have expected that someone who was paid well in excess of $100 million over the past five years and heads what is widely regarded as the world’s preeminent investment banker would be able to manage the tasks of stringing words together in complete sentences and in persuasive thoughts.  As the English language is not yet something Wall Street has learned to monetize or short, those skills do not appear to matter there.  They do to Main Street.

If, having played a central role in the worst financial meltdown since the Great Depression and needing the injection of hundreds of billions in public funds to keep it solvent, Wall Street — and especially its most illustrious icons — cannot manage to explain what they do and why in a coherent fashion to the satisfaction of Main Street, if they cannot project a sense of ethics and purpose that goes beyond self- interest, if their values appear disconnected from reality and the value they add to society seems only synthetic and contrived, the need for fundamental reform in both the culture of these institutions and the laws that regulate them is more urgent and far-reaching than anyone has yet imagined.

The Half-Baked Pie that Hit Bank of America Shareholders in the Face

The settlement was not crafted to act as a deterrent to future wrongdoing or to give the investing public confidence that the SEC is looking out for their interests in this post-Madoff era.

U.S. District Court Judge Jed S. Rakoff had finally approved the settlement between the Securities and Exchange Commission and Bank of America.  Our concerns seemed at least to have made an appearance in the courtroom, though they clearly did not carry the day.

As we set out here before the judgment, our greatest misgiving in the proposed settlement was the inherent unfairness surrounding the $150 million penalty, which effectively involved the transfer, without their consent, of money from one shareholder pocket to another.  The main players in the abuse, which included key officers and directors, got a pass on making any payment proportionate to their responsibility.  To us, the settlement could easily have been concocted by Groucho Marx.  It was not crafted to act as a deterrent to future wrongdoing or to give the investing public confidence that the SEC is actually looking out for their interests in this post-Madoff era.

Judge Rakoff correctly focused on this shortcoming in his combined opinion and order:

An even more fundamental problem, however, is that a fine assessed against the Bank, taken by itself, penalizes the shareholders for what was, in effect if not in intent, a fraud by management on the shareholders.

Unfortunately, the specter of judicial deference to tribunals like the SEC was also looking over his shoulder and he was unable to do more than register his chagrin.  That does not do a lot for investors who were victimized by the shell game Bank of America engaged in, but it may serve as further evidence that the SEC needs to seriously rethink what precisely it is seeking in such settlements.  Too often, they seem cleverly designed to create the illusion that justice is being served, rather than fostering policies that promote investor confidence in the capital markets and stand the test of garden-variety common sense on Main Street.

Judge Rakoff gave his verdict on that score, calling the settlement “half-baked justice, at best.”  We see it more like a pie in the face of shareholders, despite the efforts of a plain-speaking judge to do his best to prevent it.

Bank of America – SEC Settlement | Problem #1 (The Groucho Marks Plan)

Under the so-called new and improved SEC settlement with Bank of America, the bank will pay $150 million to settle the charges. According to court records, the settlement only “contemplates” that the sum will be paid, at some future date, to shareholders who were harmed by the bank’s non-disclosure of material facts.

But where is this money coming from? Funny, that’s B of A’s shareholders, too. To add to the insult, no details are provided as to exactly when investors would receive such compensation (from themselves, that is).  One sees the handiwork of Groucho Marks all over the SEC’s arrangement. We hope U.S. District Court Judge Jed Rakoff, a much respected figure on these pages who rejected the SEC’s previous deal, will see beyond the mustache and glasses that mask the “hello, I must be going” settlement.

The SEC has become famous over the years for this kind of shell game, where it looks like something significant is being done but where there is much less than meets the eye when all is said and done.  If there is any payment of a penalty, all or at least a substantial part should be made directly by the officers and directors (past and current) on whose watch the bank’s failures to disclose material information occurred. It was shareholders who were deprived of the information to which they were entitled. It serves neither their interests, nor those of justice, to have their money taken from one pocket and put into the other.

We examine other weakness in the settlement in a further comment.

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.

Is the SEC Missing the Corporate Governance Forest?

The agency that bills itself as “the investor’s advocate” needs to go well beyond asking boards to chime in on what’s behind their structure.  It needs to focus on the bigger picture of the role of the board in the worst financial crisis since the 1930s and the persistent folly of directors who do not direct.  That, in our view, is the real definition of systemic risk.

There is a common factor in nearly every major corporate governance failure and virtually all of the enforcement actions taken by the Securities and Exchange Commission since the 1960s.  In almost every instance, including the bankruptcy of Penn Central Railroad, the bribery scandals of the 1970s involving Gulf Oil, Lockheed and many others, the criminal misconduct at Enron, WorldCom, Tyco, Qwest, Livent, and Hollinger, and, more recently, the stock options backdating scandal at Research In Motion, these companies preferred to vest the powers of the board chair in the hands of the CEO.  In all these situations, there was a troubling degree of boardroom deference to the CEO while improprieties were occurring.

So it is that the announcement by the SEC’s new chair, Mary L. Shapiro, that the agency is thinking of requiring listed firms to disclose their reasons for adopting their particular leadership structure, and whether that structure includes an independent chair, struck us as somewhat anticlimactic and underwhelming.

The case for separating the roles of CEO and board head, with the board chair being filled by an outside director, has been supported by a formidable consensus of independent corporate governance experts since the 1940s.  It was a prominent part of the groundbreaking research by the late Myles L. Mace of Harvard in the 1970s and has continued to be embraced by leading authorities since that time.  The rationale for separating these positions is simple:  it defies both human nature and precepts of modern organization for a CEO to be held properly accountable to a board which he or she heads and leads.  To instill a true culture of accountability, a CEO needs to see an independent counterpoint to his power sitting at the other end of the boardroom table, and not just a mirror image of himself.

I made that case in 1994 when I was invited to testify before Canada’s Senate banking committee (and in several subsequent appearances), as well as in submissions to committees of the U.S. House and Senate during hearings leading to the passage of the Sarbanes-Oxley Act of 2002.   An argument can be made, as I did, that separating these top positions is as important to the effective running of a major publicly traded company as the requirement to have an audit committee composed of independent directors.

Given the undeniable weight of history in tow on this subject, the SEC should be doing more than trying to send up a trial balloon and looking rather feeble in the process.  What is required is for the agency to be far more aggressive about fostering a climate of accountability in American boardrooms.   That it has taken this long to recognize a reality that has stood the test of time for decades, and that it is only now thinking about asking boards where they stand on the issue, illustrates how far behind the curve the SEC is when it comes to modern corporate governance practices.

The agency that bills itself as “the investor’s advocate” needs to go well beyond asking boards to chime in on what’s behind their structure.  It needs to set out principles of sound corporate governance in language as hard as cannonballs, to borrow from Emerson.  And it should insist on narrative from boards that is extensive and sets out in clear language in circumstances where a company has departed from those practices, including the appointment of an independent board chair.   Naturally, separating the top positions and requiring an independent director as chair of the board is no guarantee of success.  Having a ball team of nine players is no winning formula either, as any Mets or Cubs fan will admit. But not having the right number means that you don’t even get to play the game.  Boardrooms have also reached the point where some basic structural rules are too important to overlook.

It was as a result of the financial excesses and failures of the 1930s that the SEC was born.   There has been nothing even remotely approaching that level of reform coming out of the SEC in what has been the worst financial crisis since that time.

Here’s something else the SEC is missing:  What exactly was the role of boards of directors in the credit and financial meltdowns of the past 18 months, and to what extent did a failure of structure or culture among directors contribute to a global crisis affecting hundreds of millions of individuals, costing trillions of dollars and eventually leading to the collapse of banks around the world?  We have already pointed out on these pages the colossal shortcomings of the boards of Bear Stearns, Lehman Brothers, Merrill Lynch, Citigroup and Countrywide Financial, to name a few.  All of these troubled institutions, by the way, followed the unified CEO/board chair model, although at Bear Stearns, James Cayne gave up the CEO slot and became an executive board chair a few months before the company’s collapse. 

What boards did and did not do, and how they were organized, in recent years and months when calamity has been such a frequent guest are lessons that are too important to ignore.   We suspect that what will be found is a weak and compliant boardroom culture where the most taxing job for most directors was lifting the rubber stamp marked “yes.”  That, in our view, is the real definition of systemic risk.

During a disaster of a much more limited scale -the collapse of Penn Central Railroad- the SEC ordered its staff to conduct a through review of what the directors knew and when they knew it.  Staff also examined the structure and culture of the board and its interactions with management.  The result was illuminating and became a template for the disengaged board.  As the staff report concluded:

Directors of Penn Central were accustomed to a generally inactive role in the affairs of the company.  They never changed their view of their role.

The SEC has no trouble spending what seem like endless time and resources looking at the uptick rule and the allegedly detrimental role of short-selling, for instance.  A case can be made that it is focusing too much on the individual trees and not on the health of the boardroom forest.  Much more has been lost by shareholders, and by society more recently, as a result of boards that simply did not direct, did not hold management sufficiently accountable for its actions and were not adequately engaged with the affairs of the company in order to monitor risk and foresee the disasters that were looming on the horizon.  The corporate board, with all the power and responsibility it entails, is an institution that requires considerably more focus on its limitations, its deficiencies and on its need for reform if it is to play its necessary role as a steward of investors’ interests and a guardian of the integrity of capitalism itself.  

We will have more discussion about the past and future role of boards, and where they fit into the post-subprime recession era, in the days ahead.