There is an unseemly amount of gloating on Wall Street in the wake of the stunning disclosure yesterday that New York Governor Eliot Spitzer was a client of a major prostitution ring. Disgust is called for. Delight is not.
What he did as Attorney General to clean up abuses and improprieties in the mutual fund and investment industries, to name just two areas, was long overdue and entirely justified. The ordinary shareholder, who tends to view Wall Street as a playing field that is too often tilted toward the big teams, is better off as a result. Can anyone, with the possible exception of its former CEO Dick Grasso and one-time board member Ken Langone, seriously suggest that the governance of the New York Stock Exchange was not improved by the reforms in which Eliot Spitzer played a leading role?
Clearly, there is a temptation to rewrite history. Whatever Governor Spitzer has done in his personal life should not be taken as a vindication by companies and individuals of the wrongdoing and shortcomings he exposed as Attorney General. One wonders if Wall Street senses in this scandal the feeling that some of the ethical pressure will dissipate and allow it to get back to business as usual.
Spitzer’s actions, on a personal basis, were shameful and almost too bizarre to believe. But we have seen before how bright lawyers from Harvard and Yale have done inexplicably stupid things. Many it seems begin to believe their own press clippings and the flashy magazine profiles about their apparently superhuman qualities. President Bill Clinton’s reckless affair with a White House intern, and his lying about it to the world, ranks high in that category. And a British lord, also considered brilliant by all accounts and trained in the law as well, is currently sitting in a U.S. prison in Florida because he thought he was above the law.
The governor’s resignation is but days, if not hours, away. The sooner the better. The title governor and the description “client – 9” are incompatible, to put it mildly. And he may well face criminal charges. But Wall Street faces a crisis itself. And questions are being raised about the multi-billion dollar judgments of some of its top players. Now is not the time to rejoice in the personal failing of someone who at least had the courage to make sure the rules were being followed at a time when Wall Street itself was not exactly behaving as a paragon of virtue.
When 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.
From the stock market watchdogs who permitted the premature listing of the company to the cops and regulators who were unsuccessful in bringing even a single fraudster to justice, Bre-X was a colossal failure at every level.
It’s not surprising that the Ontario Securities Commission has decided not to appeal the acquittal of John Felderhof, the only person ever to be charged in the infamous Bre-X fraud. Frankly, there have been so many strange twists and remarkable disappointments with this case that there is really little left to be astonished about. As we noted here with chagrin even before this recent setback, the OSC is clearly losing its appetite for criminal prosecution, partly because it has been doing so badly in that regard and partly because it has a leadership culture that prefers to retreat to its less aggressive era. This was pretty much reflected in a statement by OSC chair David Wilson, who told Macleans recently that the agency’s priority was “not to beat the drumbeat of more criminal cases.” As we observed previously, there were many problems with the case, and where it was heard at Canada’s lowest court level, that were beyond the OSC’s control. But if you look at the length of time it took to have the case tried (seven years), the three- year-long motion and appeal interval where it was trying to have the judge removed, and the full year it took for the judge to write his decision (there was no jury in this case) the outcome was probably as predictable as the bewildering process that gave birth to it.
So it is that the largest mining fraud ever has now become the biggest bungled case of its kind in history. From the stock market watchdogs who permitted the premature listing of the company on the prestigious TSE 100 without due diligence to the shut-eyed independent directors, credit rating agencies and analysts who saw only the glitter of fools gold and eventually to the cops and regulators who were unsuccessful in bringing even a single fraudster to justice —and now have given up entirely— Bre-X was a colossal failure at every level. It might also serve as a cautionary lesson to today’s old line boardroom stalwarts who argue that too much emphasis has been placed in recent years on structure and that there is no connection between the architecture of corporate governance and corporate performance. I will have more to say about the confused logic and selective memory of those who would move the boardroom back to the future in another posting. But it would be hard to find a worse example of corporate governance than Bre-X — unless of course you were looking at Hollinger Inc. during Conrad Black’s era or Research In Motion more recently or the nearly 25 percent of companies listed on the TSX Venture Exchange that do not comply with even the minimum disclosure regarding their own boardroom practices which is required as a condition of listing by that exchange.
In the entire decade since the scandal unfolded, not a single agency, regulator or individual has admitted even the slightest responsibility, however indirect, for this calamity. No apology has ever been made to the investors who lost billions or to the larger investing public which has an irrefutable stake in the integrity of the capital markets and the institutions that guard them. No criminal has ever been convicted. You would almost think Bre-X were an inexplicable act of nature for which no mortal can be held accountable. At least not in Canada.
If the Bre-X fiasco occurred elsewhere, and certainly if it happened in the United States, outraged legislators and congressional committees would be in full flight holding hearings to find out why the company went so far beyond the arm of justice. They’d call aggrieved shareholders as witnesses and demand that stock market officials, regulators and justice department chiefs appear before them. They’d want to know if this case was symptomatic of any larger problem and whether such a travesty could happen again in the form of another memorable name. But in Canada, where it is hard to imagine a more dysfunctional system of securities regulation and boardroom crime policing, the biggest disaster in mining history ends with barely a whimper. And the politicians go back to sleep.
Exactly ten years ago, in an Op-Ed column in the Financial Post, I first brought to public light a number of the corporate governance failures that allowed Bre-X to happen. As we close the book on this sad saga, I thought it would be interesting to reprise the article that in many ways foreshadowed all the other failures that came to be associated with that scandal.
Bre-X Was A Failure of governance
J. Richard Finlay
Originally published in the Financial Post, August 1997
Continuing denials of culpability by former directors of Bre-X Minerals Inc. and securities regulators show once again that there is a predictable rhythm to corporate governance issues in the wake of disaster. In what has become the corporate version of line-dancing, academics and the media stamp their feet in demands for reform, regulators scurry for cover from the descending wrath of shareholders, and directors pirouette in elegant assertions that things will change. But when the revivalistic music stops, exhausted directors too often slump back into their boardroom seats, returning to their customary somnolent ways. The ritual is recurring in the Bre-X debacle.
Bre-X was a massive fraud to be sure. But it was also a massive failure of corporate governance. And the failure occurred on a number of fronts. With its insider board, dubious disclosure record, curious insider trading patterns, ever-expanding boasts about ore deposits and confusion about who owns them, Bre-X was a time bomb waiting to go off. But those who could have defused it heard only the siren song of fast money and not the tick, tick, tick, of impending ruin.
Of Bre-X’s board of six, only two members qualified as independent directors. The TSE’s guidelines for publicly traded companies call for a majority of outside, independent directors. This did not appear to bother many institutions or funds. When directors began to engage in heavy insider trading, regulators and advisors should have seen the signs and looked deeper into the details of the operation. Previous problems about licensing and ownership should have provided clues. Few followed that trail. When directors made ever-exaggerated claims about the size of the Busang find, regulators and investment advisors could have demanded more details. None did.
At its height, Bre-X had a market capitalization greater than Imperial Oil, Bombardier, Inco and Molson combined. And that was without any sales or profits. That alone should have prompted major financial institutions and pension funds, to say nothing of regulators, to take a closer look at the company. It never happened.
Another board that should also be doing some soul-searching is the TSE’s. The TSE’s guidelines on corporate governance raise an interesting question: Why does the TSE itself not comply with them?
Of the TSE’s board of 14, only four directors qualify as being independent. That’s far from a majority and far short of its own guidelines on corporate governance. Would a board composed of a majority of independent directors who are unaffiliated from member institutions have been more cautious about Bre-X? Would it have been more wary about putting Bre-X on the blue chip composite index when the company had no track record and when there were so many unanswered questions? Like many things about this scandal, we may never know. But we do know from the past, and from the TSE’s own study, that independent directors make for better boards. And better boards are motivated by the longer view, not necessarily the fastest buck.
Modern corporate governance practices, as every regulator and investment advisor has been taught, have grown out of disasters like Bre-X. The collapse of Great Britain’s Royal Mail Steam Packer Company in the 1930s (which, like Bre-X, also had a board of six directors) and Robert Maxwell’s empire, the S & L scandal in the United States and the demise of Confederation Life and dozens of other financial concerns in Canada all have involved failures of corporate governance. Had those lessons been applied in the Bre-X case, the fraud likely never would have achieved the level it did because institutional investors and regulators simply would not have endorsed a company that failed to practice even the most elementary standards of good corporate governance.
Directors, regulators and investment advisors are paid to read the signs of disaster as well as the portents of profit. The investing public is still waiting for an explanation as to why they failed in their duty over Bre-X.
If Conrad Black is a great businessman, what and where is his legacy? Is it a thriving corporate empire, or is it just a Napoleonic ego exiled to some kind of legal Elba?
As Conrad Black awaits his fate at the hands of a federal court jury in Chicago, one can only hope that he and his colleagues will receive a just outcome. While I have a sense of what that outcome will be, I have declined to speculate about it for public consumption on these pages. It is a serious matter to have one’s freedom hanging in the balance, as Mr. Black and his co-defendants have. Neither the dignity nor the effectiveness of the process is assisted by pronouncements from armchair courtroom spectators.
There is a surprising interest, however, in the wider implications of what has been learned from the issues raised in the trial. I deal with the corporate governance aspects, and the failure of the guardians, watchdogs and gatekeepers, in Part 1 of this overview. As for Conrad Black himself, it is impossible to escape the public and media fascination with a man who has dominated the landscape for so many years and has done so with uncompromising zeal. Mr. Black’s trial has provided a convenient lens through which many have sought to gain a fuller picture of the person behind the headlines. He has encouraged the public curiosity by writing about the legal and human issues surrounding his case in his periodic columns in the National Post. (For nearly 20 years, my occasional Op-Ed columns were carried in the Financial Post. They never appeared again after Mr. Black took control of that newspaper.)
There will likely be little dispute that Conrad Black is one of the most interesting and intellectually gifted individuals ever to appear on the business scene. He was intriguing as a young fellow who lived in a Don Mills-area mansion, whom my chums and I would bicycle over to see from time to time in the 1950s, always feeling slightly dumber for the experience after we left. He remains fascinating half a century on. In a world where many CEOs are challenged to write coherently three successive sentences on their own, and seem to believe that the beginning of history coincided with their own birth, Mr. Black has written several sizeable historical volumes of scholarly acclaim. Most CEOs rarely have an original idea. Mr. Black has a whole closet full to which he adds on a regular basis the way Imelda Marcos added shoes. Most CEOs are rather one dimensional —or perhaps 2D, if you count their obsession with golf. Mr. Black is a multifaceted figure who has had the wisdom not to tempt that thief of time masquerading as 18 holes on nicely tended lawns.
But for all that I have admired about his larger than life presence, there is also larger than life disappointment. Mr. Black was afforded every opportunity at an early age, including the alacritous assistance of the all-connected and the impressively powerful. Yet, in the end, so much seems to have been squandered.
He was given every advantage —titles, position, money and the gift of a powerful intellect. He was awarded some of Canada’s highest tributes, including an almost unheard of elevation for a non-politician or government official to Canada’s privy council. That comes with the right to be called “the honorable,” which Mr. Black used to the hilt prior to his peerage reward, and a special passport which is claimed to smooth one’s way past snarly customs officials —or haughty head waiters.
Few had his connections or were set upon such a promising path paved by friends, relatives and mentors. He inherited a coveted place at the table of the Canadian establishment. Some might say he eventually took possession of the establishment. But if Conrad Black is a great businessman, what and where is his legacy? Is it a thriving corporate empire, or is it just a Napoleonic ego exiled to some kind of legal Elba?
The jewels of Argus —Massey Ferguson, Dominion Stores, Canadian Breweries, and even Orange Crush— have vanished. Mr. Black’s private holding company, Ravelston, the creation of E.P. Taylor, Eric Phillips and Wallace McCutcheon, is an admitted corporate criminal now controlled by a court-appointed receiver. He bought iconic newspapers like the Telegraph — he did not create them. They are gone from his empire. The one newspaper he takes credit for founding, the National Post, one might argue, has as much to do with the legendary Floyd Chalmers of Maclean Hunter as it does Conrad Black. Mr. Black bought the Financial Post long after it had been turned into a respected business institution by others and built the National Post on that foundation. It’s gone from his hands, too. Even the Hollinger name was the product of others. For many years it was a mining company controlled by Argus. Now it has shrunk to being little more than a check writing machine —for everyone except the shareholders. Lawyers and post-Black executives are making huge sums supposedly for reviving a debt-laden Hollinger. Even the company’s new CEO, someone by the name of Wesley Voorheis, is being paid nearly a million dollars a year from a company that is losing money while the stock languishes at an embarrassing 78 cents —and that’s on a good day.
That spinning sound you hear is the founders of Argus twirling in their graves over such ignominy. The ultimate symbolic indignity was the sale of the landmark Hollinger headquarters at 10 Toronto Street, long the seat of power for Mr. Black and his Argus forebears. Hollinger International also set about to create distance between Mr. Black and its principal asset, the Chicago Sun-Times. The company is now called Sun-Times Media Group, and they didn’t ask for Mr. Black’s permission.
Not all of these events can solely be attributed to Mr. Black’s failings. Some certainly can be. He has been at the helm of this empire for many years and there were, at the very least, doubtless turns in course he might have taken in order to avoid the legal and financial collision that has occurred. Sound judgment has not always been the most active part of Mr. Black’s character. Even his Canadian citizenship slipped through his overreaching hands as they preferred to clasp on to an honorific post offered by another land in a throwback to a by-gone era.
And, if it is shown that he is totally innocent of the charges against him, he has had to have set a Guinness record for bad luck. His personally selected directors have been the laughing stock of the boardroom world as a result of their courtroom performance at his trial. His long-time closest business colleague, David Radler, is an admitted felon for his criminal dealings at Hollinger. Even his private holding company, Ravelston, as noted above, pleaded guilty to a criminal count of mail fraud in U.S. federal court.
There were endless honors and awards for Conrad Black. But in a Black universe of boundless gifts, the potential of great and enduring accomplishment always seemed to be eclipsed —and defeated— by a larger sense of personal entitlement and a preoccupation that others were out to take advantage of him. He and his colleagues had to live in “a certain style,” as he called it, even while incurring the wrath of shareholders —however belatedly. Hollinger was his company, as he put it, an attitude which finally led to his ouster as its head. His obsession with having the noble title of another country caused him to give away his Canadian citizenship, which he now longs for and may wish he had before all is done. There were the Hollinger investors, whom he described as “ingrates.” A few years ago, it was all the shoplifters among the customers and employees of Dominion Stores who were nibbling away at his earnings. Servants (of whom he has many), he declared, were “a notoriously unreliable group, as any experienced employer of such people knows.” Then, of course, there were those pesky “corporate governance terrorists” of whom Mr. Black claims to be a “victim.” It is a self-image that recurs on a number of occasions in Mr. Black’s musings.
I believe Conrad Black has asserted he is a follower of the doctrine of Darwinian capitalism. Have you ever noticed that those who espouse a view of the survival of the fittest are generally those who have survived by starting out at the top? For one born to a mansion and who becomes the early protégé of one of Canada’s most prominent titans (Bud McDougald), who has every connecting door opened and every posh board seat reserved, it would take a special kind of talent to blow the establishment’s version of assisted living. Is this the Darwinian theory of which Conrad Black speaks?
This view of the world is not unique to persons of great wealth like Mr. Black. Charles Dickens wrote about them at some length, and the early 20th century produced a whole succession of such characters. It is nevertheless one of the more disappointing sides of those who hold themselves out to be champions of capitalism. It makes them smaller than they need to be in order to successfully fill that vital role.
Whoopi Goldberg once said Americans will forgive anyone for almost anything —except arrogance. The fact is that those who behave like sultans, whether from Brunei or The Bridle Path, are quick to attain the curiosity of the public but rarely, if ever, garner its respect and affection. Those might be attributes Mr. Black would wish to enjoy in the eyes of the 9 women and 3 men who now hold his fate. He may also hope that the jury will be more meticulous and attentive than his handpicked directors, as evidenced by the testimony of Hollinger’s breathtakingly inept audit committee members.
Whether he is acquitted or convicted, Mr. Black’s more historically enduring offense will be that he failed to live up to the extraordinary potential that fortune, family and providence showered upon him. He could have done so much more. He could have been an illuminating force in a time when people yearn for leaders who are smart, ethical and imaginative. That, in its best sense, is one of the important roles the aristocracy —a class with which he so clearly identifies— is supposed to serve. Instead, Mr. Black chose a path less bright. He seemed to thrive on attacking others with the sneering polysyllabic broadside that became his emblematic signature. There are occasions, of course, when healthy criticism is warranted, and we dispense our share at Finlay ON Governance. We are also on the receiving end of some. But one likes to think that powerful leaders can rise above the petty temptation to clobber others just because they are possessed of a superior vocabulary and have access to the public megaphone.
Mr. Black, it seems, has difficulty distinguishing the decidedly significant from the stupidly annoying. As a follower of some of the best military strategists in history, it is surprising that he never learned the first lesson of the successful general: to differentiate a trivial skirmish from a decisive battle. Greatness in a leader is measured as much by what he chooses not to do as by what he actually does. Restraint has always been a defining hallmark of power. It has been an irregular guest in Conrad Black’s life. He has mocked, chided and insulted virtually every party connected with his current legal woes, from the objecting shareholders and the SEC to the prosecutors at his criminal trial. And, even while they are deliberating on his freedom, he has been unable to resist imparting a sarcastic jab at the jury about their request for an exhibit related to non-compete payments.
Mr. Black’s career, as it relates to the handling of other people’s money in a publicly traded corporation, is, for all practical purposes, at an end. Who would entrust funds to someone who has articulated such a contemptuous view of the role of shareholders and acted in such a high-handed fashion when it comes to leading a board of directors? His actions have also poorly served the institution of capitalism of which he has spoken with glowing admiration. It will, of course, survive Conrad Black. But will it survive the era of excess which he has come to symbolize? It is a time which also coincides with the greatest concentration of wealth at the top in America since 1929. The danger is that the cumulative effect of these forces of greed and acquisitiveness, of which his trial has made Mr. Black such a well-documented example, may spark a backlash similar to the political intervention that reshaped the corporate and economic landscape of the 1930s.
One of the more amusing anomalies that seems to afflict so many of these self- proclaimed champions of capitalism is that their deeds often prompt conditions that stifle and undermine the freedoms of the very system they espouse. The public’s ire over perceived abuses at the hands of the privileged can ignite a firestorm of political action determined to redress the misconduct. Sometimes, it overreaches the target. Still, one rarely finds the objects of the concern willing to moderate their behavior. I suspect this is because they are less the genuine advocates of capitalism they claim to be than they are apostles of personal greed and self-interest —regardless of the consequences. They are content to have others pick up the litter they leave behind.
Mr. Black’s own words and actions create an unavoidable impression of the man. His Louis the XIV style pronouncements (“But I’m not prepared to re-enact the French revolutionary renunciation of the rights of the nobility”), his Nixonesque email moment (“Nor will we accept directors that we do not have confidence will be loyalists, by which I mean conscientious, responsible, thorough, but well-disposed, like the incumbents, though obviously, I didn’t say that”), his stinging contempt for investors and his inability to tolerate criticism — all lead to the inevitable judgment that he is one more tycoon in the grandiose march of the garishly puffed up into the New Gilded Age, one more self-absorbed boardroom titan who had no time for corporate governance and then spent all his time dealing with the casualties of that miscalculation, one more celebrity for whom the public eventually tires of their tedious displays of self-indulgence and overweening ego. However his legal travails turn out, the inevitable conclusion is that, in many ways, the Conrad Black saga is another chapter in the widening sense of betrayal people feel about those whom they have admired, and even trusted, but who ultimately leave them feeling terribly let down.
Whether his fate is that of a free man or one faced with forced confinement, Mr. Black will soon begin to recede from the sphere of influence he craved and the media was happy to facilitate. One does not have one’s boardroom antics and backroom designs (“Dear Donald: Could I ask a rather esoteric favor?”) opened up to the rest of the world without consequence. Exile from the high councils of business and public life would seem a distinct possibility, as is the prospect of legal action of a different nature on the part of the Securities and Exchange Commission and the Ontario Securities Commission, regardless of the outcome of the criminal trial.
Napoleon, it is said, reflected from afar on some of the forces that brought an unexpected end to his career. He attributed his fate not to the strength of opposing armies but to something within his own character. “As soon as I made my debut,” the dethroned emperor is said to have confided to Las Cases, “I found myself rich with power, and circumstances and my strengths were such that, as soon as I was given command, I no longer knew either masters or laws.”
The curse of hubris and a misguided sense of personal invincibility has seen the downfall of more than a few emperors, presidents and, perhaps, an occasional press baron. Having arrived at this doubtlessly unanticipated point in his life, one wonders what, if any, insights into his own character Conrad Black is capable of assessing —or whether he will be content to leave that to other historians.
