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.

RIM’s $77 Million Black Eye

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

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

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

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

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

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

Our previous postings on RIM are available here.



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.

Outrage of the Week: When Subprime CEOs Dissemble Before Congress

Never in modern business has so much been given to so few for such colossally failed results.

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In just five years, these three CEOs made more than $460 million while leading their companies into the greatest losses in their history. One of them, Charles O. Prince of Citigroup, even got a bonus of $10 million, despite presiding over more than $20 billion in losses and write-downs. Stanley O’Neal left with $161 million after Merrill Lynch chalked up its largest losses ever. And Countrywide Financial‘s Angelo Mozilo, one of the highest compensated CEOs in America, has pocketed more than $400 million since 1999. The company has lost four times that amount over the past six months. Never in modern business has so much been given to so few for such colossally failed results.

To the average working person, who rarely receives a bonus even for doing an exemplary job, much less a bad one, this performance must have seemed like something of an out-of-body experience. Pay and accomplishment seldom have seemed more disconnected.

But to the past and current CEOs who testified before the House Committee on Oversight and Government Reform this week, there is no disconnect at all. The universe, for them, unfolded exactly as it should. It was about as we expected.

They, and the heads of the board compensation committees which approved these deals, all offered the usual bromides: The amounts were fully approved; the money was earned; the market is king; high pay is needed to attract and keep the best talent. How it is that CEOs who preside over record losses represent the best talent was never quite explained. One claimed only to want to help homeowners live out the American dream. Another cited his grandfather being born a slave. A third trumpeted his company’s ethics and corporate governance reforms.  Mr. Mozilo ventured that the subprime meltdown had a notable culprit:  “There was a lot of fraud there.” he told lawmakers.  Many will agree, but they might not be thinking about the garden variety mortgage applicants to which Mr. Mozilo was referring.  What role more lofty figures had in pushing out subprime loans, and who benefited from the resulting torrent of fees and record bonuses, will be something regulators and legislators should be looking at more closely.

The group of CEOs and directors who appeared before the comittee managed to slice and dice their compensaton decisions so much that they looked like they came out of a boardroom Veg-O-Matic: the pay wasn’t for this year, it was for last; it wasn’t severance, it was deferred compensation; it wasn’t a bonus for this year, it was payment for previous excellent performance. They said they actually lost a lot of money when the stock went down, just like all the other shareholders. Except most other shareholders did not head the company and make the wrong decisions. Most did not run up record losses and most did not receive tens or hundreds of millions in stock options and bonuses and salaries bigger than the state of Texas. One more thing: the process, they testified, is all fully in accord with the Business Roundtable guidelines on CEO compensation. Now that’s a really high bar. The Roundtable is made up of America’s top and best-paid CEOs. The ranking Republican on the Committee, Rep. Tom Davis (R-Va.), called the Business Roundtable guidelines the “gold standard” for corporate compensation. Is that because it makes sure the CEOs get all the gold?

Astonishing even for this group, when asked by Rep. Paul Kanjorski (D-Pa.) if there was any amount they would consider to be too much, there was silence, punctuated by self-serving proclamations of satisfaction with the way things are. All reassured the committee that they were not underpaid, however, and thus a sigh of relief was heard across the country.

America is experiencing one of the worst economic downturns since the Great Depression. The brokerage and mortgage lending industries played the central role in creating this contagion. But if high CEO pay is truly linked to performance and is good for the economy, people will want to know why it is, during a period that has seen the largest transfer of wealth from investors to the boardroom in history, the result is now one of falling stock values, shrinking economic growth, galloping home foreclosures and mounting job losses.

The hearing this week gave a rare opportunity for business leaders to admit that CEO compensation has gotten out of control and that it’s time for a new reality show in the boardroom. What began with the attendance of prominent CEOs and boardroom luminaries ended with the spectacle of men twisted like pretzels, having engaged in every type of contortion to show that these compensation arrangements were reasonable and had nothing to do with decisions to pump out more fee-generating subprime loans and structured investment vehicles. They also sent a veiled warning: any change to or reduction in the way CEOs are compensated, and capitalism as we know it may not survive. Here’s a bulletin for the boardroom: capitalism may not survive the kind of leadership that permits an ever increasing gap between CEO pay and everyone else’s, rewards failure with multi-million dollar bonuses and severance, and sees CEOs spinning off with a king’s ransom while leaving everybody else in the dust.

This was an opportunity for real leaders to admit that there are serious problems between the leadership class of capitalism and those who depend upon it for their well-being. To stand up and acknowledge the trend toward excess, to take the lead in stepping back and not being the first in the lifeboat when disaster strikes, to show some meaningful sacrifice at a time when so many are hurting instead of flashing five figure watches, five thousand dollar suits and a tan direct from the winter mansion at Palm Beach (or Palm Springs) -this would have been the kind of leadership that CEOs showed during two great wars and other times that tested America. This group showed none of that. One suspects they are, regrettably, an accurate reflection of the pool of CEOs and directors of which they are a part.

Excessive CEO pay has become synonymous with what is worst about American business: crony boards where one back scratches the other; compliant compensation committees made up of past and current CEOs; and an ethical value system enabling displays of greed and over indulgence that is not something parents generally want to impart to their children. It has been associated with every scandal from Enron and WorldCom to Nortel and Hollinger and countless failures in between. It is now a contributing factor to the recession that is unraveling the world’s credit markets and crippling economic well-being for millions.

What was obvious, too, from the testimony is that none of these CEOs and business leaders is possessed of superhuman ability. All seemed rather ordinary in the insights they offered and in the information they imparted, despite being recipients of extraordinary compensation and a corporate publicity machine that makes superman look like a slacker.

Despite the number of experienced CEOs and directors who appeared before Congress this week, one voice was distinguished by its absence: that was the voice of genuine leadership. America is entitled at a time of crisis to more than the spectacle of hugely paid, decidedly self-satisfied CEOs who feel that the system is working as it should. It needs leaders who recognize there is a need to restore public confidence in capitalism and the ethics of those who steer it. And that requires shared sacrifice and an understanding that, even in the great American boardroom, there are limits to what rational people both need and deserve.

Capitalism, like any household, should be governed by values, and not just who can get the most as quickly as they can. And so the actions of the CEOs and directors who appeared before Congress this week, and the failures of their boards that produced these results, is our choice for the Outrage of the Week.

RIM’s Real Stock Option Problem: Maybe It’s Giving Out Too Many

When a board gets to the point where it feels it needs to have a widespread automatic stock sales program, maybe it’s a sign that it’s giving out way too many stock options to insiders

I’ve been receiving a number of calls from the press regarding Research In Motion’s new automatic stock selling plan for insiders. RIM has a problem, it seems, in managing its abundance of insider wealth. With so many directors and officers having so much stock –much of it gained by an extraordinarily generous stock option plan that saw millions of shares awarded through option grants– it has had to set up a program to sell insiders’ shares in a way that avoids any hint of impropriety. RIM is still recovering from the backdating scandal that involved the company’s co-CEOs, the CFO and a number of directors. For several months in late in 2006 and into 2007, insider stock trades were frozen because the company could not produce accurate financial statements due to option-related accounting problems. During that period, co-CEOs Jim Balsillie and Michael Lazaridis exercised more than 750,000 options between them alone. And that was just a fraction of their total awards. We’ve had some thoughts on RIM’s accounting/backdating fiasco on a number of occasions. This latest move, which will see nearly $400 million worth of stock sold over the next 12 to 18 months, is no doubt also intended to help shore up RIM’s image with the SEC, which apparently is still investigating the backdating episodes. Finlay ON Governance was the first to raise the issue of RIM’s noticeably deficient corporate governance practices that were also implicated in the backdating scandal. The company has since scrambled to repair some of its board practices, as well.

You may recall at the time the company produced the report on its internal investigation (which we thought might as well have been written on Swiss cheese because of all the holes it contained in the form of unanswered questions), Mr. Balsillie, RIM’s co-founder, who, as his company’s bio boasts, holds the Canadian chartered accounting profession’s highest certification, and Dennis Kavelman, RIM’s former CFO, who is also a professional accountant by training, both claimed not to know that undisclosed backdating was a no-no under accounting rules. RIM’s board, some of whose members also received backdated options, did not keep complete records of stock option decisions and transactions, according to the internal report. They never explained who approved the backdating for directors.

As a rule, investors like to see management and directors buying stock, not selling it. This is especially the case in a company where most of the top people are still under 50 and aren’t planning to leave anytime soon. Insiders selling significant blocks of their company’s stock en masse is not something the market sees very often and is seldom prepared to overlook.

Here is an excerpt from what I told today’s Financial Post:

I am never a fan of companies where there is a lot of insider stock selling. They are the leaders. Would they like other stockholders to sell too? The market is entitled to view mass selling by insiders as an indication of a lack of confidence in the future, since, if the price of the stock is expected to rise, a rational investor –even an insider– would not want to sell.

The fact that the plan is being unveiled at a time when RIM’s shares stand at record levels might prompt some prudent investors to wonder if the company’s insiders have a less than bullish vision of the future. Maybe RIM’s shareholders should begin to contemplate their own systematic sale of shares.

One final thought for investors to ponder: When a board gets to the point where it feels it needs to have a widespread automatic stock sales program, maybe it’s a sign that it’s giving out way too many stock options to insiders.

Cisco Restocks

The Cisco move is just the latest example of companies that put too much time and creativity into dreaming up elaborate financial schemes —schemes which, by some remarkable consistency of nature, always wind up adding to the CEO’s pay package.

I am not a big fan of company stock repurchasing. While I am the first to admit that today’s global corporations are complex institutions on almost every level, including financial, I think stock buybacks often drain potentially valuable funds that could be put to better use in research or in adding value to the traditional business chain, and serve to benefit insiders and the investment bankers arranging the deals more than anyone. One of the pluses that private equity advocates often talk about is that corporate funds for unlisted companies don’t need to be diverted into exercises like buying  back stock because the price can’t be raised any other way.  I don’t usually align myself with the private equity crowd, but on this point they seem to make sense.

And so it was with a somewhat jaded eye that I read of Cisco Systems’ plans to add billions to its already lavishly endowed program to buy back its stock. It just kicked in $10 billion more to an already huge $52 billion pot. And who do you suppose will come off best from the deal? How about Cisco insiders, like CEO John T. Chambers, who typically receives most of his compensation in the form of stock options. The company’s 2007 proxy circular notes:

During fiscal 2007, as part of the on-going companywide grant, the Compensation Committee granted Mr. Chambers an option to purchase up to 1,300,000 shares of Cisco common stock at an exercise price of $23.01 per share…. The option grant places a significant portion of Mr. Chambers’ total compensation at risk, since the option grant delivers a return only if Cisco’s share price appreciates over the option’s exercisable term.

In September 2007, the Compensation Committee also made an annual stock option grant to Mr. Chambers to purchase up to 900,000 shares of Common Stock, and the right to receive a target of 200,000 future restricted stock units based on Cisco’s financial performance in fiscal 2008.

So we have a situation at Cisco where the CEO, who also chairs its board, stands to gain significantly from a buy-up of stock that is being paid for with shareholder money from a company where the CEO is the chief decider on how it is used. An interesting moving around of the financial shells on the boardroom table, don’t you think?

The old fashioned idea of issuing a dividend —one that worked very well in the era of the Fedora CEO, as I have affectionately called them— is just too passé for Cisco. They don’t do dividends. I guess that would be too much like something that could benefit all investors in equal proportion to the shares they actually own —not the shares that might be bought on a discounted basis by a lucky CEO if things pick up.

The Cisco move is just the latest example of companies that put too much time and creativity into dreaming up elaborate financial schemes —schemes which, by some remarkable consistency of nature, always wind up adding to the CEO’s pay package— when the time and creativity and investment banking costs could instead be used for purposes of product innovation, employee education and in finding better and more efficient ways to add value to the customer.

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.