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’s Record Settlement: The tsunami of wrongdoing and excess that caused barely a ripple of inconvenience at the top.

The indisputable economic (and moral) fact of our time is that America’s most wealthy, from whom capitalism’s CEOs, directors, guardians and gatekeepers  are drawn, not only allowed this torrent of financial chicanery and deception to occur, they profited handsomely from it.

These pages have voiced strong doubts over the years about the leadership and compensation practices that prevail at many of America’s corporations. Chief among the criticisms were that these plans provided incentives and rewards that caused companies to take improper risks which allowed CEOs to rack up huge gains in the short run while investors — and, ultimately, society — were left holding the costly bag of empty promises when reality came crashing down.

Take Bank of America, for example, which recently settled with the U.S. Justice Department by agreeing to pay a record $17 billion in penalties and restitution.  In the long history of American business, there has never been anything approaching this outsized penalty.  It stems from improprieties at Countrywide Financial, which B of A bought in another fit of misguided thinking, just before the onset of the Great Recession. There were also irregularities involving disclosures about its takeover of Merrill Lynch as well as with Bank of America’s own mortgage practices.

You might think that CEOs and boards are paid well for keeping companies out of trouble and avoiding these kinds of disasters.  Half of that observation is certainly true.  In the five years leading up to the crash of 2008 and the beginning of the worst recession since the Great Depression, B of A’s CEO Ken Lewis was paid more than $200 million.  Each of the bank’s directors awarded themselves a minimum of $1.5 million in the same period.  Many collected more.

When  he retired in 2009, Mr. Lewis walked away with a further $83 million in retirement benefits. Others connected with B of A, such as former Merrill Lynch CEO John Thain and Countrywide Financial’s former CEO Angelo Mozilo, also made off with huge fortunes as a result of deals made with the bank under Mr. Lewis.

And for all that, one of America’s most prominent financial institutions did not walk — it ran — into the giant propeller of U.S. government in a predictable and avoidable financial collision that resulted in this staggering record payout.

Bank of America was, as we documented over the course of several years, far from alone in practicing financial acrobatics that were more suited to a travelling carnival than an iconic institution of capitalism.  Yet in this mighty tsunami of boardroom wrongdoing and excess that nearly upended Main Street, barely a ripple of bother was felt among the first-class decks of Wall Street and America’s financial elites.  No CEO has been sent off to jail.  No director  or chief executive has been forced to return any pay.  As we noted in The Fallacy of Giantsin most cases when these kinds of eye-popping settlements are announced, the company’s stock shoots up.  Government fines, no matter how staggering, and accusations of abuse and betrayal by top management and boards, no matter how shameful, are regarded by many business insiders and much of the market as just another cost of doing business.

The indisputable economic (and moral) fact of our time is that America’s most wealthy, from whom capitalism’s CEOs, directors, guardians and gatekeepers  are drawn, not only allowed this torrent of financial chicanery and deception to occur, they profited handsomely from it.  The result is that those same elites in the period between 2007 and now managed to gain an even larger choke hold on the wealth and income of America than at any time since the 1920s.  This, despite the fact that were it not for the bailout provided by America’s taxpayers who largely live on Main Street, not only would this expansion of wealth not have occurred, but capitalism itself  might not have survived.  On that point, is it not interesting that the same voices that are generally quick to rail against government excess and demand fiscal discipline when it comes to the public purse are uncharacteristically silent when it comes to the $5 trillion the U.S. Fed paid to finance the bailout? Does that have any connection with reality, or is it just another case, like CEO compensation, for instance, where there is one set of ever accommodating rules for those at the top and another for everyone else?

What happened with Bank of America, and other prominent institutions like it, and the ease with which moral and legal improprieties can be sloughed off with little consequence for those in charge, is at the heart of the current record level of public disaffection with  capitalism and those who lead it. Having spent nearly half a century working with and around capitalism and its leaders, it is hard for me to imagine that one day it may cease to exist.  But the too often overlooked reality is that the fundamental currency that sustains modern capitalism is not capital at all — it is the consent of the public.

If present trends in income equality and  corporate immorality continue, and its leaders fail to ensure that capitalism is governed by a set of values that is consistent with the needs and dreams of Main Street, it is hard to imagine how it will survive.

Still Searching for Signs of Life on the Bear Stearns Board

Corporate governance at the failed Wall Street giant had all the hallmarks of a disengaged boardroom stacked with cronies and dominated by insiders. Finally, Congress can shed some light on where the board was at Bear Stearns — or if it existed at all.

Former Bear Stearns CEO James Cayne will be making a rare public appearance this week when he testifies before the Financial Crisis Inquiry Commission.   Other top executives from the once thriving firm that was a fixture on Wall Street for nearly a century will be giving evidence as well. It will be an ideal opportunity for the Commission to explore the role that questionable corporate  governance practices played in Bear Stearns’s failure.  We set out our views on that subject in a two-part posting called “Did Bear Stearns Really Have a Board?” in early 2008.  They can be viewed here and here.  They remain among our most widely-read columns even today.  Our comments were quoted in The New York Times reviewed book “Money for Nothing” by John Gillespie and David Zweig.

Corporate governance at Bear Stearns had all the hallmarks of a disengaged boardroom stacked with cronies and dominated by insiders.  The most strenuous task of the all-male board seemed to be lifting the rubber stamp embossed with “yes” for gigantic bonuses and anything else management wanted. Only at the very end did the directors even faintly awaken to their duties, after the sudden shock of seeing that no one was at the controls of the engine that was speeding toward catastrophe and realizing that it was too late to retreat to the heavily curtained sleeping car where they long resided.

As we said back in March 2008:

Dig deeper though and you will find a dysfunctional board, overstretched independent directors and an executive chairman whose approach to his duties is novel, to say the least. The first thing that hits you about this Wall Street icon is that it is governed by men. Only men. It was like that at its inception in 1923; it remains a men’s club in 2008. Three of its 12-member board are insiders, as is the executive chairman, James Cayne. (There were actually four insiders until Warren J. Spector, the firm’s president and co-chief operating officer, resigned last fall over the collapse of Bear’s hedge funds.) Best corporate governance practices generally prefer management limited to one or two seats at most. The insider problem in Bear’s boardroom is even more pronounced where all the heavy lifting is done: the company’s executive committee. Composed entirely of the top insiders of the investment bank, company filings confirm that in 2006 (the most recent figures available) the executive committee met on 115 occasions. By contrast, the full board met only six times.

We concluded by suggesting exactly the type of inquiry that is occurring under the Congressional appointed commission headed by Phil Angelides

When such an important financial institution begins to crumble so quickly, leaving the capital markets in turmoil and requiring the intervention of the highest echelons of the federal government, Congress needs to ask some pointed questions.  It should start with the Bear Stearns board.

Finally, a window of Congress can shed some light on where the board was at Bear Stearns — or if it existed at all.

The Examiner of Lehman’s Untoasted Boardroom Marshmallows

The court-appointed Examiner chose to continue the same lackadaisical approach to directorial performance and accountability in his search for answers as the directors themselves evidenced in their drowsy drift toward disaster.

A little noted statement in the report of the court-appointed Examiner in the Lehman Brothers bankruptcy reveals the extent of the deference displayed to the company’s former directors.

The Examiner admits in his report that he provided witnesses “advance notice” of the topics he intended to cover and that he allowed them to make use of notes and written statements before the interviews in order to “refresh recollection.” No doubt these were prepared with the assistance of legal counsel, whom the Examiner confirms represented interviewees in the “vast majority” of cases.   Significantly, the Examiner chose not to conduct his examinations under oath, and, if that’s not astonishing enough, no transcripts were ever recorded.  The Examiner preferred an “informal” approach over the formal depositions available to him.

This is how the largest bankruptcy in history conducted its search for information and how Lehman’s directors, who presided over the downfall, were allowed to take part in what amounted to a quest for the truth with all the rigor and intensity of a marshmallow roast – – without the fire.

We have long maintained that directors are among the most pampered class in the business world, accorded by society, the media, investors and the courts a level of deference and respect that has few parallels.  Time and again, it is this approach that has permitted directors to take shelter in the harbor of the disengaged and uninformed, giving rise to the appearance of men and women who, having been lauded in press reports and company statements just days or hours before as experienced and exceptionally accomplished, suddenly adopt the demeanor of amiable dunces in their hapless efforts to explain what happened and why.  This is what occurred in Enron’s collapse and before the fall of the Penn Central Railroad.  The spectacle of Hollinger’s confused directors at Conrad Black’s criminal fraud trial in 2007, where board members appeared challenged even in reading important documents, will also be recalled among astute boardroom watchers.

As we noted well before the company’s demise, and repeated here, Lehman’s feeble approach to corporate governance was well established by its board and the structure and membership it adopted.  It was, in our view, a significant and inevitable contributor to that downfall.  It is an outrage that the Examiner chose to continue the same lackadaisical approach to directorial performance and accountability in his search for answers as the directors themselves evidenced in their drowsy drift toward disaster.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Question for Secretary Geithner: What Does “Recuse” Mean?

New York Times

In his sworn testimony today before the House Committee on Oversight and Government Reform, U.S. Treasury Secretary Timothy Geithner reasserted that he had recused himself from making any decision in connection with AIG payments to Goldman Sachs in November 2008.  But he also testified that he was made aware by Fed officials that the payments had been made.  He knew this at a time when it was not public information and even Congress itself had been kept in the dark.

Some scepticism has been expressed on these pages before about the credibility of this scenario.

I have had some experience over the years in advising government agencies and public officials about issues related to conflict of interest and when there is a need to step aside.  When they do, they keep out of any aspect of the matter; they don’t get updates and briefings on the decision in which they did not take part.

The Committee needs to dig deeper into what the details of Mr. Geithner’s recusal were and what legal advice he had on that subject.  It also needs to look more carefully at what the mechanism was by which he became aware of the AIG counterparty decision – and why he felt he should be kept in the loop on the decision from which he says he removed himself.

Reshuffling the Crew on the Citigroup Titanic

True to form for a company that has proven itself consistently too late and too slow, Citi’s board is now moving backwards with the choice of its new chairman, Richard D. Parsons. 

Mr. Parsons is part of the old guard and has been a director since 1996.  He is among the crew that missed more red flags than are on an admiral’s ship and has presided over the obliteration of billions in share value.

What Citi needs is new people and bold action to steer it into prosperity.  That begins with Citigroup’s directors.  Rearranging the crew on the Titanic after it hit the iceberg would not have done much to avoid the impending calamity.   Citigroup and its board have repeatedly managed to hit one iceberg after another over the past several years.  Reshuffling its current directors isn’t likely to have any better outcome.