On the Record

Centre submission jpeg jan05

Excerpts from A Sampling of The Centre’s Testimony, Submissions and Media Interviews

(For more recent commentaries, media coverage and submissions see Finlay ON Governance)

Screen Shot 2016-03-05 at 10.44.08 AMFocus Magazine, January 2007

“Größte Bedrohung des Stabilität“

Doch der kanadische Unternehmensexperte J. Richard Finlay sieht den derzeitigen Trend zum „Going Private“ mit großer Skepsis: „Dies ist eine der größten Bedrohungen für die wirtschaftliche Stabilität und das Wohlergehen der Anteilseigner im vergangenen halben Jahrhundert“, warnt er. „Wenn es an Offenheit in den Firmen fehlt, werden Probleme oft so lange versteckt, bis die Lage so kritisch wird, dass niemand mehr etwas tun kann. Und dann können die Folgen für die Mitarbeiter, die Zulieferer und die Gemeinden verheerend sein.”

Als Beispiel nennt er den kanadischen Immobilienkonzern Olympia and York, der in den 80er-Jahren zu einem der größten Grundbesitzer der Welt aufgestiegen war. 1992 implodierte das Unternehmen unter der Last seiner Schulden von mehr als 20 Milliarden Dollar und der Inkompetenz seiner Bosse, der Brüder Albert, Paul und Ralph Reichman. „Es gibt wenige Beweise dafür, dass private Beteiligungsfirmen besser geführt werden oder weniger zu Dummheiten und Machtmissbrauch an der Spitze neigen“, meint Finlay. „Und den Chefs große Summen von Geld nachzuschmeißen, hat sich nie als zuverlässige Formel für den Erfolg erwiesen.“ Der Chef der Baumarktkette Home Depot, Robert Nardelli, der für sein Scheitern mit 210 Millionen Dollar belohnt wurde, sei das beste und nicht einzige Beispiel dafür.

Corporate Governance, also die Unternehmensführung unter Aufsicht, ist für Finlay nach wie vor die beste Methode, ethisches und verantwortungsvolles Verhalten an den Firmenspitzen zu gewährleisten. „Es ist kein Zufall, dass die größten Firmen mit der eindrucksvollsten Geschichte von Einkommen, Innovation und Fairness gegenüber den Anlegern, etablierte Aktiengesellschaften sind, die sich über lange Zeit entwickeln konnten.“ Private Beteiligungfirmen hingegen seien wie der Ozeandampfer „Titanic“: „Jeder glaubt, sie seien zu groß, um versagen zu können, und zu raffiniert, um nicht erfolgreich zu sein. Und dann, eines Morgens, wacht man auf und muss entdecken, dass das Undenkbare geschehen ist.“


Standing Committee on Finance and Economic Affairs, Five Year Review of the Securities Act, Legislative Assembly of Ontario, 2004

The Ontario Securities Commissions lines of accountability lack the necessary transparency and its governance is in need of major reform. In some respects, the Commission does not live by the standards of openness, transparency and accountability it demands of those it regulates, and in others, it fails to set the highest tone that is required of a leader. Indeed, we believe many of the Commissions governance practices fail to conform with the requirements of the Memorandum of Understanding between the Ministry of Finance and the Commission.

The OSC should be fundamentally restructured in order to preserve both the fact and appearance of fairness and impartiality in its mission and dealings and to be consistent with 21st century expectations of accountability in public institutions. Only by ensuring that its own practices are beyond reproach and consistent with principles of fairness and impartiality can the Commission fulfill its mission of preserving the integrity of the capital markets it regulates and public confidence in the securities industry.




Business News Network, 2003  (interview with J. Richard Finlay)

Disengaged and inattentive boards have been associated with every major corporate disaster for the past 100 years. Its not just that they were asleep at the switch; in most cases they were not even on the train. If we want companies to succeed and avoid WorldCom’s and Enrons in the future, or Canada’s own failures like Bre-X and Livent, we need to end this era of the disengaged director.


Standing Committee on Banking, Trade and Commerce, Senate of Canada, 2003

A common refrain, and one inevitably heard when corporate scandals occur, is that directors need to direct. The idea that boards have a critical role to play both in the performance of the organization and in the preservation of public confidence in capitalism has recurred with astonishing regularity. It has returned again in the aftermath of Enron, WorldCom, Tyco, ImClone, Rite-Aid and so many others.

In my view, these disasters were the predictable consequence of an all too pervasive corporate culture characterized by: excessive CEO compensation that has created a mindset of short-term thinking; complacent boards dominated by past and current CEOs who are often more interested in not offending management than aggressively representing the interests of shareholders; and an ethos among too many gatekeepers ”including auditors, investment bankers, analysts and advisors” who have sought to please management as a means of advancing their own professional interests.

Dysfunctional boards have left their fingerprints on corporate disasters in Canada, as well. Like their U.S. counterparts, Canadian boardrooms are still dominated by past and current CEOs who often share the same mindset and have a vested interest in maintaining the same flawed compensation system. There is very little meaningful assessment of boards or director performance. There are too few women on Canadian boards. In addition, we have one structural impediment to effective oversight and improved corporate governance that the U.S. does not have: an outdated and cumbersome system of securities regulation that sees 13 provinces and territories exercising control over that field.

In 1994, I appeared before this committee and recommended the passage of a number of corporate governance reforms while at the same time urging a new approach toward resolving Canadas outdated, multi-jurisdictional system of securities regulation. Since then, we have seen a series of home-grown corporate scandals, from Bre-X to Livent. The steps proposed were a desirable objective in 1994. They are an urgent prerequisite today for Canadas ability to compete and to protect investors.




BusinessWeek, May 2002.

Excessive CEO pay is the mad-cow disease of American boardrooms,” says J. Richard Finlay,chairman of Canada’s Center for Corporate &Public Governance. “It moves from company to company, rendering directors incapable of applying good judgment and common sense.”

A study by Finlay shows that many boards devote far more time and energy to compensation than to assuring the integrity of the company’s financial reporting systems. At Oracle Corp. (ORCL ), where CEO Laurence J. Ellison’s exercise of stock options just before the company issued an earnings warning led to a record $706.1 million payout last year, the full board met on only five occasions and acted by written consent three times. The compensation committee, by contrast, acted 24 times in formal session or by written consent. “Too many boards are composed of current and former CEOs who have a vested interest in maintaining a system that is beneficial to them,” says Finlay


The Conference Board’s Commission on Public Trust and Private Enterprise, 2002

The mystery of the disengaged director has been one of the longest running acts in modern business. Invariably corporate calamity is followed by the question œwhere was the board?. Search and rescue parties of blue ribbon panels and congressional investigations are dispatched to find the answer, only to discover the directors were asleep while the chicanery was in full motion. No amount of financial manoeuvrings or management acrobatics is apparently too obvious or too elaborate to rouse some directors from their slumber, as disasters from Penn Central Railroad to Enron and WorldCom demonstrate. Then, startled by the clamour of investigators and outraged investors, directors awaken and promise reform. It was claimed by one commentator in 1934 that the entire New Deal had fallen on the board of directors. In the 1970s, the aftermath of a series of further scandals prompted a prominent director at the time to announce that the boardroom œhad come alive. Similar declarations by business leaders have followed the scandals of recent months.

History cautions that many boardroom sentries soon fall back to their preferred state of dormancy once the hollering dies down. Stocks begin to rise, CEOs are heralded once more as modern-day caesars who single-handedly deliver success to shareholders, and discussions about accountability are seen as a noisy and unwelcomed intrusion in the otherwise quiet life of the boardroom ”quiet, that is, until disaster again comes banging at the door. And it does so with predictable regularity.

Evidence of a culture of over-accommodation of CEOs by boards has been amply illustrated in recent cases of excessive of CEO pay, where misguided incentives create something of a moral hazard permitting those at the top to become insulated from the consequences of their actions. While promoting short-term benefits in stock, such incentives have proven both destructive to the long-term interests of corporate stakeholders and inimical to confidence in capitalism itself. The preoccupation of boards with compensation has been demonstrated not only in Enron and WorldCom, but also in companies like Oracle that have not been tainted by scandal. In these companies, the boards compensation committee met sometimes twice or three times as often as its audit committee. As I first observed in 1997, excessive CEO compensation is the Mad Cow disease of the North American boardroom, moving from company to company apparently leaving directors incapable of applying good judgment and common sense. The composition of boards, however, which favours predominantly past and current CEOs, might suggest to the cynical observer a more deliberate method in the appearance of such madness. In any event, there can be little doubt that excessive executive pay is a symptom of the ascendancy of the CEO in the boardroom, and of the inclination of boards to defer to the dominant power in the corporate hierarchy.

It is the disequilibrium between power and accountability that is generally at the centre of the malfunctioning corporate board and the dysfunctional company. The Conference Boards panel should squarely confront this imbalance if it wishes to bring an end to the alternating waves of boardroom slumber and public outrage that recur with striking regularity.

Standing Committee on Banking, Trade and Commerce, Senate of Canada, 2002

There have been a number of uneven attempts to improve practices in the boardroom. In that connection, the Committee itself might ask why it has been necessary to have so many inquiries and commissions on corporate governance in recent years. Why, as I suggested in my 1994 testimony, does boardroom reform œmove at a pace that makes glaciers seem like speed demons?. Why do scandals presided over by ineffective boards and resulting calls for strengthened corporate governance exemplified by more vigilant directors resonate throughout modern corporate history?

The continuing affliction of directors who do not direct not only erodes the moral authority of the boardroom but undermines the future of capitalism itself. For more than a century there has been a revolving door of corporate mishap and board failure, slumbering directors who suddenly awake to disaster, promise reform, and then go back to sleep until the next calamity occurs. This door must be closed. Legislation and rule-making doubtless have an important place in ensuring that boards will do their jobs. In that regard, laws which focus on the abuses and excesses of stock options and which prescribe greater corporate disclosure may offer some immediate hope of eradicating a mentality where directors and CEOs are all ultimately drinking at the same trough. But more must be done, and much of it must come from within the business community itself.

In 1994, I suggested to the Committee that the business community needed a few courageous Churchills in the boardroom who were prepared to stand up and say about these all too frequent failures: This is not good enough. We need to do better. That kind of leadership is required today more than ever. There are times when business needs its change leaders more than its cheer leaders. The challenge to improve corporate governance and restore faith in capitalism makes this one of those times.

In my view, the most important force in improving boards and minimizing the disasters over which they so often preside will be the creation of a business culture, championed by the leaders of business itself, where it becomes unthinkable for directors to fail to direct and where an unswerving commitment to ethical values of fairness, decency and sound judgment in the boardroom becomes commonplace.

The march of public opinion is an indispensable ally in that task. Whatever else it does, I would urge the Committee to invite to its proceedings people whose backgrounds do not normally make them candidates to appear before it but whose experience make them an invaluable witness to boardroom reality. Many laid-off workers and beleaguered individual investors feel a palpable sense of betrayal with respect to corporate leadership and governance today. They know better than anyone the sting of excessive CEO compensation and the consequences of compliant directors who do not direct. Their confidence in the integrity of the boardroom and the capital markets needs to be regained if our economy is to flourish. I would hope their voices, along with the Committees own recommendations, might form words as hard as cannonballs in reminding boards of their duties to know and guide the affairs of the corporation and their unique responsibilities to Canada’s shareholders and to the ideal of capitalism itself.

Governance Committee of the New York Stock Exchange, 2002*

Allowing CEOs to lead and head a board to which they ultimately report compromises both the practice and perception of fair and reasonable accountability. Accountability is the fundamental hallmark of the capital market; without it all other functions are placed in jeopardy. As is becoming increasingly clear, the absence of sufficient accountability, most frequently involving the relationship between the CEO and the board, was the most prominent factor in the recent wave of corporate scandals and abuses.

It will also be noted that under the existing regime where CEOs dominate both management and the board, research reveals that most boards still do not evaluate director or board performance; most boards are composed of current and former CEOs; most boards have no program of continuous education; most boards have no policy respecting the number of boards of publicly traded companies on which a director can sit; and most boards remain woefully underrepresented by capable women. The current system of unifying the positions of CEO and board chair has neither empowered boards nor improved their effectiveness. It has had the opposite effect. Not all board underperformance leads to scandal or criminal activity on the part of errant management; but all board underperformance constitutes an under-used corporate asset which often leads to sub-optimal financial performance.

Excessive CEO pay has been an indicator of the manifest deficit in ethics and values that has overshadowed too much of the business world. In the 1970s, the average CEO made about 43 times what the average worker made. In 2001, that gap had widened to 500 times. This phenomenon, representing the largest transfer of wealth from owners to a small class of hired professionals in history, interestingly coincides with the greatest decline in respect for business and its leaders, the largest loss of shareholder wealth and the longest parade of disgraced CEOs since the Great Depression. It symbolizes more than a dysfunctional system of CEO compensation. It stands as an emblem of the failure of directors to live up to their ethical and legal responsibilities and tarnishes the moral authority of capitalism.

*This submission was made to NYSE CEO Richard Grasso one year prior to his ouster amid a scandal involving excessive pay and complacent directors.

Subcommittee on Oversight and Investigations, United States House of Representatives, 2002 (hearings leading to the passage of the Sarbanes-Oxley Act of 2002)

A popular theme in recent years has been that directors should assume the responsibility of directing, noted a distinguished commentator of the American business scene. It was an apt characterization when William O. Douglas made the remark seventy years ago during another crisis of confidence in American capitalism. Regrettably, it remains an accurate depiction of boardrooms today, where all too frequently directors fail to direct.

No other function of modern business has so consistently failed to perform as the board of directors. The spectacle of Enron’s board pleading ignorance to the advancing dangers that brought down the company is a scene that has been played out repeatedly in the great corporate disasters of the past century. In 1970, Penn Central Railroad collapsed, making it at the time the largest bankruptcy in U.S. history, just as Enron is today. Like Enron, it prompted numerous Congressional hearings and demands for boardroom reform. In its investigation, the Securities and Exchange Commission observed: “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 internal investigation of Enron’s own board concluded: “…the board of directors failed, in our judgment, in its oversight duties”.

The nearly century-old revolving door of corporate mishap and board failure, of slumbering directors who suddenly awake to disaster, promise reform, and then go back to sleep until the next calamity occurs, must be closed. It is time to get serious with the affliction of directors who do not direct.

Committee on Banking, Housing and Urban Affairs, United States Senate (hearings leading to the passage of the Sarbanes-Oxley Act of 2002)

I am often asked by investors, MBA students and the media why so many boards fail; and why does their failure to perform their duties so often presage the destruction of entire corporations and individual careers? The customary litany long discussed by corporate governance scholars is persuasive. Too many directors are over extended, sitting on too many boards at the same time. Too many are clothed as being independent but really have lucrative side deals with management, as several Enron directors did. Too many directors œare more concerned about not offending management than with protecting shareholders, as former SEC chief Arthur Levitt told the Committee recently. But in my view, the greatest single factor in the failure of boards can be traced to their composition and the resulting obsession with compensation matters” an obsession that ultimately benefits the directorial community as much as it does the pool of CEOs.

Enron’s board, which awarded over a billion dollars to top management in recent years, met 10 times in 2000. Its audit committee, which is supposed to protect the financial well-being of shareholders, met half that number. At Global Crossing, the second largest bankruptcy in U.S. history, the compensation committee met 12 times while its audit committee met six. Bankrupt Kmart’s compensation committee, which paid its CEO of only 22 months nearly $25 million, met 16 times. Its audit committee met five times.

The commanding heights of stock option packages today reflect this boardroom obsession with compensation. The danger is not that shareholders are unable to afford the vast awards, although that is becoming a problem in the context of shrinking earnings. The far more perverse problem is that such lofty sums tempt CEOs to artificially push up the price of the stock in ways that cannot be sustained and to cash out before the inevitable fall. It is the growing divide between the boardroom and the mailroom, between the self-interest of top management and the best interests of investors and employees, between CEOs being insulated from the consequences of their actions and being held accountable in a meaningful way that is the most troubling aspect of excessive CEO compensation. As the tragedy of Enrons employees and retirees illustrates, it is the corrosive and blinding effect upon a larger sense of corporate purpose and responsibility that is the greatest danger posed by excessive compensation and by boards who act more as chief tellers to management than vigilant guardians of the shareholders assets.

Securities Industry Committee on Analyst Standards, 2001

Effective corporate governance and the role of board ethics committees are paramount in ensuring the level of supervision required, and will convey a powerful signal to firm employees and the investing public about the importance placed on the integrity of the disclosure process.

However, an additional measure of protection can be achieved by the creation of the office of ethics ombudsman for the industry. This office would allow analysts and other member firm employees to raise and discuss possible conflicts on a confidential basis and provide a means for independent intervention if required. In my experience establishing and working with such offices over the years, I have found that their creation often sends an important signal to a universe of interested parties regarding the priority placed on ethics matters and the determination on the part of an industry to ensure the objective enforcement of ethical practices.

There is a dichotomy that often arises between statements of good intention at the top and what actually occurs in the daily functioning of the organization. The Committee has properly recognized that such circumstances exist in the industry.

Thirty years of observing and advising the financial services sector has persuaded me that a culture of ethical complacency too easily afflicts many organizations. I believe many of the incidents and questionable practices that led to the Committees formation are symptomatic of this reality. In my view, the most potent force in minimizing the risk of ethical folly in an organization is the creation of a dynamic ethical culture. Building such a culture into the core values of an organization requires that a commitment to the highest standard of ethics be visibly reflected and reinforced in board policies and in top management actions, and that it be backed up in performance and compensation systems, training programs and periodic external audits. The reputation of any organization and the credibility of the information it provides rest on its standards of ethics and probity. An organization with the right ethical culture will at the end of the day do more to instill investor confidence and deter abuse of trust than any amount of law and regulation. The Committee has a rare opportunity to reinforce, in the most compelling language at its command, the importance of high ethical values among industry members and professionals. That opportunity should not be missed.

Standing Committee on Banking, Trade and Commerce, Senate of Canada, 1994

More effective corporate governance practices, led and administered by more vigilant directors, are essential to public confidence in business and to the improved competitiveness of Canadian corporations. In my experience, there are few quicker ways of effecting positive financial change in large organizations than through progressive governance practices. Conversely, there is no more certain path to failure than weak and ineffective boards.

When I say directors need to direct, I am talking about a board that will really supervise the management of the corporation. To do that, directors need to be inquisitive, vigilant and informed. They need to evaluate the CEO and make sure that the company has a proper plan in place for its future. Above all, directors need to exercise independent judgment in determining what is in the best interest of the company.

This is the trust that directors assume when they accept the responsibility of directing.

A board of directors is not a country club. Directors are the guardians of public confidence in the economic system. Public confidence today seems to be demanding change. We need corporate and public policy leaders who will stand up and say, about the role of boards today, “This is not good enough. We can do better.” One of the most important steps in that process is the separation of the positions of CEO and board chair, with the appointment of an independent director as head of the board.

Toronto Stock Exchange Committee on Corporate Governance, 1993

The long history of otherwise avoidable corporate catastrophes has led many to ask where was the board when the major decisions were being made. The question echoes throughout so many scandals over the past century that one is compelled to conclude that major changes must be made in this institution if it is to move from irrelevance to one of empowered representation of shareholder and stakeholder interests. That process starts by requiring boards of publicly traded companies to spell out their purpose and function, to describe in detail the duties of directors, to have boards composed of a strong majority of independent directors and to be led by an independent director and not the CEO. Too many directors are over extended with appointments to multiple boards while too few women are found in the boardroom.

We need better training and continuous education for directors and regular assessment of their performance” requirements long established and demanded in every other function of the modern corporation. Board committees, especially audit and nomination committees, need to be strengthened and be comprised solely of outside directors. Our submission also calls for the creation of governance committees to oversee the board’s function and the progress of boardroom change. We go into some detail in setting out 21 steps for building the 21st century board. It is a blueprint for fundamental reform in the way boards work.

Directors of publicly traded companies are custodians of an important public trust –to investors, other stakeholders and to the institution of capitalism itself. It is a trust that must be properly discharged. Structural changes in boardroom culture and the way boards work are imperative in order to fulfill that duty and to ensure continued confidence in the capital market and its major corporate symbols. We conclude by suggesting that if serious steps are not made at this time to address fundamental weaknesses in corporate governance, beginning with the role and responsibility of the board of directors, the stage will be set for further episodes of boardroom scandal and corporate disaster, each more costly than the period that preceded it. Not only will business risk damage to its reputation and to the institution of the board of directors, but, if it fails to shore up its serious boardroom failings, it will almost certainly invite legislation that will seek to do that job and on much less favourable terms than anything that might emerge from this committee.