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.

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In light of the comprehensive nature of the Company’s management-initiated, voluntary internal review of stock options, including the past and future role of the Compensation Committee of the Board of Directors in respect of stock option grants, the audit committee believes it is important that the internal review not only be objective in fact, but also be perceived by RIM’s stakeholders as being objective.

–RIM press release, January 5, 2007

The board probe into possible irregularities in the handling of stock options at Waterloo-based Research In Motion takes yet another surprising turn, and one of several we continue to follow at Finlay ON Governance. The latest involves the announcement that Douglas Wright and Kendall Cork, two directors on the audit committee who also serve on RIM’s compensation committee, have recused themselves from the company’s internal stock options investigation. This was done, the company claims, to avoid even the appearance of conflict. Such a decision so late in the review raises the inevitable question: Was something more troubling discovered?

The two directors who have stepped down from the probe because they were also members of the compensation committee were members of that committee when the investigation began in September of last year. They have been part of the investigating committee all through October, November and December. They have sat on the compensation committee for several years. Yet, if we are to believe the company, no potential conflict was even considered until January of 2007.

The fact that only now, months after the investigation began, the company has come to realize that it is important that the review also be “perceived by RIM’s stakeholders as being objective” is a staggering admission, to say the least. The issue of “appearance” in connection with RIM’s board and the makeup of the committee heading the options probe was raised on these pages here in early December, when we said:

…the fact that RIM’s independent directors share an options deal with its management directors raises serious questions about how independent they really are and suggests at least the appearance that they may be unduly beholden to the founders of the company for a substantial part of their own (the independent directors’) wealth.

This is not the first surprise RIM has presented to investors. In December, it advised the Ontario Securities Commission that it had uncovered hundreds of thousands of new documents it needed to review. It also hinted that many had been destroyed in computer systems and had to be reconstructed. Before that, RIM’s co-chairs applied to the OSC to have the ban on insider stock trades lifted so that Jim Balsillie and Mike Lazaridis could exercise the purchase of more than 750,000 RIM options. This struck us at the time, and still does, as an odd thing for the OSC to permit given that it was the awarding of stock options to top management that was the subject of the investigation in the first place and the reason why RIM had failed to make its statutory financial filings.

This most recent announcement raises a number of additional points that trouble more than they reassure. By RIM’s own admission, there are only two directors out of the company’s board of seven, who are capable of overseeing the investigation. But there may well be additional problems for those members as well. James Estill has been on RIM’s board since 1997, during which time RIM’s securities filings confirm the board’s role in overseeing compensation and stock option decisions:

The Stock Option Plan is administered by the Board of Directors and the Compensation Committee. Each of the Board of Directors and the Compensation Committee has full and complete authority to interpret the Stock Option Plan, to prescribe such rules and regulations as it deems necessary for the proper administration of the Stock Option Plan and to make such determinations and to take such actions in connection therewith as it deems necessary or advisable.

Additionally, the board as a whole played a key role in setting dates and terms for stock option decisions, according to RIM’s statements:

Options granted under the Stock Option Plan have an exercise price of not less than the closing price of the Common Shares on the Toronto Stock Exchange (“TSX”) or Nasdaq National Market (“Nasdaq”) on the business day immediately preceding the date on which the option is granted and are exercisable for a period not to exceed ten years. The term and vesting of stock options is at the discretion of the Board of Directors and Compensation Committee.

So there are some legitimate questions as to whether board members are still in the position of investigating their own decisions and oversight conduct. In these kinds of high profile situations, it is often advisable to appoint new directors, who have had no previous involvement in decisions, to supervise investigations. To make a change in an internal probe so late in the process, following on the heals of a previous announcement in which the company said its anticipated restatement would be “significantly higher” than previously revealed, does not further investor confidence and should send up some large red flags to both the SEC and the OSC. Since RIM’s legal counsel has been before the OSC on several occasions in this matter, it is rather disturbing that neither the Commission’s hearing panel nor staff evidenced the slightest concerns about any potential conflict involving RIM’s independent directors and the probe they were heading.

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 explored these in detail previously at Finlay ON Governance.

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.