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.

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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.

The New York Times’ Floyd Norris makes some typically insightful comments on the Apple Computer stock options scandal on his blog. Finlay ON Governance has been on this story itself, along with The Centre for Corporate & Public Governance.

It’s unfortunate that the Times requires a paid subscription to view it because this is the kind of thoughtful perspective from which all members of the investing public and interested observers can benefit. Here is an excerpt from his posting today.

It will be interesting to see if the Securities and Exchange Commission agrees that there is no problem if a chief executive was aware that favorable grant dates were selected but did not “appreciate the accounting implications.” And we are asked to believe that when options given to him were ostensibly approved at a board meeting that never happened, he did not know what had gone on, although he was a member of the board.

I responded to the post with the following comments, which can also be viewed at Mr. Norris’s blog:

Another conclusion might be that Apple has not taken corporate governance seriously. It has a tiny board of only seven directors, one of whom is CEO Steve Jobs. Many of them, including Jobs, sit on the boards of several other prominent corporations, thus requiring substantial attention away from Apple. Rather puzzling is the fact that no director or officer of the company appears to hold the title of board chair. I have never encountered this anomaly in any other publicly traded company in some 30 years in and around North American boardrooms. It seems to suggest a lack of proper board organization. No wonder they don’t know when they meet.

As to the matter of stock options, the fact that they appear to be such a driving force in the company, and on the board itself, might account for some of the current problems. Outside directors participate in a stock option plan in which they are eligible to exercise hundreds of thousands of options. It will be recalled that IBM’s board recently eliminated the practice of issuing stock options to directors, thereby winning considerable approval among corporate governance experts for the move. It is disturbing that the board committee admitted that its CEO was complicit in the manipulation of dates in respect of options but does not appear to regard that as a serious breach in the ethical leadership of the company. Nor does it suggest any further steps it plans to take to ensure a culture of integrity and accountability in the company.

A final point on Apple’s board: no woman sits among its directors. There is really no excuse for such a gender gap in corporate governance these days, and when it occurs, it suggests a company that lacks an adequate understanding of the times in which it lives and the expectations that confront major publicly traded companies. There is a serious disconnect between Apple’s technology prowess and its governance performance. It has been costly. And that, perhaps, is the most significant conclusion to come out of Apple’s options mess.

Looking over what has been disclosed by Apple’s board about its investigation –the company should have released the full report to the public in order to avoid further confusion– I am of the view that the company’s independent directors took an overly narrow approach to their mandate. They should have probed further into what was done, why it was done and the implications for the company’s reputation and culture. It is not enough to say that CEO Steve Jobs did not make unlawful or improper gains from options manipulation. Improprieties occurred on his watch. He permitted or encouraged backdating according to the report. Concerns must, therefore, also focus on exactly to what extent Jobs might have assisted in the backdating and whether he misled investors as to the disclosures that were made and have subsequently been proven false to the tune of $84 million.

The report also asserts that Mr. Jobs was unaware of the “accounting” implications involved. He has been CEO of the company for a considerable period and is widely reputed to be a “hands-on” manager. A Ken Lay type excuse that Mr. Jobs was not aware of what was happening around him or did not understand even the ethical implications of what he was doing, and was not bright enough even to seek counsel about any uncertainty, not only is not plausible, but even if it were would still raise serious questions about the standards of competency in the company’s top management.

Inasmuch as CEOs have been fired for making false statements on their resumes and have had their bonuses reduced because of plagiarism, it appears that Apple’s board has not adequately considered the full implications, including far-reaching ethical implications, of what has occurred. What failures in governance oversight, along with the size and functioning of the board, that may have contributed to the fiasco, and what needs to be done to address these shortcomings, also appear to have escaped the board’s gaze.

It’s pretty clear from the actions of all the players involved that there will be more fallout from Apple’s revelations.