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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RIM’s latest news sends up a large red flag about the management of both organizations.

What a surprise. After claiming in numerous news releases that RIM did not expect any material charge as a result of its stock options probe –they estimated between $25 million and $45 million at the time– the company’s lawyers now say it will be “significantly larger”. The revelations arise from RIM’s third appearance before the OSC to give an update as to why the company has failed to satisfy its disclosure obligations. However, this recent clarification does not appear on RIM’s web site, unlike the lower estimates. So investors are left again to wonder in the dark about this, just as they are about the company’s current financial picture. RIM remains in default of its statutory filing requirements.

RIM also claims that delays in getting to the bottom of its options probe arise from the discovery of 250,000 additional documents. Wow. Everyone misplaces a document or two now and then. But it takes a special skill to lose a quarter-million and then discover them by surprise.

RIM lawyers, acting for the board’s audit committee, advise that the voluminous new documents were uncovered through “forensic imaging” of company hard drives. Translation: They recovered files and records that had previously been deleted. That’s a troubling admission which again raises questions as to when they were deleted, why and by whom.

A legitimate further question, and one the OSC does not appear to have asked: When did the company become aware of these additional documents? Did RIM know about their existence when it asked the OSC on November 30th to lift the insider trading ban to permit management to exercise hundreds of thousands of stock options? The OSC granted the request.

There is often a tendency in these matters to underplay the expectation of bad news at the outset and then let it drift out during the course of an investigation in the hope that the market will not react with shock when the details finally surface. Like certain of its corporate governance practices, which were the subject of an extensive posting on Finlay On Governance, RIM’s handling of the probe from the outset raises significant issues.

First, there was the initial formal announcement on September 28th:

Research In Motion Limited (RIM) (Nasdaq: RIMM; TSX: RIM) announced today that the Audit Committee of RIM’s Board of Directors, comprised solely of independent directors, is completing a management-initiated, voluntary review of RIM’s historical option granting practices.

Notice that, on September 28th, the first time the company made mention of its internal investigation, it said the audit committee was “completing” its review.

Later in the release, the company claims:

Although the review is ongoing, it is currently expected that the potential effect of such restatement will be to increase the amount of non-cash charges associated with past option grants and thereby reduce the amount of the Company’s previously reported GAAP earnings by an aggregate amount of approximately $25-45 million over the period since the Company’s IPO in 1997.

And then it states:

The Company does not at present anticipate a material adjustment to current or future fiscal years’ operating results, including the preliminary Q2 operating results reported today in its separate earnings press release, and RIM has defined enhanced procedures and controls to address issues of this nature.

It is curious that RIM seemed to have enough information in September to estimate the $25 to $45 million charge and to assure investors that it was not material. But you have to ask, How did it arrive at that figure? How long had it been investigating the issue before it made the disclosure to investors? And why, if the audit committee was “completing” its probe in late September, did it take three more months to announce that the investigation is more complicated, that it will take longer and that its outcome will be more costly, than originally thought? Does the company’s newest position of a “significantly higher” charge than previously announced, veer into the material lane?

The investing public is entitled to more information than the company has provided or which the OSC seems to think relevant. That’s got to be a red flag regarding the management of both organizations. It is especially troubling that the OSC, after temporarily lifting its insider-only trading ban so that RIM executives could exercise their hefty number of stock options, a subject commented about here, felt it to be in the interests of the investing public to allow the company until March of next year to set its books right or report back on the status of its continuous disclosure obligations. The operative word is status. There is no ultimatum requiring RIM to get its act together or else. Indeed the OSC’s ‘drop back in a few months if the problem is not resolved’ approach seems more typical of a family doctor than a securities regulator.

I have a feeling we have not seen the last of surprises at RIM over its stock options probe. It may well highlight the need for changes in the corporate governance landscape of the company given some of the shortcomings which were raised previously on these pages.

The Centre for Corporate & Public Governance has received so many inquiries about the RIM affair, and the OSC’s role in it, that it felt it necessary to issue a statement. It will continue to monitor the progress of RIM’s investigation and the OSC’s handling of the file.