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.

There is a reason why the bank’s board appears little more than a bystander to the destruction of shareholder wealth.  A good part of it has to do with its discredited governance structure.

Watching Citigroup’s shares crash through the 10 dollar level, then nine, then eight, seven, six -like some kind of inexorable countdown leading to the inevitable disaster- investors might be excused for asking, Where is the board?  The answer is that it is stuck somewhere back in the 1940s, when it was considered bad form for directors to actually direct.  As we said in Part 1 on this subject:

“Common to these problems has been Citigroup’s board of directors, which increasingly resembles a first-class sleeping car on a train wreck that just keeps happening. Almost whatever it does, it is too slow and too late.”

There is a reason why the bank’s board appears little more than a bystander to the destruction of shareholder wealth, and a good part of it has to do with its discredited governance structure.  Here are a few examples:

1   Insider influence:  Of Citi’s 15 directors (Lawrence Ricciardi, 67, was added in late July, after the annual general meeting in April, and was not listed among the board nominees included in the shareholder proxy statement), four are considered by the bank to be insiders, i.e. non-independent directors.  Their voices around the boardroom table are bound to hold more sway than those of independent directors, who are less involved in the company.  Outsiders generally defer to the (perceived) greater source of knowledge.  Inside directors also have a vested interest in supporting management.  For all practical purposes, they are management.  For at least three decades, best practices have called for boards to have no more than two insiders.  The most admired boards have no more than one: the CEO.

2    An insider as board chairman: The chairman of the board, Sir Winfried Bischoff, is an insider.  As executive chairman, he is part of the management team.  He’s paid well, too.  Most recent records disclose that his total compensation was more than $6 million for 2007.  There isn’t a lot of information available as to exactly what Sir Winfried does for this lofty sum.  Virtually every corporate governance expert alive (or dead, for that matter) has taken the position that boards are best headed by an independent director, not an insider.  This is one of the most efficacious means of a board’s manifesting its supervision over management.  Boards need to be led in the process of holding management to account, and that seldom happens where management (or an insider) is doing the leading.  Perhaps the bank thought the world would be more impressed by a titled gentleman heading the board.  If that is the case, Citi can do a lot better than this.  There is currently a British baron residing in the United States who rates above a knight in the titled class, and he has a lot of time on his hands.  Lord Black of Crossharbour can currently be reached at the Coleman Correctional Facility in central Florida, where he is serving 78 months for mail and wire fraud in addition to obstruction of justice.  Hollinger, which Conrad Black headed, also had a large number of inside directors.  Its board lacked an independent chairman, too.

3    Director stock options: Citi’s board has a stock option plan.  Boards work best when their interests are aligned with investors, who generally have to buy the stock at its market price -not at a convenient discount.  With a stock option plan, directors’ interests are aligned with management, which also has a nice stock option plan.  It may not mean a lot now with the share price collapsing, but it might give a clue as to the mindset of the board, which has been decidedly in management’s camp for too long.

4    Overextended directors: The board has a number of directors who have a lot of other business duties demanding their attention.  Sir Winfried Bischoff, in addition to being the company’s full-time (executive) chairman, sits on the boards of Eli Lilly, McGraw-Hill and Prudential.  Six of its directors hold 17 board positions among them in other listed companies, in addition to their membership on Citi’s board.  Most of the company’s directors also serve on the boards of prominent educational institutions, medical facilities and philanthropic organizations to which they owe a significant fiduciary duty.  When your home is on fire, you like to think the fire department is focused on the job at hand and not going off to stock shelves at Wal-Mart before the flames are doused.  In the 1930s, William O. Douglas, then the second person to hold the position of chairman of the new Securities and Exchange Commission, suggested that non-executive directors could serve prudently on the boards of no more than three to six listed companies, and that was at a time when the corporation was considerably smaller, less complex and less global than it is today.  Taking on responsibility for an institution of the size and intricacy of Citigroup, along with two or three other publicly traded entities where directors also serve on numerous committees, invites a level of distraction that investors ought not to tolerate when they are already paying good money for the directors they hire. Douglas, who soon after making the comment was nominated to the U.S. Supreme Court and became one of its longest serving justices, was alert to the dangers of the “multiple director” who winds up devoting too little time to each board.

5    The curse of the executive committee: Bear Stearns had one.  So did Lehman Brothers.  Hollinger had one, as well, and in a first that we originally brought to public attention, almost its entire membership has served time in U.S. federal prison as a result of the fraud they perpetrated against investors.  Up until late summer, Citigroup’s board operated with an executive committee chaired by Robert Rubin and comprised of three insiders and three independent directors.  The company never disclosed how often the board’s executive committee met.  Best corporate governance practices have long argued against such committees.  Mr. Rubin had held this position full-time at Citi since 1999, a period during which many of the flawed decisions that led to the company’s current calamities were being made.  It appears that he never saw the gathering storm, though he was in one of the best positions to know and to decide what was happening at Citi and what was shaping the market in which it operated.   The nomination and governance committee apparently has now been given the power to act for the board between meetings.  While the move can be applauded, it took far too long for the board to wake up and see the urgency of a change it should have demanded a decade ago.

6    A dearth of banking experience: Not a single independent director on Citi’s board has recent senior experience in the banking sector.  All that perspective is vested in its insider group.  This places the independent voices at a considerable disadvantage.  It is one illustrated in Technicolor in the performance of the company and its shares.   The experience deficit should have been addressed by the nomination and governance committee of the board, which company records show could not muster more than five meetings in 2007.  But since this is a board where a large block of insiders and a highly-paid, non-independent chairman are happily tolerated, and the company’s performance and share value have been permitted to fall off the charts under its current CEO and management directors, it is not surprising that change is a slow arrival, if not an altogether empty chair, in Citigroup’s boardroom.

There is a reason why boards exist and directors are expected to actually direct.  They are supposed to add value, prevent misadventure and ensure that the right kind of leadership is always on the bridge.  But their failures are monumental in the history of modern business.  Waves of corporate disaster -going back to the panic of 1907, through the market crash of 1929, the Enron-era calamities of the early 21st century, and now the subprime-related debacles which have resulted in the most serious stress to the economy since the Great Depression- have resulted in legislators examining the performance of the boardroom and finding that it fell unacceptably short.  Indeed, with its failure to prevent or event mitigate the current crisis, much less to foresee the consequences of the company’s mounting risk and over-leveraging, Citi’s board brings to mind a comment that gained considerable prominence during a time of corporate turbulence in the 1930s when governance failures also loomed large:  “It is not enough to describe them as directors who do not direct.  Too often they do not even influence.”

When you have a situation as it exists at Citigroup today, where billions of dollars in shareholder value is being obliterated and management and the board seem paralyzed in addressing the decline, much less inspiring needed investor confidence, you have to ask, Could it be any worse if there were no board at all?

That question alone is an indictment of the quality of governance and boardroom leadership at Citigroup, and a principal reason for the unraveling of one of the great corporate names in the history of American banking.

As this is being written, Citi stock fell to $3.64.  That is not a misprint.  It is an outrage.