2011 marks the 10th year of Board Games, The Globe's annual report on corporate governance. See the rankings:
It was a revolution so quiet that most people are unaware it even happened.
In the decade since the collapse of energy giant Enron Corp. ushered in major reforms in the boardroom, Canada's corporate boards have undergone a tectonic shift in the way they operate.
Senior directors, who normally work in silence far behind the scenes, are stepping forward to report a profound reversal: Where many boards were once hand-picked by CEOs and beholden to them, directors now say they operate independently and oversee the top executives. The balance of power has shifted dramatically.
"Over the last 10 years, I'd say the most important change has been the ability of the board to function independently of management," says David O'Brien, chairman of both Royal Bank of Canada and Encana Corp.
"In the old days it was all mixed up as to the management and the board, and they were always together. I think the board lost any sense that they were really responsive to the shareholders."
Enron's bankruptcy filing on Dec. 2, 2001, was one of the key events in launching that revolution. The giant Houston-based energy trading company had been lauded for its innovative management and stellar board governance. But it collapsed within a matter of weeks after it was revealed that senior executives had participated in a massive accounting fraud – and its blue-chip board had been unaware or had done nothing to stop it.
Enron was followed quickly by several other scandals, including the bankruptcy of WorldCom Inc., headed by Edmonton-born CEO Bernie Ebbers, now serving a 25-year sentence on a variety of charges. The cumulative effect was to shatter confidence in corporate oversight. U.S. lawmakers quickly enacted the Sarbanes-Oxley Act to compel boards to be more vigorous and independent, including a new requirement for audit committees to have only independent directors to oversee financial statements.
The reforms flowed across the border to Canada, spurring similar changes in rules, as well as voluntary efforts by boards to improve their oversight. More companies began to strip away the chairman's role from the CEO and give it to an outsider who was independent of management. Today, 50 per cent of the companies in The Globe and Mail's annual report on corporate governance have a chair with no links at all to the company's top executives (that is, someone who is neither a member of management nor related to it, such as a former CEO). In 2002, when the Globe did its first version of Board Games, the figure was 34 per cent.
Those were the visible signs of the revolution. But the real legacy of Enron lies in the less visible reforms, which have fundamentally changed how companies operate, business leaders say. CEOs rely on boards far more in strategic planning, directors are more demanding in their oversight, and companies increasingly consider broader questions of governance in their social and environmental decisions.
Good governance has come to mean far more than adopting a list of best practices like requiring directors and top executives to own a minimum number of shares, says director Mary Mogford, who heads the corporate governance committee at Potash Corp. of Saskatchewan.
"I've seen a move from saying 'Oh, corporate governance? Let's check all these boxes,'" she says.
"[Now]it's just a way you do business yourself, the way you conduct yourself. It's just embedded in everything. It's not something that's separate over here that's a checklist. It's just how you do what you do."
In an odd twist, these diligent reforms have not eased public mistrust of corporate elites. If anything, after the financial crisis, the dissatisfaction is greater than ever.
Shareholders have become more and more frustrated, evidenced by greater activism, demands for "say-on-pay" votes on compensation and for more power to name nominees for boards. The broader public also remains disillusioned, as shown by the level of support for the "Occupy" movement across the continent, spurred by economic frustration and growing income inequality.
One reason for these dissonant views is that much of the governance revolution has occurred behind the scenes among a typically anonymous and circumspect group of corporate directors.
Much of what has most infuriated the public has happened at a relatively small group of extremely high-profile financial sector companies at the centre of the downturn, many of them based in the United States. Perhaps most gallingly, some Wall Street firms continued to pay huge bonuses to top executives after receiving billions of dollars in government bailout funds.
Manulife Financial Corp. chairwoman Gail Cook-Bennett says she isn't surprised many people who cannot find jobs are growing frustrated with the corporate sector. And while there may be boards that aren't trying to behave responsibly, she says, "the people I talk to, the directors are really trying to respond."
"If I were sitting on the outside and knew what I know on the inside of the boards I'm on, I'd just be much happier now [about how corporations are governed]than before."
For Inmet Mining Corp. chairman David Beatty, the lesson from the dissatisfaction is that boards need to profoundly rethink their roles. (
"More and more we see with these 'Occupy' movements that you've got to earn the social right to operate … I think you have to have a more holistic definition [of your role]now, and you have to get away from the idea that our job is to maximize shareholder value in the next quarter."
With the passage of time, more directors are willing to tell stories about the "bad old days" of board governance in the pre-Enron era. One wry old joke goes like this: A new director goes to his first board meeting and is told by the chairman it is customary for new directors to not speak for the first year. He replies, "Okay. I'll be back next year," and leaves.
"It wasn't that many years ago where it was more at the board level, 'Speak when spoken to,'" recalls Bank of Nova Scotia chairman John Mayberry.
"And the [combined]chairman and CEO held the gavel and dominated the discussion and the content of the discussion … I think the board dynamic has changed rather dramatically, not just on bank boards but on all boards."
Veteran corporate director Bill Dimma, who has been a director on more than 90 boards over his long business career, says a typical board meeting 20 years ago may have lasted for just two hours, during which directors quickly approved everything management proposed. (
Then everyone had a sumptuous lunch accompanied by wines "with which even the most dedicated oenophile could find no fault" before heading home.
Some boards didn't even hand out material to read before meetings, Ms. Mogford says of her early days on boards 30 years ago.
Today, directors do far more work. A 2010 survey showed directors spend an average of 227 hours each year on work for a large corporate board, including volumes of reading before two-day-long committee and board marathons.
Companies have also adopted new ongoing director education programs, organizing training sessions each year to keep boards current. Calgary energy company Nexen Inc., for example, lists 49 educational events it held for directors in 2010, including sessions on accounting changes, securities regulation and the petroleum market.
"If I had to use one term to characterize boards 15 to 20 years ago, that would be 'passive,'" says corporate director Peter Dey, who drafted the first board governance guidelines for the Toronto Stock Exchange in the 1990s.
"Today in my experience, they are very engaged … A lot of boards were constituted with people connected to the CEO and they felt beholden to the CEO. It made it difficult for them to challenge what management wanted to do. That, in my experience, has completely changed."
After 10 years of measuring governance practices at Canada's largest companies, The Globe and Mail's own data clearly show that boards are more independent than they were a decade ago. So, too, are their audit and compensation committees, where much of the hard work is done in keeping CEOs accountable. (
While 43 per cent of companies had directors connected to management on their audit committees in 2002 – using the Globe's strict definition of independence – just 10 per cent fall in that group today.
When the Globe started Board Games, more than half of companies (58 per cent) had related directors on their compensation committees; in many cases, a CEO's close friend influenced the size of his paycheque. That number is down to 23 per cent now. While CEOs often sat on their own audit and compensation committees in 2002, that practice has since been banned.
Nevertheless, no governance reform can change the fact boards are not equally competent, says Toronto-Dominion Bank chairman Brian Levitt.
The best 15 per cent of boards did well before Enron and would have done well without any reforms, he says. The 70 per cent in the middle have benefitted most from the governance revolution, and the 15 per cent at the bottom are unchanged.
"It hasn't made boards that are hopeless workable," Mr. Levitt says. "And it hasn't made boards that were very good better."
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