Home Capital settlement: Executives pay the price – and so, too, will investors

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Imagine this scenario: You're on the board of directors at a Canadian company. The business runs into a problem.

The CEO promptly tells you about the issue and how it's being fixed, and fires the people responsible. You inform federal regulators and your insurance company. Your lawyers, from one of the country's top firms, and your auditors, from one of the largest global partnerships, tell you there's no need to share the information with the public.

You likely listen to that wise counsel.

And if you did, and you were on the board at Home Capital Group Inc., you ended up in front of the Ontario Securities Commission on Wednesday, paying out $11-million over your failure to disclose material information. You watch the mortgage lender's former executive team head to the penalty box, banned from serving as corporate officers for two years or more.

What just happened at Home Capital makes it a whole lot more difficult to be a director, or senior executive, at a public company. It forces business leaders to second-guess advice they are getting from outside professionals, such as lawyers and accountants.

Executives, boards and advisers are going to respond to the Home Capital settlement by pushing more information out the door. Some will argue this makes for good governance.

But the value of a director, or an executive, rests in part on their discretion. Good governance sees corporate leaders sift through the affairs of the business and only share what's important.

Wednesday's settlement with the OSC makes it clear that Home Capital's board weighed the facts in a tough situation and "acted in good faith by relying on external professional advisers." The market watchdog decided that wasn't good enough.

Home Capital had to accept this settlement without waiting to argue its case before an OSC tribunal. There was a run on deposits in April after the commission said that, in 2015, Home Capital failed to disclose fraudulent applications behind a portion of its home loans.

Losing the confidence of the marketplace is fatal to a financial institution. Home Capital was at the brink, and would have been forced to close its doors long before the OSC allegations would have been tested in front of a tribunal.

If a tribunal had heard the allegations, a lot of smart, principled people say the company's approach to disclosure would have passed muster. But the war would have been lost long before the OSC battle was fought.

At the end of the day, Home Capital was penalized for keeping mortgage fraud from investors. However, the company did widely share its woes. The OSC settlement details that the company promptly reported the issue to two federal government agencies: the Office of the Superintendent of Financial Institutions (OSFI) and Canada Mortgage and Housing Corp.

Home Capital also spelled out the problem for its insurer, Genworth, and its auditors, Ernst & Yonge LLP. Wednesday's agreement notes that Ernst & Yonge "did not raise any concerns about the financial statement disclosure."

Home Capital's leaders made difficult decisions during a tough time, and Wednesday's OSC settlement showed that they acted in good faith, with blue-chip outside advice. The mortgage lender still got hammered by the OSC.

In the wake of Home Capital's near-death regulatory experience, boards and management teams will err on the side of caution. They will be tempted to set aside discretion, and dump even the most mundane business developments into regulatory filings. Drowning investors in information doesn't help them make good decisions.