Dallas keynote2012leblanc

2012 Key Issues and Trends and What Really Happens Inside the Boardroom Institute for Excellence in Corporate Governance University of Texas at Dallas October 4, 2012 Dallas, Texas Richard Leblanc, PhD Associate Professor, Law, Governance & Ethics, York University

10th Annual Corporate Governance Conference

Copyright © 2011 Richard Leblanc. All rights reserved.

Agenda 2

This slideshow can be downloaded from Slideshare: www.slideshare.com/drrleblanc or email Prof Richard Leblanc at [email protected] and Richard will gladly provide you with a copy.


Agenda 3

The emerging trends and issues herein should not be viewed as a question of whether you or your board will be affected, but rather when and how, given your company and industry. “S-Ox is kindergarten compared to this.” ~ NACD director webinar, 2011.

Copyright © Richard Leblanc. All rights reserved.

Agenda 4

Ø  1. Board Composition; Ø  2. Unprecedented Regulatory Intervention; Ø  3. Governance of Executive Compensation; Ø  4. Oversight of Risk Management; Ø  5. Shareholder Activism and Value Creation; Ø  6. Conflicts of Interest in the Boardroom; Ø  7. Political Governance and Contagion; Ø  8. Information Technology;

Ø  9. CEO Succession Planning; and Ø  10. Boardroom Dynamics.


The Financial Crisis and Aftermath 5


The New Governance Normal (2012-14) 6

2012


Two Important Reports 7

n  Widespread failures in financial regulation; n  Dramatic breakdowns in governance; n  Ill prepared policy makers who did not

understand; n  Systemic breaches in accountability and

ethics;

n  High risk lending; n  Regulatory failure; n  Inflated credit ratings; n  Abuses / conflicts of interest by

investment banks;


Research, Teaching and Practice 8


Research and Practice 9


What does governance failure look like? 9

Corporate governance is about decision-making and power.


1. Board Composition: Diversity (global) 10

n Diversity = “Number one corporate governance issue”;

n Broader than women:

n Four approaches to board gender diversity: n  Nothing, US, Australia (600%é), Quebec/Norway

n EU: 40% proposed: US ~ 15%;

n Women make better monitors;

n Strategic & broad business/P&L;

n  India, UK, Ma, Sg, HK: ~ 9-10 year cap;

n Competency / skills matrix;

: visible minority, aboriginal, disability, military


Board Diversity: Private Ordering 11

Broad strategic role and industry

knowledge


Movement to Competencies: Financial Regulators 12


Director Independence & Competencies 13

n  Independence and reasonable person test;

n  Financial regulators moving on competencies now;

n  Tenure limits & link renomination to peer review;

n  Interlocking directors;

n  Service providers;

n  Personal relations + data;

n  Shareholders and control person, vs. minority.


Being a Director on a Control Block Board 14


Retirement Age 14

“Then it is moved and seconded that the compulsory retirement age

be advanced to ninety-five.”


Governance Assessment & Third Party Reviews 15


Legal and Regulatory Update 16

n Proxy Access Rule 14a-11 struck down;

n Whistle-blowing & “bounties”;

n UK Bribery Act & corruption risk;

n Internal Pay Equity and ratio (to come);

n PFP (to come) & “realized” pay;

n Bank Governance & FSB/Basel;

n  More regulation: separate deposits from proprietary trading;

SEC Chair “many of business

ethics problems severe enough to be investigated –

individuals succumbing to peer pressure”

Protected mechanism people have confidence in


Legal and Regulatory Update 17

n Proxy Access struck down;

n Whistle-blowing & “bounties”;

n UK Bribery Act & corruption risk;

n Internal Pay Equity and ratio (to come);

n Pay for Performance (to come);

n Bank Governance & OSFI Guidelines;

n  OSC Staff Notice 54-701 and NP 58-201;

SEC Chair “many of business ethics

problems severe enough to be

investigated – individuals

succumbing to peer pressure”

Protected mechanism people have confidence in

Niko Resources: 9.5M (June 11) CFPOA


White Collar Crime & Corruption Risk 17

“This city, this province, this country has a reputation of being the best location to carry out white collar crime, corporate fraud, in the industrialized world.”

Source: Spencer Lanthier, recipient of the ICD peer-

adjudicated fellowship, ICD Fellowship Awards Gala, June 9, 2011.


Governance of Executive Compensation 18

Source: Basel (May 11), Europe (Dec 10) and FDIC (Feb 11)


Malus and Risk Adjusted Metrics 19

n Clawbacks: 82% of companies (Equilar);

n Consultants: comparables vs “too complex”;

n Ex adjustment (quant and qualitative);

n Deferral and explicit ex post adjustment; n Malus; n  Case examples: quantitative/formulaic, absolute,

corporate, short-term, vs. qualitative, relative, personal, long-term: balanced weightings, stretch, discretionary, risk adjustment, tailored & independent;


Use of Peer Groups – University of Delaware 20

n Disclosure, scorecard & law of unintended consequences;

n Business model of compensation firms and peer groupings; at 50, 75, 90th percentile;

n Perpetual, compounded 17% increase;

n Lack of ranking of CEO performance; backdoor;

n  “Stewardship of Assets”; 483rd ranking; credible threat?

n Significant disparity to wage of average worker; “coddle”;

n Regulators, boards, shareholders, have not solved;


Dodd-Frank: Independent Directors & Advisors 21

“We wanted an independent consultant, and there are none.” n Duty to client paramount;

n Comp. Committee & consultant independence;

n Remuneration code (UK);

n Cost will increase (like audit);

n  Independence of Special Committees;

n  Independence of Advisors;

~Ken Feinberg, Sept. 24 2011 to academics at Wharton conference


Oversight of Risk Management 22 22

Strategic

Financial

Information Technology

Human Resources

Accounting & Reporting

Integrity Operations

• Strategic Planning • Capital Investment • Corp. Organization

• R&D

• Acquisitions • Divestitures/Closures

• Manufacturing Strategy • Functional Location • Financial Planning &

Modeling

• Risk Management - Insurance • Risk Management - Interest Rates

• Investments • Financing

• Liquidity/Cash Flow • Credit/Bad Debts

• Performance Management

• SEC Reporting

• Financial Forecasts • Tax Accounting & Reporting

• Management Reporting

• Reputation

• Management Fraud • Employee/Theft/Fraud • Illegal Acts • Resource Misuse • Ethics

• Brand Image

• Tone At The Top

• SG&A • Capital Projects

• Quality • Customer Credits/Rebates

• Inventory Management • Procurement

• Training

• Perf/Rewards Alignment • Availability of Skilled Staff

• Communications • Morale and Job Satisfaction

• Leadership • Salary Inflation

• Knowledge Assets • Empowerment

• Access • Availability

• Information Relevance • Continuity

• System Integrity • Technology Infrastructure

• Tech Development & Integration • IT & Business Strategic Alignment

• Outsourcer Management • Cost Control

• Safety • Environmental Compliance

• Govt. Compliance • Reliability

• Operating Costs • Sales and Marketing

• Contract Compliance • Capacity Planning

• Engineering • Repair Services

Environment • Political • Legal

• Regulatory • Business Interruption • ExternalTheft/Fraud/

Illegal Acts • Business Practices

• Innovation

Customers • Customers’ sales

• Planning • Reliability

• Relationships • Contracts

• Standards and Expectations

• Customer viability

Suppliers • Supply • Pricing • Quality

• Relationships • Billing

• Logistics

• Risk Management – Foreign Exchange

Rating Agencies • Maxtor credit • Vendor terms (guarantees,

advance payments)

• Workforce management

Technology • Product

Obsolescence

• Tax Strategies • Debt Compliance

• Lease Compliance

• Statutory Reporting

• Analyst Communications

Competitors

• IP Protection

Source: N. Marks

“We missed it.”


Oversight of Risk Management 23 23

Strategic

Financial

Information Technology

Human Resources

Accounting & Reporting

Integrity Operations

• Strategic Planning • Capital Investment • Corp. Organization

• R&D

• Acquisitions • Divestitures/Closures

• Manufacturing Strategy • Functional Location • Financial Planning &

Modeling

• Risk Management - Insurance • Risk Management - Interest Rates

• Investments • Financing

• Liquidity/Cash Flow • Credit/Bad Debts

• Performance Management

• SEC Reporting

• Financial Forecasts • Tax Accounting & Reporting

• Management Reporting

• Reputation

• Management Fraud • Employee/Theft/Fraud • Illegal Acts • Resource Misuse • Ethics

• Brand Image

• Tone At The Top

• SG&A • Capital Projects

• Quality • Customer Credits/Rebates

• Inventory Management • Procurement

• Training

• Perf/Rewards Alignment • Availability of Skilled Staff

• Communications • Morale and Job Satisfaction

• Leadership • Salary Inflation

• Knowledge Assets • Empowerment

• Access • Availability

• Information Relevance • Continuity

• System Integrity • Technology Infrastructure

• Tech Development & Integration • IT & Business Strategic Alignment

• Outsourcer Management • Cost Control

• Safety • Environmental Compliance

• Govt. Compliance • Reliability

• Operating Costs • Sales and Marketing

• Contract Compliance • Capacity Planning

• Engineering • Repair Services

Environment • Political • Legal

• Regulatory • Business Interruption • ExternalTheft/Fraud/

Illegal Acts • Business Practices

• Innovation

Customers • Customers’ sales

• Planning • Reliability

• Relationships • Contracts

• Standards and Expectations

• Customer viability

Suppliers • Supply • Pricing • Quality

• Relationships • Billing

• Logistics

• Risk Management – Foreign Exchange

Rating Agencies • Maxtor credit • Vendor terms (guarantees,

advance payments)

• Workforce management

Technology • Product

Obsolescence

• Tax Strategies • Debt Compliance

• Lease Compliance

• Statutory Reporting

• Analyst Communications

Competitors

• IP Protection

Source: N. Marks

“We missed it.”


Ex:“Top 15” ERM-related Risks, York University 23

9.  Organization Structure Risk.

10.  Performance Measurement Risk.

11.  HR Academic Risk.

12.  Reputation Erosion Risk.

13.  Strategic Labour Relations Risk.

14.  Enrolment Targets Risk.

15.  Resource Allocation Risk.

1.  Government Policy Risk.

2.  Competitor Risk.

3.  Change Readiness Risk.

4.  Capital Availability Risk.

5.  Leadership Risk.

6.  HR Non-Academic Risk.

7.  Student Satisfaction Risk.

8.  Communications Risk.


Oversight of Risk Management, continued 24

Source: Basel (May 10), Europe (Dec 10) and FDIC (Feb 11) Copyright © 2011 Richard Leblanc. All rights reserved.

Internal Controls – Your Tools to Customize 24

§  Segregation of duties §  Restricted areas

§  Approvals §  Reconciliations §  Record retention

§  Safeguarding and asset accountability §  Management override

§  Manual controls §  Data Security

§  IT, inventory and other controls; §  Areas of vulnerability and fraud schemes;

Source: R. Leblanc, Assessment methodology for audit committees


Proper Internal Audit and Controls 25

n  Independent;

n Compensation;

n Stature / Hiring / Firing;

n Work plan approved;

n Link to Audit Committee ~ Executive Sessions;

n Gross to residual risk for all material business risks;

n Testing design and effectiveness of all Internal Controls;


Oversight of Risk Management, continued 26

Source: Basel (May 10), Europe (Dec 10) and FDIC (Feb 11) Copyright © 2011 Richard Leblanc. All rights reserved.

Internal Controls – Your Tools to Customize 26

§  Segregation of duties §  Restricted areas

§  Approvals §  Reconciliations §  Record retention

§  Safeguarding and asset accountability §  Management override

§  Manual controls §  Data Security

§  IT, inventory and other controls; §  Areas of vulnerability and fraud schemes;

Source: R. Leblanc, Audit Committee Review Copyright © 2011 Richard Leblanc. All rights reserved.

Comprehensive Risk Governance 26

Audit Committee (or equivalent)

Comp. Committee (or equivalent)

Nom/Gov. Committee (or equivalent)

Risk

Material financial and non-financial business risks & IC reporting

CFO

Committee Charter Coverage

CS, GC

S-Ox Dodd-Frank

EA CC GA, SF

Board of Directors

CRO

ICFR IA

CEO

ICNFR

Basel/King

RAP

SHRO

?


ERM Risk Register Template 26

§  University Strategic Direction

Risk

Inherent Risk Before Response

Overall I.R. Rating Before

Response

Risk Management Strategy & Points of Reliance

Residual Risk After Response

Overall R. R. Rating

After Response

Accountability & Action Required

Proba-bility Impact Proba-

bility Impact

University Strategic Directions

IT Infrastructure will not support University initiatives (p. 9)

4 - Likely

5 - Major

Reduce ICT Foundational Document ITS Unit Plan Data Use Policy Etc.

3 - Possible

4 - Major

Complete plan Develop & implement college & admin unit plans including contingency & recovery • Etc.

High Critical importance to the success of the University in meetings its financial and non-financial goals

Moderate Important but not critical to the success of the University in meetings its financial and non-financial goals

Low Risk does not have a material bearing to the success of the University in meetings its financial and non-financial goals

Source: University of Saskatchewan


Weaknesses of Risk Management 27

n  “Risk takers” & compensation assurance – see new banking reforms;

n Non-financial risks and ICNFR: operations, technology, reputation, health, safety, security;

n Management knows the risks;

n Board:

n Protect Internal Assurance;

n Complete, coordinated, independent assurance;

MGMT Certif.

Integrated Mapped Assurance

Internal Assurance

Top Risk Families

External Assurance


Comprehensive Risk Governance 28

Audit Committee (or equivalent)

Comp. Committee (or equivalent)

Nom/Gov. Committee (or equivalent)

Risk

Material financial and non-financial business risks & IC reporting

CFO

Committee Charter Coverage

CS, GC

S-Ox Dodd-Frank

EA CC GA, SF

Board of Directors

CRO

IA

CEO

Basel/King

RAP

SHRO

?


Non-Financial Risks, Assurance: What’s coming? 29

n  Governance of non-financial risks; n  Committee(s)? Board? Integrated reporting, agendas, workplans

so all families of material risks assured and reported;

n  Assurance mapping over all business risks, internal controls and compliance;

n  “Integrated” reporting: Big4 see as annuity;

n  Board expertise in sustainability / stakeholder relations;

n  Incorporate non-financial leading indicators (customer satisfaction, employee engagement, culture) into compensation metrics;


Shareholder Activism and Value Creation 30

n  The “compliance” board vs. strategy and value add;

n  Money being “left on the table”;

n  Director selection: industry expertise and value creation;

n  Elevating strategy: full understanding of business model, causation & KPIs;

n  Responding to activists and your duty;

n  Activists may know more about your company than you do: this should not be the case;

n  Engaged, focused, results-oriented & disciplined board and chair;


Shareholder Engagement 31

n  Shareholder engagement:

1  active monitoring of companies, 2  engaging in dialogue with the board, 3  using shareholder rights, including voting and

cooperation with other shareholders; n Majority voting, say on pay and proxy access:

ICD, CCGG debate (1 April 2011);

n Shareholder stewardship codes / obligations;

n Say-on-pay as engagement catalyst (EU);

n Dual class vs. minority shareholders (EU);


End to End Vote Confirmation 32

n  University of Delaware Report and The Quality of the Shareholder Vote in Canada

n  Timely.

n  Accessible.

n  Accurate.

n  Certain.

n  Cost-effective..ness

CSCS leadership


Looking to the Future 33

n Elections; LSUC; YUFA; disenfranchisement;

n Obligation will be on issuers to invest in technology and websites – to enable meaningful shareholder coordination and proxy seeking (EU);

n Obligation on intermediaries to have ICs and address CoI;

n  If you do not engage, dissident shareholder will;

n Cost-effective and pull technology intelligence;

n This area will be regulated in the future;


Conflicts of Interest and Transactions 34

n Oversight and special committees / independence;

n Boards have considerable latitude in self-governing conflicts;

n Conflicts among shareholders, directors, control persons;

n Conflicts by proxy advisors – SEC now studying;

n Company Code of Conduct, monitoring and enforcement;

n Mechanism for oversight by the Board;


Political Governance and Contagion 35

n Contagion

G-7


SM & Governance: “Power of a Single Tweet” 36

n  Exponentially interconnected;

n  Brand, reputation, ICs;

n  Email, press clippings slow, limiting, outdated;

n  Independent analytics (2 ex.);

n  “Communications, IR, public policy, SM”;

n  Gender/age effects (ex.);


Boardroom Technology – Trends & Touchpoints 36

n Browsers eclipsed by “ipads overwhelming winner, with no close second” – “86% of Fortune 500” (WSJ);

n Paperless boardroom (example) 3-9 month hybrid;

n To come: written consent, annotation, highlighting; voice recognition; “gestures”;

n  IT on director matrix; n Director experience: interactive dashboard with

collaboration, mobility, security, transparency; n Cybercrime: lack of knowledge, controls: you are

being, or will be hacked at some point; n Social media policy: controls vs opportunity;


SM & Governance: “Power of a Single Tweet” 37

n  Exponentially interconnected;

n  Brand, reputation, ICs;

n  Email, press clippings slow, limiting, outdated;

n  Independent analytics (2 ex.);

n  “Communications, IR,

public policy, SM”; n  Gender/age effects (ex.);


CEO Succession Planning and Entrenchment 38

n Outsiders cost more and perform worse, evidence indicates;

n Resistance by incumbent;

n Average board: 2 hours per year;

n Lack of immediate successor: 39% of companies; investors demanding

n Steps: document skills and experience profile; pick model, have planned-for succession;

n Boards increasing say in assurance and C-Suite;


Board Dynamics: Boardrooms of the future 39


Board Dynamics and Behaviour 40

Board Dynamics

Board-Management Relationship

Undue Influence

IT & Reporting

Director Behaviour

CEO Posture

Chair Leadership


Board Dynamics: Governance Red Flags 41

n Bully CEO; n Disengaged Directors; n Cliques / factions; n Weak Chair; n Board denial; n Body language; n Undue influence over compensation; n  Inadequate risk, internal controls; n Lack of / ineffective Internal Audit;


Red Flags, continued 42

n Integrity and information/transparency issues; n Stakeholder Directors; n Micro-Managing Directors; n Tone at top and ethical reporting; n Poor CEO / executive succession planning; n Non renewal of Directors; n Happy face questionnaires; and

n Lack of governance disclosure and transparency;


Governance Disclosure 43

n Canadian regulator: “unacceptable”;

n Stakeholder communication will be via visual, digital media, not paper, email or even in person;

n Meetings and voting will be digital;

n Boardroom disclosure is a missed opportunity by many companies: Inferences are made;

n Accessibility, mobility, interconnectedness is up and cost is down;

n Crisis planning – media is primary reputation risk now;


“Comply or Explain” Regime 44

Source: Basel (May 10), Europe (Dec 10) and FDIC (Feb 11)

n CSA Staff Notice 58-306 (Dec10): “unacceptable”;

n EU Submission


Thank you! 44


Contact Information

Professor Richard Leblanc Faculty of Liberal Arts & Professional Studies York University tel: (416) 736-2100 x 33744 Email: [email protected]

Twitter: http://twitter.com/DrRLeblanc

Blog: http://www.canadianbusiness.com/author/richardleblanc

http://ca.linkedin.com/in/rwleblanc

LinkedIn Group: Board Advisors

45

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