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Archived - Spencer Stuart/Conference Board of Canada National Awards in Governance, Speech by Mr. L.R. Wilson, February 12, 2008 - Toronto

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Governance and Competitiveness

I am honoured to be with you here this evening to celebrate this year’s winners of the Conference Board/Spencer Stuart National Awards in Governance.  I hasten to congratulate both the winners and the top contenders, and the sponsors and organizers of the Awards, Anne Golden of the Conference Board, Andrew MacDougall of Spencer Stuart and Phillip Crawley of the Globe & Mail, along with the members of the Awards Advisory Board, many of whom I know very well.

This is a highly significant recognition event celebrating something important.  This afternoon, I also had the honour of presenting diplomas to the 2007 Directors College graduating class in my capacity as Chancellor of McMaster University, one of the partners in the Directors College.  Congratulations, once again, to those graduates with us this evening, and to Chris Bart of McMaster.

I was particularly interested in the guidelines for this year’s Governance Awards.  “Boards that have achieved something important”. “Something important” including having:

  • Operated in an ‘anticipatory mode’ to take advantage of opportunities or mitigate risks.
  • Provided leadership for the organization to be effective in a globalbusiness context.
  • Helped create organizational strength and met stakeholder expectations on tough issues (e.g. executive succession, compensation, etc.).
  • Managed a crisis.

These guidelines fit well with the subject of my remarks this evening.

I have labelled my speaking notes “Governance and Competitiveness”.  In so doing I intend to draw attention to what I would suggest is one of the most important governance roles of boards of directors.  I should point out that my remarks are focussed on the governance of public companies in the private sector, but many of the issues, I would suggest, are also relevant to the governance of organizations in the public and not for profit sectors.  I have always found the governance and management of these entities even more intricate and difficult for obvious reasons — particularly those related to the complexity of performance measurement and adjudication.

The stockholder–inspired corporate governance movement of the past 15 years, along with legal and regulatory initiatives such as Sarbanes Oxley, and stock exchange guidelines, have given rise to huge improvements in governance requirements, as well as board structures and composition.  A number of studies in different countries have looked at the link between “good” corporate governance procedures and performance, and have generally determined that better governance scorecards are positively correlated with better performance.  However, here in Canada some of our most successful companies don’t score high on corporate governance questionnaires because of dual class share structures.

I certainly believe that better governance (broadly defined) does contribute to greater corporate success over the medium and longer term — and I am sure all of you in this room tonight share that view.  And just to be clear, we are talking here about corporate governance in the broadest sense, not just about those items typically laid out for box–checking or rating on a governance questionnaire.  We are referring to important qualitative factors as well — things such as tone and corporate culture, the relationship between the board and senior management, continuous effective performance assessment, and clarity of corporate mission and direction.  We are also referring to those things mentioned in your criteria for the Governance Awards.

I will argue tonight that we cannot and must not be complacent about the governance progress which has been made.  Establishing better guidelines and procedures — achieving better scores in the annual ROB corporate governance survey — demonstrating greater attention to board fiduciary and compliance functions — are clearly necessaryconditions for improved corporate governance.  But business in every sector is changing at breakneck speed.  Globalization may mean different things to different industries and services, but the challenges and opportunities created by global competition affect every firm and individual.  And it is this aspect of corporate governance — of the responsibilities of boards of directors for global competitiveness, which I want to address tonight.

Before I do, let me remind us all of the enormous changes in corporate governance over the past 25 years.  Perhaps two anecdotes from my own experience might serve to illustrate.

In 1982, I joined the board of one of Canada’s leading financial institutions — a trust company.  Board meetings were held monthly at the company’s head office in Toronto.  The directors would arrive and assemble in the hall outside the boardroom just before 11:00 a.m.  A large long case clock in the hall would strike 11, the doors to the boardroom would open, and we would file in to take our assigned seats at a large table.  There were about 30 directors.

Having been raised in the Presbyterian church, the meeting format was not unfamiliar to me.  The Chairman, who was also the CEO, would conduct the business of the meeting somewhat like a prayer meeting, and we were invited at appropriate times to say “Amen” (that is to say, raise our hands to signify approval), and by 12:15 p.m. the meeting would be terminated, and we would adjourn for lunch.

After 3 or 4 meetings, I asked one of the senior directors, who was a good friend, if the board ever discussed the business of the company.  He chuckled, and told me of one of our board colleagues, who had joined the board after a distinguished career as the boss of the consulting practice of a leading accounting firm.  After a few meetings he raised his hand and said, “Mr. Chairman, I wonder if I could ask a question about the policy of the company with regard to such and such”.  The Chairman glowered across the table and replied, “No, you can’t!”.

During the same time period, at a meeting of the board of a Canadian public company, controlled by a large international corporation, we the directors were advised that a decision on the appointment of a new CEO was imminent.  The Chairman was asked whether the board would be involved in the selection process.  Somewhat surprised, he replied.  “Do you think it should be?”.

Clearly a whole lot has changed since those days.

So what have been the changes over the past quarter century?  Well, let me just list some of them — I’ll pick 10, you may think of others.

  • Smaller board size — from 20 — 40 for large corporations, to 10 — 20.
  • Greater diversity (not just gender) in the composition of boards.
  • More “independent” directors.
  • Strengthened audit committees and the role of “financial experts” and the work of the company’s auditors.
  • The “non–executive” chairman.
  • Education programs for directors.
  • The emergence of Governance advocates, “experts” and activists.
  • A more active and interactive role for institutional shareholders.
  • Greatly increased disclosure and transparency — proxy statements used to be 10–20 pages, now they are upwards of 100 pages or more.
  • Increased time commitments and work schedules for board members.

The focus on better corporate governance has certainly brought about enormous change in a relatively short period.

One of the hats I wear these days is that of Chairman of the Federal Government’s Competition Policy Review Panel.  This Panel was formed last July to examine issues affecting Canada’s productivity and competitiveness in a rapidly–changing international context.  It includes Brian Levitt, who is with us tonight, Murray Edwards, Isabelle Hudon and Tom Jenkins.  We spent the first 3 months getting our minds around some of the issues, and issued a consultation paper at the end of October entitled “Sharpening Canada’s Competitive Edge”.  Our job is to focus on those rules, regulations, policies, and initiatives or interventions by Government which affect the competitiveness of Canadian businesses, and of the Canadian economy as a whole.  We have received 150 submissions and are now engaged in extensive consultations with those who have sent in submissions.  We have also commissioned some 20 studies and research papers.  Our consultation paper, and all of the submissions we have received, are posted on our web site www.competitionreview.ca, for those of you interested in following our progress. 

On page 4 of our consultation paper we point out:

“The answers will not come from the Panel or the Government alone.  The Panel recognizes the primary role to be played by the management and Boards of Canada’s private sector companies. While the focus of the Panel’s work is on public policy, Canadian success will depend on the commitment and abilities of Canada’s private sector”.

And this brings me to my key point this evening, namely the role of boardsof directors in fostering competitiveness.  Jim Goodfellow of Deloitte’s spoke to me a couple of months ago about his observation that boards were spending more and more time on compliance issues — that perhaps in the wake of Worldcom and Enron, and of Sarbanes Oxley, with the pendulum of board oversight swinging towards audit, control and risk management issues, not enough board attention was being devoted to business strategy, and to dealing with the challenges and opportunities of intensifying global competition.

My own experience, and the work of our Panel leads me in the same direction.  I am very reluctant to generalize here, however, as many corporations and their boards have been, and continue to be, well ahead of the curve in this regard.  But let me offer a few observations on the title of my talk tonight, “Governance and Competitiveness”.  Some of my suggestions will be self–evident. 

My first comment relates to the board’s responsibility for the medium and longer–term strategy of the corporation.  I would argue that good governance — successful governance — invariably encompasses relentless attention to competitiveness.  This means dedicated oversight by the board of the strategic thinking and assessment process — including a regular review of the initiatives and progress of competitors, or emerging competitors, all around the world.

Second, governance discussions have tended to focus on the independenceof directors as a key element in board oversight.  I would suggest that this needs to be balanced by the need for experienced men and women who understand the business of the corporation, and the rapidly changing international business environment.

For 15 years I was a director of Tate & Lyle, a U.K. public company.  This company, and most other U.K. public companies, had a board comprised of “executive directors” and “non–executive directors”.  The “non–executive” directors were a majority of the board, and they were truly independent.  But there were also 4 or 5 or 6 “executive” directors who managed the company’s businesses and who were able to fully present the business risks, challenges and opportunities.  I believe the board, as a result, was able to act with better overall information.  Not that the proposals of management always held sway — far from it.  And having strong, independent “non–execs” was vital, as it always is with any board.  But the balance was useful.  I am not suggesting that the U.K. model is a perfect fit for us in Canada, but the presence on the board of relevant expertise is, in my view, highly desirable.

My third suggestion relates to the role of the board in selecting and compensating the Chief Executive and his or her executive team.  With increased scrutiny by shareholders and the media, of people and pay issues, boards must devote increased time and attention to succession planning and to short and longer–term compensation issues. Disclosure requirements are increasing rapidly, and Board deliberations on succession and compensation issues must take on greater weight.  These are tricky issues, and missteps here cannot be dismissed simply by arguing that the board checked all the boxes.  Good governance entails good judgement when it comes to people and pay.

Finally, leadership is critical. Strong, experienced, ethical men and women are the key to successful governance.  Structures, procedures, and compliance oversight mechanisms are important building blocks, but success over time — competitiveness in an increasingly global context — depends on consistently good  decisions by dedicated people applying foresight and sound judgement.

I have spent a good part of my working life serving on corporate, as well as public sector and not for profit boards, and believe that governance matters — it matters hugely.  Board work has become much more demanding, and at the same time far more interesting and important during my business lifetime.  I would simply suggest that the governance revolution of the past 15 years should recognize and embrace more explicitly the board’s role in fostering global competitiveness as one of its pillars.

My congratulations once again to those being honoured here this evening.