Companies Energized by Need to Change Practices

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Regaining investor confidence and trust is a problem faced by public companies as well as the bodies that govern them. As such, many companies — both public and private — have been proactively reviewing the actions and structures of their own governance frameworks. However, due to the lingering financial impact and profile of Enron and a number of subsequent corporate scandals, the emphasis on a uniform approach to corporate governance is top-of-mind with executives in Canada.

Understanding corporate governance is a full-time job. Just ask Mike Harris, Partner and Leader of the Canadian Corporate Governance Practice at PricewaterhouseCoopers LLP.

"There's a real appetite for education about where corporate governance is heading," Harris says. "With all the change in the marketplace, people are hungry for information about what other companies are doing, not just information about the rules and interpretations of them. Whenever PricewaterhouseCoopers holds a directors' briefing about corporate governance rules and best practices, the next of which will take place on June 9, in Toronto, the seats fill quickly."

"A harmonization of governance practices is now taking place between Canada and the U.S. in many respects," says Kevin J. Dancey, FCA, Canadian Senior Partner and Chief Executive Officer at PricewaterhouseCoopers LLP. "For example, the role and composition of the audit committee are similar. However, the American approach has been to set stricter standards governing the process companies must undergo before they are listed on the New York Stock Exchange and NASDAQ. Other countries, including Canada and Australia, have tended toward a system of expected best practices around board independence and good board processes."

Most of the new corporate governance rules reflect the content of the Sarbanes-Oxley Act passed in 2002 in the United States following the high-profile corporate failures of Enron and WorldCom. In Canada, it has been proposed that companies not only disclose whether or not they are following the best practices, but if a board decides not to follow the best practices, it must explain why.

"Having to disclose why the majority of the board members are not independent of the company or why you've elected to forgo a mandated charter is putting the right kind of pressure on a company to abide by these best practices," Harris says.

Up to now, the standards for the best boards have been based on mechanical or process issues such as the composition of the board, the independence of the members and the number and type of meetings. But there is a move to consider a board's performance and effectiveness based on competency and skills.

Richard Leblanc, Certified Management Consultant, and Professor at York University's Schulich School of Business in Toronto, is a world leader in measuring a board's effectiveness based on the behaviour of the board and the individual directors. For his recently completed doctoral PhD dissertation, Leblanc spent five years studying corporate governance from inside the boardrooms of 39 large Canadian organizations and interviewing almost 200 senior directors. "It's only from inside the boardroom that one can measure the effectiveness of a board of directors," Leblanc says. "For that reason, it is time to introduce some rigour into how boards are selected, how they are run and what they do."

The Ontario Securities Commission relied on Leblanc and his research when putting together its proposed new guidelines for corporate governance, Multilateral Policy 58-201: Effective Corporate Governance. These proposals outline the best practices for board composition, mandate, position descriptions, orientation and continuing education of directors, a code of business conduct and ethics, nomination of directors, compensation and regular board assessments.

"The key to unlocking shareholder value is the strategic role played by the directors, and that's a direct function of the competency and skills of individual directors, how they work together as a team and, in particular, the leadership skills of the chairman," Leblanc says.

To ensure a high level of competency among the directors, Leblanc says a board needs position descriptions for individual directors, the chairmen of the committees, and the chairman of the board. Once the descriptions of the positions are in place, the directors need to assess themselves, each other, the chairman and the board as a whole. After that, the key is to act upon what the assessments say — whether that is to remove the chairman or to appoint new directors.

"Should directors be immune to accountability to shareholders and to performance?" Leblanc asks. "Ultimately, where we need to go is for board tenure to be based on performance."

Leblanc expects some push-back from directors on this point because many directors have been used to informal processes and might be uncomfortable assessing one another in this manner.

But full assessments of all directors allow a board to use what Leblanc calls a 'behaviour matrix' to see what kinds of directors need to be appointed to strengthen the board. By crossing the competencies and skills that the board believes it needs to do its job, whether it currently has them or not, with the competencies and skills of the current directors, it will give a clear indication of who the board should be selecting.

Leblanc says the best boards he studied used these processes as a matter of course and have been recognized for their governance standards. Although this would be a dramatic change for many boards, Leblanc describes it as "an inclusive, constructive and enabling process."

Harris has also found that while some companies are adopting the new standards only because they must, other companies are being energized by them.

"They see the need to change as a positive development. If they are going to be working on their processes and documenting them, many are taking the time to benchmark and re-engineer. It is a potential way to gain efficiency," says Harris.