CGTI, Organizational Governance- William Swirsky

1. Organizational Governance:
What the 21st
Century Board Member Needs to Know for
- Short Term Success (60)
- Long Term Relevance and (30)
- Regenerative Sustainability (10)
Understanding the New Board Game of
Accountability
William J.L. Swirsky MBA, FCPA, FCA, ICD.D
1

2. 2
Principles of Good Governance

3. 1.1. Create a framework for oversight and accountabilityCreate a framework for oversight and accountability
2.2. Structure the board to add valueStructure the board to add value
3.3. Attract and retain effective directorsAttract and retain effective directors
4.4. Continuously strive to improve the board’sContinuously strive to improve the board’s
performanceperformance
5.5. Promote integrityPromote integrity
6.6. Recognize and manage conflict of interestsRecognize and manage conflict of interests
7.7. Recognize and manage riskRecognize and manage risk
8.8. Compensate appropriatelyCompensate appropriately
9.9. Engage effectively with shareholdersEngage effectively with shareholders
3
Practices of Good Governance

4. CANADIAN SECURITIES ADMINISTRATORS
REQUEST FOR COMMENT
PROPOSED REPEAL AND REPLACEMENT OF
NATIONAL POLICY 58-201
CORPORATE GOVERNANCE GUIDELINES, NATIONAL INSTRUMENT 58-101
DISCLOSURE OF CORPORATE GOVERNANCE PRACTICES, AND
NATIONAL INSTRUMENT 52-110 AUDIT COMMITTEES
AND COMPANION POLICY 52-110CP AUDIT COMMITTEES
[Dated: 12/19/2008
1.1. Create a framework for oversight and accountabilityCreate a framework for oversight and accountability
2.2. Structure the board to add valueStructure the board to add value
3.3. Attract and retain effective directorsAttract and retain effective directors
4.4. Continuously strive to improve the board’s performanceContinuously strive to improve the board’s performance
5.5. Promote integrityPromote integrity
6.6. Recognize and manage conflict of interestsRecognize and manage conflict of interests
7.7. Recognize and manage riskRecognize and manage risk
8.8. Compensate appropriatelyCompensate appropriately
9.9. Engage effectively with shareholdersEngage effectively with shareholders
4
NEWS from the Canadian SecuritiesNEWS from the Canadian Securities
AdministratorsAdministrators
November 13, 2009November 13, 2009
Withdraw proposals to implement newWithdraw proposals to implement new
“governance regulations/guidance”“governance regulations/guidance”

5. @ futureinnovate.net and presenters,
2010, 2014,2015
5
Business Taxonomies: Changing Paradigms

6. 6
Skills now required in the C-Suite

7. @ futureinnovate.net and presenters,
2010, 2014 7

8. The future is unknowable.The future is unknowable.
Its strategies aren’t.Its strategies aren’t.
Vision is just imaginationVision is just imagination
if you aren’t prepared to actif you aren’t prepared to act
8

9. BirthdayBirthday
GreetingsGreetings
SOXSOX
EnactedEnacted
July 30,July 30,
20022002
9

10. The SEC has merged several offices and functions
to create a
division of risk, strategy and financial
innovation.
New from the SEC ….
September 16, 2009
10

11. The division "combines the SEC's
• Office of Economic Analysis,
• Office of Risk Assessment
• and other functions.
It will assume those areas as well as
• strategic and long-term analysis,
• identification of new trends in financial markets,
and
• risk to the financial system."
New from the SEC….
September 16, 2009
11

12. Corporate Folklore
12

13. BRE-X
Minerals
13

14. November 12, 2008
…federal watchdog can assess 5
categories of Intervention Stage
Rating(ISR) …
“0” to “4” <non-
viability/insolvency imminent>
…
ISR goes from
“0” to “1” …
February 2009 OSFI assessed
Manulife at the 2nd
highest
composite risk
rating
In December, 2008…OSFI met with
the board…
concerned with…
”board-approved risk-tolerance
policies” credit risk management
and asset-liability risk management
as potentially higher risk areas…
wanted board to develop “action
plan” with “specific trigger points for
action to stay compliant …
and that
the board add members with
actuarial or risk-management
experience
DEADLINE: March 31, 2009
The Financial Post – January 30, 2010
By the end of 2008 senior management
and the board had acted and thought
that they had “weathered the storm” –
THEY THOUGHT WRONG
OSFI thought that management
had deliberately misled the
board….. Deloitte was hired to
conduct an independent review
of
the insurer’s risk-management
processes for its segregated fund
and variable annuity products,
14

15. 15

16. 16
Who is Responsible for What?
1.Internal Auditor
2.In-house Counsel
3.Advisors to the Board
4.Consultants to the
Board
• Compensation
• Actuary
• Investment Banker
5.Corporate Counsel
6.Investor Relations
7.Others ….

17. 17
Who is Responsible for What?
1. Financial data <numeric>
• Estimates
• Off-balance sheet
2. Non-financial data <numeric>
• Credit risk
• Liquidity risk
• Market risk
3. Text <non-numeric>
4. Graphs, charts, symbols
5. Others ….

18. Do you know your PWR score?
18

19. Getting to a PWR score!!!
Name (Company, Organization, Institution)
P riorities are right:
• What needs to be done?
• Connected to mission?
• Correct?
• Clear?
W ho do we have that are right:
• Have we hired the right people?
• Deployed the right people against the
right priorities?
• Understand the team strengths and risks?
• Has the team been developed?
R elationships that work :
• Internal and external connectivity
• Communications coordinated?
• Individuals Committed to mission, leader, team?
• Leadership that can motivate/challenge team?
PScore 1 thru 10
Max 10
WScore 1 thru 10
Max 10
R
Score 1 thru 10
Max 10
PxWxR
Score:
Max 1000
5x5x5=125; 6x6x6=216; 7x7x7=343; 8x8x8=512; 9x9x9=729
From POWER SCORE .. by Geoff Smart, Randy Street, Alan Foster .. 2015 – Ballantine Books, New York

20. 20
Defining financial expertise
• Accountant – CPA –CA/CMA/CGA
• Business Executive – MBA
• Finance Professional – CFA
• Experienced in C-Suite – CEO, CFO, COO, CIO, CRO
• Lawyer – M&A
• Board experience – C.Dir, ICD.D
• Novice

21. Board Responsibilities Demand Information
• External Accountability
– Investors
– Regulators
• Internal Oversight
– CEO & executives
– Strategic plans
– Operating
performance
– Systems, controls,
risk
– Regulatory
compliance
The Board of
Directors
Management,
Policies,
Systems
Audit Committee
The Shareholders
Chair
Chair
Chair Chair
Audit Committee
External
Auditors
21

22. 22
Measuring Performance
Product/Service
Quality
Customer
Satisfaction
Environment &
Sustainable
Development
Health & Safety
Intellectual
Capital
Innovation
New Product
Introduction
Financial
Measures
(GAAP)
Senior Management
and The Board
M&A, Financing
Activities
Pensions, Post
Employment
Benefits
External Communications
And Formal Reporting
How to
Interpret
How to
Integrate

23. Proxy
Material
Analyst
Material
& Calls
Financial
Performance
Non Financial
Performance
Historical Future
Prospects
Reporting Package
23
The Changing Corporate
Reporting Universe

24. 25
Six Principles for MD&A
(Update #3)
1. An entity should disclose information in its MD&A that
enables readers to view it through the eyes of
management.
2. MD&As should complement as well as supplement
financial statements
3. MD&A’s should be complete, fair and balanced, and
provide information that is material to the decision-making
needs of users.
4. A forward-looking orientation is fundamental to useful
MD&A reporting.
5. The focus in MD&A’s should be on management’s strategy
for generating value for investors over time.
6. To be useful, MD&A’s should be understandabe relevant,
and comparable

25. 26
Exhibit 1-Strategic Management of Information for Boards

26. 27
Exhibit 2 -Strategic Management of Information for Boards

27. 28
Exhibit 4 -Strategic Management
of Information for Boards
CAUTION:
Information UFOs in the Area !!!
• Useless
• False
• Outdated

28. “ A wealth of
information creates a
poverty of attention”
Hebert Simon
Nobel Prize Laureate
Economist
29

29. 30
So what does accountability look like during the year?So what does accountability look like during the year?
Board Audit Committee IRC Not for Profit
Board Meetings 10 N/A N/A 10
Investment Committee
Meetings
10 to 20 4 4 to 10 N/A
Audit Committee 4 + 1 4 +1 N/A 6
Compensation Committee 6 to 10 N/A N/A 2
Governance Committee 2 to 4
Education Sessions 4 to 6 2 to 4
Annual Meetings/SessionsAnnual Meetings/Sessions 37 to 55 4 + 1 4 to 10 18
Meetings with CFO 4 to 6 6 to 8
Meetings with Internal
Auditor
4 to 6
Meetings with External
Auditor
6 to 10 1 to 2
Meetings with External
Actuary
2
Annual MeetingsAnnual Meetings 16 to 24 7 to 10
Chair of Audit Committee

30. 31
So what does governance mean in reality…who do we listen to?So what does governance mean in reality…who do we listen to?
Board Audit
Committee
IRC Not for Profit
External Auditors (Big 4) 2
Big 4 Big 4 Big 4
External Actuary Big 3
Internal
Auditors
Internal resource •Boutique Internal
resource
N/A
I/A Peer reviewer •Boutique
Investment Mgrs • large number • 4 + Big 3 Specialized
Boutique
N/A
Business /Real
Estate Valuations
•Big 4 (2)
•Specialists (2)
Accounting/
Disclosure advice
Big 4 (2) Big 4 Big 4 (IFRS)
Compliance Auditors •Big 4 (2)
•Big 7
Compensation •Big 3
•Boutique
Ultimate Auditor OAG PAG
Business Continuity Big 4 Big 4
External Risk Advisor •Boutique

31. Evolution of Business Reporting
Integrated
Business
Performance
Reporting
Integrated
Business
Performance
Reporting
Guidance for
MD&A
(Annual and
Quarterly)
Guidance for
MD&A
(Annual and
Quarterly)
GAAP Financial
Statements
(annual
& quarterly)
Time
Financial
Capital
Concepts
Value
Creation
Concepts
32

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33. 34

34. 35

35. 36

36. eHealth:Lessons
from the Media
To get to “assurance” it took:
1.Board
• 1 CPA-CA and 1 Lawyer
2.Finance, Investment +Audit
Committee
• 2 CPA-CAs+2 Lawyers
3.Financial Audit
• ErnstYoung
4.Compliance Audit
• Malette
5.Performance Evaluation Audit
• KPMG
6.Project Claims Audit –
• Samson
7.Conformance Audit –
• Boutique firm ( In progress)
8.Investment Performance and
Compliance
• Mercer
9.OAG Audit
10.Senior staff complement: 4 CPA-
CAs (Director of Compliance; COO; ED; CFO(for
start-up period) 37

37. 38
Value
MeasurementPerspective
Transparency
Consistency
Completeness
Financial
+
Non-financial data
Objectivity
Reliability
Measurement Taxonomy of Terms
Completeness
Materiality
or
Significance
Completeness
Relevance

38. 39
Changing
Accountability in
Disclosure:
Compensation

39. 40
Compensation Related Risks
• Terms not clearly defined
or could easily be
misinterpreted
• Non GAAP measures used
for measuring performance
that are not clearly defined
• Disconnect between
“principles” and
arrangements
• Triggering events not
clearly defined
Compensation Related Risks
• Objectives of compensation
arrangements
• Patchwork quilt - elements
of arrangements not linked
or aligned
• Linkage between “pay” and
“performance” not clear
Design Risks
• Mandate of compensation
committee
• Independence of members
• “compensation literacy”
• Expertise of compensation
advisor
• Independence of
compensation advisor
• Relationship with board and
audit committee
Governance Risks Interpretation Risks
 What “tone at the top”
messages are being
conveyed through the
compensation
arrangements?
 How are compensation
arrangements shaping
internal environment and
“culture of integrity”
 Impact on DC&P and ICFR
Behavioural Risks
• No formal systems to
capture, summarize and
report on performance
measures specified in
compensation
arrangements
• Lack of independence in
compilation and verification
of information
• Lack of controls
Measurement &
Reporting RisksDisclosure Risks
• Lack of “disclosure control”
in preparing new
disclosures
• Inconsistencies between
financial statements, MD&A
and CD&A
• Disclosures lack clarity and
understandability
• All aspects of
compensation not
disclosed

40. 41

41. 42

42. 43
CEO
Compensation

43. 44
Board
Compensation

44. 45
Changing
Accountability in
Disclosure:
IS RISK NEXT?

45. 46

46. 47
ERM – Enterprise Risk Management

47. 48

48. 49

49. 50

50. 51
Risk to 2012 Strategic Goals
Almost Certain
Likelihood
March 31, 20xx
Reputation Risk
Rare Unlikely Possible Likely
Financial Risk
IT Governance Risk
Insignificant
Regulatory and Legal Risk
People & Organizational Risk
Minor
Privacy and Security Risk
Project Implementation Risk
Moderate
Stakeholder Relations Risk
Major
Key Risks Consolidated Risk Profile
Impact
Extreme
2
1
4
3
6
5
8
7
9
1
2
3
4
56
7
89
to
Risk to 2012 Strategic Goals
April 1, 20xx
Key Risks Consolidated Risk Profile
Impact
Extreme
Privacy and Security Risk
Project Implementation Risk Major
Stakeholder Relations Risk
Moderate
People & Organizational Risk
Minor
Likelihood
June 30, 20xxFor Period:
Reputation Risk
Rare Unlikely Possible Likely Almost Certain
Regulatory and Legal Risk
Financial Risk
IT Governance Risk
Insignificant
2
1
4
3
6
5
8
7
9
1
2
3
4
56
7
89
1
9

51. Our top ten risk management lessons
1. Develop a risk intelligence culture
2. Set the right tone at the top
3. Do not get lost in the detail
4. Do not outsource risk understanding
5. Connect the dots and develop the big picture
6. Do not ignore Black Swan type risks
7. Link compensation and risk management
8. Engage in dynamic not static risk
management
9. Enhance your disclosure
10.Assess your risk governance structure and
processes 52

52. 53
Disclosure StructureDisclosure Structure
The Board
Management
Chair
External
Auditors
Internal
Audit
Creditors
Investors
Regulators
Audit
Comm
Other
Comm
Other
Comm
Supply
Chain

53. 54
Accelerated and More Comprehensive DisclosureAccelerated and More Comprehensive Disclosure
ObligationsObligations
• Certification by CEO / CFO
– Financial Reporting
– Disclosure Controls
– Internal Controls over Financial
Reporting
• MD&A Disclosures
• Continuous Disclosure
Obligations / Timely Reporting of
Financial Results

55. 56
Emerging IssuesEmerging Issues
• Certification
– Disclosure Controls and Internal Control Effectiveness
• Executive Compensation
– bonuses for what performance
• IFRS
– International Financial Reporting Standards
• GHG Measurement and Reporting
• Business Intelligence /Informatics
• THE BURDEN OF MEASUREMENT + DISCLOSURE
– Compliance is the new “rubics cube”
– Fast Changing Priorities
– Mediocre Management Leadership
– Fast failing relationships …customers, supply chain,
….and more to follow….

56. 57
Smart People,
Dumb Decisions

57. 58
Ten principles for aTen principles for a
Black Swan-proof world…Black Swan-proof world…
Nassim Nicholas TalebNassim Nicholas Taleb
1. What is fragile should break early while it is still small
2. No socialization of losses and privatization of gains
3. People who were driving a school bus blindfolded( and
crashed it) should never be given a new bus
4. Do not let someone making an “incentive” bonus manage
a nuclear plant – or your financial risks
5. Counter-balance complexity with simplicity
6. Do not give children sticks of dynamite, even if they come
with a warning
7. Only Ponzi schemes should depend on confidence.
Governments need to “restore confidence”
8. Do not give an addict more drugs if he has withdrawal
pains
9. Citizens should not depend on financial assets or fallible
”experts” for their retirement
10.Make an omelet with broken eggs

58. 59
User’s Guide to 21User’s Guide to 21stst
Century Economics…Century Economics… UMAIR AQUEUMAIR AQUE
• Tomorrow will not be like yesterday
• 20th
Century Business isn’t fit for 21st
Century Economics
• Tomorrow’s market leaders have new DNA
• Defining marketing risk…
– What is the role of marketing in a world where consumption
must slow?
– What is the role of distribution in a world where consumption,
savings, and investment will accelerate in volatility?
– What is the role of production in a world where consumption
becomes savings?
– What is the role of strategy in a world where the game is no
longer about winning more consumption than rivals?
– What is the role of innovation in a world where greater
investment will flow to reinventing moribund industries?

59. 60
The end of the start…
• The beginning of next steps …
– PWR
– Short Term Success (60)
– Long Term Relevance and (30)
– Regenerative Sustainability (10)