Governance in The 21st Century
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This presentation was given to The Treasury Management Association of Canada National Conference in Spet 2009
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Governance in The 21st Century
- 1. The governance Professionals TMAC 27th Annual Conference Niagara Falls, Ontario Governance in the 21st century: the changing role of the board of directors Gerard Buckley, BBA, FICB, ICD.D Partner, RSD Solutions Inc. & Janis A. Riven, LLB,BCL,MBA,FCIS, Acc.Dir. Lecturer, John Molson School of Business Concordia University, Montreal President, ICSA (Quebec)
- 2. The governance Professionals Agenda • The emerging vision of governance • Changing board duties and responsibilities • Changing skill sets and behaviours • The audit committee: a very special group • Breakout exercise copyright 2009 ICSA 2
- 3. Clean sweep at lotto corp. The governance Professionals “Finance Minister Duncan announces sweeping changes in wake of expense claims” • • • The CEO of troubled Ontario Lottery and Gaming Corp., Kelly McDougald, has stepped down and OLG board chair Michael Gough and the rest of the board of directors have also resigned, Ontario Finance Minister Dwight Duncan announced this afternoon You are a member of a temporary board appointed by Minister Duncan on Aug 31 and today is your first meeting. Discuss the agenda items you would like to propose for your first meeting copyright 2009 ICSA 3
- 4. The governance Professionals Corporate Governance- its not just compliance Compliance – A way of managing legal, regulatory, reputational and certain operational risk by: • Respecting rules and principles • Tone from the Top “the way we do things around here” – Staying out of jail Corporate Governance • • • The framework for the direction and oversight of the enterprise The process that ensures the direction, control, oversight and evaluation of the enterprise, and its management. The means to enhance the decision making process copyright 2009 ICSA 2008 4
- 5. And why do we care?... The governance Professionals • Good governance is not merely being in compliance with laws • Good governance enhances shareholder and stakeholder value by balancing demands of each • Manages conflict of interest areas • Deals with ‘principal-agent’ problem • Good governance brings investor confidence, economic stability, and increased flows of risk capital copyright 2009 ICSA 5
- 6. The governance Professionals Directors’ Duties • Corporate law sets out the following duties: – Fiduciary duty (duty of loyalty) • Duty to act honestly, in good faith and with a view to the best interest of the corporation – Avoid conflict of interest – Duty of confidentiality – Duty to disclose • Imposed on each director – Duty of Care • Duty to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances copyright 2009 ICSA 6
- 7. The governance Professionals Board Paradigm Shift • Old Paradigm – Provides legal direction – Formal and routine – Passive board: unquestioned personal loyalty to chairman – Prestige, recognition, rewards – Minimal contact and dialogue with other directors copyright 2009 ICSA • Engaged Board – Reviews and counsels management – Open collegial dialogue – Active board: main loyalty to company – Opportunity to make a difference, meet challenges, build relationships 7
- 8. The governance Professionals Boards are now actively engaged in… 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Strategy Investments and M&A Human resources / organization Financial management Risk management External relations CEO effectiveness Succession Corporate governance Other? copyright 2009 ICSA 8
- 9. The governance Professionals eg: Green accounting • Corporate accounting will get cleaner and greener—and perhaps even meaner. • companies will be more eager than ever to offer up environmental indicators to show their good citizenship. • green accounting is already starting to conform to one standard. – The Global Reporting Initiative – 1,750 global companies expected to issue reports based on 2008 guidelines copyright 2009 ICSA 9
- 10. Eg: Sustainability reporting The governance Professionals • • • • • • • • Global Reporting Initiative Dow Jones Sustainability Index FTSE4Good UN Principles for Responsible Investment ISO 14001 (environment) SA 8000 (human rights) ISO 2600 (social responsibility) UN Global Compact copyright 2009 ICSA 10
- 11. The governance Professionals Eg: Risk Management • Risk – Risk refers to the uncertainty that surrounds future events and outcomes. It is the expression of the likelihood and impact of an event with the potential to influence the achievement of an organization's objectives. • Risk Management – Systematic approach to risk taking • Enterprise Risk Management (ERM) – ERM is the proactive execution of a senior management sponsored entity-wide strategic process of assessing and responding to the collective risks that impact an organization’s ability to maximize stakeholder value. copyright 2009 ICSA 11
- 12. The governance Professionals Risk management The board of directors has overall responsibility for identifying and monitoring risks, and ensuring adequate control mechanisms are in place. • Ask questions about emerging risks • Clear committee mandates to ensure all risks are reviewed – Audit v. risk committee? • Provide visible support to RM process • Link RM to strategic planning • Promote culture –’everyone is a risk manager’
- 13. The board’s role:risk prioritization High Secondary Risks Key Risks • Lower likelihood, but could have significant adverse impact on organization objectives • Critical risks that potentially threaten the achievement of organization’s objectives Low Priority Risks Secondary Risks • Significant monitoring not necessary unless change in classification Impact The governance Professionals • Lesser significance, but more likely to occur • Periodically reassess • Reassess often to ensure changing conditions (move to high significance) Low Rare • Consider cost/benefit trade -off Likelihood copyright 2009 ICSA Almost Certain 13
- 14. The governance Professionals The effective board requires new skill sets….. integrity prudence experience discretion diligence availability loyalty competence objectivity training leadership knowledge teamwork _________________________________ Availability, Competency, Integrity+ ... copyright 2009 ICSA 14
- 15. Effective boards need independence The governance Professionals • Independence in Fact : – Not subject to control by others - neither fear nor favour – Independence from management – Independence from controlling shareholder – Based on definitions – structural • Independence of Mind – Think, speak and act independently with confidence and courage – Be critical and responsive to change and new thinking – Have confidence and the will to make tough decisions, including the strength to challenge the majority view – Be willing to risk rapport with Chair and other Directors and / or C.E.O. in taking a reasoned, independent position copyright 2009 ICSA 15
- 16. The governance Professionals The role of governance professionals • Key role is the implementation and oversight of effective governance processes – Culture shift from growth to sustainability – Focus on key tools • Accountability • Transparency • independence copyright 2009 ICSA 16
- 17. The governance Professionals The Audit Committee… • Why, Why, Why? How many of you have said this? • Why do these old guys require all this information? • How many of you have said this or have those thoughts • The world is changing! • Board Education is improving: ICSA, ICD, Directors College, CICA and many of the accounting firms now have Board Governance Practices. This is giving the independent director knowledge and he/she is using it! copyright 2009 ICSA 17
- 18. The governance Professionals The Audit Committee… • Audit Committee Members are personally accountable for their negligence (Duty of Care) • If an employee is negligent they lose their job; if a board/committee member is negligent they can be sued! • In simple language “the buck stops here” with the Board of Directors - not with the CEO. • D & O insurance does not cover a director for neglect of their Duty of Care copyright 2009 ICSA 18
- 19. Audit Committee Structure The governance Professionals • • • • • • • • • Most boards required to have an AC AC governed by OSC MI 52-110 Audit Committee Charter External Audit reports directly to AC Internal Audit either reports to or has direct line to BOD All members independent Must meet financial literacy test Whistleblower program Audit Committee meetings planning document copyright 2009 ICSA 19
- 20. The governance Professionals The Audit Committee and Financial Risk Management • Board risk assessment in many cases is managed by the AC • How much strategic financial risk should or can the company accept. (Lemans, AIG, Barings etc.)? • Who is responsible for the other risks in the organization’s ERM? • There is a new book on ERM coming this fall on ERM that is worth reading: Enterprise Risk Management: Today's Leading Research and Best Practices for Tomorrow's Executives John Fraser (Editor), Betty Simkins (Editor) copyright 2009 ICSA 20
- 21. The governance Professionals Roles and Responsibilities • Risk Assessment • Assess process relating to control environment • Oversee Financial Reporting including MD&A and earnings press releases • Evaluate the internal audit process • Evaluate the external audit process copyright 2009 ICSA 21
- 22. The governance Professionals ‘Better’ Practices’ • Chair of AC of should be an expert (CSA does not require this: USA does) • Minimum three members of AC, but more depending on business complexity • Meet minimum 5 times a year, once for each quarter and extra meetings as required • CSA does not require AC Charter; however, NP 58-201 Corp Gov. Guidelines recommend a written mandate copyright 2009 ICSA 22
- 23. The governance Professionals Skills Required • Ability to understand financial risks of the organization. • Ability to understand financial complexities of the organization • Ability to understand new accounting pronouncements for your organization’s industry • Time !!!!! copyright 2009 ICSA 23
- 24. The governance Professionals Authority of the Audit Committee • Engage independent counsel and other advisors • Set and pay the compensation for any advisors employed • Communicate directly with the internal and external auditors copyright 2009 ICSA 24
- 25. The governance Professionals Ontario Lottery and Gaming In your same groups • What questions should the new directors be asking? • What went wrong and how should it be fixed? copyright 2009 ICSA 25
- 26. The governance Professionals Shaping the board of the future • Accountability: – Individual directors who understand their responsibility • Focus – Boards composed of right mix of skills and competencies – • Creative tension – Relationship between board and management – • Vision – A broad view and understanding of all stakeholder needs copyright 2009 ICSA 26
- 27. The governance Professionals Questions or comments? Gerard Buckley Partner, RSD Solutions Inc. Email: gbuckley@RSDsolutions.com Tel: 416.884.9522 & Janis Riven President, ICSA-the institute of governance professionals (Quebec) Email: janis.riven@sympatico.ca Tel: 450.226.7100
Notas del editor
- If CG is not compliance – what is it??? In terms of structure, CG is the framework for the DIRECTION (read ‘mamagement’) and OVERSIGHT (read’board of directors’) of the enterprise. But structure is only part of governance. It is also a PROCESS – read slide- which brings in the principle of accountability - And finally, the PURPOSE is to enhance the decision making process ensuring that the organization achieves it goals. So, why, again, should we care??....
- Realities of : Multiple stakeholders –who has a stake in the org? majority v. minority shareholders v. institutional investors independent v. management directors chair v. CEO employees lenders public government Conflicts of interest in: financial reporting Directors’ & Executive compensation Principal – agent issue arises because agent (mgmt) takes decision and acts on behalf of principal (shareholders). Principal has to accept consequences of agent’s actions but might want some redress against an agent acting outside his authority. Grows out of separation of ownership and control Need stability in financial and capital markets, which comes from trustin the organization’s governance process.
- Fiduciary Duty – means that each director must be loyal to the company you can consider the interest of employees and shareholders – but duty is to the company alone! Avoid all appearance of conflict Under common law – meant there could be NO benefit received from a relationship with the company: legislators realized practical implications – would impede commerce – have set certain limits by statute. Must declare interests – not participate in voting Cannot us info obtained as a director for your own benefit (duty of confidentiality) Duty of Care – obligation to – apply due diligence (ask questions – take your time) + to use your particular skills Defence for board decisions that are impugned: How did you vote? – rules to dissent in law Did you ask questions? Did you apply YOUR skills?
- (These concepts were covered in the corporate governance module- use slide as a quick jump off to why boards need to be knowledgeable about and engaged in risk management Board must be proactive
- Setting the tone from the top that systematic and integrated risk management is valuable for understanding uncertainty in decision-making and for demonstrating accountability to stakeholders; Determining the best way to implement the Integrated Risk Management Framework; Ensuring that a supportive learning environment exists for risk management, including sensible risk taking and learning from experience; Ensuring that risks are prioritized, and that appropriate risk management strategies are in place to respond to identified risks; and Ensuring the capacity to report on the performance of the risk management function
- Plotting risks on a risk map according to Likelihood and Impact provides a very usual visual representation of the key risks identified. Board members can easily understand now which risks are “key” (top right quartile of risk map) and must be effectively managed to help ensure the organization meets its objectives. Importance of understanding difference between ‘likelihood’ and impact – give example of trader – has market’wins’ 70% of his trades. Ask whether you would hire this person for your trading desk???? But what is you were told he only makes 3$ on wins but loses 10$ on losses…. …example of another way to view risks…………..heat map
- Board are made up of a combination of management directors, representatives of particular shareholders, and TRULY ‘independent’ directors Every director should be able to make some particular individual and unique contribution ( ensures board has all the required competencies) Canadian residency requirements should not be forgotten ( is becoming less important in Canadian legislation but still a 25% requirement) Availability – studies in US showed little difference between ‘good’ and bad directors with respect to attendance. Too often directors do not prepare properly for the meetings by studying the board materials in advance. Directors sitting on too many boards – impact on independence as well as availability. Boards in crisis often need a lot of time ( Nortel board met over 80 times in the past year – acc. To Guylain Saucier) Competency – not every director needs to be an industry expert – but will need to do research and be provided with some assistance by the company in order to understand the principle drivers of the industry. But MUST be analytical, strategic thinker – know how to ask questions – understand the thin line between micro-managing and oversight. Best directors play 2 key roles = watchdog (challenge)/ sounding board(Partner) Integrity – even a ‘related’ director must be independent thinker. Willing to take responsibility .and ………………………
- Independence in FACT: -not subject to control indep. From management (some require 3 year window) Not involved with a controlling shareholder Regulatory definitions: NP 58-201 – ALL COMPANIES SHOULD HAVE MAJORITY OF INDEPENDENT DIRECTORS – THEY SHOULD MEET SEPARATELY ON A REGULAR BASIS INDEPENDENCE DEFINED IN 52-110 WHICH REQUIRES AUDIT COMMITTEE MEMBERS BE INDEPENDENT: NO DIRECT OR INDIRECT MATERIAL RELATIONSHIP ANYTHING THAT COULD INTERFERE WITH INDEPENDENT JUDGMENT Independence of MIND – individual characteristics needed – can’t be legislated! !