Tim Rowley, "Measuring the Effectiveness of Boards: Shining Light on Unlit Areas of Corporate Endeavour", Rotman Lifelong Learning 2005, June 3, 2005

Lifelong Learning 2005, Rotman School of Management, (University of Toronto), held at the Fairmont Royal York Hotel, June 3, 2005, 9:20 a.m.

Tim Rowley, Deloitte & Touche Professor of Strategic Management and Director, Clarkson Centre for Business Ethics and Board Effectiveness, Rotman School

These participant's notes were created in real-time during the meeting, based on the speaker's presentation(s) and comments from the audience. These should not be viewed as official transcripts of the meeting, but only as an interpretation by a single individual. Lapses, grammatical errors, and typing mistakes may not have been corrected. Questions about content should be directed to the originator. These notes have been contributed by David Ing (daviding@systemicbusiness.org) of the Systemic Business Community ( http://systemicbusiness.org ).

Introduction by Andrew Gowers

• Tim Rowley, graduate of U. Pittsburgh

[Tim Rowley]

Discussing governance

• What do directors do?
• Some problems we see
• What's going on in Canada, and what's helping in Canada, so that some of the governance problems we see in the world will be taken care of.

What do directors do?

• Appointing the CEO
• Approving strategy
• Monitor performance
• Set compensation

More like anti-inflammatories, than steroids

• Don't focus on upside.
• Attempt to reduce the number of downturns, and survival

David Beatty's calendar

• BMO board, 175 hours
• For every hour in boardroom, about 1.5 hour getting ready
• In INMET, small company, more time spent travelling
• Korn Ferry says that directory spend about 215 hours/year

Survey on boards: want to spend less time on oversight, and more time on talent management

Jay Lorsch: The duties of directors, can't do in the time allotted.

• Leads to confusion

Boardroom: the grand canyon

• One side is the management working 24 hours
• The other side, directors parachuting in every few months
• Information gap: most compliance procedures are trying to bridge this gap
• One bridge is the audit committee, some experts on the board going deep

e.g. Hollinger case:

• The ownership structure is extremely complicated

A lot of governance problems today aren't different from history

• Amsterdam, 1600
• Dutch East India Company had 21 year exclusive license to trade in the East Indies
• First share certificates
• They had 70 board members, with same challenges: mismanagement, insider trading, shredding of documents

To 1720 England, South Seas Company, doing the same thing

• Crash
• Benefits going to a few people
• Money going to a few people
• Painting: William Hogarth 1721, destruction of the city based on the South Seas Trading Company

A lot in the press on huge value restructuring: Enron, Worldcom, Nortel

This comes back onto directors

Richard Breedon wrote the report for Worldcom, as well as Hollingers

• CEO Ebbers ... even though not remotely qualified for his position

Martha Stewart, did what every MBA student was trained to do

Disney: compensation committe head is Michael Eisner's personal lawyer

• Policy that the number #2 person at Disney couldn't make more then 75% of the top person

Cartoon: T'he only thin that can save us is an accounting breakthrough

Healthsouth: 11 executive pleaded guilty to criminal charges

Parmalat

Where were the directors?

Standards changing, focused on accounting standard, changing the compliance side of governance

• Audit standards from the listing organizations (NASDAQ) and into regulators

Regulation changes, but what about the directors?

• In Canada, Clarkson Centre does governance rankings

A lot of bodies outside boardrooms are putting pressure on change.

• The number of companies getting poor scores is going down
• Still, there are places where change would be good

What are the factors that lead to governance reform?

• The corporate elite: good or bad for reform?
• Looked at 2184 directors sitting on the S&P/TSX index
• Elite directors are most sought after, and willing to sit on board
• 16 people, old boys club -- all men.
• Most TSX company people sit on one board
• The Elite 16 represent 1% of directors, but 31% of the companies, and 50% of market cap
• They sit on the largest Canadian corporation

Thesis: They're bad for governance

• The Elite 16 sit on the same boards: a dense web of interlocks and influence
• Two islands
• The middle: Rob Pritchard, the hub, at University and Torstar

Relationship networks are effective in diffusion, in innovation and disease

• SARS was the result of four nurses that work at mulitple hospitals
• A lot of work, Gerald Davis at U. of Michigan show the same thing, e.g. the adoption of a poison pill, compensation packages
• Thus Robert Pritchard is the principle gatekeeper of governance reform

Average score of TSX index firms, with the Elite 16

• Overall, they seem to be doing a pretty good job.

Comparison on different criteria in comparing Elite to others

• The company does better if it has an elite member
• Defeats the thesis that the status quo is bad

Went to directors, and asked: how come?

• One response: I'm a professional director, and want to be good at what I do
• Reputation is so high, that I go down with the ship

Questions

Andrew Gowers: Counter to expectation. How about 10 years ago?

• Impact on governance reform; not sure can extend this to say that they're good on other parts.
• Easier to publish, if found the other result.
• 10 years ago, probably wouldn't have seen this: there's a fire.
• Used to be that put as a director as a reward

Question: Of the Elite 16, only one has a full-time executive job elsewhere. Changing notion of professional directors?

• People are treating it more like a profession.
• Rob Pritchard's board want him on more boards, because he learns more.
• Pritchard says: some people join golf clubs, I join boards.
• Red flags help drive change.
• Judge Brandeis: the best disinfectant is sunlight.

Enron and Worldcom claims, out of own pocket. Volunteer chill for directors?

• Scary.
• Hearing directors say that they're not sure if they want to sit on the audit committee.
• They now select financial experts.
• Changes in the governance world is changing faster than liability insurance.
• Should look to E&O
• If you're shareholders, and company sue the own directors, E&O won't pay unless the directors win.

Directors, management skill and education over the past 40 years? Higher level of professionalism

• These doesn't explain the Elite 16.
• Maybe people are getting better, but through practice
• Use to be able to sit on the board, not develop any skills, and get away with it -- not today
• May need to defend self on course: training, and followed the right process.

Directors spending more time on talent. SOX North. Demarais has said boards are spending too much time on process, and not on strategy.

• Right, but years away.
• SOX section 404 is insance
• Taking management away from creating value.
• In the short to medium term, it's here.
• Sarbanes interview: it's overboard.

Domenic D'Allesandro and Frank Stronach: feedback from them?

• Large boards aren't a problem, it's the smaller companies
• If you're under $500M, will have problem meeting Sarbanes-Oxley
• If fewer companies can't go public, or some go private, will be feasible.
• Will more Canadian companies go to the south, and become private, rather than public?

Causal relationship between the Elite 16, and how they're better players on corporate governance. Could it be they're better, because they're large companies?

• Yes, don't have all of control variables, but do have industry variables and past control issues.

Increase in liability risk. What's happened to compensation?

• Compensation of directors has gone up.
• A lot of companies have gone to flat rate, you don't get a bonus for showing up.
• Seeing some audit committee boards being paid more than chairman.
• Some up to $150K, but average is under $50K.

Where to find directors in the future?

• Elite 16 say the map shouldn't be so dense.
• Challenge is that need people with more experience, but also want more diversity.
• To get good dynamics in the boardroom, looking for someone you know personally.
• Have done this work on women, who represent only 9% of board seats on the TSX in 2002; by 2004 has gone to 9.3%.
• It's the same 12 women sitting on multiple boards.

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