Presentation made to insurance experts (as a panelist) on the topic of : The impact of the financial crisis on Governance for SME

1. Crisis Impact on Director’s & SME’s Governance
Hugues Lacroix
PLUS - May 2009 Conference
The Global Credit Crisis

2. Guest speaker - Hugues Lacroix
• CA, MBA & ICD.D
• More than 20 years of experience in finance
and governance
• Investment Vice-President, at the Fonds de
Solidarité (VC) for 12+ years
• Director for Labrie Environmental
Group, ex-Spectra Premium & ex-Manac
• Guest lecturer - MBA (Tours & Sherbrooke
Universities), IAS DEP program (McGill);

3. Agenda
1. Foreseeable risks
2. Can you mitigate them ? How ?
3. Nature of the risks
& if time permits :
4. How to interact at that level
to protect value (vs create) ?

4. Agenda
1. Foreseeable risks
Disclaimer :
I am not a lawyer
or an
insurance specialist…

5. Lets make a little test…
• Anyone from the United States in the audience ?
• OK, those from Canada too…
• Who has 20$ dollar bill in their wallet or purse ?
• Do you have many of them ?
• Did you know that you were taking an undue risk ?
• Because you have too many of them…
• XXX You should have less twenty’s
& more 10$ and 50$ bills XXX

6. Because of the
Green-Backed Commercial Paper Scandal
We’ve just been told that $20 bills are no longer
“legal tender” and are of uncertain value

7. You should have known !!!
You’re gonna tell me that :
• You got them at the bank from a reputable ATM
• They were “rated” by a reputable notation agency
• You were told they were backed by gold (no longer)
• How could you know, they were treated as cash on
the balance sheet…
Well, you should have requested 2 notation
agencies… (this is how we feel right now)

8. Managing risk
Unidentified risks cannot
be managed !

9. Risks are devious by nature…
Some are easier to anticipate (more common) :
• Imported toxic products (sofas, milk, toys paint ,..)
• Improper conduct from management (City, Unions,…)
Some are tougher :
• ABCP
• Giant corporation crashing down (GM, Abitibi,…)
• Planes crashing on New-York towers

10. Managing risks is
not a plus …
It’s a must !

11. Managing risk
• Can it be done in SME context ?
• Do they have the proper tools ?
• What changed since the crisis ?

12. Agenda
2. Can you mitigate them ?
and if so, how ?

13. Things that could be done – industry related
Your industry could :
• Required certification / training of directors;
- Plenty of very valuable course : ICD, IGOPP, CAS
• Or at least, credit it’s value against premium;
• Required a real due diligence prior to accepting a
directorship;
• Supply tools to BoD to identify & manage risks
• Offer a policy for directors’ personal coverage;

14. You can also try insuring : ethical behaviour
• behaviour of CEO & directors is fundamental
• must promote the « Tone at the top »
• no longer tolerable for entrepreneur to act illegally or
unethically in the name of the corporation
Making sure they avoid :
• using privileged information to personal means
• misbehaviour that will engage your personal responsibility
• mingling their personal interests & those of the corporation

15. Managing industry risk
One of your client have
just been offered a
director’s position…

16. What an honor !
Impossible not to accept
Wrong …!
What could you do ?
What should they do ?

17. What DD could be required prior to accepting ?
Should validate :
• Availability ?
• With whom & why ?
• What (understanding the context) ?
• Professional BoD or not ?
• Absence of any conflict of interests
• Quality of the information & of decisional process

18. Minimal Diligence – things to obtain
• Attestation of paid salaries, DAS, taxes… + follow-up
• BoD minutes for the last 12 to 24 months
• Audited financial statements
• Indemnification agreement
• Subscribe good « D&O » insurance policy
• Right to opinions from independent third parties
Example of information request : 

19. Example of an information
request done by a skeptic
director in a file…
Requested details on :
• D&O insurance details
• Indemnification agreement
• Management declaration
• Legal records (of proceedings)
• Right to third parties opinions

20. Request details on :
• BoD minutes
• Audited financial statements
• BoD & committees charter
• Board book for last BoD
• Any conflicts of interest
• Old Due Dill material
• Business plan / press review
• Key shareholders’ list
• Meet CEO, directors, lawyer,
auditors,…
No need to say that my services
were not retained…

21. The best protection remains* :
Do not accept a
director’s position…
(*) : According to Me Catherine Tyndale, Nicholl Paskell-Mede

22. But should we still accept ?
« Nowadays, anyone who agrees
to sit as a director seems to
demonstrate that he (or she)
lacks the necessary judgment to
make a good director ! »
Groucho Marx revisited

23. Mitigating risks
Once your client is
hooked in…

24. What can they do better, to mitigate the risks :
• Attend the meetings : continued presence &
critical mind remain their best defense
• Keep copies of important documents used
(in decision process)
• Read minutes, have them corrected if needed
• When in doubt, get an expert opinion, best to
delay a decision, and obtain addt’l information

25. Dissidence & resigning
• Dissidence should be registered
if necessary (abstention is not an option !)
• Must be recorded in minutes if do not share
opinion of the majority & if conclude that
not in best interest of corporation
• dissidence absolve directors of
responsibilities linked to a decision
Consequence : I quit ! or You leave ?
(or : After me, the flood can come)

26. 3. Nature of the risks

27. Managing risk in an SME context…
Corporations still have 3 objectives :
• Insure it’s continuity
• Make profits
• Grow
But to achieve that, it must avoid failure

28. Managing risk in an SME context…
BoD still has 3 objectives, namely to insure risks are :
• Identified by senior management;
• Managed by the corporation (via a plan to :
prevent, avoid, reduce, transfer or segregate the
risks); OK : Insure them…
• Followed upon, once issue raised to their attention
Directors must provoke a discussion & obtain information
allowing them to make the right decisions (is it done… ?)

29. Managing risk in an SME context…
Directors (in Quebec) still have 3 real personal risks :
• Reputational risk
• $$$ risk for legal fees (defend against “claim” not
properly insured - indemnity vs responsibility)
• $$$ risk for governmental claims (if not covered)
(Note that 2 out of 3 are covered by your industry)

30. Managing risk in an SME context…
• In that context, for directors of private
companies, real risks are limited;
• Most of the residual ones are driven by the
presence of minority or institutional investors;
• Slightly more risky for publicly traded
corporations;
• The problem is…

31. The “Expectation Gap”…
According to the general public, directors should :
• Know it all;
• Make no mistake;
• Catch all improprieties (if any);
• Leave no question unanswered;
In clear, to be someone close to “GOD” status

32. Questions ?
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??

33. Agenda
4. How to interact at that level to
protect value (vs create) ?

34. Roles of a BoD
Accountants are familiar with FIFO & LIFO
Directors must familiarize themselves with NIFO :
« Nose In, Fingers Out »
Role of a BOD is not to initiate or stop
management actions, but to guide them.
Directors are not there to manage the company
but to insure that it is well managed

35. Remember : 5 modes of governance available
1. Advisory : Voluntary, no rules « per se »
2. Statutory : Meet minimal legal requirements
3. Cosmetic : Approve, but without really challenge the CEO /
Shareholders’ position
4. Controlance : Revise what is proposed & do monitoring;
Oriented towards BoD effectiveness & protection of value
5. Governance : Authorise major orientations, supervise &
monitor their deployment; Oriented towards BoD efficiency
& value creation
Most of your private client are likely to be at level 3 or 4

36. More control to preserve value
Possible course of actions :
• insure information exactitude & integrity
• validate value of internal controls
• monitor financial results
• measure operational performance
• insure organization & BoD effectiveness
• insure appropriate ethical & legal behavior
• insure appropriate divulgation

37. More governance to create value
Possible course of actions :
• leadership continuity
• establishing a clear vision, mission or strategy
• identify & share opportunity (M&A)
• increase organizational & BoD efficiencies
• evaluate CEO & Directors performance
• identify & manage risks (can be preservation too)
• create synergies (network)

38. To govern is to make choices…
• Strategy is making choice, to take risks, differentiate;
• Easier & comfortable to manage conformity & control;
• If every situation is analyze with same filter, always
trying to minimize risks, we all become alike;
• Thus, negating value creation options;
• Must manage and not negate risks;

40. Un leader du capital de développement de la
PME, établi depuis 1983 au 30 novembre 2008
Faits saillants
Nombre d’actionnaires
Près de 575 000
Actif net
6,2 milliards $ Souscriptions annuelles
moyennes depuis 5 ans
611 millions $*
Entreprises partenaires
1 881*
Investissements
3,7 milliards $
Emplois créés, maintenus
ou sauvegardés
Placements 126 035*
2,5 milliards $
Valeur de l’action
21,20 $
* Données au 31 mai 2008

41. Un portefeuille diversifié Au 31 mai 2008
Industries
et services
69 %
Incluant notamment :
• transport, textile,
plastique, récréo-
touristique, ressources
naturelles, agroalimentaire,
services financiers,
construction, aérospatiale,
Entreprises
immobilier, etc.
du secteur technologique
• soutien aux projets
31 %
d’exportation

42. Le rendement du Fonds
4,1 %
(15,3) %
Valeur
de l’action
21,20 $
Depuis le début Semestre terminé
des activités le 30 novembre 2008
Note : Ne tient pas compte des crédits d’impôt accordés aux actionnaires.

43. Une force qui grandit rapidement
Actif net (en millions $)
6 171
5 955
4 534
30 juin 2002 31 mai 2005 30 novembre 2008

44. Une force qui grandit rapidement
Investissements (en millions $)
3 705
2 901
2 769
30 juin 2002 31 mai 2005 30 novembre 2008

45. Volumes d'investissements* (en millions de $)
730
668
643
492
405
2004 2005 2006 2007 2008
(11 mois)
31 mai
* Incluant les investissements non admissibles à la norme de 60 %.

46. Le Fonds de solidarité FTQ… nous sommes :
Un fonds d’investissement d’appartenance
syndicale qui est devenu la plus grande institution
québécoise vouée à la création d’emplois par la
solidarité économique.
Pour toute information :
Hugues Lacroix CA, MBA, IAS.A
(514) 383-2595
hlacroix@fondsftq.com