Dallas keynote2012leblanc

10th Annual Corporate
Governance Conference

2012 Key Issues and Trends and What Really
Happens Inside the Boardroom
Institute for Excellence in Corporate Governance
University of Texas at Dallas
October 4, 2012
Dallas, Texas

Richard Leblanc, PhD
Associate Professor, Law, Governance & Ethics,
York University

2
Agenda

This slideshow can be downloaded from
Slideshare: www.slideshare.com/drrleblanc
or email Prof Richard Leblanc at rleblanc@yorku.ca
and Richard will gladly provide you with a copy.
Copyright © 2011 Richard Leblanc.
All rights reserved.

3
Agenda

The emerging trends and issues herein
should not be viewed as a question of
whether you or your board will be affected, but
rather when and how, given your company
and industry.

“S-Ox is kindergarten compared to this.” ~
NACD director webinar, 2011.


4
Agenda
Ø  1. Board Composition;
Ø  2. Unprecedented Regulatory Intervention;
Ø  3. Governance of Executive Compensation;
Ø  4. Oversight of Risk Management;
Ø  5. Shareholder Activism and Value Creation;
Ø  6. Conflicts of Interest in the Boardroom;
Ø  7. Political Governance and Contagion;
Ø  8. Information Technology;
Ø  9. CEO Succession Planning; and
Ø  10. Boardroom Dynamics.
Copyright © Richard Leblanc.

The Financial Crisis and Aftermath 5


The New Governance Normal (2012-14) 6

2012


7
Two Important Reports

n  Widespread failures in financial regulation; n  High risk lending;
n  Dramatic breakdowns in governance; n  Regulatory failure;
n  Ill prepared policy makers who did not n  Inflated credit ratings;
understand; n  Abuses / conflicts of interest by
n  Systemic breaches in accountability and investment banks;
ethics;

Research, Teaching and Practice 8


What does governance
Research and Practice failure look like? 9

Corporate governance is about decision-making and power.

Copyright ©

1. Board Composition: Diversity (global) 10

n  Diversity = Number one corporate governance issue ;
n  Broader than women:
: visible minority, aboriginal, disability, military

n  Four approaches to board gender diversity:
n  Nothing, US, Australia (600%é), Quebec/Norway

n  EU: 40% proposed: US ~ 15%;
n  Women make better monitors;
n  Strategic & broad business/P&L;
n  India, UK, Ma, Sg, HK: ~ 9-10 year cap;
n  Competency / skills matrix;

Board Diversity: Private Ordering 11

Broad strategic
role and
industry
knowledge


Movement to Competencies: Financial Regulators
12


Director Independence & Competencies 13

n  Independence and reasonable person test;

n  Financial regulators moving on competencies now;

n  Tenure limits & link renomination to peer review;

n  Interlocking directors;

n  Service providers;
n  Personal relations + data;
n  Shareholders and control person, vs. minority.


Retirement Age
Being a Director on a Control Block Board 14

Then it is moved and seconded
that the compulsory retirement age
be advanced to ninety-five.

Governance Assessment & Third Party Reviews
15


Legal and Regulatory Update 16

SEC Chair many
n Proxy Access Rule 14a-11 struck down; of business
ethics problems
n Whistle-blowing & bounties ; severe enough to
be investigated –
Protected mechanism people have confidence in

individuals
n UK Bribery Act & corruption risk; succumbing to
peer pressure

n Internal Pay Equity and ratio (to come);
n PFP (to come) & “realized” pay;
n Bank Governance & FSB/Basel;
n  More regulation: separate deposits from
proprietary trading; Copyright © 2011 Richard Leblanc.

Legal and Regulatory Update Risk
White Collar Crime & Corruption 17

SEC Chair many
n Proxy Access struck down; has a reputation
This city, this province, this country of business ethics
problems severe
of being the best location to carry out white collar
n Whistle-blowing & bounties ; enough to be
crime, corporate fraud, in the industrializedinvestigated –
world.
Protected mechanism people have confidence in

individuals
n UK Bribery Act & corruption risk;
Source: Spencer Lanthier, recipient of the ICDsuccumbing to
peer-
Niko Resources: 9.5M (June 11)fellowship, peer pressure
adjudicated CFPOA

n Internal Pay Equity and ratio (to9, 2011.
ICD Fellowship Awards Gala, June come);

n Pay for Performance (to come);
n Bank Governance & OSFI Guidelines;
n  OSC Staff Notice 54-701 and NP 58-201;
Copyright ©

Governance of Executive Compensation 18

Source: Basel (May 11), Europe (Dec 10) and FDIC (Feb 11) Copyright © 2011 Richard Leblanc.

Malus and Risk Adjusted Metrics 19

n  Clawbacks: 82% of companies (Equilar);

n  Consultants: comparables vs too complex ;

n  Ex adjustment (quant and qualitative);

n  Deferral and explicit ex post adjustment;
n  Malus;

n  Case examples: quantitative/formulaic, absolute,
corporate, short-term, vs. qualitative, relative, personal,
long-term: balanced weightings, stretch, discretionary, risk
adjustment, tailored & independent;

Use of Peer Groups – University of Delaware 20

n  Disclosure, scorecard & law of unintended consequences;

n  Business model of compensation firms and
peer groupings; at 50, 75, 90th percentile;

n  Perpetual, compounded 17% increase;

n  Lack of ranking of CEO performance; backdoor;

n  Stewardship of Assets ; 483rd ranking; credible threat?

n  Significant disparity to wage of average worker; coddle ;

n  Regulators, boards, shareholders, have not solved;

Dodd-Frank: Independent Directors & Advisors
21

We wanted an independent consultant, and there
are none. ~Ken Feinberg, Sept. 24 2011 to
academics at Wharton conference
n  Duty to client paramount;
n  Comp.
Committee & consultant
independence;
n  Remuneration code (UK);
n  Cost will increase (like audit);

n  Independence of Special Committees;

n  Independence of Advisors;


Oversight of Risk Management 22

Customers We missed it.
Suppliers
• Customers sales Human Financial • Supply
• Planning
• Reliability
Resources • Risk Management - Insurance • Pricing
• Availability of Skilled Staff • Risk Management - Interest Rates • Quality
• Relationships • Perf/Rewards Alignment • Risk Management – Foreign Exchange • Relationships
• Contracts • Workforce management • Investments • Billing
• Standards and • Communications • Financing • Logistics
Expectations • Morale and Job Satisfaction • Tax Strategies
• Customer viability • Leadership Strategic • Debt Compliance
• Salary Inflation • Lease Compliance
• Innovation • Strategic Planning • Acquisitions • Liquidity/Cash Flow
• Knowledge Assets • Capital Investment • Divestitures/Closures • Credit/Bad Debts
• Empowerment • Corp. Organization • Manufacturing Strategy
Rating • Training • R&D • Functional Location • Financial Planning &
Modeling
Agencies
• Maxtor credit
Integrity Operations Accounting &
• Vendor terms • SG&A
(guarantees,
• Safety
• Environmental Compliance • Capital Projects Reporting
• Management Fraud
advance • Govt. Compliance • Quality • SEC Reporting
payments) • Employee/Theft/Fraud • Reliability • Customer Credits/Rebates
• Operating Costs • Inventory Management • Management Reporting
• Illegal Acts • Sales and Marketing • Procurement • Statutory Reporting
• Resource Misuse • Contract Compliance
• Capacity Planning • Financial Forecasts
• Ethics • Engineering • Tax Accounting & Reporting
• Repair Services
• Brand Image • Performance Management
• Analyst Communications
• Tone At The Top Information Technology
Environment • Reputation • Access
• Political • Availability
• Legal • IP Protection
• Information Relevance
• Regulatory • Continuity
• Business Interruption • System Integrity
• ExternalTheft/Fraud/ • Technology Infrastructure Technology
Illegal Acts • Tech Development & Integration
• IT & Business Strategic Alignment • Product
• Business Practices Competitors • Outsourcer Management Obsolescence
• Cost Control Copyright © 2011 Richard Leblanc.
Source: N. Marks

Ex: Top 15 Risk Management
Oversight ofERM-related Risks, York University
23

We missed it.
Government
Customers
1.  • Customers sales Policy Risk. 9. 
Human Organization Structure Risk.
Financial
Suppliers
• Supply
• Planning
• Reliability
Resources • Risk Management - Insurance • Pricing
• Availability of Skilled Staff • Risk Management - Interest Rates • Quality
Competitor Risk.
• Relationships
2.  • Contracts • Perf/Rewards Alignment
• Workforce management 10. 
• Risk Management – Foreign Exchange
Performance Measurement
• Investments
• Relationships
• Billing
• Standards and • Communications • Financing • Logistics
• Tax Strategies
Expectations • Morale and Job Satisfaction
• Leadership Risk.
Strategic • Debt Compliance
3.  Change Readiness Risk.
• Customer viability
• Salary Inflation
• Innovation • Strategic Planning • Acquisitions
• Lease Compliance
• Liquidity/Cash Flow
• Knowledge Assets • Capital Investment • Divestitures/Closures • Credit/Bad Debts
Rating
• Empowerment • Corp. Organization
• R&D11.  HR Academic Risk.
• Manufacturing Strategy
• Functional Location • Financial Planning &
Capital Availability Risk.
• Training Modeling
4. 
Agencies
• Maxtor credit
Integrity Operations Accounting &
• Vendor terms
• Safety 12.  Reputation Erosion Risk.
• SG&A
Reporting
5.  Leadership Risk.
(guarantees,
advance
• Management Fraud
• Employee/Theft/Fraud
• Environmental Compliance
• Govt. Compliance
• Reliability
• Capital Projects
• Quality
• Customer Credits/Rebates
• SEC Reporting
payments) • Management Reporting
• Inventory Management
Strategic Labour Relations
• Operating Costs
• Illegal Acts • Sales and Marketing13.  • Procurement • Statutory Reporting
6.  HR Non-Academic Risk.
• Resource Misuse • Contract Compliance
• Capacity Planning • Financial Forecasts
• Ethics Risk.
• Engineering
• Repair Services
• Tax Accounting & Reporting
• Brand Image • Performance Management

7.  StudentTone At The Top
•  Satisfaction Risk. Information Technology
• Analyst Communications
Environment • Reputation 14.  Enrolment Targets Risk.
• Access
• Political • Availability
• Legal • IP Protection
• Information Relevance
8.  Communications Risk.
• Regulatory • Continuity
• Business Interruption 15.  Resource Allocation Risk.
• System Integrity
• ExternalTheft/Fraud/ • Technology Infrastructure Technology
Illegal Acts • Tech Development & Integration
• IT & Business Strategic Alignment • Product
• Business Practices Competitors • Outsourcer Management Obsolescence
• Cost Control Copyright © 2010 Richard Leblanc.
2011
Source: N. Marks

Oversight of Risk – Your Tools to Customize 24
Internal Controls Management, continued

§  Segregation of duties
§  Restricted areas
§  Approvals
§  Reconciliations
§  Record retention
§  Safeguarding and asset accountability
§  Management override
§  Manual controls
§  Data Security
§  IT, inventory and other controls;
§  Areas of vulnerability and fraud schemes;
Source: R.Basel (May 10), Europe (Dec 10) and FDIC (Feb 11)
Source: Leblanc, Assessment methodology for audit committees Copyright © 2011 Richard Leblanc.

Proper Internal Audit and Controls 25

n  Independent;

n  Compensation;

n  Stature / Hiring / Firing;
n  Work plan approved;

n  Link to Audit Committee ~ Executive Sessions;
n  Gross to residual risk for all material business risks;
n  Testing
design and effectiveness of all Internal
Controls;

26
ERM Risk of Risk – Your Tools continued
Oversight Register Template to Customize
Comprehensive Risk Governance
Internal Controls Management,
26

Board of Directors
§  Segregation of duties
Inherent Risk Risk Residual Risk After
§ 

Overall I.R. Overall R.

§  Restricted areas
University Before Response Management Response Accountability
Strategic Risk CEO Rating
Strategy &
R. Rating
& Action
Before After
Direction Points of Required

S-Ox
Proba Response Proba- Response

§  Approvals Basel/King
Impact Reliance Impact

University IT
Dodd-Frank
-bility
4- 5- Reduce
bility
3- 4- Complete plan

§  Reconciliations
Strategic Infrastructure Likely Major ICT Possible Major Develop &
Directions will not Foundational implement
EA supportCC GA, SF RAP
Document college &

?

Record retention
§  Comp.
University ITS Unit Plan admin unit
initiatives plans including
Data Use Policy
Audit
(p. 9) Nom/Gov. Etc.
contingency &

§  Safeguarding and asset accountability Risk
recovery
Committee Committee Committee • Etc.
(or equivalent) (or equivalent) (or equivalent)

§  Management override
IA
ICFR
§  Manual controls
High ICNFR
Critical importance to the success of the University in meetings its
financial and non-financial goals
CFO
Data Security
§ SHRO
Moderate
CS, GC CRO
Important but not critical to the success of the University in meetings
its financial and non-financial goals
§  IT, inventory and other controls;
Committee Charter Coverage
Risk does not have a material bearing to the success of the
§  Areas of vulnerability and fraud schemes;
Low
University in meetings its financial and non-financial goals
Material financial and non-financial
business risks & IC reporting
Source: Basel (May 10), Leblanc, Audit Committee Review
Source: R. Europe (Dec 10) and FDIC (Feb 11)
Source: University of Saskatchewan Copyright © 2010 Richard Leblanc.
2011

Weaknesses of Risk Management 27

n  Risk takers & compensation assurance
– see new banking reforms;
External
n  Non-financial risks and ICNFR: Internal
Assurance
Assurance
operations, technology,
reputation, health, safety, security; MGMT
Certif.
n  Management knows the risks;
Integrated Mapped Assurance

n  Board:

Top Risk Families
n  Protect Internal Assurance;

n  Complete, coordinated, independent assurance;

Comprehensive Risk Governance 28

Board of Directors
CEO

S-Ox Dodd-Frank Basel/King

EA CC GA, SF RAP

Audit
Committee
(or equivalent)
Comp.
Committee
(or equivalent)
Nom/Gov.
Committee
(or equivalent)
Risk
?

IA
CFO SHRO CS, GC CRO

Committee Charter Coverage

Material financial and non-financial
business risks & IC reporting Copyright © 2011 Richard Leblanc.

29
Non-Financial Risks, Assurance: What’s coming?

n  Governance of non-financial risks;
n  Committee(s)? Board? Integrated reporting, agendas, workplans
so all families of material risks assured and reported;
n  Assurance
mapping over all business risks, internal
controls and compliance;
n  “Integrated” reporting: Big4 see as annuity;
n  Board expertise in sustainability / stakeholder relations;

n  Incorporate
non-financial leading indicators (customer
satisfaction, employee engagement, culture) into
compensation metrics;


30
Shareholder Activism and Value Creation

n  The “compliance” board vs. strategy and value add;
n  Money being “left on the table”;
n  Director selection: industry expertise and value creation;
n  Elevating
strategy: full understanding of business
model, causation & KPIs;
n  Responding to activists and your duty;
n  Activists
may know more about your company than you
do: this should not be the case;
n  Engaged, focused, results-oriented & disciplined board
and chair;

Shareholder Engagement 31

n  Shareholder engagement:
1  active monitoring of companies,
2  engaging in dialogue with the board,
3  using shareholder rights, including voting and
cooperation with other shareholders;
n  Majority voting, say on pay and proxy access:
ICD, CCGG debate (1 April 2011);
n  Shareholder stewardship codes / obligations;
n  Say-on-pay as engagement catalyst (EU);
n  Dual class vs. minority shareholders (EU);


End to End Vote Confirmation 32

n  University of Delaware Report and
The Quality of the Shareholder Vote in Canada

n  Timely.

n  Accessible.

n  Accurate.

n  Certain.

n  Cost-effective..ness

CSCS leadership


Looking to the Future 33

n  Elections; LSUC; YUFA; disenfranchisement;

n  Obligation
will be on issuers to invest in
technology and websites – to enable meaningful
shareholder coordination and proxy seeking (EU);

n  Obligation
on intermediaries to have ICs and
address CoI;

n  If you do not engage, dissident shareholder will;

n  Cost-effective and pull technology intelligence;
n  This area will be regulated in the future;

Conflicts of Interest and Transactions 34

n  Oversight and special committees / independence;
n  Boardshave considerable latitude in self-governing
conflicts;
n  Conflicts among shareholders, directors, control
persons;
n  Conflicts by proxy advisors – SEC now studying;
n  Company
Code of Conduct, monitoring and
enforcement;
n  Mechanism for oversight by the Board;


Political Governance and Contagion 35

G-7

n Contagion


SM & Governance: Power of a Single Tweet 36
Boardroom Technology – Trends & Touchpoints

n  Browserseclipsed by ipads overwhelming winner, with
no close second – 86% of Fortune 500 (WSJ);

n  Paperless boardroom (example)
n  Exponentially interconnected; 3-9 month hybrid;
n  Brand, reputation, ICs;
n  To come: written consent, annotation,
highlighting; voice recognition; gestures ;
n  Email, press clippings slow, limiting,
outdated;
n  IT on director matrix;
n  Independent analytics (2 ex.);
n  Director experience: interactive dashboard with
n  collaboration, mobility, security, transparency;
Communications, IR,
public policy, SM ;
n  Cybercrime: lack of knowledge, controls: you are

n  being, or will be hacked at some point;
Gender/age effects (ex.);
n  Social media policy: controls vs opportunity;

SM & Governance: Power of a Single Tweet 37

n  Exponentially interconnected;

n  Brand, reputation, ICs;
n  Email, press clippings slow, limiting,
outdated;
n  Independent analytics (2 ex.);
n  Communications, IR,
public policy, SM ;
n  Gender/age effects (ex.);

38
CEO Succession Planning and Entrenchment

n  Outsiders cost more and perform worse, evidence
indicates;
n  Resistance by incumbent;
n  Average board: 2 hours per year;
n  Lack
of immediate successor: 39% of companies;
investors demanding
n  Steps:
document skills and experience profile;
pick model, have planned-for succession;
n  Boards increasing say in assurance and C-Suite;

39
Board Dynamics: Boardrooms of the future


Board Dynamics and Behaviour 40

Chair Leadership

Board-Management
CEO Posture
Relationship

Board Dynamics

Undue Influence Director Behaviour

IT &
Reporting


Board Dynamics: Governance Red Flags 41

n  Bully CEO;
n  Disengaged Directors;
n  Cliques / factions;
n  Weak Chair;
n  Board denial;
n  Body language;
n  Undue influence over compensation;
n  Inadequate risk, internal controls;
n  Lack of / ineffective Internal Audit;


Red Flags, continued 42

n Integrityand information/transparency issues;
n Stakeholder Directors;

n Micro-Managing Directors;

n Tone at top and ethical reporting;

n Poor CEO / executive succession planning;

n Non renewal of Directors;

n Happy face questionnaires; and

n Lackof governance disclosure and
transparency;

Governance Disclosure 43

n  Canadian regulator: unacceptable ;

n  Stakeholder
communication will be via visual, digital
media, not paper, email or even in person;

n  Meetings and voting will be digital;

n  Boardroom
disclosure is a missed opportunity by
many companies: Inferences are made;

n  Accessibility, mobility, interconnectedness is up and
cost is down;

n  Crisis planning – media is primary reputation risk now;

Thank you!
Comply or Explain Regime 44

n  CSA Staff Notice 58-306 (Dec10): unacceptable ;

n  EU Submission

Source: Basel (May 10), Europe (Dec 10) and FDIC (Feb 11) Copyright © 2011 Richard Leblanc.
Copyright ©

Contact Information 45

Professor Richard Leblanc
Faculty of Liberal Arts & Professional Studies
York University
tel: (416) 736-2100 x 33744
Email: rleblanc@yorku.ca
Twitter: http://twitter.com/DrRLeblanc
Blog: http://www.canadianbusiness.com/author/richardleblanc
http://ca.linkedin.com/in/rwleblanc

LinkedIn Group: Board Advisors


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