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Independence makes big gains in the boardroom

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Even those companies that trade only in Canada are facing regulatory pressure to make changes. Most of Canada's provincial securities commissions have adopted new rules requiring boards to have independent audit committees by July, 2005, at the latest. And regulators are also drafting voluntary guidelines that will recommend majority independence on compensation and nominating committees.

Charles Baillie, the former chairman and chief executive officer of Toronto-Dominion Bank, who now sits on several boards, says companies are responding to the times by reforming their governance practices, but cautioned that directors must not be distracted by this.

"There has been so much pressure because of the scandals to make sure your governance looks good," he said. "There are pluses to that, but there are dangers, too. The board needs to be sure that it has good governance, but it must not get consumed by process."

Critics of regulatory intervention have complained about the independence trend, noting that directors who meet strict independence rules may not actually perform well, and say independence itself does not guarantee directors are knowledgeable and diligent when they sit at the board table.

But shareholders say independence generally has a logical benefit because directors are distanced from management, and is a factor that can be measured from a distance, even if shareholders cannot individually assess the mindset of each director.

"No one is going to be inside every person's head," argues Mr. Beatty from the Canadian Coalition for Good Governance, which represents large institutional investors. But he said experts and shareholders typically agree that independence is generally positive.

For many directors and governance experts, the solution is to consider independence to be a starting point for a good board, but not the final answer.

"The independence issue is important and necessary but not sufficient," notes David Nadler, chairman of New York-based Mercer Delta Consulting.

Mr. Nadler, who has worked with numerous boards, said many directors are technically independent but fail to act independently.

"There is another dimension that is harder to measure, which is psychologically how willing is someone to challenge the CEO and stake out an independent position," he said.

He believes the most essential element for fostering independent behaviour is the existence of regular meetings of independent directors without management, which is now a requirement for companies listed on the New York Stock Exchange. Canada's securities regulators have also recommended in-camera meetings for companies as part of the draft of new voluntary governance standards.

"I think it is one of the big, unheralded changes," Mr. Nadler said.

Indeed, many prominent directors in Canada say meetings without management present have been a key feature of independent board behaviour, allowing directors to freely raise concerns before problems become crises.

"If there are issues, it is really important that they are nipped in the bud. That, I think, is the magic of in-camera sessions," said David Galloway, a long-time director and new chairman of Bank of Montreal.

In fact, many veteran directors say that, as board members become more at ease speaking their minds in private, it becomes easier for them to voice concerns with the CEO in the room. Such freedom of communication, they say, can be even more constructive.

David O'Brien, chairman of Royal Bank of Canada and EnCana Corp., and a director on several boards, said as boards gain experience with in-camera meetings, he finds they are more comfortable expressing opinions during private sessions that include the CEO.

"There is a tendency in the early days for people to complain about this, that and the other thing, which frankly would have been better if the CEO had heard it and responded," he said. "I have said [as chairman] if there is anything you think the CEO should hear, I want you to say it now -- otherwise, it just becomes a carping session."

In 2004, the Report on Business review found that 47 per cent of S&P/TSX companies said they hold in-camera sessions at each board meeting, while another 22 per cent said they hold them regularly.

These changes form part of a broad improvement in governance standards since the Report on Business began its review in 2002.

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