Skip navigation

Janet McFarland

The Globe and Mail, Oct. 12, 2004

With the publication of another Report on Business ranking of corporate governance standards in Canada, there will undoubtedly be more debate about whether three years of reform have resulted in meaningful improvements to boards. Within the business community, there are many who argue we've seen little more than a flurry of process-oriented changes that have wasted time and distracted directors without accomplishing much for shareholders.

It's easy enough to find evidence to support optimistic or pessimistic opinions about governance reform. The bad news is that there continue to be weak companies with poor governance. There are still scandals, and still cases in which boards have failed to rein in excess. There are broad areas of governance that still have seen little movement, such as diversity on boards or better disclosure regarding executive compensation. And many directors complain that too much board time is now wasted on regulatory compliance and empty questions whose main purpose is to lay down evidence of technical diligence should legal action ever emerge against directors.

But the better news is that, broadly speaking, many reforms seem to be significant and valuable. Interviews with an array of Canada's most prominent directors and chairmen show broad optimism that boards are doing a better job of recruiting new nominees who add valuable skills. They are using evaluations effectively to improve board operations. And they are making powerful use of private meetings without management present, a development that seems to have had an unexpected degree of success in helping boards operate more independently.

The optimism that boards are improving is borne out by the Report on Business's Board Games survey over the past three years. Overall scores have risen to an average mark of 70 out of 100 in 2004, up from an average of 61 in 2002. Just 11 per cent of companies scored less than 50 in 2004, compared with 27 per cent in 2002.

Notably, the survey has found major changes in board and committee composition. Boards have become more independent, with key committees becoming strikingly more so.

The logical question, of course, is whether this in itself is a valuable change. There is much academic debate about whether independence does anything to improve a board's operations. Some argue, in fact, that it is even a negative trend, encouraging companies to stack their boards with cardboard cutouts who know nothing about the particular industry or even about running a company -- politicians leap to mind -- but who look good in a proxy circular because they are fully independent.

But even if independence is a superficial measure of a board's quality, this does not render it irrelevant. As a rule, shareholders can expect a board to be more responsive to investors and less aligned with management, if it is, well, less aligned with management.

Like most trends, there is undoubtedly a happy medium. Independence from management is broadly important. For example, Hollinger International investors would no doubt have been better served by a board not composed of Conrad Black's friends, who have been accused of rubber-stamping the CEO's proposed transactions without adequate documentation or debate. But there is also room for related directors on boards who can bring valuable industry or company expertise to the table.

In the Report on Business review, companies are awarded full marks if they have two-thirds of their board independent of management, but there is no extra score for going further. This recognizes that there is no clear incremental value in insisting that boards have just one related director, typically the company's chief executive officer, and no others.

Mainstream thinking now seems to suggest that, while a significant element of board independence is crucial, other factors are equally important, notably business expertise and a willingness to challenge management. And, increasingly, another factor is gaining prominence: industry-specific skill.

For years, many have argued that a professional director can sit on any board, and that the vaunted "generalist" is preferable to industry-specific experts. That pendulum seems to be swinging back, pushed by recent examples of blue-chip boards that have failed to anticipate problems because of a lack of expertise. Tomorrow, the Board Games series looks at the backgrounds of new directors joining top boards, and analyzes the trends in board recruitment.

While governance problems will never disappear, it is clear many boards have shown a genuine desire to improve their practices. They have worked hard to go beyond superficial process to make thoughtful change. This message echoed through every Board Games interview with every top director. For all the pessimism in the business community about directors' preoccupation with regulation and process, shareholders can take heart.

jmcfarland@globeandmail.ca

Recommend this article? 2 votes

Back to top