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Boards recruit new faces, new visions

Demand for diversity and financial and international experience among directors is growing, ELIZABETH CHURCH reports

The Globe and Mail, Oct. 13, 2004

The clubby circle of directors who sit on Canada's largest boards is growing wider, thanks to an increasing demand for diversity, international experience and financial expertise. A Report on Business examination of the latest rounds of board appointments also shows that nearly half of the directors who joined major Canadian companies since the beginning of last year did not sit on another large board.

As well, more than one-third of those new directors were identified by firms as living or working outside Canada -- an indication of the international outlook many Canadian firms are now taking.

Even so, getting appointed to a blue-chip board is still far easier if you already hold at least one other significant director position or know someone else who does. While formal searches for directors are on the rise, many prominent chairmen say personal recommendations are still the first line of search for many of Canada's largest boards. And when it comes to picking candidates, well-known former chief executive officers remain the superstars of board recruitment drives, the numbers show.

"It is valuable to have former CEOs -- they have been there," said David Galloway, chairman of Bank of Montreal and the retired CEO of Torstar Corp. "And you do have some time when you retire, which really helps."

More than one-third of all director appointments handed out by major Canadian firms since the beginning of last year went to individuals who sat on another Canadian blue-chip board, according to a review conducted by Report on Business with the aid of statistics gathered by the Clarkson Centre for Business Ethics & Board Effectiveness at the University of Toronto. An additional 18 per cent went to company executives, or individuals with business or personal ties to the firm. Just 7.8 per cent were handed out to women who did not have ties to the company.

Statistics are for appointments made between January, 2003, and September, 2004, to the boards of the 218 companies on Toronto's S&P/TSX index as of June 15. During that period, a total of 358 board seats were filled at those firms.

The examination showed that even with the growing drive for diversity, the most popular new directors by far remain recently retired chief executive officers.

Peter Godsoe and Charles Baillie had their choice of directorships when they hung up their leadership hats at two of the country's largest banks.

Both former bankers serve on the boards of five Canadian companies listed on the S&P/TSX index.

Other current directors who added more board seats to their list since the beginning of last year include John Mayberry, the retired chief of steel maker Dofasco Inc., and Ronald Osborne, the former head of Ontario Power Generation.

Competition can be fierce for the most sought-after directors. In the case of Mr. Godsoe, the former chairman and CEO of Bank of Nova Scotia says he was courted by firms that wanted him on their board for as long as five years before he left the bank. "I guess some of them thought I was staying around too long," Mr. Godsoe said in a recent interview. "I told them when I am fully retired I will look at it."

At Finning International, chairman Conrad Pinette said the Vancouver company also got a head start recruiting former Royal Bank chairman John Cleghorn, who joined its board in 2000. "To be very forthright with you, we knew that he was about to retire and we decided to approach him early rather than late," Mr. Pinette said recently. "I'm sure if we had waited a year we would have missed the boat in terms of Mr. Cleghorn."

David McLean, chairman of Canadian National Railway, said recently retired CEOs are highly valuable directors because of their general business knowledge and their ability to make a contribution. "Active CEOs have difficulty on boards because of their time commitments." CN is one of the companies that recruited Mr. Baillie, the former Toronto-Dominion Bank chief executive officer, as a director. Mr. McLean said Mr. Baillie "had all the connections, but he was not so busy that he could not attend board meetings."

But Mr. McLean and several others say there also is a clear move away from boards filled with generalists to ones that represent a range of specific skills and industry expertise.

David Nadler, chairman of New York-based Mercer Delta Consulting, which advises many boards, sees this shift as a response to the rising stakes facing corporate directors.

In the past, he said, picking board directors was like decorating a Christmas tree. "It was like picking nice ornaments that look good," he said. "You had retired politicians and public figures or other people that seemed to add lustre to the Christmas tree of the board."

The problem with that approach, he said, is that while individual directors might be fine people with good intentions, they sometimes lack specific knowledge. "I was amazed in the '90s working with boards of technology companies that had no knowledge of technology."

David O'Brien, chairman of both Royal Bank of Canada and EnCana Corp., and a director on several boards, said an active board requires a lot of general business knowledge, some business savvy and specific industry knowledge. "It is not enough to have a lot of well-intentioned people sitting around the board table . . . you need people who understand the business and get engaged. That takes a lot more effort."

Indeed, many chairmen at prominent Canadian firms say that when they set out to fill a vacancy on their board, they are looking to fill a very particular set of skills.

This new-found search for specific expertise has been especially intense in the area of financial literacy, given the rising importance of the audit committee and the requirements from regulators that companies have directors with financial expertise. Along with former corporate executives, financial experts such as former federal auditor-general Denis Desautels and retired accounting firm executives Hugh Bolton and Thomas O'Neill also have attracted high-profile board appointments.

As well, about 15 per cent of the independent directors who joined a single board since the beginning of last year also are reported to have an accounting designation. The real number is likely higher since not all firms give details of director qualifications.

Yet for all the talk of building boards and expertise, most director appointments still seem to be happening by word of mouth and personal referral, rather than a more formal search process.

"We have never needed an outside headhunter," said Mr. McLean at CN. "We talk to senior advisers, our counsel in the [geographic regions that] we are looking for directors."

Paul Cantor, who as chairman of Russell Reynolds Associates specializes in director searches, estimates that about 80 per cent of appointments are done through networking or the recommendations of lawyers and accountants. Boards need to work as a team and many fear that appointing a director who they do not know could damage that relationship.

Indeed, many chairmen say the need to build camaraderie around a boardroom table makes it difficult to hire new directors without some personal reference, either from a current director or another colleague. At the same time, they admit that can be tricky when searching for foreign candidates.

At Finning International Inc., chairman Conrad Pinette said the board uses a formal search process to get the international representation it feels is vital. But he said the board is careful not to make commitments until directors are confident the chemistry is right. "We have gone right down to the final selection process and then said, 'No this is not going to work.' "

Mr. Galloway at Bank of Montreal sees both sides of this debate. "One of the things that is still important is the culture of the board," he said. "It is not easy when someone is bringing on a total stranger. I don't think we should throw out the old method. It wasn't all terrible to say 'I know this person and I think he would fit well on the board.' "

At the same time, Mr. Galloway said he knows from his own experience as a director at U.S. media company E.W. Scripps Co. that an effective board filled with individuals recruited for their expertise -- as he was -- is possible. "You can put five strangers in the room and it can work very well,'' he said.

Mr. O'Brien said that in his experience, the push for diversity on boards depends a lot on the industry and the nature of the business.

"If you are a broad consumer business, you want a more diverse board than you do if you are a mining business," he said. "The more retail you get, the more diverse you need a board to be."

Many also point to the approaching retirement of many directors as another motivation for boards to look beyond traditional sources for new recruits. That pool is shrinking because the increasing demands of boards is causing many current and even retired executives to limit the number of seats they will take.

Mr. Cantor, the consultant, said he now finds candidates are considering board offers more carefully. But he argues there is not a shortage of director candidates, just a shortage of traditional candidates such as retired executives.

As for the most popular directors, they can afford to be choosey about which boards they join.

Mr. Godsoe said he picked his board appointments because he knew the chief executives running the companies and felt his knowledge would be put to use. "You have to have confidence that you can make a meaningful contribution," he said.

Mr. Baillie said that when he was picking boards, he looked for companies that fit with his desire to see Canada excel. He, too, wanted to be sure his contributions would count.

"I wanted to be on boards that had an impact beyond Canada and were a leader in their industry," he said. "I tried to make sure they were using their directors, rather than treating them as mere decorations."

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