The State of Corporate Governance in Canada

September 17, 2015  |   Blog   |    

Merriam Webster defines “to govern” as “to control, direct or strongly control the actions and conduct of” and “to hold in check or restrain”. It is interesting that this definition of governing is so restrictive in nature, whereas we find that good corporate Boards play a large role in overseeing strategy development and helping grow the companies they govern. To us, the governance movement is as much about enabling as it is about restraining.

 

We consider the state of corporate governance in Canada as pretty good and getting better. It is not long ago that it was unheard of for a Board to conduct a search for a new Board member. The pool of Director candidates was small and domestic or even local in nature. Members just invited their friends who they knew and trusted and were confident wouldn’t give them a hard time. To the extent a search was commissioned, it was used as window dressing to sanitize a choice that had already been made.

 

Today this market is active and vibrant. About 50% of our assignments are for Board members and these searches are real, because existing members, driven by the need for diversity and geographical representation, simply don’t know enough people from the specification being sought. Plus these new members are required to be independent from others on the Board.

 

Of course independence can cut both ways. This “holy grail” of the Canadian corporate governance movement is not always what it’s cracked up to be. Our three Cs of good governance today are “competence, caring and commitment”, with a fourth C, “chemistry”, thrown in for good measure.

 

Competence often requires a knowledge of the business – hard to obtain when, to be considered independent, one can’t currently be or have recently been a competitor, customer or supplier, even of professional services. And caring and commitment also often fly in the face of independence. Although a conscientious Director will always be there when the company needs him or her, too many Directors stay in the background when the crunch comes, as they don’t want to take any risks to their reputations.

 

Speaking of reputations, we consider this fixation on reputational management to be the biggest drawback to good governance today. No Director ever got criticized for not making a decision or for backing the selection of an “obvious” service provider, but it is often different recommendations that should be made to most benefit the company in question.

 

How can this be solved? One way would be to put competence, caring and commitment, along with a good dose of fitting the Board’s chemistry, at the heart of new Board member selection criteria. A study done a few years ago by Yvan Allaire, now chair of IGOPP, demonstrated a somewhat negative correlation between the degree of Board member independence and the company’s stock price performance over a five year period!

 

Maybe the companies with two classes of shares, one being multiple voting in nature, have gotten it right, as they aren’t required to care as much about independence. As a result they are less constrained in picking members who have a deep knowledge of their business and who will be more likely to redouble their efforts when the chips are down.

 

As shareholders, aided by regulators, seek to have their own nominees put in place, one way to withstand their scrutiny of the Director selection process is to be able to demonstrate excellence in it. In this fashion, Boards can avoid this external burden by getting it right themselves and having their Boards comprised of members who can be shown to have been chosen through a rigorous process against properly determined specifications. Otherwise the chance of getting the all -important fourth C in place, Board chemistry, becomes greatly diminished.

 

As the busy fall season gets underway, we offer this food for thought and look forward to helping you with key Board appointments as the drive to enhance corporate governance in Canada accelerates.

 

With kind regards,

Bob.