The game has changed. RIM’s management has not. Neither has its board.
Today’s latest (20 percent) plunge in the stock of Canadian based Research In Motion, this time because the company missed about every expected metric for the quarter, re-confirms that RIM needs a new operating system for its boardroom. It is the board, with a its succession of lame directors, that has permitted a culture of smugness, distraction and disconnection to cloud the judgment and performance of top management, and has too long tolerated a disingenuous streak in the way the co-founders deal with adversity. This is what has led to RIM’s fall from glory and the devastation of its stock. Management was playing its own game and setting its own rules. It thought success would continue indefinitely and the market would defer endlessly to its much-trumpeted wisdom.
The game has changed. RIM’s management has not. BlackBerrys are out. Apples are in. The kids decide what’s hip and everybody wants to be cool. Holding up a new Playbook is the definition of uncool. Launching it in the summer is the definition of stupidity. Only grandiose egos, too used to everyone genuflecting to their brilliance, could come up with this foolishness.
Long before it became popular, in the wake of the billions of dollars in company value that have been obliterated, we lamented the weaknesses of RIM’s governance practices . We predicted further casualties from a board mentality where management is effectively accountable to itself and still allows a regime involving co-this and co-that at the top that would not be tolerated in any mature, self-respecting company, let alone one that is experiencing something of a freefall in its shares. The stock is down more than 60 percent this year. No significant change in management, or the board for that matter, has been forthcoming.
RIM’s problems will not end until the board steps up, key management actors are forced to step down and a new culture of accountability is rebooted in RIM’s boardroom.
The purest treasure mortal times afford is spotless reputation.
Shakespeare, King Richard II
Two universal facts remain unchanged in the News Corporation saga of serial hacking and management misjudgments: First, a company with a weak ethical culture, no matter how successful financially, will never fully survive the winds of public outrage when it flounders upon the shoals of moral misdeeds. Secondly, it is the board of directors that must ultimately ensure that there is a culture of ethics that is unswervingly heeded and vigorously enforced in any major publicly traded corporation. Given recent events, it is doubtful that News Corp’s board fully grasps its role as an ethical steward for the company. Since eight out of 17 directors are insiders and family members, Rupert Murdoch holds the posts of CEO and board chair and the board itself met on only six occasions in 2010 (the last year for which such figures were reported) it is very unlikely that News Corp’s board understands its other duties as well.
It is no surprise, therefore, that Sir Roderick Eddington, the company’s most senior independent voice and so-called lead director, has not offered a word to shareholders or the public on the calamity facing News Corp. In this kind of family dominated operation, the surprise would be that the board might exercise some independent thinking and step up to the plate which shareholders actually expect directors to occasionally grace. No company could possibly have a genuine culture of ethics and still find itself in such a state of public odium. No serious board or senior management team could have allowed the warning signs that were evident years ago on this subject go unheeded. It is particularly troublesome that James Murdoch, the so-called heir apparent, was prominent among that senior management group. These are all signs that ethics was the missing voice in the News Corp boardroom.
This is a scene that has been played out in the great corporate fiascos of the past 100 years, from the demise of Penn Central Railroad and Barings to the collapse of Hollinger and Livent. One might have thought a lesson would have been learned from the disintegration of Robert Maxwell’s media empire some years ago, which foundered in an ocean of corruption and deceit. (Mr. Maxwell actually did drown at sea.) But the only lasting lesson to be learned from these kinds of situations is that the lessons of the past are never remembered by those who need to remember them.
For more than four decades, I have been writing, commenting and advising on what I have called the high cost of ethical folly. One of those articles from the past is reprised below. In these tragedies, which are always avoidable, the cast of actors may change but their lines of feeble defense and mock surprise at the scandals that unfold on their watch remain immutable, as does the ultimate carnage of players and others at the end. I have spent many a frustrating time over the years with skeptical boards and CEOs, trying to counsel a greater commitment to ethical issues only to see later that their blindness, indifference and arrogance has landed them in a very thick ethical soup.
What is amazing is that for all the progress there has been in the corporate world during this period, for all the sophisticated MBA programs and record levels of pay for CEOs and directors, not to mention the abundance of painful examples of moral failure, these silent ethical sentries of the boardroom are still tolerated.
Why? Some thoughts, below, of more than a decade ago may still be valid.
BUSINESS ETHICS IS NOT A ‘SOFT’ ISSUE, IT’S A MATTER OF SURVIVAL: Until boards and management become serious about ethics there will be more Barings
J. Richard Finlay
11 March 1995
The Financial Post
(Copyright J. Richard Finlay)
What several European revolutions, two world wars and numerous depressions could not do to London’s Barings Bank in more than 200 years, one28-year-old employee accomplished with a few computer key strokes. And the bank collapsed.
Such is the high cost of ethical folly in the ’90s. It is a lesson that has been demonstrated before by companies such as Drexel Burnham Lambert Inc.,which could not survive the fallout from its conviction for securities fraud and the $600-million fine levied against it in the 1980s. Prudential Securities is still reeling from the estimated $1.4 billion in penalties and restitution costs arising from wrongdoings in its limited partnerships. Kidder, Peabody & Co.recently disappeared after a scandal involving phantom profits and lax accountability. And then there are the Canadian cases of Standard Trustco and the Northland Bank that were seized by regulators, leaving a trail of questions about ethics and accountability practices in their wake. Ethical concerns also have been raised in connection with the collapse of Confederation Life last summer.
What these examples demonstrate is that ethics, far from being the esoteric ”soft” issue many in business think it to be, is about as bottom-line focused as you can get. It is a key to survival in a financial world that depends more and more upon confidence and accountability as the twin pillars of success.
There is, however, no great surprise in the fact that these kinds of disasters continue to surface with predictable regularity. The real surprise is that there aren’t more of them. The structure of many companies almost invites such catastrophe. Most organizations have very weak codes of ethics that are poorly supervised and almost never audited. If the same approach were taken to financial performance, investors would desert the company in droves.
Short-term thinking, often prompted by the lure of quick profit, is another cause of ethical folly. In the case of Barings, management was alerted months ago to the inadequacies of its oversight systems. But management chose to ignore that advice, presumably because everyone seemed to benefit from the system as it was. ”Why fix something when it’s not broken?” is a bromide that many advocates of strengthened corporate ethics systems hear time and again. Ethics also gets short shrift because it is easy to ignore. Slap the pre-packaged code of ethics into the employee manual and you create the impression of an ethically sensitive organization. Drexel Burnham Lambert, Prudential Securities and Kidder, Peabody each had a code of ethics. But without a strategy for embedding ethics into the culture of the organization, without a commitment to making it an overriding component in every decision of the organization, a code of ethics is little more than window dressing.
Ethical performance doesn’t just happen. Like product quality, customer satisfaction, competitiveness and any other important ingredient of success, the ethical performance of a company needs to be managed. It requires clear goals, the understanding and involvement of employees, continuous training, regular evaluation, periodic auditing and, most of all, the commitment of top management.
It is this latter category that is so often the missing – and fatal – component in the ethical equation of organizations. Unless senior management is fully dedicated to ensuring the highest standards of ethical performance, and incorporates compliance and supervision practices into the structure of the organization, ethics will never move from theory to reality. In this connection, the role of the board of directors is paramount.
The board is ultimately responsible for preserving the integrity and the continuation of the organization. But too few boards have ethics committees or make regular examinations of the ethics practices of their organizations. Does the company have an ethics training program and hold ethics seminars?
Should an ethics ombudsman or external ethics counsellor be hired? Is there an adequate whistle-blower policy? Can outside members of the board be reached independent of top management? Many scandals have developed because initial problems were covered up by management. As author Peter Drucker has noted, the board was always the last group to hear of trouble in the great business catastrophes of the 20th century. This latest disaster shows that many boards are still in the dark over such issues.
As the Barings saga unfolds, it will doubtless reveal the existence of warning signs that should have been heeded by management and the board, weaknesses in the bank’s accountability structure that no prudent firm should tolerate and excesses in behavior of the offending trader that should have sent up red flags everywhere. And people will say, as they always do in such cases, how could that have happened? The answer is that until boards and top management become serious about business ethics, and realize that it is survival ethics, such catastrophes cannot but continue to occur.
(Ed. note) J. Richard Finlay heads a Toronto-based management consulting firm specializing in ethics and governance issues.
The crashing fall of Research In Motion’s stock from its euphoric highs where management could do no wrong (even when it did) to the current depths of shareholder odium has one explanation — and only one explanation. It is a failure of corporate governance, pure and simple. What brought RIM to this point was adumbrated on these pages some time ago. A few changes in boardroom players followed our reports, but a change in culture did not. The current crisis confirms that the board remains overly deferential to its co-founders. This, along with the fact that directors continue to permit them to head the board as co-chairs, as well as head the management team as co-CEOs, is exhibit one in the case for RIM’s governance shortcomings. Any board that would have allowed the two men who were at the center of RIM’s options backdating scandal and who displayed such sophomoric excuses as to their knowledge of corporate governance practices and basic accounting rules (Mr. Balsillie retains a professional accounting designation) is not a board that entirely understands its role in protecting shareholder interests. We were the first to call for the appointment of a non-executive chair at RIM some years ago and for the dismantling of the peculiar positions of board co-chairman and management co-CEO. Those reforms are needed now more than ever, yet the board seems both deaf and blind to their urgency.
As RIM’s shareholders have watched billions wiped out in stock value over the past several weeks, little has been heard from the board or its lead director, John E. Richardson, however. Nor has there been any indication that directors are foregoing their fees during a time when investors are losing so much. Each director is paid a minimum of $150,000 annually. That’s a reasonable fee for directors who are adding value; it is far too much for bystanders to a company’s calamity. Exactly one year ago , RIM’s stock on the NASDAQ Exchange closed at $58.84. As of this posting, the stock has fallen to $26.74. Investors are bailing in droves.
It is time for a shakeup at RIM. It starts with a board that ceases to be mesmerized by management actors who have too long dominated the corporate governance stage and brings in serious accountability reforms that raise investor confidence and restore corporate performance.
It is not whether someday Apple shareholders will wish they had a more robust corporate governance regime. It is only a matter of when this will occur, and at what price.
There is a widely held consensus, made all the more vivid as the company’s stock pushes past $300 a share, that Apple Inc. is an amazing success story whose vision has transformed the way we hear and communicate with much of the world. We share that view. But we also have long held on these pages that Apple remains an under-governed and poorly directed company that needlessly places continued success at risk.
We were the first to spotlight the absence of women on its cozy six-member board (it has one now) and the fact that its chairmanship, which is informally held by Steve Jobs, has never been properly documented. The board meets infrequently and there is no reasonable way such a small number of directors could properly discharge their duties serving on Apple’s various committees, especially on top of the other outside roles most board members have. Three of Apple’s five outside directors serve as either chairman or CEO of other companies and sit on additional boards as well. Steve Jobs remains synonymous with Apple and a key to its success. Despite much ballyhoo about having others who could fill his shoes when he took his medical leave a few years ago, this is widely viewed as wishful thinking. The board has done little to show that an active succession plan is in place.
This style of corporate governance may be suited to a fledgling business located in a garage. But when it comes to one of the most highly valued companies by shareholder capital ($278 billion by today’s count) in North America, a higher standard is surely advised.
Why is Apple reluctant to adopt the corporate governance reforms enacted by so many companies? One reason may be that it has the same mindset about the company’s own vulnerabilities that it applies to its computers. Antivirus software, it is widely asserted by Apple aficionados, is for all those other millions of computers operating on the Windows system. Few viruses ever affect Macs, so they say. That’s more than a bit of wishful thinking, too, as there are dozens of other ways in which Mac computers can be compromised, as anyone who has had an encounter with malware or phishing exercises will attest. More likely, though, it’s probably just plain old hubris — the imposter of triumphant success that has seen the demise of great leaders and mighty institutions for thousands of years. There is little that is permanent about success, except the universal principle that success is never permanent.
It is not whether someday Apple shareholders will wish they had a more robust corporate governance regime, led by a larger and more engaged group of independent directors. It is only a matter of when this will occur, and at what price. Behemoths that did not take corporate governance, among other matters, seriously, have been struck down to pitiful shells before. Some, like General Motors, rise again — but never to their previous dominance. Others, like Enron, WorldCom and Penn Central Railway, vanish altogether.
It should not take the prospect of a Titanic disaster to realize that with every surge upward to yet more dizzying heights in its stock, Apple’s investors have also begun to move into some very perilous waters.
Corporate governance at the failed Wall Street giant had all the hallmarks of a disengaged boardroom stacked with cronies and dominated by insiders. Finally, Congress can shed some light on where the board was at Bear Stearns — or if it existed at all.
Former Bear Stearns CEO James Cayne will be making a rare public appearance this week when he testifies before the Financial Crisis Inquiry Commission. Other top executives from the once thriving firm that was a fixture on Wall Street for nearly a century will be giving evidence as well. It will be an ideal opportunity for the Commission to explore the role that questionable corporate governance practices played in Bear Stearns’s failure. We set out our views on that subject in a two-part posting called “Did Bear Stearns Really Have a Board?” in early 2008. They can be viewed here and here. They remain among our most widely-read columns even today. Our comments were quoted in The New York Times reviewed book “Money for Nothing” by John Gillespie and David Zweig.
Corporate governance at Bear Stearns had all the hallmarks of a disengaged boardroom stacked with cronies and dominated by insiders. The most strenuous task of the all-male board seemed to be lifting the rubber stamp embossed with “yes” for gigantic bonuses and anything else management wanted. Only at the very end did the directors even faintly awaken to their duties, after the sudden shock of seeing that no one was at the controls of the engine that was speeding toward catastrophe and realizing that it was too late to retreat to the heavily curtained sleeping car where they long resided.
As we said back in March 2008:
Dig deeper though and you will find a dysfunctional board, overstretched independent directors and an executive chairman whose approach to his duties is novel, to say the least. The first thing that hits you about this Wall Street icon is that it is governed by men. Only men. It was like that at its inception in 1923; it remains a men’s club in 2008. Three of its 12-member board are insiders, as is the executive chairman, James Cayne. (There were actually four insiders until Warren J. Spector, the firm’s president and co-chief operating officer, resigned last fall over the collapse of Bear’s hedge funds.) Best corporate governance practices generally prefer management limited to one or two seats at most. The insider problem in Bear’s boardroom is even more pronounced where all the heavy lifting is done: the company’s executive committee. Composed entirely of the top insiders of the investment bank, company filings confirm that in 2006 (the most recent figures available) the executive committee met on 115 occasions. By contrast, the full board met only six times.
We concluded by suggesting exactly the type of inquiry that is occurring under the Congressional appointed commission headed by Phil Angelides
When such an important financial institution begins to crumble so quickly, leaving the capital markets in turmoil and requiring the intervention of the highest echelons of the federal government, Congress needs to ask some pointed questions. It should start with the Bear Stearns board.
Finally, a window of Congress can shed some light on where the board was at Bear Stearns — or if it existed at all.
Leonard Lance, (R.NJ): Mr. Cruikshank, to follow up in your remarks. Do you believe there were corporate governance failures at Lehman?
Thomas Cruikshank, Chairman, Lehman board auit committee: No, I don’t. I think our governance procedures were really very, very good.
House Committee on Financial Services, April 20, 2010
A number of revealing facts emerged from testimony before Congress this week on the Lehman Brothers bankruptcy. The Securities and Exchange Commission said that, despite being aware of red flags, it did not believe it could press for any changes at the company where staff members were embedded for several months. It appears some SEC staff had other things on their minds, however.
CEO Richard S. Fuld Jr. claimed he had no idea about the problems that were brewing and had never heard of any Repo 150 transactions. And Thomas H. Cruikshank, chairman of the defunct investment banker’s audit committee and a Lehman director since 1996, pronounced that “(Lehman’s) governance procedures were really, very, very good.”
His statement came in response to a question from Rep. Leonard Lance (R-NJ), who accepted Mr. Cruikshank’s assurance without further question. And that was all that was asked about board practices at Lehman. The committee could have probed into some of the concerns we first raised on these pages nearly two years ago. It might have inquired whether it was really a good idea to concentrate so much power in Mr. Fuld, who was CEO, chairman and of the board and chairman of the board’s executive committee, or for half of Mr. Fuld’s handpicked board members to be in their seventies and eighties. It could have looked at the executive committee, which had just two members — Mr. Fuld and John D. Macombre, who was in his eighties at the time the Lehman crisis was unfolding. It might have cast its eyes on the risk committee of the board, which met on only two occasions in 2007, or considered whether several of the directors had been overloaded with responsibilities on other boards. Was being an actress sufficient qualification to be a board member,or was a poor performance something that was common to all of Lehman’s directors? The committee did not pursue any of these lines of inquiry.
In his voluminous report, Anton Valukas, the court appointed examiner for Lehman’s bankruptcy, gave the board a clean bill of health and said it did not know what was going on. He could not point to anywhere management had actually informed the board of the extent of the risks that were being incurred or the undisclosed use of accounting tricks like Repo 150. But he also does not cite a single case where directors asked discerning questions and where they were misled by management’s response.
However, in a scathing criticism of the SEC, Mr. Valukas told the committee:
The SEC did not ask the right questions. It’s failure to ask about off-balance sheet transactions in the post Enron-era is hard to understand.
But it is also hard to understand why Mr. Valukas did not apply the same thinking to Lehman’s board, which he seems to exonerate because it was not told about wrong doing or alerted to red flags. This, too, raises the ghost of the Enron board whose specter the examiner invoked.
On that point, it is unfortunate that neither Lehman investors nor legislators have had the benefit of an investigation such as the one the Enron board itself commissioned (much to its later dismay). In an extensive and courageous probe conducted under the chairmanship of William Powers Jr., the report concluded that:
Enron’s “Board of Directors failed … in its oversight duties” with “serious consequences for Enron, its employees, and its shareholders.” With respect to Enron’s questionable accounting practices, the Report found that “[w]hile the primary responsibility for the financial reporting abuses … lies with Management, … those abuses could and should have been prevented or detected at an earlier time had the Board been more aggressive and vigilant.
One wonders what at Lehman Brothers would have made the actions of its board so different or less deserving of scrutiny and condemnation than Enron’s. Would not a prudent board, faced with a crisis of unprecedented proportions in the capital markets, have made diligent inquiries of management that could have produced the answers needed to grasp the real extent of the company’s exposure? What questions might it have asked of its auditors and management that would have enabled the firm to detect the unfolding disaster at an earlier time? What steps could it have taken in its structure and composition as a board that would have made it more pro-active and less an array of Christmas lights that only work when the CEO turns them on? Mr. Valukas’s report was unenlightening in this regard, as were Mr. Fuld and Mr. Cruikshank at the committee’s hearing.
Mr. Fuld was paid nearly half a billion dollars in salary, stock options and bonuses between 2000 and 2007. In the same period, independent directors were paid approximately $20 million in fees and stock awards. For that sum, shareholders saw the fabled firm that had been a Wall Street landmark for more than 150 years sink into the ground and the value of their stock plunge with it.
They can be grateful, however, that Lehman’s governance procedures were “very, very good.” Had they not been as long-time director Thomas Cruikshank warranted and the Congressional committee accepted without challenge, instead of being faced with a calamitous outcome of historic proportions, investors would have had to deal merely with a catastrophe of unprecedented magnitude.
Such is the fantasy world that has long come to define corporate governance in America and the legislative and regulatory apparatus that permits it.
