There are too many unanswered questions and inconsistent statements for anything less than a formal investigation by the U.S. regulator. It is another example of how Canada’s OSC has dropped the ball.
There is a lesson for companies conducting internal investigations that are to be reviewed by securities regulators. When writing the report, don’t do it on Swiss cheese. We set out our misgivings about Research In Motion’s board probe some time ago. Now it seems the SEC is having a problem with some of the rather flimsy and self-serving findings of RIM’s directors, who discovered backdating had occurred at the company. Quite a lot of it, actually. The U.S. securities regulator has launced a formal investigation into RIM’s practices. The fact that directors overseeing RIM also received stock options that were backdated, with no explanation as to who approved the move, and RIM co-CEO Jim Balsillie’s assertion that, even though he is a chartered accountant who holds that profession’s highest designation and is both founder and chair of an institute specializing in financial governance, he had no idea that backdating was wrong, may leave too many holes to ignore. The inconsistencies between what RIM’s directors and top officers were saying in their securities filings about the company’s stock options practices —including important certifications by RIM’s CEO and CFO made under U.S. Sarbanes-Oxley legislation, which we talked about here— are matters that need to be taken seriously. Apparently, Canadian regulators have not seen it that way. They need to get another pair of glasses.
Fortunately, the SEC may not entirely be buying what it has been handed by RIM, and as a result, investors seem to be selling. The stock was down substantially overnight. As for the OSC, which we noted here has often been little more than a delayed echo of the SEC, it seems once again to have been outpaced by its American counterpart. The OSC appears quite happy to dine on Swiss cheese, even though, in news The Centre for Corporate & Public Governance broke earlier this week, it has 90 employees who earn more than SEC chairman Christopher Cox. I have a suspicion, based on the volume of emails received at Finlay ON Governance, that a large number of Canadian investors and policy makers are beginning to ask if they are really getting value for their money.
Remarkably, too many women see, hear and speak no evil in the face of the male-dominated executive suite
Since the 1970s —that’s right, for more than 30 years— I have been arguing in speeches, lectures, appearances in the media, op-ed columns and in high-level meetings in boardrooms and in the councils of government that business needs to draw more of its top talent from the ranks of women. A report published by Catalyst shows that in Canada, at least, not that much progress has been made. Women held just 5.4 per cent of the top jobs at Canada’s 500 largest companies last year, up from 4.5 per cent two years earlier.
Overall, women remain largely excluded from the key jobs that signal corporate power and influence, despite comprising nearly half of the Canadian labour force and more than a third of all management roles,” said Deborah Gillis, executive director of Catalyst Canada.
Why has the pace of advancement been soooooooo slow?
Short answer: Too many men and women are prepared to turn a blind eye to it. In the 1990s, when Canada’s Toronto Stock Exchange was reviewing its corporate governance practices for publicly traded companies, I appeared before the committee and urged it to adopt language that recommended more women be appointed to corporate boards. Just the use of moral suasion, you understand, nothing too onerous. They refused. A similar plea was made to Canada’s Senate Banking Committee, where I have appeared as an expert witness on several occasions since 1994, and most recently, in 2003. They, too, declined to make such a recommendation. As far as I am aware, The Centre for Corporate & Public Governance, on whose behalf I was appearing, was the only group to call on these bodies to encourage the promotion of more qualified women. I heard not a word from any advocacy group at the time. I did hear from a number of my male colleagues in the corporate sector who expressed resentment over the proposal and made it clear that kind of talk would not be appreciated at the cozy club or in their boardrooms. Such feedback is helpful. I don’t believe backwards thinking should be rewarded in business and I always like to know what companies I should avoid as a consumer and investor; the list grows rather longer each year, unfortunately.
Fast-forward to one of the world’s most recognized names in cool telecommunications equipment: Research In Motion, makers of the iconic BlackBerry. It’s a brand used by many women, a number of whom also have stock in the company. But I don’t recall a note of criticism from any women or advocacy groups or by so-called enlightened pension funds about the fact that, since its inception as a publicly traded company and until several months after Finlay ON Governance first brought it to public attention last year, RIM had no women on its board or on its top executive team. It was an outrageous situation for any company that seeks the use of other people’s money, but all the more so for one whose co-CEO, Jim Balsillie, takes considerable credit for founding and heading the board of a non-profit think tank (supported with public funds) dealing with international governance issues.
Many are quick to decry the absence of more women in the executive suite and in the boardroom. And there are members of both genders who would like to see the workplace made more productive by tapping better the formidable talents of nearly half the labor force. But a remarkable number appear to regard this as a theoretical issue, and between the idea and the act they fall into T.S. Eliot’s shadow. When it comes to the real world where their voices and actions might make a difference —like with RIM for instance— too many still see, hear and speak no evil.
John Gray, an insightful columnist with Canadian Business, has a couple of pointed and well researched pieces on RIM’s stock options backdating revelations. He drew some of his observations from our postings on the subject at Finlay On Governance and from interviews with me.
Here is an excerpt: (more…)
There were several suitable candidates for the Outrage this week. A Harvard educated MBA trained as an accountant, who founded a center to deal with governance issues in global financial institutions, claimed to be befuddled by both accounting rules and good governance practices. RIM co-CEO Jim Balsillie spun quite a story to escape any suggestion of wrongdoing over stock options he and others backdated at that company.
Then there is the role of the Ontario Securities Commission in all of this, which is becoming quite a loser in enforcement cases. A conviction in a major stock tipping case was thrown out on appeal. The Bre-X trial has taken years without result. They dropped a case altogether last week in the middle of the trial. And there is the regulator’s perpetual tardiness in adopting rules to protect investors and give them more clout long after they have been approved in the United States.
Since last September, the OSC has given RIM extension after extension for the filing of financial statements. They even allowed company founders to exercise more than 750,000 stock options during this period. This week, they extended their extensions until June. There is not the slightest evidence to suggest that the OSC sees anything terribly wrong with a company that repeatedly fails to provide investors with the audited information they are entitled to by law, which along with its embarrassingly inept enforcement record, leaves many to conclude that the OSC must be the most dysfunctional securities regulator in the G7. Does the OSC even have files marked Livent or Nortel any longer or is justice to be a casualty there as well?
Worthy as these incidents are for this weekly slot, they pale in comparison to revelations that certain U.S. companies exploited the terrorist attacks on America by backdating stock options to that horrific time in order to further line their pockets. When the full extent of this disgraceful conduct emerges, it will shock and outrage Americans in a way that previous abuses in CEO pay have not.
Much has been said and written about the generation that fought a world war against oppression, saved democracy and built the foundation for today’s prosperity. They have been called the Greatest Generation. This was the generation of my father and mother. The grandchildren of this generation carry on that tradition on battlefields far away in Afghanistan and Iraq, where they courageously fight to bring peace to lands too long in the grip of tyrants and the intolerant. I have opposed the war in Iraq and, more particularly, the manner of its commencement and execution by the Bush administration. But I have never for a second doubted the heroism of those answering their country’s call.
At home, however, we see time and again leadership of a different kind: a world where no CEO can be left behind. For many, there is never enough. They believe the world owes them tens, and sometimes hundreds, of millions just for showing up. They need to be motivated, so the conventional boardroom wisdom goes. And the money just pours into their laps. Thus we see, both in the United States and in Canada, reflections of the Greatest Generation and what I call the Greediest Generation: young men and women struggling and dying for a cause that is greater than themselves; CEOs amassing unparalleled fortunes for a cause that is so often singularly about themselves.
And now we have some that have used the tragedy of 9-11 as an opportunity to gain even more. It doesn’t get much worse than that in the boardroom. Which takes this growing scandal of stock options backdating into an entirely different ethical sphere that should appall responsible investors and thoughtful individuals. It is a story we will be hearing much more about in the weeks and months ahead and is, without doubt, the Outrage of the Week.
Despite RIM’s co-CEO Jim Balsillie’s valiant efforts to twist himself into a pretzel and downplay the significance of RIM’s stock options and backdating fiasco, a sampling of which follows below…
“A heartbeat ago, it was just Mike and me and a half-dozen others where we shared an office and had the metal desk.”
“Was I trained in these governance matters? No.”
“Mike and I have voluntarily put US$5-million each
into this to cover costs, so it’s a bit of our Warren Buffett kind of moment.”
“I haven’t read the Canadian rules handbook for 20 years.”
“So did we do backdating? Yeah. We did backdating. Did we do it knowingly to line our pockets? No. No. Did we do it recklessly? No.”
…there are important corporate governance concerns connected with RIM’s internal report on the company’s stock options fiasco. The most basic questions: Where was the board, what did it know and what did it do about it?
The report fails to explore what role, if any, RIM’s directors had in approving backdating of options for the co-CEOs. We know the report claims Balsillie, Lazaridis and Kavelman engaged in the manipulation of grant dates for their subordinates. How did the dates get rejiggered for the benefit of top management? The report is silent.
The report gives no details as to the dollar value of options that have been backdated or for whom or when the dates were contrived. Perhaps the company can at least confirm that there was not backdating in the period immediately following the terrorist attacks on America which eventually led to a steep drop in shares on all North American exchanges.
A further question: Why was this so-called management initiated review commenced “at the initiative of Dennis Kavelman, the Company’s Chief Financial Officer, with the support of Jim Balsillie, the co-Chief Executive Officer of the Company, and the executive management team amidst the heightened public awareness and concern regarding stock option granting practices by publicly-traded companies?” Why did the audit committee or the board’s compensation committee not take the appropriate action to initiate the review? Was the board even aware of the media coverage regarding stock options in the United States? As in many things involving RIM, the board seemed not entirely on top of things.
Having decided to investigate, why did the audit committee permit members of the board’s compensation committee to participate in the investigation? More important, since top management was involved in backdating and knew it, at what stage in the probe was this disclosed to the committee? And why did it take seven months for this information to be put into the hands of investors?
As for the board’s role in receiving backdated options, the report found:
“Certain of the Company’s outside Directors also received an in-the-money benefit from the Company’s options granting practices. Such amounts currently appear to be immaterial. As the selection of grant dates used on grants made to outside directors was not apparent to those directors, they were unaware that they were receiving grants with dating issues.”
If the probe determined the amount of such benefits was “immaterial,” the exact amount must be known. Why does the report hide that figure? Why not put it out and let the investing public decide whether it is “immaterial”? The report claims the directors were unaware of the dating issues associated with their options. They didn’t fall out of the sky, so who approved them?
RIM’s board wanted the world to think it was in control over stock option decisions. As it stated in the most recent company proxy filing:
The Stock Option Plan is administered by the Board of Directors and the Compensation Committee. Each of the Board of Directors and the Compensation Committee has full and complete authority to interpret the Stock Option Plan.
Yet the report finds to the contrary:
The Review revealed that until after the commencement of the Review in August 2006, all stock option grants, except grants to RIM’s co-CEOs, were made by or under the authority of co-CEO Jim Balsillie or his delegate in accordance with an apparent delegation of such authority by RIM’s Board. For a number of years after the Company’s initial public offering in 1997, Mr. Balsillie was directly involved in approving grants, including grants that have been found to have been accounted for incorrectly. Mr. Balsillie’s direct involvement in approving grants diminished over time, as more responsibility for approving certain grants was delegated, without explicit conditions or documentation, to the Company’s Chief Financial Officer, Dennis Kavelman, and to other employees. Mr. Kavelman and other, less senior, personnel were also involved in the granting of options that have been found to have been accounted for incorrectly.
Note the phrase “apparent delegation of such authority by the board.” There appears to be no basis for this so-called delegation, which begs the question: Was the board so disconnected and disengaged from stock option concerns and compensation matters that it had no idea what kind of decisions were being made and by whom? Surely it must have known huge numbers of options were being granted. Did it ever wonder how option dates were being set and how much that might be costing shareholders? The board appears to have been merely a passive bystander in these events.
It seems to me that since certain directors received backdated stock options, and the board itself played an overly passive role in the company’s governance and control, an investigating committee of two audit committee directors was not in the best position to objectively detail the failures that led to these problems. The report assigns no blame or responsibility to the board or its committees for the failures and improprieties that occurred, nor is there any critical statement made about its actions. This is in stark contrast to the report of Enron’s special board committee which examined that company’s debacle, and placed considerable responsibility at the boardroom door.
Some might think it’s a little too cozy for the board to be investigating its own actions given that one of the committee’s members, James Estill, has been on RIM’s board since 1997 and has served with other directors on the compensation and audit committees for the past ten years. Clearly, he would be a key part of any weaknesses detected in corporate governance and board oversight, as would be his colleagues on RIM’s board with whom he has served for the past decade.
The report does make the following reference, which is enough to send chills up the spine of any serious investor:
The Special Committee determined that the Company failed to maintain adequate internal and accounting controls with respect to the issuance of options in compliance with the Company’s stock option plan…
But again, the committee assigns no responsibility for this failure. It speaks in the passive tense about the Company. Is the “Company” referring to top management or the board? Was the audit committee at fault? Mr. Estill is a member of the audit committee. It does get complicated when people are wearing several hats and trying to tap dance at the same time.
There are many questions the board does not seem to want to answer. But the riddle is: Is it even able to? This appears to be a board that doesn’t really know how often it meets.
During interviews this week, were he compared himself to Warren Buffet in terms of philanthropic generosity, co-CEO Balsillie, claimed repeatedly that the board generally has just four meetings a year. Prior to stepping down from the position a few days ago, Mr. Balsillie served as board chair from the IPO in 1997. The number of meetings he claims is well below the frequency recommended for the boards of publicly traded companies. More to the point, however, the statement is at odds with RIM’s latest proxy release, which claims the board met formally a total of 11 times. This is another discrepancy the company should explain. Keep in mind, investors were for the past several years provided with the following assurance in the company’s proxy statement:
The Company believes that it has a sound governance structure in place for both management and the Board of Directors.
As it turns out, RIM’s former board chair confirmed in a whirlwind of media interviews after the report’s release that the company was less attentive to these matters than it needed to be. We detailed RIM’s serious corporate governance shortcomings some months ago at Finlay ON Governance at a time when few seemed to see any problem. Clearly, as these findings and RIM”s own proposed changes reveal, RIM did not have a well evolved corporate governance culture. It didn’t have one because management called the shots and dominated the affairs of the company. I see little to suggest that will change given the disingenuous nature of the spin that has been put out to explain why the company’s governance practices fell into the appalling and costly state they did. RIM has had the level of board involvement and governance practices the founders wanted. I doubt if real change is on their agenda, given Jim Balsillie’s expectations of “just four meetings a year that last two or three hours.”
What all this comes down to is an incomplete report that skated over key questions, failed to provide necessary details and turned a blind eye to the board’s own role in the debacle that involved weak controls and absent compensation committee landlords.
The kids have marked their own exam. Perhaps now we can have some adults conduct the real investigation and get to the bottom of what happened, why it happened and what should be done about it.
Dealing in the field of corporate governance for a few decades now, I’ve read more than my share of self-serving corporate documents. Sometimes you’d think these things were written at a service station in between fill-ups. But the report of the internal committee reviewing RIM’s stock options irregularities is in a category by itself —so full of holes it’s hard to keep a grasp on it long enough to read it.
Among key questions that remain unanswered:
Exactly how much did top management and directors receive in options that were improperly accounted for or issued through backdating?
How, when and by what authority were these options approved?
What precisely was the options granting approval process for RIM’s co-CEOs and how and by whom were the dates for those options set?
Who set the option dates for RIM’s independent directors who also received backdated benefits, according to the report?
If improper gain was not the motive, what caused this quarter-billion dollar fiasco? Was it just good luck with bad advice?
Since it was determined that top management, including the co-CEOs and CFO, backdated options for certain personnel, and somebody apparently backdated options for the so-called C-group, why did it take seven months for this to be revealed? Why didn’t the co-CEOs just admit what they had done so that the information would be in the hands of investors earlier rather than later? Mr. Balsillie says these blunders occurred “on (his) watch.” He says he takes responsibility. Wouldn’t earlier disclosure have been more consistent with that spirit? That would have been leadership, not just spin.
It might be worthwhile to consider how this internal investigation came about. It was prompted by “the heightened public awareness and concern regarding stock option granting practices by publicly-traded companies.” Taking such action in the face of almost certain regulatory investigation is not exactly an act of altruism.
The list of accommodating oversights and failed questions goes on and on.
The report tries to explain away the backdating by saying an “informal” approach was taken to the granting of stock options. The use of other people’s money and the term “informal” should never occur in the same room.
Management, the company would have us believe, did not fully appreciate the accounting implications of their actions. Apple tried that line for Steve Jobs in its internal review and apparently got away with it. To see if it will work at RIM, we first need to do a check. Do we have the right Mr. Balsillie about whom it is claimed did not possess an understanding of the accounting implications of his actions? This is not Mr. Balsillie the medieval studies major at Yale or Mr. Balsillie the shoe salesman at Gap. This is Jim Balsillie who has two business degrees, including an MBA from Harvard. He is also a chartered accountant who, the company’s website boasts, has received the highest designation from the Institute of Chartered Accountants. No, I don’t think the Steve Jobs defense will work here.
What about RIM’s CFO, Dennis Kavelman? He was also involved in options backdating and received certain options whose dates had been favorably adjusted. The report does not disclose who specifically approved those dates. Are we to believe he, too, was unaware of the accounting implications? Mr. Kavelman is also a chartered accountant who has worked in that profession. The credentials of these accounting trained executives seemed to elude the internal investigation team. I guess it was too difficult to connect the dots where accountants actually might be expected to know something about accounting rules.
If you accept the report’s conclusion that there was no intentional wrongdoing and only honest mistakes were made, you would also have to believe that the two co-CEOs and the CFO had no idea of the significance of the Form 52 documents they were regularly required to sign under U.S. securities laws attesting to the accuracy of company financial statements. The certification by CEOs and CFOs was a direct result of the Enron-era scandals in which too many chief executives thought they could invoke the I-had-no idea-that-was-wrong defense made popular by Ken Lay, Jeff Skilling, Bernie Ebbers, Martha Stewart and a long line of similar actors. The fact that Messrs. Balsillie, Lazaridis and Kavelman were affixing their signatures to these important securities forms during the period in which they had all participated in the alteration of option dates boggles the mind.
Finally, there is some indication from previous company statements that certain records had to be recovered and “forensic imaging” was employed. In other cases, the report claims the necessary documents do not exist. Were records destroyed or deleted? The report itself offers no clarification and it should. Was there a failure on the part of the audit committee or top management to insist upon a proper policy of document retention? The uncovering of efforts to destroy records during the course of an investigation is something that always sends up red flags to regulators and justice investigators in the United States. We will see what happens here.
We’ll have more to say about the role of RIM’s board, and the staggering failures in oversight and control that led to this costly embarrassment for the company and its investors.
