2011 marks the 10th year of Board Games, The Globe's annual report on corporate governance. See the rankings: 2011 corporate governance rankings and see the full 2011 Board Games website here.
It was a revolution so quiet that most people are unaware it even happened.
In the decade since the collapse of energy giant Enron Corp. ushered in major reforms in the boardroom, Canada’s corporate boards have undergone a tectonic shift in the way they operate.
Senior directors, who normally work in silence far behind the scenes, are stepping forward to report a profound reversal: Where many boards were once hand-picked by CEOs and beholden to them, directors now say they operate independently and oversee the top executives. The balance of power has shifted dramatically.
“Over the last 10 years, I’d say the most important change has been the ability of the board to function independently of management,” says David O’Brien, chairman of both Royal Bank of Canada and Encana Corp.
“In the old days it was all mixed up as to the management and the board, and they were always together. I think the board lost any sense that they were really responsive to the shareholders.”
Enron’s bankruptcy filing on Dec. 2, 2001, was one of the key events in launching that revolution. The giant Houston-based energy trading company had been lauded for its innovative management and stellar board governance. But it collapsed within a matter of weeks after it was revealed that senior executives had participated in a massive accounting fraud – and its blue-chip board had been unaware or had done nothing to stop it.
Enron was followed quickly by several other scandals, including the bankruptcy of WorldCom Inc., headed by Edmonton-born CEO Bernie Ebbers, now serving a 25-year sentence on a variety of charges. The cumulative effect was to shatter confidence in corporate oversight. U.S. lawmakers quickly enacted the Sarbanes-Oxley Act to compel boards to be more vigorous and independent, including a new requirement for audit committees to have only independent directors to oversee financial statements.
The reforms flowed across the border to Canada, spurring similar changes in rules, as well as voluntary efforts by boards to improve their oversight. More companies began to strip away the chairman’s role from the CEO and give it to an outsider who was independent of management. Today, 50 per cent of the companies in The Globe and Mail’s annual report on corporate governance have a chair with no links at all to the company’s top executives (that is, someone who is neither a member of management nor related to it, such as a former CEO). In 2002, when the Globe did its first version of Board Games, the figure was 34 per cent.
Those were the visible signs of the revolution. But the real legacy of Enron lies in the less visible reforms, which have fundamentally changed how companies operate, business leaders say. CEOs rely on boards far more in strategic planning, directors are more demanding in their oversight, and companies increasingly consider broader questions of governance in their social and environmental decisions.
Good governance has come to mean far more than adopting a list of best practices like requiring directors and top executives to own a minimum number of shares, says director Mary Mogford, who heads the corporate governance committee at Potash Corp. of Saskatchewan.
“I’ve seen a move from saying ‘Oh, corporate governance? Let’s check all these boxes,’” she says.
“[Now]it’s just a way you do business yourself, the way you conduct yourself. It’s just embedded in everything. It’s not something that’s separate over here that’s a checklist. It’s just how you do what you do.”
In an odd twist, these diligent reforms have not eased public mistrust of corporate elites. If anything, after the financial crisis, the dissatisfaction is greater than ever.
Shareholders have become more and more frustrated, evidenced by greater activism, demands for “say-on-pay” votes on compensation and for more power to name nominees for boards. The broader public also remains disillusioned, as shown by the level of support for the “Occupy” movement across the continent, spurred by economic frustration and growing income inequality.
One reason for these dissonant views is that much of the governance revolution has occurred behind the scenes among a typically anonymous and circumspect group of corporate directors.
Much of what has most infuriated the public has happened at a relatively small group of extremely high-profile financial sector companies at the centre of the downturn, many of them based in the United States. Perhaps most gallingly, some Wall Street firms continued to pay huge bonuses to top executives after receiving billions of dollars in government bailout funds.
Manulife Financial Corp. chairwoman Gail Cook-Bennett says she isn’t surprised many people who cannot find jobs are growing frustrated with the corporate sector. And while there may be boards that aren’t trying to behave responsibly, she says, “the people I talk to, the directors are really trying to respond.”