When University of Toronto assistant professor Tim Rowley set out on his latest research project, he intended to illustrate the undue influence of Canada's "old boys' network" on corporate boards of directors.
Instead, he came to the surprising conclusion that while there is an elite of interconnected directors at Canada's largest firms, they have had a positive impact as leaders of corporate governance reform.
"The assumption has always been that the old boys' club is a bad thing. And in many cases, it probably points to recruiting practices that aren't desirable," said Prof. Rowley, who is also director of the Clarkson Centre for Business Ethics & Board Effectiveness at the U of T's Rotman School of Management. "But when it comes to governance, our research indicates they actually drive good governance."
His study, prepared in partnership with Rotman researcher Matt Fullbrook, concluded that there are 16 influential directors who form a "corporate elite" in Canada.
This group represents just 1 per cent of the 1,689 directors who sit on the boards of companies in Canada's S&P/TSX composite index. They sit on 68 boards, representing 31 per cent of the index's 223 companies. In total, their boards comprise 51 per cent of the market capitalization of the benchmark index.
The study found that most of the 16 directors have used their "disproportional influence" to diffuse positive corporate governance improvements throughout their boards. Most of their boards received above-average corporate governance scores in the annual Rotman survey of governance of companies in the S&P/TSX index.
"This group has done better than the overall average," Prof. Rowley said. "That suggests to me that this group [of directors]is promoting, rather than blocking, governance change."
Prof. Rowley said he would have predicted the opposite before doing the study, assuming that powerful corporate leaders might play down trendy new governance ideas in favour of older, tried-and-true business practices. But he said many are full-time professional directors, and feel their credibility and reputation are tied to good governance.
"Everybody wants to be known to be good at what they do. And for these directors, this is what they do. For a lot of other people, it's a part-time job."
Alcan Inc. chairman Yves Fortier -- who sits on five S&P/TSX index boards and is one of the 16 directors identified in the study -- said he has seen much "cross-pollination" of governance ideas among boards. When directors see a practice that works well at one company, they promote it at others, he said.
"All too often the expression 'old boys' network' has a pejorative connotation, and I'm prepared to acknowledge it was a connotation that was deserved in the past" Mr, Fortier said.
"But I think it has evolved now to a point where the old boys have become sold on the importance of good corporate governance. And because they are old boys . . . they can bring to the table more authority in dealing with and addressing these issues."
Indeed, he says he has seen "old boys" adopt new governance ideas "more easily than some of the new boys" because their business experience has demonstrated their value.
He added that a single director can't always compel an idea to catch hold at another board. But some directors command more authority because they have served for a long time on a board, or chair a key board committee, or have more extensive personal contacts with their colleagues, he said.
"There are directors who are more influential than others."
The U of T study looked only at the group of 16 directors who sat on five or more boards of S&P/TSX index companies as of September this year. The researchers graphed the web of connections between the companies they oversee, and placed one director at the centre of the web: Torstar Corp. chief executive officer Robert Prichard.
Prof. Rowley calls Mr. Prichard a "principal gatekeeper" of governance reform because his five boards all connect directly or indirectly to every other member of the group of 16. Mr. Prichard sits on the boards of Torstar, George Weston Ltd., Bank of Montreal, Onex Corp. and Four Seasons Hotels Inc.
Other directors near the centre of the web include Mr. Fortier, Royal Bank of Canada chairman David O'Brien, Nova Chemicals Corp. chairman Edward Newall, Petro-Canada chairman Brian MacNeill and former New Brunswick premier Frank McKenna. Just a short time after retiring as CEOs, three of Canada's best-known former bank chiefs have also joined the inner group of influential directors: Charles Baillie, John Cleghorn and Peter Godsoe. Others in the group are André Bérard, Oyvind Hushovd, Spencer Lanthier, Ronald Osborne, Jack Cockwell, Donald Mazankowski and Lawrence Tapp.
The study calls Mr. Mazankowski and Mr. Tapp "islands." Although they sit on six and five boards respectively, their boards do not connect into the broader web of companies in the study.
Mr. Tapp, however, has left one of his boards since the study was completed in September, and would no longer fit within the study's criteria because he does not sit on a minimum of five S&P/TSX index boards. Meanwhile, director David Beatty joined a fifth S&P/TSX index board this month, so would join the list. Prof. Rowley said the study will be updated next year to reflect all subsequent changes.
Prof. Rowley said many other directors are also highly influential, but were not considered in the study because they do not sit on a minimum of five S&P/TSX index boards. If the study is widened to look at directors who sit on four or three boards, he said, the dense web of interconnections becomes "incomprehensibly" interlinked.
Corporate board bonds
A University of Toronto study has found a small group of elite directors are interlinked on al large number of Canada's most prominent corporate boards, allowing them to widely disseminate good corporate governance practices. Here's how six key directors link a diverse array of companies.
A 69-year-old Calgary resident and retired CEO of Nova Corp., Mr. Newall is chairman of both Canadian Pacific Railway Ltd. and Nova Chemicals Corp.
Nova, Alcan, CP Rail, Royal Bank
The 69-year-old Montreal lawyer and chairman of Alcan Inc., is Canada's former ambassador to the United Nations.
Alcan, Nova, Nortel, Royal Bank
The 63-year-old retired CEO of Royal Bank of Canada, is now chairman of SNC-Lavalin Group Inc.
CP Rail, Nortel, Molson
The 63-year-old former CEO of Canadian Pacific Ltd. is chairman of Royal Bank and Encana Corp. He sits on four other boards.
Royal Bank Molson, Fairmont
The 66-year-old former CEO of Bank of Nova Scotia is a director of Ingersoll-Rand Co. and Lonmin PLC.
Onex, BMO, Torstar, George Weston, Four Seasons
SOURCE: ROTMAN SCHOOL OF MANAGEMENT, UNIVERSITY OF TORONTO