There have been two particular governance situations that makes one wonder if minds and attitudes are properly shaped at the governance level – Home Capital and Bombardier.
Boards need to be composed of individuals who have the competence to affect good governance for the organization being governed. The governance talent needed to govern a hospital is different than the talent needed to govern a financial institution. The Board of a financial institution is accountable for the safety and security of people’s life savings which have been placed on deposit. The Board of a financial institution needs to have a deep understanding of enterprise risk management as well as risk categories of credit, interest rate, liquidity, regulatory, and operations. The Board of a financial institution needs to have the ability to understand the information being presented by internal and external auditors as well as the regulator and ensure that appropriate actions are taken to protect the assets of the institution and the life savings of the depositors. So did Home Capital have the right composition of talent for a financial institution? Was there sufficient independence from management? Was there sufficient scrutiny over the reported fraud and the appropriate direction to the internal auditors to properly investigate? Did the Audit Committee properly appreciate the depths of the implications of the mortgage broker fraud which has been evident in the financial institution sector for years? Did the Audit Committee properly oversee the timely disclosure of the material information to the shareholders?
Only recently has Home Capital tried to reassure investors by now appointing individuals with financial institution knowledge to its Board. Being an effective executive in the health care sector, does not make one an effective governor in a financial institution. The Board has demonstrated that it did not have capable Directors by now appointing people with the required talent. In a two week span, Home Capital added five individuals who brought financial institution experience and governance onto the governing body of the financial institution. Why did it take a crisis for the Board to take the right action? All Boards of Directors have a job to do and like any other job, it demands that the persons carrying out the job have the competencies required. This is not a new idea – this has been a governance expectation for years.
Why can’t we rely on Boards to take the right action for the interest of the corporation and the stakeholders at the outset rather than only when a crisis has become so significant there is loss of reputation and loss of confidence?
And then we have Bombardier. In February 2017, the federal government announced it would provide $372.5 million in interest free loans to Bombardier. A year earlier the company had received a $1 billion investment from the Quebec government in exchange for an ownership stake in the company.
Following the infusion of public funds, the company announced the layoffs of thousands of workers. Then the Board saw fit to allow huge pay raises to the executives. As reported by media on March 29, 2017, Bombardier’s senior executives saw their compensation rise by nearly 50 per cent. Total compensation for the Montreal-based company’s top five executives and board chairman Pierre Beaudoin was US$32.6 million in 2016, up from US$21.9 million the year before. The CEO received US$9.5 million, up from US$6.4 million in 2015 in salary, share and option-based awards. Is the Board considering its accountability for the application of those public funds? The Board has allowed the layoffs for thousands of staff while using millions to reward a handful of already well compensated executive.
This is why people lose confidence in corporate Canada and the leaders of these organizations, and demonstrates the skepticism around government bailouts and the lack of accountability for these public funds.
Fay Booker is principal of Booker & Associates, a firm focused on promoting good governance, enterprise risk management and operational effectiveness – www.bookerandassociates.com.