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Corporate governance absurdities

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Corporate governance absurdities

Three vignettes to demonstrate further the absurdities of corporate governance practices today.

I start with Leo de Bever, the CEO of the Alberta Investment Management Corporation, one of the largest public sector pension funds in Canada. Leo should become the poster boy for term limits for corporate directors, and the exclusion of individuals with full-time jobs from the boards of directors of companies. His intelligence and experience unfortunately were insufficient to keep the First Leaside Group of Companies from imploding. Being a director should be a very time-intensive job, and directors should never become too attached to companies on whose boards they sit.

Then there is the gang of “independent” directors at SNC Lavalin. They are spending millions of dollars of the shareholders’ money to investigate $35 million in bribes allegedly paid by one of SNC Lavalin’s senior people in Libya. Did it ever occur to any of these directors to ask senior management how the company was able to generate hundreds of millions of dollars in contracts in Libya? Did any of them ever look at the Transparency International corruption index and ask why the company was even in Libya?

If they had checked the index, they would have found Libya tied for 146 place (out of 178) – tied with such illustrious and honorable countries as Haiti, Cameroon, Iran, Nepal and Paraguay, and just a notch above the Central African Republic, Guinea-Bissau, Laos, Tajikistan, Guinea and Venezuela. If they had ever checked this list, they might have asked senior management the right questions. I wonder in how many other countries in the bottom 25% of the corruption index SNC Lavalin operates?

So why are they spending other people’s money to verify that bribes most likely were paid? To protect themselves when the company is sued. Amazing how directors can become focused on important governance issues when their own money might be at stake.

Finally, there is Dean Martin, aka Roger Martin the Dean of the Rotman School of Business at the University of Toronto (by the way, one of my alma maters). Dean Martin is not a fan of stock options. As I have argued before, there is nothing wrong with options as long as the exercise prices are indexed to a portfolio of the shares of the companies comprising the comparator groups for compensation purposes. Indeed, I would go even further and suggest that if the compensation package offered to senior officers of a company is intended to place their compensation among the top 25% of the comparator group for example, the exercise price should be indexed to the top 25% of the share prices of the comparator group. Indexing most likely would have eliminated the egregious awards cashed in by senior officers at many companies.

Obviously, my solution was too simple for a governance guru. Instead, RIM, where Martin has been a director for several years, moved away from stock potions to restricted share units (RSUs) for the co-CEOs of the company. RSUs are even more advantageous for senior officers because they retain some value even when the share price falls below the price when they are initially granted. When this happens in the case of options, the options lose all value. If stock options with no indexing of the exercise price are a bad idea, then RSUs are an even worse idea.

Moreover, did the co-CEOs, who each own 26+ million shares really need annual bonuses and RSU grants to motivate them? Every $1 move in RIM’s share price impacted their respective wealth by over $26 million.

Before the co-CEOs finally agreed to step down, they apparently offered to stay in their positions for an annual salary of $1. Obviously, no additional incentives were required.

The opinions expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs


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