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Organizational Governance:What the 21st Century Board Member Needs to Know for
- Short Term Success (60) - Long Term Relevance and (30) - Regenerative Sustainability (10)
Understanding the New Board Game of Accountability
William J.L. Swirsky MBA, FCPA, FCA, ICD.D
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Principles of Good Governance
1.1. Create a framework for oversight and accountabilityCreate a framework for oversight and accountability
2.2. Structure the board to add valueStructure the board to add value
3.3. Attract and retain effective directorsAttract and retain effective directors
4.4. Continuously strive to improve the board’s Continuously strive to improve the board’s performanceperformance
5.5. Promote integrityPromote integrity
6.6. Recognize and manage conflict of interestsRecognize and manage conflict of interests
7.7. Recognize and manage riskRecognize and manage risk
8.8. Compensate appropriatelyCompensate appropriately
9.9. Engage effectively with shareholdersEngage effectively with shareholders
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Practices of Good Governance
CANADIAN SECURITIES ADMINISTRATORSREQUEST FOR COMMENTPROPOSED REPEAL AND REPLACEMENT OF
NATIONAL POLICY 58-201CORPORATE GOVERNANCE GUIDELINES, NATIONAL INSTRUMENT 58-101
DISCLOSURE OF CORPORATE GOVERNANCE PRACTICES, ANDNATIONAL INSTRUMENT 52-110 AUDIT COMMITTEES
AND COMPANION POLICY 52-110CP AUDIT COMMITTEES[Dated: 12/19/2008
1.1. Create a framework for oversight and accountabilityCreate a framework for oversight and accountability
2.2. Structure the board to add valueStructure the board to add value
3.3. Attract and retain effective directorsAttract and retain effective directors
4.4. Continuously strive to improve the board’s performanceContinuously strive to improve the board’s performance
5.5. Promote integrityPromote integrity
6.6. Recognize and manage conflict of interestsRecognize and manage conflict of interests
7.7. Recognize and manage riskRecognize and manage risk
8.8. Compensate appropriatelyCompensate appropriately
9.9. Engage effectively with shareholdersEngage effectively with shareholders
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NEWS from the Canadian Securities NEWS from the Canadian Securities AdministratorsAdministrators
November 13, 2009November 13, 2009
Withdraw proposals to implement new Withdraw proposals to implement new “governance regulations/guidance”“governance regulations/guidance”
@ futureinnovate.net and presenters, 2010, 2014,2015
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Business Taxonomies: Changing Paradigms
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Skills now required in the C-Suite
@ futureinnovate.net and presenters, 2010, 2014 7
The future is unknowable. The future is unknowable. Its strategies aren’t.Its strategies aren’t.
Vision is just imagination Vision is just imagination if you aren’t prepared to actif you aren’t prepared to act
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BirthdayBirthdayGreetingsGreetings
SOX SOX EnactedEnactedJuly 30, July 30,
20022002
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The SEC has merged several offices and functions to create a
division of risk, strategy and financial innovation.
New from the SEC ….September 16, 2009
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The division "combines the SEC's • Office of Economic Analysis, • Office of Risk Assessment
• and other functions.
It will assume those areas as well as• strategic and long-term analysis,
• identification of new trends in financial markets, and • risk to the financial system."
New from the SEC….September 16, 2009
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Corporate Folklore
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November 12, 2008
…federal watchdog can assess 5
categories of Intervention Stage
Rating(ISR) … “0” to “4” <non-
viability/insolvency imminent>
… ISR goes from “0” to “1” …
February 2009 OSFI assessed
Manulife at the 2 nd highest
composite risk rating
In December, 2008…OSFI met with
the board… concerned with…
”board-approved risk-tolerance
policies” credit risk management
and asset-liability risk management
as potentially higher risk areas…
wanted board to develop “action
plan” with “specific trigger points for
action to stay compliant … and that
the board add members with
actuarial or risk-management
experience
DEADLINE: March 31, 2009
The Financial Post – January 30, 2010
By the end of 2008 senior management
and the board had acted and thought
that they had “weathered the storm” –
THEY THOUGHT WRONG
OSFI thought that management
had deliberately misled the
board….. Deloitte was hired to
conduct an independent review of
the insurer’s risk-management
processes for its segregated fund
and variable annuity products,
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Who is Responsible for What?
1.Internal Auditor2.In-house Counsel3.Advisors to the Board4.Consultants to the
Board• Compensation• Actuary• Investment Banker
5.Corporate Counsel6.Investor Relations7.Others ….
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Who is Responsible for What?
1. Financial data <numeric>• Estimates• Off-balance sheet
2. Non-financial data <numeric>• Credit risk• Liquidity risk• Market risk
3. Text <non-numeric>4. Graphs, charts, symbols5. Others ….
Do you know your PWR score?
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Getting to a PWR score!!! Name (Company, Organization, Institution)
P riorities are right:
What needs to be done? Connected to mission? Correct? Clear?
W ho do we have that are right:
Have we hired the right people? Deployed the right people against the
right priorities?
Understand the team strengths and risks? Has the team been developed?
R elationships that work :
Internal and external connectivity Communications coordinated? Individuals Committed to mission, leader, team? Leadership that can motivate/challenge team?
P Score 1 thru 10
Max 10
W
Score 1 thru 10 Max 10
R Score 1 thru 10
Max 10
PxWxR
Score: Max 1000
5x5x5=125; 6x6x6=216; 7x7x7=343; 8x8x8=512; 9x9x9=729
From POWER SCORE .. by Geoff Smart, Randy Street, Alan Foster .. 2015 – Ballantine Books, New York
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Defining financial expertise
• Accountant – CPA –CA/CMA/CGA
• Business Executive – MBA
• Finance Professional – CFA• Experienced in C-Suite – CEO, CFO, COO, CIO, CRO
• Lawyer – M&A
• Board experience – C.Dir, ICD.D
• Novice
Board Responsibilities Demand Information
• External Accountability– Investors– Regulators
• Internal Oversight – CEO & executives– Strategic plans– Operating
performance– Systems, controls,
risk– Regulatory
compliance
The Board of Directors
Management, Policies, Systems
Audit Committee
The Shareholders
Chair
Chair
Chair Chair
Audit Committee
External Auditors
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Measuring Performance
Product/ServiceQuality
Customer Satisfaction
Environment &Sustainable Development
Health & SafetyIntellectual Capital
InnovationNew Product Introduction
Financial Measures (GAAP)
Senior Managementand The Board
M&A, FinancingActivities
Pensions, Post Employment Benefits
External CommunicationsAnd Formal Reporting
How to
InterpretHow to
Integrate
ProxyMaterial
AnalystMaterial& Calls
FinancialPerformance
Non FinancialPerformance
Historical Future Prospects
Reporting Package23
The Changing Corporate Reporting Universe
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Six Principles for MD&A(Update #3)
1. An entity should disclose information in its MD&A that enables readers to view it through the eyes of management.
2. MD&As should complement as well as supplement financial statements
3. MD&A’s should be complete, fair and balanced, and provide information that is material to the decision-making needs of users.
4. A forward-looking orientation is fundamental to useful MD&A reporting.
5. The focus in MD&A’s should be on management’s strategy for generating value for investors over time.
6. To be useful, MD&A’s should be understandabe relevant, and comparable
26Exhibit 1-Strategic Management of Information for Boards
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Exhibit 2 -Strategic Management of Information for Boards
28Exhibit 4 -Strategic Management of Information for Boards
CAUTION:
Information UFOs in the Area !!!• Useless• False• Outdated
“ A wealth of information creates a poverty of attention”
Hebert Simon Nobel Prize Laureate
Economist
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So what does accountability look like during the year?So what does accountability look like during the year?
Board Audit Committee IRC Not for Profit
Board Meetings 10 N/A N/A 10
Investment Committee Meetings
10 to 20 4 4 to 10 N/A
Audit Committee 4 + 1 4 +1 N/A 6
Compensation Committee 6 to 10 N/A N/A 2
Governance Committee 2 to 4
Education Sessions 4 to 6 2 to 4
Annual Meetings/SessionsAnnual Meetings/Sessions 37 to 55 4 + 1 4 to 10 18
Meetings with CFO 4 to 6 6 to 8
Meetings with Internal Auditor
4 to 6
Meetings with External Auditor
6 to 10 1 to 2
Meetings with External Actuary
2
Annual MeetingsAnnual Meetings 16 to 24 7 to 10
Chair of Audit Committee
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So what does governance mean in reality…who do we listen to?So what does governance mean in reality…who do we listen to?Board Audit
CommitteeIRC Not for Profit
External Auditors (Big 4) 2 Big 4 Big 4 Big 4
External Actuary Big 3
InternalAuditors
Internal resource •Boutique Internal resource
N/A
I/A Peer reviewer •Boutique
Investment Mgrs • large number • 4 + Big 3 Specialized Boutique
N/A
Business /Real Estate Valuations
•Big 4 (2)•Specialists (2)
Accounting/ Disclosure advice
Big 4 (2) Big 4 Big 4 (IFRS)
Compliance Auditors •Big 4 (2)•Big 7
Compensation •Big 3 •Boutique
Ultimate Auditor OAG PAG
Business Continuity Big 4 Big 4
External Risk Advisor •Boutique
Evolution of Business Reporting
Integrated BusinessPerformance Reporting
Integrated BusinessPerformance Reporting
Guidance for MD&A(Annual and Quarterly)
Guidance for MD&A(Annual and Quarterly)
GAAP Financial Statements (annual & quarterly)
Time
Financial Capital Concepts
Value Creation Concepts
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eHealth:Lessons from the Media
To get to “assurance” it took:1.Board
• 1 CPA-CA and 1 Lawyer
2.Finance, Investment +Audit Committee
• 2 CPA-CAs+2 Lawyers
3.Financial Audit • ErnstYoung
4.Compliance Audit • Malette
5.Performance Evaluation Audit • KPMG
6.Project Claims Audit – • Samson
7.Conformance Audit –• Boutique firm ( In progress)
8.Investment Performance and Compliance
• Mercer
9.OAG Audit10.Senior staff complement: 4 CPA-CAs (Director of Compliance; COO; ED; CFO(for start-up period) 37
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Value MeasurementPerspective
Transparency
Consistency
Completeness
Financial
+
Non-financial d
ata
ObjectivityReliability
Measurement Taxonomy of Terms
Completeness
Materiality
orSignificance
Completeness
Relevance
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Changing Accountability in
Disclosure: Compensation
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Compensation Related Risks
• Terms not clearly defined or could easily be misinterpreted
• Non GAAP measures used for measuring performance that are not clearly defined
• Disconnect between “principles” and arrangements
• Triggering events not clearly defined
Compensation Related Risks
• Objectives of compensation arrangements
• Patchwork quilt - elements of arrangements not linked or aligned
• Linkage between “pay” and “performance” not clear
Design Risks
• Mandate of compensation committee
• Independence of members• “compensation literacy”• Expertise of compensation
advisor• Independence of
compensation advisor• Relationship with board
and audit committee
Governance Risks Interpretation Risks
What “tone at the top” messages are being conveyed through the compensation arrangements?
How are compensation arrangements shaping internal environment and “culture of integrity”
Impact on DC&P and ICFR
Behavioural Risks
• No formal systems to capture, summarize and report on performance measures specified in compensation arrangements
• Lack of independence in compilation and verification of information
• Lack of controls
Measurement &Reporting RisksDisclosure Risks
• Lack of “disclosure control” in preparing new disclosures
• Inconsistencies between financial statements, MD&A and CD&A
• Disclosures lack clarity and understandability
• All aspects of compensation not disclosed
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CEOCompensation
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BoardCompensation
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Changing Accountability in
Disclosure: IS RISK NEXT?
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ERM – Enterprise Risk Management
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Risk to 2012 Strategic Goals
Almost Certain
Likelihood
March 31, 20xx
Reputation Risk Rare Unlikely Possible Likely
Financial RiskIT Governance Risk Insignificant
Regulatory and Legal Risk
People & Organizational Risk
Minor
Privacy and Security Risk
Project Implementation Risk
Moderate
Stakeholder Relations RiskMajor
Key Risks Consolidated Risk ProfileIm
pact
Extreme2
1
4
3
6
5
8
7
9
1
2
3
4
56
7
89
to
Risk to 2012 Strategic Goals
April 1, 20xx
Key Risks Consolidated Risk ProfileIm
pact
ExtremePrivacy and Security Risk
Project Implementation Risk MajorStakeholder Relations Risk
ModeratePeople & Organizational Risk
Minor
Likelihood
June 30, 20xxFor Period:
Reputation Risk Rare Unlikely Possible Likely Almost CertainRegulatory and Legal Risk
Financial RiskIT Governance Risk Insignificant
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1
4
3
6
5
8
7
9
1
2
3
4
56
7
89
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9
Our top ten risk management lessons
1. Develop a risk intelligence culture
2. Set the right tone at the top
3. Do not get lost in the detail
4. Do not outsource risk understanding
5. Connect the dots and develop the big picture
6. Do not ignore Black Swan type risks
7. Link compensation and risk management
8. Engage in dynamic not static risk management
9. Enhance your disclosure
10.Assess your risk governance structure and processes
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Disclosure StructureDisclosure Structure
The Board
Management
Chair
External Auditors
Internal Audit
Creditors
Investors Regulators
AuditComm
OtherComm
OtherComm
Supply Chain
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Accelerated and More Comprehensive Disclosure Accelerated and More Comprehensive Disclosure ObligationsObligations
• Certification by CEO / CFO– Financial Reporting– Disclosure Controls – Internal Controls over Financial
Reporting
• MD&A Disclosures
• Continuous Disclosure Obligations / Timely Reporting of Financial Results
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Emerging IssuesEmerging Issues
• Certification– Disclosure Controls and Internal Control Effectiveness
• Executive Compensation– bonuses for what performance
• IFRS– International Financial Reporting Standards
• GHG Measurement and Reporting• Business Intelligence /Informatics• THE BURDEN OF MEASUREMENT + DISCLOSURE
– Compliance is the new “rubics cube”– Fast Changing Priorities– Mediocre Management Leadership– Fast failing relationships …customers, supply chain,
….and more to follow….
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Smart People, Dumb Decisions
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Ten principles for a Ten principles for a Black Swan-proof world…Black Swan-proof world…Nassim Nicholas TalebNassim Nicholas Taleb
1. What is fragile should break early while it is still small2. No socialization of losses and privatization of gains3. People who were driving a school bus blindfolded( and
crashed it) should never be given a new bus4. Do not let someone making an “incentive” bonus manage
a nuclear plant – or your financial risks5. Counter-balance complexity with simplicity6. Do not give children sticks of dynamite, even if they come
with a warning7. Only Ponzi schemes should depend on confidence.
Governments need to “restore confidence”8. Do not give an addict more drugs if he has withdrawal
pains9. Citizens should not depend on financial assets or fallible
”experts” for their retirement10.Make an omelet with broken eggs
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User’s Guide to 21User’s Guide to 21stst Century Economics… Century Economics… UMAIR AQUEUMAIR AQUE
• Tomorrow will not be like yesterday• 20th Century Business isn’t fit for 21st Century Economics• Tomorrow’s market leaders have new DNA
• Defining marketing risk…
– What is the role of marketing in a world where consumption must slow?
– What is the role of distribution in a world where consumption, savings, and investment will accelerate in volatility?
– What is the role of production in a world where consumption becomes savings?
– What is the role of strategy in a world where the game is no longer about winning more consumption than rivals?
– What is the role of innovation in a world where greater investment will flow to reinventing moribund industries?
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The end of the start…
• The beginning of next steps …– PWR– Short Term Success (60)– Long Term Relevance and (30)– Regenerative Sustainability (10)
