Anderson in Dialogue With Colter (the Director's Chair) - Listed (Sep 2013)

7/29/2019 Anderson in Dialogue With Colter (the Director's Chair) - Listed (Sep 2013)

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The Directors ChairGary Colter

Setting the bar highwhere it belongsIn The Directors Chair with David W. Anderson: No matter what the business, director Gary Colter says theres

no excuse for boards to cling to dated, inefficient and ineffective modes of governance

Photography by Jeff Kirk

As a member of the dissident slate of directors that shareholders voted intopower in the gripping Canadian Pacific Railway proxy battle of 2012, GaryColter has had a front row seat for recent debates over directors dutiesand effective board governance. Put him in the progressive camp. Here, inconversation with governance and leadership adviser andListedcontribut-ing editor David W. Anderson, Colter opines on most of todays cornerstoneboard governance issuestenure, board evaluation, committee and chairstructure, succession planning and engaging with shareholders. In the process,he makes a convincing case for current thinking that sees boards as active,

responsive, engaged and hard-working teams committed to the success ofthe corporations they serve.

Gary ColterPrimary roles

President, CRS Inc.; Corporate director

Current director

Canadian Pacific Railway; CIBC; Core-Mark Holding Co.; Owens-Illinois; Revera Inc.

Former executive leadership

Managing partner, Financial Advisory Services, KPMG Canada; vice-chair, KMPC Canada; managing partner, Global

Financial Advisory Services, KPMG International; member, International Executive Team, KPMG International

Former director

Saskatchewan Wheat Pool Inc.

Education

HBA, Ivey Business School, University of Western Ontario

Honours

Fellow Chartered Accountant (FCA, FCPA)

Current age

67

Age when first became a director

56

Years of board service

11 years


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David W. AndersonDirectors often conflate the terms gover-

nance and compliance. Candidly, theyll say, Lets get this gov-

ernance stuff out of the way and get on with being a director.

Does it surprise you these terms are interchanged?

Gary ColterNo, but they are different. Weve had significant challeng-

es to the stability of our system through the financial crisis, and ob-

vious weaknesses in governance before that, which precipitated new

rules and regulations. Its an understandable response on the part of

regulators when bad things happen to create a floor of new approach-

es. These blanket approaches apply to low- and high-performing or-

ganizations. In reality, a lot of this is good stuff to pay attention to, as

it lessens the chance of things going wrong, but it does change the al-

location of time in favour of compliance over running the business. Its

a real art to creating annual meeting plans and agendas, and allowing

them to evolve with circumstances. Its never going to be perfect. So

the challenges are to set aside enough time throughout the year and

then allocate the right proportion of time for all the other important

things where directors naturally want to add value: testing strategy,

monitoring execution against the strategic plan, building leadership

capacity and succession planning. We cant get away from compliance

issues, but we do need to balance our time to govern holistically, at-

tending to long-term value creation and value preservation.

David W. AndersonDirectors devote much more time per direc-

torship now than 15 years ago. Anecdotally, some say its dou-

bled. How far ought this to go? If director time doubled again,

would company performance improve?

Gary ColterNo, we quickly reach the point of diminishing returns.

I think weve evolved to a good place in North American corporate

governance. The current division of labour works well, with boards

providing oversight and management execution. If you ask manage-

ment to spend too much time in meetings with the board, it becomes

counter-productive. Management needs adequate time to go out

and perform against the strategy and business plan approved by the

board. But if things get difficult, you can always lay on more time

including an extra strategy session or a business division review.

Where directors do get called on to spend much more time is during

times of difficultywhether it be a hostile takeover, operational trou-

ble, reputational challenge or leadership transition. Directors com-

mit the needed time because they want their companies to do well.

David W. AndersonHow relevant to the quality of boards and

board performance are a directors length of tenure and age?

Gary ColterTheyre not the most importantat least not for a given

director. Age and tenure limits are popular, but Im concerned that

the focus is misplaced. Im not convinced that leading-edge gover-

nance is served by current guidelines. Ive seen high-performingdirectors making tremendous contributions well beyond typical nu-

merical limits. Who would say that Warren Buffett is too old or that

hes been around long enough? Why would you prevent a capable

director from serving, based on an arbitrary number? In my view, age

alone should not be used as a determining factor in leaving a board.

David W. AndersonAre you suggesting boards do away with such

caps on tenure and age?

Gary ColterIm saying that boards need the flexibility to keep stars

and should review their policies in that light. Im not talking about

increasing the longevity of directors, much less underperforming di-

rectors. I look at the board as whole. The board needs to have a range

of tenures and ages amongst its directors to benefit from the different

perspectives they bring. So in addition to keeping experienced star

performers, we have to bring on younger directors. Its not healthy

when the average age of the board gets too high. The good news is

that boards are upgrading their bench strength more diligently than

ever before. I look at a directors relevant experience to the industry,

contribution to board chemistry and teamwork and quality of input

to our deliberations. I think this makes it important for age and ten-

ure limits to be reviewed periodically based on circumstances.

David W. AndersonSome investors and regulators continue to

push for such limits because they see them as catalysts for what

you describe. Is this rooted in a scepticism of directors ability

to self-monitor performance and act accordingly?

Gary ColterI think age and term limits are used as a means of last

resort to force board renewal. Thats why some stakeholders en-

dorse this as the solution, but its not the right answer. Lets recog-

nize there is a core tension here between the need for continuity and

new blood. No one who is interested in the welfare of an organiza-

tion wants to see a board thats either stale or green. Given whats at

stake when were talking about corporate governance, boards have

an obligation to ensure that directors continued service on a board is

based on their performance. Frankly, its a failure of the board not to

remove nonperforming directors, regardless of their age. Thats the

problem with prescriptive tenure and age limitsthey diminish the

pressure on boards to apply performance standards along the way. If

you want a competent boardone with a mix of experience and new

thinkingthen you need to have an active, comprehensive process

for managing board membership. Im talking about a rigorous direc-

tor succession planning, anchored by a robust, annual evaluation.

David W. AndersonHow do you convince a board theres business

value in board evaluation?

Gary ColterThe proof is in the pudding. If you havent made changes

in a couple of years to your governance as a result of evaluation, youd

have to wonder why youre doing it. But my experience is we come

up with good ideas from board members each year to tweak our ap-

proach to governance, which makes us more effective.

David W. AndersonWhat are some specific changes youve made

to improve your performance as a result of board evaluation?

Gary ColterFeedback from directors and executives on my various

boards has prompted us to make significant, if incremental, change

to various aspects of our work over time. Weve rebalanced how we

spend our time in meetings; changed the timing, content and layoutof information coming to the board; adjusted our approach to director

recruitment to emphasize diversity of skills and backgrounds; recon-

sidered the size of the board, its committee structure and the philoso-

phy of committee chair and member rotation; revisited the role of the

board versus management as circumstances and people changed; took

steps to strengthen talent management and succession planning, and

considered ways to enhance our relationship with management.

David W. AndersonThats a lot of good coming from board evalu-

ation. Why does it remain an unpalatable proposition to many?


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Gary ColterDoing board evaluation well is not easy. Directors get

frustrated with the time it requires, even when its 60 minutes once a

year. Typical check-the-box exercises tell you little of value, so direc-

tors wont see meaningful change. A numerical rating slightly higher

or lower year over year is essentially meaningless. The pressure then

is to reduce the time asked of directors because not much comes of it.

David W. AndersonBoard self-evaluation is notoriously weak,

just as youve described it. In your experience, what approaches

to board evaluation are effective?

Gary ColterAll the boards I serve on conduct an annual board evalu-

ation, yet each does it differently. The most effective board evaluation

processes are regular, rigorous reviews of both board and director

performance. Some are self-evaluations while others use an outside

service provider. In either case, you have to set aside sufficient time to

answer thought-provoking questions that elicit director commentary.

Ratings are insufficient. Directors need to trust the process enough

to give their candid feedback on issues concerning them. This confi-

dential and anonymous feedback has to be transparent for subsequent

consideration by the governance committee and the board. Out of

this, the value comes in developing a game plan for the following year,

addressing the issues identified. At the start of the next years evalua-

tion process, I like to come back to the board and say what weve done

for each issue. This completes the cycle and allows the board to see

change and hold itself accountable.

David W. AndersonWhile many boards do some form of evalua-

tion focusing on the board as whole, individual director evalua-

tion remains a tough bridge to cross. Is it worth the effort?

Gary ColterI support vigorous consideration of each directors individ-

ual performance because I know that when its done right, it improves

board performance and the directors experience. I dont support re-

quiring each director to fill out a survey on every other director. Its bet-

ter to have an annual meeting between the independent chair and each

director in which they discuss a range of issues, including suggestions

for any of their peers to do with style or substance. The chair is in a posi-

tion to accumulate this input, add his or her own observations and then

provide feedback to each director in a thoughtful and constructive way.

David W. AndersonSometimes the chair is the weakest link

either not holding the respect of the board or not being engaged

enough to meet with directors. What then?

Gary ColterThe functioning of the independent chair is vitally impor-

tant, so the governance committee itself needs to review the chairs per-

formance with the board, with the board chair absent the discussion.

Having separate board and governance committee chairs is useful in

this regard. The governance committee must be prepared to modify theevaluation process to suit the people and dynamics on the board.

David W. AndersonWhat about feedback from another source

shareholders? As a member of the dissident slate of directors

in the CP proxy fight, whats your view on communication with

shareholders?

Gary ColterIm an advocate of communication. I believe its always

good. When people tell me they dont think shareholder engagement

is a good idea, I ask, Youre not prepared to have a conversation with

the people who own this entity? Its a position I dont understand.

It is important that any board communication be coordinated with

management and in most cases led by the independent chair.

David W. AndersonYet its a common view. Why is shareholder

engagement so difficult for directors?

Gary ColterI think there are three main reasons. First, some direc-

tors hold the view that the board is elected by shareholders to do

a job and that they dont have to communicate. These directors

think engagement with owners is best left to management, led by

the CEO. In my view, this is out of date and changing for the bet-

ter. Secondly, directors are concerned about the legal risk associated

with exchanging of confidential information inappropriatelya risk

that applies equally to management. As with management, this risk

is easily manageable, with careful planning and advice from the gen-

eral counsel on how to conduct sessions so as not to run afoul of laws.

Engagement with shareholders in which directors mainly listen to

their points of view goes a long way to satisfying shareholders de-

sire to be heard and poses little risk of selective disclosure. Thirdly,

directors worry about the issue of short-termism, and dont want to

give shareholders with short-term interests too much influence over

the affairs of the company to the detriment of long-term value cre-

ation. But I say you dont have to agree; its always better to know

what people think.

David W. AndersonAre there risks to not communicating that are

being overlooked?

Gary ColterYes, when people want to communicate with you and

you make it clear you dont want to communicate with them, it

causes frustration. Frankly, it increases the risk they will do some-

thing you dont like, which may not be in the best interests of the cor-

poration. When you listen, there is no downsideyoull pick up the

perspective of someone who has invested significant money. They

are entitled to have their views heard, whether you agree or not.

Directors need to consider thoughtfully and respectfully any sugges-

tions for change or improvement. Its the right thing to do. Directors

have to recognize that expectations have changed and the trend is

clearly toward more communication and openness.

David W. AndersonYoure setting a high bar for boards. How

close are we to this as a reality for most boards?

Gary ColterI think things are changing fast. If a board doesnt un-

derstand it needs to deliver results and doesnt set high expectations

for itself and its directors, then the board needs to change. Thats not

good governance, in my view. Directors need to know that share-

holders are watching and raising the bar. Passive ownership among

institutional investors and private equity firms is decreasing. They

are using tools at their disposal to drive better performance. Im astrong proponent of leading corporate governance because excellent

boards can make a difference.

David W. Anderson, MBA, PhD, ICD.D is president of The

Anderson Governance Group in Toronto, an independent

advisory firm dedicated to assisting boards and manage-

ment teams enhance leadership performance. He advises

directors, executives, investors and regulators based

on his international research and practice. E-mail:

[email protected]. Web: www.taggra.com

Documents

Anderson in Dialogue With Colter (the Director's Chair) - Listed (Sep 2013)