Effective boards make for good business

The makeup of a board of directors and how they function as a group is under greater scrutiny these days as more attention is paid to issues of diversity and just how public companies and stakeholders are served by their boards. For the most part, criticism of the number of women populating Canadian boards of directors has been getting the most attention. But as the light is shined on just how dysfunctional they can be, the more interesting discussion is becoming what makes for a highly effective board?

That’s why it was interesting to see the results of the Excellence in Governance Awards put on by the Canadian Society of Corporate Secretaries and held in Halifax this past summer. A glimpse at its winners (see page 9) will give you an indication of what boards of the future may look like as best practices are shared and their effectiveness becomes more evident to the public.

In the category of “best sustainability, ethics, and environmental governance,” Telus Communications Co. took the top prize. Nominees in the category had to outline their climate change and environmental health and safety policies, explain their anti-corruption framework, social outreach, and political engagement. Judges considered the extent to which the company integrated corporate social responsibility issues into everyday business practices and the role the company plays in the communities it operates in.

In the category of “boardroom diversity,” entrants were judged on their diversity policy, measurable diversity objectives, a director competency and skills matrix, director qualifications, and other practices, such as tenure limits, restrictions on the number of boards on which incumbent directors serve, and recruiting of first-time directors.
Shoppers Drug Mart was the winner of that award, recognized for its efforts to have not only women on the board but also chairing committees. They also didn’t have “over-tenured” directors.

One of the judges of the awards, Richard Leblanc, an associate professor of law, governance, and ethics at York University, raised the point these companies are undertaking these endeavours (diversity, environmental sustainability) in the absence of any specific board diversity or climate legislation in Canada. Without any government push, he says there is no firm obligation requiring boards to focus on these efforts.

For the most part, I think corporations understand the social and business reasons to pursue diverse boards and have environmentally sustainable operations. But most probably don’t measure their efforts. Leblanc emphasized the importance of using metrics, noting there must be assurances a company is not “gaming the metrics.”

Last summer, Harvard Business School lecturer and former general counsel for Fidelity Mutual Funds Robert Pozen told the Canadian Coalition for Good Governance that it is high-functioning boards, not legislation, that leads to better governance. Pozen argued regulatory legislation in the United States failed to protect against the actions that led to the financial crisis. In 2002 after the WorldCom and Enron Corp. scandals, the U.S. Congress passed the Sarbanes-Oxley Act requiring a majority of independent directors, independent audit committees to oversee financial statements, and assessment of internal controls. But the list of companies that were SOX-compliant included Lehman Brothers Holdings Inc., Citigroup Inc., and Bank of America Corp.

In 2007, of the 16 directors on Citigroup’s board only one had ever worked for a financial services company. That speaks volumes to the requirement for director competency, a skills matrix, and specified director qualifications.

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