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To: Proud Deplorable who wrote (138632)	12/9/2008 1:16:57 PM
From: kidl	Respond to of 312597

Botox: Thought you would enjoy this. Where were the directors? DAVID BEATTY Tuesday, December 09, 2008 We are in the midst of a tectonic-plate movement in the financial world that is shaking the ‘real' world quite dramatically. My purpose here is not to review the causes and potential consequences of our current situation, but to explore the possibility that once again, in the world of publicly traded companies, boards of directors have let us down. If we go back to the bursting of the South Sea bubble in London in 1720, we can record the first time shareholders bellowed this refrain: ‘Where were the directors?' Following the collapse of the Great South Seas Corporation (and many others), Alexander Pope wrote a sonnet that began: ‘At length corruption, like a general flood, /Did deluge all, and avarice creeping on, /Spread, like a low born mist and hid the sun.' The British Parliament acted swiftly, putting many directors in jail, taking over their estates, and banning joint-stock companies for 100 years. Following the market crash of 1929 and the Great Depression that ensued, a revolution in oversight and regulation of public markets occurred under President Franklin D. Roosevelt. The Securities and Exchange Commission was established and stock exchanges dramatically tightened their listing requirements. Fast forward to 2001 and the failures of Enron, WorldCom and a clutch of others, when once again the question surfaced: ‘Where were the directors?' These failures resulted in the tectonic plates of regulatory reform moving again for the first time in over 70 years. The Sarbanes-Oxley Act of 2002 (SOX) created dramatic changes in the way modern, publicly traded companies must govern themselves. A vast array of details was included in the SOX legislation, including CEO/CFO certification of the accounts, under the threat of criminal prosecution. At its very core, SOX transformed the nature of the auditing profession's relationship to the corporation that it audited. This reform, in the American context, was sorely needed. SOX also had three major effects on American boards that spilled over to corporate Canada. First, the chair of the Audit Committee had to have solid financial credentials and members of the Audit Committee were expected to be ‘financially literate.' Second, the work of the board in its oversight functions, particularly the review of the financial accounts, became much more detailed. The average American board began to spend significantly more time in the boardroom and in preparation for the boardroom. Estimates vary widely, but some observers suggest that the average time spent as a director of a major American company increased from 250 to 350 hours a year. Third, the time spent by directors was shifted towards regulatory and oversight matters and away from longer-term work such as helping management develop strategy and talent. Having only recently recovered from the SOX reforms, boards now not only have to navigate the troubled credit and liquidity waters of the financial tsunami but also face the prospect of yet more governance reforms. This will be especially true in the financial-services sector. Just as SOX imposed skill requirements upon directors serving on Audit Committees, I am confident that a call will be raised for at least one director – especially in financially regulated institutions – to have had direct line experience with risk management. There may also be requirements for the Risk Management Committee to be composed only of ‘risk literate' directors, to be independently ‘audited,' and to report to shareholders separately from the auditor's report on the risk-management practices of the board. The need for independent and unconflicted advice to the Compensation Committee will be further emphasized. As it happens, the compensation-advisory industry is dominated by firms who provide many compensation services to company executives (for example, pension-fund calculations). In general, I would expect to see boards move to a more ‘expert' model. SOX imposed the financial expert; the current crisis will likely establish the need for a risk expert on the board and possibly a compensation expert. But, to be an effective contributor to strategy, a board must also contain subject-matter experts. The task is certainly not to meddle with management but to increase the likelihood that boards can contribute to management's thinking about future strategic direction. Boards have been struggling for centuries to represent their shareholders effectively. There is no doubt that today's multiple crises will lead to further evolution in the corporate-governance practices of boards and that future crises will again raise the bar. In the meantime, boards must work hard at evaluating themselves, their practices, and the lessons to be learned from others. David Beatty is the Conway Director of the Clarkson Centre for Business Ethics + Board Effectiveness and a professor of Strategic Management at the Rotman School of Management. A fellow of the Institute of Corporate Directors, he serves as a corporate director of BMO Financial Group, is an Officer of the British Empire, and was the inaugural managing director of the Canadian Coalition for Good Governance. The preceding is an excerpt from David Beatty's chapter in The Finance Crisis and Rescue: What Went Wrong? Why? What Lessons Can Be Learned? (Rotman/UTP Publishing, 2008). To order: rotman.utoronto.ca/financecrisis © The Globe and Mail