Shareholders left holding bag in CIBC fiasco.
Bad things happen to good people when nobody is minding the store.
Post-Enron media reports on the absence of corporate governance appear daily on the financial pages. Business Edge is no exception.
Financial writer Gyle Konotopetz’s column on Page 18 this week examining the corporate governance shortcomings of the Canadian Imperial Bank of Commerce (CIBC) and the price that the bank’s shareholders and others are paying for the institution’s oversight makes investors’ blood boil.
However, because our eyes tend to glaze over when discussions of corporate governance take place, transgressors are able to take the actions highlighted in Konotopetz’s column and go unchallenged
There is an ethical crisis in corporate Canada that is eroding public trust and breaking down organizational cultures. The perpetrators play their roles without regard to the human suffering, unemployment and losses sustained by investors, including widows and orphans.
Yes, widows and orphans whose funds have been invested in institutions with the expectation that they have made a safe investment in a blue-chip bank that will pay dividends needed to pay their food and monthly mortgages. The strength of the Canadian economy is in large part the strength of our equity market. The actions of CIBC and others that diminish the strength of Canada’s equity market and therefore the Canadian economy must be condemned.
“Organizations are becoming and must become more transparent in the wake of recent regulatory initiatives,” notes Anita Wolfe, president of Environment for Change, a Victoria-based environmental consulting group. Unfortunately, even increased transparency is not enough to prevent the frivolous erosion of shareholders’ wealth.
Consider that one of the most chilling observations arises from a brief examination of the remuneration paid by shareholders to those charged with corporate governance of the CIBC.
The outgoing CEO John Hunkin, on whose watch the CIBC corporate governance transgression was perpetrated, received about $52 million Cdn in stock and other securities as his retirement package.
In addition, while under this fiduciary duty, he pocketed nearly $15 million in salary and bonuses since his appointment as CEO in 1999.
At a time, when the average bank teller was expected to live on part-time hours and a wage of about $10 to $15 per hour, the CIBC chief received compensation more than 100 times the salary of the tellers.
Ask the question: Have employees and shareholders received value for money?
Wolfe said: “Firms must have leadership with integrity. It is about serving the organization. As a consultant when I work with boards, it is critical to identify at the outset their collective accountability. It is imperative that the responsibilities of the board and senior executive be clearly established.”
New regulations assist in establishing accountability.
In July 2002, Senator Paul Sarbanes and Representative Michael Oxley introduced the Sarbanes-Oxley Act in the United States.
The act’s objective was to protect investors through improving accuracy and reliability in corporate disclosures; punish corporate fraud and corruption; ensure justice for wrongdoers, and to protect the interests of workers and shareholders. It was well-received by investors. The act, among other things, prohibits organizations from lending money to their executives and directors.
Two years later, in March 2004, Canadian regulators followed suit by adopting three sets of corporate governance rules similar to the Sarbanes-Oxley. First, it is required that CEOs and CFOs supply certifications of annual and quarterly reports. Indeed, it may even be required that an external auditor test managements’ evaluation of the internal controls.
Second, Canadian public companies must have a fully independent and financially literate audit committee. This rule includes provisions to safeguard whistleblowers. Finally, the adoption of a rule that prevents independent auditors from performing various non-audit services for their audit clients was adopted. In the past, accounting firms often provided consulting services as well as accepting appointments as the firm’s auditors. At best, this relationship presented a perceived conflict of interest.
These new rules for corporate governance present new challenges for businesses. One challenge is getting the composition of the board balanced between the views of proponents who contend that all members should be “independent” directors and those who advocate that a board comprised solely of “independent” directors will not have sufficient knowledge and expertise about the business, industry or governance to effectively discharge their oversight and control responsibilities.
Firms wishing to enhance corporate governance should obtain copies of the Best Practices Guide widely available from institutions including the faculty of management at Victoria’s Royal Roads University.
For example, when establishing your board, it is important that its membership contain different perspectives, interests and backgrounds. In order to achieve this outcome, businesses must widen the talent pool; think strategically about the skills and competencies required by the organization; raise the performance bar for directors; ensure there is an initial and continuing education training for board members, and be realistic about setting the board member’s compensation.
“In this environment, consumers and businesses buy the same thing – a company’s reputation,” said Don Colegrave, branch manager with a Victoria outlet of Coast Capital Savings, a Richmond-based credit union.
“The reputation of the brand, achieved in part as a result of sound corporate governance among other things, is the firm’s value proposition,” he said.
Businesses must make positive contributions to society through their core business activities, their social investment and philanthropy programs, and their engagement in public policy. Greed cannot be the determinant. Firms that ignore corporate social responsibility should not be permitted to do business in Canada.
Note: This article was originally published in 2005.
