Blog

December 2, 2013
BOARD EFFECTIVENESS & GOVERNANCE

Recently a group of former board members of now-defunct Northstar Aerospace reached a settlement with the Ministry of Environment of the Province of Ontario regarding the cost of decontaminating and cleaning a parcel of land owned by the company. The Ministry had originally demanded $15 million; the settlement was, at $4.75 million, a fraction of that amount. The deal, however, represented a first instance (at least as has been reported) of the general legal principles that limited the personal liability of directors of a public company. The settlement also came shortly before a hearing was to have begun appealing the ruling. During this hearing it was expected that the former directors would argue that they did not cause the pollution nor were they in a position to prevent it.

This was, undoubtedly, a complicated file and the implications of it may be more narrow than some observers (The Institute of Corporate Directors, for example) have hitherto argued. All the same this is coming after a decade in which – thanks to Sarbanes-Oxley and other regulatory changes – the governance burden on boards of directors (and audit committees) has measurably increased.

These changes have also marched in tandem with a steady increase in the percentage of “independent” directors on boards. A study conducted by Professor Jeffrey Gordon of Columbia Law School has tracked how, in the six decades after 1950, the percentage of independent directors on the boards of larger-capitalisation public companies climbed inexorably from 20% to 75%. This was supposed to provide an advocacy group for the broad mass of shareholders whilst curbing the power and empire-building ambition of over-mighty chief executive officers.

The three trends discussed in this commentary may, in isolation, rebound positively: respect for the environment may now be more carefully enjoined upon boards in Canada, new regulations may have slashed the risk of misleading financial statements and provided a “truer” picture of earnings, and more independent directors may well curb over-mighty CEOs.

Yet taken together these trends, all of which entail more focus on governance and monitoring, can absorb large portions of board meetings and leave substantially less time and energy for focus on corporate strategy and adjusting the company’s capital structure accordingly. This is not to suggest that any of the goals – environmental stewardship, reliable financial statements and independent boards – are bad; rather it can be argued that the governance regime around them creates a challenge for the effective management and operation of a board. If financial structure and business strategy are compressed into the last portion of a meeting, competing with nervous glances as watches as the hour to depart for the airport draws nearer, then boards cannot be held to be functioning at anywhere near the level of effectiveness required. Chairmen and Chairwomen must monitor this need for balance attentively. In this context agenda-setting is of growing importance and meetings will benefit from circulating concise, lucid summaries of key strategic and financial in well in advance.