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	<title>IGOPPFinancial crisis &#8211; IGOPP</title>
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		<title>Corporate Governance in the post-pandemic world</title>
		<link>https://igopp.org/en/corporate-governance-in-the-post-pandemic-world/</link>
		<comments>https://igopp.org/en/corporate-governance-in-the-post-pandemic-world/#respond</comments>
		<pubDate>Fri, 01 May 2020 15:42:27 +0000</pubDate>
		<dc:creator><![CDATA[IGOPP Site web]]></dc:creator>
				<category><![CDATA[News Articles]]></category>
		<category><![CDATA[Crise financière]]></category>
		<category><![CDATA[Financial crisis]]></category>
		<category><![CDATA[Gestion des risques]]></category>
		<category><![CDATA[Parties prenantes]]></category>
		<category><![CDATA[Risk management]]></category>
		<category><![CDATA[Stakeholders]]></category>

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		<description><![CDATA[Human beings are wonderful amnesiacs, an observation grounded in the history of traumatic events which have faded gradually into oblivion. That may well be the case with the current pandemic. For instance, how did societies, corporations and their governance system cope with recent dramatic events (so called “Black Swans” or for the more statistically inclined [&#8230;]]]></description>
		<content><![CDATA[Human beings are wonderful amnesiacs, an observation grounded in the history of traumatic events which have faded gradually into oblivion. That may well be the case with the current pandemic.

For instance, how did societies, corporations and their governance system cope with recent dramatic events (so called “Black Swans” or for the more statistically inclined “Six-Sigmas” events, although many would rightfully question whether these were really “Black Swans”)?

Take the financial/economic crisis of 2007-2008. Few sequels remain. Regulations of the financial sector were enhanced somewhat, banks had to increase their capital, executive compensation was “subjected” to an advisory “say-on-pay” vote by shareholders and some of the most outrageous financial speculations were curtailed. But overall, not much has changed despite the panic and dread at the time when many knowledgeable observers and actors feared a total collapse of the world’s
financial and economic system.

But 9/11 is a different story. Although located in New York, the event has brought about lasting, dramatic changes on an  international scale. Air travel was never the same after 9/11. States and government have increased permanently their authority and means to surveil and control societies and the worldwide flow of communications. Some individual freedoms were sacrificed on the altar of security with the consent (?) of the citizenry.

As the current pandemic has a much broader and deeper impact, the 9/11 scenario offers a weak template for what will happen when the pandemic begins to fade away: greater control on citizens’ behavior, close monitoring of all movements through instant communications, government-issued safe-conducts to gain access to any public event. Constitutionally protected individual freedoms will be infringed upon by a State/medical bureaucracy determined to protect us at all costs. All of these coercive measures will be promoted, and accepted, as essential to avoid a recurrence of some form of pandemic.

This painful experience will also foster some changes of a social/political nature: the work arrangements adopted during the crisis will call for a critical re-thinking of the standard pattern of commuting/office work/in-person meetings with colleagues. The resulting reduction of “polluting travel” will be hailed by all environmentalists despite the “irrelevant” cost of anomie, social isolation and estrangement.

The inevitable quest for greater self-sufficiency in many areas (food, pharmaceuticals, etc.) will bring about different industrial policies as well as a renewed skepticism about “globalization” and its supposed benefits. But this latest crisis may also generate a lasting anxiety and a sense of vulnerability in large segments of the population, who will subject all their public activities to the imperatives of total safety.

The role and responsibility of boards of directors

1. Coping with uncertainty

Even if 9/11 or the 2008 financial crisis may not fully qualify as Black Swans, for most corporations these events were unexpected and unplanned for. Corporations were taken by surprise and had to improvise some response. After the 2008 financial crisis particularly, most boards have enhanced their role in risk monitoring and risk mitigation.

But, boards have to cope with uncertainty, not only risk. Uncertainty is different from risk because there is no probability estimate of the occurrence of uncertain event within a given time frame, no way to predict the likely occurrence of a “six-sigma” event. The typical “predict-and-prepare” approach of risk management system and process does not work.

There are always “clairvoyants” who claim, with some justification, that they had foreseen the catastrophe. But how often had they been wrong in the past?

So what is a board to do? To ask management to list all unlikely dramatic events to which a corporation may be vulnerable and prepare contingency plans for each would paralyze any organization. A bank executive claimed recently that his institution had planned for “all” contingencies (nuclear attacks, fires, hurricanes) but had never foreseen a pandemic (Richard Dufour, La Presse, April 25th 2020). What about tsunamis, 9.0 earthquakes, an asteroid hit, etc.?

In an uncertain world where unpredictable and uncontrollable events may have catastrophic consequences, a board of directors must call upon management to hoard strategic and financial resources, build redundancy, and increase the corporation’s flexibility and adaptability to uncertain events. (See Allaire and Firsirotu, Coping with Strategic Uncertainty, Sloan Management Review)

Coping with uncertainty means:

 	maintaining an acute sense of the firm's vulnerability;
 	experiencing the future as largely unknowable; and
 	considering the firm’s survival to be dependent on organizational flexibility, on building buffers and redundancy and on hoarding strategic and financial resources.

No doubt such measures will have a short-term impact on earnings per share, on return on assets, on optimal capital structure. But that is the cost of some preparedness to cope with uncertain events.

2. Designing the organization for a new set of circumstances

There will be a decisive relaxation, even rejection, of the neo-liberal framework which has defined the functioning of societies and large corporations for decades: the expectation of continuous growth in earnings per share; the cost-driven global search for the locations of cheapest labor where to farm out operations; the massive creation of income and wealth inequality; the indecent enrichment from financial speculation and legerdemain, from activities with little or no social value; the tradeoffs between debt, deficits and social expenditures with the former having a distinct priority over the latter.

Boards of directors should heed the early warnings of impending disturbances of a political and social nature. They may be harbingers of the next flock of black swans. If boards do not effectively handle expectations, they should expect governments, now flush with power, to take actions about work arrangements, executive
compensation, sharing of wealth, punitive taxation for outsourcing, and so forth.

Contrary to what one might have expected given the serious financial issues that will be faced by many business corporations, the recent infatuation of large institutional shareholders with ESG (Environment, Society, Governance) drivers and its corollary, the stakeholder model of the corporation, will not abate. Too much wind in those sails and the pandemic will push further for compliance by publicly traded corporations.

It behooves management and boards of directors to act pre-emptively in five areas:

 	Monitor and enhance the corporation’s self-sufficiency in critical supplies within the home country;
 	Review and re-assess all past decisions to outsource and off-shore operations to low-cost countries;
 	Design work arrangements to adapt to the circumstances post pandemic as well as to the people’s legitimate quest for balance, couple burden sharing;
 	Cut the Gordian Knot of executive compensation; examine the form and level of compensation so as to reduce the gap and set an acceptable ratio of top management compensation to the salary of the median employee;
 	As most large institutional funds have become advocates of ESG, make clear to shareholders what this emphasis and the above adjustments will mean for the management and performance of the company in the future.

The powerful forces of continuity, habits, and normalcy may bring us back to the status quo ante. We may wake up from this nightmare unscathed. Perhaps! But a board of directors should not take this happy ending for granted.

&#160;

The authors are solely responsible for the opinions expressed in this article.
]]></content>
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		<item>
		<title>Are Independent Board Members Necessarily Credible?</title>
		<link>https://igopp.org/en/are-independent-board-members-necessarily-credible/</link>
		<comments>https://igopp.org/en/are-independent-board-members-necessarily-credible/#respond</comments>
		<pubDate>Wed, 08 Aug 2018 18:46:15 +0000</pubDate>
		<dc:creator><![CDATA[IGOPP Site web]]></dc:creator>
				<category><![CDATA[News Articles]]></category>
		<category><![CDATA[American governance]]></category>
		<category><![CDATA[Financial crisis]]></category>
		<category><![CDATA[Independence of Board members]]></category>
		<category><![CDATA[Value-creating governance]]></category>

		<guid isPermaLink="false">https://igopp.org/are-independent-board-members-necessarily-credible/</guid>
		<description><![CDATA[By the late 2000s, independent directors were in the majority on the boards of almost every type of U.S. organization. While this achievement may have improved corporate governance, it was not the panacea that some had anticipated, as subsequent events like the financial crisis of 2008 brought down even some of the best governed corporations. [&#8230;]]]></description>
		<content><![CDATA[By the late 2000s, independent directors were in the majority on the boards of almost every type of U.S. organization. While this achievement may have improved corporate governance, it was not the panacea that some had anticipated, as subsequent events like the financial crisis of 2008 brought down even some of the best governed corporations.

The tragic fate of Lehman Brothers, which declared bankruptcy on September 15, 2008, the triggering event of the financial crisis, illustrates the limitations of independent board members. Lehman's board of directors, typical for the time, was made up of independent people, many of whom were ex-CEOs of large corporations like IBM, GlaxoSmithKline, Haliburton, Telemundo Group, and Sotheby’s.

The board made its decisions on the basis of the members’ experience, which had little relevance to the business of Lehman, an investment bank and a large trading operation that dealt with complex financial products.

The report of the examiner appointed by the bankruptcy court to determine the responsibility of Lehman's board of directors for the bank’s collapse (the Jenner &#38; Block Report) is instructive. For the board meeting on March 20th, 2007 at which a fateful decision was made about Lehman’s larger financial commitment to the sub-prime mortgage market, the people responsible for preparing a presentation for the president of Lehman exchanged e-mails conveying his expectations. One e-mail read:

Board is not sophisticated around subprime market- Joe [the president of Lehman] doesn’t want too much detail. He wants to candidly talk about the risks to Lehman but be optimistic and constructive – talk about the opportunities that this market creates and how we are uniquely positioned to take advantage of them (Jenner &#38; Block Report, p.90).

Later in the report, the examiner wrote:

Although Lehman’s management did not provide the Board with all available information concerning the risks faced by the firm in 2007 and early 2008, that fact is not surprising given the Board’s limited role in overseeing the firm’s risk management, and the extraordinarily detailed information available to management. (Jenner &#38; Block Report, p. 185).

Thus, a board made up of independent members with impressive biographies is not ipso facto credible. This helps explain why corporate governance falls short at too many organizations.

A board's credibility rests ultimately with management’s assessment of the board: does the management feel that the board understands in depth their strategic choices, the real drivers of performance, the complexity and ramification of proposed decisions? Do the members of the management team feel that discussions with the board are productive and stimulating, bring out new viewpoints and add value to the decision-making process? A board of directors is only credible to the extent that a significant number of its members are able to interact knowledgeably with management on the multiple factors that influence performance. This type of exchange calls for a board’s deep and systemic understanding of the company’s business model.

That’s why so many experienced, real-world, observers of corporate governance have begun to advocate "specific competence" and "understanding the company's business model." (See, for example, William, 2013; Bailey and Koller, 2014; and Lorsch et al., 2012, The Future of Governance).

Having interviewed 78 board members of large U.S. companies, Jay W. Lorsch, professor at the Harvard Business School, reported that they, unanimously or nearly so, said boards must significantly enhance their skills, and lamented "the huge deficits in expertise and understanding of the business."

The more complex a business is, the more important it is that the board can count on directors who are well versed in the arcane aspects of its operations, although it may be at the price of their independence.

Lorsch concludes that "It is difficult, if not impossible, to find directors who possess deep knowledge of a company’s process, products, and industries who can also be considered independent."

The current, conventional, approach to selecting board members consists of drawing up a list of the different types of professional expertise that would serve the company well. The search also includes a number of retired or active senior managers from diverse corporations. This process will not necessarily lead to a credible board, because the senior managers selected too often lack experience in the business sectors where the company to be governed operates.

The selection process should begin by identifying industries with characteristics in common with the industry in which the target company operates. Those characteristic should include capital intensity, time horizon of investments, industrial vs. consumer markets, international scope of competition, key success factors, and generic strategies. Executives with experience in such industries will more quickly master the essential aspects of the company while also qualifying as independent, thus reconciling independence with credibility.

This approach should also apply to the selection of a director with, say, an expertise in finance. The selection process should stress that candidates must have experience acquired in an industry with characteristics similar to those of the target company’s industry. There is very little transferable expertise, whether in financial management, human resources, risk management, or information technology, among a retail business, a resources company, a financial institution, and a firm in the aerospace/defense industry.

If new board members lack credibility, then the board must determine whether they have committed to investing the time necessary to develop it and, have the necessary education and intellect and whether the board itself has created programs to enhance the credibility of new members.

A board’s credibility is the cornerstone of effective governance. Thus, the search for, training, and retention of credible board members has become the dominant issue and inescapable challenge for corporate governance in the 21st century.
]]></content>
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		</item>
		<item>
		<title>Board members are independent, but are they credible?</title>
		<link>https://igopp.org/en/board-members-are-independent-but-are-they-credible/</link>
		<comments>https://igopp.org/en/board-members-are-independent-but-are-they-credible/#respond</comments>
		<pubDate>Wed, 06 Jun 2018 13:42:28 +0000</pubDate>
		<dc:creator><![CDATA[IGOPP Site web]]></dc:creator>
				<category><![CDATA[News Articles]]></category>
		<category><![CDATA[Publications ]]></category>
		<category><![CDATA[Financial crisis]]></category>
		<category><![CDATA[Independence of Board members]]></category>
		<category><![CDATA[Value-creating governance]]></category>

		<guid isPermaLink="false">https://igopp.org/board-members-are-independent-but-are-they-credible/</guid>
		<description><![CDATA[By the late 2000s, the goal that boards should be made up of a majority of independent members had been achieved in almost every type of organization. While this achievement may have raised the quality of governance, it turned out that independent boards were not the panacea that some had anticipated. Events since, in particular [&#8230;]]]></description>
		<content><![CDATA[By the late 2000s, the goal that boards should be made up of a majority of independent members had been achieved in almost every type of organization. While this achievement may have raised the quality of governance, it turned out that independent boards were not the panacea that some had anticipated.
Events since, in particular the financial crisis of 2008, have shocked the world of corporate governance as impeccably run corporations were cut down one after the other.
Companies, regulators and all savvy observers of governance had to admit that board members’ independence and their general management experience in industries with little in common with the firm to be overseen were an insufficient basis for high-performance governance. Boards must also have a high level of expertise and experience about the specific issues and challenges faced by the company. That’s what board credibility means.
The more complex the company, the more difficult it is for a director to be credible, as was shown in the financial sector during the years leading up to the crisis of 2008.
A board of directors is only credible to the extent that a significant number of its members are able to interact knowledgeably with management on components of performance and the multiple factors that influence performance. This type of exchange calls for a board’s deep and systemic understanding of the company’s business model.
In our day and age, board members will not become, nor remain, credible if they do not master the immense reservoir of information available on the internet to fashion their own independent sources of data.
The current, conventional, approach to board-member selection consists of drawing up a list of the different types of professional expertise that would serve the company well. The search will also include a number of (retired or still active) senior managers from diverse corporations. This process will not lead to a credible board. Actually, the weak link of that process lies in the recruitment of senior managers with experience in business sectors with little in common with the industry in which the company to be governed operates.
The selection process should begin by identifying industries with characteristics that closely track those of the industry in which the target company operates: such as, capital intensity, time horizon of investments, industrial vs. consumer markets, international scope of competition, key success factors, generic strategies. The reason for this is obvious. Executives with experience in such industries will more quickly master the essential aspects of a company operating in a “similar” industry and still qualify as “independent.” This recommendation will help reconcile the regulatory need for “independence” and the important quest for “credibility.”
That recommendation applies equally if and when a board is looking to select some new member with, say, an expertise in finance. The selection process should stress that this experience must have been acquired in an industry with comparable characteristics (as defined above) to that of the target company. There is very little transferable expertise, whether in financial management, human resources, risk management or information technology, between the retail business, a resources company, a financial institution or a firm in the aerospace industry.
If, upon joining the board, new members do not have a high level of credibility, have they committed to invest the necessary time, do they have the education and intellectual wherewithal to become credible within a reasonable period of time … and to maintain that credibility?
The quest for board diversity and “refreshment” has brought about some policies to force automatic termination of board membership. It is now the fashion to impose age limits (70, 72 or 75) and/or tenure limits (15 years on the board).
Those sorts of policies are sub-optimal, but clearly much easier to implement and less emotionally charged, than asking members to leave as a result of his/her performance evaluation. If truly seeking to raise their board’s credibility, board chairs and governance committees should evaluate all board members (whatever their age and the length of their tenure) for their specific knowledge of, and experience with, the type of business or organization they are asked to govern. That’s a tall order, but a necessary step toward more credible boards capable of creating value for all stakeholders of a corporation.
A board’s credibility is the cornerstone of effective governance. Thus, the search for, training and retention of, credible board members has become the dominant issue and inescapable challenge for corporate governance in the 21st century.
]]></content>
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		</item>
		<item>
		<title>Corporate Governance: looking backward, looking forward</title>
		<link>https://igopp.org/en/corporate-governance-looking-backward-forward/</link>
		<comments>https://igopp.org/en/corporate-governance-looking-backward-forward/#respond</comments>
		<pubDate>Wed, 07 Dec 2016 16:34:27 +0000</pubDate>
		<dc:creator><![CDATA[mlamnini]]></dc:creator>
				<category><![CDATA[Publications ]]></category>
		<category><![CDATA[Reports & Studies]]></category>
		<category><![CDATA[American governance]]></category>
		<category><![CDATA[Financial crisis]]></category>
		<category><![CDATA[Hostile takeovers]]></category>
		<category><![CDATA[Public governance]]></category>
		<category><![CDATA[Regulation]]></category>

		<guid isPermaLink="false">https://igopp.org/?p=6909</guid>
		<description><![CDATA[Once upon a time, the governance of publicly listed corporations was a friendly, fraternal affair with few requirements and little risk. Then, during the 1980s, a group of funds (leveraged buyout funds) sprouted up claiming that this sort of governance deprived shareholders of the full economic value of the business they had invested in. Cozy [&#8230;]]]></description>
		<content><![CDATA[Once upon a time, the governance of publicly listed corporations was a friendly, fraternal affair with few requirements and little risk. Then, during the 1980s, a group of funds (leveraged buyout funds) sprouted up claiming that this sort of governance deprived
shareholders of the full economic value of the business they had invested in. Cozy boards and complacent management, these funds claimed, were not motivated to maximize value for shareholders.

Their solution was a dramatic one: this system must be changed by a "revolution" in governance made possible only by the full privatization of these companies. Having access to large pools of funds and the borrowing capacity of the targeted companies, these LBO “revolutionaries” carried out a wave of hostile takeovers of companies and their subsequent privatization. That period was unusual for the large number of transactions – nearly always hostile – to privatize public companies.

This "revolution", which was to some degree successful and did leave a lasting impact on corporate governance, eventually faded away as a result of two events at the end of the 1980s and beginning of the 1990s:

 	The financing of these LBO transactions relied heavily on another "innovation", namely junk bonds, whose principal protagonist was Michael Milken. However, at the end of the 1980s, a series of financial scandals implicated several major actors in the
financial world, including Milken himself who was charged and eventually served jail time. This criminal turn of events had the effect of immediately drying up the junk bonds market as a source of financing for LBOs.
 	Legislators in 30 or so U.S. states, prompted by an electorate that was shocked and outraged by the impact on their communities of these hostile "privatizations", adopted laws giving boards of directors increased authority and leverage to repel any
unwanted takeover bids.

However, stung by the arguments of LBO funds, boards of directors would henceforth set compensation of senior executives in a way that would motivate them to create economic value for shareholders. That meant, inter alia, generous helpings of stock options so that management would work hard to push up the stock price, pleasing shareholders and ipso facto enriching themselves.

This radical change in executive compensation was strongly supported, and even instigated, at the time by institutional investors. As executive compensation shot up, public companies, beginning in 1992, were obliged to disclose detailed information about the compensation of their five best-paid executives.

Thus, during the 1990s, hostile takeover bids quickly dried up and were replaced by transactions that had become "friendly"1. The aggressive, “hostile” LBO funds morphed into “gentle” Private Equity Funds (PEF).

Board governance reverted to the quiet, collegial nature of the old days, but failing inexcusably to factor in the increased risk of management misbehaviour brought about by a system of compensation now loaded with stock options. This risk went unforeseen until the tornado known as Enron, WorldCom, Global Crossing, et alia caught boards of directors by surprise in 2001.

The American political and regulatory system, sensing that accusations of laxity were forthcoming, adopted the Sarbanes-Oxley (SOX) Act in short order in July 2002. Thus, having interpreted the Enron/WorldCom scandals as being largely attributable to accounting flaws and management malpractices resulting from overly generous incentives, SOX imposed new safeguards, including the following:

 	Independence requirement for audit committee members;
 	Responsibility of audit committees for the quality of internal controls;
 	Explicit responsibility of the CEO and CFO to certify that the financial statements adequately represent the corporation's financial position;
 	Full disclosure of off-balance sheet transactions;
 	Creation of the Public Accounting Oversight Board;
 	Severe restrictions on other services that audit firms can provide to corporations for whom they assume audit responsibility;
 	More expeditious filing of insider trading reports;
 	The reimbursement of any variable compensation obtained according to financial statements that were subsequently restated;
 	The prohibition of loans to senior management and directors;
 	Longer prison terms for financial fraud.

Not only did the bankruptcies of Enron and WorldCom lead to unusually long prison sentences for the officers of these corporations but board members were required to pay out of their own pockets fines of $13 million and $18 million respectively. Although there was no equivalent jail time or monetary fines in other cases, the Enron/WorldCom sagas triggered a shock wave among the officers and board members of U.S. public corporations.

Having to comply with the SOX requirements, worried about the risks they now ran for any laxity in governance, submerged under an avalanche of measures, standards and principles of "good governance" put forth by committees of experts, security commissions and the stock exchanges, boards of directors engaged in a sweeping reform of the governance of public corporations. Boards would henceforth play their role fully and assert a new (or renewed) fiduciary authority over corporate management.

This phenomenon, which first appeared in the U.S., spread like wildfire to Canada and the United Kingdom, and then more slowly to other developed countries. Read more [1]

The opinions expressed in this article are the author's own.

[1] https://igopp.org/wp-content/uploads/2017/01/IGOPP_Rapport_CorporateGovernance_EN_v1.pdf]]></content>
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		</item>
		<item>
		<title>Systemic federal risk :</title>
		<link>https://igopp.org/en/systemic-federal-risk/</link>
		<comments>https://igopp.org/en/systemic-federal-risk/#respond</comments>
		<pubDate>Wed, 09 Oct 2013 17:56:41 +0000</pubDate>
		<dc:creator><![CDATA[mlamnini]]></dc:creator>
				<category><![CDATA[News Articles]]></category>
		<category><![CDATA[Financial crisis]]></category>
		<category><![CDATA[National securities regulator]]></category>
		<category><![CDATA[Risk management]]></category>

		<guid isPermaLink="false">http://aimta712.org/?p=1800</guid>
		<description><![CDATA[The federal minister of finance is wrong to think a national securities commission would lower risk. Give the federal minister of finance his due: He is nothing if not persistent. Rebuffed by the Supreme Court of Canada in a unanimous and blunt judgment, the minister is trying to squeeze a national securities commission through the [&#8230;]]]></description>
		<content><![CDATA[The federal minister of finance is wrong to think a national securities commission would lower risk.

Give the federal minister of finance his due: He is nothing if not persistent. Rebuffed by the Supreme Court of Canada in a unanimous and blunt judgment, the minister is trying to squeeze a national securities commission through the small openings contained, as a sort of consolation prize, in the Supreme Court’s decision:

“While the proposed Act must be found ultra vires Parliament’s general trade and commerce power, a cooperative approach that permits a scheme that recognizes the essentially provincial nature of securities regulation while allowing Parliament to deal with genuinely national concerns remains available…

However, as important as the preservation of capital markets and the maintenance of Canada’s financial stability are, they do not justify a wholesale takeover of the regulation of the securities industry which is the ultimate consequence of the proposed federal legislation. The need to prevent and respond to systemic risk may support federal legislation pertaining to the national problem raised by this phenomenon, but it does not alter the basic nature of securities regulation which, as shown, remains primarily focused on local concerns of protecting investors and ensuring the fairness of the markets through regulation of participants.”

(Judgment of the Supreme Court, December 2011; emphasis added)

The federal minister of finance has thus embarked on a campaign to woo the provinces with trinkets and baubles of “cooperative federalism.” Ontario, which needed no persuasion as it has been drooling for a long time to become the home of a central, national securities commission, and British Columbia have jumped on the federal bandwagon. Other provinces are more reticent and may wave the train by. Certainly Quebec and Alberta, the formidable challengers of the last federal initiative, remain doggedly opposed to, and unimpressed with, this new variant.

But, why does the federal government manifest such determination to having it its way, to impose some central organization to oversee the securities business?

Let’s put aside any political motive that twisted minds might conjure up and suppose rather that the federal minister of finance is truly worried about the heightened systemic risk to the Canadian financial system brought on by our fragmented, provincially based securities commissions.

Is he right to fear that without a central coordinating body regulating securities, Canada could be handicapped in dealing with a systemic financial crisis of the sort the world experienced in 2008.

The answer is a simple and categorical no!

"Canada has no need of any ‘central’ securities commission"

The last financial crisis, the most lethal we have experienced since 1929, provided an eloquent demonstration: The countries with centralized securities commissions, such as the Unites States and Great Britain, were the most affected by the crisis. At no time did the crisis threaten the Canadian financial system; the only event that had a whiff of what was happening elsewhere occurred with respect to asset-backed commercial papers (the famous ABCP); but at no time did that unfortunate episode pose a systemic risk for Canada.

In fact, the six large Canadian banks represent the true systemic risk to our financial system; the size of their assets, the diversity of their operations and the linkages among them put the whole system at risk should one of them falter. However, these banks come wholly under federal jurisdiction. The Office of the Superintendent of Financial Institutions (OSFI) and the Bank of Canada wield the power and authority to impose all precautionary measures on these banks. In March 2013, under the terms of the Basel Accords, the OSFI formally decreed that the six Canadian banks were systemically important financial institutions (SIFI). As a result, these banks must submit to a set of measures (enhanced capital ratios, etc.) designed for worldwide institutions that have been so labeled.

Over-the-counter (OTC) derivatives, opaque and poorly regulated, played an important systemic role in triggering the last financial crisis. Remember AIG and its virtual insolvency resulting from its massive involvement in credit derivatives. The astronomical volume and transnational character of these OTC derivatives could once again create havoc for the international financial system. What should Canada do about these lethal derivatives? Does the absence of a “national” securities commission inhibit efforts to deal with this systemic problem?

Well, a little known instance, the Heads of Agencies (HoA), dealt with the issue swiftly, cooperatively and effectively. The HoA, under the leadership of the Governor of the Bank of Canada, brings together OSFI and the heads of the securities commissions of Alberta, B.C., Ontario and Quebec, to discuss and take actions on matters of national importance. The HoA has been tasked to implement all measures recommended by the G20 to which Canada has committed.

Canada now has a framework to enhance the transparency and international regulation of derivative instruments, a framework developed through a cooperative process, without the need of any “central” securities commission.

The federal minister of finance, once again, is basing his initiative on arguments that are unfounded in fact or in theory. Canadian systemic risk comes above all from the major universal banks, a sector wholly under federal jurisdiction.

As for other risks, the framework put in place to regulate over-the-counter derivatives provides a fine demonstration that the present system works well.

The burden of proof that the present system increases systemic risk in Canada falls squarely on the minister’s shoulders. It is a burden he has failed to discharge thus far.
]]></content>
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		<title>Five years on from the financial crisis, what has changed?</title>
		<link>https://igopp.org/en/five-years-on-from-the-financial-crisis-what-has-changed/</link>
		<comments>https://igopp.org/en/five-years-on-from-the-financial-crisis-what-has-changed/#respond</comments>
		<pubDate>Mon, 23 Sep 2013 20:07:22 +0000</pubDate>
		<dc:creator><![CDATA[mlamnini]]></dc:creator>
				<category><![CDATA[News Articles]]></category>
		<category><![CDATA[American governance]]></category>
		<category><![CDATA[Financial crisis]]></category>
		<category><![CDATA[Value-creating governance]]></category>
		<category><![CDATA[World Economic Forum]]></category>

		<guid isPermaLink="false">http://aimta712.org/?p=1839</guid>
		<description><![CDATA[Five years after the collapse of Lehman Brothers, the Forum:Blog will be publishing a number of personal views by key figures on the event and its implications. The views expressed are those of the author, not necessarily the World Economic Forum. A great deal of pain was inflicted on ordinary, innocent people by the financial [&#8230;]]]></description>
		<content><![CDATA[Five years after the collapse of Lehman Brothers, the Forum:Blog will be publishing a number of personal views by key figures on the event and its implications. The views expressed are those of the author, not necessarily the World Economic Forum.

A great deal of pain was inflicted on ordinary, innocent people by the financial crisis, a crisis that was neither an act of God nor a perfect storm but a totally preventable, greed-fuelled tragedy.

The simmering crisis erupted on September 15th 2008 at 1h15 AM when lawyers for investment bank Lehman Brothers petitioned the U.S. court for protection under Chapter 11 of the bankruptcy code. With liabilities of over $600 billion, it was the largest bankruptcy in U.S. history.

The Lehman bankruptcy triggered a lethal spiral. As liquidity and trust evaporated from the system and as the linkages among financial institutions became glaringly obvious, the whole financial system was revealed to be vulnerable and tottering. A wind of panic blew hard and cold. Politicians had no other choice but to throw public money at the banks and other financial firms to prevent a total meltdown of the international financial system.

The storm passed. In amazement and disbelief, the world looked at the extent of the devastation and the price that governments had to pay to contain the crisis. Then the real economies of almost all the developed countries went into a recessionary tailspin. Some governments introduced ill-advised austerity programs to repay some of the debts and further deepened their economic woes. Popular anger was and still is palpable and flammable.

Regulation post-crisis

Committees, commissions and books that have looked into the crisis have largely concurred on its causes: the massive deregulation of the financial system; the size and form of executive compensation; the use of poorly understood, esoteric financial “products”; rating agencies’ uncritical approach to those products; poor risk assessment methods; and accounting principles which turned out to be lethal in a crisis situation.

Proposals for new laws, regulatory frameworks and preventive measures gushed out from the G20, the European Union, Basel and Washington. In July 2010 the American Congress passed the Dodd-Frank Act, 800 pages of legislation aimed at giving additional powers to regulators.

After enduring a purgatory of vilification by lawmakers, pundits and lay people, the financial industry began to push back. A different twist was given to the causes of the crisis, a twist that emphasized the reckless behaviour of people with little means wanting to live beyond their financial capability.

Wall Street quickly realized that not much had changed in how the American political process operated. The implementation of the Dodd-Frank Act has been slowed down by political manoeuvring and court challenges. Key parts of the Act remain in limbo, and reformist enthusiasm in Congress is gradually subsiding.

Five years on from Lehman and more than three years after the enactment of Dodd-Frank:

 	Derivative products are but partly regulated;
 	Other than an advisory say-on-pay vote by shareholders and the eventual publication of the ratio of CEO compensation to the employee median compensation, executive pay levels and practices remain practically unchanged;
 	The “Volker rule”, to prohibit banks from trading in the markets on their own account and restrict their activities involving private equity and hedge funds, remains inoperative;
 	The rating agencies have retained most of their prerogatives;
 	Systemically important financial institutions have been identified and will eventually be subjected to capital-adequacy rules and other measures to limit the risk they represent for the financial system as a whole;
 	The limitations of corporate governance in large complex organizations – the asymmetry of information, expertise and knowledge between the board and management – remain unaddressed.

Slow-paced, stumbling, diluted, yet a financial system reform is taking shape and will eventually reduce the risk of a crisis with the same dynamics as the last one; it may be the equivalent of building the Maginot Line after WWI ! But the character of the international financial system is fundamentally unchanged; the motivations that drive the system remain as they were before the crisis. That may be a harbinger of crises to come.

What should be done?

Space here does not allow for an extensive consideration of measures that may go to the root of the causes; but here’s a sketchy set of proposals:

 	It must be noted, and it is not a coincidence, that all firms involved in the financial crisis were widely-held, stock-market traded corporations; a particular nexus of risk-rewarding compensation systems, soaring complexity and weak board governance has come to characterize this form of ownership; but for the last twenty years, all investment banks were organized as partnerships; would partners have taken the risks that Bear Stearns, Lehman, Morgan Stanley and Goldman Sachs eventually took on as publicly traded companies? Publicly traded firms should not be allowed to take on more complexity than a competent board can govern effectively.
 	Corporations must take on a broader role than delivering ever growing quarterly earnings per share; yet, the whole framework of impatient and transient shareholding, proxy advisory firms, and activist hedge funds make it very difficult to pursue any objective other than the satisfaction of the financial markets; it would be productive to adopt measures to motivate longer term holding of shares (different vote structure, enhanced dividend after a period of years, et,) as well as alternative forms of ownership, like dual class of shares, cooperative undertaking, private ownership. In this way, companies might be insulated somewhat from short-term pressures and again plan and manage for the long term, which implies due consideration to all stakeholder that give legitimacy to a business firm.
 	The legal framework for corporation should make clear that the board must act and decide in the long-term interest of the corporation, which must include consideration of all stakeholders of the company.
 	Finally, let’s review the whole system for setting executive compensation; it is a broken system that needs retooling.

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		<title>Canadian companies urged to end stock option rewards</title>
		<link>https://igopp.org/en/canadian-companies-urged-to-end-stock-option-rewards-2/</link>
		<comments>https://igopp.org/en/canadian-companies-urged-to-end-stock-option-rewards-2/#respond</comments>
		<pubDate>Tue, 22 May 2012 18:14:39 +0000</pubDate>
		<dc:creator><![CDATA[mlamnini]]></dc:creator>
				<category><![CDATA[IGOPP in the Medias]]></category>
		<category><![CDATA[IGOPP in the medias]]></category>
		<category><![CDATA[Executive compensation]]></category>
		<category><![CDATA[Financial crisis]]></category>
		<category><![CDATA[Stakeholders]]></category>

		<guid isPermaLink="false">http://aimta712.org/?p=2951</guid>
		<description><![CDATA[&#8220;An influential group including representatives of Canada’s business, regulatory and academic circles is calling for an end to the “mistake” of rewarding executives with stock options. The Institute for the Governance of Private and Public Organizations issued the bold challenge Tuesday as part of package of recommendations aimed at reining in executive pay and tying [&#8230;]]]></description>
		<content><![CDATA["An influential group including representatives of Canada’s business, regulatory and academic circles is calling for an end to the “mistake” of rewarding executives with stock options.

The Institute for the Governance of Private and Public Organizations issued the bold challenge Tuesday as part of package of recommendations aimed at reining in executive pay and tying compensation firmly to long-term strategy execution.

A 64-page policy paper produced by the Institute concludes that it was “a major mistake, and a source of many shenanigans” to make stock options a large component of executive compensation.

“We are convinced that a modicum of social trust, loyalty and reciprocity must be rebuilt in publicly traded companies, and that management must manage for the long-term benefit of the corporation and its varied stakeholders,” the report says. “We are also convinced that this will not happen without fundamental changes in the compensation models currently in use in most companies.”

The use of options proliferated in the 1990s after changes were made to the deductibility of executive salaries in the United States. But options have come under heavy criticism in the aftermath of the 2008 financial crisis because they are seen by some as a culprit in creating the excessive risk-taking blamed for the meltdown and ensuing economic woes" ... Read more [1]

[1] http://business.financialpost.com/2012/05/22/canadian-companies-urged-to-end-stock-option-rewards/]]></content>
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		<title>Roger Martin versus Michael Jensen: much ado about nothing</title>
		<link>https://igopp.org/en/roger-martin-versus-michael-jensen-much-ado-about-nothing/</link>
		<comments>https://igopp.org/en/roger-martin-versus-michael-jensen-much-ado-about-nothing/#respond</comments>
		<pubDate>Fri, 13 Jan 2012 20:46:41 +0000</pubDate>
		<dc:creator><![CDATA[mlamnini]]></dc:creator>
				<category><![CDATA[News Articles]]></category>
		<category><![CDATA[American governance]]></category>
		<category><![CDATA[Executive compensation]]></category>
		<category><![CDATA[Financial crisis]]></category>
		<category><![CDATA[Stakeholders]]></category>

		<guid isPermaLink="false">http://aimta712.org/?p=1855</guid>
		<description><![CDATA[In a profanity-laden interview with Terence Corcoran of the National Post (January 6th 2011), Professor Michael Jensen rejects the accusation in Roger Martin’s latest book that he is the spiritual father of the shareholder-value maximization movement. True enough; in the seminal Jensen-Meckling article of 1976 that Martin singles out as the source of this abomination, [&#8230;]]]></description>
		<content><![CDATA[In a profanity-laden interview with Terence Corcoran of the National Post (January 6th 2011), Professor Michael Jensen rejects the accusation in Roger Martin’s latest book that he is the spiritual father of the shareholder-value maximization movement. True enough; in the seminal Jensen-Meckling article of 1976 that Martin singles out as the source of this abomination, the authors never make the argument that maximizing shareholder value should be the aim of corporate management.

But, Jensen does protest too much. His contribution to the field of finance, very influential in the 1980s and 1990s, consisted in two main arguments:

 	The theory of agency costs and the nexus of relationship between principals and agents; in his view, shareholders (and debt holders) are the principals of the board of directors, and the latter, the principals of management. If shareholders are indeed the principals of the board of directors, for whose benefits should the agents (the board) act in all circumstances; fairly or not, the conclusion drawn broadly and widely from this article was that boards should urge and prod management to do whatever is necessary to maximize shareholder value. Marx might not have liked what Lenin did with his theory but he still bears the blame for its contents.
 	In two famous article in the Harvard Business Review (September- October 1989), Jensen wrote of the "Eclipse of the Public Corporation” and in May-June 1990 (with Kevin J. Murphy) about “CEO Incentives: It’s not How Much You Pay, But How”, Jensen argued that the CEOs of the public corporation got too small a share of the value they created for shareholders. That is why “so many CEOs act like bureaucrats rather than value-maximizing entrepreneurs”. That insight triggered a search for ways to let senior management get a larger share of the wealth created for shareholders. Lo and behold, stock options were the perfect device to accomplish that, it was thought at the time. So Jensen may not have advocated directly for the widespread use of stock options as an effective means of incentivizing management but that was the inference drawn from his theoretical musings.

After the collapse of Enron, WorldCom, Global Crossing and others in 2001-2002, Jensen took some distance from his own earlier writings. He may claim, and rightly so, that he has proposed alternatives to the shareholder-value model as well as the stakeholder model. He is right to argue that the stakeholder model proposed by Roger Martin and a host of writers before him never provides any clarity as to how the trade-offs between the interests of various stakeholders would be set and resolved.

Jensen (as well as Allaire and Firsirotu in books published 1993, 2004, 2009) proposes “value-maximization” as an alternative model, by which he merely means the maximization of the long-term interest of the corporation. That happens to be the fiduciary responsibility of boards of directors under Canadian law.

The argument here is that this objective cannot be achieved without careful consideration of the interest of all stakeholders who have an influence on the long-term survival and success of the company. It does not entirely avoid the issue of trade-offs among stakeholders but puts in a manageable framework.

As for the elimination of stock options, Jensen, unlike I and Roger Martin, may not have proposed this measure but, in a long piece (again with Kevin J. Murphy) published in 2004, he points out the flaws and limitation of stock options as a form of incentive compensation. His solution at the time, options indexed by the cost of capital of the firm, would have created more problemsthan the flawed stock option system he subjected to virulent criticism.

Indeed, most boards of large corporation have come to agree, gingerly and slowly, that stock options are a deeply flawed system of compensation. For the CEOs of the S&#38;P 500 companies, stock options represented 49% of their total compensation in 2000 but only 25% in 2008. For the Canadian CEOs of the TSX 60 companies, stock options represented 35% of total compensation in 2000 and merely 22% in 2010.

So, far from a far-fetched, leftist proposal, the elimination of stock options is happening gradually as boards of directors come to terms with the severe limitations of that form of compensation but are careful to proceed slowly, lest it should lead to some inopportune CEO exit.
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		<title>After the meltdown</title>
		<link>https://igopp.org/en/after-the-meltdownregulating-the-financial-markets-2/</link>
		<comments>https://igopp.org/en/after-the-meltdownregulating-the-financial-markets-2/#respond</comments>
		<pubDate>Wed, 02 Mar 2011 03:35:20 +0000</pubDate>
		<dc:creator><![CDATA[mlamnini]]></dc:creator>
				<category><![CDATA[News Articles]]></category>
		<category><![CDATA[Financial crisis]]></category>
		<category><![CDATA[Regulation]]></category>
		<category><![CDATA[Securities and Exchange Commission]]></category>

		<guid isPermaLink="false">http://igopp.org/?p=3939</guid>
		<description><![CDATA[The financial crisis of 2007-08 has generated new rules, regulations and guidelines to cope with the flaws and faults of the international financial system. What kind of regulatory context is likely to evolve from this massive effort? Will it be sufficient to prevent the next bubble and crisis? Or is this only a political operation to placate an angry [&#8230;]]]></description>
		<content><![CDATA[The financial crisis of 2007-08 has generated new rules, regulations and guidelines to cope with the flaws and faults of the international financial system. What kind of regulatory context is likely to evolve from this massive effort? Will it be sufficient to prevent the next bubble and crisis? Or is this only a political operation to placate an angry population? Clearly, the sum total of new rules and regulations once fully implemented would prevent a crisis of the same form and nature as the last one. But will it prevent the next one? That is the question.

[...] Read more [1]

[1] http://igopp.org/wp-content/uploads/2014/10/Policy-Options-After-meltdown-Yvan-allaire.pdf]]></content>
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		<title>No one (in Ottawa) would listen!</title>
		<link>https://igopp.org/en/no-one-in-ottawa-would-listen-the-strange-obsession-with-a-national-securities-commission-2/</link>
		<comments>https://igopp.org/en/no-one-in-ottawa-would-listen-the-strange-obsession-with-a-national-securities-commission-2/#respond</comments>
		<pubDate>Mon, 28 Feb 2011 19:56:52 +0000</pubDate>
		<dc:creator><![CDATA[mlamnini]]></dc:creator>
				<category><![CDATA[News Articles]]></category>
		<category><![CDATA[Financial crisis]]></category>
		<category><![CDATA[National securities regulator]]></category>
		<category><![CDATA[Securities and Exchange Commission]]></category>

		<guid isPermaLink="false">http://aimta712.org/?p=3010</guid>
		<description><![CDATA[Of all the convoluted arguments marshaled to support the case for a centralized, national securities commission, none is more shop-worn than pointing to the shining example of the American Securities and Exchange Commission (SEC). Clearly, it is asserted with a booming voice, modern financial markets require tightly coordinated regulations and enforcement, which only a single, [&#8230;]]]></description>
		<content><![CDATA[Of all the convoluted arguments marshaled to support the case for a centralized, national securities commission, none is more shop-worn than pointing to the shining example of the American Securities and Exchange Commission (SEC).

Clearly, it is asserted with a booming voice, modern financial markets require tightly coordinated regulations and enforcement, which only a single, centralized agency can provide. Canada, they continue, is sadly unique in the world with its Province-based and decentralized regulatory system. Canada is also a rare country to have weathered the financial hurricane of 2008 relatively unscathed!

Superior coordination and enforcement??

If anyone persists in claiming superior virtues for a centralized regulatory system à la SEC, let them read (actually force them to read) Harry Markopolos’s true financial thriller “No one would listen” (Wiley, 2010). Markopolos is, of course, the whistle-blower who vainly tried to get the SEC to investigate Bernie Madoff from 2000 until the eventual collapse of his Ponzi scheme in December 2008 as a result not of any action taken by the SEC but of the stock market crash.

Markopolos tells a frightening tale of incompetence, indifference and arrogance at the SEC. What’s most relevant to our federal attempt to install a centralized regulator with regional offices is the impotence and frustration of the SEC’s Boston office, to which Markopolos reported his findings on Madoff’s scheme.

Markopolos writes: “The New England region extended south only as far as Greenwich, Connecticut. Even if [the Boston office] had wanted to, it would not have been permitted to send an investigative team into New York City. Once you crossed into New York State, you had to deal with the New York regional office. And […] the two offices were extremely competitive; there was not a lot of respect in either office for the other one. […] the chances of the New York office warmly embracing a case handed to them by the Boston office were somewhat limited”

So much for the benefits of superior coordination and seamless operations that will flow naturally from a centralized Canadian securities commission!

Anyone who has studied organizations knows that branches, regional offices, divisions of the same organization are not more likely to cooperate with each other than with outside entities.

Indeed, a study sponsored by the Hockin Expert Panel to assess the causes of the ABCP issue and whether a centralized regulatory system would have prevented the problem states: The ABCP crisis turns out to be a poor test with respect to arguments in favor of greater consolidation of regulatory responsibility… The case for consolidation would be strengthened if there is evidence that communication between different parts of a single agency proves more effective than communication among agencies. (Chant, 2008, p.46) [...] Read more [1]

[1] http://igopp.org/wp-content/uploads/2014/05/Yvan_Allaire-No_one_in_Ottawa_would_listen-long-2.pdf]]></content>
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