The winds of change are blowing in London as the G20 prepares to meet. Unfortunately no one knows when the winds will stop and who will be swept away. There are many views, however, on how and where to take cover. Many countries, particularly the European countries, are agitating for agreement on global and coordinated regulatory measures to improve both the macro and micro prudential regulation of banks, other financial institutions and capital markets in general. Other countries, particularly the United States, are more focused on the imperatives of a global and coordinated approach to stimulus to revive a rapidly deteriorating economy.
Others countries like China, India, Brazil and Russia come to London with complex and different problems but united in their insistence on gaining a more vocal and powerful place in the governance of the international financial system. China, in particular, is voicing concern about financial mismanagement, massive debt loads that countries like the United States and the UK are assuming and a status quo that leaves one of the largest and still growing economies on the periphery of global financial management. The G20 will have to attempt to reconcile these competing views and strategies and work toward some meaningful consensus on how to address the myriad of problems that confront the present and future of the financial system. But can the G20 possibly arrive at some consensus and strategy for a global approach to financial system management? And perhaps, more importantly, is that where the international community should be focusing its efforts? Continue reading The G20 and Global Approaches to the Regulation of Finance: Zeitgeist for the Times or Just Apparition of the Moment
|
|||||
 |
I am a religious follower of the Daily Show with Jon Stewart. His succinct and insightful summaries of important topics enable ordinary people like me to get at issues which seem otherwise purposely complicated to keep us in the dark. In watching the recent media-created “feud” between Jon Stewart and CNBC’s Jim Cramer I was able to articulate my frustration with the stock market in the current financial crisis. Continue reading Jon Stewart vs. Jim Cramer – Exposing the role of the stock tip in the current financial crisis So how is it possible that some of the largest banks in the world, with the most sophisticated risk management teams, and with elaborate processes for conducting due diligence, have been caught up in one of the greatest financial frauds ever? Bernard Madoff, founder of Bernard L. Madoff Investments, was arrested last week for defrauding investors – banks and corporate institutions – who funded charitable and nonprofit organizations, of around $50 billion. While the investors lost billions in the scandal, the funded charities and education facilities are struggling to survive the aftermath. It is the end of casino capitalism. The end of the era of greed. A new financial world order is on the way. These are the clarion calls coming from many people all of whom share the anger at a financial and banking system that has failed them. Central banks and regulators and politicians of all stripes have already signaled that important and systemic changes are on the way. They have all had to adjust- if not abandon- their previous commitments to free market capitalism in order to address the financial and banking system failures. People like Hank Paulson -who is the poster-boy for those committed to the principles of the free market- have had to admit to the failures of the existing system and turn to highly unusual and unpalatable options like bailouts, guaranteed loans for banks and government taking a more active role as an equity partner in financial institutions. Around the world it is a similar story. In places like the UK and rest of Europe, there have been even more dramatic system failures and more dramatic responses including bank nationalizations and provisions for government to play a role in the governance of financial institutions, particularly those who line up for financial assistance from taxpayers. European governments have nationalized some of their largest banks and have indicated that all financial institutions will come under greater governmental control and supervision. So now the deal has been done. Bailout 2.0 (more formally known as TARP or the Troubled Asset Rescue Plan) has passed its last Congressional hurdle and now the machinery of US government can soon begin to implement the plan to defrost the credit markets. This political compromise may have preempted a deeper and more formidable financial crisis but it remains unclear whether this plan will stop the US and global economy from descending into deep recession or, as the most pessimistic bears fear, a depression. Most people, including the Plan’s authors and supporters, realize that the bailout is limited in what it can do. It will, hopefully, provide a bottom to the markets for toxic assets, allow banks to get bad assets off their books, free up credit markets, instill confidence in the financial systems for investors, consumers and banks, and lead to healthier and more fluid capital markets. BCE has been a fixture of the Canadian corporate landscape for 130 years. When Alexander Graham Bell and his father Melville Bell introduced the telephone in Canada, who could have predicted the impact that this mysterious and innovative piece of technology would have on global telecommunications. With its most innovative years arguably behind it, now the most immediate impact that BCE is likely to have is on the rights of shareholders and bondholders on the playing field of Canadian corporate governance. BCE’s treatment of bondholders has come under scrutiny by Canadian courts for the way the company has balanced the interests of its bondholders against the interests of shareholders. A bit of background is useful: In June 2007, BCE entered into an agreement with a consortium of investors who were interested in acquiring BCE through a leveraged buyout (LBO) whereby the investors would acquire all outstanding shares of BCE at a price of $42.75 per common share which was, at the time, a 40% premium on the current trading value of BCE shares. Though the shareholders may have been happy, the bondholders were not since in order to finance this deal it included an agreement whereby Bell Canada (BCE’s wholly owned subsidiary) would act as guarantor for a large debt issue. As a result, the value of Bell Canada’s bonds fell over 20% or more than $1 billion. So did BCE act incorrectly or is this economic consequence to the bondholders a necessary implication of the Board acting on its mandate and obligation to maximize shareholder value? Bondholders obviously feel that BCE acted incorrectly and did not take into account the contractual and other obligations owed to them. BCE’s Board and shareholders countered that BCE properly executed on its obligation and that Canadian law supports the deal, even with the consequences it holds for bondholders. And so the case went to court. In late May, the Quebec Court of Appeal ruled that the proposed privatization of BCE Inc. was not fair and reasonable to the Bell Canada bondholders. As with all complex legal cases, the decision contains more nuance than this overview permits but one of the most far-reaching elements of the Court’s decision was that Directors duties are not limited to maximizing value for shareholders. The Court of Appeal re-affirmed that the Directors must act in the best interest of the corporation and those interests cannot be equated with the interests of shareholders alone. The reasonable expectation of all stakeholders, including creditors, must be considered. The foremost question is whether this standard is, in fact, the legal standard against which the conduct of Board will be measured. If it is, what are the practicalities of executing on this legal obligation when there are numerous stakeholders with complex and divergent interests from shareholders? What seems to have been important to the judges of the Quebec Court of Appeal was whether BCE and its Directors did, in fact, make an effort to address and accommodate the interests of bondholders. Also important to the Court was the issue of whether oral representations were made to bondholders leading up to and during negotiations that created expectations beyond the contractual obligations that BCE had to respect and acknowledged. The case is really about these specifics: what form and process is necessary to execute on the duty of care of the directors. The Court did not rule that the interests of shareholders and bondholders deserve equal weight and accommodation in these circumstances but rather that reasonable efforts should be made so that the arrangement plan is fair and reasonable. So what is fair and reasonable, and does that change with the circumstances, and even time? The Quebec Court of Appeal decision was appealed to the Supreme Court of Canada which granted leave and has agreed to an expedited decision. Serious corporate governance and legal issues are in play? What is the duty of care owed by corporate directors and to whom is it owed? If the duty is owed to the ‘corporation” as the Supreme Court ruled in People Department Stores Inc. (In Trustee of) v. Wise, what happens when the interests of various stakeholders are directly at odds? And if courts continue to acknowledge and defer to the judgement of directors in accordance with the business judgement rule, what are the circumstances when the courts will no longer defer? The Supreme Court has an opportunity to add some additional clarity to Canadian corporate law which has become increasingly cloudy. If the duty of care of directors is owed to the corporation rather than shareholders, what is required of directors when those interests conflict, as they increasingly do, particularly in leveraged buyouts? In order to execute on this duty, is it enough that the directors meet with the bondholders or other potentially impacted stakeholders in efforts to reach a fair and reasonable accommodation? Is the law a procedural or a substantive requirement, or will it depend on the facts? In the Quebec Court of Appeal’s decision, it appeared very relevant to the court that BCE had declined requests made by the bondholders to meet and discuss options for accommodation. This case underscores some of the most difficult problems of modern corporate law and good governance: for whom does the bell toll? Asserting that directors owe a duty of care to the corporation rather than only shareholders sounds reasonable but becomes highly complicated when the interests of equally weighty groups of stakeholders come in conflict. How do directors execute properly on their duty of care in those circumstances? The Quebec Court of Appeal decision does try to effect this balance through a fair and reasonable accommodation. But that fair and reasonable accommodation has a particularly important procedural aspect to it: directors cannot just claim that the interests of potentially adversely impacted stakeholders were taken into account. There must be real evidence that these efforts were made, and that may require direct meetings between the Special Committee of the Board and the aggrieved stakeholders. And as with so many legal cases and outcomes, the facts will remain critical. If companies make oral representations that implicitly or explicitly raise the bar of expectations, then those facts will also be taken into account. With the BCE scenario, those representations and facts were in play. It is quite likely that corporate law in Canada and elsewhere is moving away from the mantra of maximizing shareholder value. That principle is too vague to guide directors and may not result in a decision that is in the corporation’s overall best interests. Courts will likely continue to defer to the business judgement of directors so long as they make sincere (both substantive and procedural) efforts to arrive at a fair and reasonable accommodation of all stakeholders, particularly when those other stakeholders are large groups and the economic consequences are significant. And perhaps over the coming years corporate practice and corporate law will be more specific on the procedures and substance that are deemed fair and reasonable. Depending on what the Supreme Court decides, the conduct of BCE directors may fall on the wrong side of this emergent standard. Whatever the Supreme Court decides, it is likely that whatever standard it identifies to guide the conduct of directors in these situations will remain fluid and fact-driven. Good corporate governance is a moving target and so are the expectations that shareholders and other stakeholders have for directors. Other bells will undoubtedly toll in the distant landscape and future of good corporate governance. IT governance is a complex beast. By Danny Bradbury You run a bank and you are in a quandary. A new technology is emerging that will change the way customers interact with you; in the ’70s it may have been ATM cards, now perhaps it’s contactless payments, but in any case all the banks want to be first on the scene with this feature. When most people think of governance, compliance probably springs to mind. Enron’s bankruptcy in 2001 following runaway fraud led to the creation of the Sarbanes-Oxley Act (SOX) the following year, which sought to impose tighter controls on the way companies operated. Canada’s milder SOX equivalent, Bill 198, came into effect a year later. Other controls such as the banking industry’s BASEL II and the industry-imposed PCI-DSS rules for handling credit card data have also led companies to question how well their IT departments are protecting their systems and information. Recent events have highlighted the relationship between risk management in the IT department and the broader business world more than ever. Michael Parent, director of the CIBC Centre for Corporate Governance and Risk Management at Simon Fraser University’s Segal Graduate School of Business, highlights the TJX debacle, in which the retail group lost tens of millions of customer records to thieves following a lapse in IT security. “TJX’s share price took a 3.5 per cent drop two days after the class-action lawsuit was filed,” he said, also recalling the Federal Trade Commission’s investigation of the group six weeks later. “That opens you up to shareholder lawsuits.” Help available Several standards focus on particular aspects of IT governance. For example, ISO 27001 and 27002 set out specific security practices for applications in an IT context, which is a focal point for much compliance-driven governance activity. But with high-profile data breaches regularly covered by the press, it is easy to forget that IT is about more than locking down computer security. Simply throwing a best-practice security document at a computer team and following up six months later with an audit won’t cut it. Lambert refers instead to a definition of governance issued 10 years prior to SOX. The U.K.’s 1992 Cadbury Report on the financial aspects of corporate governance has become a template for many institutions. “Corporate governance is the system by which companies are directed and controlled,” the report said. This direction goes beyond simply covering your corporate behind against security threats. It includes setting strategic goals, supervising the management of the business and reporting on the leaders’ stewardship. Frameworks that address this broader view of governance run into double figures. Among them are the Information Technology Infrastructure Library (ITIL), published by the U.K. government, which is a set of best practices for providing IT services to end users. Others include AS 8015, an Australian methodology that has been adopted internationally, and IT GAM, a matrix of different areas of IT developed by Peter Weill and Jeanne Ross, two professionals lauded for their approach to IT governance. In North America, the Control Objectives for Information and related Technology (COBIT) lays out best practices for running an IT department. “It’s all summed up in the five fundamental dimensions of IT governance,” Lambert said, describing COBIT.
These five struts of IT governance don’t exist independently, however, picking one without addressing the others is difficult. For example, change management procedures (such as applying new system patches) may be considered a resource management issue, but also affect the level of risk within the organization because the frequency and speed of system patches or other changes could affect your vulnerability to security exploits. Assessing compliance Above those frameworks lie the strategic IT decisions that must be made to support the business, he explains. “At the bottom layer, you have the things that support those COBIT and ITIL frameworks. They’re things like job descriptions, skills and competency development in IT, and management of employees so that you can get them up to a sufficient competency level.” Unfortunately, employee training is the biggest challenge facing small (sub-1,000 employee) companies considering governance strategies, according to IDC. Lambert also emphasizes the importance of producing IT governance skills in academic institutions, and said that there are too few courses focusing on this. Perhaps that’s one reason why most of the experts Backbone interviewed believe Canada isn’t governing its IT very well. “You’d have to question how far along the Canadian marketplace is in asserting that IT is in a good state to be able to do those things,” said David Senf, IDC Canada’s director of security and software research. “The situation in Canada is significantly different from the U.S. in that we have way more smaller-sized companies,” said John Singleton, former auditor general for Manitoba, and a former president at the Information Systems Audit and Control Association (ISACA), which co-developed COBIT. He argues that, generally, these companies aren’t driven to comply with SOX, which has been a big driver for governance initiatives in larger firms. However, Senf said that even larger companies are experiencing limited success. “In organizations with over a thousand employees, we see a better penetration of standard best practice for governing IT,” he said. “But where they are adopted, we don’t see that many IT organizations are far along with that.” Grim IT picture Singleton points to a fundamental cultural divide between IT professionals and businesses. The fault there lies with the board, said SFU’s Parent. In a study evaluating the presence of IT expertise on the board, he found Canada ranking a sorry fourth behind Britain, Australia and the U.S. (and the state of those countries wasn’t much better). “It’s a pretty grim picture,” he said. “It’s one of these things that we all know we need to do, but we don’t do it until a crisis occurs, and then we get religion.” Therein lies the problem. Senior management has traditionally viewed IT as a black box; a mysterious discipline in which obscure technical things happen, and into which money flows and the occasional productive system flows out. And yet in an age where the fortunes of many companies are intrinsically tied to the quality of their computing operations, having a solid understanding of IT on the board amounts to a fiduciary duty, Parent said; it’s table stakes. “Boards are being negligent in discharging their responsibilities in terms of IT in the organization from two perspectives,” he warns. Firstly, they’re not minimizing the risks associated with IT investments, but they’re also failing to acknowledge the successes that investments in IT can bring. He proposes a structured model for communicating risk to senior management. There are five broad types of IT risk, he said: competence, infrastructure, project risk, business continuity and information risk. These should be subject to both internal and external audit, he said, and the audit committee responsible for that should report to the board. What about fulfilling the board’s other duty: to properly align IT with business strategies in an accountable way, ensuring that it is used effectively to drive new efficiencies into the business? “At the board level, it’s about going beyond the compliance and control issues with technology, and seeing the value of it,” said Nicole Haggerty, assistant professor of management information systems at the Richard Ivey School of Business. “They need to shape a framework of accountability. Who makes decisions? Who gets involved in them, and what are the core decisions that need to be made around business priorities and architecture?” This requires regular meetings between the board and IT, said PwC’s Balasubramanian. Other methodologies may be useful here. Another framework from ISACA, called VALIT, is based on COBIT but extends it to connect IT with the board’s strategic objectives. Getting started “Operations and efficient service organization are two very important things but given our size they haven’t been issues,” said Neil Beaton, CIO at Pacific & Western Bank of Canada, which runs its systems entirely on PC technology and maintains just 60 staff. Instead, his main focus is on formalizing risk management, he said. “We don’t have the same formal infrastructure adoption challenges that a large corporation would have.” No matter how scaled back your IT governance operation, you’ll still need money to make it work, said Carmi Levy, a former CIO in the finance sector and Info-Tech research analyst, and now senior vice-president in strategic consulting at technology advisory firm AR Communications. “You have to have budgetary approval in the first place,” he said. It isn’t surprising that risk management sits at the top of most companies’ radar when it comes to IT and corporate governance. No wonder people like Beaton are starting there. But Levy is one of many who insist that this is just the tip of the iceberg. Once IT departments have convinced the board of the need for effective IT risk management, they should be advocating a stronger emphasis on the other aspects of governance that could cement the relationship between the server room and the boardroom. “You have to show how much this ad hoc approach to service delivery is costing,” Levy said, and then follow up by explaining how beneficial a formalized, strategic link between IT and the board can be. This article was originally printed in Backbone magazine. http://www.backbonemag.com/Magazine/Executive_Overview05050801.asp For more information on Dr. Parent’s research, please follow this link. |
||||
|
Copyright © 2012 Simon Fraser University - All Rights Reserved |
|||||