By David Dias
Ian Giffen enjoys a good fight. The professional director has a long history of boardroom battles, and standing up to vested interests when he believes others are shirking their fiduciary duty. But even he will admit that the mantle of independence can at times be a heavy one.
In 2008, Giffen led the board of Certicom Corp., a Mississauga, Ont.-based encryption provider, to file suit against BlackBerry Ltd., after the tech giant used confidential information to launch a hostile bid. Giffen, who was just three months into his independent directorship, was made chair of the special committee advising on the bid. His recommendation was emphatic: Certicom had to sue.
Getting the rest of the board on side, however, turned into a frustrating ordeal. On Bay Street in those days, BlackBerry wielded a big stick, and Certicom’s board was packed with conflicted directors — bankers and industry execs — who were at some point going to have to do business with the Waterloo, Ont.-based company again. None of them wanted to upset BlackBerry.
Giffen rejected his peers’ worries and forced the issue, leading the company to file the precedent-setting case known as Certicom v. RIM. The outcome was a happy one for Certicom shareholders: the hostile bid was thwarted, other bidders emerged and, ultimately, BlackBerry returned with a much friendlier offer worth twice its original bid.
But the incident made Giffen question his decision to have ever joined the board in the first place. “I remember thinking in the early days, this really isn’t worth it, because this is a lot of work and there are a lot of surprises,” he says. “It was a very challenging process and probably took 90 days solid of my life.”
Today, Giffen’s brand of independence is in high demand; he routinely declines appointments, and he isn’t the only one. The rise of shareholder activism has heavily leaned on independent directors. More stakeholder involvement has led to more disputes, which in turn has increased the burden on independents called upon to mediate those disputes. Boards now complain that increased workload and reputation risk has scared off qualified candidates, resulting in a shortage.
Even regulators have begun to take notice. Last fall, the Canadian Securities Administrators addressed complaints from controlling shareholders that the current approach to independence was “flawed, inconsistent with practices in all other jurisdictions other than the U.S. and fails to consider the unique role of controlling shareholders.” In response, the CSA took the unusual step of publishing a consultation paper requesting comment as to whether it should relax some of the rules around board independence.
By the end of January, the CSA’s period for comment had closed and, predictably, shareholder groups staunchly opposed the idea. But the mere fact that the securities commissions’ umbrella organization is even considering relaxed regulation seems to mark a turning point in the corporate governance debate.
After two decades of incremental movement toward greater transparency, more regulation and more shareholder involvement, could the pendulum be finally swinging back? After working so hard to create rules around independence, could regulators now be looking to take some of the heat off outside directors, and give boards more discretion to manage their own affairs?
Two decades or so ago, governance was largely considered a joke in Canada. Ostensibly public companies were routinely lorded over by so-called visionary founders, or their descendants, who had managed to sell most of the common shares while hanging on to most of the voting shares, thus allowing them to indefinitely preside over management and the board. With no real power, boards were seen as mere extensions of management, a kind of entourage of business celebrity cheerleaders.
“They thought their job was to support management,” says Barry Reiter, a corporate governance lawyer who heads the practice area at Toronto-based Bennett Jones LLP. “You came in and poked management on occasion when they needed it, but otherwise you were there to be the ‘Rah! Rah!’ team and tell them what a good job they were doing, and to slap them on the back and commiserate with them when times were difficult.”
With little oversight or responsibility to speak of, directors were free to “collect” as many as 20 board seats — and the fees and prestige that came with them — like memberships to social clubs. Reiter credits a single report, written in 1994, for changing all that. Where Were the Directors?, written by lawyer and veteran corporate director Peter Dey, was commissioned by the Toronto Stock Exchange, which at the time was looking to beef up governance guidelines for public issuers.
The Dey report revolutionized Corporate Canada’s approach to governance, advocating nothing less than a separation of church and state: separate individuals should hold chair and CEO positions, and the majority of directors should be independent from management. The TSX eventually adopted those guidelines, which emboldened shareholder activists to agitate for further reform, and, ultimately, they led to regulation.
Today, provincial securities commissions require most directors to be independent. The definition is kept intentionally vague, but it’s described in Ontario as the absence of any “material relationship” with the issuer that could “interfere with the exercise of an individual’s independent judgment.” Beyond the principle, there are also certain “bright-line tests” (the very same ones the CSA was looking to perhaps dispense with). For example, independent directors can’t be employees of the company or the company’s external auditor. They can’t be outside consultants or lawyers who’ve been paid more than $75,000 a year by the company. And they can’t have family ties to major shareholders of the company.
Twenty-four years after his landmark report, Peter Dey, who now chairs the board at Paradigm Capital Inc. in Toronto, clearly has mixed feelings about the shareholder activism he helped bring about. Dey continues to believe boards must be objective — representing shareholders in general as opposed to any particular interest — but says his 1994 report “overemphasized” the importance of rigid criteria for independence. That, as a result, has led many boards to lose sight of other important qualifications, such as industry experience.
“The search for directors who had no connection to management may have generated some [poor appointees],” Dey says. “I would much prefer to have directors who have some connection to the corporation, but are real independent thinkers and are prepared to put their reputations and positions on the line to express an independent view in the boardroom.”
Dey says he’s gratified to have seen so many improvements to governance, but feels activists within the institutional shareholder community have overreached in recent years. Instead of seeking a principled approach, shareholders are increasingly pushing for pedantic rules that replace the business judgment of directors with a more mechanical direct democracy.
For example, Dey is opposed to say on pay, which allows shareholders to vote on the appropriateness of executive compensation. Nor is he a fan of proxy access, which allows shareholders to bypass the board when nominating candidates. “[These initiatives] disturb the balance of power between the board and shareholders,” he says. “Boards of directors aren’t parliaments. They are groups of people with an appropriate skill set who bring a very objective view.”
These days, with proxy advisory firms and shareholder groups breathing down their necks, independent directors are often limited to having about five board seats. Any more than that will invite accusations of lackadaisical governance due to “overboarding” and, ultimately, ejection from one board or another. Moreover, directors know that in the current heated climate, poor performance will be called out in a very public manner. “Their actions and interactions are going to be looked at,” Reiter says. “Their attendance records are going to be looked at. Their compensation is going to be looked at. Their conflicts are going to be looked at.”
Even without arbitrary limits, many independent directors restrict themselves to five or six boards because of the significant time demands of such positions. As a rule of thumb, Reiter calculates an independent director will work about 200 hours (or around six weeks) per year for each board seat. That number can easily double in times of crisis, such as when a whistleblower exposes the company to scandal, shareholders sue or the board faces a hostile takeover or proxy battle.
In other words, when the shit hits the fan, independent directors are expected to move into high gear, forming special committees that essentially take control of the investigation while conflicted board members recuse themselves. “A director may need to spend six or eight hours a day, two or three times a week for a month,” Reiter says. “That’s not unrealistic.”
It’s no wonder then that boards complain they’re having a hard time attracting good candidates. Oftentimes, board candidates with the most industry experience are also the ones with the most baggage — the kinds of connections and “material relationships” that automatically disqualify them from independence. “If you try to be pristine about independence,” Reiter says, “you can wind up with zero expertise on the board, and that’s not a good thing either. You wind up with directors who are really independent and probably useless.”
In the best-case scenario, those who meet independence standards get the privilege of sitting in the crossfire as regulators and shareholder groups snipe from a distance. In the worst-case scenario, they are called upon to go to war, potentially burn their bridges and have their credentials dragged through the court. Given the legal and reputational risks, it begs a question: Why would anyone want the job?
Giffen says that despite the extra work, governance specialists such as him derive great satisfaction from helping a company sort out their boardroom issues. “That’s why we’re hired: to fix these things, not to run away from them.”
In order to do that, directors need to be independent thinkers, Giffen says, but they need more than that. “I’ve seen a lot of boards that have been caught in the headlights. They find themselves in a situation, and they don’t have the experience or the understanding of governance, so they listen to their advisers, and the advisers will tell them, this is the safe way, this is the safe way,” he says. “But sometimes you have to have the experience to know that the safe way is not the right way to go for shareholders and other stakeholders, and be prepared to put your own reputation on the line and stand up.”