ICGN 2010 Annual Conference, The Changing Global Balances: Toronto
Publisher’s Disclaimer: Many of the speakers, especially those affiliated with governments, indicated their remarks represent their own personal views. Not being the best note-taker, what follows are my cryptic recollections and personal comments. I’d say they are for entertainment purposes only, but that would lead readers to anticipate more than I deliver. For actual quotes and transcripts, contact the International Corporate Governance Network.
MONDAY 7 June
Christy Wood, Chairman, ICGN opened the conference noting that Canada set highstandards for its banks and in other areas, helping it weather the financial crisis better than the US.
Conference opening keynote
Jim Flaherty, Minister of Finance, Canada spoke of the G20 Summit coming to Toronto and walked us through how the financial crisis occurred and was addressed, noting that a majority of the stimulus packages will end about next March. The Canadian economy, which is growing at a rate of more than 6%, hopes to then cut its deficit in half, even while cutting taxes. He said that
Canada has the lowest taxes on businesses, is the first tariff-free country on manufactured imports and has the strongest recovery within the G7. Shareholders should bear the costs associated with bank failures, preferably through use of contingent cash reserves. He looks forward to a federal securities regulator in Canada and expressed hopes that emerging economies would increase domestic demand to counterbalance European fiscal discipline.
Session 1: The New Global Economic Balance
The financial crisis of 2008 and the “Great Recession” of 2009 raise tough questions about governance of the global financial system. The write-down of assets is approaching US$ 4 trillion, a record-setting destruction of wealth. How can global governance gaps be overcome? Is global integration under threat or will the widespread social backlash subside in a post-crisis world? What will the “New Normal” look like in terms of economic balance?
Antonio Borges, Chairman of the Hedge Fund Standards Board and the European Corporate Governance Institute, Portugal. – Greece represents the tip of an iceberg in the banking sector. What starts with a small country can create contamination. Sovereign debt had not been considered risky, like CDOs. Countries blame market speculators, according to conventional wisdom, but we need to solve the moral hazard problem that would accompany any bailout.
Christian Strenger, Government Adviser and Director, DWS Investment GmbH, Germany. – The root cause lies in fundamental deficits, lack of stringent supervision. The general public and the banks were misled concerning the safety of Greek bonds.
George Lewis, Group Head, Wealth Management, RBC Royal Bank. – Lewis began on an optimistic note, discussing the need to address trade flows and market distortions.
Borges: The Eurozone is working fine, in balance. Countries that are competitive will attract capital. Some Southern European countries have misspent their debt wastefully. Their fiscal problems will only be eliminated by becoming competitive and through growth. Stressed the importance of savings, since a lower savings rate leaves them very vulnerable when foreign capital is at stake.
Moderator Chrystia Freeland, Global editor-at-large, Reuters, Canada. – But didn’t Goldmen Sachs facilitate by hiding possible liabilities through public/private partnerships?
Strenger: Too often things were allowed that were not entirely in conformity with the highest ethics. There’s noting wrong with making $100M in a day but the general public finds it difficult to understand. Authenticity problems.
Lewis: We need to reinforce the role of fiduciaries and agents. Regulators need to establish better fiduciary standards, empowering shareowners, reinforcing a duty of care – suitability, not inappropriate mortgage products. Too little down-payment and there was also the issue of commissions based on selling mortgage products.
Borges: Don’t ask regulators to do more than they can, otherwise you generate a false sense of security. Who are the people interested in financial security? Investors must be mobilized around tougher transparency requirements. Investors are in charge, not regulators but ownership is decoupled when control rights are traded away. High frequency trading is having a growing impact, since a large number of shares do unvoted. (or were these last points made by Strenger?)
Lewis: Yes, there are problems around ownership and control. We need sound regulations to level the playing field, reinforcement of a stronger role for debt holders.
Freeland: Was government bailing out its friends? Canadian banks rebut that the source of risk wasn’t commercial banking but mortgages in the US.
Borges: It wasn’t casino banking but relying on market specialists. In addressing the issue Borges noted that about 80% of corporate financing comes from banks in Europe, about the reverse of in the US, where about 80% comes from market equities.
Christian: At least part of the problem was that companies are often engaged in businesses their boards don’t fully understand.
Borges: The most important role of financial markets is to impose discipline. Shareowners need to hold companies accountable.
Audience: A major function of the market is to control risk but if you can pass on the risk, responsibility vanishes and you don’t have to at prudently.
Borges: People who take risks must do so responsibly. Although retail investors may need protected, sophisticated institutional investors must push for transparency and then take risks. Risks should be taken by specialists. Regulations may raise the cost of capital.
Lewis: Touched on proposed Basel III rules and competition.
With more diversification by institutional investors, they know less and less about the markets they are in. Global guidelines and standards influenced by ICGN become more important. Meeting is timely with G20 also coming to Toronto. There was discussion around the idea that attempts to regulate executive pay have actually driven pay higher. Real answers will come with better boards and more control by shareowners, whose rights have been hampered in the US. Consensus around the idea of more input from ICGN into G20. ICGN should be viewed by them as a valuable resource worth consulting.
Session 2 – The business case for more women on boards
Diversity affects the way groups behave. Evidence indicates that more diverse groups foster creativity and produce a greater range of perspectives and solutions to problems. A larger proportion of women on boards seems to affect directors’ attendance behavior and the number of scheduled board meetings. Demographically dissimilarity in the boardroom seems to affect incentives for replacing CEOs, the director nomination process, and the design of compensation systems. But is this enough to prove the “business case” for more women in the boardroom? The panel discussed the most recent academic findings as well as practical experience from the US and Norway, the only country in the world where gender diversity on boards are regulated in law.
Eli Sætersmoen, Managing Director, Falck Nutec AS, Norway. – The threat was that companies that didn’t comply with the new requirement of 40% women on their boards would be liquidated. She’s been serving on boards for more than 10 years and sees that women add value… more detail oriented… leading to more socially robust and stronger boards. Interestingly, once companies had to bring on women directors they became very concerned about qualifications for directors. Once qualifications were written down, they were also applied to men. Result: golf club members down; professionals up. She suggests the Norwegian model could be adjusted based on culture… the real question is political will.
Faye Wattleton, former Chair of Nom. Comm of Este Lauder, USA. – She was the only woman on the board but it takes three before the culture of the board really changes. There needs to be a “critical mass” to reduce the need to “explain the details to the woman on the board.” We are a different species, resulting in more decisions grounded in reason and more open communication. A company’s highest governing boy should reflect society or at least its own customer base. Favors something more like affirmative action, rather than mandates like Norway.
Daniel Ferreira, Reader (associate professor), Department of Finance Director, Corporate Finance and Governance Programme, Financial Markets Group (FMG) London School of Economics. (book chapter on Board Diversity, Women in the Boardroom and Their Impact on Governance and Performance and other papers). – One difference is that not only do women directors have a better attendance record at board meetings but men at boards with women also have better attendance, suggesting their presence results in the job being taken more seriously. Women are most likely to be on certain committees, least of which are compensation committees… so there was no data to correlate women on boards with executive pay. Boards with women were more likely to replace CEOs after poor performance… apparently, tougher monitors. Gave a plug to further research being done by his “Women in the Boardroom” co-author Renee B. Adams on Swedish boards (see also).
Deborah Gillis, Vice President, North America, Catalyst. – Companies with more women had 53% higher return on equity. (see The Bottom Line: Corporate Performance and Women’s Representation on Boards, 2007 and the Catalyst Research and Knowledge Base). Agreed with Wattleton re need for three to change culture, signaling a tone at the top that is respectful of differences. More woman directors also leads to more woman corporate officers, more innovation and out of the box thinking. Companies with diverse boards are more likely to recruit the best talent. She would be hesitant to require quotas and likes the SEC’s recent requirement for disclosure re diversity to ensure the conversation at least happens. Boards need to broaden their search beyond C-suites.
Moderator David R. Beatty O.B.E., Conway Director, Clarkson Centre for Business Ethics and Board Effectiveness, Rotman School of Management, University of Toronto.
Session 3 – The Evolution of Capital markets – threats to good corporate governance
Capitalism has both good and bad sides. On the one hand, it fuels economic growth and wealth creation. On the other, it is susceptible to being managed or even manipulated by certain players in the system. This session examined threats to good corporate governance ranging from the role of new exchanges and high-frequency trading, derivative-based ETFs to regulatory arbitrage between stock exchanges.
Claire Bury, European Union. – We’ve moved from believing everything to nothing about what bankers tell us. Interested in high frequency trading and increasing liquidity at US banks. Also expressed concerns with securities lending/empty voting. Advocates transparency above a certain level in debates in Brussels this week. Concerning short-selling, sees need for European-wide disclosures. When voting capital is small, relative to trades shares, it leads to major problems. Frenetic trading generates profits for bankers and brokers but not usually for investors. During Q&A, suggested that maybe debt holders should hold voting rights if shareholders don’t exercise their rights.
Tom Kloet, Chief Executive Officer, TMX Group, Canada. – TMX recognizes the difference between mature and venture companies, operating both the Toronto Stock Exchange and the TSX Venture Exchange. Regarding high frequency traders, they are in the market to stay. With 25% of the volume, they keep markets liquid. He doesn’t think they are hurting corporate governance. ETFs were a key invention, first appearing on TSX 20 years ago.
Marcel Jeucken, Manager for Responsible Investment, PGGM Investments, The Netherlands. – Emphasized using shareowner rights, integration of voice with the investment process, and transparency. Advocates disclosing votes and informing management. Yes, buy proxy research, but also underst how that impacts each specific company, avoiding a check-box approach. Funds should be transparent themselves. Indexes can’t vote with their feet. Funds that integrate corporate governance concerns within their investment designs should outperform. Problems in Asian companies where votes are counted by hands raised, not in proportion to the number of shares held.
Moderator Doug Steiner, Strategic and technical operations consultant, Scotia Capital, Canada. Mentioned that he sees market for voting rights coming. We may soon be monetizing voting rights. (see Monetization, Realization, and Statutory Interpretation by Paul D. Hayward and post by Broc Romanek)
Session 4 – The New Balance in Corporate Social Responsibility
Understanding and managing a corporation’s relationships with its stakeholders is critical to the corporation’s ability to execute its strategy. A significant part of CSR, Environmental Strategy, is top in the minds of investors, businesses and governments internationally. The resource sector faces some of the most high profile issues in this area. During this session leading CEOs discuss their approach in mitigating their impact on theenvironment.
David Collyer, President, Canadian Association of Petroleum Producers . – Thinks tar sands mining can be responsible but they need to listen to their critics. Demand for energy is growing exponentially. Developed world is stabilizing but not India, China. Doubling by 2050. Oil on decline.
Supports diversification of supply sources but we need to be pragmatic about how long they will take to develop. World increasing reliant on conventional gas and oil resources. Tension: enviro, eco growth, energy security and reliability. Going to need all sources. How done responsibly. Oil producers are in much more than oil sands. They’re active in renewables. But oil sands lie at the nexus. They are a key part of addressing energy, representing the 2nd largest reserve of oil in world… 1/2 of accessible reserves. Canada is open to dialogue not possible in other parts of world where oil is being developed. Water use is a low 2% of Athabasca River flow. Surface area impacted by mining is less than a medium sized city. Only slightly higher contributor to greenhouse gases and conventional extraction. Canadians, 74%, support continued development. Working with his members to facilitate responsible engagement. Believes in responsible energy and they’re on track to improve and demonstrate. We’re up to the challenge.
Brian Ferguson, President and Chief Executive Officer, Cenovus Energy, Canada . – One of 25 largest Canadian companies. Probable reserves of 2.1 billion barrels. Technology driven oil sands company operating in Alberta and Saskatchewan.
Uses two technologies. On 15% use conventional mining techniques but 85% of sands are accessed through horizontal drilling wells. Cenovus has 40% of the global carbon capture and sequestration capacity… 15 million tons stored to date. Small footprint at well-pad. Striving for good governance. Rigorous, respectful and ready. One doesn’t have to be sacrificed for the other (environment and energy). Environmental stewardship integrated with exploration and extraction. Corporate responsibility impacts business. Will release report later this month. Oil sands will be a significant contributor for decades to come. Measurable improvements in intensity, footprint, air pollutants, water usage. 95% of water they use is brackish water. None from surface. Production growth is up 190%. Injecting steam into wells, extracting from wells below. Relative infancy so innovation continues. They see themselves as a technology company in the oil industry. Working on 50 different technologies. Energy efficiency and operations program. Environmental opportunity fund (with investments in renewables).
Hal Kvisle, Chief Executive Officer, TransCanada Corporation. – TransCanada is involved in pipeline and power generation. They are North America’s 2nd largest narutral gas storage operator. Big project to move gas down to US Midwest. Another to bring gas down from Alaska. ExxonMobil partner. Building largest compressors globally for the Mackenzie valley pipeline. $800M to get through regulations. $40B project. Mega project challenges. NGOs always ready to weigh in. Impact on right of way. Constructing below ground (unlike Alaska pipeline). Impact on consumers. 85% from clean sources, 15% coal. Reduce consumption. Substitution. Different forms of energy. Remove CO2 from atmosphere. Values: integrity, collaboration, responsibility, innovation. The entire financial sector was painted with one brush but Canada did relatively well. Things may unfold that way on energy side as well.
Damon Silvers, Director of Policy and Special Counsel for the AFL-CIO, Member of the Congressional Oversight committee for the TARP. – Ambiguities: Middle East blood, Nigeria, environmental issues. Good jobs in Alberta. Getting harder and harder to extract fossil fuels. People died on BP platform. Energy prices rising and becoming more volatile. Funds have chased commodity prices over time. Financial crisis should teach us the need for regulation. We are universal investors and don’t jump in and out for glamor. Bubbles: look out for them. Tobacco also reduced a lot of good jobs. Labor had a close relationship. We tried to figure out how to act responsibly. They ended up facing perjury charges, admitted to selling poison. There is no way to look at fossil fuels as anything other than selling poison. Good they are trying to do it less dirty but we shouldn’t continue to deny, even through there are a lot of good jobs there, that global climate change must be addressed sooner rather than later. The challenge isn’t how to shut it all down but is come up with a feasible transition strategy.
Collyer: Tobacco industry of our times. No. Hydrocarbons are going to be here. Policy makers will decide. This isn’t about my energy being better than yours. Focus has to be on cleaning up. Dirty oil? The worst kind of tobacco. Market will decide. Barriers could be put in place based on environmental damage.
Moderator Chrystie Freeland, Global editor-at-large, Reuters, Canada. – Asks Ferguson about worst case scenario? Yes, they’re looking at that. Every employee must understand their safety role. How do you make sure you go home safely. Governance practices and procedures. Understanding risk. He doesn’t contemplate an environmental disaster. When pressed, he responds that a “steam rupture” could come to surface. But it could be easily contained and mitigated. The inherent risk is low.
My reaction: Come on, you just lost all credibility with that answer… although, I then start thinking the Gulf spill could be good news for oil sands. For a more balanced view, see Report Weighs Fallout of Canada’s Oil Sands, NYTimes, May 18, 2009. My conclusion: If reliance on oil is like tobacco, oil sands will place us on a speedier path global warming and massive death… even if a lot of profits are made along the way.
Session 5 – International Financial Reporting Standards – Was Accounting a Root Cause of the Global Financial Crisis?
Were accounting standards one of the reasons behind the financial crisis? How do the standards continue to impact on companies?
Shyam Sunder, James L. Frank Professor of Accounting, Economics and Finance, Yale School of Management. – Principles are hare to define. In legal systems, we have judges. The head of Arthur Andersen liked the ideal in the 1950s. Sunder likes it today. God has no accounting standards. While institutions seek order, we should keep in mind that any such order will be circumvented. Messiness will continue.
Paul Cherry FCA, Chairman, Standards Advisory Council,
Canada. – Canada put in place a form of arbitration.
Unfortunately, it was done once and shelved.
Moderator Kim Shannon, President and Chief Investment Officer, Sionna Investment Managers, Canada
Session 6: The New Balance: Strategic Environment for Business, Keynote: Lowell Bryan, Director (Senior Partner), McKinsey & Company, US
Dramatic shifts in world economy. Showed pictures of a couple of cities in China 15 years ago and today. Wow, from hovels to high rises. Expects, 50% growth in next 10 years from emerging markets.
Drivers. Organized people, urbanization, labor productivity. Less dependents, purchase power. Over 10-15 years there will be adjustments in currency that may reduce growth. Over $1B new middle class consumers in next 20 years. Creating new business models. Rethought and re-engineered. Refrigerator designed for interruptible electricity. GE developed electrocardiogram for India that cost 15%. Demand is up for raw materials.
Volatility could be back. How do you get your house in order with this much unemployment? We could revalue our currency. Demand for commodities will put pressure on prices. If currencies are overvalued, they will overpay for commodities. Developed countries are paying too little. China is paying too much.
Fault lines: currency misalignment, commodity (currency issue), debt risks. Surveys show a high probability of another financial shock in next 3 years. Safe harbors? Organizations need to be more flexible. Scenario planning should be taken seriously. Improve risk/reward opportunities. Banking relationships. Error on side of over-capitalization, over-liquid and over-prepared. Decisions just in time.
Invest heavily in options that pay. Lots of broken business models, capital strategies, regulatory regimes, posture to governments, make decisions just in time. Keen awareness of time horizons critical.
Companies have more degrees of freedom than individuals and governments. There are consumption growth opportunities. Assumption for inflation: risk here is financial. Demand driven high in developing markets. Developed world cutting spending and deficits. Will global structures survive? He thinks we’re going to get adjustment because market forces will push us to do so. Look at Asia in 1987. Their policies have served them well. Difficult economic times could lead to other problems.
Rise in populist governments. If you express your fears and prepare, maybe they won’t happen. Governments need right policies. Will populations do the right thing in a crisis? US saves more, gets better trade balance… not happening. Democracies frequently don’t understand their own interests. We face a backlash from a fading middle class, like the Tea Party. It has to happen to get policy adjustments. He’s confident government leaders will do right thing… eventually.
Welcome Reception at the Royal Ontario Museum
Peter Dey, Chairman, Paradigm Capital Inc., Canada received a lifetime achievement award for his work in making corporate directors more effective, developing governance guidelines in 1994 for companies on the Toronto Stock Exchange, and later helping develop global governance guidelines for the Organization for Economic Co-operation and Development and its Global Corporate Governance Forum.
Dey said he supports shareholder activism by advocacy groups like the Canadian Coalition for Good Governance (CCGG), but said their best tool is the use of private conversations with a board, not “public confrontations.” “Where you can be most effective is identifying good directors, getting them on the slate and electing them, and, if necessary, removing ineffective directors,” he said. “But to try to jump in and make judgments where the board should be making judgments, I think is just the wrong direction.”