From The Globe and Mail =97 Canada's Most Trusted = News Source

From: Subject: =?Windows-1252?Q?From_The_Globe_and_Mail_=97_Canada's_Most_Trusted_News_S?= =?Windows-1252?Q?ource?= Date: Wed, 23 Nov 2005 10:09:40 -0500 MIME-Version: 1.0 Content-Type: multipart/related; type="text/html"; boundary="----=_NextPart_000_0000_01C5F016.04AA65F0" X-MimeOLE: Produced By Microsoft MimeOLE V6.00.2900.2527 This is a multi-part message in MIME format. ------=_NextPart_000_0000_01C5F016.04AA65F0 Content-Type: text/html; charset="Windows-1252" Content-Transfer-Encoding: quoted-printable Content-Location: http://www.theglobeandmail.com/servlet/ArticleNews/printarticle/gam/20021030/COSCHACTE From The Globe and Mail =97 Canada's Most Trusted = News Source

Our leaders must be = tamed
Comparing the twin crises in Ottawa and
on Bay Street = can help=20 solve both,
says governance expert MARK SCHACTER
3D""

By MARK SCHACTER
3Dspace=20

Wednesday, October 30, 2002 =96 Print = Edition,=20 Page A19

We face two nearly identical governance crises: corporate and=20 political. What we learn about one can help us understand the = other.

Governance is a balancing act. It's about giving leaders the = power to=20 do their jobs, while limiting opportunities for abuse of power. = Our=20 leaders are human, not angels, and so we must take = precautions.

Whether it be Enron and WorldCom ("off-balance sheet entities" = and=20 orgiastic self-dealing), YBM Magnex and Repap in Canada (lack of=20 disclosure and extravagant executive compensation), misadventures = of=20 Canadian cabinet ministers (contracts for friends), or the = irrelevance of=20 Parliament (MPs as rubber stamps rather than overseers of = government),=20 we're dealing with variations on identical governance themes -- = misuse of=20 power, inadequate processes, weak or unenforced rules and = incomplete=20 accountability.

Governance gets important when there is a gap between ownership = and=20 control. Citizens "own" government (through payment of taxes), but = have no=20 direct say in how it is run. Shareholders own a piece of a = corporation=20 (through stock holdings), but have no direct role in influencing = its=20 activities. Governance aims to bridge the gap through arrangements = that=20 require or encourage top management -- a prime minister and = cabinet, or a=20 chief executive officer and senior executives -- to act in the = interests=20 of citizens/shareholders.

Citizens/shareholders have neither the time nor expertise to be = directly involved in running a country or a corporation. So they = empower=20 leaders to make decisions that support their shared interests: = creating a=20 good society (government) and creating wealth (corporations).

Naturally, top management has more information about its = business than=20 any of us has or wants to have. Because management knows more than = owners=20 do, tempting opportunities will arise for management to misuse its = power=20 at the expense of owners' interests. Governance arrangements are = intended=20 as a countervailing force, a bulwark against human nature.

The details of those arrangements will vary from case to case. = But=20 whether we're talking about corporate or political governance, the = underpinnings are profoundly similar. In each, we have a dispersed = group=20 of owners (citizens/shareholders) and a concentrated group = of top=20 managers. No individual owner can affect the operation of = the=20 government/corporation. A deliberative body = (Parliament/board of=20 directors) that has authority over top management mediates the=20 relationship between it and owners.

(My corporate governance scenario assumes widely traded = companies, and=20 that the corporation's ultimate accountability is to shareholders. = This is=20 for simplicity only. "Corporate social responsibility" widens the = firm's=20 accountability to other stakeholders.)

Interaction among owners, deliberative body and top management = is=20 covered by governance rules, processes and institutions that = determine=20 (among other things):

pressure on top management to be accountable;

the type and quality of information to be disclosed by top=20 management;

compliance by top management with norms of financial management = and=20 accounting;

the degree to which owners should have a say in the operation = of the=20 government/corporation.

This analysis helps us see where governance can go wrong. Look = first to=20 top management. While it may sometimes be tempted to behave badly, = its=20 impulses can be checked by informal processes linked to sound = ethical=20 values and a supportive corporate culture.

We've seen what happens when values fail. Enron revealed a = culture of=20 greed among top managers. The scandal around federal government=20 procurement of advertising services in Quebec showed a culture = where=20 breaking the rules was regarded as normal.

We look also to the deliberative body tasked with ensuring that = management acts in owners' interests. This body is often not up to = the=20 task. Parliamentarians cry about lack of power to oversee the = government.=20 Corporate boards, meantime, are criticized for failure to = challenge=20 management due to lack of independence. The Globe's survey of = corporate=20 governance found that many companies don't comply with the Toronto = Stock=20 Exchange guidelines on director independence. Independence was a = factor in=20 a Business Week survey of American boards.

We look to rules that cover, among other things, what top = management=20 should disclose. In our federal government, rules have toughened = recently=20 regarding information that departments must give Parliament. They = must=20 provide more detail about the results they are producing for = Canadians.=20 But insiders at the Treasury Board Secretariat (Canada's "budget = office")=20 acknowledge that the process is not working as well as it = should.

On the corporate side, rules related to disclosure have been = put under=20 a microscope with a view to narrowing the information gap between=20 management and owners.

For example, Canadian authorities are moving on the question of = disclosing the bottom-line impact of stock options, an important = way of=20 compensating top management.

Finally, institutions of accountability (I've mentioned two: = Parliament=20 and boards of directors) are the keystones of the governance = edifice. They=20 come in many forms, and are potentially the strongest = counterweight to top=20 management. In the federal government, the auditor-general is key. = While=20 there are legitimate gripes, the auditor-general nevertheless = plays a huge=20 role in keeping the government on its toes. Political parties, by=20 aggregating the dispersed interests of citizens, ought also to be = an=20 important source of accountability. But their role is limited in = our=20 system, especially when we have majority governments.

The audit profession should be a key institution of = accountability with=20 respect to corporate leadership. But recent U.S. experience has = shown that=20 auditors can be "captured" by management, and fail to perform = their duty.=20 Institutional investors, by aggregating the dispersed interests of = owners,=20 perform a role not unlike political parties. Recent events have = reawakened=20 interest in how they can hold management accountable.

As we puzzle over our twin governance crises, it's helpful to = remember=20 that they are so similar that what we learn from one can help us = handle=20 the other. At the root of it all is a gap between ownership and = control.=20 Our main instruments for addressing that gap's harmful effects are = corporate culture, rules, processes and institutions of = accountability.=20
Mark Schacter is a director of the Institute on Governance = in=20 Ottawa. On Nov. 5, he becomes the director of governance = and=20 corporate social responsibility at the Conference Board of = Canada.

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