Canadian prof cited by US regulator believes rule proposals need to go further

TORONTO - The United States remains one of the few Anglo-Saxon economies that does not adequately vet and review the directors of its public companies, despite a recent push for new rules, says a York University expert in corporate governance.

“It is a noticeable omission in these latest reforms and the lack of proper governance has cost the US dearly in the past,” said Richard Leblanc, a professor of Corporate Governance, Law and Ethics in York’s Faculty of Liberal Arts and Professional Studies in Toronto.

Leblanc’s call for skill and competency-based boards is cited in the Securities and Exchange Commission’s proposed amendment to item 401, one of a large number of proposed rule revisions intended to improve the disclosure of corporate governance practices at public companies, including information about:

* The “experience, qualifications, attributes or skills that qualify a person to serve as a director of the company…”

* Company leadership structure.

Director competencies and skills matrix

While corporate Canada largely made the move to assessing directors based on competencies and skills in 2005 using the ‘comply or explain’ approach, U.S. regulators have to date shied away from such measures.

“Right now, you can be on a risk committee of a New York Stock Exchange-listed board and not be risk literate. You can be on a compensation committee and not be compensation literate. This would be difficult today in Canada,” Leblanc said.

US investment banks, for example, have been criticized for their lack of risk management and industry expertise at the board level. Some blame this lack of oversight, coupled with regulatory failure, as a leading cause of the global credit crisis.

Leblanc’s own research suggests directors often poorly understand risk management. A competencies and skills matrix would combat this lack of understanding by exposing areas – in addition to risk management – where a board lacks expertise.

Separating the Roles of Board Chair and CEO

“All else equal, separating both roles is a good idea,” Leblanc said, noting, however, that empirical evidence is mixed that an independent chair, per se, is good for shareholders, or makes the board more effective. “Just because you’re independent, doesn’t mean you’re effective,” Leblanc said. “In fact, a clever and autocratic CEO may push for a non-executive, non-effective chair.” The upcoming Walker review of UK bank boards is expected to call for responsibility-based chairs, Leblanc said.

In Canada, regulators have required listed companies to draw up position descriptions for independent board and committee chairs. Additionally, colleagues assess their fellow directors’ performance – including that of board and committee chairs, taking into account their position description – and boards act on those assessments in the selection and re-nomination process.

Leblanc believes public companies in the US need to start assessing individual directors, not just entire boards and committees.

“They now have an unprecedented opportunity, by spending political capital and seizing the will of the public, to make changes that could prevent a future financial collapse that is similar in scale to the current one. Why did the economic crisis happen? Because many at the helm – including the regulators – didn’t have the skills to see it coming,” he said.

Leblanc’s detailed advice has helped shape the governance guidelines mandated for all Canadian public companies. His work has been looked to by other sectors, including hospitals, crown corporations, credit unions, co-operatives and not-for-profits.

His contribution to Boardroom Realities – “Getting the Right Directors on Your Board” – is edited by Jay Conger and published in March 2009 by Jossey-Bass. The book has received advance praise and “assembles the biggest names in the study of board governance as well as corporate board members themselves to address the critical questions that corporate boards face today.”

Richard Leblanc (BSc, MBA (Toronto); JD (Detroit); LLB (Windsor); LLM, PhD (York)), is a Certified Management Consultant, Member of the Law Society of Upper Canada (ON) and the Roll of Solicitors (UK). His other research areas include business law, business policy, as well as general management.