(Photo: Peter Macdiarmid/Getty)
I remember one of the first times I observed a control block board in action: In walked the Chairman and CEO, also a significant shareholder, who promptly sat down at the head of the table. These are my plans, he said, and then went on for about ten minutes, after which the gavel was struck and directors were asked if there were any questions. There weren’t more than one or two. The board meeting was over. Everyone went for lunch.
What this meeting taught me was how much power a chair and CEO has, especially when they’re a significant shareholder, like Rupert Murdoch. Directors are really not independent in these situations, directors tell me, but more like “friends” or “advisors” to the significant shareholder, to whom they owe their position on the board.
When the significant shareholder also runs the company (as CEO) and the board (as chair), the power differential is even more pronounced. It is a corporate governance trifecta—a perfect storm.
But it’s not the only criticism being leveled at News Corp.’s corporate governance practices. Below are some of the others and their application to Canadian boards. They’re lessons worth learning.
1. Directors are often too old and past their prime
Murdoch is 80 years old. Fellow director Thomas Perkins, 79, worries about his friend, given that they’re about the same age. The board also has eight other long-serving directors. But directors can’t serve forever. As one put it to me yesterday, most people know when a director is not performing. From management’s perspective, nothing new is coming from the person and it’s all been heard before. Directors, however, wiggle, entrenching themselves as they obtain enormous reputation from sitting on prestigious boards. The chair of a CEO search committee told me yesterday that long-serving directors are one of the biggest problems on his board.
The UK Code at least has a presumption of losing director independence after nine years of service, while Canada has no comparable provision. In Canadian banks, for example, which largely set best practice examples for corporate governance, 30 directors among the top five banks have served beyond nine years. Several directors have served on bank boards between 10 and 20 years, and in one case, a director has served for 25 years. RBC has nine; Scotiabank has eight; BMO has seven; and TD has six directors serving beyond nine years.
Retirement ages and tenure limits exist to provide independence, fresh perspectives and board diversity opportunities. Diversity was recently described by an award-winning Canadian director as being the number one issue in Canadian corporate governance.
2. Boards need to be more critical, skeptical even
The News Corp. board is criticized for not having properly investigated alleged phone-hacking, starting in 2007 when management was aware of the allegations (James Murdoch is alleged to have lied in this respect). A special committee of independent directors certainly should be established now. The committee established recently is still a management committee. News Corp’s directors, audit committee and external auditors have been criticized.
A board should have all material risks and internal controls reported on and assured, including reputation and code of conduct compliance. A board or committee is entitled to access to any piece of information, advice or personnel to fulfill its responsibilities.
Good audit committees meet separately with the CFO and internal audit. Good boards will insist the CEO leave the room for a portion of every meeting, sometimes twice. Good directors ask questions, even stupid questions. If something is too good to be true, it likely is. The question that should have been asked in the Murdoch boardroom is: “How the heck did we get this story?”
3. Most directors should be independent
Formal independence guidelines, at least as currently drafted, do not ensure actual independence of mind of directors within a boardroom. A majority of board directors should appear to be independent, not only of management, but also of any significant shareholder; and free from any association or relationship that could reasonably be perceived to compromise this independence. The basis upon this independence should be affirmatively made, for each director, and readily accessible to shareholders and other stakeholders.
4. Minority shareholders need fair representation at the table
If a corporation has a significant shareholder, an appropriate percentage of board seats should be reserved for minority shareholder representation, and that percentage should fairly reflect the investment in the corporation by shareholders other than the significant shareholder. The only way to represent minority shareholders is a seat at the table. Independent directors are too beholden to the significant shareholder.
In the News Corp. board, the case could be made that 60% of the directors are independent from Murdoch (the Murdoch family owns 12% of the company and 40% of the voting shares), but because of formal independence guidelines, and because Murdoch is also chair, the balance is tilted in his favour.
5. Power must be split
It is a governance red flag to have the CEO, chair and a significant shareholder be the same person, as is the case at News Corp. As mentioned above, a board chair should be independent. The duties and responsibilities of both the chair and the CEO should be clear, detailed and accessible to stakeholders. The chair and CEO should be separately assessed on their duties by all directors. Remediation and feedback should be provided, including replacement as necessary. Succession planning for both positions should be publicly available. If the mandate of the board is limited in any way by a significant shareholder, this should be disclosed.
6. Related party transactions can be bad for shareholders
Lastly, the News Corp. board is being sued by shareholders for a transaction with Mr. Murdoch’s daughter. This is a related party transaction. A related party transaction is a conflict of interest between the related party (e.g., a control person, a significant shareholder, an officer, or a director of the corporation) and the corporation itself. A related party transaction is essentially a deal between an insider and the company. Therefore, non-insiders should approve it.
If the board of directors does not take all appropriate action or shareholders—including minority shareholders—do not have full and complete knowledge of the opportunity to approve the transaction, the result could be self-dealing and appropriation of monies or opportunities by the related party at the expense of the corporation and/or minority shareholders.
At a minimum, a special committee composed of directors independent from all related parties should be established, with independent expert opinion retained on the effect of the transaction on the company and minority shareholders.
We will see how the News Corp. scandal plays out, but it is widespread and I’d wager it’s taught many of its onlookers a thing or two about governance.
Blogs & Comment
Six lessons for boards from News Corp.
When the significant shareholder also runs the company and the board, the power differential is very pronounced.
By Richard Leblanc
(Photo: Peter Macdiarmid/Getty)
I remember one of the first times I observed a control block board in action: In walked the Chairman and CEO, also a significant shareholder, who promptly sat down at the head of the table. These are my plans, he said, and then went on for about ten minutes, after which the gavel was struck and directors were asked if there were any questions. There weren’t more than one or two. The board meeting was over. Everyone went for lunch.
What this meeting taught me was how much power a chair and CEO has, especially when they’re a significant shareholder, like Rupert Murdoch. Directors are really not independent in these situations, directors tell me, but more like “friends” or “advisors” to the significant shareholder, to whom they owe their position on the board.
When the significant shareholder also runs the company (as CEO) and the board (as chair), the power differential is even more pronounced. It is a corporate governance trifecta—a perfect storm.
But it’s not the only criticism being leveled at News Corp.’s corporate governance practices. Below are some of the others and their application to Canadian boards. They’re lessons worth learning.
1. Directors are often too old and past their prime
Murdoch is 80 years old. Fellow director Thomas Perkins, 79, worries about his friend, given that they’re about the same age. The board also has eight other long-serving directors. But directors can’t serve forever. As one put it to me yesterday, most people know when a director is not performing. From management’s perspective, nothing new is coming from the person and it’s all been heard before. Directors, however, wiggle, entrenching themselves as they obtain enormous reputation from sitting on prestigious boards. The chair of a CEO search committee told me yesterday that long-serving directors are one of the biggest problems on his board.
The UK Code at least has a presumption of losing director independence after nine years of service, while Canada has no comparable provision. In Canadian banks, for example, which largely set best practice examples for corporate governance, 30 directors among the top five banks have served beyond nine years. Several directors have served on bank boards between 10 and 20 years, and in one case, a director has served for 25 years. RBC has nine; Scotiabank has eight; BMO has seven; and TD has six directors serving beyond nine years.
Retirement ages and tenure limits exist to provide independence, fresh perspectives and board diversity opportunities. Diversity was recently described by an award-winning Canadian director as being the number one issue in Canadian corporate governance.
2. Boards need to be more critical, skeptical even
The News Corp. board is criticized for not having properly investigated alleged phone-hacking, starting in 2007 when management was aware of the allegations (James Murdoch is alleged to have lied in this respect). A special committee of independent directors certainly should be established now. The committee established recently is still a management committee. News Corp’s directors, audit committee and external auditors have been criticized.
A board should have all material risks and internal controls reported on and assured, including reputation and code of conduct compliance. A board or committee is entitled to access to any piece of information, advice or personnel to fulfill its responsibilities.
Good audit committees meet separately with the CFO and internal audit. Good boards will insist the CEO leave the room for a portion of every meeting, sometimes twice. Good directors ask questions, even stupid questions. If something is too good to be true, it likely is. The question that should have been asked in the Murdoch boardroom is: “How the heck did we get this story?”
3. Most directors should be independent
Formal independence guidelines, at least as currently drafted, do not ensure actual independence of mind of directors within a boardroom. A majority of board directors should appear to be independent, not only of management, but also of any significant shareholder; and free from any association or relationship that could reasonably be perceived to compromise this independence. The basis upon this independence should be affirmatively made, for each director, and readily accessible to shareholders and other stakeholders.
4. Minority shareholders need fair representation at the table
If a corporation has a significant shareholder, an appropriate percentage of board seats should be reserved for minority shareholder representation, and that percentage should fairly reflect the investment in the corporation by shareholders other than the significant shareholder. The only way to represent minority shareholders is a seat at the table. Independent directors are too beholden to the significant shareholder.
In the News Corp. board, the case could be made that 60% of the directors are independent from Murdoch (the Murdoch family owns 12% of the company and 40% of the voting shares), but because of formal independence guidelines, and because Murdoch is also chair, the balance is tilted in his favour.
5. Power must be split
It is a governance red flag to have the CEO, chair and a significant shareholder be the same person, as is the case at News Corp. As mentioned above, a board chair should be independent. The duties and responsibilities of both the chair and the CEO should be clear, detailed and accessible to stakeholders. The chair and CEO should be separately assessed on their duties by all directors. Remediation and feedback should be provided, including replacement as necessary. Succession planning for both positions should be publicly available. If the mandate of the board is limited in any way by a significant shareholder, this should be disclosed.
6. Related party transactions can be bad for shareholders
Lastly, the News Corp. board is being sued by shareholders for a transaction with Mr. Murdoch’s daughter. This is a related party transaction. A related party transaction is a conflict of interest between the related party (e.g., a control person, a significant shareholder, an officer, or a director of the corporation) and the corporation itself. A related party transaction is essentially a deal between an insider and the company. Therefore, non-insiders should approve it.
If the board of directors does not take all appropriate action or shareholders—including minority shareholders—do not have full and complete knowledge of the opportunity to approve the transaction, the result could be self-dealing and appropriation of monies or opportunities by the related party at the expense of the corporation and/or minority shareholders.
At a minimum, a special committee composed of directors independent from all related parties should be established, with independent expert opinion retained on the effect of the transaction on the company and minority shareholders.
We will see how the News Corp. scandal plays out, but it is widespread and I’d wager it’s taught many of its onlookers a thing or two about governance.