Peter Dey: Let directors direct

In The Director’s Chair with David W. Anderson: Peter Dey, Canada’s preeminent governance guru, discusses the primacy of board accountability and its continuing role in driving good governance, board improvement and productive owner-board relations

No single Canadian can take more credit for being a catalyst of improved corporate governance and board reform than Peter Dey. Today, Dey is chair of Toronto-based investment dealer Paradigm Capital and an active adviser on governance to global bodies and private sector organizations alike. However, he will be forever remembered as chair of the 1994 Toronto Stock Exchange Committee on Corporate Governance in Canada. That committee’s final report, Where were the directors? is known today simply as the Dey Report. An investigation into Canadian governance practices in the wake of several large corporate failures, the Dey Report laid out a blueprint for improving governance that is still being followed and built on to this day.

Peter Dey

David W. Anderson What is the value of governance?

Peter Dey Every organization needs a process to make decisions. Governance enables an organization, from the simplest to most complex, to make value-creating decisions on behalf of stakeholders within a framework of accountability. Accountability of the board is fundamental to our system of corporate governance.

David W. Anderson What then is the best argument for good governance?

Peter Dey By being effectively governed an organization is better positioned to create value. Consider what it’s like recruiting a CEO or raising capital. In both cases, interested parties are going to ask, ‘Does this company have directors with a history of creating value? Has the company been constituted to practice good governance? Does it have a board that understands its role?’ These are threshold questions that we ask at Paradigm before undertaking a financing for a company. There’s a better prospect of getting a good CEO and raising capital when the market judges a company to be well governed. Governance doesn’t guarantee value, but it does position a company to be more competitive, and thus more likely to create long-term value.

David W. Anderson From your vantage point as Canada’s governance guru, what has been the most important change in practice you’ve witnessed since your Dey Report in 1994?

Peter Dey Governista maybe, but not guru! Without question it is the separation of the chair’s role from the CEO to establish the importance of a board independent of management. The board’s principal role is to recruit, assess and compensate management. Making the CEO chair of the board creates an inherent conflict.

David W. Anderson Is there any aspect of governance today that could benefit from regulation?

Peter Dey The most effective way to achieve reform in governance is to convince companies that the reform will create value. I see nothing in the corporate landscape crying out for regulation. The only hard regulation of note in the last two decades pertained to disclosure, requiring accurate and transparent disclosure of governance systems, which I fully support. Other than in the pursuit of transparency, I’m opposed to broad prescriptions for upgrading governance. The most effective changes come from a well-informed market pushing for change. This has been borne out in the last 20 years, as the vast majority of governance reforms have come from guidelines for best practice.

David W. Anderson There are calls now for regulation regarding board diversity, as the market seems not to have either recognized the potential value or acted on it. Is it time for Canada to act?

Peter Dey Diversity needs to be addressed. There is this vast pool of talent out there that has not been effectively tapped. Drawing on this pool will be a value-creating exercise. Like I said earlier, the most effective way to achieve reforms in governance is to demonstrate that the reform will create value. This is a value-creating reform. If our Canadian companies aren’t more proactive on diversity, it will become a bigger issue, in which case there could be a role for regulatory bodies to impose a comprehensive diversity disclosure policy. I prefer a non-regulated solution in which boards state their own goals and progress toward achievement rather than outright and across-the-board quotas.

David W. Anderson It’s not often that owner-capitalists agitate for state regulation, but consternation over pay has some seeking rules that give owners greater control of pay. Is such a shift in power from boards to owners needed—even if generated from guidelines?

Peter Dey No. I’m strongly opposed to say-on-pay by shareholders, by guideline or regulation, because it undermines the accountability of the board. I place responsibility for governance on boards. Shareholders should hold boards accountable generally, through director election, not for specific decisions. I appreciate that the patience of shareholders has been severely tried, but diluting the board’s role in compensation, or removing it altogether, undermines the principle of board accountability. Given the broad range of highly interrelated decisions boards make, I don’t understand how shareholders can single out just one of them. If a board is a failure, then shareholders have failed. The solution isn’t to give shareholders more power, it’s to get shareholders and boards to do their respective jobs effectively, not combine them. Boards should be kept free of additional owner-imposed constraints on board decision-making.

David W. Anderson How might owners do a better job holding boards accountable for the quality of their governance performance?

Peter Dey Our system has generated shareholder groups, like the Canadian Coalition for Good Governance, which engage in active dialogues with board chairs and committee chairs (such as compensation and governance), as well as with CEOs. These conversations are immensely useful in conveying the principled interest of owners and providing specific suggestions to companies for improvement. If the soft touch doesn’t work with a board, shareholders can challenge the board at a shareholders’ meeting. As the recent example of Canadian Pacific shows, this is not a mere theoretical possibility. I think it’s encouraging and entirely useful to see owners hold boards accountable for under-performance of the company.

David W. Anderson Chairing an independent investment dealer, you appreciate the legitimate place of owners to control their companies. What is the appropriate role of owners?

Peter Dey The principal role and responsibility of owners is to constitute a board that is effective in overseeing the management of the business. Some shareholders are frustrated about not being more directly involved when decisions don’t go the way they want, but owners can be more involved through the election of directors. The market in directors in this country is pretty efficient. Owners have the opportunity to be continually upgrading boards of directors.

David W. Anderson The primary power of owners is exercised in the election of directors nominated by boards themselves. Should owners nominate directors or otherwise more directly choose a board?

Peter Dey I think there is a greater role for owners in constituting boards through direct dialogue, including suggestions for nomination, but it is difficult for owners to participate directly and effectively in the nomination process itself. Composition of the board is best left to directors to ensure the board has the necessary range of skills to effectively oversee management and individually the qualities that enhance board dynamics. Constituting a board is as much an art as it is a science. Constructive chemistry in the boardroom is essential to making good decisions. The ongoing, continuing challenge for owners and boards on the owners’ behalf is to upgrade boards of directors.

David W. Anderson How else can owners influence boards?

Peter Dey Direct dialogue between boards and owners. There has been a marked increase in the involvement of significant shareholders with boards, typically in the form of private dialogue. This can be very effective. Boards want to know what owners are thinking. We are currently engaged in a process of owner-director engagement that is an important component of effective governance systems.

David W. Anderson What are owners telling boards in private?

Peter Dey Owners focus, appropriately, on performance and the relationship of compensation to performance. Owners (and boards) are increasingly focused on CSR issues. These issues are of course more important for a company involved in an extractive industry, particularly if it operates in foreign jurisdictions.

David W. Anderson You prefer the subtle approach of owner-board dialogue to improving boards. Are boards are up to the task?

Peter Dey Recent evidence is encouraging. Dialogue is preferable with a willing partner, as it’s efficient, cost-effective and respectful. Ongoing preventative maintenance is in everyone’s interests, as it avoids the need for board overhaul. The responsibility is on both existing boards to recognize this need to upgrade and shareholders to put to boards propositions as to where improvement is expected. There is a risk that directors can become too comfortable sitting on a board and this leads to a passive approach to board reform. Boards are organic; they evolve. Every board can be improved. That’s the message boards are hearing from owners. The good news is boards are listening.

David W. Anderson Practically speaking, what should boards do to improve their performance and meet this challenge you’ve laid out?

Peter Dey Start with the people around the table. Companies evolve; so must the board evolve with them. Those sitting around the table also need to keep current in the affairs of the business. It’s a mistake to limit board engagement to quarterly meetings and an annual strategy day. Management needs to keep the board apprised of what’s going on in the business. The best CEOs make sure this happens by sending periodic notes to directors to keep them up-to-date and aware of implications for the company from developments in the sector.

David W. Anderson In studying board behaviour, it’s clear the board chair is the lynchpin in board performance. What role might the board chair play in improving performance?

Peter Dey The board chair leads the board and determines the quality of board performance in three ways. First, the board chair needs to assess the integrity of management and the quality of information coming from it. The board can’t do its job without knowing how much confidence it can place in management. The chair is best positioned to make this initial assessment, given the functional relationship between the chair, the CEO and senior management. Having made and shared this assessment with the board, and with its concurrence, the chair must guide the board in acting on that judgment, or fail in its duty.

Secondly, the chair is responsible for the board’s agenda and ensuring directors receive appropriate information to address that agenda. Thus the chair needs to work with the CEO to determine an appropriate agenda and supply the board with necessary materials in advance of decisions. There’s a subtle logistical consideration here; as the board generally doesn’t control its own resources, it is dependent on the CEO. The chair must mediate and finesse this relationship if the board is to perform well.

Thirdly, a board chair needs to run board meetings. A chair who knows how to run a good meeting is a significant driver of board value. Effective board chairs bring out the views of all directors and work to find consensus, recasting the issue, integrating perspectives to focus on what’s important, and facilitating a decision. It’s magic to see a good chair in action.

David W. Anderson Foreign regulators and international bodies addressing global governance seek out your input. Do governance practices translate well from one jurisdiction to another?

Peter Dey I do keep abreast of reforms and practices elsewhere. There are principles that are sufficiently abstract to transcend differences in law and custom. The idea of board independence is an example. It’s clear to all that the board has a unique role to play in corporate life and thus needs to exercise its own power. Yet there are different views as to how “pure” that independence ought to be and thus how it is translated into practice. For instance, I focus more on the independence of mind of the director than definitional independence. Directors with some connection to management can play an important role on every board provided the board is satisfied that the director is applying independent judgment to the matters at hand. Many of our American colleagues translate differently the independence principle, maintaining a combined chair and CEO and creating a structural fix in the form of lead director to bolster independence. Interestingly, there’s a growing movement there to separate the chair and CEO roles, as we’ve done in Canada and as is standard in the UK, so these interpretations can and do evolve. My general advice in any jurisdiction is this: what happens elsewhere is informative but not instructive.

David W. Anderson In addition to your international advisory role, you continue to work abroad as well. What specifically do you recommend to improve Canada’s global competitiveness?

Peter Dey This question raises the relationship between governance and global competitiveness. Those of us who have the opportunity to participate in the governance systems of Canadian companies have to ensure that our systems support, and not stifle, innovation and creativity. Governance is not about thoughtless adherence to rules. Governance is about growth and value creation. The mindset of Canadian companies is increasingly international reflecting a willingness to compete in any market where it makes economic and social sense.

David W. Anderson, MBA, PhD, ICD.D is president of The Anderson Governance Group in Toronto, an independent advisory firm dedicated to assisting boards and management teams enhance leadership performance. He advises directors, executives, investors and regulators based on his international research and practice. E-mail: Web:

Photo: Evan Dion


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