No director left behind

Most boards recognize that director education and development is essential and ongoing. But many still struggle with the complicated challenge of packaging and delivering useful, relevant, timely training for rookies and veterans alike
By Jim Middlemiss

Ask Gwyn Morgan what he thinks about continuing education programs for company directors and the corporate titan has mixed feelings.

On one hand, Morgan, the former CEO and president of Encana Corp. (TSX:ECA), says continuing education programs are good at “bringing directors up to speed on all their responsibilities.”

Gwyn Morgan, former chair, SNC-Lavalin: "Directors have to invest in their craft if they are going to be effective"

However, he says, too often they are focused purely on “processes” and issues around “due diligence.”

The missing components, he says, are programs aimed at what he calls “the culture of ethical values” and helping directors understand and measure how well a company stacks up to its code of conduct and how engrained it is across the entity. “I think director education should spend more time on culture values, implementation and monitoring for directors.”

He adds that boards also need more training on crisis management. “How to respond to crises is not something I’ve ever seen in director education. It’s not just what’s happening to you, it’s how you respond to what’s happening to you.”

He makes his observation honestly. Morgan was the chairman of the global engineering giant SNC-Lavalin Group Inc. (TSX:SNC), when the company ran into trouble after a handful of executives were entangled in fraud and corruption allegations relating to construction projects.

Morgan, who was slated to step down as chairman in 2012, stayed on, and new managers were brought in to steer the company through the crisis. An independent investigation was undertaken, the report was made public, and SNC worked with justice officials—although the company was charged in March this year with corruption and fraud over its Libyan dealings. SNC has said it will plead not guilty.

Morgan retired in May 2013 after six years as chairman. He’s since described the 16 months following the bribery allegations as “one of the most disturbing and challenging” in his more than 40 years in business.

Looking back, he says in an interview, his biggest mistake was dropping his guard and assuming that the 100-year-old engineering firm, which had “highly respected leadership,” was living up to its ethical criteria.

“There doesn’t seem to be any reasons I had to be on high alert. There was no evidence of any problems. You have to trust each other. You can’t go around mistrusting management and thinking they are stealing from the company, otherwise you can’t work together as a team.” Directors, he says, are “not the CIA. That’s not what they do.”

As teachable moments for directors go, Morgan’s experience at SNC represents an extreme situation. But it’s an extreme example of an everyday challenge for directors and boards: the need to remain vigilant and to continue the learning process, no matter how senior or experienced one might be.

Morgan’s recollections and insights highlight the challenges boards and directors face on a daily basis when it comes to knowing and understanding their organizations better. It’s just one example of the job’s many demands. Christian Buhagiar, director of education at the Institute of Corporate Directors, says “today’s world is clearly more complex for boards and directors, and there are more eyes on directors and expectations from those outside the boardroom.

“Directors,” he says, “are really understanding they have to invest in their craft if they are going to be effective.”

It’s no surprise, then, that director education programming is undergoing a boom and moving to the top of many board agendas. The 2014 Spencer Stuart Board Index, which examines trends and practices at Canada’s 100 largest companies, found that every company disclosed offering some form of education program to its board. The most common were management-led seminars, cited by 91% of respondents, followed by site visits, at 64%. Site visits have risen dramatically, up from 11% in 2011. Another 58% indicated they held seminars led by external experts, while only 10% held board-led seminars.

“Director education in today’s boardroom is pretty important,” says Art Korpach, a former investment banker who now sits on multiple boards. “There is growing interest…[and] designations are gaining more prominence.

Indeed, there is no shortage of options when it comes to courses being offered by organizations such as business schools and continuing education providers like the ICD. As well, external suppliers, such as law and accounting firms, are quick to offer directors the latest insight into new developments and best practices to help boards become better at decision-making and oversight.

"Orientation programs are crucial for introducing industry-specific information to new directors," says governance expert and lawyer, Carol Hansell

But what makes a good director education program? Should it be delivered internally or externally? Do generic programs about the roles and responsibilities of a director go far enough, or should the focus be more industry specific? What exactly should programs focus on—processes and monitoring, or strategy and culture? And how do you create a program that provides value when directors come from such diverse backgrounds and have a wide range of expertise? These are only some of the challenges companies face as they invest more heavily into director education.

Compliance counts; so do culture and value

A common misconception equates director education with securities manuals and compliance briefings. It’s much more than that.

Gwyn Morgan says one of the key things he learned from his SNC experience is that directors should spend more time on culture and values. “You have to make sure there is inherent in the company a culture and a set of values that will inevitably have people blow the whistle if they think something is wrong.”

The problem is that ethics and culture are not easy things to measure, weigh or teach. In fact, many director education programs focus on harder skills, such as legal duties, reading financial statements, running committees or enhancing performance and shy away from the more philosophical elements, such as culture or ethics.

Focusing on hard skills, such as financial literacy, doesn’t necessarily allow directors to get at a core element—is their organization operating ethically across all divisions and departments?

Morgan noted SNC had thousands of contracts where nothing went wrong and the audit committee reviewed those where problems arose. The company even had whistleblower processes for its thousands of employees and contractors around the world. Yet, despite those precautions, it still got entangled, highlighting a potentially widespread need for more director training on cultural and ethical issues.

Regulators require education disclosure

Under Canadian securities regulations, issuing companies are required to disclose director continuing education practices in their management proxy circulars. If a board does not provide continuing education for its directors, companies are required to describe how the board ensures that directors maintain the skill and knowledge needed to meet their obligations.

For example, in its Management Proxy Circular, Royal Bank (TSX:RY) notes that its audit committee held sessions with industry experts to “explore accounting, audit and other matters that have an impact on the bank in current and future periods,” while its risk committee participated in education sessions that provided a review of specific lines of business using a “risk lens.” The governance committee is also responsible for director orientation programs to assist new directors, and the company offers a “comprehensive Director’s Guide.” It also falls on the governance committee to oversee continuing education programs for directors.

Karen McCarthy, vice-president, associate general counsel & secretary at RBC, says “there is definitely a desire by directors for more [continuing] education.”

She says RBC has an online reference portal for its directors, where they can obtain a wide range of materials. It also does an annual survey, asking directors what type of topics they need more information about in order to do their jobs effectively.

“We identify the type of continuing education that our committees and directors might need.” It could be anything from briefings on new regulations or legislation to risk management and strategy, says McCarthy.

Directorship is evolving

The job of director is slowly becoming a regulated profession, such as accounting or law, complete with continuing education requirements and professional accreditation, which can even lead to discounts on D&O insurance premiums.

The ICD offers the Directors Education Program in conjunction with the Rotman School of Management at the University of Toronto. Its graduates receive the ICD.D designation, complete with examinations and a requirement for 14 hours of mandatory continuing education annually.

The Directors College, a joint venture between the Conference Board of Canada and the DeGroote School of Business at McMaster University, oversees the Chartered Director Program, bestowing the C.Dir designation on its graduates.

Donald Chynoweth, a graduate of the ICD program who sits on a variety of nonprofit and corporate boards, including Potash Corp. (TSX:POT), believes that accreditation will become mandatory for directors within the next 10 to 15 years. “The issues are becoming that complicated and the learning programs are so vast for boards that it’s going to have to move that way.”

Boards need to step it up

But that’s simply a starting point. While director orientation programs are great at giving a director his or her sea legs, they are often generic in nature, discussing issues from a macro perspective and often failing to drill down to the industry level, where a board’s attention needs to be focused.

Where boards stand: A 2014 study of 300 top Canadian listed companies by Korn Ferry yielded these results. Click to enlarge

So while designations are a good start, directors and boards need to step it up. Lawyer Carol Hansell, a corporate governance expert at Hansell LLP in Toronto, says many independent directors are accomplished business people, but “don’t necessarily have the industry perspective or knowledge and have to be schooled up on it.”

“The generic programs are good and important, but they are only a start.”

Orientation programs are crucial for introducing industry-specific information to new directors.

“You don’t want to be running education programs during your board meetings,” she says. Board dinner meetings are now often being used for education programs, as directors want more than simply a meet-and-greet session.

Hansell also surveys boards about education programs and what works. She says often the best sessions involve management discussing with directors “the kinds of things they look at when making decisions.”

One of the challenges with putting together a program is catering to board diversity. Often there are different levels of expertise and experience on a board. A program that caters to the lowest common denominator risks alienating the more seasoned veterans.

Also, the various standing committees will need a deeper dive than the whole board on issues relevant to their topic area. For example, the audit committee needs a greater level of education and detail on financial matters than most board members will require. So education programs need to cater to the different levels of expertise that are at play on boards.

One thing RBC does is rotate its directors through the various committees to provide them better exposure to the organization. It also creates specific subject-matter programs for a committee, and makes those available to other directors who might want to sit in.

Coping with time constraints

Experts say one of the growing challenges in delivering director education is time. It’s a precious commodity. “Most companies are trying to schedule it,” says Korpach. “The challenge is how do you make time in a limited agenda?”

Korpach says it also falls on directors’ shoulders to ensure they are making the effort. “Each director has his or her own obligation and passion to stay current. Board members appreciate that we are in a world that is constantly changing.”

Hansell adds “there’s a lot of governance fatigue [at the board level]. When you talk about continuing education, directors think you are going to give them another lecture about governance. What directors are really looking for is industry-specific information, particularly in the areas of risk.”

Continuing education delivery models

There’s also a debate about which model to use and what works best when delivering continuing education programs. Should they be delivered internally by management and staff, or externally through third-party advisers or suppliers, such as law and accounting firms?

Dean Woodward, a chartered accountant at Collins Barrow in Calgary, says both are essential. “It’s useful to get that external perspective,” says Woodward. “A good company would not have one in favour of the other.”

As well, there are also questions about what form should programs follow? Should it be a straight lecture, a presentation with a question and answer session, or some type of case study with a facilitator?

Korpach says education programs are “really unique to each company.” He personally favours the case study. “What it tries to do is enhance your perception of how you make decisions.”

Director Art Korpach: Education programs are "really unique to each company"

He also dislikes a pure lecture format where there is no interaction between speaker and board members. “You need to create a forum where there is some real dialogue.”

Increasingly, boards are turning to universities to help them fine-tune their education offerings. For example, Hansell, who is also a director, sat on one board where professors from a business school provided a seminar on the latest in risk theory.

The ICD’s Buhagiar says there is no single delivery model that is best suited for educating directors, as the format and style runs the gamut.

However, he says, “You have to be smart about it,” adding, “it’s important for boards to understand that not everybody sitting around the board table is the same. Education has to be tailored to the needs of the group.”

He finds the most effective programs are designed for smaller groups and “it has to be practical. The education has to tie back to what the board is trying to do.”

Topics are endless

Experts say the topics for education are limitless. A few years ago, International Financial Reporting Standards (IFRS) and accounting was the rage as regulators introduced new rules. Now, it’s things like executive compensation, foreign corruption and cybersecurity that are drawing the attention. The need is often driven by changes in laws and regulations, or even new court rulings, which touch on director liabilities or fiduciary duties.

Education on business strategy also continues to remain strong. “Boards are starting to get more heavily involved in strategy,” says Chynoweth. “It’s about understanding what’s the difference between tactics and strategy.” He says directors often confuse the two.

Education programs are also expanding beyond the traditional theoretical discussions around financial matters, strategy and risk to include more practical analysis. For example, site visits have grown in popularity, not just involving company operations, but extending to clients as well.

In his role as director at Potash, Chynoweth says he has visited clients on their farms and food processing sites, which as a director he finds valuable.

“How do you truly bring value as a board member to understanding the industry if you have never met the customer?” asks Chynoweth, who has been to sugar cane fields in Florida and an avocado farm in California.

“I’m amazed to see where the product is going and what concerns [clients have]. You get it straight from the client’s mouth and not through the filter of management.”

While director education programs are becoming more advanced and greater in scope, Hansell warns they are not a panacea and can’t solve every possible problem, such as rogue employees or those determined to commit fraud.

“What these education programs do is help directors recognize red flags. They are more likely to ask critical questions.”

Education programs also step up the game for management. Because directors are more knowledgeable, management has to be better prepared, she says, calling it a “continual improvement cycle.”

What comes to the board is a different product, she explains. “What actually happens is that because the board is better, management is going further before they bring things to the board. Management is catching [issues] before they get to the board.”

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