Taking the long-term view
The British-North American Committee may not ring a bell, but the names of its blue-chip membership surely will. The 41-year-old policy forum boasts a glittering roster that includes retired U.S. general Wesley Clark, British business leader Sir Paul Judge, Moosehead brewer Derek Oland, and retired forestry executive William Turner. Founded in 1969, the panel's name evokes a time when maintaining the Canadian-British-U.S. connection was of compelling concern - before China's rise and the financial meltdown.
Now, the BNAC wades into the debate on governance of financial institutions, offering a post-meltdown prescription for transparency. As chairman of the committee that wrote the report, the 81-year-old Mr. Turner, a veteran director and CEO of former forestry giant Consolidated-Bathurst Inc., explains the thinking behind the document - and offers some of his own perspective on events.
No one would argue with your recommendations for greater transparency on financial statements and stronger regulatory oversight. But aren't you closing this door after the horse has bolted from the barn?
That's fair comment, but 15 years ago there wasn't anyone who wanted to listen to this. The thing is the guys on this committee have actually run companies. This isn't something from a university professor who is giving a 45-minute lecture, and just assumes the problem is already solved.
You also say that limits on directors' years of service is not conducive to building an effective board.
The Brits made a huge mistake when they decided that any outside director on a public board who lasted 10 years was automatically an insider. It forced a lot of people to get off their boards. There is sort of a feeling like that in Canada, but it has never been expressed in law. In some of these huge complicated international companies, as a director you don't know what's going on for the first five or six years. The best time for directors is often in those [later] years.
One recommendation is that financial institutions should compensate executives based on three- to five-year performance. Is that practical?
There is a tendency now to judge everything on a single year's basis. When you get around to compensation for mergers or big deals, one year is not an appropriate period on which to judge if the deal has been successful. In the financial world, there is a great tendency to do one big deal, make a hell of a lot of money from it, and you could care less what happened to the company afterward.
But if you merge with another company and the stock goes up or down in the first year, you shouldn't judge the impact on that basis. Judge it on a five-year basis. That keeps the people worrying about their success in the long run instead of just the short run. And I wouldn't pay executives much in cash. I would pay them stock in the company and I wouldn't let them be able to sell it for a while.
Would this require a new mindset among financial executives?
When I got into business world in the 1950s, there were a lot of people in the financial business who believed their job was to be an adviser to the corporation. They were looking to see their corporate clients through good and bad times. Nowadays, everything is done on the basis of a single deal. Look at the Potash [Corp. of Saskatchewan Inc.] thing that is going on right now.
I'm reading a book about the financier Siegmund Warburg, whom I met once when [industrialist] Maurice Strong was running Power Corp. and I was the No. 2. Warburg was a marvellous guy and his view of being a financier was to be a consultant for life. It's switched from that attitude to Wall Street today, where everyone wants to do the big deal and then quit and become a professor somewhere.
Where do you personally come down on the Potash deal?
Somebody has to take a hard look at it. There is a legitimate role for government in the review process. The danger is that your major international companies will get swallowed up because when they are in cyclical businesses and at the bottom of the cycle, [outsiders] will buy them. And I think the idea of going after U.S. Steel about its Stelco acquisition [and allegedly unfulfilled job guarantees] makes a lot of sense. If these guys promise something and then times go bust, they forget about it.
Will Potash be the test case on this issue?
I think it should be. The company is allegedly run from Saskatoon, but the guys [who manage the company] live in Chicago. This is a time for government to come in and say, "Let's reverse that." At least for this one area of activity, agricultural chemicals, they should say "If you take this company over, you should run that portion of the business from Saskatoon."
One recommendation in the report is that the roles of chairman and CEO should be split between two people. When you ran newsprint giant Consolidated-Bathurst, didn't you have both those jobs at the same time?
No, I never did. When I was chairman, I ran the meetings and someone else was the CEO. It's stupid to combine the two. The chairman's job in a big international company is to keep your directors informed between the meetings about what the heck is going on, and that takes a lot of time. The other guy has to run the business.
What happened to Consolidated-Bathurst after you left when it was sold? As AbitibiBowater, the successor firm is now in bankruptcy protection.
The trouble is the guys who ended up running it were ex-mill managers and didn't have a wide view. I feel very sorry about that. My pension disappeared, among other things, because of their ineptitude. But the long-term trends for newsprint were obvious when I left [in 1989] - that the electronic media were taking over the business.
Are you still worried about the health of the financial system?
I think Europe is in bad shape. I couldn't understand why the European Union would go for a single currency with eventually 27 finance ministers who can screw it up, and with no overall regulatory oversight. I think the Brits were very smart to stay out of the currency.
What about the future of the BNAC organization? The committee's names are impressive - Paul Martin, former finance minister Michael Wilson, super-investor Peter Cundill, scientist John Polanyi ...
The problem is we need to get more guys in their 30s. Do you have any ideas? I'm no good at finding people in their 30s unless they happen to be friends of my kids.
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What the report urges
Here are key recommendations of a report by the British-North American Committee on the governance of financial institutions: 1. Greater transparency in institutions' financial statements, including more disclosure on asset quality, liquidity and contingent liabilities. More detailed reporting of revenue and operating income by business activities.
2. Stronger regulatory oversight, including elimination of overlap on responsibilities among agencies.
3. Restored public confidence in how financial institutions are run, with primary responsibility falling on directors.
4. Among the key duties of a board of directors: Members should thoroughly understand the business. Restrictive terms on length of service of directors do not contribute to an effective board;
Roles of chairman and CEO should be separate;
Management's assessment of risk should be regular topic on board agendas
Executive compensation should be based on performance over three to five years.
Gordon Pitts
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William Turner
Title: CEO of Exsultate Inc., his holding company. Chair, Corporate Governance Working Group, British-North American Committee, Montreal.
Born: Jan. 27, 1929, Sharon, Pa. (to Canadian parents).
Education: BSc mechanical engineering, Univ. of Toronto; MBA, Harvard Business School.
Career highlights:
1963-82: senior executive, Power Corp. of Canada
1982-89: CEO, Consolidated-Bathurst Inc.
Served as trustee and vice-chair, World Economic Forum
