I remember one of the first times I observed a control block board in action. I was seated in the corner of a large room, with a yellow note pad. Very esteemed directors were at the boardtable. After a short period of time, in walked the Chairman and CEO, who was also a significant shareholder. The person sat down, at the head of the table, and said that “these are my plans,” or words to this effect. The Chair and CEO spoke 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 brief questions. Then the board meeting ended and everyone went for lunch. The entire meeting lasted about 20 minutes.
What this meeting taught me was how much power a Chair and CEO has, and especially if the person is a significant shareholder (e.g., Rupert Murdoch). Directors are really not independent in these situations, directors tell me, but more of “friends” or “advisors” to the significant shareholder. They owe their position on the board to this person.
The Perfect Corporate Governance Storm
When the significant shareholder also runs the company (CEO), and the board (Chair), the power differential is even more pronounced. It is a corporate governance “trifecta” or “perfect storm.”
There are other criticisms being leveled at News Corp’s corporate governance practices.
Here are some of them and their application to Canadian boards.
1. Age and Tenure of Directors – Get on, Step up and Get off
Mr. Murdoch is 80 years old. Fellow 79 year-old director Mr. Perkins worries about his “friend,” given that they are about the same age. The board has eight other long-serving directors.
Directors can’t serve forever. As one director 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 has all been heard before. Directors however “wiggle,” entrenching themselves as they obtain enormous reputational profile from sitting on prestigious boards. The Chair of a CEO search committee told me yesterday that long-serving directors is one of the biggest problems on his board.
The UK Code (at B.1.1) has a presumption of losing director independence after nine years service. (Canada has no comparable provision.)
In Canadian banks, for example, who 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.
Long-serving directors (banks and non banks) have served during loses (financial and non-financial).
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. Tone at the Top, Access & Reporting
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 their 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 in the heck did we get this story??”
3. Independent Directors – In Substance as Well as Form
Formal independence guidelines, at least as currently drafted, do not ensure actual independence of mind of directors within a boardroom.
A majority of directors of a board should be reasonably perceived 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. Significant Shareholder ~ “It’s [X]’s way or the highway”
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 Mr. Murdoch (the Murdoch family owns 12% of the company and 40% of the voting shares), but because of formal independence guidelines, and because Mr. Murdoch is also Chair, the balance it tiled in favor of Mr. Murdoch.
5. Board Leadership – Independent and Effective
It is a governance red flag to have the CEO and Chair and significant shareholder be the same person, as is the case at News Corp.
A board chair should be independent (see above).
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
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 (all shareholders, including minority) do not have full and complete knowledge of, or 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 there are lessons to be learned on governance best practices.