From his experience at the heart of the Canadian economy, Tiff Macklem, former Senior Deputy Governor of the Bank of Canada, has brought a fresh perspective to the University of Toronto’s Rotman School of Management, one which underscores the School’s long established strength in the area of corporate governance and risk management research and education.
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Macklem had a front-row seat during 2008-2009 financial storms where, as he says, “It was very scary.” This experience gave him a profound understanding of the dynamics of financial crises and global financial systems, and consequently the need for strong risk management and corporate governance and the need for quality executive education to promote better boardroom culture and leadership.
In the wake of the crisis Canada emerged with its reputation enhanced, as the world noticed the strength of the governance in Canada’s financial institutions and companies. According to Macklem this was due first to the way governance was monitored and the high level of transparency in the reporting on companies in Canada, including by The Globe and Mail, and secondly to director education and boardroom development – an area where Rotman held a pre-eminent position.
Since 2003, Rotman has partnered with the Institute of Corporate Directors to train directors to meet and exceed heightened expectations of good corporate governance. Over 3,800 directors have graduated from the program since its inception.
Proud of this tradition, Macklem says that Canada must not be complacent. Although currently Canada still tops the international league table in terms of good governance leading the way in many areas, in the wake of the financial crisis, many other countries have stepped up – Norway for example has championed diversity and the UK has recently established good rules around independence. Progress has been made around the world but a lot remains to be done as the era of corporate scandals is clearly not over, and a mistrustful public expects much better from its business leaders.
Over the past two decades, business leaders have had to face a growing number of challenges which have placed increased demands on directors and intensified the call for better governance. From the bankruptcy of Enron in 2001 through the financial crisis of 2008 to the present, multiple corporate scandals have exposed the egregious failure of executive boards to prevent excessive risk taking, presenting a huge challenge to the business world to do better. This overarching challenge is made more difficult by several other new pressures.
One new pressure is that CEOs and boards have to be constantly alert to interventions by ‘activist shareholders’ – large institutional and hedge-fund investors – who frequently play a decisive role in interactions between corporations and markets, too often it seems for their short term gain rather than the company’s long term good.
Another growing challenge is the emerging need for greater governance of technology risk and cyber security. This covers a wide range of issues from building systems and processes to guard against cyber-attacks and online fraud to monitoring the company’s social media interactions to guard against reputational damage and to react almost instantly to negative press.
The need to react promptly to fast changing events echoes another pressure that causes a short-term outlook in too many boardrooms – the pressure for quarterly reporting. This need to report good news to shareholders and analysts every quarter, allied to the growing need to focus on regulatory and compliance issues, stops boards from stepping back and considering the biggest issue of all: long-term strategy.
“Successful boards find time for longer term strategic thinking” says Macklem and yet too often “The squeaky wheel gets the most oil”– the constant pressure from analysts and regulators attracts boardroom attention to the detriment of strategy. A board that focuses on the short-term and the legalistic tends to develop a ‘tick-box’ culture and crucially fails to have the challenging in-depth conversations that really question the company’s long term prospects and direction.
Ethical corporate behaviour is not merely a boardroom issue; it is rather a matter of overall corporate culture. However, as Macklem insists, corporate culture starts and is led from the top before it spreads down through the organization. Risk management needs to be a board, or risk committee, priority but its implementation then depends on clear communication down through the organization.
There has always been a conflict been a values-based culture imposed through regulations and compliance and one that relies on trust. Canada has been better than most in finding a balance. The key is to develop a culture that is based on principles, one where management can be effectively challenged, and where open-minded thinking is encouraged to make sure every option is considered and good ideas are nurtured – so the cream rises to the top. The first place to start, says Macklem, is in the boardroom, where ‘groupthink’ must be avoided and as a matter of practice all strategic options should be open for discussion.
Board dynamics, starting with leadership from the CEO, can set the tone for the wider corporate culture and can crucially steer the organization away from the shocking failures in financial risk taking that we have seen in the recent past, towards an ethical culture that discourages greed and says: we first and foremost are here to serve our customers and clients.
Our interview with Dean Macklem took place around the time the news of Volkswagen’s emissions scandal broke – news which underscores his belief that a top priority for executive educators at business schools is to develop ethical leadership practices and promote principles based corporate cultures. Business schools have a key role both through their cutting-edge research in this area and in translating research so it can be applied and have a real impact in practice. Hard pressed senior executives have a deep responsibility to manage governance, for their organizations and for society as a whole, in an ethical and accountable way, and business schools can provide the support and thought-leadership to support them.