As its stock tumbled into nothingness, costing investors billions-one institutional investor alone, CalPERS, the retirement fund of California public employees, took a bath conservatively estimated at $105.2 million-Enron became the final block in a game of corporate Jenga that lasted through most of the 1990s bubble market. The tower came tumbling down, destabilizing capital markets and ruining tens of thousands of investors.
When the dust settled, it became painfully clear that Enron's "creative" accounting practices, which included overstatement of earnings to the tune of $600 million annually and resulted in a disclosure of $6 billion in debt weeks after claiming another increase in profits, were hardly unique. Corporate America was infected, and restatements of earnings and declarations of bankruptcy were the symptoms.
WorldCom, another corporate giant spawned by the new economy, revealed it essentially overstated its earnings by some $3.6 billion-over a period of 15 months. Tyco International's senior management allegedly looted the company of at least $600 million. The 50-year-old Adelphia Communications Corp. also fell, with its executives accused of using billions of dollars of company cash for their own benefit. Joining Enron, Adelphia and Tyco among the ruins were its auditors and consultants, a former member of the accounting Big Five, the once-respected Arthur Andersen LLP-the first accounting firm to be convicted of a felony.
What toppled the free-wheeling capitalist Tower of Babel? The stock-holding public howled for payback, blood, and someone to blame. In short order, the unbridled ambition and shameless greed of CEOs, CFOs, and other players who profited on stock options, interest-free loans and inside information were named as key culprits. Greed and ambition, said the pundits, were the root causes of the disease eating its way through Corporate America.
That these characteristics were suddenly bad came as something of a surprise to many in the business world. CEOs-good and bad-always have been ambitious and greedy, as even U.S. Federal Reserve Chairman Alan Greenspan pointed out (he blamed the 2001 meltdown of stock options). So something else had to be wrong. And that something was, simply, the failure of ambitious and greedy players-at all levels of the game-to accept limits. Limits to growth. Limits to ambition. Limits to power. Limits to personal profit. Limits, in the case of Arthur Andersen, to scope of services offered (and potential of fees earned).
"There were warnings along the way, but everyone becomes invested in the process, and people believed their own bullshit," says Edward Waitzer, chairman of Stikeman Elliott. In the heated atmosphere of the bubble market, everyone believed everything was going to keep on going up and up. Analysts, investment bankers and investors themselves put pressure on companies like Enron to keep on growing by 12, 15 per cent a year. Hey, 20 per cent in organic growth was possible. Naysayers were not tolerated. Not even the sky was the limit.
The only ones accepting limits were directors of certain public companies. Compliant in fulfilling circumscribed roles, they abdicated their oversight responsibilities and allowed senior management to go unsupervised on the ethics-and-integrity skirting rollercoaster ride of the 1990s. Their failure brought governance of public companies under the microscope, suggesting its principles-namely, transparency, disclosure, and rigorous oversight of what those ambitious and greedy executives got up to-weren't an integrated part of the corporate landscape. Even those who really should have known better apparently didn't get it: as he was churning out post-Enron corporate governance standards for America's companies, the Securities and Exchange Commission's (SEC) Chair Harvey Pitt found himself getting the boot for failing to understand what disclosure meant in actual practice.
Corporate America had to be cleaned up and re-educated on what good corporate governance was, and what disclosure and oversight really entailed. And so, against the backdrop of the ruins of Enron, WorldCom, Adelphia, Tyco, and the 950 companies the SEC asked to restate their earnings, the U.S. Congress passed the Sarbanes-Oxley Act, an immense legislative club intended to whip Corporate America into shape and force at least some limits on the ambitious and the greedy.
North of the 49th parallel, Corporate Canada was following its own lugubrious path towards corporate governance compliance. It was a path heavy on reports and committees-the Dey Report in 1994, the Allen Committee Report in 1997, the Saucier Report in 2001-and light on action and enforcement. The path more travelled was typified by a voluntary approach to compliance with the best practices of corporate governance-an approach different from the more prescriptive and rule-heavy approach down south even in the pre-Enron and pre-Sarbanes-Oxley days. It was a path that favoured principles and guidelines over rules and regulations. And it was working out very well, thank you, said Corporate Canada, as represented by bodies such as the Toronto Stock Exchange (TSX), the sponsor of most of Canada's corporate governance committees and reports, and the Canadian Council of Chief Executives. After all, Canada had no scandals comparable to Enron, and even Enron Canada was solvent, and, amazingly, relatively unsplattered by the mud coming out of Houston.
Well, there was the rather sordid case of YBM Magnex International, Inc., still being played out before the Ontario Securities Commission (OSC), [which saw the FBI investigate the company as early as 1998] and Cartaway Resources Corp. And then there was Bre-X Minerals Ltd., which had soared to a market cap of $6 billion on the strength of salted core samples, and was crumbling just as Peter Dey, now a partner with Osler, Hoskin & Harcourt LLP, was completing the Dey Report. And VisuaLABS. And Blue Ranger Resources. And...
"Nothing happened as a result of Bre-X, nothing happened as a result of Cartaway, and nothing happened as a result of YBM," says Thomas Allen, Q.C., a partner with Ogilvy Renault in Toronto and chair of the Allen Committee, which produced one of the successors to the Dey Report. Both the Dey Report and the Allen Committee Report examined corporate governance practices in Canada, and found plenty of room for improvement. Allen notes that legislation stemming from the Allen Committee Report's recommendations, "was prepared by the OSC and was, metaphorically speaking, sitting wrapped in a box with a ribbon on it, and nothing happened. There simply was not the legislative will to implement the recommendations, or the legislation was seen as overkill."
Nothing happened, or, given Canada's past track record, was likely to happen, as a result of Enron either. Then came Sarbanes-Oxley. Its scope sent major Canadian issuers reeling, and it achieved what no Canadian corporate scandal, from Bre-X to YBM, had managed. It forced regulators, public issuers and their lawyers to shake off their complacency, put aside national sanctimony, and gaze deep into the navel of Canadian corporate governance. All was not rotten, but neither was it rosy. Outright fraud and poor board oversight littered the landscape. Ineffective, conflicted or simply confused directors allowed "rockstar" CEOs to run companies as virtual fiefdoms. And the legal profession, which should have been earning its fees by molding strong and ethical corporate governance practices, was itself struggling with the concept of limits, i.e., law firm partners sitting on the boards of clients. In the meantime, the 13 Canadian regulators-one for each province and territory-were themselves conflicted over an appropriate response to Sarbanes-Oxley.
That a response of some sort was necessary was perhaps the only item not up for debate. At stake, as David Brown, Q.C., chair of the OSC, reiterated time and time again, was investor confidence in the Canadian capital market, not to mention the hard-won multijurisdictional disclosure system agreement with the U.S. The Ontario government moved first, amending and expediting legislation that would enable the OSC to pass rules in many of the areas identified by Sarbanes-Oxley. Even as the OSC refined its original position, reconsidering whether it was appropriate to import wholesale Sarbanes-Oxley provisions given the very different profile of the Canadian issuer-much smaller in size and accessing a market exponentially smaller than that of the largest capital market in the world-its approach to Canadian securities regulation post-Enron was very much coloured by one fundamental, underlying premise. "There's a North American market, not a Canadian market," as Maureen Sabia, a Toronto-based lawyer and director of a number of public companies, including Canadian Tire Corporation, Limited and O&Y Properties Corporation, puts it.
"I don't think Canada can afford to be very far behind the U.S. in terms of its regulatory environment," argues Sabia. "If Canadians want to take advantage of the North American market, they have to have a regulatory environment in which investors have confidence. I don't think Canadians have a lot of choice in the matter." It is an attitude prevalent in Toronto. Says Christopher Koressis, a partner with Toronto-based Fogler, Rubinoff LLP, "We're so closely tied to the United States, and we do so much transborder business, it would be advantageous to make the rules as consistent as possible. I don't know if a made-in-Canada policy is the right thing to do."
Out west, they don't see things quite the same way. "We do have some philosophical differences with our friends in Ontario," says Douglas Hyndman, chair of the British Columbia Securities Commission (BCSC). The BCSC and the Alberta Securities Commission (ASC), along with the TSX, have been arguing that Sarbanes-Oxley is grossly inappropriate for most Canadian issuers. ASC Chair Stephen Sibold, Q.C., was no fan of the U.S.'s "very prescriptive, rules-based, heavy-handed regulation approach" to securities regulation even before Sarbanes-Oxley. He's even less enamoured now. The U.S. regulatory model, says Sibold, "is the most complicated and costly system to comply with in the world. The U.S. capital markets flourish in spite of their system of regulation, not because of it. It works well in the U.S. because the capital markets are simply so large that people can afford to comply with the rules."
Out west, they don't see things quite the same way. "We do have some philosophical differences with our friends in Ontario," says Douglas Hyndman, chair of the British Columbia Securities Commission (BCSC). The BCSC and the Alberta Securities Commission (ASC), along with the TSX, have been arguing that Sarbanes-Oxley is grossly inappropriate for most Canadian issuers. ASC Chair Stephen Sibold, Q.C., was no fan of the U.S.'s "very prescriptive, rules-based, heavy-handed regulation approach" to securities regulation even before Sarbanes-Oxley. He's even less enamoured now. The U.S. regulatory model, says Sibold, "is the most complicated and costly system to comply with in the world. The U.S. capital markets flourish in spite of their system of regulation, not because of it. It works well in the U.S. because the capital markets are simply so large that people can afford to comply with the rules."
The companies accessing those markets are larger too. By U.S. standards, the vast majority of Canada's 4,200 public companies are micro-cap. Fewer than two hundred of them are large enough to interlist on the U.S. exchanges. The interlisted companies, says Sibold, are telling the regulators they're going to comply with Sarbanes-Oxley anyway. "All they're asking is that we don't make things more difficult for them with conflicting legislation." It's the smaller issuers who are protesting being held up to the standard set by Sarbanes-Oxley, and it is for these small issuers that Sibold and the ASC have been pushing two-tier regulation (now relabelled, proportionate regulation) long before the Enron legislative aftermath.
Signed into law on July 30, 2002, Sarbanes-Oxley is a public accounting reform and investor protection Act that, as John Kazanjian of Osler, Hoskin & Harcourt LLP points out, serves as a checklist of all the things that went wrong at Enron. The act requires CEOs and CFOs of all public companies to certify the company's periodic reports and financial statements. "The day of a CEO saying I did not know what was going on or I didn't understand the financial statements is now over in the U.S.," says Frank Allen, a partner with Borden Ladner Gervais LLP in Toronto.
It also prohibits most loans to directors and executive officers, protects whistleblowers, places more rigorous and numerous reporting obligations on companies, and, among a myriad of other provisions, attempts to make boards of directors, especially their audit committees, more active and effective by making them independent and stacked with "financial experts".
But in its attempt to restore accountability to a corporate culture permeated with the concept of the borderless economy, Sarbanes-Oxley itself recognizes no limits or exceptions. All public companies have to play by the same rules, regardless of size, and all foreign issuers either interlisted on the U.S. exchanges or making any sorts of submissions to the SEC are subject to its provisions.
And there's the rub for small Canadian issuers, if Sarbanes-Oxley style legislation is enacted domestically. Smaller issuers such as Calgary's junior oil and gas companies, explains Allen, already have a hard time attracting directors, pay them very little, and feel they have little hope of getting a majority of independent directors, let alone a financial expert, on their audit committee.
As currently proposed by the SEC, a financial expert is someone who has: (i) an understanding of generally accepted accounting principles (GAAP) and financial statements; (ii) experience applying GAAP in connection with accounting for estimates, accruals and reserves comparable to those used in the public company's financial statements; (iii) experience preparing or auditing financial statements that present accounting issues comparable to those raised by the public company's financial statements; (iv) experience with internal controls and procedures for financial reporting; and (v) an understanding of audit committee functions-essentially, someone who has been a principal financial officer, controller, principal accounting officer, public accountant or auditor of a public company.
Got that? Despite an expected surplus of CAs in the market-how many unemployed Arthur Andersen partners are there out there?- "It's not a wide universe of people in the States, let alone here," says Allen. Moreover, as highly qualified professionals (and experts), these people expect to be paid, and paid well. So what's a small oil and gas company, which is paying its directors in stock options, to do?
Stephen Sibold and Douglas Hyndman suggest they be allowed to play by more lenient rules, such as striving for a majority of independent directors, with the best practice being a fully independent board with an independent audit committee. At the OSC, David Brown is also softening his stance and considering an approach that doesn't "constitute an unfair burden (on the) resources (of small-cap companies) and an unacceptable barrier to their ability to compete."
Not everyone buys the "we're too small to comply" argument. "I always get nervous when someone says high standards shouldn't apply because it's going to make it difficult for people to do business. I have a lot of trouble with that general concept. Don't make the rules for enforcing compliance too high because it will make it too difficult to do business-I don't buy that," says Lawrence Pringle, a partner with the Toronto and New York offices of Baker & McKenzie.
At Oslers, Kazanjian agrees, "We've got to understand that doing right means doing right. Should the CEO of a small company not certify its financial statements just because it's a small company? I should have a license to lie because I'm a small company? That's bizarre." Partner Peter Dey concurs. "The small companies-it's even more critical for them to hold out to the capital markets that governance is important."
But is it? "Everybody today will be very quick to give you lip service to corporate governance. When it comes to applying it, that's a much more difficult issue," says William Rowley, Q.C., chairman of Toronto-based McMillan Binch LLP. "I see managers who still hold back from their boards of directors relevant information, and they think they're doing the right thing. When it comes to the boards themselves of non-executive directors, most of them don't have a real knowledge of what a board is all about and what their job is about. Many of them come from the old school of directors' appointments in Canada, which see appointees come in who feel that the most important job is to be the supportive ally of management."
What boards should be doing-and what Enron made clear many boards were not doing-is acting as chief critic, watchdog, and "an investor's first line of defense," says Stephen Cooper, the new CEO at post-scandal Enron, as well as chairman of worldwide operations at Kroll Zolfo Cooper LLC. In their oversight capacity, boards create the limits within which management steers the company. To do their job effectively, stresses Cooper, boards must be "100 per cent independent-and that means no insiders, no friends, no business relationships and no CEO."
Cooper goes further than Sarbanes-Oxley, which, despite its overall scope, shies away from attacking that career pinnacle, the ultimate achievement: CEO and chairman of the board. "The two positions should have been separated years ago," Maureen Sabia says emphatically. But it's another limit the vast majority of the North American business community is unwilling to accept. Canada has made more strides in this direction than the U.S., with the Dey Report and the Allen Committee Report both recommending that the two roles be filled by different people (albeit, as a result of pressure from Corporate Canada, both reports softened the language of the recommendations considerably between draft and final versions).
While not yet enshrined in any legislation, separation of the chair and CEO roles is coming to be accepted as a best practice in Canada, albeit slowly. For Cooper, Sabia, and many other governance experts, it's an essential part of good governance.
As a member of the senior management, the CEO to a large extent controls what information is put before the board. The chair sets the agenda and steers the board meeting. The person who fills both roles ends up with an excessive amount of power and control. And, if he is what Cooper calls a "rock star CEO...more interested in self-promotion and entitlements than the slow, hard work of value creation," the company he is managing and overseeing is in trouble.
The media has been complicit in creating and promoting the rock star CEOs, plastering their faces on covers of Business Week, Time, and, in Canada, Report on Business and Canadian Business. "When you do the post-mortems on all these scandals, dominating personalities are almost always a factor," says Brock Gibson, a partner with Blake, Cassels & Graydon LLP in Calgary. As Gibson's partner Dallas Droppo points out, dynamic personalities tend to rise to the top.
But the deluge of recent scandals has amply illustrated the danger of leaving a company's long-term health in the hands of a self-promoting, self-interested charismatic executive who has the board of directors in his pocket and no checks or balances on his schemes. A prime example lies in VisuaLABS's former CEO (and chairman of the board) Sheldon Zelitt and his allegedly non-existent 3-D technology, still being prosecuted by the ASC and sued by his former company. Before being suspended and then fired by his board, Zelitt routinely fired those directors who questioned him.
The charisma of the rock star CEO seems to make otherwise smart and cautious people do stupid things. Says William Rice, national managing partner of Bennett Jones LLP, "People have a sense of how things should be done and who is not doing it, but they seem to tolerate this. You hear of rather outrageous conduct, and in many cases, you should have seen that coming. There's a history of bad behaviour. But the business community doesn't sufficiently exercise internal restraints. People seem to get enamoured with a personality and ignore risks that come with the personality."
If the CEO-rock star or not-in addition to being the chair of his board, also controls the selection and instruction (not to mention the firing) of the company's auditors, lawyers, and consultants, as well as the nomination (and essentially the election) of the directors, then "the name of the game was make the CEO happy, and you become happy," says James Goodfellow, an accountant and partner with Deloitte & Touche. That's a recipe for a dependent board, which is a recipe for disaster. And it has implications for lawyers that cut very close to the bone. The focus on conflicts and board independence coming out of Sarbanes-Oxley has cast a shadow on one of the legal profession's favourite business development practices: sitting on the boards of clients.
Arthur Andersen got into trouble, like its clients, by failing to accept limits-in its case, limits on the types of services it provided. The accountants filled two incompatible roles, those of auditors and of consultants. In doing so, they compromised their ability to deliver impartial judgments and inadvertently (or not) created situations in which their partners would have to make questionable judgement calls. Lawyers, some observers suggest, put themselves in a similar situation each time they accept a seat on the board of a client.
According to Stephen Cooper, lawyers should never sit on boards of clients. Ever. "I don't think they're independent if they or their partners are acting for the company," he says. "That's not to say the lawyer on the board is a good guy or a bad guy. But why would you ever put anybody in a position to worry about which way to make a decision, because of the backdrop of personal and professional self-interest? You run a risk, regardless of how good the lawyer is, of not being as effective as you would be otherwise," both as the company's director and as its legal advisor. Even without conflicts brought on by dual roles, says Cooper, external advisors such as lawyers and accountants have had a propensity to become "lapdogs of management."
For some law firms, this conflict is as obvious as the solution. "We have a firm policy that prohibits lawyers at Baker & McKenzie worldwide from sitting on boards," says Lawrence Pringle. That policy predates Sarbanes-Oxley and Enron by many years. If they sit as directors on boards of clients-as they generally do-what should lawyers do, Pringle asks with "information picked up [in a role as] a director in the course of a board meeting that may bear on advice that's given? How do I, as a partner in a law firm, not pass that on to my partner down the hall who is providing legal advice to them? On the other hand, if a partner of mine finds out something in the course of providing legal advice-let's say he discovers there's something wrong with the expense accounts of the CEO-what does he do? Does he come and tell me, and what's my responsibility? And if he doesn't tell me, what's our responsibility as a law firm to that client? There are huge issues like this that have now been compounded by Sarbanes-Oxley."
The issue is not so clear cut at Davies Ward Phillips & Vineberg LLP, one of Canada's top corporate law firms. "There's a bit of a resistance on part of the firm to lawyers acting as directors," says Carol Hansell, a corporate partner and author of Directors and Officers in Canada: Law and Practice (1999) and What Directors Need to Know about Basic Corporate Governance (Carswell, February 2003). Conflicts and liability are a concern, but the chief reason Davies Ward doesn't like to see its lawyers on boards is workload. Explains Hansell, "If you're doing your job properly [as a director], it's very time consuming and we already work very hard."
According to Hansell, "What you should do is make lawyers part of your governance team. It's a mistake to do it the other way. You need somebody who's providing advice on the specific issues, and not getting involved in the fiduciary sorts of things that a director would be concerned about." And that's apart from the liability issues. "If you're sitting on a board, and one of the reasons they wanted you to sit on the board is because you're a well respected lawyer, and they ask you a legal question-there's a concern about whether or not your professional liability insurance would cover those circumstances."
The situation is more or less the same at Blakes. The firm isn't actively discouraging its lawyers from serving as directors, but Brock Gibson is reducing his directorships anyway. Says Gibson, "There are lawyers for whom it's good business development to be on boards of clients. There are business decisions being discussed, you can provide input, you can help steer the company in a good direction-there are lots of good reasons for a law firm to have that close relationship and interplay."
However, Gibson prefers to do without the potential awkward situations that develop when lawyers wear the two hats of director and advisor. "I can stay close to my clients anyway," he says. In Calgary, that's a rare attitude. The top corporate lawyers at firms like Burnet, Duckworth & Palmer LLP, Macleod Dixon LLP and Bennett Jones are frequently directors on client boards. Peter Lougheed, P.C., C.C., Q.C., Alberta's former premier, now counsel to Bennett Jones, appears to be on virtually every board in the city.
"Our view [i.e., Bennett Jones] still is that we have a lot to contribute to boards of clients," says Bill Rice, who sits on a number of boards of both private and public companies, and currently serves as chairman of the board of Tesco Corporation and MILIT-AIR Inc. Clients need people they are comfortable with and whom they trust. Their lawyers, he explains, fit the bill. And, of course, "It's one way to strengthen relationships with clients."
Post-Enron, however, even Bennett Jones is likely to revisit its board policy. Says Rice, "We'll probably look a little harder at that policy going forward, and see if it should be as open as it is, and if we should be as encouraging as we are about our lawyers sitting on boards.... If we found ourselves walking into squabbles, we would walk away." But why, asks Stephen Cooper, would any lawyer want to put himself in that position in the first place?
That's surely a question that Cassels Brock & Blackwell LLP and David Peterson, P.C., Q.C., former Ontario premier and now chairman of Cassels Brock, must be ruminating. Peterson, of course, is a former YBM director. There is little question that the views of Barry Reiter at Torys LLP represent the opinion of many corporate lawyers. "Here's a guy whose job in life is to be a director and to bring legal work to his firm through that. And now he is at risk for everything. The odds that he will be asked to be on another board, regardless of the OSC's decision in YBM, are small. So, for $20,000, $30,000 a year, he exposed his whole livelihood. And for what?"
In the U.S., more and more law firms, like Baker & McKenzie, are preventing their partners from sitting on boards of public companies. Bill Rice recalls the reaction of colleagues down south when discussing appropriate liability insurance for a partner elected to sit on the board of a U.S. public company. "They basically said it would be a frosty Friday before they would get one of their partners on a board of a public company. They were horrified at the thought of exposing themselves to that risk," he says. "We're not there yet."
"It's not a good time for the accountants," concedes James Goodfellow of Deloitte & Touche. But blaming accountants does not move Canadian corporate governance practices forward. Says Maureen Sabia, "We have to be careful not to react in a knee-jerk fashion to what is perceived to be the public desire to beat up on the accountants. We have to be careful not to step on a trendy bandwagon, because the flavour of the month changes every week." According to Sabia, there's more than enough blame to go around, and almost everyone involved is complicit to some degree. And, as Sabia and Goodfellow argue in their book, Integrity in the Spotlight: Opportunities for Audit Committees, involving everyone, from directors through to management, auditors, corporate counsel, and external advisors such as accountants and lawyers, is what it takes to create good corporate governance practices. Despite the current focus on independence of boards, if companies are to be effectively governed, they should aspire to interdependent relationships, in which management, the board, its committees, and external stakeholders, including auditors and legal advisors, recognize the interdependence of the relationship among them. In this interdependent relationship, the partners communicate openly and candidly and trust each other's motives and goals.
And, will this atmosphere of trust be fostered by the various provisions of Sarbanes-Oxley? William Rowley thinks not. "I think we are overreacting to the problems that we've seen in the last year. Don't get me wrong, the problems have been horrendous and they've done huge damage to our public markets and to our wealth-building, but to react in the way we have, I think, is perhaps understandable, but not helpful. First of all, the law was there, and the obligations we're worried about not having been lived up to, they were there already. All Sarbanes-Oxley and the copycat legislation is doing is to impose a series of legislative checklists of extra steps that must be taken to insure that we are doing our job. Those are highly intrusive, they are expensive, and they create a culture of 'if we check this box, we are going to be okay.'"
That culture is not aspirational, with no impetus to go beyond the bare requirements of the rules. It also sends advisors, lawyers and accountants, searching for loopholes, with the attitude that if there's no rule prohibiting an action, then it's not illegal, however unethical it may appear. And that's dangerous. It leads to Enrons. After all, on paper, Enron had stellar corporate governance. "But fundamentally it was not complying with the spirit of the principles," says Douglas Hyndman.
For Hyndman, "The events that led to Sarbanes-Oxley-Enron and WorldCom-demonstrate the need to get away from prescribed rules and back to principles." The rules versus principles debate is one of the key philosophical differences between the ASC and BCSC versus the OSC in their quest to cleaning up corporate governance post-Enron, and, along with the voluntary versus mandatory approach, a key difference between the overall Canadian and U.S. attitude to compliance.
But the debate, to a large extent, is futile. As OSC's general counsel Susan Wolburgh Jenah observes, "The debate is a superficial one, because neither on its own is a possibility." From the other side of the line, Hyndman notes, "Unethical people don't comply with either rules or principles." And that's the challenge of corporate governance post-Enron-how to make lying, cheating and stealing difficult for those without ethics without completely stifling what Frank Allen at Borden Ladner calls the "creativity and entrepreneurial flair...of a lot of well-intentioned business people."
The backlash to the rock star CEO, in the form of a cult of the dull and staid, has already started. Many companies are questioning what pre-Enron everyone believed were legal (and ethical) off-balance sheet transactions-just aggressive ones. And it's likely their lawyers will likewise be much more cautious. Says Chris Koressis, "I think what Enron and WorldCom have taught us is it's better to be on the conservative side and the cautious side. It's really a wake-up call to some of the more aggressive companies that have a so-called "cowboy" or "cowgirl" culture. The cowboy mentality-Enron is probably a good example of a company where the culture is, do what you can to increase our business, and the rest will fall into place, and people run around trying to increase business at all costs. You really can't do that. You have to have some controls and policies."
Regardless of where Canadian regulators end up, corporate governance in Canada, North America and in the world is going to change drastically. "There's never been such a premium attached to good governance in the capital markets," says Peter Dey, and, in the final analysis, this premium is coming out of market pressure, not Sarbanes-Oxley. "If there was no Sarbanes-Oxley, but a market response, boards would have had to act anyway," says Harold MacKay, O.C., Q.C., chair of Saskatchewan-based MacPherson Leslie & Tyerman LLP. MacKay recently completed a report on the state of Canadian securities regulation regimes for the Department of Finance. Thomas Allen at Ogilvy Renault emphatically agrees: "The market is self-policing to a great extent. The market will pay a premium for a company that is seen to be well-governed, and the reverse is also true. The market will extract a haircut from companies that are seen to be ill-governed." Ironically, the very human failing that caused Enron & Co.-looking out for number one-may be the human characteristic that restores credibility to corporate governance practices. "It's very much in the interest of the company, its directors, its officers, and its shareholders that they govern the company in such a way that it is seen to be well-governed," says Allen.
Being well-governed does not preclude reaching for the sky-the man chosen to salvage Enron lacks neither ambition nor self-interest. But what Stephen Cooper and other governance experts prescribe for the ills of Corporate America, essentially, is a recognition that the end does not justify the means and that living and surviving in the real world means recognizing certain limits: limits on growth, limits on profits.
"This very real pressure to achieve organic growth rates of 12 per cent annually is insane, and the myopic focus on quarterly stock price-as opposed to long-term value-is at the root of some awful judgment calls," says Cooper. Restoring a culture of accountability must include a re-alignment of personal and corporate interests, in which compensation, for boards, CEOs and management, is tied to "real results, not earnings management." He calls for public companies to "embrace decision-making that's geared towards the long-haul-at a risk of a short-term dip in the stock price.
Will investors (and analysts) allow this? Will lawyers consider stepping off clients' boards? Will Corporate America and Corporate Canada accept limits? Enron didn't. Arthur Andersen didn't. The lesson for the survivors should be obvious. Those who do not learn from history are doomed to repeat it. The first Tower of Babel fell four thousand years ago.
Marzena Czarnecka is a Lexpert staff writer. In addition to the persons quoted above, she gratefully acknowledges the time and contributions of James Turner of Torys, Pamela Hughes of Blake, Cassels & Graydon, Perry Spitznagel and Martin Lambert of Bennett Jones, Grant Zawalsky of Burnet, Duckworth & Palmer, and Harold Reasoner of Vinson & Elkins, to the materials and files used in preparing this article.