CEO Steps Down As Chairman
Roles of Chairman and CEO Being Separated
Updated March 7, 2007. Waterloo, Ontario. Research In Motion Ltd., the company that makes the popular and revolutionary BlackBerry, announced what are being reported as sweeping corporate governance reforms - reforms being made in the wake of a disclosure of US$250 million in accounting errors related to under-reporting stock option costs. Three and a quarter years of earnings will need to be reduced by the amount of the errors.
In its press release RIM announced that, "Consistent with current best practices in corporate governance, the roles of Chairman and CEO are being separated. Mr. Balsillie has voluntarily stepped down from the role of Chairman to allow future consideration of a non-executive Chairman by the Nominating Committee. Mr. Balsillie will retain his leadership roles as Co-CEO and Director."
In addition, the release states that "the board has been expanded from seven members to nine."
Regarding his stepping down as chairman, Jim Balsillie, says "That one's overdue in everybody else's mind," he said. "That's the No. 1 recommendation by all the governance practices by every single Canadian regulator." "We were one of the last holdouts for separating chair and CEO (positions), which seems to be something that people are focusing in on. Many would say it was due and overdue."
"Going Overboard on the Governance Stuff"
In speaking to Peter Nowak of the Financial Post, Balsillie also stated, "One could argue we are almost going overboard on the governance stuff."
Balsillie will continue as a director. It remains to be seen if the process of electing directors is open and competitive, or whether selected candidates must be nominated by a nominations committee. An executive sitting on the board, and directors selected or anointed by executives will undermine the effectiveness of any professed corporate governance reforms.
Governance Best Practices-Directors Represent Shareholders
Governance best practices requires that all shareholders have a voice in nominating directors and that they have the ability to exercise their franchise in electing directors. In addition, the election of directors needs to be a competitive process designed to give shareholders the best possible representation in the boardroom. The directors need to be accountable to the shareholders in addition to their accountability under law.
RIM Announces Role for Independent Directors
To RIM's credit, it has announced that "A new Oversight Committee of the Board will be established, comprised exclusively of independent directors, whose mandate will include providing oversight into areas typically under the responsibility of management. Among other things, the Oversight Committee will examine executive compensation, the use of stock options as a compensation mechanism, trading by insiders, hiring practices and a general review of activities within the accounting and finance groups." One can only hope that this new Oversight Committee will be objective and will have the ability to enforce accountability.
What is an Independent Director Anyway?
The term "independent director" is applied inconsistently. If it is meant to mean a director not appointed by the CEO or one who is not one of the corporation executives - good. If it means a director who is not a shareholder, but one appointed or nominated by the board for their expertise, say accounting - that can be a problem. The concept that technocrats will somehow be independent or represent the best interests of shareholders is a fallacy and in many ways makes a bad situation worse. If a board needs,say, expert accounting advice, they can hire an account to advise them.
Even if a board nominating committee presents a slate (which may include a technocrat), shareholders present should be able to nominate directors for election in some fashion if not from the floor. Governance best practices require that all directors should be freely elected at general meetings. If needed there will be a contested election - a true election. An open nomination and election process ensures accountability. It stands to reason that shareholders, as any other democratic constituency, have the wisdom to choose individuals who will best serve their interests. A typical board fears an election and tries to push through a slate of their choice. This process does not result in independence.
An independent director should primarily be one who is nominated and elected by shareholders. Corporate executives, CEO included, should not be permitted to either stand as a director, nominate or suggest the nomination of a director.
Corporations where a single shareholder or family holds more than fifty percent of the shares, are in effect private corporations. However, with publically traded corporations, while the majority shareholder may be in a position to stack the board with his or her nominees, the directors will still need to conform to law in their protection of minority shareholder rights. This is especially true for the disbursement of funds to the majority shareholders and their nominees.
CEOs Offer to Reimburse RIM
Balsillie shares the board director and co-chief executive officer titles with Michael Lazaridis. Both are reported to have offered to reimburse RIM C$5 million each to help defray costs related to the accounting review, calling this their "Warren Buffett moment!!".
Balsillie was also "directly involved" in approving stock option grants, some of which were later discovered to have been "accounted for incorrectly". RIM says that "Mr. Balsillie's direct involvement in approving grants diminished over time..." Balsillie adds that the accounting problems were related to RIM's strong growth. "You grow so fast you almost don't pay as much attention to all the governance practices as you should." he said.
Separation of Roles and Powers
Mark Anderson of The Ottawa Citizen wrtes: "Once, long ago, I queried Ottawa tech pioneer Denzil Doyle as to the keys to corporate success.
"The first point he hammered home was that separation of executive and board functions was desirable, if not critical. Executives manage day-to-day operations, boards provide general guidance and safeguard shareholder interests. The two roles are complementary, but in no way interchangeable. Moreover, said Doyle, boards led by or dominated by company executives tend to be ineffectual -- all the more so when, as in the case of RIM, the CEOs are not only board members, but company founders and major shareholders."
This governance practice of separating the role of board chair and CEO, is particularly desirable in publicly-traded corporations where the profit interests of founders who continue to hold both chair and CEO positions might conflict with the interests of shareholders. A conflict of interest may not be a problem and may therefore not be a required practice when the corporation is privately held.
The Need for Governance Practices to Evolve as a Company Grows
RIM made its initial public offering of stock in 1997. It would appear that governance practices did not evolve when RIM evolved from being a private corporation to a public corporation. Most owner/managers of private companies find it diffucult to relinquish the control they had when their company seeks to attract public funds. More importantly, they find the accountability requirements of a public company to be bothersome. What has transpired at RIM is a rude awakening of what these changes can mean.
"There's no question our world is busy, and there's no question your governance practices lag when you're growing that fast," said Balsillie. "These are very important changes. They're all part of becoming a more mature company. The funniest thing is that we just celebrated 10 years of being a public company, and in that time I still think of us as a small company."
The good news is that shareholder confidence in both the corporation and the senior executives appears to remain strong while belated (and somewhat tentative) steps in governance reform are being instituted. However, RIM remains under investigation by the U.S. Securities and Exchange Commission and the Ontario Securities Commission.
Options & Conflicts-of-Interest
Balsillie sites Warren Buffett in his comments. Warren Buffett is both Chair and CEO of a large public corporation. However, Buffett has avoided a conflict of interest by taking a very modest salary and no stock options. He profits when his other shareholders profit. CEOs of many public North-American corporations are often the largest receivers of stock options which are used to compensate CEOs over-and-above their regular salary.
Options scandals in major corporations began to draw attention to the practice of back-dating came to a head about a year ago. At that time, US regulators implemented reporting requirements for the costs of non-cash compensation paid to employees including executives. Options give employees the ability to buy shares in the future at a predetermined "exercise" price. Back-dating the date the stock options were granted, can give the options an instant and higher value.
On March 5, 2006, RIM acknowledged that in many instances, options had been backdated to realize "favorable pricing." "There's no question our administration of our options plan did not line up with U.S. rules, and we accept that and we take all of this very seriously," states Balsillie.
Research in Motion March 5, 2007 Press Release