The recent report by Guylaine Saucier on corporate governance is the latest one on a topic that has come under tighter and tighter scrutiny. One of the leaders in governance standards has been Bank of Montreal, and in this article, its Chairman and CEO Tony Comper describes the practices for which the bank received the Conference Board of Canada’s National Award of Governance. From its policy on recruiting directors to its role in ethical oversight, the boards’ exemplary — and best — practices are described.
I’ve got a Board of Directors that does a lot more than keep me on my toes. They also keep each other on their toes, and that, perhaps more than anything else, is what allows Bank of Montreal to lay claim to best corporate governance practices. It’s a claim most recently endorsed by a National Award in Governance from the Conference Board of Canada in partnership with SpencerStuart, the executive search consultants.
I raise these points at the outset only to present credentials for authoring an article like this. When it comes to establishing best practices in governance—not just in financial services but the corporate world generally—Bank of Montreal’s leadership traces back to 1991 and a study we undertook called “Shaping the Board of Directors for the Future.”
Corporate governance was only a moderately hot topic then, unlike today when calls for reform of boards of directors have risen closer to the top of a number of priority lists, both internally and across a wide variety of interested communities: regulators, policymakers, legislators, industry analysts, media critics and (pointedly not least) institutional investors. I won’t even say that we saw the day coming when just such a clamour would arise.
What we did see back in 1991, however, was that from a business point of view, Bank of Montreal’s Board of Directors had room to improve. One of the most obvious reasons was the fact that the board of the day had 29 members. That was well down from our high of 54 in 1975—the year after Peter Drucker concluded that, “There is one thing all boards have in common. They do not function”—but still large compared with the 15 members, myself included, who serve the bank’s needs today. One of the first reforms we undertook was to instigate a “no backbenchers” policy; every member of our board today has plenty of assigned work to do, work that is utterly critical to both the here-and-now and the long-term success of the organization.
Before I turn to the substance of the changes that resulted from “Shaping the Board of Directors for the Future,” I would like to emphasize that reforming our corporate governance practices has been relatively easy. What started out as a management initiative was enthusiastically embraced and taken over by the board itself.
The first step was to clarify the respective roles of the board and management. What this means in practice is that the board is responsible for: selecting, evaluating, compensating and replacing the CEO; shaping, assessing and approving strategic plans and objectives; approving major decisions and corporate plans; providing advice and counsel to the CEO in good times and in bad; selecting directors and evaluating board performance; overseeing ethical, legal and social conduct; and reviewing the financial performance and condition of the bank.
The next step was to develop approval and oversight guidelines, setting out the specific responsibilities of directors and management in order to ensure clear lines of accountability. It was decided that prior board approval is required for any decision, whether tactical or strategic, that could materially affect the bank. For example, the board needs to approve the annual provision for loan losses but it only needs to review routine accounting and reporting issues. In order to ensure completely candid discussion of sensitive issues, it was further decided that management be excluded from a portion of every board meeting. The attributes, roles and responsibilities of board members were then summarized in a one-page Charter of Expectations for Directors.
This led to a major innovation, the Peer Feedback for Directors survey, a peer assessment process in which directors rate one another’s performance each year against the standards set down in the Charter of Expectations. Our directors evaluate each other on a range of skills and qualities that include strategic insight, financial literacy, business judgment and accountability, communication, personal ethics and professional track record. While all is confidential (an outside consultant administers the survey), each director receives a copy of her or his evaluation. As far as I know, we continue to be the only major Canadian corporation that requires its directors to participate in such a survey.
Another key to maximizing effectiveness has been the implementation of an annual Corporate Governance Survey that goes to individual directors, asking them for their opinions on a variety of vital concerns, from the quality of the bank’s strategy to the performance of its management team.
The intelligence gathered in this survey, also fully administered by outside consultants, essentially frames the board’s agenda for the following year. (It may be of interest to know that every year directors are queried about the quality of the program itself—how it stacks up against other boards on which they serve. And every year they overwhelmingly opt for the Bank of Montreal approach.)
The overall responsibility for the governance of Bank of Montreal falls to our Governance Committee, a rare breed in 1991, but much more commonplace today. This is the committee that recommends all board appointments, recruits new directors, accepts resignations, and establishes and mandates the other committees. This is also the committee that conducts annual reviews of the board’s performance, drawing on the Corporate Governance Survey.
Among the policies generated by our Govern a n c e Committee are mandatory retirement at 70 and a requirement that directors tender their resignations if they change their principal occupations. Resignations are also expected from those who fail to attend at least 75 percent of scheduled meetings. And, in a very disciplined way, this committee ensures that we follow a rigorous selection process for new board members. As detailed in the Charter of Expectations for Directors, we choose people who are known for their integrity, accountability, independent critical judgment, financial literacy and mature confidence—people with the experience and history of achievement to guide us toward the highest levels of performance.
I should also point out here that along with the logic of recruiting directors who re p resent markets of growing importance, there is also the logic of recruiting directors who bring a whole diff e rent experience and perspective to the board room table. In keeping with another one of our pioneering efforts that also began in 1991—the advancement of women in the bank and the levelling of the playing field—20 percent (three of 15) of our directors are female.
The board ’s Human Resources and Management Compensation Committee conducts its own independent annual review of the state of the bank’s human resources and reviews management succession plans. This committee also reviews the performance of the bank’s senior leadership team, CEO included, and recommends how each of us should be compensated.
This is one of two committees that judge my performance. While the Governance Committee evaluates my role as Chairman of the Board, the Human Resources and Management Compensation Committee evaluates me as a Chief Executive Officer, producing an annual “CEO’s Scorecard.” Here, from our 1996 publication Accountability and Corporate Governance, is how the CEO of Bank of Montreal is scored:
“This assessment is designed to promote a systematic, rigorous and independent evaluation of the Chairman and Chief Executive Officer’s performance. [It] takes into account the following factors: the bank’s financial performance and condition, the effectiveness of its risk management and control system, marketing and customer satisfaction, human resources management, bank image and reputation, strategy management and board chairmanship.”
As befits a financial services organization, the role of the board’s Risk Review Committee is an especially prominent one. When they join this committee, directors take on the task of ensuring that effective risk control strategies are in place and that they are being followed. What this requires, obviously, is becoming well versed in the bank’s risk-taking activities, and given the many types of risks we encounter—interest-rate risk, foreign risk and liquidity risk, not to mention specific portfolio risk—this can be no mean feat. Since Bank of Montreal is an acknowledged leader in this field, however, the directors on this committee appear to be managing very well.
The board’s Audit Committee, which by legislation is composed solely of outside directors, is responsible for ensuring the integrity of the bank’s financial reporting, reviewing all financial statements before they reach the board level. The Audit Committee is also responsible for ensuring that the proper internal control procedures are in place for monitoring our regulatory compliance program, and for reviewing any transaction or investment that might negatively affect the well-being of the organization.
The board’s Conduct Review Committee plays an ethical oversight role, ensuring that no conflicts of interest arise in dealings the bank may have with related parties (for example, companies led by bank directors) and that the bank’s best interests are scrupulously served. It is also the “customer’s committee,” charged with fielding any unresolved complaints.
This committee also drives a disclosure-of-information initiative that has just about put Bank of Montreal in a class by itself—notably the enhanced disclosure of financial information and the use of more accessible, plain language in our annual report. For eight years running our annual report has been recognized at the Annual Report Awards sponsored by the Canadian Institute of Chartered Accountants and the National Post, three times for Leadership in Corporate Governance.
Our quest for exemplary corporate governance is furthered by a considerable number of policies and pro c e d u res. One critical factor in promoting hands-on involvement in the success of the enterprise is the nature of our directors’ compensation package which, as determined by the board itself, tends to be much shorter on cash and much longer on s h a res. Another critical factor, this time for improving hands-on involvement, is clear, thorough and timely communication, making sure that every director has all the information he or she needs to fully participate in crucial decision-making at Bank of Montreal. Every director is required to have a laptop with e-mail capacity in order to receive a steady s t ream of time-sensitive company information.
What I hope I have shown is that the members of the Board of Directors of Bank of Montreal are doing an important job for us—and that it’s a job they want to do and one they have made their own. As they recognized a decade ago, and as subsequent surveys would confirm and reconfirm, good corporate governance is increasingly seen as simply good business, particularly in the eyes of those all-important and restive institutional investors. In 1997, a Russell Reynolds Associates study in the U.S. found that the “quality of a company’s Board has become an important evaluation factor for institutional investors.” And even more recently, a McKinsey & Company survey of investors found that more than 80 percent “would pay a premium for the shares of a well-governed company.”
So far, with the leadership we assumed a decade ago, and the self-correcting mechanisms we have put in place at Bank of Montreal over the years, we maintain a system of corporate governance that serves us exceptionally well. Not only are we doing it right, but we are seen to be doing it right. We have a Board of Directors that plays an active and indeed activist role in where Bank of Montreal should be going in both the short and long term, and what routes we need to take to get there.
Now that we have these mechanisms in place, it will be all but impossible for this organization to go back to the old days and old ways. People who have been recruited because they think and act for themselves will recruit other people who think and act for themselves. Good governance, to paraphrase Jonathan Swift, also proceeds ad infinitum.