Globalization and Corporate Governance: Ne'er the Twain Shall Meet?
Publication:
The Empire Club of Canada Addresses (Toronto, Canada), 8 Nov 1990, p. 132-141


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Fullerton, R. Donald, Speaker
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Text
Item Type:
Speeches
Description:
Corporate governance. A set of principles that direct and limit the actions of a corporation and its officers. The act of institutionalizing ethical business behaviour in the corporate setting. The new environment of the global economy; a new business approach. Successes and failures. Corporate governance as a key ingredient to long-term business success. Some results of globalization. A period of massive transformation and upheaval in financial markets. The opportunity for some ambitious companies to be reckless. Alternative sources of funding. Fee-based advisory services. The example of the investment house Drexel, Burnham, Lambert and its junk bond guru, Michael Milken. The infamous battle for control of RJR Nabisco. The end of the 1908s; for many, bankruptcy. The need to revisit basic priorities and re-emphasize qualities that reward honest, responsible management and sound, long-term thinking. The role of legislation in business. The lack of need for legislation when principles of corporate governance are in place. The integrity and competence of directors and management. The responsibilities of management. Characteristics of corporations and international business leaders of the future.
Date of Original:
8 Nov 1990
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English
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The speeches are free of charge but please note that the Empire Club of Canada retains copyright. Neither the speeches themselves nor any part of their content may be used for any purpose other than personal interest or research without the explicit permission of the Empire Club of Canada.
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Full Text
R. Donald Fullerton Chairman and Chief Executive Officer, Canadian Imperial Bank of Commerce
GLOBALIZATION AND CORPORATE GOVERNANCE: NE'ER THE TWAIN SHALL MEET?
Chairman: Harold Roberts President

Introduction:

Charles Flint, a daring speculator, operated in Wall Street at the turn of the century. Once he found himself in serious financial straits, and knowing J.P. Morgan, the elder, slightly, he approached him for a loan.

Mr. Morgan consented to take a stroll with him to the Battery. He talked polite nothings, however, the entire time. Finally, after about an hour, Flint blurted, "But, Mr. Morgan, how about that million dollars 1 want to borrow?" Morgan held out his hand to say goodbye and answered, "Oh you won't have any trouble getting it now that we have been seen together."

Images are important! But, by far, values reflect the depth of an organization.

When one thinks of the Canadian Imperial Bank of Commerce, there is an image of power, strength and stability. The second largest chartered bank in Canada and the fifth largest bank in North America in terms of assets, fourth in terms of deposits, 1,561 branches in Canada and 86 Corporate Banking Centres around the world.

The bank has been in operation since 1961, but its roots go back to the Canadian Bank of Commerce, incorporated as the Bank of Canada in 1858 and the Imperial Bank of Canada, incorporated in 1875.

Image is important.

But the 1989 Annual Report of the Bank reflected a sense of values, and I quote:

"Quality of service will be the big factor in determining financial industry leadership in the 1990s."

"C.I.B.C. employees are going beyond the procedures manuals and exercising Initiatives in dealing with their customers." "C.I.B.C.'s commitment forged over a century ago, to the highest standards of Integrity and ethical principles remains in force today." "Delivering service that meets customer expectations and falls within budget--calls for Creativity in large measure."

"Service quality programs, initiatives, ideas and solutions are all for nothing unless a fundamental Respect for people underlies every activity."

Initiative, Integrity, Creativity, Respect. These are value words that reflect great depth.

At the helm of this great financial institution is R. Donald Fullerton. As Chairman and Chief Executive Officer of the C.I.B.C. Group of Companies he has given the bank a lasting legacy; an entirely different approach to performance that is profit oriented, but people centred. He has encouraged the growth and development of management talent that recognizes that banking is people business. The Bank of Commerce is a leader in the field of philanthropy. They are generous corporate citizens.

Born in 1931 in Vancouver B.C., Mr. Fullerton graduated from the University of Toronto with a B.A. in 1953. He joined the bank later that year and served in a variety of positions ultimately becoming C.E.O. in 1984 and Chairman in 1985.

He enjoys golfing and skiing but his true recreation must be family life; he has six children.

We welcome Mr. Fullerton to The Empire Club of Canada, as he addresses us on Globalization and Corporate Governance: Ne'er the twain shall meet?

Donald Fullerton:

I'm particularly delighted to be here at The Empire Club today to talk about a subject sorely neglected in recent years. That subject is corporate governance, the development of--and adherence to--a set of principles that direct and limit the actions of a corporation and its officers. You could call it the act of institutionalizing ethical business behaviour in the corporate setting.

Over the past decade, the airwaves and pages of the business and financial media have been filled with tales of the excesses of corporations that have ignored the need for corporate governance in their quest for global recognition. Their failures have also been recorded.

As well, the decade that gave rise to these developments played host to a now memorable epoch in the world of business. The 1980s will be remembered as the years in which the international economy really came of age. Advances in information technology, deregulation of financial services and the erosion of trade barriers combined to make the global marketplace the only marketplace for many businesses serious about staying competitive.

Success in the "trans-national economy" of the 1980s, to use Peter Drucker's phrase, meant penetrating the broad spectrum of global but local markets. It also meant managing international money, credit and investment flows between the financial centres of North America, Europe and Asia.

In other words, the environment called for a new business approach that was appropriate for the times. The global imperative of the day demanded that companies think globally about their business plans, strategies and decisions if they wanted to stay ahead of their competitors. In the face of this challenge, a new business mentality with one single-minded objective came to the fore: success on a global scale, no matter what the cost.

In the no-holds barred, all-or-nothing arena that emerged, there were a number of notable success stories for businesses operating on an international scale. Companies like Northern Telecom in Canada, Proctor and Gamble in the U.S. and a number of corporations in Japan have demonstrated their ability to more than meet the demands of global competition. On the other hand there have also been some spectacular failures. "The secret of life," Groucho Marx once quipped, "is honesty and fair dealing. If you can fake that, you've got it made." As we look back over the past decade, we can see that many short-lived global corporations took this light-hearted advice seriously.

Looking back over the last ten years, we can only wonder how so many corporations went so wrong in their effort to be competitive in the global environment. Now, as business plots its future course, it is clearly evident that corporate governance has come out of the shadows and regained its prominence as a key ingredient to long-term business success. And that if corporations intend to survive in the international marketplace, they will need to abide by its principles.

In my view, the re-emergence of corporate governance as a determining factor of success or failure in today's global business arena is no accident. The mood of business in the '90s is more cautious and measured than it was in the last decade. In this environment, international corporations have had to become more selective in the kinds of business they choose to do in different countries. They have also had to be more sensitive to the prevailing values of countries where they operate. Each country has its own set of laws, conventions and business practices. Consequently, principles of corporate governance must of necessity take full account of these factors.

It's a sobering thought that the laws and values of different countries within the European Community, for example, not only differ from those of the United States and Japan, but are also quite different from each other. On a global scale, even the simplest of corporate governance principles--the legal responsibilities of directors, for example--takes on quite a perplexing dimension when considered in this light.

For those corporations operating globally, the issue is whether strict adherence to a single set of principles of corporate governance is an impediment to success in the marketplace. Can companies doing business in a number of local markets around the world realistically follow one standard, universal set of rules? Or, when in Rome, should these businesses just do as the Romans?

In my judgment, the answer to these questions is unequivocal and clear. The variation of laws, conventions and business practices between countries poses no dilemma for corporations with well-defined principles of business conduct. Quite the contrary. These companies are usually successful internationally precisely because they consistently maintain the same standards of corporate conduct wherever they do business. Only the strongest commitment to--and enforcement of--a single, universal set of principles through a strong corporate board and an effective senior management team will create the right setting for leadership and success in today's global marketplace.

As a result of globalization, business has been living through a period of massive transformation and upheaval in financial markets. In this climate, many corporations have recklessly attempted to move into the limelight on the global scene with little more behind them than audacity, a lot of imagination, and some creative financing. Nowhere are the effects of this process more evident than in the financial sector. In Canada, as in other countries, the 1980s catapulted the Canadian banks from the comforts of their own familiar domestic and international turf into a new world of intensified and increasingly creative competition.

Unfortunately, the integration of the world's financial markets and the rapid development of innovative financial products not only changed the industry, they also unwittingly gave ambitious companies the opportunity to be reckless. The proliferation of leveraged buyouts and highly

leveraged transactions that emerged towards the end of the '80s was a direct result of this new found creativity. A host of new financial products gave companies the opportunity to borrow vast sums of money with only a promise to pay it all back later.

The creativity was not simply confined to LBOs and HLTs. With such a wide array of seductive financial vehicles at their disposal, chief financial officers were no longer obliged to go to financial institutions to meet their needs. They found it was relatively easy--and cheaper--to side-step intermediaries and go directly to the suppliers of funds.

As a consequence, financial institutions were no longer called upon for their traditional lending services. Instead, they turned their attention to fee-based advisory services, such as merchant banking, asset securitization and private placements, to keep their profit margins buoyant. This allowed them to temporarily finance some of the ill-conceived business objectives of their clients. But regrettably, as the markets deteriorated, these temporary financing activities frequently became permanent. All too often, playing by the established rules was no longer as important as going after the quick hit that promised huge profits at relatively little risk. In the corporate boardrooms of the day, the issue of corporate governance had virtually lost its seat at the bargaining table.

Probably more than any other, the event which best captured the spirit and the essence of the decade was the meteoric rise and fall of the investment house, Drexel, Burnham, Lambert and its junk bond guru, Michael Milken. The predominance of Drexel and Milken, and the almost insatiable prevailing appetite for takeovers stemmed from one simple economic idea: junk bonds. These high-yield investments reflected the greater risk inherent in highly leveraged transactions. And they proved, in the short term, to have great investment potential.

Junk bonds, Milken reasoned, also had another function. They could be used to finance lower quality borrowers--aggressive companies which could not easily get credit from more conventional sources.

As the corporate establishment was not long in finding out, he applied these two strands of logic to dramatic--and highly lucrative--effect. By the mid 1980s Drexel had assumed the role of kingmaker in a corporate kingdom desperate for success and quick results. Milken's now legendary ability to raise capital from his junk bond buyer network was as good as money in the bank.

Along with other traditional values, prudence, long-term commitment and the interests of shareholders were firmly on the back burner, and the era of mega-takeover deals was in full swing. At its height, the investment banking frenzy found it's most sublime expression in the now infamous battle for control of RJR Nabisco. Playing for such high stakes, Wall Street went to war, with almost every mergers and acquisitions team in the business shamelessly fighting for a piece of the action--and a chunk of the immense financing and advisory fees that would go to the winner. If there was anything positive to come out of all this, it was the publication of two best sellers: the very readable Barbarians at the Gate, and the slightly more disturbing Predators' Ball.

Inevitably, the 1980s came to an end. And, as we now know, those companies with foundations built on junk were soon to follow--buried underneath the weight of mounting interest payments that they could not meet. As the decade drew to a close, companies that had bought into the dream were jolted out of their fantasies into bankruptcy.

One of the most regrettable aspects of these business failures was the number of supposedly shrewd lenders who abandoned the cardinal rules of prudential risk management in their zeal to capture the lion's share of the fee-income market. These failures point to a key challenge for companies intent on carving out a significant presence in today's global markets. And that is the need to be recognized internationally as organizations built on sound and enduring principles and run by responsible managers.

We need to revisit our basic priorities and re-emphasize those qualities that reward honest, responsible management and sound, long-term thinking. In my view, that is what good corporate governance is all about.

Corporate governance is not confined solely to a single-minded maximizing of the bottom line or to generating a return on shareholders' investment. If it were, dumping toxic wastes into our rivers and streams and polluting the air we breathe would be perfectly acceptable. And we wouldn't have to contend with the extra costs associated with containing pollution and conserving resources.

In today's corporation, the CEO is like a juggler with many balls in the air at once. These balls have labels like shareholders, employees, customers, environment, community and country--to name some of the more important ones. If the juggler/CEO and the board are sincerely interested in the long term viability of the enterprise, the juggler must keep all the right balls in the air. And the board must make sure the CEO and the management team keep them there. In other words, it's a question of balance: the need to balance the corporation's social responsibilities with the expectations of shareholders; the balance between protecting the environment and treating employees fairly, and the balance between a constructive contribution to the public policy process and the financial well-being of the organization.

All of this doesn't really fit in with the credo of the corporate raider. In the name of maximizing shareholder value, raiders purchase and systematically dismantle companies to repay the massive debt incurred to buy them in the first place. In this scenario, all the balls--customers, employees, environment, community and country--come crashing down, taking the corporation with them.

But, if the company is to survive and prosper in the long term, the juggler/CEO, with the support of the corporate board, has a much more demanding task. He must ensure that no one constituency gets more than its fair share of attention in the policy making process and that all are given the proper emphasis in the company's strategic and operational plans. This very deliberate and delicate balancing act is corporate governance at its best. There is simply no substitute for it, including legislation, moral suasion or any other form of pressure applied from the outside.

The recently-released proposals for financial institutions legislation reform in Canada, which call for one third of the directors on the boards of banks and other financial institutions to be non-affiliated, is an attempt to guard against self-dealing through externally imposed--and ultimately futile--means. In my view, the real issue is whether there is a corporate governance culture at work within the institution. If these principles are in place, legislation won't be necessary. If they aren't, the only way to introduce them is from within: by establishing criteria for measuring board performance and developing an effective working relationship between the board and management.

In practice, this would mean a change of emphasis for the auditors. And regulators would need to turn their attention to drawing up governance procedures for directors and managers. This applies not only to financial institutions, but to all organizations. If we are truly sincere in our commitment to good corporate governance, we must disabuse ourselves of the notion that our problems can be legislated away. It's the integrity and competence of directors and management that count. These are the real drivers of good corporate governance, not new laws.

The unfortunate fact is that the dishonest and the unethical among us have always successfully managed to side-step laws, rules and regulations. You only have to look at the savings and loan crisis south of the border for evidence of that. And while legislation does have an important place in business, resorting to it for reasons of corporate governance is really an admission of defeat.

At the beginning of my speech, I jokingly quoted Marx--that's Groucho not Karl!--on the merits of faking honesty and fair dealing. There is, of course, a very serious message behind Groucho's quip. And that is honesty and fairness can't be faked or artificially imposed. In the final analysis either you have it or you don't.

At the board level, I believe that all directors--both insiders and outsiders--must be constantly willing to challenge management, to question their actions and to hold them accountable. A good director is one who not only brings the full extent of his or her knowledge to bear on boardroom discussion but one who also questions the actions of management.

For its part, management is responsible for running the affairs of the corporation in a manner that will ensure compliance with the law, secure its long-term financial viability and protect the interests of all its constituents. It is equally important that an organization's cultural values are not only understood and embraced by employees so that they are second nature, but that they serve as a guide for action. Corporations with this kind of culture stand out conspicuously in the corporate landscape because their approach, and their commitment to strong corporate values, is so distinctive and recognizable.

In the global arena of the 1990s, corporate governance is making a strong and spirited comeback But can globalization and corporate governance have the same priority in today's corporation? In my judgment, they must. Because only those corporations with the commitment, determination and will to give them both the same emphasis can expect to be among the international business leaders of the future.

Thank you.

The appreciation of the meeting was expressed by Harry Seymour, Managing Partner, Waterston Group of Companies and a Past President, The Empire Club of Canada.

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Globalization and Corporate Governance: Ne'er the Twain Shall Meet?


Corporate governance. A set of principles that direct and limit the actions of a corporation and its officers. The act of institutionalizing ethical business behaviour in the corporate setting. The new environment of the global economy; a new business approach. Successes and failures. Corporate governance as a key ingredient to long-term business success. Some results of globalization. A period of massive transformation and upheaval in financial markets. The opportunity for some ambitious companies to be reckless. Alternative sources of funding. Fee-based advisory services. The example of the investment house Drexel, Burnham, Lambert and its junk bond guru, Michael Milken. The infamous battle for control of RJR Nabisco. The end of the 1908s; for many, bankruptcy. The need to revisit basic priorities and re-emphasize qualities that reward honest, responsible management and sound, long-term thinking. The role of legislation in business. The lack of need for legislation when principles of corporate governance are in place. The integrity and competence of directors and management. The responsibilities of management. Characteristics of corporations and international business leaders of the future.