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City’s ‘black-and-white’ mindset proof against exec pay scandals

Scott Taylor
Ottawa Business Journal
May 25, 2005

According to the executive compensation list included in this week’s OBJ, there were seven millionaire executives in Ottawa’s technology sector in 2004.

After the splashy headlines involving Canada’s own Hollinger and Royal Group Technologies, not to mention that little dust up at Environmental Management Solutions, one may wonder how, if at all, high-level compensation has been impacted locally.

David Perry, founder and partner of executive search firm Perry-Martel, said that while compensation issues may flourish elsewhere, Ottawa is a breed apart. Honesty abounds simply because of the type of person running the show.

“You have to appreciate the difference between Ottawa and the rest of (North America),” he said. “Ottawa is a town where high tech is rampant with engineers who have become CEOs. It’s not the same environment as businesspeople. These people tend to be very black and white and detailed.”

Concerning an issue like Sarbanes-Oxley, he said the local cheeses not only accept it, but are happy to have it. “For theses guys, it’s a blessing because they play by the rules anyway. This may not be what you want to hear, but it’s true. I’ve been doing this for 20 years and worked on over 900 projects, and I’ve never seen a large disconnect between the board and the CEO.”

When friction has occurred, he added, it’s been because of strategic and philosophical differences, but rarely related to compensation.

“Guys in this town are probably laughing. They think it’s great to have these new rules because they already play by them.”

“In Ottawa, boards are now becoming more involved in the hiring of the right personality because they’re looking to balance. An example of this is a company I was involved with had a CEO who was very engineer focused. They wanted a CFO with a more outward facing view on Bay Street so they could raise money and deal successfully with those types. It has clearly affected recruitment.”

Susan Mogensen, CEO of the International Policy Governance Association, cautioned that a strong board and accountable CEO are the keys to a successful organization and a fairly compensated leader. A situation in which the CEO is also the chair can work, but she strongly advises against one person wearing those two hats.

Her organization, with about 100 members, is a non-profit corporation that promotes the benefits of a practical governance system, and supports those who use and work with it.

“The IPGA is committed to owner-accountability governance,” she said. “It’s a system that allows a board to be fully accountable to shareholders, who are the owners of the company.”

Rather than a government-ordered accounting policy like Sarbanes-Oxley, Ms Mogensen advocates a comprehensive set of integrated distinctions that, when consistently applied, allow governing boards to realize their accountability.

“Canadian business has the opportunity to go farther than Sarbanes-Oxley. We don’t just want to follow the rules, we want to strive for excellence in governance.”

To wit, boards need to have the power to evaluate the performance of a company’s CEO and to set compensation based upon those results. “The board needs a clear determination to see if he’s doing well or not. How else should they know what to pay? And the CEO should know exactly how he’s doing as well. The board should define what results should be achieved and pin those results on the CEO. Boards exist to transfer authority from the shareholders to the organization. A passive board is bad for the organization and its shareholders.”

Ms Mogensen was asked about disgraced tycoon Conrad Black, who appeared to have ultimate power over all the activities in his empire before his fall from grace.

“It sounds like he was a completely dominating figure. He was everything in one person, which is not democratic. If the CEO isn’t evaluated against set criteria, the water gets very muddy.”

Also, a slight boom in the market has seen some companies shift away from their strategy of just trying to weather the storm in favour of going on the offensive.

“These companies are letting loose their hold-down-the-fort CEOs, who did a good job battening the hatches and burrowing during lean times. Now, celebrity CEOs are coming back into vogue. They were taboo, but suddenly those well-connected and public leaders are back and they’re more expensive.”

That’s not to say that companies are opening the vaults – legally or otherwise – to attract them, Mr. Harmon said. “There are a lot more restrictions on CEOs borrowing from the company. Back-door arrangements to find and keep the top CEO are a thing of the past. They’ll pay the money transparently, but no compensation board in the world is going to put forth a package that’s going to make (former WorldCom CEO) Bernie Ebbers happy.”