Alleged Quebec financial fraud - Montreal-area planner Earl Jones

Alleged Quebec financial fraud - Montreal-area planner Earl Jones
It is A CONSTANT in our global society today to read articles about FINANCIAL-PLANNERS AND FRAUD, these two seem to be somehow inseparable. In a recent investigation into one of Quebec’s investment brokerages, and the whereabouts of a broker, as much as $50 million that was entrusted to him seem to have disappeared into thin air. Peter Tzanetakis, vice-president of regulatory affairs at Advocis, the association representing financial advisers in Canada said "The financial advice industry is extremely regulated, financial advisers are typically licensed for insurance purposes and registered for securities and mutual fund purposes, but additional regulation for financial planning would not have any impact on someone who is intending to run a fraudulent scheme."
Please read my blog space:

http://corporategovernanceconcerns.blogspot.com/2008/07/dr-rookmin-maharaj-corporate-governance.html

and my article written in June 2008 about this very serious epidemic that is plaguing not only Canada, but is prevalent around the globe.

The only advise our regulatory bodies can offer include unhelpful remarks as follows:
1) there are plenty of strict guidelines in place already to keep them in check
2) it's a reminder clients need to ask hard questions and avoid blind trust, especially when their life savings are involved
3) The financial advice industry is extremely regulated; financial advisers are typically licensed for insurance purposes and registered for securities and mutual fund purposes
4) additional regulation for financial planning would not have any impact on someone who is intending to run a fraudulent scheme
5) Investors have learned through authorities that Jones, a self-proclaimed financial planner operating in an office tower in a Montreal suburb, was never licensed to handle their money
6) The Financial Planners Standards Council, a not-for-profit organization that raises awareness about financial planning and enforces professional standards through certification, says it's important for consumers to do their homework because anyone can call themselves a financial planner
7) The regulatory environment allows anyone to hold themselves out as a financial planner," said Tamara Smith, vice-president marketing. So it becomes incumbent on the consumer to verify credentials and ask to see certification and references, she said. "It is so important to find a planner you can engage in conversation, that you can trust
8) Sylvain Theberge (representing Quebec's securities regulator - the Autorite des marches financiers )said more inspectors may not be a foolproof solution. "We don't have the ability to be at every door in Montreal, to look at every office," Theberge said, adding more inspectors wouldn't necessarily have led them to Jones. "It's knowing the unknown," Theberge said. "In Mr. Jones' case, he worked for years and years on the basis of a confidence link from generation to generation."
SO WHAT ARE THE ROLES OF THESE SO CALLED REGULATORY BODIES (ABOVE), IF WE, AS EVERYDAY INVESTORS HAVE TO DO THE GROUND WORK FOR THESE SO CALLED REGULATORY BODIES?
REGULATORY BODIES OFFER NO REMEDIES for the average investors, this is a crying shame!
One year ago I wrote about this epidemic. Again, one year later I say the same thing:

It is imperative to note that this fraudulent, unethical behaviour is ALLOWED TO CONTINUE in our society by the pertinent ‘powers’ that be. This fraudulent, unethical behaviour affects families, individuals, and generations to come.
This fraudulent, unethical behaviour may also establish that failures within these companies' corporate cultures and management systems ARE ACTULAY allowed, if not encourage, by key individuals.
Dr. Maharaj argues that:
COULD IT BE THAT THE CONTINUATION OF THE OLD BOYS/GIRLS CLUB may be the fundamental reason for the blatant disregard for humanity? COULD IT BE THAT THERE IS A perception of invincibility/groupthink mentality by these crooks.

COULD IT BE THAT ONCE AN EMPLOYEE IS INCREASING THE PROFITS AND BOTTOM LINE OF AN ORGANIZATION HE/SHE IS SHELTERED BY TOP EXECUTIVES, WHO MAY TURN A BLIND EYE TO UNETHICAL PRACTICES?

And to date we have no remedies from the so called pertinent authorities, whether these watch dog bodies are for-profit or not-for-profit. They have been established to do a job, they are being compensated with some sort of financial consideration. Yet, whenever there is an investigation these ‘so called’ competent authorities’ throw the blame elsewhere. Their only advise to investors include:
“buyer beware” , they take no responsibility!
THE ONLY SOLUTION TO THESE BLATANT INJUDICIOUSNESS include:
changing the behaviours, the regulatory bodies must take responsibility and ensure that they conduct their monitoring duties. Perhaps, the reasons that this is not being done is that the regulatory bodies are not:1) the regulatory bodies are not ‘INDEPENDENT MINDED’
2) the regulatory bodies do not have the knowledge that is required to regulate
3) the regulatory bodies do not have the skills to regulate
This can be achieved by recruiting ‘new regulatory bodies’ in contrast to nominating ‘friends’ and continuing the tradition of the old boys/girls club.
Dr. Maharaj argues that, and has tangible evidence, that what should be done is a forensic audit on 'the people that are hired to these regulatory bodies' What is your opinion? Does your opinion change with this update?


Dr. Rookmin Maharaj’s research on: Corporate Governance on organizations and investigates corporate governance issues from a behavioural viewpoint. It makes a distinction between strict adherence to formal rules and regulations and investigates informal characteristics of regulatory bodies, their knowledge, values, and groupthink mentality.
There are three main conclusions from this research and corporate experience:
1. Proves that formal rules and regulations are inadequate; they have little effect upon decision making.
2. Informal characteristics must be considered in unison with the formal system when incorporating any of these so called watch dog regulatory bodies
3. Similar values and groupthink can contribute positively to corporate decision making. However, there is a high possibility for groupthink and values to become redundant, masking members’ and managements’ knowledge thereby, affecting these regulators decision making process.
4. Skills matrices that include questions related to values, knowledge and groupthink should be considered by corporations to ensure the nomination of well-rounded members, management and employees. Changes to these regulatory bodies, are seminal in preventing future fiascoes.



Peter Tzanetakis, Advocis, Financial Planners Standards council, Sylvain Theberge , Corporate Governance , Quebec investment broker, Montreal-area planner Earl Jones

View from the top: what directors say about board process

View from the top: what directors say about board process
View from the top: what directors say about board process- Dr. Rookmin MaharajTitle: View from the top: what directors say about board processAuthor(s): Dr. Rookmin MaharajJournal: Corporate GovernanceYear: 2009Volume: 9 -Issue: 3 -Page: 326 - 338Publisher: Emerald Group Publishing LimitedAbstract:Purpose – This paper aims to use the argument that formal regulations alone may not be the defining factor in improving corporate governance and the decision making process of the BOD. Design/methodology/approach – Based on 20 semi-structured interviews with board chairs, members of corporate boards, CEOs, and upper/executive management at 12 Canadian companies, a bird's eye view is taken from the top. A content analysis of the interviews was performed. a clear picture about the interaction and behaviour of directors emerged. Subsequently, three objectives that are required for effective decision-making were developed: knowledge; motivation; and transmission channels/internal control. The analysis offers three critical objectives, which all boards should endeavour to accomplish. Findings – These interviews demystify board process and provide the bases for three critical objectives for effective corporate governance: ascertain and embellish the knowledge base of directors; motivate directors to share and gather information; and ensure clear and fluent transmission channels exist. Practical implications – The usual board measures such as CEO duality, insider and outsider ratio, number of board members and directors' share ownership may not be the only critical determinants of board effectiveness. Originality/value – Conventional notions of decision making have neglected key human faculties and individual characteristics that combine to determine organizational outcomes. This paper fulfils a need for research in the area of board processes and board decision making and provides a roadmap to improve corporate governance within organizations.Keywords: Corporate governance, Decision making, Senior management board decision makingArticle Type: Research paperArticle URL: http://www.emeraldinsight.com/10.1108/14720700910964370Posted by Dr. Rookmin Maharaj at 7:11 AM Labels: Corporate governance; Decision making;Senior management; board decision making;

Corporate governance decision-making model: How to nominate skilled board members, by addressing the formal and informal systems - Dr. Rookmin Maharaj

Article may be viewed in its entirety at:

http://www.palgrave-journals.com/jdg/journal/vaop/ncurrent/index.html#08012009

This research study focuses on the problems involved in nominating board members based solely on rules and regulations, which neglect the affective dynamics of board behaviour and board process. For example, choosing board candidates who are independent (not part of a company's management), a rule imposed by the Toronto Stock Exchange (TSX) guidelines, may ensure that an organisation remains listed on this lucrative exchange. However, it does not ensure that the candidates have the necessary knowledge or are well versed in the company's business activities to effectively serve on a particular board. Having independent board members does not ensure that they ask tough questions of themselves or of management or that they have an extensive network from which to draw for advice on strategic issues. These are equally important areas of board governance that cannot be ignored when choosing candidates for the board, and these questions should not be suppressed in favour of concentrating solely on formal concerns such as independence.

Information about board characteristics can provide management theorists with a broader range of 'informal' variables that can contribute to the decision-making process. Board characteristics assist the board in operating as a team, improving the efficiency of the board. Selecting board members with the most suitable and effective characteristics for a particular board ensures that directors are spending their limited time on the company's most important challenges. This research was carried out in several stages in order to gather both qualitative and quantitative data. In this research there was a significant relationship for values and decision-making and no relationship for TSXFormal and decision-making, which is consistent with the literature, suggesting there must be a change in executives' values to ensure changes in behaviour.

A corporate governance model was developed. This model helps in ensuring that boards populated with board members who have knowledge and values (skills matrices) are more aware of the detrimental effect that groupthink can have on the decision-making process. Several executives mentioned the ability of board members 'to apply due diligence' to strategic decision-making. This means that directors apply their experience and expertise to better understand issues and bring these to bear upon the decision-making process. Additionally, knowledge, values and groupthink (skill matrices) may be used both when nominating new board members and as an annual evaluative tool.

Businesses are continually diversifying and board members need to continuously embellish their skill set and knowledge in order to adapt. However, the finding and the development of this corporate governance model are significant as they mark the start of how board characteristics can be operationalised. What is needed is more balanced research that looks at both the formal and the informal system. In doing so, more articulate measures of board decision-making process will evolve.
The business environment is ever changing and dynamic; research in these areas will convey the interrelationship between the formal and informal system. Nevertheless, this research is unique as it has investigated the formal and informal system using both primary qualitative and quantitative data analysis and therefore provides much needed information about the characteristics requisite for nominating board members.

Dr. Rookmin Maharaj's Model can help US President Barack Obama get the United States back on track!!contact Dr. Maharaj : maharajl@netzero.com

WAKE UP AND SMELL THE COFFEE!!!!!!!!!!!!!!!!Tim Hortons

WAKE UP AND SMELL THE COFFEE!!!!!!!!!!!!!!!!Tim Hortons - just the beginning of this sort of behaviour in Canada where manager (s) are acting a bit overzealously (http://www%20.theglobe%20and%20mail/. com/servlet/ story/RTGAM. 20080507 .wt im bit0507/ CommentStory /National/home/). Perhaps there may be another side to this story, the managers side, however,

Universities, Superstore, Canadian Tire, the police force the Energy Sector are just a few sectors that are bringing foreign workers into Canada without thought about the ramifications of bringing workers (executive staff or lower rank employees) without the proper orientation into Canadian culture. 'So called' Canadian companies are now hiring (in an uncontrollable manner) mangers and senior staff from the United States.

(Calgary has 10% UK bobbys- “But now that expat officers account for roughly 10 per cent of Calgary's police service, forces in the provinces want to slow down foreign recruiting programs and instead redouble efforts to find more home-grown…………..”talent(http://www.thesudburystar/ .com/ Article Display .aspx?e=974170Alberta flooded with bobbys; Calgary, Edmonton look to England to solve police shortage)

PLEASE NOTE CEOs, BOARD MEMEBERS AND MEMBERS OF THE EXECUTIVE, THAT OUR CULTURE IS DIFFERENT FROM THAT OF THE US, UK for example. PLEASE TRAIN, EDUCATE AND TAKE THE TIME TO RECRUIT WITH CARE.

Please remember that good governance can prevent ‘value’ destruction.

Dr. Rookmin Maharaj research integrates the disciplines of Political Science, Education, and Business in the area of corporate governance/Sarbanes Oxley (SOX). Dr. Maharaj has developed a unique model that can be used as a compass by corporations, educational, healthcare, and political institutions to build better boards, management and employees. Her method improves and increases the bottom line/profits of organizations. She is currently consulting with companies in Alberta, Canada on Corporate Governance. She has worked in the energy sector in Alberta Canada for over fifteen years. She has a master’s degree in Higher Education and has taught in France, the Caribbean and in Canada at the University of Calgary and Mount Royal College on Environmental Management and Business.

Visit Dr. Maharaj blog and read her research papers to review a tested Corporate Governance Model that reduces the risk of losing ‘organizational reputation.’ Contact Dr. Maharaj for advice on hiring the ‘right’ employees for the ‘right’ positionshttp://corporategovernanceconcerns.blogspot.com/

CORPORATE GOVERNANCE, GROUPTHINK AND BULLIES IN THE BOARDROOM

EXECUTIVE SUMMARY:

This research study discusses corporate governance issues from a behavioural viewpoint. It makes a distinction between strict adherence to formal rules and regulations: CEO/Chair separation, independence of board members and board size and informal characteristics of board members: knowledge, values and groupthink.
There are three main conclusions:

1) This research clearly proves that formal rules and regulations are inadequate; they have little effect upon decision making by board members. Informal characteristics must be considered in unison with the formal system when nominating board members in order to restore shareholder confidence and to rebuild trust in board governance.

2) Similar values and groupthink can contribute positively to board members' decision making. There is, however, a high possibility for groupthink and values to become redundant, masking board members' knowledge.

3) Skills matrices that include questions related to values, knowledge and groupthink and three behavioural characteristics should be considered by boards to ensure the nomination of well-rounded members.Changes to board process, and board decision making, are seminal in preventing future Enron and WorldCom fiascos.

It is only by changing the behaviours of the board of directors, through adopting skills matrices, that sweeping changes can occur. In the past, boards have asked: who are our board members?

The most important question a board can ask today, however, is: how can the skills and knowledge of our board members be used in service of the strategic direction of the corporation?

This can be achieved by recruiting new board members who fill the needs of an organisation, in contrast to nominating 'friends' and continuing the tradition of the old boys club.

It should be noted that out of the 100 of the largest economies in the world, 57 of these are corporations and 49 are countries. Corporations are powerful entities in our society, operating in a manner similar to representative governments.

Like heads of government, at the top echelon of each corporation is the board of directors; their decisions have enormous ramifications for everyone. Although most citizens have a limited or a passive interest in corporate governance, we each depend on these corporations for jobs, salaries and as investors.

Governance of these gargantuan corporations, which wield considerable economic power in the world, concerns each and every citizen.

This study draws novel conclusions about the state of governance today, and presents practical solutions for corporations to consider when selecting board members. The detailed discussion about what happens in the boardroom demystifies board process and provides the bases for three critical objectives when selecting new board members or evaluating current board members performance:

1) ascertain and embellish the knowledge base of directors;

2) motivate directors to share and gather information to ensure personal values are congruent with organisational values; and

3) ensure clear and fluent transmission channels exist to reduce the potential of having groupthink on board.view

Dr.Rookmin Maharaj's full journal article at:http://www.palgrave-journals.com/jdg/journal/vaop/ncurrent/abs/2050074a.html

PRE- EMPTIVE FORENSIC CORPORATE GOVERNANCE - Dr. Rookmin Maharaj

While corporate failures, such as Enron, WorldCom, Tyco International Ltd, Peregrine Systems, iVillage, Adelphia Communications Corp, Hollinger International , Barings Bank and the recent Societe Generale bank have focused attention on issues of accounting and financial indiscretion, there is nothing inherently new in the reasons behind these corporate collapses.

Neither is there anything original in the media's hurry to name a scapegoat. For example, at “Barings Futures Singapore (BFS)'s [the] management’s structure through 1995 enabled Leeson to operate without supervision from London headquarters. Leeson was not only the floor manager for Barings' trading division on the Singapore International Monetary Exchange, he was also the head of settlement operations. Leeson was responsible for ensuring that accurate accounting information was reported to the unit.

Normally the head of settlement operations and floor manager would have been held by two different employees. In other words Leeson reported to himself. This absence of checks and balances short-circuited normal accounting and auditing safeguards. After the collapse, several observers, including Leeson himself, placed much of the blame on the bank's own deficient internal auditing and risk management practices. People at the London end of Barings were all [know- it- all’s] that nobody dared ask a stupid question in case they looked silly in front of everyone else” (http://en.wikipedia.org/wiki/Barings_Bank).

SO WHO GAVE LEESON ALL THIS AUTONOMY? WAS IT NOT TOP EXECUTIVES??If …… “Most important, the corrective actions taken to date [cannot] be sufficient to reduce the frequency and magnitude of corporate bankruptcies. …Without changes in the policy-related conditions that contribute to corporate failure, improved accounting and auditing procedures [will] accelerate bankruptcies with little effect on their frequency or magnitude. Almost all of the public and press attention, however, has focused on reducing the accounting violations, not on those policies that contribute to business failure. The major lesson from the collapse of Enron and other large corporations is that the rules of corporate governance do not adequately protect the interests of the general shareholders against the increasingly divergent interests of corporate managers (www.cato.org/pubs/handbook/hb108/hb108-22.pdf).

It is argued that a combination of legislation, regulation, effective risk management and appropriate sanctions are needed, if such unethical behaviour, and resulting corporate failure, is to be prevented in future. However, what is required is an astute, independent, assessment of these financial collapse debacles. This may establish that failures within these companies' corporate cultures and management systems allow, if not encourage, unethical behaviour by key individuals.

COULD IT BE THAT THE CONTINUATION OF THE OLD BOYS CLUB may be the fundamental reason for the blatant disregard and perception of invincibility/groupthink mentality of same.

COULD IT BE THAT ONCE AN EMPLOYEE IS INCREASING THE PROFITS AND BOTTOM LINE OF AN ORGANIZATION HE/SHE IS SHELTERED BY TOP EXECUTIVES, WHO MAY TURN A BLIND EYE TO UNETHICAL PRACTICES?

Dr. Rookmin Maharaj’s research on:Corporate Governance and the Board of Directors:Study of the Importance of the Role of the Formal & Informal SystemsInvestigates corporate governance issues from a behavioural viewpoint. It makes a distinction between strict adherence to formal rules and regulations: CEO/Chair separation, independence of board members and board size and informal characteristics of board members: knowledge, values, and groupthink.There are three main conclusions from her research and corporate experience:

1. Clearly proves that formal rules and regulations are inadequate; they have little effect upon decision making by board members. Informal characteristics must be considered in unison with the formal system when nominating board members, management and employees in order to restore shareholder confidence and to rebuild trust in corporate governance.

2. Similar values and groupthink can contribute positively to corporate decision making. However, there is a high possibility for groupthink and values to become redundant, masking board members’ and managements’ knowledge thus affecting their decision making process.

3. Skills matrices that include questions related to values, knowledge and groupthink should be considered by corporations to ensure the nomination of well-rounded members, management and employees.Changes to board process, and board decision making, are seminal in preventing future Enron and WorldCom fiascoes. It is only by changing the behaviours of the board of directors, through adopting skills matrices, that sweeping changes can occur.

In the past boards have asked: who are our board members?

However, the most important question a board can ask today is:

how can the skills and knowledge of our board members be used in service of the strategic direction of the corporation?

This can be achieved by recruiting new board members, management and employees who fill the needs of an organization, in contrast to nominating ‘friends’ and continuing the tradition of the old boys club.

Dr. Maharaj argues that, and has tangible evidence, that what should be done is a forensic audit on 'the people that we hire' and 'employees, managers, board members' should also conduct an audit on their potential employers. What is your opinion?

Does your opinion change with this update?According to alleged rogue trader Jerome Kerviel, " his bosses turned a blind eye to his massive, questionable trades as long as he made money for the bank"(EMMA VANDORE, http://ap.google.com/article/ ALeqM5h4ncvzDOrX AnqyB9avT4zvg 1iJTQD8UG7MBG0Societe Generale Board Meets).
Posted by Dr. Rookmin Maharaj at 2:05 PM

10 comments:

Anonymous said...
Dr.Maharaj,Do you really believe that the old boys network still work today?

January 29, 2008 11:39 AM
Dr. Rookmin Maharaj said...
The old boys/girls network is alive in many different manifestations. For example, there are many studies/research that indicate that people hire those that are similar to themselves. Is this a manifestation of the old boys/girls network? Of couse it is!!!

January 29, 2008 2:24 PM

Anonymous said...
How then do you ensure board independence?
January 29, 2008 2:30 PM

Dr. Rookmin Maharaj said...
You can and will ensure board independence by using Dr. MAHARAJ'S corporate governance model. The model essentially pre screens nominees to the board, not only regarding their technical knowledge, or who they may know on the board, but on their values. Are their values congruent with those of the organization? Does the potential board member fit with the other board members, will he or she have the will to ask tough questions of other board members and of management? This can be accomplished with an in-depth skill matrix in the pre-assessment stage. Then the post stage follows with an annual peer review and evaluations on each board member including the chair and CEO. These evaluations should be conducted by a (independent) third party.
February 4, 2008 7:03 AM

Anonymous said...
Why are there so few women on boards?
February 4, 2008 12:28 PM

Anonymous said...
Taking into context recent events in the stock market, should boards have forseen the enormous losses? What could they have done differently?
February 4, 2008 12:31 PM
Anonymous said...
With all the regulations in existence, there are still too many corporate scandals. How can this be avoided,if at all?

February 4, 2008 12:33 PM

Dr. Rookmin Maharaj said...

In recent interviews I conducted with several Chairs, board members, and CEOs, I asked questions about “boards’ foresight regarding situations that are just inappropriate, whether the actions or inaction by management and the board manifest as losses to shareholders or blatant fraud perpetrated by the board and management.” The general consensus is that boards’ are in a position to govern, not manage the day to day operations of an organization.

However, if the board realizes that the CEO/management are taking advantage of stakeholders, there is lag time that it takes to actually oust a CEO and this affects the amount of losses that may occur. In order to reduce the probability of management/CEO taking advantage of stakeholders, boards members must be vigilant and astute by questioning management if they have concerns about risky projects or are aware of improper risks being undertaken by management and quick and precise action should be taken by the board to rectify the indiscretion.However, there is not only the principal-agent problem for shareholders/stakeholders to consider.

In today’s global economy stakeholders cannot depend solely on the invisible hand. Stakeholders must investigate and look at who are the board members. Is there collusion between board and management, there is the ‘old boys’ network’ to consider. In a recent high profile fraud case one board member (a well RESPECTED U.S. attorney) stated that he ‘skimmed’ documents that were given to him by management since he believed that if there was anything amiss management would have advised him.

In other words this example suggests that board members are yes men/women to management. A reasonable person may be under the impression that the board of directors will enforce and ensure that the agents (CEO/management) will not take unfair advantage of the principals (investors, shareholders and all stakeholders). According to modern governance theory the board of directors is considered the intercessor to the principal-agent problem. But in most of our corporations in Canada and the United States the principals are the agents they are one and the same or alternatively this is called the ‘small pool problem.’

As investors, community members, and stakeholders we as individuals must make a concerted effort to exercise our right as shareholders/stakeholders to ensure we police the police (board members), remember we can attend annual meetings and chose to vote out the board.
February 6, 2008 8:08 AM

February 7, 2008 6:50 AM

While corporate failures, such as Enron, WorldCom, Tyco International Ltd, Peregrine Systems, iVillage, Adelphia Communications Corp, Hollinger International , Barings Bank and the recent Societe Generale bank have focused attention on issues of accounting and financial indiscretion, there is nothing inherently new in the reasons behind these corporate collapses. Neither is there anything original in the media's hurry to name a scapegoat. For example, at “Barings Futures Singapore (BFS)'s [the] management’s structure through 1995 enabled Leeson to operate without supervision from London headquarters. Leeson was not only the floor manager for Barings' trading division on the Singapore International Monetary Exchange, he was also the head of settlement operations. Leeson was responsible for ensuring that accurate accounting information was reported to the unit. Normally the head of settlement operations and floor manager would have been held by two different employees. In other words Leeson reported to himself. This absence of checks and balances short-circuited normal accounting and auditing safeguards. After the collapse, several observers, including Leeson himself, placed much of the blame on the bank's own deficient internal auditing and risk management practices. People at the London end of Barings were all [know- it- all’s] that nobody dared ask a stupid question in case they looked silly in front of everyone else” (http://en.wikipedia.org/wiki/Barings_Bank).SO WHO GAVE LEESON ALL THIS AUTONOMY? WAS IT NOT TOP EXECUTIVES??If …… “Most important, the corrective actions taken to date [cannot] be sufficient to reduce the frequency and magnitude of corporate bankruptcies. …Without changes in the policy-related conditions that contribute to corporate failure, improved accounting and auditing procedures [will] accelerate bankruptcies with little effect on their frequency or magnitude. Almost all of the public and press attention, however, has focused on reducing the accounting violations, not on those policies that contribute to business failure. The major lesson from the collapse of Enron and other large corporations is that the rules of corporate governance do not adequately protect the interests of the general shareholders against the increasingly divergent interests of corporate managers (www.cato.org/pubs/handbook/hb108/hb108-22.pdf).It is argued that a combination of legislation, regulation, effective risk management and appropriate sanctions are needed, if such unethical behaviour, and resulting corporate failure, is to be prevented in future. However, what is required is an astute, independent, assessment of these financial collapse debacles. This may establish that failures within these companies' corporate cultures and management systems allow, if not encourage, unethical behaviour by key individuals. COULD IT BE THAT THE CONTINUATION OF THE OLD BOYS CLUB may be the fundamental reason for the blatant disregard and perception of invincibility/groupthink mentality of same. COULD IT BE THAT ONCE AN EMPLOYEE IS INCREASING THE PROFITS AND BOTTOM LINE OF AN ORGANIZATION HE/SHE IS SHELTERED BY TOP EXECUTIVES, WHO MAY TURN A BLIND EYE TO UNETHICAL PRACTICES?Dr. Rookmin Maharaj’s research on:Corporate Governance and the Board of Directors:Study of the Importance of the Role of the Formal & Informal SystemsInvestigates corporate governance issues from a behavioural viewpoint. It makes a distinction between strict adherence to formal rules and regulations: CEO/Chair separation, independence of board members and board size and informal characteristics of board members: knowledge, values, and groupthink.There are three main conclusions from her research and corporate experience:1. Clearly proves that formal rules and regulations are inadequate; they have little effect upon decision making by board members. Informal characteristics must be considered in unison with the formal system when nominating board members, management and employees in order to restore shareholder confidence and to rebuild trust in corporate governance.2. Similar values and groupthink can contribute positively to corporate decision making. However, there is a high possibility for groupthink and values to become redundant, masking board members’ and managements’ knowledge thus affecting their decision making process.3. Skills matrices that include questions related to values, knowledge and groupthink should be considered by corporations to ensure the nomination of well-rounded members, management and employees.Changes to board process, and board decision making, are seminal in preventing future Enron and WorldCom fiascoes. It is only by changing the behaviours of the board of directors, through adopting skills matrices, that sweeping changes can occur. In the past boards have asked: who are our board members? However, the most important question a board can ask today is: how can the skills and knowledge of our board members be used in service of the strategic direction of the corporation? This can be achieved by recruiting new board members, management and employees who fill the needs of an organization, in contrast to nominating ‘friends’ and continuing the tradition of the old boys club.Dr. Maharaj argues that, and has tangible evidence, that what should be done is a forensic audit on 'the people that we hire' and 'employees, managers, board members' should also conduct an audit on their potential employers. What is your opinion?Does your opinion change with this update?According to alleged rogue trader Jerome Kerviel, " his bosses turned a blind eye to his massive, questionable trades as long as he made money for the bank"(EMMA VANDORE, http://ap.google.com/article/ALeqM5h4ncvzDOrXAnqyB9avT4zvg1iJTQD8UG7MBG0Societe Generale Board Meets).
Posted by Dr. Rookmin Maharaj at 2:05 PM
10 comments:
Anonymous said...
Dr.Maharaj,Do you really believe that the old boys network still work today?
January 29, 2008 11:39 AM
Dr. Rookmin Maharaj said...
The old boys/girls network is alive in many different manifestations. For example, there are many studies/research that indicate that people hire those that are similar to themselves. Is this a manifestation of the old boys/girls network? Of couse it is!!!
January 29, 2008 2:24 PM
Anonymous said...
How then do you ensure board independence?
January 29, 2008 2:30 PM
Dr. Rookmin Maharaj said...
You can and will ensure board independence by using Dr. MAHARAJ'S corporate governance model. The model essentially pre screens nominees to the board, not only regarding their technical knowledge, or who they may know on the board, but on their values. Are their values congruent with those of the organization? Does the potential board member fit with the other board members, will he or she have the will to ask tough questions of other board members and of management? This can be accomplished with an in-depth skill matrix in the pre-assessment stage. Then the post stage follows with an annual peer review and evaluations on each board member including the chair and CEO. These evaluations should be conducted by a (independent) third party.
February 4, 2008 7:03 AM
Anonymous said...
Why are there so few women on boards?
February 4, 2008 12:28 PM
Anonymous said...
Taking into context recent events in the stock market, should boards have forseen the enormous losses? What could they have done differently?
February 4, 2008 12:31 PM
Anonymous said...
With all the regulations in existence, there are still too many corporate scandals. How can this be avoided,if at all?
February 4, 2008 12:33 PM
Dr. Rookmin Maharaj said...
In recent interviews I conducted with several Chairs, board members, and CEOs, I asked questions about “boards’ foresight regarding situations that are just inappropriate, whether the actions or inaction by management and the board manifest as losses to shareholders or blatant fraud perpetrated by the board and management.” The general consensus is that boards’ are in a position to govern, not manage the day to day operations of an organization. However, if the board realizes that the CEO/management are taking advantage of stakeholders, there is lag time that it takes to actually oust a CEO and this affects the amount of losses that may occur. In order to reduce the probability of management/CEO taking advantage of stakeholders, boards members must be vigilant and astute by questioning management if they have concerns about risky projects or are aware of improper risks being undertaken by management and quick and precise action should be taken by the board to rectify the indiscretion.However, there is not only the principal-agent problem for shareholders/stakeholders to consider. In today’s global economy stakeholders cannot depend solely on the invisible hand. Stakeholders must investigate and look at who are the board members. Is there collusion between board and management, there is the ‘old boys’ network’ to consider. In a recent high profile fraud case one board member (a well RESPECTED U.S. attorney) stated that he ‘skimmed’ documents that were given to him by management since he believed that if there was anything amiss management would have advised him. In other words this example suggests that board members are yes men/women to management. A reasonable person may be under the impression that the board of directors will enforce and ensure that the agents (CEO/management) will not take unfair advantage of the principals (investors, shareholders and all stakeholders). According to modern governance theory the board of directors is considered the intercessor to the principal-agent problem. But in most of our corporations in Canada and the United States the principals are the agents they are one and the same or alternatively this is called the ‘small pool problem.’ As investors, community members, and stakeholders we as individuals must make a concerted effort to exercise our right as shareholders/stakeholders to ensure we police the police (board members), remember we can attend annual meetings and chose to vote out the board.

February 6, 2008 8:08 AM
Anonymous said...
February 7, 2008 6:50 AM

Dr. Rookmin Maharaj said...
Anonymous said.... With all the regulations in existence, there are still too many corporate scandals. How can this be avoided,if at all?

Dr. Maharaj said..... This question of more rules and regulations!!!, rules and regulations can only act as a guide. An important issue is who are these people who are chosen as board members?

We NEED TO wake up to reality. If board members are handpicked by management there must be a reason, for example, in a recent high profile fraud case, an experienced, well respected audit chair ‘under oath’ stated that ‘the documents he SKIMMED were prepared by management and counsel, and if anything was INCORRECT he RELIED ON MANAGEMENT TO DRAW HIS ATTENTION TO THE non-compete agreements’.

THIS, MAY I REMIND YOU was A WELL RESPECTED AUDIT CHAIR! The fact is that he left due diligence to management, in other words he left his job to management, and rubber stamped their decision. The questions remain, was this audit chair unaware that his job involved investigating whether non-compete payments are legal in the pertinent jurisdiction or he was aware of this and instead of ‘causing waves’ or being a ‘trouble maker’ he succumbed to a groupthink mentality?

“Groupthink occurs when a person’s thought process and decision-making capabilities become marred by peer pressure. This may cause the group to overestimate their power and morality, causing the members to ignore the ethical or moral consequences of their decisions. This behaviour can encourage an illusion of invulnerability, creating excessive optimism and encourage the group to take extreme risks” (Maharaj, 2007).

The probability of nominating board members with a groupthink mentality can be reduced by using Dr. Maharaj’s Corporate Governance decision making model.

Dr. Maharaj’s research is based on both qualitative and quantitative research conducted over a period of two years on over 1,200 executives in both Canada and the united States.

Dr. Maharaj’s Corporate Governance decision making model suggests that there is a temporal linkage between board characteristics which are Values, Groupthink and Knowledge and the three tools Evaluations, Skills Matrices, Interconnections on Decision-making (Maharaj, thesis, 2007).

Therefore, corporations, Universities, health care organizations, and political institutions, (to name a few) should use Dr. Maharaj’s model to nominate board members who are not afraid to question the status quo or encourage creative tension in the board room instead of being merely parsley on fish.

References:

Maharaj, R., (2008). International Journal of Disclosure and Governance, 5, 68–92 "Corporate governance, groupthink and bullies in the boardroom. "Maharaj, 2007, Thesis Dissertation.

CORPORATE GOVERNANCE, GROUPTHINK AND BULLIES IN THE BOARDROOM

EXECUTIVE SUMMARY:

This research study discusses corporate governance issues from a behavioural viewpoint. It makes a distinction between strict adherence to formal rules and regulations: CEO/Chair separation, independence of board members and board size and informal characteristics of board members: knowledge, values and groupthink.

There are three main conclusions:

1) This research clearly proves that formal rules and regulations are inadequate; they have little effect upon decision making by board members. Informal characteristics must be considered in unison with the formal system when nominating board members in order to restore shareholder confidence and to rebuild trust in board governance.
2) Similar values and groupthink can contribute positively to board members' decision making. There is, however, a high possibility for groupthink and values to become redundant, masking board members' knowledge.
3) Skills matrices that include questions related to values, knowledge and groupthink and three behavioural characteristics should be considered by boards to ensure the nomination of well-rounded members.

Changes to board process, and board decision making, are seminal in preventing future Enron and WorldCom fiascos. It is only by changing the behaviours of the board of directors, through adopting skills matrices, that sweeping changes can occur. In the past, boards have asked: who are our board members? The most important question a board can ask today, however, is: how can the skills and knowledge of our board members be used in service of the strategic direction of the corporation? This can be achieved by recruiting new board members who fill the needs of an organisation, in contrast to nominating 'friends' and continuing the tradition of the old boys club. It should be noted that out of the 100 of the largest economies in the world, 57 of these are corporations and 49 are countries. Corporations are powerful entities in our society, operating in a manner similar to representative governments. Like heads of government, at the top echelon of each corporation is the board of directors; their decisions have enormous ramifications for everyone. Although most citizens have a limited or a passive interest in corporate governance, we each depend on these corporations for jobs, salaries and as investors. Governance of these gargantuan corporations, which wield considerable economic power in the world, concerns each and every citizen. This study draws novel conclusions about the state of governance today, and presents practical solutions for corporations to consider when selecting board members. The detailed discussion about what happens in the boardroom demystifies board process and provides the bases for three critical objectives when selecting new board members or evaluating current board members performance:

1) ascertain and embellish the knowledge base of directors;
2) motivate directors to share and gather information to ensure personal values are congruent with organisational values; and
3) ensure clear and fluent transmission channels exist to reduce the potential of having groupthink on board.

view Dr.Rookmin Maharaj's full journal article at:

http://www.palgrave-journals.com/jdg/journal/vaop/ncurrent/abs/2050074a.html