Here’s an interesting situation. Research In Motion, a company with a reputation for being forward-thinking in its management and in its products, has a governance problem. It begins with its internal investigation into circumstances surrounding the exercise and accounting of stock options by company insiders and the fact that it is taking an eternity to complete. The TSX- and Nasdaq-listed company is also being investigated by the Securities and Exchange Commission, along with at least 130 other companies, over the same matter. And because of its investigation, RIM has been unable to certify its most recent financial statements for the quarter ending September 2, 2006, leaving investors in quite a fog.
Now, the possibility of stock option irregularities is bad enough, but RIM’s handling of the matter leaves much to be desired. The four directors overseeing the internal investigation are themselves beneficiaries of stock options, as indicated by RIM’s own securities filing, which discloses that they exercised stock options amounting to some $8.6-million over the past six years. These same directors, who also comprise RIM’s compensation committee, get to decide who will receive options and on what basis for both themselves and management. There is nothing illegal about this, but I don’t know any self-respecting corporate governance expert who thinks directors and management should ride on the same stock option train.
As I have been observing and commenting in the financial press for some time on this subject, directors are supposed to take the longer view and ought not allow themselves to be placed in a situation where they have an incentive to run up the price of the stock in order to make a quick return. Independent directors, like the investors they represent, should have to buy and sell shares the old fashioned way: at real time price, not a special boardroom discount.
Compromised at the outset by the fact that the directors who are investigating RIM’s options problems also received and exercised options themselves, the committee that started its review in September is still investigating three months later. There is no practical reason why a review of whether or not options were properly exercised and accounted for should take so long, especially when investors are being deprived of timely financial results in the process. If history is a guide, the objective in these internal reviews is as much about damage control and preparing the right spin for any bad news as it is about determining whether improprieties have occurred.
RIM has other governance issues that should raise red flags among investors and analysts, however. Its small board of seven men –there are no women– has three insiders. The two co-CEOs (an unusual situation in itself) are insiders. RIM’s vice president of operations also serves on the board. Defunct Livent and disgraced Hollinger both had several board seats filled by senior managers. This is not the best model to follow.
RIM’s board is chaired by its co-CEO, Jim Balsillie. There is no lead director. Increasingly, corporate governance practices urge that the chair of the board be an outside, independent director. RIM’s arrangement creates a situation where insiders and management hold the potential to exert far too much influence on the mindset and direction of the board and where the board is considerably underempowered in terms of independence. The involvement of the four outside directors on the nomination, compensation and audit committees alone would be enough to overtax most board members, especially when Kendall Cork and John E. Richardson, two of RIM’s audit committee members who are currently overseeing the internal stock option investigation, also serve on the boards of at least eight other publicly traded companies and investment funds between them, in addition to their very demanding day jobs.
RIM needs new and more independent faces on its board, and soon. As noted previously, the fact that RIM’s independent directors share an options deal with its management directors raises serious questions about how independent they really are and suggests at least the appearance that they may be unduly beholden to the founders of the company for a substantial part of their own (the independent directors’) wealth.
Of the company’s seven directors, only one came on board in the 21st century. Did I mention there are no women in the boardroom of this so-called marvel of innovation? How is that possible in 2006? I would add parenthetically by personal observation that there appears to be at least as many BlackBerry users among women as men. In other respects, such as the need for directors to be elected by a majority of voting shareholders and limiting the number of other boards on which a company director can sit, RIM appears to have no policy and has taken no position.
Leading edge as RIM is in its products, it is decidedly lumbering in its corporate governance practices. Only in the past year did the company adopt a written mandate for its board and a charter for its compensation committee, according to its July 2006 Management Information Circular. And here’s a shocker: “The Board and the CEOs have not developed a written position description for Co-CEOs.” Can you believe that a high-valued company like RIM would not have a job description for its most senior executives when the same would be demanded for a junior admin assistant or a mailroom clerk?
The irony in all of this is that Jim Balsillie, the co-founder and co-CEO of RIM, believes he and his company have something to teach the world about good governance. They donated a substantial amount, along with money from the government of Canada, to establish the Centre for International Governance Innovation. Interestingly, that organization’s board of six members has three directors from RIM’s own board and senior management. Mr. Balsillie chairs both RIM’s board and the CIGI board. Kendall Cork, in addition to sitting on RIM’s board as an outside director and one of those overseeing the company’s internal stock option investigation, serves on the CIGI board. RIM’s chief financial officer also sits on the CIGI board. Presumably, RIM should have no problem obtaining advice on its own corporate governance practices from an organization that shares so many connections with RIM itself, although that relationship could pose problems to some governance observers.
Readers who have been following my writing on this subject over the past couple of decades (or even more recently) will know I am not a fan of the it’s a successful company so who cares about corporate governance approach. You don’t wait until a collision to make sure your car has working brakes. And you don’t wait until disaster comes knocking at the boardroom door before you adopt sound corporate governance practices. The purpose of both measures is to avoid catastrophe. It is bewildering that when so many large pension funds, including the Ontario Teachers’ Pension Plan, which regularly speak out on the theory of modern corporate governance and have invested substantially in RIM, have not demonstrated a greater interest in changing the boardroom practices of the company. It is refreshing to see a small institutional investor, the Ironworkers Ontario Pension Fund, raising questions about board structure and performance.
RIM is a dynamic company with bright young fellows at the helm and a brand that is the envy of its industry. In those respects, it is truly a 21st century player. There is no excuse for such an issuer, with a market capitalization of more than $28 billion, to have fallen into a minefield over stock options, to have created a situation where it can’t certify or release its financial statements and to have an outmoded governance system that is less than what investors deserve and its founders and board should know it requires.