risk-dice

The controversy surrounding Senator Pamela Wallin has put the spotlight on relationships between business and government.

Wallin resigned from the boards of Porter Airlines and investment firm Gluskin Sheff and Associates amid an investigation into alleged irregularities in her travel expenses, which she has since acknowledged.

Read: Sen. Wallin resigns from Gluskin Sheff

Should active politicians be permitted to sit on corporate boards?

Richard Leblanc, a lawyer and governance consultant, says no. Because senators may be reviewing legislation that impacts the companies whose boards they serve on, “there’s an appearance of a conflict of interest,” he explains.

This isn’t the only area of potential conflict, says Matt Orsagh, director of capital markets policy for the CFA Institute. “Politicians don’t—or shouldn’t—have time to serve on boards. I don’t know who should have been more upset, [Senator Wallin’s] constituents or the boards she served on. I don’t believe she could serve both fully—these are full-time jobs.”

The Wallin controversy is an example of the reputational risk companies face when they have current politicians on their boards, Leblanc notes.

“Thanks to Google you can see all the boards a politician sits on; with social media the news spreads like wildfire. The negative effect on boards he or she is affiliated with is magnified when the director fails to get in front of the negative message, which is hard to do because of how quickly information moves.”

Orsagh notes that with sitting politicians, this problem can arise through no fault of their own. “At some point they may have to vote on a controversial issue, which can alienate a large portion of the customer base no matter which side they take. This is a major risk for corporations looking to stay out of the headlines for the wrong reasons,” he says, adding both sales and share prices can suffer.

Leblanc notes some boards ask new directors to agree to resign should they cause reputational problems. Otherwise, “it’s difficult to remove them—normally only shareholders can do that,” he explains.

Read: 3 tools for shareholder activism

“The terms of these agreements are broad based and typically include examples of incidents that could lead to removal. They’re similar to the code of conduct management’s required to adhere to, and can include clawback clauses,” Leblanc says.

THE PLUS SIDE

Politicians who leave office with reputations intact can be great assets to boards, says Leblanc.

“They bring tremendous understanding of policy and the regulatory process. Highly regulated companies can benefit from their political acumen,” he explains.

Politicians or other national leaders often have specialized knowledge. “I once did an assessment of an airline,” Leblanc recalls, “and I recommended a military leader for the board. He was a general with combat experience; he had a deep understanding of terrorism and security intelligence and had a vast network of contacts.

“During a board meeting he asked why the airline labelled the pilots’ food. The CEO said it was just something they’d always done.” But the former general said a terrorist who wanted to bring down a plane would know whose dinner to poison.

And if a company wants access to natural resources in other jurisdictions, “Having a former politician or ambassador on the board can open doors for senior management and help them navigate problems that may arise,” says Leblanc.

Another reason former politicians are valuable is their skill in consensus building. “They’re great at brokering diverse perspectives and bringing tensions to ease. They’re often highly effective chairs for this reason,” Leblanc notes.

But be wary of high-profile appointments.

“Some former politicians have a tendency to rent their names, and don’t do the detail-oriented due diligence and compliance obligations directors are now responsible for. They approach things at a high level,” Leblanc explains.

Read: OFSI revises corporate governance rules

Originally published on Advisor.ca
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