This document summarizes a presentation on governance challenges and the need for bottom-up governance approaches. It notes that despite years of top-down governance regulations, corporate behavior has changed little and governance has had minimal impact on performance. It argues governance is missing a critical bottom-up component involving employees to improve strategy execution, risk management, and productivity. The presentation also highlights issues like poor board oversight of strategy, high CEO turnover, and the declining number of public companies listing on exchanges. It questions whether governance has reached a point of diminishing returns and if new bottom-up approaches are needed to make a true difference.

1. PECB Insights Montréal Conference 2017
Legs and roots
The missing parts of the
governance puzzle :
The 2000 tide
and what to expect by 2020
Louise Champoux-Paillé
Robert Pouliot
Quebec University in
Montreal, School of
Management sciences

2. Why top-down governance is missing legs and roots and the
need for new and innovative bottom-up governance
! What has really changed on the governance front over the last 25 years, since the
Cadbury report and numerous statutory regulations imposed around the world?
! Despite years of adding governance layers on top of management teams, corporate
behavior has changed little. Academic studies have little to show in terms of true
governance impact on corporate performance and sustainability.
! If governance has brought so much progress, how do we explain the exponential rise of
product recalls? The record-low engagement of employees?
! Despite years of pressure and rising say-on-pay, compensation remains a central issue
with on-going sources of risks. The return of multi-voting shares and the emergence of
no voting shares are troubling new signals of past fiduciary abuse. Insider trading
remains a critical issue that regulars have failed to solve
! Governance is in search of a critical missing part: the bottom-up approach, involving
employees. Three major reasons to transform human resources into a far more
contributive factor in corporate arena: improve strategy execution, reinforce risk
management and awareness and enhance productivity, research and development.

3. “critical audit matters” (CAMs)
Many corporate incidents remain hidden – Recent evidence
suggests that more are turning into full-blown corporate fires

4. Defining a corporate sense of purpose
▶︎ Rules and practices by which a board of directors ensures accountability, fairness,
and transparency in a company's relationship with its all stakeholders
Board
Top Management
Team (TMT)
Clients
Internal or bottom-up governance
The missing piece !
The board of an organization:
▶︎ Arbitrages various conflicts of interests between 7 stakeholders
▶︎ To oversee the Top Management Team (TMT)
▶︎ Generate value for stakeholders,
▶︎ Ensure sustainability
▶︎ Achieve the mission as set by its shareholders

5. Noise, shuffle, rules and codes :
Does governance really make any impact
beyond transparency and exchanges around the CEO?
US - Dodd-Frank Act
Source adapted from:
« 2017 Global trends in
Corporate
Governance », by
Farient Advisors, 2016
Minder Initiative
in Switzerland
UK
Cadbury
report
1992
Canada
Dey Report
1994
Québec
Saucier
Report
2001
US -Sarbanes-Oxley
Act model and
global following
France-
Rapport
Viénot II
1998
France-
Rapport
Bouton
2003
France-
Corporate
governance
code –Afep-
Medef 2008
German Corporate
governance code
2013
Australia code of
governance -2004

6. As a result of 25 years of governance
Quick reminder of Board responsibilities
! Strategic Planning
! Oversight Functions, Compensation and Succession Planning
! Board of Directors Structure and Composition
! Risk Management
! Internal Controls
! Financial Reporting and Disclosures
! Business Ethics, Compliance and Corporate Governance
! Relations with Shareholders and Stakeholders

7. Shareholder push for change at the top
Added a director with a
specific skillset
Added diverse
board member(s)
Added younger directors
Removed a board member
due to age
Added an activist
representative
Removed a board member
with long tenure
Source: PwC:2016 Annual
corporate Directors Survey,
October 2016

8. Is governance working?
Critical issues for corporate directors
! Poor strategy mastering – The rule rather than the exception among directors . If strategy
is 10% intention and 90% execution in corporate strategy, where is true governance?
! Compensation – Far too much for less, a system creating more corporate risk than
alignment of interest between CEOs and shareholders
! The showcase of independence and gender diversity – Few studies show the true impact
of independence and gender diversity on corporate performance. Too many non-executive
directors seem to harm and dilute expertise, while gender diversity overshadows true
expert diversity. The worst bank failures in 2008 had amongst the best board compositions.
! The great M&A illusion – If academics and consultants still can’t demonstrate clearly the
value creation of mergers and acquisitions for mid- and large size companies, why are they
still ballooning ? Meanwhile, statistics show a downward trend in organic growth outside
the technology world as well as a decline in R&D.
! The Happy pill – Employees are key stakeholders along with suppliers and investors. But HR
is only meant to keep them happy, avoid accidents and prevent loss of production instead of
involving them. As a result: employee engagement reached its lowest point in 2016 - a
mere 13% across the world (32% in the US) and strategy execution is poor

9. Executive compensation
! Say on Pay votes
! Pay Disparity Disclosures
! Pay for Financial Performance
! Pay for Extra-Financial Performance
Source: PwC:2016
Annual corporate
Directors Survey,
October 2016
Compensation consultants
Proxy advisory firms
Institutional investors
Employees
CEO pressure
Public opinion
72% note that say-on-pay
voting has not had an
impact on ‘right-sizing’ CEO
compensation.

10. Brand new members with more skills
Background of Non-Executive Directors Appointed annually
to the Boards of CSSBI 100 Companies (2011-2016)
(source: Spencer Stuart Board Index)
Recruiting from outside the
boardroom box: still an exception
Gender

11. Men Join Boards With Less Experience Than Women
First-time female board members are less common
than men. When a woman is appointed, there’s a 32%
chance she’s already served as a director elsewhere.
When a man does, there’s only a 23% chance he’s
already held a seat. The gap suggests the old
Catch-22: To get chosen to be on a board,
Women already have to be on a board.
Europe leads, with North
America behind…
…Far away comes Asia and lower still, Latin America

12. Is governance working?
Critical issues for corporate directors
! Compliance and regulation burden – The overall cost is still climbing, to a point where one
wonders who governs anymore: the regulators or the directors? Worse still, academic studies
show that governance has little – if no effect at all – on fraud !
! Cost of capital and hedge fund activism – If governance contributes so much in reducing the
cost of equity and debt capital, why is hedge fund and shareholder activism pushing so hard
and increasing so much?
! The Takata effect - Product reliability and safety: callbacks continue to grow on most sectors,
from cars to children toys, from electric appliances to cosmetics, a worldwide phenomenon.
Supply chain management or risk control systems more vulnerable than ever.
! The continuous fall of stock market corporate listings (IPOs) in North America. Last year,
Toronto listed only 3 new firms. Equity research spend dropped to ≈ $3.5 billion this year to vs
$8 billion in 2008, while ≈$1 trillion flowed out of active managed assets in the US to passive
funds now reaching 50% (vs 30% in 2010) of US funds under management.
! The broken link of shareholder proxy system: still under repair in North America where
double counting or over-voting is common, with multiple voting shares adding no value to
corporations that use them.

13. Do we need so much singing and dancing?
The why more than the how
Strategy
(to create
long term
value)
Culture
(software
to make
work fun)
Execution
(to make
strategy truly
operational)
Structure
(hardware
to simplify
work)
+
2 of four
Talent
and/or
Leadership
and/or
Innovation
and/or
M&A
Evergreen Project, Survey
Survey of 200 manage-
ment techniques across
160 corporations,
Harvard Business
School
« It doesn't really matter if you implement ERP
software or a CRM system; what really counts is
that, whatever technology you choose to
implement, you execute it flawlessly. Centralize
or decentralize business doesn’t matter either
as long as you pay attention to simplifying
the way your organization is
structured. » – Nitin Nohria, Dean,
Harvard Business School
4

14. CEO turnover around the world hits 5-year peak
In Canada, the average tenure of a CEO dropped from 8,1 years in 2000 to below 6 years in 2015
From
forced to
planned
CEO exits

15. Shareholders and Board Communications
Shareholder proposals
Management performance
Executive compensation
Board composition
Company strategy
development and oversight
Financial oversight
Use of corporate
cash/resources
Risk management/oversight Source: PwC:2016
Annual corporate
Directors Survey,
October 2016

16. What do directors spend their time on during their board meetings ?
Strategy for 37% - And risk for > three times less =11%
16
Number (n) days/year of work
spent by directors – number =
772
Where directors claim to be the
most efficient over the last 12
months (% respondents) –
number=1119
Strategy
Performance
management
Governance and
compliance
Investment and
M&As
Risk
management

17. Yet, the great dilemma of board members is to ignore too often the
strategy or the business model of their organization
l If directors don’t understand the strategy of their own corporation, can
they expect their mid-level managers to relay it adequately to all
employees?
Barton, 2015 – « Where Boards Fall Short » showing that only a third of board directors sounded by
McKinsey in 2013 understood the strategy of their company and only 22% admitted grasping the value
creation model of their company, by Dominic Barton; Mark Wiseman, Harvard Business Review,
January-February 2015
17DSR 6200 Deuxième partie – 1ercours
22%
Share of directors
claiming that their board
knows how their
corporation creates value
16%
Share of directors
claiming that their board
understands the
dynamics of their industry

18. Strategic Planning
! More time spent on strategic planning
! Collaboration versus confrontation
! Monitoring the process
ll executives know that strategy is
important. But almost all also find
it scary, because it forces them to
confront a future they can only guess at.
Worse, actually choosing a strategy
entails making decisions that explicitly
cut off possibilities and options. An
executive may well fear that getting
those decisions wrong will wreck his or
her career. ”
– “The Big Lie of Strategic Planning”, by Roger
Martin, professor at and former dean of the Rotman
School of Management at the University of Toronto,
Harvard Business Review,
February 2014
A“

19. Bigger the companies and more CEO ethical lapses
https://www.youtube.com/watch?v=qs-CPpUdh7Q

20. In short, is this the Peter’s principle?
Has governance efficiency flattened to reach a zero
slope and outgrown its true level of effectiveness ?
Are corporations only now discovering the true cost of
neutralizing fiduciary risk and reach an effective
level playing field for all investors ?
Or is the top-town system simply broken, in need of a
critical bottom-up component to make a true
difference beyond all the bandaids we might apply ?

21. Risk management
! Audit versus Risks committees
! Financial versus extra-financial risks, especially operational risks
liable to jeopardize the whole trustworthiness of an organization
! Board expertise
! Board education

22. The vanishing public corporation
In the period 2010–2014, there were 243 IPOs on all Canadian exchanges with a value of $15.5 billion. This compares to 419 IPOs
with a total value of $18.8 billion in 2005–2009 (in which the market saw both a decade high in 2005 and low in 2008).

23. Global Initial public offerings by exchange
New York
$26 billion
London
$6 billion
Hong Kong
$1 billion
Listings fell by nearly 50% since 20
years back to levels of early 1970s Listings
Delistings
US capital markets 1974 to 2014

24. If public listing doesn’t seem to work
Does private equity guarantee better governance ?
▶︎ PE claims: its beneficial governance (=“governance dividend”) structure minimizes agency
costs and aligns interests of management and ownership by:
! Creating strong financial incentives for managers to improve
performance metrics
! Closely and actively monitoring management behavior
! Deploying deep industry, capital market and financial
expertise to support these mechanisms
▶︎ Yet, this “governance dividend” is largely being overstated :
! The fund (PEF) filters and dilutes standard governance mechanisms by shifting most
decision powers from the investee company straight up to the sponsor (PEFS);
! Investors are not treated equally with various side-letters favoring some investors
to the detriment of others; right of say is hampered; transparency is weaker than for
listed corporations; lack of exit option with poor, if no feet voting by investors; firing
the PEFS for cause virtually impossible; no SOX equivalent accountability.
! The compensation model incentivize excessive risk-taking by PEFS and creates
classic moral hazard by capturing much of the gain with insulation from losses
! Performance since 2006 have been more or less equivalent to public markets
Private
equity firm
Sponsor
(PEFS)
Investors
(Pension funds,
endowments,
mutual funds, etc.)
Private
equity
fund (PEF)
Portfolio
Investee
company
Sources: “How Do Private Equity
Investments Perform Compared to
Public Equity?”, by Robert S. Harri, Tim
Jenkinson and Steven N. Kaplan,
Journal of Investment Management,
July 2016 – “The public cost of private
equity”, by William J. Magnuson,
Minnesota Law Review,
Vol. 102, 2017

25. Most large size M&As destroy value
The general pattern of returns for public acquisitions is quite similar to that for
private acquisitions but is generally more negative. The average return to pubic
acquisitions at the end of the 2-day window is −0.85%, compared with 0.68% for
private acquisitions.
This histogram shows that nearly half of all acquisitions of privately-held
targets have negative cumulative abnormal returns. Almost half of all private
acquisitions (46%) with significant negative returns is far too many.
“The most successful deals
are often midsize takeovers
that add 10–20 percent to
the size of a company, rather
than the headline-grabbing
mega- mergers of equals.
The media often focus on
the cultural problems
inherent in mergers,
which are real and
challenging,
but are difficult to
measure.” – Steve
Kaplan,
May 2016

26. Even though ‘growth from within’ pays more ultimately
Quicker external growth (M&A) is preferred
Source: « The value
premium of organic
growth », by Marc
Goedhart and Tim Koller,
McKinsey & Co, January
2017

27. Major trends in R&D across the world
Source: « The coming
R&D crash » by Brad
Plumer, February 26,
2013
Down in US and UK –Up,
up, up in China
Source: “The most important charts
for the Canadian economy in 2016”,
Maclean’s, December 2015

28. Gaining the right to propose ideas and nominations in proxy circular
Shareholders’ push for proxy access
It makes the company more
vulnerable to activist investors
It undermines the authority of the
board’s nominating and
governance committee
It gives shareholders too much of
a voice in the company’s
governance
No concerns with
proxy access ? ¿ ? ¿
Source: PwC:2016
Annual corporate
Directors Survey,
October 2016
Activist investors
are too short-term
focused
Proxys advisors have too
much of a say in corporate
governance
Activists compel companies to
more effectively evaluate their
strategy, execution and capital
allocation
Activism has resulted in companies
improving their operations and capital
allocation
Investors have too much
of a say in corporate
governance

29. Giving legs
and roots to
governance:
from
top-down
to
bottom-up
Source adapted from: « 2017
Global trends in Corporate
Governance », by Farient
Advisors, 2016
Country income
inequality slows
GDP
Internal
governance
Independent minded
executives
Intracorporate
pay gap
Less for more
proftability
Triplex
communication
Down, Up and
sideway
When trust
becomes the
core of
employee
empowerment
Tone at the top now needs
tone at the middle and below
Those who MAKE
are those who KNOW

30. Why Internal governance ≥ board governance
l Top executives recruited before the CEO
can often play a more critical
counterbalancing role than board
members. Their independent mindedness
form a strong internal governance,
especially in the high uncertainty industries
(medical equipment, machinery,
agriculture, computers, software, etc.)
l Corporations with stronger TMTs provide
better returns on assets and more
successful partnerships and M&As
l The European Banking authority is now
regulating for greater internal governance
of the financial system to avoid Wells
Fargo type of major culture void
l Increasingly, the whole environmental
front is being managed on a bottom-up
approach, with front line diligence
Excess market to book ratioAverage Excess ROA % points
Best internal governance (IG)
Worst I.G. Worst I.G.
Best I.G.
Loosing more
Loosing less
The case for mergers and acquisitions

31. Higher intracorporate pay gap lowers profits
! As country income inequality slows GDP growth, higher intracorporate
pay gaps lowers average profit margins across all sectors, except
Materials, between 2009 and 2014
! Globally, Consumer Staples had the highest intracorporate pay gap
globally.
! In the US, the highest gap was in the Consumer Discretionary sector.
Both sectors are most vulnerable to movements pushing up minimum
wages (up to 15$/hour).
! Labor productivity (sales per employee) was lower for companies with
higher intracorporate pay gaps on average

32. The case for bottom-up
instead of top down governance
! Danone (food) group shows how to generate leadership from bottom-
up
! W.L. Gore & Associates (technoogy) is unlisted and yet, demonstrates
worldwide how to sustain motivation and innovation on the highly
competitive technology market and still remain private. Focus on team
work, employee involvement
! Harley Davidson (motocycles) experienced its spectacular relaunch
effect by empowering employees
! Amazon (on-line distribution) measures the efficiency of its executives
by the mistakes they make to innovate
! DLGL (software), a Quebec-based employee self-managed company
that has become a Canadian leader in its field

33. Aggregating standards to give a sense to governance
Overall quality Management
Quality management - ISO 9001:2008 –
QME Quality Management Essentials,, ISO
30301 Management System for Records,
ISO 21500 Project Management
Management systems
Management Systems Certification - ISO
30301, ISO 39001, ISO 55001, ISO/TS
29001 Oil and Gas, ISO 50001, ISO
28000 Supply Chain Security, ISO 13053
Six Sigma, ISO 22000, Food Safety, IATF
16949 Automotive Quality
Management, ISO 13485 Medical
Devices, ISO 37001 Anti-Bribery ,
ISO/IEC 17025
SRI –Environnement
Environmental Management
Essentials
ISO 14001 Environmental
Management System, ISO
26000 Social
Responsibility
Human Resources
ISO 45001 Occupational Health
and Safety Management
Systems
OHSAS 18001, Occupational
Health and Safety Management
Systems, ISO/IEC 27035
Incident Management
Risk control
ISO 31000 Risk Management, Risk
Assessment Methods, ISO 22301
Business Continuity, Business
Continuity Management Systems
Essentials Certification, ISO 22301,
SCADA Security Manager, ISO
20121 Event Sustainability
Management Systems, ISO 28000
Supply Chain Security
Management System, Disaster
Recovery, ISO/IEC 27034
Application Security
IT-Telecom
ISO/IEC 38500 IT Governance, ISE -
Information Security Essentials, ISO/IEC
20000 IT Service Management,
ISO/IEC 20000, Penetration Testing,
ISO/IEC 27001 Information Security
Management System, ISO/IEC 27002
Code of Practice for Information Security
Controls, ISO/IEC 27005 Information
Security Risk Management, ISO/IEC
27032 Cyber Security, Computer
Forensics, ISO/IEC 29100 Lead Privacy
Implementer
Corporate compliance or a
standard Christmas tree?
What meaning for governance?
Only two - ISO 9001 et 14001- account for 90% of all certificates around the world
Certifying peopleCertifying organizations

34. World TRADE and MARKETING goals – NOT governance –
drive Management & Environment ISO certification
,0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
ISO 14001 - Worldwide total
,0
200,000
400,000
600,000
800,000
1000,000
1200,000
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
ISO 9001 - Worldwide total
Europe dominated until
2004. Now its growth is
falling since 2011
East Asia and Pacific
now exceeds 50% of
world share since 2015
North America
weighs 2,7%, or
only twice as
much as the
Middle East
Environmental management Management system, incl. 2015 version
Standard on the rise up
ISO22301 (risk) 78%
ISO50001 (energy) 77%
ISO/IEC27001 (info) 20%
Europe still
leads with 42%
East Asia and
Pacific follows
with 40%North America
weighs 4,5%, or
less than Latin
America

35. Key issues for change
! Fighting short-termism
! Seeking corporate social
responsibility
! Ensuring cybersecurity
! Keeping a closer eye on social Media
! Integrating the climate change into
strategic factors
! Enhancing risk management on a top
down/bottom up scale
! Last but no least: achieving
employee involvement to give a
sense to goals and organizations
“ Socrates
in the
land of
processes
Office life or
how I
fell into
the land of
absurdity ”

36. Stakeholders and Board
Time for a new standard revolving around governance
The real issue about
governance is not about great
directors or TMT members.
It is to ensure the enactment
of governance at all levels of
an organization, from top
down to bottom up

37. The missing puzzle piece to be called ESG
for: Environment, Society and Governance
Why a new standard?
! We are getting confused with all the standards available that governance could
take advantage of, but can not without any global aggregator
! ISO auditors are close to front-line managers who can make a whole difference
in the governance of an organization at middle and lower
! Risk related certifications are the fastest growing market segments of
management standards, which go deep into unobserved corporate weaknesses
in various aspects of strategy execution
! Risk and compliance cannot be properly managed without active employee
involvement, with the most critical case involving whistleblowing
! The standard we need is one involving directly all employees, their talents,
their skills and their know-how
! A dynamic standard that goes beyond process to give a sense
to organizations and transform them from the bottom-up