Complex but not Complicated

‘It’s time for candour.’ Ed Waitzer, former chair of the OSC, partner at Stikeman Elliot, undisputed member of the regulatory aristocracy in Canada, hopes that the current crisis will lead to a ‘teachable moment’ for the financial services industry.

Speaking at the Responsible Investment Conference, he began by stating that leaders will now need to expand their horizons, to look further ahead, beyond financial regulation, into other international processes and to widen the circle. Recognizing that people will attempt to game any regulatory framework, he says “you can’t solve problems by bureaucratizing morality”

Mr. Waitzer has some welcome ideas about the need to rebuild trust, and how to go about it. First, we need new reporting and assurance mechanisms based on a duty to serve. This would refocus the responsibility of asset managers as stewards of wealth. Second, we need to start looking at reporting as a learning process rather than an end in itself. This would open up all sorts of possibilities. What if we asked stakeholders to report on the performance of organizations, in addition to the organizations reporting to the stakeholders, creating an interactive process? Thirdly, and relatedly, we need to see assurance as a process and not just as an outcome. To think about it as something that helps and informs the organization.

This was a message that resonated with the audience. Current responses to regulation encourage ‘bureaucratic formalization’ at the expense of innovation and adaptability. Mr. Waitzer suggests that we reduce our dependence on complicated financial assets which would in turn reduce the need for expert advice. He believes that if we focus on the interest of long term beneficiaries, and spend more time on fiduciary standards, that would encourage responsible investing. Realigning compensation with long term incentives would also help. Excellent ideas, and ones the SRI community has been advocating for some time.

However, Mr. Waitzer also startled the audience by suggesting that independent directors were not necessarily a good thing. He suggests that ‘cosmetic boards’ may look good, but ultimately have limited power as they often only get the information that management gives them. He contrasts this with boards of private companies. These will lack independent directors, but the directors are more likely to be extremely involved in the company and better able to understand the impact of the decisions they are asked to make. From a time perspective, these private directors may spend a significant amount of time on their director’s duties, as compared to the 10 -15 hours per meeting put in by the independent director. Interesting points, and sure to be researched by some people in the room. Stay tuned for the debate.