Crisis Impact on Director’s & SME’s GovernanceHugues LacroixPLUS - May 2009 ConferenceThe Global Credit Crisis

Guest speaker - Hugues Lacroix•CA, MBA & ICD.D•More than 20 years of experience in finance and governance

•Investment Vice-President, at the Fonds de Solidarité (VC) for 12+ years

•Director for Labrie Environmental Group, ex-Spectra Premium & ex-Manac

•Guest lecturer - MBA (Tours & Sherbrooke Universities), IAS DEP program (McGill);

Agenda

1. Foreseeable risks2. Can you mitigate them ? How ?3. Nature of the risks

& if time permits :4. How to interact at that level

to protect value (vs create) ?

Agenda

1. Foreseeable risks

Disclaimer :

I am not a lawyer or an

insurance specialist…

Lets make a little test…• Anyone from the United States in the audience ?• OK, those from Canada too…• Who has 20$ dollar bill in their wallet or purse ?• Do you have many of them ?• Did you know that you were taking an undue risk ?• Because you have too many of them…• XXX You should have less twenty’s

& more 10$ and 50$ bills XXX

Because of the Green-Backed Commercial Paper Scandal

We’ve just been told that $20 bills are no longer “legal tender” and are of uncertain value

You should have known !!!You’re gonna tell me that :• You got them at the bank from a reputable ATM• They were “rated” by a reputable notation agency• You were told they were backed by gold (no longer)• How could you know, they were treated as cash on

the balance sheet…Well, you should have requested 2 notation

agencies… (this is how we feel right now)

Managing risk

Unidentified risks cannot be managed !

Risks are devious by nature…

Some are easier to anticipate (more common) :• Imported toxic products (sofas, milk, toys paint ,..)• Improper conduct from management (City, Unions,…)Some are tougher :• ABCP• Giant corporation crashing down (GM, Abitibi,…)• Planes crashing on New-York towers

Managing risks is not a plus …

It’s a must !

Managing risk

• Can it be done in SME context ?• Do they have the proper tools ?• What changed since the crisis ?

Agenda

2. Can you mitigate them ? and if so, how ?

Your industry could :• Required certification / training of directors;

- Plenty of very valuable course : ICD, IGOPP, CAS • Or at least, credit it’s value against premium;• Required a real due diligence prior to accepting a

directorship;• Supply tools to BoD to identify & manage risks• Offer a policy for directors’ personal coverage;

Things that could be done – industry related

You can also try insuring : ethical behaviour• behaviour of CEO & directors is fundamental• must promote the « Tone at the top »• no longer tolerable for entrepreneur to act illegally or

unethically in the name of the corporation Making sure they avoid :• using privileged information to personal means• misbehaviour that will engage your personal responsibility• mingling their personal interests & those of the corporation

Managing industry risk

One of your client have just been offered a

director’s position…

What an honor !

Impossible not to accept

Wrong …!

What could you do ? What should they do ?

Should validate :• Availability ?• With whom & why ?• What (understanding the context) ? • Professional BoD or not ?• Absence of any conflict of interests • Quality of the information & of decisional process

What DD could be required prior to accepting ?

• Attestation of paid salaries, DAS, taxes… + follow-up

• BoD minutes for the last 12 to 24 months• Audited financial statements • Indemnification agreement• Subscribe good « D&O » insurance policy• Right to opinions from independent third parties

Example of information request :

Minimal Diligence – things to obtain

Example of an information request done by a skeptic

director in a file…

Requested details on :• D&O insurance details• Indemnification agreement• Management declaration• Legal records (of proceedings)• Right to third parties opinions

Request details on :• BoD minutes• Audited financial statements• BoD & committees charter• Board book for last BoD• Any conflicts of interest• Old Due Dill material• Business plan / press review• Key shareholders’ list• Meet CEO, directors, lawyer,

auditors,…

No need to say that my services were not retained…

The best protection remains* :

Do not accept a director’s position…

(*) : According to Me Catherine Tyndale, Nicholl Paskell-Mede

«  Nowadays, anyone who agrees to sit as a director seems to demonstrate that he (or she)

lacks the necessary judgment to make a good director  ! »

But should we still accept ?

Groucho Marx revisited

Mitigating risks

Once your client is hooked in…

• Attend the meetings : continued presence & critical mind remain their best defense

• Keep copies of important documents used (in decision process)

• Read minutes, have them corrected if needed• When in doubt, get an expert opinion, best to

delay a decision, and obtain addt’l information

What can they do better, to mitigate the risks :

• Dissidence should be registered if necessary (abstention is not an option !)

• Must be recorded in minutes if do not share opinion of the majority & if conclude that not in best interest of corporation

• dissidence absolve directors of responsibilities linked to a decision

Consequence : I quit ! or You leave ?

(or : After me, the flood can come)

Dissidence & resigning

3. Nature of the risks

Managing risk in an SME context…

Corporations still have 3 objectives :• Insure it’s continuity• Make profits• GrowBut to achieve that, it must avoid failure

Managing risk in an SME context…BoD still has 3 objectives, namely to insure risks are :• Identified by senior management;• Managed by the corporation (via a plan to : prevent,

avoid, reduce, transfer or segregate the risks); OK : Insure them…

• Followed upon, once issue raised to their attention

Directors must provoke a discussion & obtain information allowing them to make the right decisions (is it done… ?)

Managing risk in an SME context…

Directors (in Quebec) still have 3 real personal risks :

• Reputational risk• $$$ risk for legal fees (defend against “claim” not

properly insured - indemnity vs responsibility)• $$$ risk for governmental claims (if not covered)(Note that 2 out of 3 are covered by your industry)

Managing risk in an SME context…

• In that context, for directors of private companies, real risks are limited;

• Most of the residual ones are driven by the presence of minority or institutional investors;

• Slightly more risky for publicly traded corporations;

• The problem is…

The “Expectation Gap”…

According to the general public, directors should :• Know it all;• Make no mistake;• Catch all improprieties (if any);• Leave no question unanswered;In clear, to be someone close to “GOD” status

Questions ?

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Agenda

4. How to interact at that level to protect value (vs create) ?

Roles of a BoD

Accountants are familiar with FIFO & LIFODirectors must familiarize themselves with NIFO :

« Nose In, Fingers Out »

Role of a BOD is not to initiate or stop management actions, but to guide them.

Directors are not there to manage the company but to insure that it is well managed

Remember : 5 modes of governance available1. Advisory : Voluntary, no rules « per se »

2. Statutory : Meet minimal legal requirements

3. Cosmetic : Approve, but without really challenge the CEO / Shareholders’ position

4. Controlance : Revise what is proposed & do monitoring; Oriented towards BoD effectiveness & protection of value

5. Governance : Authorise major orientations, supervise & monitor their deployment; Oriented towards BoD efficiency & value creation

Most of your private client are likely to be at level 3 or 4

More control to preserve valuePossible course of actions :•insure information exactitude & integrity•validate value of internal controls•monitor financial results•measure operational performance•insure organization & BoD effectiveness•insure appropriate ethical & legal behavior•insure appropriate divulgation

More governance to create valuePossible course of actions :•leadership continuity •establishing a clear vision, mission or strategy•identify & share opportunity (M&A)•increase organizational & BoD efficiencies •evaluate CEO & Directors performance •identify & manage risks (can be preservation too)•create synergies (network)

To govern is to make choices…

•Strategy is making choice, to take risks, differentiate;•Easier & comfortable to manage conformity & control;•If every situation is analyze with same filter, always trying to minimize risks, we all become alike;

•Thus, negating value creation options;•Must manage and not negate risks;

Un leader du capital de développement de la PME, établi depuis 1983 Faits saillants au 30 novembre 2008

Entreprises partenaires1 881*

Emplois créés, maintenusou sauvegardés

126 035*Placements2,5 milliards $

Nombre d’actionnairesPrès de 575 000

Souscriptions annuellesmoyennes depuis 5 ans

611 millions $*

Actif net6,2 milliards $

Investissements3,7 milliards $

Valeur de l’action21,20 $

* Données au 31 mai 2008

Entreprisesdu secteur technologique31 %

Industrieset services69 %

Incluant notamment :• transport, textile,

plastique, récréo-touristique, ressources naturelles, agroalimentaire, services financiers, construction, aérospatiale, immobilier, etc.

• soutien aux projetsd’exportation

Un portefeuille diversifié Au 31 mai 2008

Le rendement du Fonds

Valeurde l’action

21,20 $

Note : Ne tient pas compte des crédits d’impôt accordés aux actionnaires.

Depuis le débutdes activités

4,1 %

(15,3) %

Semestre terminéle 30 novembre 2008

Une force qui grandit rapidement

4 534

5 955

Actif net (en millions $)6 171

30 juin 2002 31 mai 2005 30 novembre 2008

Une force qui grandit rapidement

2 769 2 901

3 705

Investissements (en millions $)

30 juin 2002 31 mai 2005 30 novembre 2008

Volumes d'investissements* (en millions de $)

* Incluant les investissements non admissibles à la norme de 60 %.

20072004 2005 2006

405

492

643 668

2008

31 mai

(11 mois)

730

Le Fonds de solidarité FTQ… nous sommes :Un fonds d’investissement d’appartenance

syndicale qui est devenu la plus grande institution québécoise vouée à la création d’emplois par la

solidarité économique.

Pour toute information : Hugues Lacroix CA, MBA, IAS.A

(514) 383-2595hlacroix@fondsftq.com