Conference Board of Canada Spencer Stuart Awards in Governance

Donna Soble Kaufman – Chair of TransAlta’s Board – was the keynote speaker at the the 2009 Conference Board of Canada Spencer Stuart Awards ceremony. This speech was given in Toronto on Feb. 10, 2009.


Good evening ladies and gentlemen. I’m delighted to have been invited to participate in this wonderful event. It is an honour to celebrate the 2009 Conference Board/Spencer Stuart National Awards in Governance, and a thrill to see TransAlta’s Board being recognized alongside the likes of so many outstanding organizations from across Canada’s public, private, and not-for-profit sectors.

These awards exemplify the very best principles of good governance, innovation and leadership, and I warmly congratulate each of you on this achievement.

I’d also like to thank tonight’s sponsors and organizers, who continue to bring the practice of good governance to the forefront of corporate Canada.

Finally, let me add my congratulations to the graduating class of the 2008 Directors College. You have certainly picked an interesting time to embark on a career in corporate directorship. I admire you for your intrepid spirit!

I am going to speak tonight about a special aspect of corporate governance that is too often taken for granted. Some will dismiss it as obvious; others might consider it old-fashioned. Yet, I would suggest that in today’s world it is more important than ever before. The topic is corporate reputation: its importance … and its limitations.

Let’s deal first with its importance. In Shakespeare’s Comedy of Errors, The Merchant asks “How is the man esteem’d here in the city?” Angelo, the goldsmith replies: “Of very reverend reputation, sir, of credit infinite, highly belov’d, second to none that lives here in the city: His word might bear my wealth at any time.”

“… of credit infinite … His word might bear my wealth at any time.”

I won’t poll the bankers in the room, but I would guess that those are not exactly sentiments you hear expressed very often these days.

It’s certainly not the spirit in which the CEOs of Detroit’s Big Three automakers were received when they went before the US Congress last Fall. Quite the contrary, in fact.

As a columnist for The Detroit Free Press wrote on her paper’s front page: “I never knew Detroit was a dirty word.”

Turning from the Bard and the Big Three to the Oracle of Omaha, some of you might recall that when Warren Buffet took control of Salomon Brothers following the Treasury notes scandal in the early 1990s, he famously fired all those involved and said to those who remained:

“If you lose money for the firm by bad decisions, I will be very understanding. If you lose reputation for the firm, I will be ruthless.”

How interesting: Warren Buffet, one of the world’s great investors, prizes reputation over profit.

But, why?

The answer may be right here in this room …in a manner of speaking. In a 2007 Conference Board report on Reputation Risk, Matteo Tonello wrote:

“Research shows that corporate reputation is an indication of equity value, and reputable firms are more likely to sustain superior financial and market performance over time.”

The report goes on to say that strong reputations lower transaction costs, and increase price premiums for the reputable party.

In plain English: a good reputation is good business.

This principle – that a good reputation is good business — was on full display last October when Berkshire Hathaway acquired stakes in two of the world’s premiere companies, General Electric and Goldman Sachs, on terms that simply weren’t available to anyone else.

Why? Because GE and Goldman got something more than a capital infusion … something they could have gotten only from Warren Buffet.

As the Economist put it, “Goldman could not have wished for a more credible vote of confidence.”

Buffet’s reputation had become a currency of its own. He got terms no other investor could have, and GE and Goldman received the ultimate “Good Housekeeping Seal of Approval.”

All of this leads to one conclusion: that reputation matters. Not only is it good business, but insofar as it can also be a driver – and a safeguard – of shareholder value, it is good governance as well.

This is not to say reputation is more important than other areas of board responsibility. It is to say, however, that reputation is perhaps equally important, and yet it seems to receive less time and attention than it deserves.

I can think of a few reasons why that might be the case. For one, reputation is difficult to measure. And as we all know, if something is difficult to measure, it’s difficult to manage.

It is also difficult to assign accountability for. If I’m a CEO and my company has a legal problem, I’m going to go to the legal department. It’s not so easy with reputation. There is no “reputation” department because the responsibility for reputation belongs to everyone, and sometimes that means it belongs to no one.

Finally, I suspect reputation doesn’t get the kind of board-level attention it deserves because, like beauty, it is in the eye of the beholder. We don’t get to decide what reputation we have. Our customers do. Or our employees, shareholders, regulators, the media or – more realistically – some mosaic that emerges from the collective and conflicting views of all these constituencies.

Reputation is unique because it is a vitally important corporate asset that we fundamentally don’t control.

So what do we control? Well, if reputation is an output, then we control the inputs.

We determine the skills, qualities and values we want in the Chief Executive Officer. We define the incentives, rewards and expectations embodied in our executive compensation plans. We review capital allocation priorities and sign off on the investments our companies make in product quality, customer service, community support and environmental stewardship.

These are all issues that rise to the board level in some fashion or other. Once there, reputation shouldn’t be the only consideration, but it must be a consideration.

But apart from all this, we set the tone at the top that defines the corporate culture.

More than any corporate policy manual or any “mission, vision and values” statement, the culture of an organization is the product of its history; the stories that define it and the behavior its leaders exhibit. It is the unwritten code that guides and governs the activities of hundreds, or thousands — or hundreds of thousands — of people across a diverse enterprise. There will always be rogue players, but culture is the key to reputation.

Perhaps this is a good time to talk about the limits of reputation, because there is more to the story than just reputation and culture.

We are all familiar with the axiom, “perception is reality.” This bit of wisdom is intended to convey that for better or worse, people believe what they think they see. This means that a bad reputation carries a very real economic cost, and a good reputation can be a powerful competitive advantage.

But as we have seen too often, and at great cost, sometimes perception isn’t reality at all.

Enron, Bernie Madoff and certain mortgage-backed securities come to mind. In turn, they benefited from reputations for innovation, consistency and security. But in time, each was proved false.

The lesson: reputation matters, but reputation isn’t enough. Perception isn’t always reality. Transparency matters too. And the two together – reputation and transparency — bring us right back to the boardroom.

Reputation – and reputation risk – belong on the board agenda, in my view, because reputation is about more than what a company says. It is earned – good or bad – by what a company does and the extent to which others can see it.

This means that companies must say the right things, do the right things and give others the means to judge for themselves. That means increased transparency. And that means ensuring the Board’s decisions can withstand the scrutiny that transparency brings.

Last year at this dinner, Red Wilson made a compelling argument that Boards must move past compliance to performance. I agree wholeheartedly with Red’s thesis, and I would like to close tonight by building on it by suggesting a few questions directors can ask to help make reputation a key consideration in their planning and priorities.

  • Have we considered the reputation risks and rewards of the decisions we are making, be they on governance, compensation or strategy?
  • Will we be able to defend in bad times what seem like good ideas in good times?
  • Are we really as good as we think we are? Could we do better?
  • Is our disclosure adequate? Could it be better?
  • Are we comfortable with how this will look on the front page of the Globe & Mail?
  • What does common sense tell us?
  • Are we doing the right thing?
  • And finally, in the broadest sense, are we leading by example?

Because for me, when all else is said and done, that’s what it really comes down to. Create a culture of integrity, transparency and of doing the right thing, and we will have companies with reputations we can all be proud of. More important, we will have companies with reputations that will serve them well in the competition for capital and the creation of value.

By its nomination, the Conference Board has recognized TransAlta’s efforts to bring enterprise risk management to life throughout the organization and up to the Board level. The opportunity exists for all of us on the boards we serve to do the same by elevating the role of reputation in our deliberations, our decisions and even in our performance-measurement plans.

The fiduciary duty of the corporate director is to act in the best interests of the corporation. Building and safeguarding reputation is a critical and often overlooked part of that responsibility.

Well, I have barely scratched the surface, but I hope my remarks will provoke further thought and discussion.

Thank you for your attention, and for your continued leadership.

Donna Soble Kaufman – Chair of the Board
Toronto, ON – Feb. 10, 2009

February 10, 2009

TransAlta Chair, Donna Soble Kaufman, speaks to attendees of the Conference Board of Canada Spencer Stuart National Awards in Governance ceremony. This speech was given in Toronto on Feb. 10, 2009.

TransAlta Chair, Donna Soble Kaufman