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© Copyright 2000 Rogers Media. The following article first appeared in the October 2000 edition of
BENEFITS CANADA magazine.
Governance game plan
Effective governance strategies are essential. Glorianne Stromberg provides six steps to
implementing an effective system for a global marketplace.
By Barbara Clapham
There are systemic problems in the financial industry that need to be addressed. This was one of the
messages delivered by Glorianne Stromberg, a former commissioner for the Ontario Securities Commission, in
her keynote address at the recent Risk Management Conference, co-sponsored by the Bonham Centre for Finance
at the University of Toronto and Canadian Investment Review.
Capital markets have chang-ed considerably over the past 10 years or so, and it's time to take a fresh look
at the way business is done to ensure that there is fairness, efficiency and integrity in the marketplace.
One of the major problems is the constant pressure put on money managers and those who work at financial
institutions to perform, combined with methods of compensation that exacerbate the stress. Many employees
feel that in order to keep their jobs they must satisfy existing clients, bring in new ones and record
stellar investment performance--at the same time, all the time.
Some methods of performance evaluation and remuneration simply don't make sense anymore. For example, it is
now possible to trade securities around the clock, around the world. As a result, the practice of measuring
the performance of a portfolio manager based on closing prices of the last trading day of a given quarter
should be updated to reflect the new trading environment.
The current system is also faulty in that it serves to facilitate unethical behaviour such as high closing
practices, which are carried out to boost performance figures and corresponding pay.
What, specifically, can be done to address this issue? Stromberg offers several suggestions:
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Change the basis for valuing portfolio securities from the price of the last trade of the day to a
volume-weighted average price.
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Recognize the need to develop universal standards of valuation to be used by all industry participants
with respect to performance information in all types of managed accounts.
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Develop best practice guidelines concerning the calculation of asset and performance-based
compensation. This would include eliminating end-date biases in determining an average value on which
compensation is calculated.
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Recognize the need for, and solicit the cooperation of, regulators and the industry in other
jurisdictions.
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Implement better internal systems and controls as well as other governance procedures and ensure that
they are activated and continuously monitored. This requires a clear identification of the
responsibilities and roles of people who are directors, officers and part of the management team, as
well as adequate oversight mechanisms and some element of informed independent review.
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Improve the awareness and training of all personnel involved.
Implementing these actions should go a long way towards helping financial institutions adjust to new
conditions in the global marketplace.
Barb Clapham is editor of Canadian Investment Review and a contributing editor to BENEFITS CANADA.
As editor of Canadian Investment Review, I am pleased to tell you about the first annual Barclays
Global Investors Canada Research Award. This award recognizes excellence in Canadian capital markets
research and is the largest academic award of its kind in Canada.
The author of the winning paper, as determined by a panel of independent judges, will receive $10,000
and an abridged version of the paper will be published in Canadian Investment Review. More
information and submission guidelines can be found at investmentreview.com.
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CONFERENCES
Proactive Compliance Action Plans
Nov. 13 to 14, 2000
Holiday Inn on King, Toronto
This conference will address how to recognize flags and fortify compliance procedures through better
corporate governance. Call (416) 944-8833.
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