In a world facing several crises, the question of purpose has never been more important for corporate directors

In 2021, corporate boards are being forced to reckon with the impact their business has on a variety of stakeholders.

Credit: Byron Eggenschwiler

Three leaders of B.C. businesses, each with intimate board experience, share their thoughts on how a company should be governed for long-term success

A crisis has a way of pushing certain issues—stuck in the footnotes of an annual report—into the Letter From the CEO. Such was 2020, our annus horribilis. In addition to managing the fallout of an epochal pandemic, organizations everywhere had to respond to social upheaval and questions around diversity and representation in the wake of Black Lives Matter protests. And the planet’s climate emergency—given lip service by many pre-pandemic—raced into the white-hot Klieg light of corporate governance. More than just a health emergency, COVID exposed many of our world’s frailties—all at the same time.

Some organizations flinched in the face of adversity, while others faced the cascading issues head-on. On March 29, 2020—as the broad-reaching impact of COVID was becoming apparent—Larry Fink, chair and CEO of BlackRock, the world’s largest money management firm, laid out the challenge in his letter to shareholders. “I have always believed in a long-term view. I have advocated for it in letter after letter,” Fink wrote. “And I believe long-term thinking has never been more critical than it is today. Companies and investors with a strong sense of purpose and a long-term approach will be better able to navigate this crisis and its aftermath.”

Boards are constantly forced to wrestle with matters of the moment, while keeping an eye firmly on the future. For many companies, the filter of ESG—environmental, social and governance issues—has become vital to decision-making, both at the board and management level. And while last year forced many to focus on the S of ESG—as the pandemic and racial strife ripped through society—2021 seems likely to bring the E back into focus. (To wit: Fink recently made a company’s commitment to net-zero emissions a condition for investment by BlackRock.)

By late spring, it was clear that the tide had really turned: Royal Dutch Shell got a court order to shrink its greenhouse gas emissions, while activist investors pushed fellow oil giants Chevron Corp. and ExxonMobil Corp. in the same direction.

But having “a strong sense of purpose and a long-term approach” is about more than just ESG. It’s also about who makes it onto the board, what their motivations and skill sets are, and how they view their roles as directors. And according to the following three leaders of B.C. businesses—each with intimate board experience, and each with a unique take on how a company should be governed for long-term success—the question of purpose has never been more important.

Chip Wilson
Founder, Lululemon Athletica
CEO, 1998–2005
Board member, 2005-15 (chair, 2007-13)

For Chip Wilson, the challenge of corporate governance—something he’s struggled with since 2005, when he sold 49 percent of Lululemon to a group of VC investors—is the challenge faced by every entrepreneur: how to let go as your company grows.

“I got to appoint the CEO, which was a verbal commitment that I received,” recalls Wilson of the decision to bring in outside investors and the company’s first external chief executive, Christine Day. “But I lost control of the board. What I didn’t realize—and what I coach a lot of people on—is that it doesn’t really matter when you sell to private equity and set up a private board. What really matters, at that particular time, is how it gets set up for when you go public.”

That happened two years later, in 2007, when Lululemon listed on the NASDAQ Stock Exchange. In Wilson’s telling, it became a losing battle to maintain the sort of creative input that had been critical to Lululemon’s early success. “What I observed was that the type of people that a board attracts—especially for a U.S. company—is to set up [to defend] against litigation. I would say it’s ‘control, risk-averse, metric-driven.'”

Though no longer on the board, Wilson remains a vocal minority shareholder, with an 8.5-percent stake. He’s particularly critical of how much attention has been paid, post-IPO, to finding the right person to sit on the audit or compensation or governance committee—and how little to the “creative, brand side” of Lululemon, which he argues represents 80 percent of its value. “If you’re only one voice, as I was, against eight, then it’s very difficult for a public company to be great. The mechanisms to keep it mediocre are just too strong.”

When Lululemon was formed, says Wilson, the aim was to build a “social movement company”—so the S in ESG has always been core to its identity. He notes that it also played a pioneering role in gender diversity—”we were the first company to have a woman-dominated board of directors; our first CEO was a woman”—but otherwise is unwilling to weigh in on issues of representation at modern-day Lululemon: “Anything I say can be misconstrued, in so many ways.” (Lululemon had no comment.)

In other ways, Wilson feels liberated since leaving the Lululemon board in 2015. “Now I can go to the AGM and ask questions in public, in a way that I can’t move the board internally.” (Although, he adds, they don’t always elicit a response: “They won’t even answer my questions at analyst meetings. I know too much about the company.”) Today, he sits on the board of Facio Therapies, a privately held pharmaceuticals company based in the Netherlands, as well as Amer Sports, the private company behind Salomon, Arc’teryx and other brands, in which he’s an investor. But his days of sitting on a public board are over.

“Because of what’s occurred with Lululemon, and my open fight with the board, I wouldn’t even be considered for another public board,” Wilson acknowledges. “In order to be an entrepreneur and build what I did, I have opinions about the future that are not acceptable in the realm of society at present. Because I look to see where society is going. And that makes people uncomfortable, and in this world of press and social media, I am a liability.”

Philippe (Phil) Arrata
CEO, Mountain Equipment Co-op, 2019-20
Board director, MEC, 2015-18
CFO, Best Buy Canada, 2017-19

Phil Arrata came to Mountain Equipment Co-op (MEC) the way a lot of employees do: as a fan. “I have a passion for the product and the outdoors and sports,” Arrata says. “The values of MEC really resonated with me, and I thought, I can add value.”

Arrata had been a senior VP with Best Buy Canada when he joined the MEC board in 2015. He soon discovered some of the unique limitations of co-operative boards—first among them that board members aren’t picked for their expertise the way public directors are. While a nominations committee tries to match up candidates with missing skill sets—and recommend those candidates to the membership, in MEC’s case—in the end, governance was in the hands of a select group of voters.

“MEC typically would have 30,000 to 40,000 people voting for the board, out of 5.7 million members,” Arrata says. Although he made it through for one three-year term, when it came time for a second, he didn’t make the cut—despite being recommended again by the nominations committee. (This system similarly presents a challenge to diversity: while there were five women on the most recent board, notes Arrata, no racialized directors were elected.)

A year after leaving the board, MEC approached Arrata (then Best Buy’s CFO) about the CEO role—and on July 2, 2019, he returned to the co-op, this time as its top executive. His mandate was to turn around what had become a perennial money loser; MEC lost $11.5 million on $462 million in revenues in fiscal 2018-19. By the fall of 2020, Arrata had developed a turnaround plan, focused on factors such as better customer (or what MEC calls “member”) satisfaction tracking and a streamlined merchandising management (cutting 50 percent of SKUs and 50 percent of vendors).

Over the winter, things started looking better, says Arrata, with same-store sales trending upward. Then COVID hit, and revenue went off a cliff—down 50 percent initially, he says. The retailer also had its debt facility with Royal Bank of Canada set to expire in August 2020; when the bank didn’t renew, the co-op filed for creditor protection on September 10. Five days later, MEC was bought by U.S. private equity firm Kingswood Capital Management for an undisclosed amount.

Arrata stayed on through the transition period, leaving MEC (now officially known as Mountain Equipment Co.) at the end of December. Looking back, he says that while COVID presented once-in-a-lifetime challenges, some board decisions made it harder. As one example, he points to the reticence of directors to sell real estate in the fall of 2019, as part of his proposed turnaround efforts. “With a stronger balance sheet,” he notes, “we might have had a chance to survive as a co-op.”

Ultimately, Arrata says, co-op boards are limited both by who runs for a board like MEC’s—and how much skin they have in the game. “MEC members were passionate, but the people who ran for the board were the people who put up their hands. So it was harder to say, We need somebody who has done retail restructuring. We need somebody who’s done a financial turnaround.”

The new owners, he says, will have a clear focus on both the short and long-term success of MEC—and a hand-picked team of expert advisors to make it happen. “They’re expecting a return on their investment. When somebody became a member at MEC, and gave us $5, they just wanted to have a great experience.”

Andrea Wood
Chief legal and governance officer, Telus Corp., 2018-present
VP of legal, Telus, 2013-18

When the Black Lives Matter protests rose up across North America in June of 2020, companies struggled to figure out how to respond. Some “blacked out” their social media feeds in allyship and called it a day. Others issued press releases affirming their commitment to the cause.

For Telus, engaging with social movements like BLM has been integral to its self-described purpose as a “social capitalism” company. The many ways the company responded last year included making a $50,000 donation to the Canadian Civil Liberties Association, to help further antiracism education and advocacy.

“In navigating curr ent events, it’s very helpful to have some values as ‘north stars,'” says Andrea Wood, chief legal and governance officer for Telus. “For us, as we have considered Black Lives Matter, we’ve benefited from our firm and consistently held belief that there is an issue to be addressed here. We oppose systemic racism. We oppose violence. And we think it’s important to listen to and elevate the voices of people of colour.”

Wood joined Telus in 2013 as VP of legal, taking on the expanded governance role five years later to help it manage its obligations to various stakeholders. Given the company’s size, those obligations are substantial—especially in light of its explicit commitment to doing well by doing good.

“Telus is extremely ambitious with respect to corporate social responsibility, ESG, social capitalism—call it what you will,” Wood says. “We are determined to be a leading player in social capitalism. Part of that is governance, so it’s really important that we aspire to be one of the best-governed companies In the world.” Wood says that ESG is core to Telus’ corporate strategy—and that all of the community investments it makes do, ultimately, create more customers, by bridging the digital divide and giving people the tools to succeed.

As chief governance officer, Wood helps to support the strategy-setting at the board level that makes ESG commitments possible. “My obligation is to challenge [directors], to ensure that they are considering all stakeholder interests as they make their decisions,” she says. “They’re all very experienced board members, but I’m ensuring that they are hearing about best practices in governance and also in corporate social responsibility.”

An example she gives is Telus’ sustainability team, which provides regular reports to the board’s corporate governance committee. While many experts see climate change as “the” issue of 2021 and beyond, there’s still a steep learning curve for many corporate boards—including Telus’. Wood notes that the company has developed a matrix of skill sets that it references in recruiting new board members, with an emphasis on “diversity of knowledge” in areas such as finance, information technology and retail. But nothing, as of the 2021 Telus information circular, that specifically addresses climate change expertise.

“I think that it’s increasingly an area of expertise that all board members should have,” Wood admits. “And hopefully we are helping them all to develop it. But you’re right: climate change competence or knowledge about climate change and its impact to our business is very specialized, so we will have to give some thought to how we want to approach our skills matrix going forward.”

Throughout the first half of this year, especially during AGM season, executives and directors across North America faced many questions—from investors and other stakeholders—about how they are handling ESG issues. Nobody—not even Warren Buffett—escaped the ire of activists who are looking for action.

Beware the stakeholders

Failure to consider all stakeholders comes at considerable legal risk, according to Carol Liao, director of UBC‘s Centre for Business Law and associate professor at the Peter A. Allard School of Law. Liao notes that, under the Canada Business Corporations Act (CBCA), stakeholders have ways to keep a company accountable for their actions on ESG matters—citing the oppression remedy, under the CBCA, which seeks to “prevent oppressive, unfairly prejudicial and unfair disregard of certain stakeholder interests, based on stakeholders’ reasonable expectations.”

“In Canada, there are categories under the law. And then they have one other category: anybody deemed appropriate by the court,” Liao says. “Essentially, anybody has the right to sue the corporation for ‘oppressive, unfairly prejudicial’ disregard of their interests, based on reasonable expectations, which can change over time.” She lists a series of stakeholders—shareholders, employees, creditors, consumers, government, retirees and (through affiliated organizations) the environment—as potential instigators of legal action.

“I did an empirical study in 2014, which I’m now in the middle of revamping,” Liao says. “In it, I interviewed 35 senior practitioners across Canada, talking about the requirement to consider stakeholder interests. And they said to me: Whether or not it’s the law, you should do it just to cover your butt.”

If directors have learned nothing else in the past year, it’s the importance of covering yourself for posterity’s sake.