Bob Tricker, named by Sir Adrian Cadbury as the godfather of corporate governance, is a hero of mine. While he did not 'invent' the term (Richard Eells did, in 1960), Tricker did do most the heavy lifting—helping all of us who followed understand what corporate governance is and, crucially, what it is not.
Sadly, some directors, consultants and academics have lost sight of Tricker's useful guidance; wandering off to propose all manner of definitions and descriptions. Thankfully, Tricker and a few others have continued to carry the baton, periodically reminding us what corporate governance actually is. Recently, Tricker put pen to paper again, writing this short piece to call out a common mistake: of conflating governance and management. That these two terms are used interchangeably has become a real problem.
A key insight from Tricker's most recent article is that corporate governance is what the board does. In contrast, management is what managers do. Sometimes, the two distinct roles (director and manager) are performed by the same person (an executive director, for example). In such cases, the person performing both roles must be diligent in the extreme, to correctly discern the particular hat they are wearing at a given moment in time.
Thank you for the timely reminder Bob.
The storied fall from grace of Wells Fargo continues to produce fodder for both informed discussion and speculation. And rightly so. Much can be learned from this case, of a once-proud bank that started believing its own press, and then breaching ethical and legal boundaries. To maintain a fictitious facade undermines the confidence that many private citizens place in banks.
The first, and most important learning is that when trust is eroded—regardless of whether through illegal and immoral actions or more simply ineptitude—consequences typically follow. In Wells Fargo's case they have, well mostly. The bank's share price and reputation have both taken a hit: mistrust being a heavy burden.
Now, the results of an independent investigation into the fake accounts scandal have been published. The report is comprehensive (it is nearly 100 pages long). The stated goal of the investigation was to identify the root causes of "sales practice failures", so that "these issues can never be repeated and to rebuild the trust customers place in the bank". So, what was discovered?
Expectedly, operational failings were uncovered. The report lays much of the blame on the shoulders of the then chief executive, Mr Stumpf. This is appropriate because the chief executive is the person who is normally responsible for operational performance, in accordance with both approved strategy and policy. Changes to personnel and practice have been made.
What is perhaps surprising however, is what is not reported. The board does not appear to have looked in the mirror. Yes, the roles of chairman and chief executive have been separated and allocated to two different people—but what of the board's engagement in effective oversight of management? The board of directors knew of the sales practice failures as early as 2014. Remedial actions were (supposedly) taken in 2015, and management reported these were working. But who checked?
That the board knew about the problem and remedial actions were supposedly taken is clear. What is far less clear is whether the board satisfied itself that the actions had in fact been taken and/or that the desired effects had been achieved. Sadly this is not uncommon. That the board trusted management, and blindly so it would seem, does not excuse the board from the consequences of the scandal that followed.
The board-commissioned independent review has shone the light brightly on management. Problems have been identified and actions taken. This is good. Now, one significant step remains: the board should have a good long look in the mirror.
Further to my recent announcement, the full findings of my doctoral research are now available. You can read the abstract here, or download the full thesis (all 359 pages!):
Understanding corporate governance, strategic management and firm performance: As evidenced from the boardroom (5.2MB, PDF)
The research is informed by a longitudinal multiple-case study of two large high growth companies. Data was collected from direct observations of boards in session, and multiple secondary and tertiary sources, creating a rich and rare data resource. The analysis revealed numerous insights, leading to a mechanism-based model of the governance–performance relationship and an explanation of how boards can exert influence beyond the boardroom including firm performance.
If you would like to discuss the research (or raise a challenge), ask a question or explore how your board might benefit from the findings, please get in touch. I'd be glad to hear from you.
One of the biggest corporate news stories to break in 2016 was the Wells Fargo 'fake accounts' scandal. Many commentators, including me, wrote op-eds. At the time, I wondered whether the company had lost sight of its corporate purpose (reason for being), or if greed and hubris had permeated the corporate culture. These were speculations based on partially formed publicly-available snippets of information. Thankfully, the company initiated a far-reaching review, to try to get to the root of the problem.
Now, six months after the scandal was uncovered, the post-scandal investigation is reportedly wrapping up. Hopefully, the underlying causes will be identified, and credible recommendations to restore customer and market confidence in this once-fine brand will be presented. I look forward to reading the report.
This is the second of two instalments summarising observations from my recent two-week skip across Western Europe. This summary covers the UK leg of the trip. You can read the first instalment here; the European leg.
The trip was framed around four objectives, namely, to share learnings from my recently completed doctoral research and discuss the implications for boards; fulfil some speaking engagements; discuss emerging trends with boards; and, attend a training course. After travelling between cities (actually, countries) every day during the first week, the second week was much more settled. I was based in London for two-and-a-half days for meetings at institutions and with directors. The balance of the week saw me at Cambridge University, for a training course. Here's a brief summary of the key observations:
If you would like to know more about these observations, please get in touch.
In the last two weeks I have visited six countries spread across three timezones; slept in seven different beds; experienced snow, sunshine and rain; attended an intensive training course at Cambridge, one of the world's top universities; delivered six formal presentations; and, participated in more than 50 significant discussions about organisational purpose, corporate governance, strategy and board effectiveness. It's been invigorating! Along the way, I've been fortunate to gain many insights, a few of which are summarised in the points below:
These are but five significant insights to emerge. If you'd like to know more, please get in touch.
This is the first of two postings, covering the first week of my nomadic journey. Watch for the second posting soon!
Longstanding readers of Musings may recall that I embarked on a journey in 2012, to try to understand whether boards of directors are able to influence the performance of the company they govern and, if so, how. The journey has been long and arduous, with many challenges and setbacks along the way to be overcome.
That journey, my quest to answer a most difficult question, has reached an important milestone, the awarding of a doctorate degree. I'm thrilled that the examination panel has seen fit to recognise the groundbreaking research, a longitudinal study of the boards of two large high-growth companies. The panel's decision confirms the validation provided by the academic community late last year. Here is the doctoral citation:
Boards of directors have been the subject of considerable research attention in recent decades. While a large body of knowledge has been published, substantive evidence to explain how boards actually exert influence over firm performance from the boardroom has remained elusive. Crow conducted a longitudinal multiple-case study of two large New Zealand-based high-growth companies. Data was collected from direct observations of boards in session, and multiple secondary and tertiary sources, creating a rich and rare data source. The analysis revealed numerous insights, leading to a mechanism-based model of the governance–performance relationship and an explanation of how boards can exert influence beyond the boardroom including on firm performance.
Churchill's honesty and candor—expressed throughout his sometimes tumultuous career—speaks volumes. Whether speaking about the difficulty of defending Britain (1940); the descending of an iron curtain across Europe (1946); or, holding out false hopes (1950), Churchill's assessments were characteristically both candid and complete. His candour marked him out as a courageous leader—not always right or universally popular, but strong and courageous nevertheless.
In contrast, many boards of directors have a history of being far less complete in their communications; to the point of being economical with the truth and dismissive of the seriousness of situations. Directors—a proxy for (often) absent shareholders—are appointed to govern the affairs of the company, a fiduciary responsibility. Yet a significant number flout this trust, behaving without reference to others (notably but not only shareholders); a sad reflection of the human condition.
When boards and directors operate in a 'fast and loose' manner, and selfishly so, the casualty is often company performance (not to mention the consequential impact on company value). Sadly, shareholders typically only find out late in the piece (sometimes too late): BHS, Wells Fargo and Wynyard Group are recent examples.
Why do shareholders continue to support boards and directors who behave in this manner? Surely the learning from Churchill (and many others including the famous Johnson and Johnson Tylenol case) is that disclosure and the provision of an accurate account is the preferred way of operating, even though the short-term pain may be great. Indeed, history is a great teacher—but only if we take heed of the lessons.
Sunday 5 March is less than two weeks away. For many it is just another day. However, it is significant for me because it signals the onset of an eight week stretch of advisory, speaking, board evaluation and confidential briefing commitments in several countries. Consequently, I will temporarily embrace a nomadic lifestyle: hotel rooms, flights and airline lounges will dominate my world. Here's the schedule as it stands today:
While the schedule will be demanding, the cause is compelling: to speak into literally hundreds of situations in which boards and directors have sought guidance to improve their practices and performance will be both a great honour. That they have reached out to me is deeply humbling. I shall do my best to make a difference.
Just over twelve months ago (6 January 2016 to be exact), I wrote this muse, a reflection on both the state of corporate governance and the usage of the term. At that time, confusion over the use of the term 'corporate governance' was common, and the profession of director was shadowed somewhat by several high profile failures and missteps. The blog post seemed to hit a nerve, triggering tens of thousands of page views and searches within Musings; many hundreds of comments, questions, debates and challenges (including some from people who took personal offence that the questions were even asked); and, speaking requests from around the world. That many people were asking whether corporate governance had hit troubled waters and were searching for answers to improve board effectiveness was reassuring.
That was twelve months ago. How much progress has been made since?
At the macro level, seismic geo-political decisions; the rise of populism and the diversity agenda; and, risks of many types, especially terrorism and cyber-risk have altered the landscape. Also, new governance codes and regulations have been introduced to provide boundaries and guidance to boards. Yet amongst the changing landscape something has remained remarkably constant: the list of corporate failures or significant missteps emanating, seemingly, from the boardroom continues to grow unabated. Wynyard Group and Wells Fargo are two recent additions; there are many others.
Sadly, companies and their boards continue to fail despite good practice recommendations in the form of governance codes and (supposedly) increasing levels of awareness of what constitutes good practice. This is a serious problem: it suggests that, despite the best efforts of many, progress has been limited. Clearly, ideas and recommendations are not in short supply, but what of their efficacy—do they address root causes or only the symptoms? And what of the behaviours and motivations of directors themselves, and the board's commitment to value creation (cf. value protection or, worse still, reputation protection)?
That the business landscape is and will continue to be both complex and ever-changing is axiomatic. If progress is to be made, shareholders need to see tangible results (a reasonable expectation, don't you think?), for which the board is responsible. If the board is to provide effective steerage and guidance, it needs to be discerning, pursuing good governance practices over spurious recommendations that address symptoms or populist ideals. How might this be achieved?
An important priority for boards embarking on this journey towards effectiveness and good governance is to reach agreement on terminology, culture, the purpose of the company and the board's role in achieving the agreed purpose. If agreement can be reached, at least then the board will have a solid foundation upon which to assess options, make strategic decisions and, ultimately, pursue performance.
Thoughts on corporate purpose, strategy and governance; our place in the world; and, other things that catch my attention.