- Investors are happy with the way boards assess strategy, oversee risk and maintain board expertise
- Investors are not happy with the assessment of director performance, shareholder engagement or management incentive schemes; and they would like to see more diversity in the boardroom
- The top three risk concerns are cyber risk, climate change risk and KPIs relating to risk management
Accounting firm PwC has just released its 2014 survey of investor perspectives and board performance. You can get a copy here. The survey findings indicate that investors are generally happy with some things and less so with others. Here are the top points:
The report makes good reading. In all likelihood, it provides an accurate summary of what investors currently think (or at say they think—this is a survey after all). On the flip side, the most surprising and, frankly, most disheartening news is that investors are most interested in visible attributes (gender, composition, et al) and activities (assess, oversee) of boards. These findings suggest that if the board conforms with certain structural and composition 'requirements' and that boards do certain things, then investors are happy.
My experience—gained as an investor, a company director and a corporate governance researcher—tells me that the top priority for boards should be company performance. However it is not mentioned in the report. The only item that comes close is the satisfaction in the way boards assess strategy—and yet most boards that I've observed or sat on spend most of their time monitoring and controlling the Chief Executive! Do investors, who typically do not attend board meetings, really know if or how boards assess strategy?
From these findings at least, it would seem that company performance and value creation (growth) is not that important to investors. Is that the reality? If it is, then investors are too easily satisfied. However, if investors are interested in company performance (I think they are, they probably just didn't say so in the survey), then they need to appoint directors whose top priority is to drive business performance, in order to assure a positive return to the very investors that put them there.
This is the second of my soon-to-become regular updates written for folk who have asked to be kept up to date with my PhD write-up. I have provided updates irregularly in the past. However, I recently made a commitment to provide an update every week, in response to several requests to do so.
The week gone has been characterised by paper: lots of it, everywhere. As mentioned last week, my focus has been on the discussion and theory development (DTD) chapter. This is the piece of the thesis whereby the various threads and ideas that have been mentioned elsewhere are brought together—hopefully in a cohesive and coherent manner. As a digital immigrant, this process involves a pen and a keyboard: yes, I rely on pen-and-paper to augment what I do with computers. While the word processor is my go-to tool when writing new material, my default approach to reviewing and editing material is to print copies and mark them up with my trusty Waterman Expert rollerball. Thus the paper. I also have three piles of dog-eared research articles—each about six inches high—that receive periodic attention as I build arguments and refer to prior research work.
The biggest challenge this week has been to assemble my thoughts and ideas into a logical structure and sequence, and then to write material into each section. The process is quite easy to describe. However, it is somewhat harder to implement. Ideas can flow at any time of the day or night, so I have taken to writing when the ideas flow rather than when my schedule says I should write. It will be interesting to see what effect the change has on my productivity. I'll let you know.
My hope had been to complete the DTD chapter—to a first draft form anyway—by the end of this weekend. However, I have adjusted the structure of the chapter three times in recent days, and have opened up the conclusions chapter as well: the result of which has meant quite some re-work. I'm hoping to break the back of this work and re-work cycle in the next few days because, when I do I can start on the assembly and integration process, of pulling all of the chapters together. While there is some short-term frustration that things are taking a little longer than expected, I'm convinced that the extra effort being put in now will make the thesis easier to read later. Fingers crossed.
Earlier this week, the Chief Executive and two former directors of South Canterbury Finance, the failed finance company, faced Justice Heath to hear his verdict relating to New Zealand's largest ever fraud case. Some $1.6B was owed to creditors when SCF collapsed in 2010. Justice Heath found one director guilty on five charges, and he acquitted the other director and the Chief Executive on all of the charges they faced. In his decision (all 258 pages), the judge blamed the former chairman (Alan Hubbard, who was killed in a car crash some time after the collapse), who appeared to rule with a dominant hand.
What I cannot fathom in this case is how one director can be found guilty of knowingly making false statements and the chairman can be blamed for ruling with a dominant hand, yet another director was not found guilty. Clearly, the director adjudged to be guilty was not happy. The board is a collective of directors, so decisions should be decisions of the board—surely the prospectus was considered and approved by the board and not an individual? That the board is one is what we teach on the Institute of Directors' Company Directors Course and elsewhere.
This judgement raises some interesting issues relating to the law (that I don't profess to understand) that are relevant for practice. I have requested a copy of Judge Health's decision, and plan to read it over the coming week, because clearly I am missing something.
Acer Computer, once a strong and proud manufacturer and exporter of personal computer products, has been doing it tough lately. Record losses in the last few years, as the company has struggled to adjust its strategy to the shift from desktop computers to mobile devices, have seen the company chew through three chairmen in fairly quick succession. There have been arguments between the CEO and the board over strategy as well. What has gone wrong? Apart from missing the market shift to mobile devices, I wonder whether the company has run out of ideas and has become stale. The last three chairmen have been company stalwarts for example, steeped in the culture and history of the business. Realistically, how much fresh thinking would you expect to emerge in such environments?
Now the founder has stepped in. A outsider CEO has been appointed, for the first time, to lead the company—and to become the chairman in three years' time. This first part of this is good; it should see the introduction of some new strategic options, but only if the founder (who has come out of retirement to occupy the chair) allows it to be so. However, the second part—of anointing a leader three years before the fact, in an industry sector characterised by rapid change and tectonic shifts, is a huge call. I would have thought it made much more sense to recruit the new CEO and then recruit a new (and probably but not necessarily independent) chairman in twelve months' time. This would give the incoming CEO time to get underway, begin to deliver on the confidence the founder has placed in him, without the additional burden of preparing to add the chairman role at the beginning of year three. What say the new CEO is no good? What say a different skills and expertise mix is required to lead the board effectively in the future? The founder has, in effect, closed off the possibility of introducing new thinking around the board table—even though this seems to have been one of his aims.
Complex businesses need highly capable leaders: two good heads are almost universally better than one. Keeping one's options open, to react and respond to changing market forces is smart. Painting one self into a corner is not. Notwithstanding this, the founder can exert influence as he wishes. My view—that the longer-term future of the business, and of the value to shareholders in particular, may have been better served with a succession plan that revolved around two separate appointments—probably doesn't count for much.
What do you think?
"So, how's the research going?"
"Pretty well, thank you for asking."
I've been party to this brief exchange, or a close variant of it, most weeks this year. It's usually originated by someone who knows me; or someone who has an interest in what I'm doing; or, someone who finds it odd that I stopped working a couple of years ago to investigate how boards influence performance. My response has typically been quite private—as above—without wanting to appear to be rude. That someone might actually be interested enough to listen to me wax on for a few minutes is an assumption I have wished to avoid, However, with the project now in its final couple of months and the write-up well underway, and seemingly increasing levels of interest in the findings starting to come from business people and academics, I've decided to write a weekly update from here on in. Please let me know if they are helpful or not. If you have a specific question, please post a comment below or send a note, and I will do my best to provide an answer. My goal, of submitting the completed thesis by Christmas Day, remains intact. It'll be tight—because work has an innate capacity to expand to fill the time available—but doable.
The thesis will be six chapters long. Two of the three longest chapters (Literature Review and Research Methodology) have been out for review for a couple of weeks now. Last night, I finished the third of the 'big three' chapters (Data and Initial Analysis, the chapter that contains a summary of all of the data that has been collected and starts to makes sense of it). The first drafts of the Introduction and Conclusion chapters are completed as well. The satisfaction of having broken the back of the thesis writeup was palpable. The remaining chapter is entitled Discussion and Theory Development. It will be somewhat shorter than the big three and, as the title implies, it will hopefully answer the question that I set out to address. So, it needs careful thought. Thankfully, I have a fairly good sense of what needs to be written, although the proof of whether I'm on track will come as the week progresses and the mixed bag of notes and sentence fragments congeal (or not!).
However, there is hardly a cloud in the sky or a breath of wind in the air this morning. The sun is streaming in the window and a tui is happily calling from a nearby tree. So, I have decided to take the day off. My wife and I are going to visit a famous rhododendron and azalea garden, in our old car, with a picnic. The joys of Spring! No doubt we will chat about the real sense I have, of now closing in on the prize and of handing over the final draft so it can be examined. But one must not get ahead of themselves, for there is much to be written yet.
I'll keep you informed.
The rather sensitive matter of CEO pay has raised its head (again) today. Stories of ever-larger packages have appeared in the news columns with metronomic regularity in recent years. However, change may be on the horizon. According to the findings of a new survey conducted by Strategic Pay, one in four CEOs would take a pay cut if offered other benefits, including more time with family.
Clearly, some CEOs think that time is more important than money; that there is more to life than work.
These findings suggest that the runaway train that is CEO pay may not be boundless after all, although some CEOs will dispute them, no doubt. However, knowledge of these results creates an opportunity for boards to initiate a much needed conversation—for the health of the CEO and the good of the company.
My next trip to the London and Europe is just over five weeks away (10 Nov to 19 Nov), to speak at a conference and to attend meetings. I have some space in my diary, so if you think you might need some assistance with corporate governance or strategy and want to take advantage of me being in your area, please contact me to discuss your requirements. I am available to speak; run a workshop; discuss insights from my latest research; or address other corporate governance, strategy and business performance matters of interest to you.
I look forward to hearing from you soon.
I have just stumbled across a new conceptualisation of governance, one that looks great on the surface but may actually be troublesome underneath. It's called The Alternative Board.
The concept is that of "DIY governance", whereby owners and managers of small and medium businesses join a membership organisation to share ideas and provide support. Similar organisations abound in the market; BNI and Chambers of Commerce being two well-established examples. However, when one looks a little more closely, The Alternative Board has some unusual characteristics:
Membership of an organisation that provides assistance and collegial support is a good thing, although prospective members may baulk when they consider that this is not a classical break-even membership organisation that exists for the good of the members. The primary motivation seems to be the generation of profits for the owners—that's why franchises exist after all. Owners of smaller businesses that utilise a partnership or sole trader ownership structure can decide what they think about this and whether the proposition delivers value or not.
Stepping past this first point, there is a larger and potentially more troublesome question for those who operate their business as a company. Advisors that perform tasks similar to those of boards of directors can be deemed to be directors. As such, well-meaning members may, unknowingly and unwittingly, become bound by the Companies Act (and amendments) and the legal duties of directors.
Given these characteristics, and the implications of them, my recommendation to owners and managers who are considering whether or not to become members of The Alternative Board is this: Do your homework first. Caveat emptor.
The rather smooth road along which Hyundai has been travelling in recent years just got bumpy:
Claims (that the land purchase will enhance brand value) and counter-claims (that the Chairman wields outsized influence) are circulating. Whereas the company has performed well in recent times, things may not have been as rosy on the inside as they seemed to be from the outside. Clearly, Hyundai has struck a nasty section of potholed road. The board and shareholders face some difficult decisions:
One hopes the shareholders, board and management might set their egos and inherent response (save face) to one side, to create and implement a plan to repair a now-damaged brand image. This nasty series of potholes will not be fatal to Hyundai's long-term prospects if the three parties act quick and smartly, and do so together as one. However, if they don't strike three may not be too far away.
The latest round of annual reporting in New Zealand confirms that the size of CEO remuneration packages are continuing to track upwards. Reports from SkyTV, Ebos and others suggest that the now well-established trend shows no signs of slowing down.
The concept of executives (actually, all staff) receiving remuneration commensurate with their performance and the value they add to the corporation sits comfortably with me. However, the steady spiral upwards of CEO packages, at what seems to be an unchecked rate, may be the harbinger of a longer term problem: that any linkage between the package, actual performance and market forces is lost. If boards are truly focussed on the optimisation of performance in accordance with the wishes of shareholders, then boards need to ask the following three questions every year:
I am sure that the first and second questions are being asked by boards: the evidence is in the packages. However, I suspect the third question gets much attention. If a board was exploring its options, the likelihood of being captured by the CEO (or their reputation at least) should be much lower. While easy answers are unlikely to exist, boards need to grapple with these matters, by asking and acting on all three questions. Until they do, the law of supply-and-demand is likely to prevail, and the upward trend is likely to continue unabated, possibly to the detriment of long-term shareholder value.