The New York Times reports that Wells Fargo, a US large bank, is now struggling in the aftermath of the fake accounts scandal. Understandably, the questionable response from the board of directors; the resultant drop in earnings and business performance; and, the erosion of trust amongst customers and in the marketplace has placed a heavy burden on the company—the board especially so.
What can be learned from this now well-storied case? Firstly, no one is perfect. Mistakes happen and sometimes people commit fraud. Secondly, and importantly, recovery is possible—if certain actions are taken. The challenge (actually, opportunity) if a mistake is made or a fraud perpetrated is to apologise and make good, and to re-establish trust with key stakeholders—customers, staff, shareholders and the market—as quickly as possible. The exemplar that is often cited is the Johnson & Johnson Tylenol case.
Usually, the recovery process involves making good with parties impacted by the event (showing remorse, apologising and making reparations), and changing behaviours, processes and, potentially, swapping out people to ensure the mistake or fraud is not repeated.
The board of directors has a crucial role to play in any recovery because company culture is usually a significant contributing factor in any failure. Boards must accept that ultimate responsibility for culture—as with everything else—resides in the boardroom. The Wells Fargo board and management would be well-advised to check the J&J case carefully for insights; commission an independent review of the operating culture (starting in the boardroom); and, commit to taking appropriate actions to cut away all vestiges of the scandal. A public apology wouldn't go amiss either.
Entrepreneurs—that group of individuals who put their resources and, often, their reputation on the line, in pursuit of a big dream—are interesting people. Some are brash and larger than life; others are quieter and more considered. Despite variations in style and personality, one common thread that binds entrepreneurs is the importance of leveraging (often limited) resources to best advantage to maximise the chance of seeing their dream realised. One important and oft-overlooked resource is the board of directors. Some of the questions I've heard entrepreneurs ask include:
I will be in Brisbane Australia on Tue 7 February 2017 to help entrepreneurs and directors of entrepreneurial businesses explore these questions. The Brisbane branch of Entrepreneurs' Organisation, a global network of more than 10,000 business owners in 42 countries, has invited me to deliver a talk and to host a workshop for members. The title of the two sessions are as follows:
The action of turning the calendar to welcome a new year generally sees commentators spring into print, creating lists of trends, predictions and recommendations for their field of interest. This year has been no exception, with many contributions in the areas of boards, board practice and corporate governance including by the CEO of Diligent Corporation, EY, KPMG, the Institute of Directors and Martin Lipton, amongst others. Some of the suggestions are specific to a jurisdiction or an operating context and some, when read together, is contradictory. So, how should boards and directors decide what is important and how to allocate their time? Which commentaries are most relevant, and what issues do boards need to pay closest attention to?
Rightly understood, the role of the board is to govern: to provide steerage and guidance to ensure desired company goals (purpose) are achieved (i.e., to practice corporate governance). The board needs to give its full attention to this demanding task, lest it become a cost centre, simply monitoring and controlling management or, worse, subservient to management. The following suggestions provide a starting point for boards wishing to improve effectiveness in 2017:
The pursuit of value (embrace a performance orientation): The board of directors carries the ultimate responsibility for business performance. This is understood in law, but what of practice? When surveyed or interviewed, many directors say that business performance is a high priority of the board. However, a quick review of how boards actually spend their time reveals a slightly different story: most boards seem to be more concerned with compliance, monitoring and control activities—the avoidance of corporate and reputational risk. If the board is to fulfil its responsibilities well, it needs to become a source of value creation (cf. value protection or risk avoidance). This means the board need to allocate sufficient time to the consideration of corporate purpose and strategy, and ensure that all strategic decisions are taken, explicitly, in the context of the agreed purpose and strategy. (This is not to say that performance monitoring should be ignored. Rather, boards need to ask management to report actual performance against strategy and strategic priorities, so that the board can determine whether desired outcomes are being achieved or not. If the CEO's report is written in this way, the board can take it as read, rather than waste time interrogating each section.)
Understand and respond to the complex risk landscape: In recent years, many correspondents have encouraged boards and directors to become more savvy in specific risk areas. These have included climate change, cybersecurity and disruptive technologies, amongst others. While calls for specific expertise to be added to the board are not inappropriate per se, the more pressing challenge for boards in 2017 is to embrace an increasingly complex risk landscape holistically. Directors, collectively, need to be able to identify major risks to the business (i.e., the achievement of strategy and desired performance goals) on an on-going basis and, having understood them, make informed decisions to maximise the chance of achieving the agreed strategy and goals. To ask directors to be experts on all emerging risks in such a dynamic landscape is wasteful and, probably futile. Rather, boards need to stay focussed on the big picture—the determination and achievement of strategy. In so doing, boards should seek out experts (notice the plural) from outside the company (this is important, otherwise, the board risks being captured by management), to address the board directly and debate the likelihood and appropriate response options to emergent risks. This additional source of information should enhance both the board's consideration of strategic options and the quality of the strategic decisions that follow.
Accountability: Many companies have suffered at the hands of sanguine and, sometimes, fraudulent managers and ineffective boards (because they are not sufficiently engaged or informed) in the past. Sadly, more examples emerged in 2016 to suggest that some boards continue to flout their responsibilities: Wynyard Group and Wells Fargo being two of them. It is little wonder that 2016 saw further rises in shareholder activism. At the core, the problem is social; one of behaviour and expectation. If boards are to contribute effectively, to minimise the chance of corporate failure, one or both of two accountabilities—the board holding management to account and the board providing an account to shareholders—must be addressed. Directors are appointed by shareholders, and boards are responsible for both ensuring the on-going performance of the company they are charged with governing and providing an account to shareholders. While a strategic mindset is crucial (the value creation imperative), the underlying attribute needs to be one of service: the board and management working harmoniously together, as a team in service of the company.
These suggestions are offered for the consideration of boards seeking to make effective contributions in 2017 and beyond. While this short list is neither exhaustive nor intended to replace any other list, it may provide a useful basis for debate at a board meeting. The three suggestions—drawn from personal observations of boards in action, interactions with directors and readings—seek to establish an overall context to assist boards consider emerging trends and strategic opportunities, and so govern effectively in an increasingly complex world. If you would like to discuss the applicability of these suggestions to your situation, please get in touch.
One of the great joys of the holiday season is the opportunity it presents to let the mind wander, both to relax and recharge after a busy year, and to draw strength for the year ahead. Whether out walking, chatting with friends, completing personal projects or, more simply, sitting and reading, the time and space afforded by the lull in both business activity and the associated flow of correspondence is one to be savoured.
Amongst the books and papers that I have read in the past two weeks, the edited summary of a speech by Admiral James G. Stavridis at the National Defence University convocation in 2011 stood out. (Stavridis retired from the US Navy in 2013. He is now Dean of the Fletcher School of Law and Diplomacy at Tufts University.)
Stavridis offered the class of 2012 three keys to successful leadership in the 21st-century: read, think, write. The straightforward though wide-ranging message contained some real gems, applicable to leaders from many walks of life, especially those involved in demanding and fluid environments. Here are a few of the standout comments:
"The quintessential skill of an officer [leader] is to bring order out of chaos."
"Reading is the rock upon which you will build the rest of your career."
"We must think our way to success in incredibly complex scenarios."
"After you read, and think, I would argue you must write. Writing ... is essential in communicating what we have learned, as well as allowing others to challenge our views and thus make them stronger."
"Diversity of capabilities, capacities, and responses to any challenge should be seen as a strength, not a weakness, but only if action and tools can be used synergistically."
Stavridis said that collaboration, an innovative mindset and a preparedness to move quickly in response to emergent opportunities are crucial attributes if leaders are to meet and successfully overcome complex situations. The keys—of reading, thinking and writing—provide the foundation. However, a comprehensive approach is still needed: to bring together and synergise the talents of a variety of people from many different quarters, because no one person has all the insights let alone answers.
The parallels between the military examples mentioned by Stavridis and the business context are striking. If military campaigns are to be successful, generals must understand complex and fluid situations, deal with emergent opportunities and challenges, and make decisions promptly. Similarly, company success is contingent in no small measure on the effectiveness of the board as a decision-making team.
Despite the seemingly unending demands that press in, the most valuable asset in the director's arsenal remains: namely, the gift of time. How will you use it to your advantage in 2017?
Christmas Eve is upon us, signalling both the end of the work year for many (including me) and, importantly, one of the most significant days on the Christian calendar.
Before stepping away from my desk and client projects for a few days, I want to express gratitude to the thousands of people around the world who sought advice, attended courses, listened to talks or asked questions during 2016. Thanks also to an anonymous readership: the website received over 382,000 page views (double last year)—a level of interest beyond my wildest imagination. I count it a great privilege to have had the opportunity to serve so many boards and directors. Thank you for your encouragement and support.
Looking to 2017, my commitment to serve boards and directors intent on realising the performance of the companies they govern is strong. To this end, if you have a question or a request, please let me know and I'll respond in the first few days of 2017. In the meantime, my best wishes to you and your family. Kia kaha.
Corporate governance—the concept and the practice—has been the subject of much debate over the past two or three decades, especially as researchers, shareholders and the public have sought to make sense of the extent and meaning of the term and the appropriate role of the board.
A cacophony of ideas and understandings have now pervaded our academies and directors' institutes (including that the scope of corporate governance extends well beyond the boardroom to include the whole of the organisation). As a concequence, the appropriate role of the board is not clear. Is it one of oversight and control, or is the pursuit of performance more important? The answer to this question is dependent on one other: What exactly is corporate governance? Many directors have become confused about these questions and, as a result, the appropriate role and contribution of the board.
Thankfully, a straightforward answer is at hand.
The term 'corporate governance' was coined just 56 years ago by Richard Eells, an academic. He used the term to describe "the structure and functioning of the corporate polity" (the board of directors). Sir Adrian Cadbury added that corporate governance is "the means by which companies are directed and controlled". In other words, corporate governance is an overarching term to encapsulate what boards (should) do as corporate goals are pursued. Corporate governance frameworks (such as those proposed by Tricker and Garratt) provide the underlying detail: they describe how the board should steer and guide the company it is responsible for governing.
Directors expecting to make effective contributions in 2017 and beyond would be well-advised to consider this what–how distinction very carefully: a common (and agreed) understanding is crucial if the board is to work harmoniously and decision-making is to be effective.
The annual general meeting (of shareholders) is an important forum in company life. It is the forum where shareholders have the opportunity to engage with the company directly, and at which the board of directors is duty-bound to provide an account. Typically, such engagement includes hearing reports about the company performance (typically the outgoing financial year) and outlook; asking questions; and, importantly, making important decisions including, inter alia, the election of directors who will be charged with overseeing the company (making decisions and ensuring performance) until the next annual meeting.
Despite the importance of the annual meeting, attendances have been declining in recent years. For example, Tony Featherstone, a commentator with the Australian Institute of Company Directors, recently observed that attendances have declined by 25 per cent over the decade to 2015. Others have noticed similar declines. Reasons for declining attendances are many and varied. While the lack of time and the tyranny of distance are commonly cited, a perceived inability to influence the decision-making process is a big turn-off for shareholders—especially those who perceive that voting has been stitched up before the meeting.
Some commentators have suggested that new approaches are needed if shareholders are to be re-engaged. One alternative that has garnered widespread interest is the 'virtual annual meeting' to replace the in-person meeting. Tony Featherston and Anthony Hilton have both argued the case recently.
Superficially, the concept of a virtual annual meeting sounds great. Shareholders who cannot attend the annual meeting in person can particpate via an electronic channel. They can listen to presentations, ask questions and vote—and they can do so without incurring the time and monetary costs of travelling to attend in person. But does remote attendance constitute acceptable engagement? Shareholders attending virtual meetings often cannot 'see' or interact directly with other remote participants. Consequently, the balance of power can (and does) shift from its rightful place (the shareholders) to the head table (the board of directors). The casuality is debate.
Clearly, the prospect of introducing virtual annual meetings comes with benefits and costs.
The challenge for shareholders is to resolve whether the benefits of the virtual annual meeting outweigh the more traditional in-person meeting. Both formats have their strengths and weaknesses. Does the virtual meeting (a group of people sitting at remote locations with computers or tablets and collaboration software) enhance genuine participation (cf. attendance) as is claimed, or is the construct a thinly-veiled attempt by the board or management to assert control and constrain healthy debates at annual meetings? And what of accountability? Where does that lie and, importantly, where should it lie? The answer is analogous to the quantity vs. quality debate.
The annual meeting is the sole opportunity for shareholders to hear from the board and to hold it accountable. Accountability rightly includes answering questions and responding to challenges from those to whom the account is being provided. Boards should not be exempt from such scrutiny. Caveat emptor.
The 33rd Governance Institute of Australia national conference was held in Sydney recently. Previously, the Governance Institute (GIA) was known as Chartered Secretaries Australia, an outpost of the Institute of Chartered Secretaries and Administrators (ICSA). The name change, implemented several years ago, implies that the body is moving beyond serving the company secretary as its core constituency.
I attended to observe; meet others; serve as a panelist (topic: The pursuit of productivity, see picture); debate topical challenges for boards; and, learn more about the practice of corporate governance, especially the GIA's role in encouraging boards in their value-creation mandate. As this was my first GIA conference, some post-conference reflections are appropriate:
In sum, the conference revealed some interesting insights (see summaries in other blog entries below) and attendance was well worthwhile. However, I couldn't help but wonder whether the organisers missed an opportunity—to engage the group that actually carries ultimate responsibility for company performance; company directors. If the GIA is to make further progress towards its stated purpose, it is vital that company directors are active participants in the discourse.
This is the third update of several to summarise observations from the 33rd Governance Institute of Australia National Conference being held in Sydney this week. Here are the links to the first and second updates. (The final update, covering the second day, will be published tomorrow.)
This update includes observations from the late afternoon session.
The session was dominated by a panel discussion on the topic of culture and why it matters. John Price and Judith Fox, both of whom had addressed the conference earlier were joined by Peter WIlson (Chairman of the Australian Human Resources Institute) to discuss this important topic.
Fox and Price quickly established the strong correlation between positive organisational culture and company performance, although they did so through the 'back door': asserting the poor culture often leads to erosion of value. While this assertion is intuitively accurate, the next statement caught many in the audience off guard. The statement was, and I quote, "Good governance frameworks lead to good culture". Really? I looked forward to hearing how this might be. Sadly, the claim was not substantiated—the audience was left hanging. I was hoping for something more substantive than a straightforward claim. Fortunately, Wilson provided it—his comments caught the audience's attention.
Wilson tackled several myths of culture head on, reminding the audience that culture and performance are different; that a good culture is not a reliable predictor of high company performance (although the opposite is more reliably true as Fox and Price made clear); and, that culture can actually be measured, despite assertions to the contrary. Wilson backed up each of these claims with stories and/or evidence, all of which had strong practical undertones. Most notably, Wilson called out the importance of the board to set the 'tone at the top', and to insist (through reporting and walk-throughs) to ensure that the 'mood in the middle' is consistent and not, as is more common a 'muddle in the middle'.
Beyond the panelist's comments, my thoughts wandered to the title of Garratt's helpful book The fish rots from the head several times throughout the session. If the board is not leading by example, it is not leading at all.
This is the second update of several to summarise observations from the 33rd Governance Institute of Australia National Conference being held in Sydney this week. You can read the first update (opening session) here. This update includes observations from the late morning and early afternoon sessions.
The question explored by the panel in the late morning session was "Creating a safe harbour: Beyond the business judgement rule". Judith Fox (GIA Policy Director), Prof. Pamela Hanrahan (UNSW Business School) and John Stanhope (Chairman, Australia Post) discussed proposed changes to company law (safe harbour provisions). The panel noted that the establishment of a 'safe harbour' clause might lead to inappropriate incentives for directors and executives. Whether this possibility is any better or worse than the current situation (of boards providing little if any guidance in their forward looking statements) was discussed at length. The question was not resolved explicitly. However, the panel did agree that it is reasonable to expect boards to provide shareholders with 'fair' and 'reasonable' guidance' to indicate strategic intent, so that shareholders could make informed decisions about their ongoing interest in holding shares and director selections.
The early afternoon session spoke to emerging trends that directors and boards need to be aware of if they are to contribute meaningfully to the future performance of the company. Specifically, the topics were the Internet of Things and Innovation. Mike Briers grabbed the audience's attention by demonstrating how pervasive the IoT phenomenon is becoming: the level of connectedness and quantity of data generated as a result of millions of connected devices is expected to dwarf every other sector of commerce and life except, perhaps, astronomy. The challenge that IoT presents for boards relates entirely to strategy. How can or should boards respond to the ever advancing wave of technological innovations? What impact might any of these innovations have on current business models and markets? Boards need to create space in their meetings (and perhaps add meetings to the calendar) to grapple with these questions directly. Briers suggested that the rate of innovation is occurring at such a pace and complexity that boards and executives will struggle to understand, let alone respond well. Therefore, boards need to seek symbiotic relationships with other companies and experts. Collaboration is no longer an option. Companies should also prioritise investments in 'complex integration solutions' over behemoth systems. Amongst the turmoil, one thing was clear: if companies are not actively investigating emerging trends and technologies including the Internet of Things (amongst others) they risk becoming irrelevant to their current and future customers.
Thoughts on corporate purpose, strategy and governance; our place in the world; and, other things that catch my attention.