Is the worm starting to turn? After many years of relative calm—save a small number of judgements including this example from the New Zealand finance sector—directors seem to be facing increased levels of scrutiny, including being held accountable for actions (or inaction).
A new judgement, by the Supreme Court in England, places a stake in the ground for British companies. The seven judges determined (unanimously) that directors were responsible for their actions, and that where those actions were fraudulent directors should be held personally accountable. No doubt some directors will throw their arms up in horror, asking how they could possibly know everything in order to make informed decisions. Yet directors are responsible for the overall operation and performance of the business they govern. Therefore, directors have a duty of care to become informed before they make a decision.
The Jetivia–Bilta judgement provides a timely reminder to directors. Precedents have now been set in several countries. The buck stops with us (yes, I am a director too). Directors need to ponder the implications carefully. Thankfully, those who are not happy to carry the responsibility and accountability that goes with every appointment have an 'out'—they can (and should) resign.
Governance researchers and some more forward thinking directors have known something for a long while: that boards can add considerable value to business. However, most directors see their role on the board as being one of monitoring and compliance—to keep the chief executive honest and make sure they don't take the company to rack and ruin.
Calls for boards to put their energy into things that actually matter—leadership and strategy—are becoming commonplace now. Here's one recent example. I have been writing about it for some time as well (see here and here for examples). My doctoral research suggests that boards that are actively involved in strategic management practices (the development of strategy in particular) are more likely to influence business performance than those that embrace the monitor and control mindset. Thankfully, the basic principles of strategy haven't changed much in 30 years, so directors should find it relatively straightforward to come to up speed—but only if they want to.
Clearly, the drum is beating. How will you respond?
If you'd like to understand what an involvement in strategy might mean for your board and business, or you would like some more information, please contact me.
The Institute of Chartered Accountants in England and Wales (ICAEW) has recently published an informative series of documents to help directors and executives respond to changes in capital markets and how they affect the foundations of existing corporate governance frameworks. The material is great. Here's a series of links to the source documents:
While the intended audience is the ICAEW membership, the commentaries are useful for company leaders in other jurisdictions—if not directly then certainly as discussion starters around board and executive tables. If you are based in England or Wales and have any technical questions, please contact the ICAEW. If your business is based outside the UK and you would like to organise a facilitated discussion to explore how to take advantage of the suggestions, I'd be happy to help.
I am thrilled to announce that I have been asked to attend and speak at the Understanding Governance Workshop, to be held in Barcelona, Spain, on 11–12 June, 2015.
The purpose of this workshop is to bring together leading thinkers to discuss contemporary directions in governance; to challenge the status quo, in terms of how boards work and how research is conducted; and, to give voice to innovative critical research. My paper, entitled "Executive-controlled boards, power and influence: A reality check", fits the second and third categories. Thank you to the Workshop organisers and paper reviewers for considering this contribution worthy to be included on the programme.
With this invitation, my conference schedule for June is now confirmed, as follows:
I will be in the UK and EU from 2 June through 20 June, and am available for other advisory, speaking or facilitation engagements between the conferences. I'd be happy to discuss corporate governance, board practice, strategy or related topics; including the results of my latest research. If you wish to take advantage of my proximity, please get in touch.
A couple of days ago, I posted this tweet, a thinly-veiled criticism of some unseemly behaviours in the Co-operative Group boardroom. The hashtag #hubris was subsequently associated with the tweet, perhaps suggesting that others had similar concerns over what is going on. Leveraging the recent safe deposit box raid in Hatton Garden, Peter Hunt suggested that the "great Co-op Group heist" was a "mighty stitch-up". Strong words indeed. Now Jill Treanor has urged chairman Allan Leighton to reverse the board's plan to put forward three (of it's own) candidates for three vacant positions. This has all become quite messy—it smells of nepotism, egos and power games.
That the incumbent board (or factions within the board, at least) is clinging to power by putting forward three of its own nominations for the three vacancies is hardly good practice. However, that shareholders let the board get away with it is tantamount to dereliction of the shareholder's 'duty'.
Normally, shareholders would be expected to contribute nominations, and then to select directors through some agreed election process. In this case, the tail (certain directors) seems to be wanting to wag the dog (the shareholders). If the shareholders are interested in the performance of the business and in certain outcomes being achieved, they need to assert some control over the nomination process. However, if the shareholders remain passive, the board is free to act as it sees fit—within the bounds of the law and the Co-operative Group's constitution, of course.
One final point. If the shareholders do wish to act, and any of the incumbent directors resist such moves, the shareholders could consider taking the somewhat bolder step, of replacing the uncooperative directors. The good of the company is at stake after all—and let's not forget who the company actually belongs to.
Much has been written about the notion of value creation in recent times. The phrase is used in commerce, especially by directors, managers, consultants, researchers and facilitators, amongst others. If you listen into board meetings, discussions between managers, sales meetings, product development workshops and planning sessions, questions like "Does XYZ add value?', "How is value created?" and "What is our value proposition?" are likely to be asked. These pop up often, which suggests that value creation is recognised as being something important to be striven for. However (and alarmingly), different people have rather different ideas of what value creation is or might be. Worse still, their ideas are often based on incorrect assumptions!
We talk about value creation as we would an old friend, yet in many cases we lack a common understanding of what 'it' is! Here's one suggestion, from the Reference for Business:
Value creation is the primary aim of any business entity. Creating value for customers helps sell products and services, while creating value for shareholders, in the form of increases in stock price, insures the future availability of investment capital to fund operations. From a financial perspective, value is said to be created when a business earns revenue (or a return on capital) that exceeds expenses (or the cost of capital). But some analysts insist on a broader definition of "value creation" that can be considered separate from traditional financial measures. "Traditional methods of assessing organizational performance are no longer adequate in today's economy," according to ValueBasedManagement.net. "Stock price is less and less determined by earnings or asset base. Value creation in today's companies is increasingly represented in the intangible drivers like innovation, people, ideas, and brand."
This paragraph exposes the nub of the problem. We assume we know what it is. Several simple but incredibly powerful questions need to be asked and answered before business leaders can hope to allocate people and resources effectively in pursuit of business goals:
Rather than make assumptions (think how often have you heard sales people use "unique value proposition"), boards and managers need to seek clear answers to these questions from the beneficiaries of the value that is to be created (because value is determined by the recipient not the creator). Expect to hear several answers to these questions, because 'value' means different things to different people.
Starting at the 'top' of a company, boards should sit with shareholders and ask (or propose, if the shareholder is unclear) what 'value' looks like to them. Responses might include increased share price, a long-term market position or business model, increased market share or something completely different. This is the 'core purpose' question. Similarly, managers and staff need to sit with customers (or prospective customers) and ask the same question. Staff also need to be asked: their motivations are likely to be different from those of shareholders and customers. 'Great solutions' that 'add value' to customers / staff / shareholders are highly unlikely to do either if customers / staff / shareholders do not recognise, or are not interested in, the value that is supposedly being offered. As with strategy, boards need to take the high ground, by ensuring that value created for one recipient does not erode value elsewhere. Boards need to become crystal clear about value in a holistic sense: what it is, who the recipient is, and how it is created.
Once the value matrix (what and to whom) is understood and agreed, the answers need to be communicated in a clear and concise manner, so that effort and expectations can be aligned accordingly. Finally, the board has an ongoing role: to ask probing questions at board meetings, to ensure the required alignment (between purpose, strategy, strategy implementation and value) is actually in place and that the expected value is actually being created and delivered to the intended recipients.
We live in a paradoxical world. Rates of change are increasing, yet we want certainty. Times to market are reducing, yet we still want instant gratification. Zafer Achi and Jennifer Garvey Berger explored these paradoxes recently. They acknowledged that searches for certainty are "only natural", and that managers spend much of their time "managing the probable". However, the world is a social place. People make choices and things change, often unexpectedly. Consequently, the best laid plans can fail completely, leaving managers exposed and potentially out of a job. Achi and Berger suggest that the frame of reference used by most managers, of managing the probable, is a big part of the problem. Rather than managing the probable, they suggest that managers need to "lead the possible". They offered three recommendations to help managers make the change (see article for details):
These recommendations have the potential to change the way managers think, make decisions and lead. While reading the article, I couldn't help but think that the recommendations also have application in the boardroom. However, the adoption of 'possibility' thinking would up-end board practices in many cases. Boards that spend most of their time monitoring past performance and controlling the activities of the chief executive would probably be quite uncomfortable, even though the recommendations are neither earth-shattering nor inconsistent with the role and responsibility of the board (to maximise performance in accordance with the wishes of shareholders). Maybe its time for directors to take stock.
As westerners, we live in a world of instant gratification. It's an integral part of our culture, particularly in the USA. We are introduced to it as babes, and we become more adept as we grow into adulthood. Whether it be toys, mobile devices, motor cars, houses, share portfolios or some other expression, we want it all and we want it now. The rock band Queen sung a song about it. Photographers have given it a name: Gear Acquisition Syndrome ("Do you have GAS?").
Instant gratification pervades business as well, although some writers have lamented the consequences of short-termism in business: sustainability is the oft-cited casualty. While many of their arguments have substance, most of those who write about the problems of short-termism in business are simply shouting into the wind. Lawrence Fink makes the point deftly.
If the short-termism is a problem that needs to be fixed (because its effects are no longer tenable), two options stand out: more rules or different culture. The current practice, of creating more rules every time a major breach occurs, simply serves to impose more cost. Also, people find ways to get around rules. We need to get off that carousel: it's going nowhere. The better answer is probably to tackle the culture. Any volunteers?
The rising tide, expressed as an increasing number of women receiving appointments onto boards of directors, is now well-established. Some countries (Norway, Germany, for example) have driven change via quotas, whereas others (Australia) have utilised peer pressure by requiring companies to report the gender mix of their boards in annual reports. Others are just getting on with it.
The latest drive, in India, has seen some interesting behaviours emerge. The Indian Companies Act now requires every board of every publicly listed company to have at least one female director, with a compliance deadline of 31 March 2015. The Bloomberg reporter used "scramble" to describe recent behaviours, as if to imply that the motivation to appoint female directors is driven by compliance rather than performance. While the scramble may satisfy the statute, and some inspired appointments will be made, there is a very real risk that some boards will be encumbered with a 'token' female who does not have sufficient skill and expertise to contribute effectively.
If companies and societies are serious about achieving high business performance, then at least three things probably need to happen:
If these things (and others, no doubt) occur, then the unhelpful patterns of behaviour witnessed in India will, hopefully, be consigned to history. However, this hope is predicated on an underlying [cultural] change taking place, whereby the focus of shareholders and boards moves from conformance and compliance, to performance. Is this something worth pursuing, or might it be a bridge too far?
Diligent Board Member Services has just announced the appointment of former McKinsey partner Brian Stafford as chief executive. Stafford takes over from outgoing chief Alex Sodi, "who will become chief product strategy officer and remain on the board". This second part of the announcement caught me by surprise and, quite frankly, confused me.
I'm not sure I'd want to be in Stafford's shoes just now. The former chief executive is now both his boss (a director) and one of his staff. Consequently, the moral ownership of strategy implementation, and of product strategy in particular, is unclear to say the least. Why the Diligent board chose to structure the company in this way, and why Stafford agreed to the appointment given the challenges of 'above-and-below' reporting is beyond me. I can't see how this sort of anomaly is conducive to a high trust and high performance work environment.
Perhaps a 'better' approach might have been for Sodi to perform one or other of the two roles (director or strategy office), or to leave the company. If any readers have any insights as to why Diligent made these decisions, or how the new structure might add value to the business, I would love to hear them!
Peter's thoughts about corporate governance, strategy, our place in the world and other things that grab his attention.