- Build greater trust
- Value the non-financial data
- Extract relevant data
- Promote collaboration
- Incentivise the medium- and long-term, too
- Engage external stakeholders
- Review the outcomes
- Be patient
One of the enduring challenges that directors face every time they meet together as a board concerns decision-making. How do directors make smart decisions when 1). they often lack crucial information, and 2). the environment is fundamentally both complex and dynamic? The answer lies in the group of directors (the board) ability to make decision, as one.
Legally, the board is a collective of directors. Individual directors make contributions to discussions and debates, but not decisions. Decisions are made by the board. This transition—from the singular (individual directors, contributions, inputs) to a collective (the board as one whole, decisions, outputs)—occurs when directors meet (i.e., when the board is in session). If the transition is to occur well, all of the directors need to be engaged their work—and they must work together towards the decision, as one.
Group decisions are much harder to make than individual decisions. Reaching agreement can be a minefield, especially if information is missing, trust is low or if directors are more interested (sometimes covertly) in pursuing multiple agendas or representing constituencies rather than acting the best interests of the company (as the law requires).
How can boards get past this challenge, to make effective decisions on a reasonably consistent basis?
Recently, CGMA (Chartered Global Management Accountant, a joint-venture between AICPA and CIMA) tackled this question head on. Their report has just been released. You can read a copy of the executive summary here, or the full report here. The authors make eight key recommendations for effective group decision-making:
I commend this report to you, especially if effective decision-making has been a challenge for your board over the past year or so. Share it with your board colleagues and ask the chairman to schedule a discussion at an upcoming board meeting. If nothing else, you'll bring the expectation of effective decision-making out into the open. Or, the board may find that some behaviours or expectations need to be adjusted, and that a formal board review is appropriate. The discussion may also expose some larger but hitherto hidden issues including that the board may not be clear on the purpose or the strategy of the organisation. If this is discovered, some external advice and assistance may be in order.
Regardless of the discussion and the outcome, I suspect it will time well spent.
The much storied Yahoo Inc. continues to consume column inches (or, pixels if you consume your news online). From bold beginnings, Yahoo has endured a mixed career as an Internet search engine business. Current chief Marissa Mayer has had her fair share of headlines as well, including some stinging criticisms over some of her management decisions. Now, with a proxy fight looming, Yahoo has issued this release, which has been reported by Ronald Brausch on Dealpolitik (and no doubt others).
The release and associated commentaries make interesting reading, especially for students of corporate governance, strategic management and firm performance: For example, the release implies that owner of the new strategic plan lies with the CEO. Consider these two statements:
These statements raise a really interesting question. They imply that control lies with management. Does ultimate responsibility for firm performance not lie with the board of directors? Why has the board chosen to stand a little aloof from this? Are these statements simply examples of sloppy copywriting within Yahoo and on Brausch's part, or does control over the company strategy actually lie with the CEO?
While I have no doubt that some investors are keen to gain partial or complete control of the company (as Brausch reports), the commentary suggests that a more pressing challenge needs to be addressed if Yahoo is to become great again. The question of whether the board or the CEO is calling the shots and, therefore, is actually in control needs to be resolved, and quickly.
A word of warning for business leaders and academics invited to speak at conferences run by an organisation called WASET (World Academy of Science, Engineering and Technology): Give the organisation a wide berth. WASET appears to be a genuine organisation that runs conferences but, if the many comments on the Internet are any guide, the conferences are a front for a scam of some sort.
I nearly got caught out. In early January, I responded to an invitation to submit an abstract for consideration at the 15th International Conference on Corporate Governance in Singapore. (I had been looking for a suitable conference to share an important aspect of my research on corporate governance and strategic management. The conference seemed OK, so submitted a half-page abstract.) A few days later, notice of abstract acceptance arrived, together with a request to submit the full paper for review. All good so far. But then...
Two emails arrived today. One was an invitation to attend the conference. The other was notice that my paper has been accepted onto the programme—despite no paper having been submitted, much less reviewed! This didn't sound right. A quick search revealed many pages of blog posts and comments from people asking if WASET conferences are a scam, whether the conferences are fake, and other similar questions.
The decision to back out came easily. Luckily, no intellectual property or money changed hands.
What can Plato, a philosopher who lived over 2400 years ago possibly teach the leaders of modern companies? After all, the modern form of company only came into being in the last couple of hundred years, fully two millenia after Plato died. Well, when it comes to strategy and decision-making, Plato can teach us a lot, a point made by the author of this article. Here's an excerpt:
Plato likened the guidance of a state to the navigation, piloting, and crewing of a ship at sea. The analogy holds for the strategist and a war effort. The strategist is the navigator with skills that few others have but he may not always be the captain who leads the crew, those that must actually carry out the strategy. Strategy is not responsive to constant or wild adjustments; the hand on the rudder must be subtle and steady; the mind behind it focused on the north star of the political end state. It is for this reason that one could expect that the navalist’s mind more easily grasps the nature of strategy than that of the continentalist. For centuries, ship’s captains engaged in strategy both military and diplomatic with little guidance and no recourse to seek more just by the nature of communications and the distance that a ship could carry them.
This is one of the best summaries that I have read in a long time. While written in the context of naval strategy and with reference to Plato, the roles and tasks described here apply equally well to companies and boards. The author writes that strategy (strategos: the art of command) is something developed at senior levels, with the long-term purpose (north star) in mind. The captain's job is to carry out the strategy. Teamwork between the strategist and the captain is both expected and crucial.
The correspondence to companies and boards is stark. 'Guidance' (first sentence) corresponds to governance (kybernetes: to steer, to guide to pilot), for example. The senior-most decision-maker is the board of directors and the chief executive is 'the captain'. In naval terms, the best chance of making progress towards the 'north star' occurs when the strategist and captain collaborate closely—and so it is with the modern corporation.
Roger L Martin, a respected professor at Rotman School of Management and co-author of Playing to Win, has put the cat amongst the pigeons, with this commentary, itself a response to this widely circulated article. The authors of the original article reported findings from a study, which showed that only eight per cent of leaders are good at both strategy and execution. Martin contends that most leaders who are very effective at either strategy formulation are also very effective at execution. Quite a different view. Two different perspectives. Who is correct?
As with any report involving statistics, context is crucial. If you consider all leaders (as Leinwand, Mainardi and Kleiner did), only eight per cent are "very effective" at both formulating strategy and executing strategy. However, if you only consider only those that are "very effective at strategy", fully two-thirds are also good at execution (Martin's point). Thus, both authors are 'correct'. But which commentary is more helpful to leaders and those intent on achieving business success?
The shocking statistic is that just sixteen per cent of leaders are "very effective" at strategy formulation or execution or both. Turbulent times demand outstanding leadership, both to determine strategy and to ensure it is executed with excellence. Poor, neutral and even "effective" contributions have little chance of moving companies toward their goals if they are competing against "very effective" leaders. Consequently, 84 per cent of leaders will be found wanting (notice the Pareto Principle?). Rather than debate statistics, it may be more useful to move the discussion to discovering how to move more leaders into the "very effective" sector.
Another perhaps more important question—for boards of directors in particular—centres on Martin's assertion that strategy and execution are the same thing. Can the two tasks can be distinguished?
Strategy formulation and execution are two of the four pillars of strategic management (development, approval, implementation and monitoring). My research suggests that business success is dependent on two things: having a clear sense of purpose and an effective strategy, and great execution. The former is an important task that boards and managers should work on together and the latter is the domain of management (only) once strategic decisions are made by the board. However, some flexibility is required because things change. Decisions and adjustments are required from time to time. If companies are to react and respond quickly, strong leadership is crucial to avoid mayhem. So where does that leave Martin's assertion, that formulation and execution cannot be usefully distinguished? What is your experience?
Much has been made of the value of board 'going digital' in recent years. Many software-based systems have been produced including offerings from Boardpad, Diligent, Boardpacks and Board Management, amongst others. The benefits of these systems are reasonably self-evident: improved coordination and management of board reports, reduced administrative costs and improved security, not to mention far less weight to carry to and from meetings.
However, 'going digital' is not without its challenges. Some perhaps less credible claims have been made about software-based systems for boards, leading to misplaced optimism. Take the promise of increased engagement for example. Glance around the table at your next meeting. How many directors are listening intently, fully engaged in the discussion, and how many are covertly checking their devices for messages? Engagement with devices and systems has certainly gone up, but what of engagement between directors and with the topic at hand?
In my experience (hundreds of board meetings over the last fifteen years, as a director or an observer), the task of direction is a full-time commitment requiring total concentration, especially if the board is large and/or the topic at hand is complex. It's a tough job, with a hidden twist to boot. While directors attend board meetings, they don't make decisions—boards do. If directors are to do their job well, they need to express their opinions and concerns; ask questions; debate topics; listen carefully (to hear both what is being said and what is not being said); and, depending on arguments raised, they may need to gather more information and modify their opinions. Messages on electronic devices can wait.
While computer- or tablet-based board productivity systems can improve the administrative aspects of board meetings (and greatly so), directors cannot afford to be at their beck and call. They provide no substitute for discussion, debate and collaboration as directors meet together to carefully consider important matters and make decisions. Let's not forget that.
[Postscript: Technology and devices are appealing. I get that. I'm happy to support the introduction of any system that improves director effectiveness. The challenge for directors is to learn how to use systems well, so they can concentrate on what they are actually there for—to make decisions.]
As 2016 gets underway, have you given any time to making sure your knowledge of boards, board practice and corporate governance is up to date? If not, I'd like to offer a suggestion. One of the more heavily thumbed texts on my bookshelf is Corporate Governance: Principles, Policies, and Practices (2nd ed.), by Bob Tricker. This 550-page volume describes the nature, structures, functions and operating realities of boards and governing bodies; the major aspects of corporate governance; and, corporate governance theories. Other issues that influence board thinking including strategic risk management, corporate social responsibility, ethics and sustainability are also discussed.
Others have contributed much to what we know about corporate governance, boards, what boards do and how they work. Yet Tricker stands apart. Sir Adrian Cadbury once said, "I have always regarded Bob Tricker as the father of corporate governance since his 1984 book introduced me to the words corporate governance." High praise indeed.
Now, a third edition has been published (available here). If the value and practical application of the ideas in the second edition is any measure, the third edition is a 'must read' for all chairmen, directors and company secretaries, everywhere. I commend this seminal contribution to you.
Board rejuvenation is often considered and discussed, but statistics on boards member ages show little progress. The general public thinks a board of directors is a set of relatively old people. Common sense and corporate governance approaches lead one to think that the introduction of new ideas from younger generations would surely be a company asset.
Age diversity within a board is unquestionably desirable, but will one or two younger directors be enough? Probably not. In fact, except in exceptional cases (mainly in new technology fields), board members will probably be least 35 years old—hardly 'young' any more—by the time they have acquired the experience needed to be a skilled board director. Also, younger leaders often have full-time jobs, so will there be sufficient candidates available anyway? Recruitment of younger directors may be difficult and generally will not be enough to ensure that potential contribution from truly young people will be brought to the boards. How then to proceed ?
One approach to solving this problem might to be create a Young People Board, under the leadership of the official board—a 'shadow cabinet' of sorts. With slightly different goals, some municipalities use this approach. A Young People Board could be composed of 18 to 25 year old volunteers—a similar number of members as the official board. Recruitment could be for three-year terms (with renewal of one third every year). The aim would be to achieve multi-faceted diversity.
Periodically (say three times per year), the company board would invite the Young People Board to consider a topic discussed by the official board. The Young People Board would meet to debate the topic and develop proposals. Many ideas would emerge as young people naturally consider new technologies; social networks; data protection; ecology; ethics; and, international perspectives. Each year, a half-day meeting would be scheduled with the official board, to receive presentations and debate the topics studies by the Young People Board .
The Young People Board formula would be light, without any significant expenses or time commitment from the official board members. However, the process would enable official board members to be positively confronted with new ideas coming from truly young people. They may even retain some ideas for implementation!
Members of the Young People Board and, indirectly, their friends and relatives, would derive benefits including learning about the company activities, its executives and, importantly, the 'corporate governance' world. Through the process, the company may identify young talents for later hiring. The company could use this approach to improve its image, especially among young people.
Many speeches and writings advocate innovation. As one dwells on this, the realisation that innovation applies not only within technology areas, but also in organizational processes and the social domain. The Young People Board is a concrete example of this type of innovation. Is this something your board can support? If so, please contact Guy Lé Pechon at Gouvernance & Structures.
Have you noticed how 'corporate governance' has pervaded the modern lexicon? The term is used in all manner of contexts nowadays. Some are appropriate and some less so. I wrote about this last year, off the back on a comment made by Rob Campbell. Here's a couple of fresh examples that I've heard used in the last sixty days:
Both of these examples might sound a little contrived, but they are not. All three phrases were spoken, spontaneously and in my hearing, by capable and well-intentioned people. The people in the room knew what was meant, I think. However, these three vignettes set me thinking. Is our usage of the term 'corporate governance' starting to change—away from the original intention (describe the functioning of the polity, i.e., the board of directors) to something different, or have we become somewhat lazy in our usage? I'd be interested in your views on this one!
What makes a successful business successful? Can success be pursued, or are great outcomes largely a matter of luck? Success, it seems, is dependent on companies doing a rather small number of things consistently well. Jim Collins (Good to great), Colin Campbell-Hunt (World famous in New Zealand) and others have studied this question and produced some great insights.
Recently, business advisory firm KPMG, added their view. The KPMG study revealed eight 'DNA traits' of high-performing enterprises, as follows (click image on right for a larger version):
This guidance is as applicable to smaller companies with big dreams as it is to more mature companies wanting to defend against competitors or push on to the next level. Did you notice that a having great product or a killer app—often lauded as being 'the crucial difference'—does not rate a mention? This point has interesting implications for strategic management, and strategy development in particular. While good products and services are important, leadership, people (customers and team), smart decisions and a sense of purpose are far more significant moderators of business success.
If you'd like to discuss the implications of these observations for your board or your corporate strategy, please get in touch. I'd be more than happy to be a sounding board.
Thoughts on corporate governance and strategic management, our place in the world and other things that catch my attention.