Much has been made in the business press in recent weeks of the possibility of splitting the Board Chair and CEO roles at JP Morgan. Arguments for and against have been made, and now a non-binding shareholder vote is imminent. I can't help but feel disappointed by all this rhetoric, because arguments about Board form (structure) miss the point.
For the last 40 years or more, researchers and practitioners have searched for "the ideal Board structure" through which high performance will occur. Despite considerable effort, attempts to produce an ideal structure, or explain how Boards contribute to business performance, have failed to produce definitive results. If we pause and reflect, this lack of clarity should not be a surprise. Governance is a complex, socially dynamic phenomena, not a predictable closed system or a mass of separable attributes. As such, empirical knowledge (of the past, or of form) cannot be used to credibly predict future performance.
Rather than continue to argue over form (that is, argue over structural variables including Chair/CEO duality, gender diversity, non-executive directors), attention needs to move to the holistic consideration of governance itself, and what Boards do (how they function). Then, and probably only then, will we start to gain a clear understanding of how Boards actually contribute to business performance. But is that asking too much of the JP Morgan Board and other Boards? I guess time will tell.
Two posts on corpgov.net
have caught my eye this week:
Together, these articles present a significant challenge to the corporate governance community, and company directors in particular. To most Boards, the purpose of the company is to achieve growth and to maximise shareholder value, period. But is this narrow focus appropriate? Does it help society, or does it add to its burdens?
As I read the articles, I found myself thinking about the relationship between economic growth and societal wellbeing. You don't have to be a rocket scientist to understand that a narrow focus on profit or growth is a rather selfish win/lose strategy. Shareholders win and the rest of us lose. Is that fair? Perhaps Boards should be compelled to take account of wider societal factors as they fulfil their important role. What do you think?
Earlier today, I read an interesting article
posted on the HBR blog site about conflict and governance. The author, Solange Charas, described two kinds of conflict: cognitive (task-oriented) and affective (emotionally-oriented) in her article. She asserted that cognitive conflict is essential in creating value, whereas affective conflict erodes value. Charas' research is consistent with other research which reports that cohesiveness, vigorous debate and creative interaction are hallmarks of a good strategy development process (refs: Levrau & Van den Burghe, 2007; Kerr & Werther, 2008).
My point in raising the topic of conflict/debate in the boardroom? Many of the boards that I'm familiar with or have been privileged to observe are devoid of cognitive conflict, despite directors themselves telling researchers that vigorous debate leads to improved decision quality. Discussions tend to be "nice", lest someone offends someone else. But are such genteel behaviours good for company performance?
Can I suggest directors need to put their reputations and any affective behaviours to one side, and focus their attention on what they were appointed to do: explore strategic options and make strategic decisions (some of which may be quite contentious), and maximise performance (through the CEO). Perhaps if they do so, and adopt cognitive conflict practices, then we will start to see some serious value being created from the boardroom.
Over the past few months, I have been quietly testing some of my doctoral research ideas with a few esteemed members of the academic community. I've also chatted with some practicing directors as well. The discussions have been incredibly valuable, because they have generated a lot of interest and feedback, all of which has enabled me to refine and adjust the research.
On the strength of the feedback received, I have decided that it is time to "come out" as it were; to begin share my ideas with a wider community. To this end, I have submitted a paper abstract to ECMLG 2013
. The abstract has just been accepted, so now I need to prepare a paper and start saving to get to Austria in November. How exciting!
And the ideas that have generated the interest? Here's a peek: Much of the governance research to date has involved the statistical analysis of large data sets, resulting in correlations between observable variables and rich descriptions. However, no definitive theories to satisfactorily explain how
Boards contribute to performance have been produced. Despite considerable effort, researchers appear to have reached an impasse. A new research agenda in required if progress is to be made—one that moves from the study of isolated variables (structure, composition, behaviours) to the holistic investigation of governance itself. My reading of philosophy has exposed critical realism
(CR) as an interesting basis for a new agenda. CR rejects the common view that social phenomena (of which governance is an example) are a mass of separable events or attributes.
When I re-read the literature through a CR lens, several discrete ideas that I've been pondering for some time started to come together into a cohesive picture. It seems that active engagement; an involvement in the development of strategy; and, the making of strategic decisions are somehow potentially significant causal mechanisms that explain how Boards actually contribute to business performance. Next step is data gathering and analysis. If validated, a new theory of governance which explains how Boards contribute to performance will hopefully emerge. Thankfully, I now have a philosophical framework to build upon. Yahoo!
So, there you have it—my ideas out in the open. Sorry if this summary was tough to read and understand! If however, you are interested in governance matters, and particularly in governance research, and would like to chew these ideas through, please post a reply, or contact me directly
Three weeks ago I was getting a bit grumpy. I'd been battling the rather bureaucratic ethics process for several months and was starting to get worn down. This mandatory component of my doctoral research has taken far longer, and proved to be far more arduous, than expected. I couldn't understand what the problem was, and nor could my supervisors. The research fitted the low-risk criteria and approval was supposed to take two weeks. My supervisors agreed, however the ethics committee saw it differently. In addition, it seemed the committee had no sense of time, with 14 weeks elapsing since the original submission. Apart from continuing to do background reading while I waited, my doctoral research had stalled and I was left twiddling my thumbs.
Then, on 4 April, the email I'd been waiting so long for arrived. The brief note said the research had been approved. Finally! This was just the news I needed, because on 6 April my wife and I were leaving for two weeks holiday, and I certainly didn't want to spend the time away moping about a process I had no control over. Safe in the knowledge that the research had been approved, I read three books (The Beekeeper's Lament
, and the two mentioned here
) and quite a few governance articles, and relaxed with my wife and her siblings.
Looking back, the holiday came at just the right time. The time away enabled me to get my head back together, knowing that the roadblock I had been powerless to break through had been dealt with. Since getting home, two companies have agreed to participate in my research, with discussions underway with a third. Also, I have written an abstract for the ECMLG 2013
conference in Austria, attended a Board meeting, and moved a house-load of furniture ahead of new carpet being laid this week. It's great to be back on track, having cleared the ethics hurdle. What a difference one brief email—and a fortnight to reflect and recharge—makes!
Acclaimed businessman, Rob Fyfe (formerly CEO of Air New Zealand
), was reported this week
as saying that business students don't understand leadership in the real world, and that universities should take a more authentic approach to leadership study. I agree.
Over the last two years, I have been immersed in post-graduate study—initially a post-graduate certificate in business, and subsequently doctoral study. In so doing, I have observed some rather interesting behaviours and patterns that, quite frankly, trouble me.
- A large percentage (perhaps the majority, even) of the academic researchers and tutors I have come in to contact with seem to have a very relaxed attitude towards time. The importance of time that pervades business is not apparent in academia.
- Many of the students I've met (both under-graduate and post-graduate) seem to lack any real appreciation of how business is conducted. Consequently, their ability to appreciate management concepts and theories, and think about them critically, is compromised.
The consequences of these behaviours and patterns appear in the assignment submissions, theses and research reports produced by students and faculty. Much of the material is technically correct but either hard to understand or lacking in any applicability to real-world situations. It's almost as if the "so what?" question has never been posed, let alone wrestled with.
In my opinion, all aspiring business students should be required to undertake at least five years practical experience in a relevant field before
they are accepted into any post-graduate programme. Also, faculty should be required to do a significant period of field work on at least a sabbatical basis (every seven years). This type of requirement would ensure students and staff have at least a basic understanding of business in the real-world. Such a model may well be threatening to some faculty who sit comfortably in their learned environment. However, I suspect the quality and practical usefulness of the research produced, and calibre of graduates re-entering the workforce, would increase markedly.
What do you think?
Can shareholders and other stakeholders "blame" Boards for poor company performance? Should they? What is reasonable? If we accept that the Board is the ultimate authority in any organisation (and we should, because the legislation in most western jurisdictions supports this position), then the Board should be accountable for company performance.
This seemingly straightforward answer is not nearly so straightforward in practice however. Companies are open systems, and company performance is affected by many factors, some of which are external to, and beyond the direct control of, the Board. David Walker discussed this point in a helpful opinion piece
which appeared in the Guardian this week. Notwithstanding the complexities discussed by Walker, the Board should never be excused from taking its responsibilities seriously; from being engaged; from understanding the company's business; from regularly considering strategic options and making strategic decisions; from actively monitoring performance; from making adjustments as necessary; and, from standing by its decisions.
The Board needs to understand how the company is performing at any time. If company performance fails for some reason, the Board should know about it and act decisively. This is what shareholders expect. If a Board cannot or will not act, or if it does not understand actual performance, it should be replaced. Ultimately, the buck has to stop somewhere. This is accountability.
This week I'm on holiday with my wife at Caloundra, on the Sunshine Coast just north of Brisbane, Australia. The weather is supposed to be pleasantly mild at this time of the year, with warm sea-breezes and partly cloudy skies foretelling the easing of the summer heat and the arrival of cooler temperatures. However, this week, the weather is not doing what is it supposed to. We've had passing showers every day until today, when steady rain has been the norm. Fortunately, the temperature is still hovering around 20 deg C. Anyway, wet weather provides a nice benefit: that of relaxing inside with a good book. This week, I've started reading two books. Both have gripped me and caused me to think quite deeply about a few things. I thought I'd share them with you, even though I have not finished reading them yet. Thinking, Fast and Slow
(published 2011) is Daniel Kahneman's latest book. It was an impulse-buy in mid-2012, while buying some research books at Amazon, one that has been sitting on my bookshelf since. Snippets from the flyleaf: Kahneman takes us on a groundbreaking tour of the mind and explains the two systems that drive the way we think. System 1 is fast, intuitive, and emotional; System 2 is slower, more deliberate, and more logical. Kahneman reveals where we can and cannot trust our intuitions and how ewe can tap into the benefits of slow thinking. He offers practical and enlightening insights into how choices are made in both our business and our personal lives—and how we can use different techniques to guard against the mental glitches that often get us into trouble.A Long Walk in the Himalaya: A trek from the Ganges to Kashmir
(published 2007) was written by Garry Weare, an explorer and writer. Long Walk
caught my eye while I was passing the time in a second-hand book store a few days ago. Although I've never been a tramper or trekker as such, I have long harboured dreams of undertaking long journeys on foot, be they pilgrimages like the trek across northern Spain to Santiago de Compostela, or indulgent hikes in Yosemite
or Fiordland National Park
. While I've visited some of these places, I'm yet to tackle any long journeys as such. Anyway, to Long Walk.
This book provides an account of Weare's five-month trek from the source of the Ganges—through valleys and over mountain passes—to Srinagar in Kashmir. On one level, the book is a straightforward travelogue. One another, it provides a rich history of the region. On yet another, it stimulates spiritual and socio-political thought, of the type I've not experienced from reading a book like this before.
I'm partway through both books, and not normally wont to make recommendations. But in this case, I'll make an exception. If you are at a loose end, and are looking for something that will stimulate your mind, you could do far worse than read either of these books.
I was privileged to receive a preview (under the Chatham House Rule
) of the proposed Integrated Reporting
framework at a Business Leaders Forum hosted by Grant Thornton
yesterday. Integrated reporting (or <IR> as I discovered) has the potential to become the "new normal" in terms of reporting company performance and prospects.
<IR> is an initiative aimed at improving how companies communicate with shareholders, stakeholders and the wider community. Essentially, <IR> is about moving from compliance-based reporting, to "a concise communication about how an organization’s strategy, governance, performance and prospects lead to the creation of value over the short, medium and long term" (direct quote from the IIRC website)
This business-led initiative was music to my ears. While I can work my way through a set of financial reports, I am no accountant. The trend in recent years towards longer, and more complex, reports has made understanding increasingly difficult. Any move towards a more straightforward explanation of performance (not to mention a more sustainable model of capitalism) can only be helpful.
The initiative has garnered the support of many global brands and investor groups scattered all around the globe. If you are a business leader (particularly a Board Chair, Finance Committee Chair, CEO or CFO), I recommend you take the time to familiarise yourself with the proposal, and make comment during the upcoming consultation period.
Interest in gender diversity in boardrooms and C-suites has been increasing over the last 12-18 months. In that time, many commentators have expounded the virtues of having women alongside men on Boards and in C-suites, in both the academic and practitioner literature. Lobby groups have been established and conferences convened, with good effect.
While such efforts are laudable, the suggestion that the presence of women (on Boards) leads to increased company performance—as has been asserted in the rhetoric—is a big call. I agree that a relationship appears to exist, however I am yet to see any robust evidence that supports the assertion that the presence of women on boards per se improves company performance.
Before you launch volleys in my direction, please read on. Governance is a complex, open system, and many inputs affect the operation of Boards and the outputs they produce. A single-minded focus on one structural variable—as has been the case with gender—is far too simplistic. Rather, attention needs to move away from bidding up the percentage of seats occupied by women (and expecting performance will reliably improve as a result), towards the holistic consideration of governance as a system, and to the causative factors that affect performance. Preliminary research efforts suggest that behavioural factors; high levels of engagement; vigorous debate; an involvement in the development of strategy; and, the making of strategic decisions, are far more likely casual mechanisms than gender or any other structural variable.
So, to my question. What is the real objective of placing women on Boards? Participation or performance? If it's the latter (and I hope it is), then the focus needs to move beyond counting the number of women around the table, to discovering what Boards actually do as they go about their work, and to how that contributes to performance (or not).