If any of these questions triggered a thought in your mind, then perhaps we should talk. I will be in the UK in 1–11 September (for speaking engagements including the results of my latest research). If you would like to learn more about board practice, corporate governance, strategy and value creation, please get in touch so we can schedule a discussion. I'd be glad to learn about your business and understand how I can help.
Thirty years ago, the term 'corporate governance' rarely rated a mention. However, an awareness of boards and corporate governance has grown in the minds of the general populace as a steady stream of reports—of corporate failures, scandals, moral failures, hubris, incompetence, judicial investigations and sanctions—have been published in the popular press. In fact, the term has entered the lexicon to such an extent that it is routinely mentioned and all manner of faults are attributed to it, even though it is rarely defined. FIFA, HSBC and now Renault F1 are recent examples. Further, the systemic response to each 'wave' of corporate failures has become quite predictable: The introduction of hard law (statutory regulation) and, in the case of publicly traded companies, stricter codes of compliance. The goal of such measures is to prevent reoccurrences.
The evidence suggests that less is known about boards, board practice, director behaviour and corporate governance than what most of us have assumed to be the case. This is not good! However, all is not lost, for two pathways to knowledge seem to be available. One option is to continue to use existing tools and techniques in pursuit of a deterministic 'truth' about boards (assumption: on the right path, just not there yet). The other option is to take stock, on the chance that the contemporary understanding of ownership, shareholding and control; and popular conceptions of board practice and corporate governance are actually founded on a less-than-firm footing. But that would mean putting popular models and ideas to one side, which could be a bitter pill to swallow. Which is the best option then? Might a return to first principles be necessary? I'm starting to think so. What do you think?
While well-intentioned, the costly actions of legislators and code writers have not led to any discernible improvements in corporate behaviour or performance. Consequently, some groups have become quite jaundiced (and vocal), and the reputation of boards and business more generally have become tarnished as a result. Worse still, the research community, which has been studying boards for forty years or more, has yet to propose any credible explanations of how boards could or should work. That this much effort has been expended without 'success' (excepting a raft of spurious correlations) is a travesty of justice. It also points to a deeper problem. Our underlying assumptions could be wrong.
Of all of the roles within a modern corporation, the role of chief executive probably ranks as 'the most important'. Although the board carries the ultimate responsibility for the performance of the company, the chief executive is the standard bearer—they hold and cast the company's vision. The chief executive is also accountable to the board for the implementation of the company's strategy. Consequently, the role is crucial to the long-term performance of the company—an unexpected departure can leave a company floundering while a replacement is sought.
Succession plans are an appropriate tool to mitigate risks associated with the departure of a key executive. However, they are not normally this prescriptive ("chairman...has taken over as CEO in accordance with the company's succession plan"). To name the chairman in the succession plan does not seem to be appropriate. It is hardly in the best interests of the company. What about other executives or an external candidate? While directors filling roles temporarily—and even gaining a permanent appointment—is not without precedent (Ralph Norris at Air New Zealand being one notable case), the decision of the Coalfire board to pre-empt a contestable process seems to be somewhat short-sighted.
An appropriate chief executive succession plan usually outlines the process by which the board will approach the task of filling a vacancy, including how decisions about the appointment of an acting chief executive will be made and how the board will work with the acting chief executive in the interim. However, smart boards go further than this. They work hard to identify potentially suitable candidates from amongst the executive often many months (sometimes years) before the vacancy occurs. The Coalfire case is unusual in that the chairman was named in the succession plan. One presumes this decision was made when the board thought the chairman was the best and most suitable candidate. However, that decision was made at some point in the past. Whether the chairman continues to be the best candidate does not appear to have been tested. I wonder what the shareholders are thinking just now (*).
(*) My condolences to the family and friends of Rick Dakin at this time of his unexpected passing. This muse reflects on the decison-making and succession planning practices of the board both before and after the event of his passing. It is not intended to lessen Dakin's impact on the business nor the magnitude of his loss.
The annual European Academy of Management conference is done for another year. Consequently, my commitments in the UK and Europe are also done. As I make way home (my favourite destination!) and reflect on both EURAM and the two preceding conferences (International Corporate Governance Network and International Governance Workshop), the following ideas and observations come to mind:
The last three weeks have been great, although progress towards 'effective corporate governance' remains torturously slow. Notwithstanding this, I met some amazing people and learnt a lot. The challenge now is to assimilate the newfound knowledge, and to incorporate it into my advisory work and research, so that directors and boards can gain benefits as well. If you wish to know more, or arrange for me to speak with your board, please contact me directly.
Banks (amongst many other large corporations) have suffer reputational problems. Simply, many members of the public do not trust the motives of banking executives. Further, there is a dearth of empirical research about bank boards, because banks are routinely omitted from board research. So, when Anastasia Stepanova (Russia) discussed her perception vs. reality study of bank boards, I pricked my ears up. Stepanova's aim was to compare whether perceived relationships between board attributes and market performance were consistent with actual market performance.
Stepanova modelled data from 470 banks around the world. She studied three attributes in particular (the percentage of independent directors, the size of the board and the ownership concentration) and compared perceived market performance with actual performance metrics. The research produced some very interesting results, as follows:
While further analysis will be required to understand the implications for bank boards and shareholders (and the market more generally), the results highlight that differences between perception and reality are subtle and that they occur at the level of discrete board attributes.
Stepanova's consistent use of the term 'corporate governance' (when she was referring to attributes of boards) was notable. It demonstrated that she conceives corporate governance as being a structure. This conception was common in the 1980s, 1990s and into the 2000s. However, it is being largely superceded by the idea that corporate governance is a process or a policy framework. As a result, Stepanova may benefit from updating her terminology, to assist readers more familiar with contemporary conceptions of the phemonenon.
If you were to look across the board research landscape, the view would be dominated by studies of large, publicly-listed (and typically Anglo–American) corporations. Small-medium enterprises, family-owned businesses and businesses in emerging economies have received far less attention (although this is starting to change), and social enterprises even less so.
Saskia Crucke, of Ghent University in Belgium, is interested in social enterprises and, more specifically, in the governance function. She reported the preliminary results of a study that is considering governance in a category of social enterprise called Work Integration Social Enterprise (WISE). WISEs help disadvantaged or disabled people enter or return to the workforce.
Crucke is using an organisational behaviour construct called 'faultlines' to try to understand why some WISEs perform better than others. She used a two-stage questionnaire (the first to ask the chairman and CEO about the WISE, and the second to ask all board members questions about decision-making and performance) to collect data from several dozen Belgian WISEs for analysis. Her preliminary findings show that where faultlines exist, decision-making is impaired and organisational performance is weaker.
While this result may sound self-evident to some, it does provide a useful platform for further (qualitative) research, to discover how and why decision-making is compromised, and to inform board member recruitment. If faultlines can be minimised, then higher levels of organisational performance may be possible on an on-going bass. For a sector that is typically cash-strapped, that would be a very good outcome.
I had the pleasure of chairing a corporate governance topic session at EURAM this year, in which three papers on outside directors were presented. Each of the studies were fascinating. The first one explored director motivations, and the other two added emerging market contexts (China and India):
Perhaps the strongest message from this session was one that wasn't explicitly stated: that statistical analyses of quantitative data can only ever reveal correlations between variables (attributes) of interest—because variable measure change, not reasons. My hope is that researchers start to move beyond simply counting things, and soon. Precious research time would be far better spent collecting primary data, ideally from inside boardrooms, to understand what boards actually do, and then to draw conclusions from there.
Delegates at the European Academy of Management conference were treated to an inspirational keynote speech by Lech Wałęsa, co-founder of Solidarity, Nobel Peace Prize winner and former President of Poland. His comments, in Polish, were translated by a very impressive translator.
Wałęsa continued by looking to the future. He challenged—hard—both the communist system that dominated the Eastern bloc and the capitalist system that dominates the West. He asserted that to replace one form of evil with another was not good. Rather, European unity should be the goal, but that requires people to get together to talk and to listen. Wałęsa stressed the importance of values as a crucial foundation to enduring peace.
Wałęsa's talk was inspirational, to the extent that the impact of his contributions on the lives of ordinary Polish people and the wider Eastern bloc has been huge. However, Wałęsa's rhetoric, while eloquent, strayed a little at times. Some of his comments were thinly-veiled political statements that, in another context, could have been interpreted as calls to action. Notwithstanding this, one of his calls, for a new generation of leaders to rise up to continue to fight to freedom and unity was clear and unambiguous. It's a pity that more business leaders and company directors were not present to hear it! Although unstated, the implication of Wałęsa's call was clear: leaders need to know when to lead and when to let go.
Wałęsa started with the claim "I am a revolutionist!" He regaled the largely academic audience with stories of 'great divisions'; of 200 men who fought for change against 200,000 Soviet soldiers with little success; and, of the tipping point provided by a papal appointment and subsequent visit. Within a year of Pope John Paul II's appointment, Wałęsa had gathered over two million supporters. Change became possible. "I want you to believe." Soviet soldiers watched the rallies as the people cheered for their Polish Pope. They even made the sign of the cross across their chests, something that surprised Wałęsa but gave him hope that change might be possible. Indeed it was, and indeed is happened.
After speaking for 45 minutes, Wałęsa answered audience questions for another 45 minutes (he skilfully avoided answering any provocative questions, including one about Vladimir Putin). All too soon, the allotted 90 minutes was up. Wałęsa needed to catch a plane. He remains in demand as an international speaker on politics and history.
Two interesting papers, that explored various aspects of chairman effectiveness and CEO succession, were presented during the late-morning session of the first day of EURAM2015:
Professor Thomas Clarke, of UTS Sydney, opened the corporate governance track of the European Academy of Management 2015 conference by discussing both the history and the future of board research. In so doing, he asked the question as to whether boards and board research were on the cusp of a paradigm shift.
Looking back 83 years, Clarke called on the memory of Berle and Means, and their oft-cited work that explored the separation of ownership and control. Berle and Mean envisaged a collective and collaborative approach (between shareholders, boards and managers) to the achievement of various business goals. The article has been accorded seminal status by many researchers, yet it has been largely usurped in more recent times by agency theory (one of the most debilitating ideologies of moderns time, according to Clarke), a contribution that conceives an individual and separatist view where shareholder primacy is the primary (even only) goal.
In looking ahead, Clarke asserted that new a model is required because the world is on the cusp of a massive disruption caused by climate change. A continuation of the extant approaches will simply accelerate the demise of many economies. In calling for a zero-emission post-carbon economy, Clarke said that boards of directors have a key role to play. However, they need to be farsighted, determined and courageous. He called out Chandler (1967) and Stout (2012) as highly influential thinkers in this regard, and contrasted their theses with that of the more commonly cited Jensen and Meckling (1976) (who promoted agency theory).
The challenge for boards in the future is to return to the ideas of Berle and Means, for history suggests that their ideas were largely correct. Whereas the 19th Century was characterised by production and the 20th Century by marketing and consumption; the 21st Century will, more than likely be characterised by sustainability. Boards need to embrace this if they are to oversee the fundamental changes needed to make the transition. Whether boards will be prepared to look inwards, to re-invent themselves and the way they work is the first challenge to be surmounted. Clarke's thesis suggests that failure to act on this initial point may consign boards and the very companies they oversee to the very place they wish to avoid—the scrapheap.
Thoughts on corporate governance, strategy and effective board practice; our place in the world; and, other things that catch my attention.