- The board has been remarkably silent. This scandal rocked the entire firm, not to mention confidence in the banking sector. Why has the board not been more visible? Yes, Stumpf is gone. But why has the chairman not spoken yet? Did the board know of the decisions and activities that perpetrated the scandal? If so, why has accountability not reached to the boardroom? If not, why not? To be ignorant of something this big suggests the board may have not been making adequate enquiries. Were probing questions being asked of the chief executive, or was the boardroom a more passive environment?
- The appointment of an insider (Sloan is a 29-year company veteran) to the position vacated by Stumpf (and to the board) is curious to say the least. Sloan would have been aware of the fake accounts scandal. An 'Acting Chief Executive' appointment (to provide leadership while a full recruitment process proceeded) would have been a better move. The appointment certainly raises questions about the level of due diligence and the recruitment process the board utilised prior to making the appointment.
You must give newly appointed Wells Fargo Chief Executive Officer Tim Sloan credit. No sooner had disgraced former CEO John Stumpf left the building, Sloan delivered a speech to all employees to apologise for the scandal that had beset the company. That Sloan delivered an apology is a good first step on the path towards redemption (the company boasts a long and proud history), even though "we're sorry for the pain" appears to be an apology for the angst employees faced rather than the fake accounts action itself.
Two things are especially notable in this case:
That Stumpf's (and now Sloan's) boss has both remained silent and appointed from within is very telling.
(Note to the Wells Fargo board: If you want to talk further, in total confidence, here are my contacts details.)
English can be a confusing language. The same word can have different meanings in different contexts (by 'bear' do you mean taking up arms, putting up with or the animal; and, is a ruler a measuring instrument or the monarch?). Meaning and usage can change over time as well. The problem is not limited solely to words—phrases are not immune either. Understandings change over time, whether by design or in response to an evolutionary development. Some changes are for the better, whereas others to defy logic, perhaps inspired by political undertones.
The understanding and usage of the terms 'governance' and 'corporate governance' are topical cases in point. Historically, 'governance' (derived from the Greek root, kybernetes) meant to steer, to guide and to pilot (typically a ship)—an action-oriented noun. However, a plethora of usages and contexts have been suggested over time, especially in the business community. A range of different meanings and usages are now applied including the function of overseeing managers and what they do; the activities of the board itself; and, in a few cases, it is used to describe the board itself ("we'll need to get the governance to make that decision"). The word has also been applied in an even broader context, the business ecosystem (i.e., system of governance or whole-of-enterprise governance). The most extreme example that I have heard to date was uttered last week. "Governance can mean almost anything, it is completely idiosyncratic; different for every organisation."
Things are made worse when two distinct concepts are conflated: the phenomenon of corporate governance and the practice of corporate governance. The discourse needs to mature, and to do so rapidly.
The phenomenon of corporate governance is quite different from the practice os corporate governance. The former, which describes the concept is stable and has not changed significantly in many years. Eells (1960) was the first to use the term 'corporate governance' to describe the structure and functioning of the corporate polity. Later, Sir Adrian Cadbury (1992) defined the term as being "the means by which companies are directed and controlled". The fundamental principle is that corporate governance refers to the activities of boards. The latter (the practice of corporate governance) refers to how corporate governance is enacted. This is quite contextual. The means by which boards consider information and make decisions can and should be fluid depending on the situation at the time.
Another factor provides further context: the external environment that sets the rules under which boards operate (statutes, codes and regulations). These define the rules of engagement. Some talk about regulations and codes as if they are governance. I'm not convinced. If I can use a sporting analogy, laws, regulations and codes provide the 'rules' by which teams compete. But they are not the game. Similarly, the effects of corporate governance (i.e., the consequential impact of decisions made by boards) may influence the behaviours and actions of managers and staff. These effects may pervade the company. Is this, therefore, corporate governance as well? If so, this would suggest that corporate governance per se is ubiquitous. I'm not convinced. Corporate governance rightly describes what happens in the boardroom. However, performed well, its effects should be far reaching.
Let's not lose sight of these distinctions. The continued 'sloppy' use of language serves to simply to obfuscate.
Former sharemarket darling, Wynyard Group, was put into voluntary administration this week. The announcement was made via a notification to the share market and notice on the company website.
The company was highly-valued, well-funded and governed by seemingly capable directors. It's products, crime fighting software, were seemingly in demand. The company had experienced strong revenue growth since an IPO in 2013. Milford Asset Management, a shareholder, valued the company at nearly $120M at the time of the IPO. But Wynyard failed to make money, then or since. The result was an ever-deepening hole that, in the end, was too deep to climb out from. When last traded, the notional value of the company had fallen to less than $40M. Now that the liquidator is involved the residual share value is (close to) zero.
What went wrong?
Whereas some failures reported this year appear to have been grounded on hubris and fraudulent behaviour, such motivations do not appear to have been significant at Wynyard Group. The failure appears to have been more straightforward. Indicators have been visible for some time as well. Ultimately, the actions (or inaction?) of the board of directors need to be placed under scrutiny.
The company's business model was characterised by periodic high-value transactions (read: a lumpy revenue profile). Also, the company employed highly-capable software engineers and other technical specialists, lots of them. Effective cash management is crucial in such companies. Superficially, the company appears to have been carrying too much cost, suggesting it invested too far ahead of the revenue curve and that it may not have had a backup plan if revenue expectations were not realised in either the timeframe or manner expected.
The market seemed to know there was a problem (track the share price over the last 18–24 months), yet the situation was allowed to continue seemingly without any major corrective action being taken. Ultimately, the outcome for investors became bitter. Why was this not addressed by the board much earlier? Was the board (which included several high-profile directors who resigned in May and June 2016) not in control as it should have been? Was it adopting a more passive style of oversight than that conceptualised by Eells, Cadbury, Garratt and others? Was the board captured by an optimistic outlook and charismatic management? More pointedly, who was actually in control? The early indications suggest that the company was being controlled by management—ineffectively so, as is now patently clear—usurping the board's statutory role.
What can we learn?
The Wynyard case will, no doubt, be played out in the business media and elsewhere in the days to come. The company has unwittingly joined a rather long list of companies of interest to governance researchers and MBA classes, albeit of what not to do. In the meantime and regardless of whether Wynyard is wound up or continues to trade in some form (the latter, I hope), the case raises salutary lessons for boards elsewhere:
Boards need to discuss these and related matters periodically, to ensure they are appropriately focussed on (and adequately equipped to pursue) the value creation mandate. An outside perspective may offer useful insights as well.
I'm returning to the UK and Europe in a few days' time—to attend meetings with business leaders in London and to present a paper on corporate governance at a conference in Milan.
If you want to ask a question, make a request or schedule a meeting, please get in touch.
One of the humbling privileges of working with boards and directors is the opportunity to participate in discussions and provide guidance on themes as varied as corporate purpose, strategy, corporate governance and board effectiveness. The overarching aim is straightforward: to help boards become more effective in the important role of steering and guiding the organisation they govern towards its intended purpose.
Recently, the topic of reporting seems to have been front of mind for many directors. I've been asked who should determine the structure and content of the board pack (the board), and what the appropriate amount of detail to include in the board pack is ("sufficient"—see the maxim below).
In responding to these questions, the first consideration is that the board report is no different from any other communications channel between two parties: the purpose of the report is to transport information to both inform the receiver and enable decisions to be made. Like other communications channels, the effectiveness of the exchange between management and the board is determined by the receiver, alone. Did the board understand the contents of the material in the board report?
If the board is to have any hope of doing its job well, it needs to ensure the chief executive understands what information it requires for effective decision-making. Otherwise, what hope has the chief executive got of knowing or, worse, of the board of making high-quality decisions? If the chief executive has to second-guess the board, the likelihood (from bitter experience) is that the board pack will be structured in a form that suits the chief executive and the information may not be readily usable.
The remedy to ensure the board pack meets the board's needs is straightforward: a 'board pack review' item should be included in the annual work plan. While one review per annum is appropriate, a brief review should be undertaken whenever a new director joins the board. The board should discuss the contents and structure of the board pack to ensure directors understand the information and can readily navigate their way around the pack as presented. If there are any concerns, changes should be recommended for the chief executive to act upon. This simple task should ensure the board gets what it needs to do its job properly and the chief executive knows what to prepare.
The second question (detail) is similarly straightforward. On this question, the following maxim applies:
If you would like some more information, including examples of how to structure the chief executive's report and financial report, please get in touch.
The challenge of influencing business performance from the boardroom is one that should not be taken lightly. Recently, I was invited by MILE (Medinah Institute of Leadership and Entrepreneurship) to discuss this topic with an international audience, in a webinar format. While the audience was primarily from the Gulf States, the comments have widespread applicability.
Though biassed(!), I commend the webinar recording to you. If, having watched it, you would like to discuss any aspect of the presentation including implications for your board; challenge any claims; or, arrange an similar presentation to your colleagues, please get in touch. I am at your service.
Al Brown, restauranteur, television personality and colourful raconteur, has a way with words. In this vignette, he talks candidly about several things he has learned about running a business successfully. These include:
While Al's businesses would be correctly categorised as small-medium enterprises by most people, the principles are universally applicable. I commend this short clip to all boards, as a scene setter just before your next board meeting gets underway; and, to executive teams, as a reminder of three important elements of effective leadership.
How do these points fit with your understanding of effective business and board leadership?
Recently, an article was posted on the ICSA: The Governance Institute website, describing 5 essential qualities of a non-executive director. The author lists the following five 'core qualities' and suggests these need to form the basis of evaluations when companies are appointing non-executive directors:
This is a good list and several of the items are intuitively appealing. However, having read the article a few times now and compared these suggestions with the findings from my own research and others elsewhere, I am not sure all of these qualities are actually 'essential'. This set me thinking, leading to some supplementary questions:
Though progress has been made in recent years, these questions demonstrate our knowledge abut boards is far from complete. We still have much to learn about how boards actually work; how they should work; and, crucially, whether boards can influence company performance through the decisions made in the boardroom (or not). If answers to these very difficult questions can be found, they will probably have significant implications including perhaps to a new understanding of corporate governance and updated guidance for board practices, director recruitment and on-going director development. While some directors may struggle to come to terms with such implications, the flow-on effects for sustainable business performance, economic growth and societal well-being are likely to be significant.
The last five years of my life have been dominated by research—the goal being to begin to understand how boards influence firm performance through their contributions in the boardroom. It's been a tough journey at times, but the end is now in sight—and thank goodness because a groundswell of interest in how my research might be applied to real situations is starting to become apparent. People in Australia; the UK; Europe; USA; South-east Asia; the Middle East; and, New Zealand have been in touch with questions and requests.
While the research is yet to be published, enquiries are arriving from many quarters including invitations to write an editorial for a leading magazine; speak at the Governance Institute of Australia National Conference; participate in a multi-city (Europe and Asia) speaking tour in 2017; prepare a webcast; and, write a book for practicing directors. These are on top of confirmation from the prestigious Leadership and Organization Development Journal that an article of mine will be published soon (Vol 37, Issue 8), and earlier commitments to deliver a webinar to a world-wide audience; tailor a governance development programme for members of an industry association; and, facilitate several workshops to help companies refine their corporate purpose, strategy and governance frameworks.
That so many people have begun to question 'conventional' corporate governance thinking (that the board and management must be kept separate; that particular board structural configurations lead to better firm performance; and, that the term 'governance' can be widely applied including beyond the boardroom) has caught me somewhat by surprise. However, my commitment to serve boards and directors who are intent on exerting influence from the boardroom in pursuit of an agreed corporate purpose is a matter of public record. So respond I shall (and happily so).
If you want to ask a question or toss around some ideas, please get in touch. I look forward to the discussion.
I'm thrilled to announce that the Madinah Institute for Leadership and Entrepreneurship (MILE) has invited me to present a webinar entitled Influencing company performance, from the boardroom. The webinar will start at 3:00pm Saudi time on Sunday 2 October—to suit American, UK/European, Middle Eastern, African and Asian company directors and board members in particular.
For more information, click here. You'll need to register (free).
The following topics will be discussed during the 45-minute webinar (with an open Q&A session afterwards):
Reserve your place today!
Thoughts on corporate purpose, strategy and governance; our place in the world; and, other things that catch my attention.