In September 1970, The New York Times Magazine published an article that subsequently became a catalyst, a touchpaper even, for a step change in the understanding of the purpose of business and, as a consequence, the priorities of managers and boards of directors. Milton Friedman, an economist and Nobel laureate, argued that the doctrine of 'shareholder primacy' should prevail over that of 'social responsibility'.
The article garnered much attention (becoming seminal along the way) especially amongst those shareholders, directors and managers for whom the maximisation of profit was of primary (read: exclusive), interest. The statement most commonly used to justify the profit maximisation doctrine is right at the end of the article:
"There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase profits"
Superficially, this statement is pretty clear: the purpose of business is profit and nothing else matters. But this statement is incomplete, a portion of a longer sentence. To stop reading at 'increase profits' is to read Friedman out of context. The complete sentence is as follows:
"There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase profits so long as it stays within the rules of the game, which is to say, engages in free and open competition without deception or fraud."
Friedman was clear. He argued that the maximisation of profit is an important priority of companies, and he argued that this is not, and cannot be, an unbounded endeavour—much less an exclusive one. The proviso followed without as much as a comma—the pursuit of profit needs to occur within the context of prevailing law and regulation (rules of the game), competition and fair play. That Friedman's guidance was so clear begs a rather awkward question: Why has it been misinterpreted by so many shareholders and boards?
One of the joys of my 'work' is that I get to journey with boards and executive managers as they wrestle with some pretty challenging questions. Whether the journey involves briefings, phone discussions, meetings over coffee, professional development sessions or facilitated workshops, the goal is generally consistent: to gain understanding, in pursuit of increased effectiveness and, ultimately, better business performance.
By way of example, I was recently invited to work assist ChildFund New Zealand (*), a social enterprise committed to the ideal of eradicating child poverty. The board and senior managers gathered in a modest setting—the administration office—to strip back the layers and, in so doing, re-discover the organisation's reason for being (purpose) and develop strategy to achieve the identified purpose. The intention was to reach agreement in principle on the core elements by the end of the day, so management could form up a coherent strategy document for discussion with the board and subsequent approval.
We got underway at 9.00am, as planned. Some 116 man-hours of focussed and, at times, intense effort later, it was 5.00pm. I won't mention what was discussed or decided, other than to say agreement was reached on most of the big questions. Once the strategy elements are drafted up into a suitable document and approved (there will be a couple of iterations between management and the board to tidy up loose ends, no doubt), attention will move to implementation. The ChildFund board intends to use the approved strategy as a frame, to both resource management and hold it to account (which will include monitoring strategy implementation and verifying that the expected outcomes and benefits are actually being achieved).
Tips for effective purpose and strategy workshops:
(*) It is not my usual practice to name clients! However, when one of the ChildFund NZ directors posted a picture on social media of the board and managers gathered around a whiteboard, the occurrence of the workshop and my involvement became public. Regardless, the details of the discussion remain confidential.
I am delighted to announce my involvement in the Powerful Governance director development workshops. Powerful Governance is the brainchild of Heidi Börner, an accomplished business advisor with a strong health and safety pedigree. The workshop is designed with the boards of privately-held businesses in mind, to help synthesise the essential elements of effective corporate governance and a strong health and safety culture, leading to a more complete understanding of how to achieve high business performance outcomes.
The next workshop is being held in Rotorua on 15 August. For pricing and venue details, and an outline of the workshop programme, check the Powerful Governance website. You can register here. NOTE: The workshop is approved for NZTE capability development credits, which means participants may qualify for up to 50 per cent discount, and claim CPD hours to boot!
Whether or not one is consciously aware of it on a daily basis, time marches inexorably on. Indeed, 60 per cent of 2017 is now consigned to history.
That time marches on is a healthy reminder of the value of ongoing reflection, especially at the board table. It's really important for boards to understand and respond to actual performance in the context of agreed strategy, and to nip any variances in the bud early. To that end, how is your company tracking towards goals established for the year? And how is your board performing? Here's a few questions to kick start the board's reflections:
Beyond these questions, it may be helpful to think slightly more broadly. Earlier this year, I wrote several articles (below) to highlight some of the challenges that directors said they had struggled with 2016, none of which are independent from the questions above. As several boards have been in touch recently to discuss points mentioned in the articles (thank you), it seems appropriate to re-publish the links, as a resource for other boards reflecting on company performance and board effectiveness.
So, Travis Kalanick has left the building, no longer the chief executive of Uber, the company he co-founded. The company, which makes money through the use of a ride sharing application, has grown rapidly in recent years. From a good idea, the company has become a colossus valued at over US$65 billion. Kalanick deserves credit for Uber's rise. However, Uber's reputation is not without tarnish; reports of a toxic culture, sexism and several scandals have blotted its copybook. The co-founder's pugnacious style hasn't helped either.
Uber's widely-reported missteps raises some challenging questions about the role and function of the board of directors; questions that are strikingly similar to those asked following the Wells Fargo fake accounts scandal and the collapse of Wynyard Group, both in 2016:
Uber was founded on a strong vision and its grew rapidly. The board was technically diverse and debate did occur in the boardroom at times, yet the evidence suggests that board lost its way and became ineffective.
Though tragic, the Uber situation is instructive for directors and boards elsewhere. Power seems to have been a significant factor. If directors are serious about fulfilling their duties well—especially acting in the company's best interests and pursuing the future performance of the business—some shared understandings are crucial:
However, the presence of these factors is insufficient in terms of predicting effectiveness or performance. Ultimately, the effectiveness of any board is a function of what the board does and how directors behave. Research is starting to understand the mechanism of corporate governance, but causality remains elusive. Directors take their eyes off these considerations at their peril.
This is a brief note to advise that I will be in London next week, to speak at the ICSA Annual Conference. The conference is being held at ExCeL, London, over two days (4–5 July). Programme details are available here.
I'll be speaking on the first day of the conference, at 12noon. My topic is strategy, from the board's perspective. Here's the session summary from the programme:
Good strategy vs bad strategy
Sound interesting? Come along, I look forward to meeting you.
Note: I'll be in London Monday 3rd to Thursday 6th inclusive, with some free time both during the conference, and immediately before and after. Please get in touch if you'd like to meet up (day or night) to ask a question; discuss an aspect of corporate governance or strategy; learn more about my research on boards and business performance; or, simply have a chat over a coffee or a drink. I'd be delighted to hear from you.
During the last month, I have had the privilege of working with four different boards and management groups, helping them wrestle with why the company they govern exists (its purpose, or reason for being) ahead of formulating strategy to pursue the agreed purpose. All four engagements have been invigorating, revealing many insights and much passion (and debate!) within the assembled groups.
However, three troubling signs became apparent amidst the boards' commitment to the cause. These signs, which are not uncommon, have the potential to stymie the quality of the resultant strategy and management's ability to implement the approved strategy. The following comments highlight the issues:
The temptation to embrace detail, confuse the roles of the board and management and shorten the view remain very real challenges for companies around the world. If boards are to fulfil their responsibilities well, a clear sense of purpose supported by a coherent strategy is vital—regardless of the company's size, sector or span of operations.
The great news is that increasing numbers of boards are starting to realise that material benefits are available if they contribute directly to both the process of determining purpose and formulating strategy. However, boards have some way to go before the value they have the potential of adding is actually realised, if the evidence of the past month is any indication.
The question of whether companies with gender-diverse boards perform better than companies devoid of gender-diverse boards has been debated with passion for many years now. The locus of much of the early discourse was women on boards. However, the rhetoric has matured in recent times.
Whether motivated by political, social or cultural ideals, the weight of opinion amongst consultants and practicing board members now points to a positive correlation between various diversity attributes (sex, gender and ethnic identity, inter alia) and company performance. But is this a reliable reflection of reality? Wittgenstein's aphorism provides a useful reminder that all may not be exactly as it seems:
From its seeming to me—or to everyone—to be so, it doesn't follow that it is so.
Recently, Katherine Klein, a professor of management at The Wharton School, reviewed the findings of rigorous peer-reviewed studies and meta-analyses, in search of a more complete understanding. Her conclusions, which include the following comment, paint a rather different picture from normative opinion:
Rigorous, peer-reviewed studies suggest that companies do not perform better when they have women on the board. Nor do they perform worse. Depending on which meta-analysis you read, board gender diversity either has a very weak relationship with board performance or no relationship at all.
Klein also discussed possible reasons and implications of her findings. Boards and nominating committees would be well-advised to read Klein's commentary, understand the nuances and contextual factors and, most importantly, debate the implications for practice.
Postscript: Another review of the board diversity literature is available in my thesis (see pages 39–40).
"In our world now, the primary mover for reproductive success—and thus evolutionary change—is culture, and its weaponised cousin, technology."
The words in this quotation, originally published in National Geographic (*), stood out when I first read them recently. They seemed to lift themselves off the page, as if to highlight their significance. The penny dropped when I realised the quotation is applicable well beyond the [biological] world from whence it emerged.
Take boards of directors for example. The quotation suggests that board effectiveness (and, by implication, company performance) is more likely to be influenced by board culture and appropriate technology than any static attribute such as a particular board structure, composition or governance code. This intuitively attractive proposition enjoys widespread support in the academic literature, and case studies of actual board experiences have been reported.
Yet board and company failures abound, which begs an awkward question. Why do some boards continue to prioritise structure and compliance (with statutes and codes of practice) over culture and technology, especially when a stronger focus on the latter is more likely to lead to increased board effectiveness and, importantly, better company performance?
(*) D.T. Max (2017). Beyond Human, National Geographic, April 2017, p.49.
Monday 8 May 2017 shall, in our household anyway, be remembered as a significant date. It was on this date that a father and a daughter both crossed the stage to receive recognition for their respective achievements.
While the day was special for close family members in attendance, the awarding of academic credentials is by no means an endpoint. Rather, it marks a weigh point on a long-term journey. The priority for Megan now is to build her career in international business, marketing and customer service (get in touch if you have an opening for a willing and able staff member). I will continue to encourage boards and directors to focus on what really matters: fulfilling their responsibility for company performance.
Thoughts on corporate purpose, strategy and governance; our place in the world; and, other things that catch my attention.