As 2015 gives way to 2016, many people will be reflecting on the past and looking to the future; thinking about what was and what might have been. I'm no different. One of the books I've been reading while pondering the past and the future this week is The Servile Mind by Kenneth Minogue. A friend recommended it—he wondered whether the commentary might be applicable to directors and boards. My response, having read half of the book so far, is an unreserved 'yes'! Here's the note on the flyleaf: One of the grim comedies of the twentieth century was that miserable victims of communist regimes would climb walls, sim rivers, dodge bullets, and find other desperate ways to achieve liberty the West at the same time that progressive intellectuals would sentimentally proclaim that these very regimes were the wave of the future. A similar tragicomedy is playing out in our century: as the victims of despotism and backwardness from Third World nations pour into Western States, academic and intellectuals present Western life as a nightmare of inequality and oppression. In The Servile Mind: How Democracy Erodes the Moral Life, Kenneth Minogue explores the intelligentsia's love affair with social perfection and reveals how that idealistic dream is destroying exactly what has made the inventive Western world irresistible to the peoples of foreign lands. The Servile Mind looks at how Western morality has evolved into mere "politico-moral" posturing about admired ethical causes—from solving world poverty and creating peace to curing climate change. Today, merely making the correct noises and parading one's essential decency by having the correct opinions has become a substitute for individual moral responsibility. Instead, Minogue argues, we ask that our governments carry the burden of soling our social—and especially moral—problems for us. The sad and frightening irony is that the more we allow the state to determine our moral order and inner convictions, the more we need to be told how to behave and what to think. Humbly, I commend this book to all directors who want to govern well and make a difference in 2016.
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History is littered with many stories of corporate successes and, sadly, almost as many failures. Why do some companies perform well over the long term while others become abject failures? Is it, as Jim Collins remarked in Good to great, a matter of luck, or is some other factor at play? While luck and environmental factors can be influential, I suspect there's more to it. A common thread that seems to weave its way through many of the success (Ford, GE, Johnson & Johnson, Xero, Facebook) and failure stories (Pan-Am, Enron, WorldCom, Satyam, and Toshiba, amongst many others) is captured in the title of this posting: Accountability. All directors hold, by law, a fiduciary responsibility. In Australia, New Zealand (where I live) and many other commonwealth countries, that responsibility is to the company. In the USA, it is to shareholders. Tellingly, it is never to self (despite some directors behaving as if it was!). If directors are to serve shareholders (who appoint them) and also the wider stakeholder community well, moral fortitude is a requirement, as is competence and engagement. The role of the director is one of service; of acting (read: considering information and making decisions) in the best interests of another party; and, ultimately, of being accountable for decisions made. Consequently, directors cannot afford to be asleep at the board table, nor be selfish in decision-making. Performance, accountability and ethics needs to take precedence over reputation and prestige.
Each month, Julie Garland McLellan, non-executive director and board consultant, invites several people to respond to a tricky board or governance situation. This month (Oct'15 issue), she crafted a challenging relationship dilemma with an ethical twist, and I was asked to provide a response. Thanks for inviting me to contribute Julie. The dilemma and my response are replicated here: The dilemma: Peter's response: If you want to understand more about these options, or if you think you might need assistance with a challenging board situation, please get in touch.
Finance Ministers from the twenty most powerful trading nations, the G20, have endorsed a new set of corporate governance principles published by the OECD. The principles provide recommendations on matters including shareholder rights, executive remuneration, financial disclosure, the behaviour of institutional investors and how stock markets should function. The OECD principles have been promoted as contributing to more effective corporate governance. That sounds good—but what does 'effective corporate governance' mean and why might it be important? The OECD preamble offers this guidance: Good corporate governance is not an end in itself. It is a means to create market confidence and business integrity, which in turn is essential for companies that need access to equity capital for long term investment. Wow, this suggests that corporate governance is a mechanism to protect investors and markets. The responsibility of the board for business performance is not mentioned—thus implying that corporate governance is not a performance-based mechanism through which to pursue wealth creation. Rather it is positioned as a conformance tool to manage agency costs. What is the likelihood of boards spending time thinking about the purpose of the company, strategy or future performance if they are beholden to a set of conformance-oriented principles? Sadly, it would be appear that these latest OECD principles represent an opportunity lost—for medium-sized and privately-held companies at least.
I've been reading back through some older Musings this week, to review (and smile at) ideas that were front-of-mind a couple of years ago. Which ones have been superceded or discredited; which has been forgotten; and, which are still topical? This one, on boardroom motivations and habits, appears to still be topical today—perhaps even more so than when it was written in April 2012. How so? I was party to a discussion on boardroom behaviour today and a question of culture was raised. To what extent might culture drive conduct and ultimately business performance? The results of a recent survey conducted by Grant Thornton suggest that culture is a huge factor in corporate governance and strategy. There is much evidence to suggest that good business performance is an outcome of 'good' culture (here's one piece). However, culture is complex. Consequently, when one of the discussants said that a senior leader at ASIC is looking for policies and procedures to support [a positive] culture in boardrooms I was bemused, to say the least. How might one successfully codify—much less 'legislate'—culture, in pursuit of good conduct and presumably good business performance? A long time ago, Drucker famously said that culture eats strategy for breakfast. Might the corollary be that a well-written code of ethical conduct that is periodically discussed, agreed and pursued by directors trump any attempt to 'legislate' any particular culture into being? Compliance-based regimes rarely achieve much more than to incur expense, resentment and, sometimes, avoidance. That is well-known. However, while codes are by no means fool-proof they can be helpful if every director 'signs up' and willingly embraces them. My research suggests that the key lies with director behaviour and social interactions in the boardroom, not the code per se. That said, why all boards that are serious about creating a positive culture both within the boardroom and the wider business they govern have not implemented a suitable code of conduct is beyond me. It is a matter of accountability. Perhaps boards that decline to travel this path have not realised that the fish rots from the head!
The results of the annual director remuneration survey are in. (Read the media release here, and press reports here and here.) Fees have climbed about four per cent in the last twelve months, slightly ahead of CPI. The survey results also indicate that director workload has increased by 41 per cent over the same period. A cursory analysis suggests that the workload increase is, to a large extent, a consequence of increased compliance requirements: more rules and regulations. While a 'more work, more pay' argument is eminently justifiable, is it fair? Moves to increase directors' fees as a consequence of increased compliance workload may deliver an unintended consequence: a back-to-the-future experience. Boards are likely to become more defensive and cautious, contributing relatively little to what they are there for—the pursuit of company performance. Rather than peg directors fees to time and compliance activity, it might be more productive to ask whether company value (however that might be expressed) is growing as a consequence of board contributions. Many leading commentators (Bob Monks, Bob Garratt, Morten Huse and Richard Leblanc, amongst others) have suggested that boards need to become more strategic, by looking to the future. Yet statutes and regulations cannot be ignored. Boards and shareholders need to wrestle with this tension. Questions of strategy, decision-making, division of labour, accountability and ethics need to be debated and resolved. Ultimately, viable resolutions are most likely to emerge from a joint commitment to the long-term purpose of the company. The board needs to drive company performance in pursuit of shareholder wishes, while also ensuring that statutory and regulatory requirements are appropriately satisfied. If the board demonstrably leads the company forward, and does so in accordance with both the agreed purpose of the company and relevant statutes, shareholders are unlikely to baulk at proposals to reward the contributions of directors appropriately.
Every day, around the world, leaders in the health sector face a formidable challenge. On one hand, insatiable demands press in as people expect physical and mental health (foundational to our well-being). On the other, resources are limited—providers simply can't do everything. Consequently, tough choices need to be made, to ensure the appropriate services are delivered, efficiently and effectively. The complexity of the problem means 'best practice' answers are few and far between. However, progress should be possible if a clear sense of purpose, appropriate strategy and effective monitoring systems are all in place. The England Centre for Practice Development is hosting an interactive seminar on 11 September, to help health and social care sector leaders explore these key issues and challenges. I have been asked to facilitate the seminar, and to share insights from research and experience in boardrooms. Topics to be discussed include:
If you are a board director or an executive of a clinical commissioning group or health provider; a policy maker; a researcher; or, an interested party, I encourage you to join the debate.
The much-storied scandals at FIFA, HSBC and Toshiba have highlighted a plethora of weaknesses in the way large companies are led and run. Fingers have been pointed and blame apportioned. Management has copped a fair bit of flak, but the board has not been immune either. While the media has had a field day, finger pointing and broad statements provide little comfort to those in pursuit of long-term performance. Remedies are required. Reputability has studied a number of failures recently(*), in pursuit of remedies. The analysis identified nine prominent categories of weakness, the first six of which were influential in the majority of failures:
When these factors are considered holistically, the stark implication is that failure appears to be associated with board weakness in at least three areas (engagement, strategy and risk). If boards are to make effective contributions, these weaknesses need to be resolved. And therein lies a challenge: a return to first principles, and a different conception of corporate governance is likely to be necessary. Will boards embrace such a change in pursuit of better business performance? Let's hope so. (*) The full Reputability Report, entitled Deconstructing failure—Insights for boards, is available here.
The now very public overstatement of profits at Toshiba (approximately US$1.22bn over six years) has led to the downfall of the chief executive, Mr Hisao Tanaka (below), and seven other senior managers, all of whom were also board directors. The share price has taken a 25 per cent hit and the company's reputation is in tatters. What a mess. At least there is a modicum of accountability and remorse, something sadly lacking in many other cases including HSBC and Lombard Finance. Thankfully, people have begun thinking about what needs to change. So far, the response has followed a predictable course: The possibility of appointing independent directors to replace the disgraced directors has been mooted. Will this structural response be enough to fix the problem? Maybe, but I'm not convinced. Compliance responses rarely lead to sustainable change. (The compelling case is Sarbanes–Oxley: created post-Enron, it did little to prevent the GFC.) The problem seems to be more fundamental. The contemporary conception of corporate governance seems to be flawed. Consider these statements, which highlight the problem: The Japanese finance minister, Taro Aso, said: “If [Japan] fails to implement appropriate corporate governance, it could lose the market’s trust. It’s very regrettable.” (Guardian) The Toshiba scandal has raised questions about efforts by the Japanese government to improve corporate governance and culture. (NY Times) These seemingly innocuous statements are telling: Fix the compliance and the problem will be fixed. Yet history (Olympus, HSBC, FIFA, amongst many others) shows otherwise. Neither the 'monitor and comply' conception of corporate governance, nor the 'advise and monitor' variant espoused by many corporate governance codes and directors' institutes have achieved the desired outcomes. Yet, many boards dogmatically pursue such conceptions. How many more failures will it take to realise that additional layers of regulation and compliance-oriented boards that operate as policemen don't actually add value? How many more failures will it take to acknowledge that a new understanding of corporate governance and appropriate board practice might be appropriate? Emerging research seems to suggest that when boards adopt a strategic orientation, and corporate governance is re-conceived as a value-creating mechanism, increased performance is not only possible—it is potentially sustainable. Please get in touch if you'd like to know more.
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.
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