With 2018 consigned to history and holiday season break all but over, most business leaders and boards of directors are turning their attention to what the year ahead (and beyond) holds. Even a cursory glance reveals a plethora of issues that may have an impact on business continuity and, potentially, continuance.
Consider these indicators:
And that's just the start.
As is usual at this time of the year, business and governance commentators have stuck their collective necks out, promulgating a variety of predictions given the indicators (as real or imagined as each indicator may be); each behaving as if they possess levels of predictive insight beyond what a reasonably educated person might be able determine by tossing a coin. But do they? They cannot all be correct—in fact, none may be.
The challenge for boards, of course, is working out how to respond.
What is becoming increasingly clear is that boards have become confused by what's going on around them. Increasing numbers have grown quite tired of 'conventional wisdoms' and so-called 'best practices' (plurals intentional). Some have responded by taking defensive positions, and others are boldly trying things without first understanding the contextual relevance.
My response to enquiries from boards is straightforward: open your eyes to the possibilities, think and act strategically, but don't be impetuous.
Helping boards respond well typically involves sharing insights from research and practice; facilitating discussions; and providing contextually-relevant and evidence-based guidance. To this end, I will be travelling extensively again in 2019: the following international trips are confirmed in my diary, and more are pending:
If you would like to discuss options to lift the effectiveness of your board in 2019, please get in touch. I look forward to hearing from you.
Ten days ago, I was in Vienna to attend the Global Peter Drucker Forum, as an observer and participant. However, at the last minute—actually, three days before the Forum—the organisers asked me to 'jump in' to cover for a panelist who was a withdrawal. The session, which was recorded, was entitled "Managing like you have skin in the game". I was asked to provide a boardroom perspective. My comments start at 41m 35s:
In a couple of weeks, I'll be in England and Europe, for the third and final time this year. The schedule includes attendance at two conferences, delivery of two keynotes and a bevy of meetings, as follows:
While the schedule is fairly full, some gaps remain for additional meetings (in London).
If you would like to meet, please get in touch. I'd be glad to discuss any aspect of boards, corporate governance or effective board practice; explore a research idea; or respond to (future) speaking or advisory enquiries.
In business, as in life, the task of exerting control is commonly perceived as being one of exercising limits; of saying 'no' and imposing constraints. Such perceptions are well-founded. Check these verb usages of 'control', lifted straight from the dictionary:
If you have spent much time in boardrooms, you'll know that director behaviour tends to be consistent with these definitions, more so if the chief executive is ambitious or entrepreneurially-minded (the two attributes are not necessarily the same). When asked, board justification for exercising caution is straightforward: to keep the chief executive honest and to keep things 'on track'.
Such an understanding—holding management to account—seems admirable. Monitoring and supervising management is one key task (of four) of corporate governance after all. But does a strong hand actually lead to better outcomes? More pointedly, how might the exercise of restraint and limits advance the purposes of the company (noting the board is responsible for ensuring performance goals are achieved)? Such conduct is analogous to applying the brake when the intention is to drive on. A growing body of academic and empirical evidence suggests that a strong hand, like increased compliance, may actually counter-productive.
Rather than persist with what is demonstrably a problematic approach, it might be more fruitful for boards to consider another perspective. What if control is re-conceived in positive terms (namely, constructive control), whereby the board's mindset is to provide guidance (think: shepherd or coach) by ensuring the safety of the company and steering management to stay focused on agreed purpose and strategy? Might this deliver a better outcome?
Emerging research (here, but contact me to learn more) suggests the answer is 'yes'. Strongly-engaged and strategically competent boards that display high levels of situational awareness as they debate issues from multiple perspectives and make informed decisions in the context of the long-term purpose of the company can make a difference. Constructive control is one of five important behavioural characteristics of effective boards identified in this research.
Netflix has been in the news a bit lately, aided no doubt by public interest in its rapidly increasing 'reach', meteoric rise in its stock price and membership of a new generation of behemoth—the FAANG club. Now, the actions of the board of directors have seen Netflix become even more newsworthy, principally a consequence of this article published in Harvard Business Review. The board of directors operates quite differently from many others and, indeed, conventional wisdom. Could this be a contributing factor in Netflix's success?
Conventional wisdom, supported by both agency theory and 'best practice' recommendations of directors' institutes (in the western world, at least), suggests that 'distance' (a clear separation between the board and management) is important if boards are to objective in decision-making. The listing rules of most stock exchanges specify that at least two directors must satisfy established independence criteria at all times. Independence is de rigeuer, even though no consistent link between director independence and firm performance has ever been identified!
Back to Netflix. Two researchers, David Larcker and Brian Tayan of Stanford University, gained permission to investigate how the Netflix board keeps up to date and informed, a prerequisite of effective decisions. They found that the Netflix board does not embrace conventional wisdom. The full research report, from which the HBR article was derived, is available on the SSRN website.
The Netflix approach is based on proximity not distance. The approach has been adopted to help directors resolve a fatal flaw present in most boards: Five out of every six directors do not have a comprehensive understanding of the business being governed. Specific measures in place at Netflix include:
The combined effect of these measures has been profound: directors are much more well-informed than they would have otherwise been. The handicaps of lack of transparency or hard-to-assess information are removed. The perennial problem of information asymmetry that besets boards globally has been, it seems, solved—in Netflix's case at least.
Standing back a little from the Netflix case, several learnings are available for boards, as follows:
Many boards and directors do take their role and responsibility very seriously. But, sadly, a significant number do not display appropriate levels of commitment. If boards are to become more consistently committed to the cause—the pursuit of high firm performance and longer-term value creation—they could do a lot worse than take a page from the Netflix playbook and the advice shared here. If you want to learn more, including scheduling a discrete briefing to explore how a mechanism-based understanding of corporate governance can contribute to improved board effectiveness, please get in touch.
The chattering class has been very active of late, responding vociferously as case after case of corporate failure and misstep has come to light. Carillion plc and the venerable Institute of Directors (both UK), AMP (Australia) and Fletcher Building (New Zealand) are the latest examples that have resulted in consternation and angst.
That seemingly strong and enduring organisations continue fail (or have significant missteps) on a reasonably regular basis is a cause for much concern; the societal and economic consequences are not insignificant. Many commentators (primarily, but by no means exclusively, the media) have responded by berating company leaders (the board and management specifically), placing 'blame' squarely at their feet. This is a reasonable: ultimate responsibility for firm performance lies with the board after all.
Calls for tighter regulation and stiffer codes abound. Yet the geographical spread of these failures implies that local statutes probably aren't a significant contributory factor. The responses of the boards have been telling: some have circled the wagons (a demonstration of hubris?), others have cast out the chairman or chief executive (diverting blame elsewhere?), and some individuals have simply walked away.
At this point, it would be easy to join the chattering class; to stand on the margins and berate all and sundry. But let's not go there. Instead, let's try to identify repeated patterns of activity may have contributed to the situations, in search of learnings. Several things that stand out:
The role of the auditor: Most if not all of the firms mentioned above were attested by their respective auditors to have been operating satisfactorily. Yet they were not, clearly. Whether the auditors were in cahoots with management or the board, failing to discharge their duty to provide an accurate assessment or, even, inept remains to be seen. Regardless, something is amiss. To date, few commentators have called out the audit profession as being an accessory (Nigel Kendall is a notable exception).
Business knowledge: Remarkably few of the directors of the companies identified here seem to understand the business of the business they were governing. Many directors are recruited for their technical skills (notably, legal and accounting expertise), but few if any have any significant experience in the sector that the business operates in—research by McKinsey shows that one director in six possess such knowledge. How any board can make informed decisions when most of its directors do not understand the wider operating context well is perplexing—it would struggle to detect important though weak signals, much less understand the implications of them.
Board involvement in strategy: The boards of all of the firms identified here relied heavily on management to prepare strategy. Directors backed themselves to ask questions in response to proposals when they were presented. While most directors are capable and well-intentioned, such a heavy reliance on management is unwise. If the board is not involved in the development of strategy in some way, as many researchers and commentators recommend, the likelihood of the board understanding what it is being asked to approve and subsequently providing adequate steerage and guidance is low.
If boards are to learn from the failure cases noted here (amongst others), the first and, frankly, most pressing priority is to mitigate apparent weaknesses and focus on what matters. My research suggests that high levels of firm performance are contingent on several factors including:
Some commentators have suggested that the success of the board is entirely a matter of luck. I disagree. While outcomes are not guaranteed, my doctoral research and experience shows that boards can exert influence beyond the boardroom, including on firm performance, but only if they focus on 'the right things'. Unless and until boards start taking their responsibility for the performance for the company seriously the hope of much changing remains, sadly, dim.
Another once proud company has just suffered the indignation of failure. Carillion plc, the UK's second-largest facilities management and construction services conglomerate, collapsed on 16 January 2018, after bankers withdrew their support. The fate of hundreds of contracts with public sector agencies, and thousands of jobs were left in the lurch (although some emergency measures have since been put in place).
Though tragic, Carillion's demise should not have been a surprise to anyone for it did not occur as a result of a single external catastrophic event. Consider these indicators:
These indicators, which are not dissimilar to those of other failures (here and here), raise many questions viz. board performance, including questions of accountability; the board's supervision of management (or lack thereof); malfeasance and ineptitude in the boardroom; the efficacy of 'best practice' recommendations; and, the role of auditors. Why the Carillion board failed to act on the indicators listed here (and others not yet public, no doubt) is a matter for due process to uncover. The investigations should not be limited to the boardroom or even executive management. Other questions worthy of consideration include:
Hopefully, the investigations now commencing will result in one or more people actually being held to account. Practical guidance to help boards focus on what actually matters (firm performance) is also needed, if boards are to step beyond conventional wisdom (which is clearly not working), and the damage that inevitably occurs when boards are diverted by spurious (and typically discordant) recommendations that appeal to symptoms or populist ideals is to be limited.
Larry Fink, co-founder and CEO of influential investment firm Blackrock may have just moved the goalposts.
Writing in his annual letter to CEOs, Fink argued that companies think beyond shareholder maximisation, a maxim that has dominated investor thinking since the early 1970s. Companies need to determine their raison d'être, their reason for being, towards which all effort should be aligned. Fink could not have been more clear:
Without a sense of purpose, no company, either public or private, can achieve its full potential. Ultimately, it will provide subpar returns to the investors who depand on it to finance their retirement, home purchase, or higher education.
Fink directly associates strategy, board and purpose—and in so doing Blackrock's expectations are spelt out. Simply, boards need to take their responsibility to ensure the long-term performance of the companies they governs much more seriously. Specifically, the board should both determine and agree several things, namely, the reason for the company's existence (its purpose); how the purpose will be achieved (strategy); and, how the progress towards the agreed purpose and strategy will be monitored, verified and reported.
Together, this is corporate governance.
To have such an influential firm speak so boldly is wonderful. Mind you, I am rather biased: my research findings and experience working directly with boards over many years now is consistent with Fink's assertions.
I commend the letter to all boards. Two rather obvious questions boards may wish to discuss having read it:
The annual deluge of articles summarising on the year gone and predicting (promoting?) future priorities is in full swing. Examples include diversity surveys, lists of board priorities and cybersecurity predictions, amongst many others. While these articles make interesting reading, most of the 'predictor' ones should be taken with a grain of salt; the summaries of past practice and current thinking are more helpful.
The recently published PwC Annual Corporate Directors Survey (2017 edition) is an example of the former. It offers helpful insights about what US-based directors of large companies currently think about various board and corporate governance matters. The survey results suggest that levels of awareness amongst directors—in relation to gender diversity on boards, working relationships (both between directors and with shareholders), accountability and alignment in particular—are increasing. That the trend line is moving upwards and to the right is good news. However, demonstrable progress, in the form of better business outcomes remains resolutely elusive. This begs a rather awkward question: Why?
One possibility is that boards are spending precious time on the 'wrong' things. Little if any focus on company performance and strategy is apparent in PwC analysis; the inherent implication being that those surveyed assign responsibility for strategy to management. What's worse, a significant percentage of directors accept what is put in front of them. Critical assessment and vigorous debate is rare.
The PwC results cast a dark pall over the performance of US-based directors and boards. They suggest that many have lost sight of their statutory obligation, which is that responsibility for company performance lies with them. This assessment is consistent with first-hand observations of boards in action, including my own, which reveal that the dominant focus of many boards is compliance (monitoring historical performance and checking regulatory requirements are satisfied). The protection of professional and personal reputation is a very powerful motivation for many directors, more so than ensuring the performance of the company it seems.
If boards are to become more effective in fulfilling their value-creation mandate, directors need to hold tight to their core responsibility and concentrate on what actually matters—which is to govern in accordance with prescribed duties, and with the long-term purpose and performance of the company to the fore. Necessarily, effective steerage and guidance requires the board to be discerning and committed to the task, using reliable governance practices in pursuit of better outcomes, lest they be diverted by spurious (and often discordant) recommendations that appeal to symptoms or populist ideals. How might this be achieved?
Returning to first principles, one option is to re-conceptualise corporate governance; as a multi-faceted mechanism that is activated by competent, functional boards. The mechanism itself is straightforward: an integrative assembly comprised of strategic management tasks (the board's responsibility to influence the performance of the business places it at the epicentre of strategic decision-making and accountability), relationships (with the executive, shareholders and legitimate stakeholders) and five behavioural characteristics of directors (details). The harmonious exercise of the five behavioural characteristics in particular provides a platform for motivated directors to interact well, and for the board to make forward looking, informed, strategically-relevant decisions in a timely manner.
A mechanism-based understanding of corporate governance provides an alternative pathway to achieve more effective outcomes from those promoted by conventional wisdom. Specifically, it provides a framework to focus the board's attention on what actually matters; outlining the tasks, interactions and behavioural characteristics that are conducive to effective contributions. Significantly, those aspects of corporate governance orthodoxy that have demonstrably failed to have a beneficial impact are challenged. For example, board structure and composition recommendations are set to one side, as well as any notional separation between the board and management; an uncomfortable consequence for some.
If you would like to know more, including how to deploy such a proposal in practice, please get in touch.
The festive season—known as Christmas in most commonwealth nations, Holiday Season in the US, and other names elsewhere—is a time to gather with family and friends to celebrate, reflect and, importantly, give thanks.
To friends, colleagues and clients around the world: Thank you for your support and encouragement in 2017. To have been invited into boardrooms in New Zealand, Australia, the UK and Europe to provide assistance; speak at conferences, summits and other forums; and, contribute to the development of new, more effective models of board practice and corporate governance has been a distinct honour. Thank you.
After a busy but fulfilling twelve months, I'm about to take some time out, to relax and recharge ahead of what is already shaping up to be an interesting year serving boards and directors internationally. If think you might require assistance in 2018, please get in touch. I am available, globally, from 4 January onwards.
Thoughts on corporate governance, strategy and effective board practice; our place in the world; and, other things that catch my attention.