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 the performance of the board, 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. However, 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, and series of meaningful learnings to emerge. Practical guidance to help boards focus on what actually matters (company performance) is urgently needed, especially 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 (often 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.
From hardly rating a mention a few decades ago, boards are now newsworthy. Questionable practices and failures of various kinds have seen boards become highly topical; targets of both curiosity and criticism in the business media, regulators and, increasingly, the wider public. A plethora of corporate governance codes and 'best practice' recommendations have been produced, but most are yet to have their intended effect. What's more, many well-intentioned directors say they have become confused about the appropriate role of the board, what corporate governance is and how it should be practiced.
Clearly, corporate governance is in troubled waters.
I have joined a group to do something about it. The "Future of the Board" is a new research-based initiative dedicated to getting to the root of some of the problems that beset boards, and to producing rigorous guidance to help boards achieve better outcomes.
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.
I had the distinct privilege of attending the 9th Global Peter Drucker Forum in Vienna this week. Approximately 500 people attended the two day forum held in Aula der Wissenschften (Hall of Sciences). The programme included fifteen plenary sessions and a parallel session (four tracks). The very full programme was run to time; a Swiss watch operated with Germanic efficiency, in the birthplace of Drucker.
Many global authorities in strategy, innovation, entrepreneurship and related addressed those in attendance (and many more utilising the live feed option). Presenters included Richard Straub; Angelica Kohlmann; Jenny Darroch; Hal Gregersen; Roger L. Martin; Anil K. Gupta; Bill Fischer; Rita Gunther McGrath; Sidney Finkelstein; Tammy Erickson and Carlotta Perez, and more. The forum produced many insights; the following commentary merely a portion lifted from my 28 pages of notes:
Richard Straub, President of the Peter Drucker Society, set the scene by noting that Drucker, a man genuinely interested in the bigger 'why' questions, maintained a strong focus on business performance. He avoided cookie-cutter 'solutions', a reflection perhaps that such solutions don't work within the dynamic and social context of modern organisations. Straub went on to say that management is most accurately conceived as a liberal art [to be understood holistically], not as a social science that can be reduced to constituent elements.
Lisa Hershman, DeNovo Group, posed the question, "How do we generate growth and ensure more people participate in it?" This was not a veiled call to embrace left-leaning socialist ideals and anti-business practices, but rather a clarion call for 'inclusive capitalism'. (I've been using an equivalent term in speeches in the last couple of years: 'capitalism with a heart'.) Hershman noted that around half of the young people in the United States say they prefer socialism over capitalism. This, she said, is a clear indication that something is wrong. Business leaders have become too focussed on themselves and shareholders, to the exclusion of others. This collapse of confidence needs to be addressed by business leaders. If it is not, companies are likely to find it increasingly difficult to recruit motivated and capable young people. Why? Because they are not interested in working for poor leaders who they do not believe in, much less aspire to.
Jenny Darroch, Dean, US Peter Drucker School, explored the essence of an effective business and societal ecosystem. She described five key interests (characteristics), namely, a functioning society, where all can participate; recognition that management is a liberal art, not a simplistic of formulaic process; that self-management is important, because neither the state nor business 'owes' people work; that performance [actually] matters; and, 'transdisciplinarity' (i.e., looking beyond the immediate context, sector, role, team) is crucial. These comments set a solid platform for what was to follow.
Hal Gregersen, MIT Leadership Center, spoke on the important topics of community and communication. He asserted that isolation is the number one enemy of innovation. The world is far too complex for one person acting alone to be effective. Leaders that sit in their office and wait for input are far less effective that the best leaders, who actively seek to reduce (to zero, if they can) barriers in pursuit of the best possible information to understand current reality and what might be possible, so as to inform effective decision-making. The best leaders also encourage dissent, inviting people to both ask and respond to uncomfortable questions, because they want to discover what is wrong and what can be improved. Asking the right questions and, importantly, getting authentic responses (but not necessarily simple answers) depends on being in the right place (read: with staff, customers, in the market) and inviting people to challenge the status quo.
Roger L. Martin, Rotman School of Management, built on Gregersen's comments by observing the prevalence of certitude (that sense of 'being right' common amongst leaders especially so-caleld alpha males and queen bees. Rather than stridently asserting preferences and blindly applying models (which are often wrong because they are simplifications of reality), Martin recommended that leaders reframe their statements as follows. "I'm modelling the world, but my model is incomplete. What can you add?" Great leaders pursue multiple models, combining and building to make something better (note, a better solution not a compromise). According to Martin, this always leads to better outcomes.
Several speakers addressed the question of whether growth is actually an imperative. No speaker spoke against growth or its optionality. Rather than almost assumed the answer is 'yes', and moved quickly to consider how growth might be achieved. Anil Gupta, for example, noted that China is responsible for 27 per cent of global carbon dioxide emissions, and India 6.6 per cent. He opined that if India is to grow out of poverty then growth must be coloured—green—to avoid killing the very people it seeks to lift out of poverty. The recommended route is to industrialise, but to do so with smart technology to avoid the avoid the environmental mistakes (and their negative consequences) experienced by China and others.
Martin Reeves, Boston Consulting Group, added that while growth is necessary, it is beomcing increasingly elusive. As a consequence, companies operating in developed nations need to change their focus. Rather than growth at any cost, companies need to discover and pursue the right type of growth. Invoking Aristotle, Reeves observed that companies that embrace both economic and social goals (oikonomic companies) do better in the long term. Specific recommendations (boards and directors, take note) include:
Allyson Stewart-Allen, International Marketing Partners, and Julia Hobshawn, Editorial Intelligence, sounded a warning, arguing that the unfettered pursuit of connectedness—networking in pursuit prosperity, health and whatever else—has a dark side: info-besity. An over-reliance on social media networks have the unwanted effect of starving people of what actually matters: deep socail connections. People are human beings, not human doings, and social connections matter much more than activity masquerading as social connectedness. Pointedly, sustainable relationships and business sustainability is dependent on people, and their interaction and curiosity not social media. I found myself thinking, "Isn't this obvious?". Maybe so, but a quick glance around the room suggested maybe not: almost everyone within eyesight has their eyes down, using a smart device as the speakers continued.
Joseph Ogutu, Safaricon, and Haiyang Wang, China–India Institute, provided insights from a developing nation perspective. Whereas many Westerners perceive social disparity to be limited in developing nations, the reality is somewhat different. Disparity between people groups in developing nations is actually higher than in developed nations. Further, many African nations have de-industrialised since gaining independence. The speakers made strong calls for developing nations to embrace manufacturing as a means of achieving the economic growth needed to lift millions out of abject poverty. While many entrepreneurs and investors stand ready to fund initiatives, local communities need to pursue partnerships, lest they suffer new forms of dependency.
Steve Blank, entrepreneur, and Bill Fischer, IMD, observed that the pressures faced by chief executives in the twenty-first century are different from those in the twentieth century. Then, if CEOs met the expectations of their boards (however expressed) and responded to competitive pressures, then they were reasonably safe in their role. But things have become more complex since the turn of the century. Two additional forces have emerged, namely, activist investors (read: corporate raiders) and disruption. If CEOs are to respond well to this new reality, they need to become comfortable with ambiguity and chaos. Helpfully, Blank and Fischer offered four additional suggestions to enhance leadership effectiveness in the twenty-first century:
Rita Gunther McGrath, Columbia Business School, introduced the forum to a tool to help leaders and investors undertsnad the future growth prospects of any given company. The 'ImaginationPremium' is, simply, a ratio of a company's market capitalisation and value from operations. If the imagination premium is high (but not too high to become hype—Tesla), the sustainable growth is likely. Conversely, low ratios suggest growth is unlikely. The extreme case of a ratio less than 1 suggests shrinkage.
On strategy, innovation and disruption. Several speakers outlined cases to demonstrate that a coherent, longer-term strategy is actually more, not less, important in times of change and disruption. They noted that well-formed strategy, not detailed plans (often, incorrectly, called strategic plans), helps lift the gaze of both leaders and staff above immediate technologies and disruptions, to focus on purpose, the customer and longer-term goals.
General observations. Standing back a little, the investment to attend was well-spent. To be amidst giants, and chat with some of them (all were accessible and none pretentious) was a privilege and an honour—I learnt a lot. The only disappointment from my perspective concerned the speaking roster. While about 20–25 per cent of the speakers were world-class (both content and delivery), a similar percentage were disappointing. The lesser speakers either repeated what others had said, or their presentations were thinly-veiled sales pitches. Upwards of ten attendees, including some speakers, voiced similar concerns in private. My hope for future editions is that the organisers review speaker candidates more closely, to ensure a consistently high standard. Stepping beyond that, the general calibre of the forum (organisation, content, delivery) was very high. My intention is to return to Vienna in November 2018, for the the 10th edition of the Global Peter Drucker Forum. Hopefully, I'll be able to share the platform, offering some insights relevant to the theme.
Bob Tricker just did it again.
Long the doyen of corporate governance (Sir Adrian Cadbury used the term "father of corporate governance"), Tricker has just posted this article, a stinging critique of several emergent ideas that, through repetitive use, have permeated thinking and are becoming accepted as conventional wisdom. Risk, culture and diversity are singled out as populist memes. Yet robust evidence to support the notion that any of these memes are directly contributory to effective governance—let alone company performance—in any predictable manner is yet to emerge. Tricker's timing is, once again, exemplary.
Thankfully, Tricker offers far more than a straightforward critique. He reminds readers that the purpose of the board of directors is to govern:
The governance of a company includes overseeing the formulation of its strategy and policy making, supervision of executive performance, and ensuring corporate accountability.
The purpose of a profit-oriented company is also made clear (a point famously made by Friedman):
To create wealth, by providing employment, offering opportunities to suppliers, satisfying customers , and meeting shareholders' expectations.
In calling out this matter, Tricker has hit the nail on the head—the effect of which is to place those motivated by the promulgation of unfounded memes in a rather awkward position. I am with Tricker; our understanding of corporate governance needs to be reset. Rather than pursue new memes (a perfectly adequate definition was established over fifty years ago), boards need to discover how to practice corporate governance effectively. Tricker (Corporate governance: Principles, policies and practices), Garratt (The fish rots from the head) and a few others provide excellent guidance as to how this might be achieved.
(Disclosure: The two books named in this article are the ones that I refer to most often when working with boards. I commend them to you.)
The opportunity to work with new and aspiring directors to build capability is something I find most gratifying. Regardless of whether the task is to facilitate an established course (Institute of Directors' Company Directors Course), pilot a new one (Governance Institute of Australia's The Effective Director Course) or run a private workshop with a board, the sense of fulfilment amongst directors as they grapple with situations, gain new insights from their colleagues and learn more about the role of the director is often quite palpable. However, the learning experience is by no means a one-way street. I also expect to (and do!) gain new insights. Here are some of the themes that have been apparent in the sessions I've led this year:
For more information about these or related topics, or to discuss implications for practice, please get in touch.
The effectiveness of company boards has become a hot topic in recent years, especially as the general public has become aware of various failures, missteps, poor practice, hubris and ineptitude, but also as attention has increasingly moved from the chief executive to the boardroom in search of high company performance.
The role of the company director is not for the faint-hearted. Market forces, technical innovations and human factors all contribute to a complex and dynamic operating environment. Directors need to consider and make sense of information from multiple sources, and make informed decisions in the best interests of the company. It goes without saying that directors and boards need to maintain a continuous learning mindset if they are to keep up to date and contribute effectively.
In a few days, I'll be in Sydney, Australia (18–20 September), to work with directors committed to the ideal of high performance. While the main objective of the visit is to present the first day of a new three-day course entitled "The effective director", I have time available to attend other meetings to share ideas and discuss emerging trends in corporate governance, strategic management and related topics of interest.
If you'd like to get together while I'm in Sydney, please let me know. I have some free time and would be delighted to meet informally over coffee, or in a boardroom setting with you and your director colleagues.
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?
Thoughts on corporate governance, strategy and effective board practice; our place in the world; and, other things that catch my attention.