It has been said that a leader without any followers is, in reality, just a person going for a walk. Followers are, by definition, necessary. But the presence of followers is an incomplete measure of a leader's effectiveness. Messages of praise by acolytes and enthralled observers are rarely useful indicators either.
The winning of an election by a national politician, civic leader or a company director reveals little about the quality or effectiveness of their subsequent leadership. It simply shows they were more popular than their rivals on the day of the election! Consider the UK Prime Minister's victorious 'peace in our time' utterance in 1938 (which proved to be short-sighted, even deluded); the Watergate scandal (second-term presidential hubris); the Christchurch City Council's consents debacle (leadership ineptitude); and Wells Fargo's mis-selling of accounts (executive-level malfeasance). Chamberlain, Nixon, Parker and Stumpf were all thought to be leading well, but all ultimately stumbled when it mattered.
That leadership is a function, not a position, is axiomatic. And like magnetism and gravity, leadership cannot be seen directly; only through its effects. Indicators of leadership effect include the behaviours, decisions and actions of a leader as an overall goal is pursued.
The past three weeks have produced innumerable examples of leadership behaviours and use of positional power to exert influence or make decisions in response of the COVID-19 outbreak. Here's a few examples:
An amalgam of factors contribute to any leader's effectiveness. These include (but are not limited to):
Prime Minister of New Zealand, Jacinda Ardern, has been lauded for her handling of the COVID-19 outbreak. She is widely regarded as being a great and empathetic communicator, which should not be surprising given her training is in public relations and communications. The form is good, but what of the substance of her messages? Is Ms Ardern actually providing strong leadership, as many have opined? The factors listed above is one means of considering these questions:
The picture that emerges here is one of a communicator who is endearing, building esprit de corps. But oratory without substance is not sufficient. The content of the message matters. Leaders also need to be decisive and consistent, and insist that decisions are acted on, in full.
Calls for the Prime Minister to move beyond both empathetic sound bites and measures that would not look entirely out of place in socialist regimes have been gaining traction. The time for the Prime Minister to turn her attention to the future is now; to forge the pathway towards economic recovery and the restoration of civil liberties within a functional civil society, is a matter of great urgency. That is where the extent and quality of her leadership will be revealed. Leadership when it matters.
Like many people, I've been reading reports of the spread of COVID-19, and the impact it is clearly having on both the health and well-being of communities, and the economy. The number of confirmed cases is growing. Daily reports in New Zealand show confirmed and probable cases (April 3: 772 cases, 96 probable). Globally, the number of deaths attributed to COVID-19 also continues to climb, even though the vast majority of the deceased had comorbidities.
Stepping beyond the human elements for a moment (anxiety, cabin-fever, ambivalence, physical distancing), aspects of the reportage have confused me (and others as well, I know), to the point I wonder about the underlying motivations of some of the reporters.
Consider the case count: How many people have or have had COVID-19 in New Zealand? The following data lifted from the Ministry of Health website:
The New Zealand media is reporting the total (797, 868) as the number of cases of COVID-19 in New Zealand. But, when the Ministry of Health's criteria is applied (definition of a probable case, here), the actual number of cases is the lower number (723, 772). The WHO, too, is reporting these same official numbers.
The question that emerges from this analysis is straightforward: Why does the media persist in overstating the case count? Is it ineptitude, bias, or something more sinister?
Fatalities: Official reports from around the world have been clear: many (most, but perhaps not all) of the patients who have died had comorbidities at the time of death. Was COVID-19 actually the cause of all the reported deaths (as the media has implied), or was it a contributory factor alongside other factors?
In and of themselves, these misrepresentations by the media are probably of little consequence—until you consider that they may be indicative of a bigger problem that does merit attention.
If New Zealand is to climb out of the hole it is now in, some bold decisions are needed. Decision-makers need to think strategically, not tactically. There is widespread agreement that the social and economic costs of the measures currently being taken in New Zealand in response to the COVID-19 outbreak are going to be very high. The effects of the community lockdown, widespread economic destabilisation and imposition of high levels of sovereign debt will probably linger for a long time. They may be generational.
The decision to stop was easy; it has been made (although questions remain over whether the border is actually closed). The looming decisions concern when and how to restart. Ultimately, the quality of these decisions will be, to a large extent, dependent on the quality of evidence presented. If the government is to expedite the economic recovery, it needs to set ideology and worst-case models aside, and enlist seasoned, non-partisan critical thinkers to analyse the raw data, draw rational conclusions and present pragmatic recommendations. Without this, the real cost will continue to climb; a winter of discontent indeed.
The global onset of the COVID-19 virus has precipitated a wide range of reactions in the community, from ambivalence to anxiety. Many governments have stepped in to support their citizens. Some have imposed community-wide lockdowns and social distancing protocols in an effort to break the spread of the contagion; others have implemented rigorous testing and quarantine regimes to identify and isolate those affected.
Business leaders have been considering their options too. Working from home has become a 'thing', as has the use of video conferencing and other online tools. Amongst the many responses, one in particular caught my eye this week: proposals by the directors' institutes of several countries—notably Australia, New Zealand and Britain, and Germany and others as well—to temporarily suspend director liability in the case of insolvency.
Superficially, this sounds like a reasonable idea. When a force majeure event strikes, the impact on sales, working capital and jobs may be very significant. The effect may be immediate, especially if the company is prevented from trading due to a lockdown. If the affected company cannot restructure its cost base, draw on financial reserves or secure finance quickly, business continuity will be at risk. Insolvency may follow, and all jobs will be lost. Thus goes the argument. But on the flip side (there always is one), the suspension of director liability and allowance to trade whilst insolvent may open the door for abuse, despite the honourable intention of keeping the economy functioning.
Insolvency has always been a red line for boards and companies. This proposal makes it porous, by absolving directors of responsibility for trading while insolvent. Some questions worth considering as lawmakers assess the proposal:
While a force majeure event can catch even the most well-run companies out, those with strong balance sheets and highly-engaged boards are better placed to respond well. They probably do not need the protection of the proposed provision, because they are more likely to have a robust risk assessment and mitigation framework in place, and strategic risks will have been assessed at most board meetings. But those companies being run close to the wire, or with inadequately engaged boards or weaker systems, may be caught flat footed. And if they are, what then? Should directors be protected, or be held to account?
Lawmakers need to tackle these types of questions, and resolve ambiguities thoroughly. If they don't, expect scurrilous directors to exploit the inevitable loopholes—to defend against other, board-induced, problems such as ineptitude, incompetence, negligence or malfeasance, for example.
Enquiry is appropriate, regardless of the catalyst, because sunlight, as they say, is a great disinfectant.
Information (and mis-information) about the spread of COVID-19 around the world is clogging our airwaves, inboxes and social media feeds as quickly as the virus itself is spreading. But amongst it all, there are some things we can hold as self-evident. Many people are suffering, some are dying. New phrases are entering the lexicon, such as, social distancing (should be physical distancing, I think) and self isolation. Governments are responding with a variety of controls to limit movement. Borders have been closed, and lockdowns are being imposed in some areas. Airlines have reduced capacity, grounding fleets. Many businesses, especially SMEs, are in turmoil. People are on edge—lives have been put on hold.
While COVID-19 has spooked many people, not to mention the stock markets and wider economy, life must go on—and it will, albeit with some adjustments, of course.
The challenge for those who direct the affairs of companies—boards—is one of governing well in the face of what is, patently, a very different environment from that which existed even two weeks ago.
Businesses face continuity and safety risks every day. Routinely, staff and managers spot, assess, prioritise and respond to operational risks every day; that is their job. But when risks have strategic implications (i.e., an occurrence is likely to have a major effect on strategy execution, future business success or even company viability), the board must become involved. COVID-19 is one such risk. The board needs to understand the potential short- and longer-term impact (using information from credible sources and tools such as scenario planning, for example), consider various options and make informed decisions.
Some practical questions that the board may wish to consider include:
One final point. COVID-19 is no longer a strategic risk. It is upon us. Boards everywhere need to deal with it as well as they can, given the most reliable information available, with the best interests of the company to the fore. That means providing close support to management; more so if big decisions are needed, such as releasing staff or partial closures. However, and most importantly, boards should not panic. Neither should the board react to suggestions being advanced by some that an event such as the COVID-19 outbreak should be seen as a catalyst to redefine corporate governance. Corporate governance remains corporate governance—the means by which the company is directed and controlled. What might be appropriate though is a review, to consider how the board practices corporate governance. But that should wait until the current crisis in in hand. Fix the problem first, then learn from it.
A kerfuffle has broken out on the East Coast of the US, between Lucian Bebchuk, an esteemed professor at Harvard University, and Martin Lipton, partner at New York law firm Wachell, Lipton, Rosen & Katz. Specifically, Lipton has mounted a strong attack on an article published by Bebchuk (a critical examination of 'stakeholder governance'). That Lipton has objected should not be surprising. After all, he is a lawyer with vested interests and he has a long record of promoting stakeholder governance.
This is what Bebchuk asserted:
Stakeholderism, we demonstrate, would not benefit stakeholders as its supporters claim. To examine the expected consequences of stakeholderism, we analyze the incentives of corporate leaders, empirically investigate whether they have in the past used their discretion to protect stakeholders, and examine whether recent commitments to adopt stakeholderism can be expected to bring about a meaningful change. Our analysis concludes that acceptance of stakeholderism should not be expected to make stakeholders better off.
Lipton's counter to these assertions was strident:
We reject Professor Bebchuk's economic, empirical and conceptual arguments. They are ill-conceived and ignore real-world challenges companies and directors face today.
This debate exposes something awkward—that when partisans announce their views people react, especially if they denounce other perspectives. This tactic may well pique interest and sell column inches, but it rarely results in viable outcomes that can be sustained over time.
My own research, and experience both as an advisor and serving company director, suggests that either-or argumentation, a characteristic of determinism, is deeply flawed. To pursue profit as an exclusive goal inevitably results in selfishness and inequity. Similarly, the pursuit of priorities espoused by ESG proponents introduces a another, and not insignificant, risk—of exposing the companies and the economy more generally to an 'Icarus moment'.
Larry Fink, Chairman and CEO of Blackrock, summed things up well in his January 2019 letter:
Profits are in no way inconsistent with purpose—in fact, profits and purpose are inextricably linked. Profits are essential if a company is to effectively serve all of its stakeholders over time—not only shareholders, but also employees, customers, and communities. Similarly, when a company truly understands andexpresses its purpose, it functions with the focus and strategic discipline that drive long-term profitability. Purpose unifies management, employees, and communities. It drives ethical behaviour and creates an essential check on actions that go against the best interests of stakeholders.
Fink's position highlights that a balanced perspective is probably 'best'. But how might it be achieved? The pathway may be hiding in plain sight. If the board is to fulfil its duty to ensure value is created over time, it needs to look well beyond selfish interests and motivations. This means considering the wider context within which the company operates, creating a viable strategy, determining appropriate 'performance' measures and only then governing accordingly.
Bebchuk was brave to call out the messianic assertions of the stakeholder capitalism camp. Perhaps Lipton might take stock, and meet with Bebchuk—the purpose being to explore the nuances of each other's views, in search of a more balanced understanding of the purpose of companies and role of the board.
Dave Rennie, a rugby coach from New Zealand, has just been appointed as coach of the Australian national team, the Wallabies. This appointment has raised eyebrows, not only because of the passport the appointee carries, but because of the appointment process.
It turns out the Rugby Australia had been speaking with Rennie for six months prior to the appointment being announced. Superficially, this appears to have been a smart move on Rugby Australia's part; a succession planning exemplar. But was it, or was it an act of disloyalty against the incumbent, Michael Cheika? The incumbent only made his intentions clear during rugby's showpiece, the Rugby World Cup, vowing to resign if the Wallabies did not win the William Webb Ellis Cup. Cheika and Raelene Castle, chief executive of Rugby Australia, were hardly the best of buddies, for sure. But when does strength in leadership (Castle has form) cross the line, becoming bullying?
This case exposes an interesting dilemma for boards of directors. When does the board's duty of loyalty to the incumbent chief executive cease? Is it reasonable, for example, to publicly support the incumbent while also scheming in the shadows to replace him or her? If the board finds itself in a position of lacking confidence in the chief executive (regardless of the reason), it owes a moral duty to both the chief executive and the organisation for which it is responsible to act both swiftly and with integrity. Rugby Australia appears to have done neither. While Castle probably operated within the law (she is on record as saying that formal contract negotiations did not take place until after the Rugby World Cup), the moral high ground was forfeited long ago. And that, sadly, places both Castle and the Rugby Australia in a rather awkward position.
Leadership is topical in most spheres of human endeavour; companies are no exception. To encourage others to achieve great things is the stuff of effective leaders. The most successful are widely-lauded. But leadership can take many forms, of course. Cast your eye over the last 100 years or so and you'll discern leadership in action in different ways. The era of the titan (Rockerfeller, Carnegie and Morgan being notable examples) saw leaders exert control over companies powerfully. The emergence of the management class in the inter-war years saw the emphasis change, the efficient operation of companies came to the fore. Since the turn of the century and the entry of corporate governance into the business lexicon, leadership has taken another form: the oversight of companies from the boardroom.
Often, perhaps typically, leadership is understood to be an individual endeavour; a person exerting influence. But leadership has a collective dimension too—the board of directors is an instructive case. While individuals (directors, trustees) contribute to board discussion and process, it is the board (not directors) that decides. Leadership in this context is, exclusively, collective.
Collective leadership requires a different approach. Directors need to work together to reach consensus for a start. This article has some more great tips that boards may wish to consider as they seek to lead effectively:
How does your board measure up? More pointedly, does your board even know the effect of its decisions? Nearly thirty years ago, the challenge of explaining board influence over company performance was famously described by Sir Adrian Cadbury, a doyen of corporate governance, as being "a most difficult of question". Thankfully, some progress has been made in recent years, as researchers have entered the boardroom to conduct long-term observational studies of boards in session, and leaders such as Charles Hewlett have shared insights from their experience. While robust explanations remain elusive, one thing is now clear: neither the structure nor composition of the board is a direct predictor of its effectiveness, let alone company performance. If boards are to contribute effectively in the future, they need think, act and behave differently.
Trust is one of those social interactions that is crucial for getting things done with others. Boards are by no means exempt. When directors a faced with making strategically-important decisions, they must rely on their board colleagues, the chief executive and any other advisors who may have been invited to contribute. Then, having made a decision, the board needs to follow through, by ensuring the decision is implemented well. However, the sad reality is that levels of trust both between directors and with external stakeholder groups is often lower than is needed for effective decision-making. The following comments, originally published in 2016 by EpsenFuller (subsequently acquired by ZRG Partners), make the point deftly:
Board directors today face a variety of challenges. Whether it is a case of corruption or the increasing threat of cybercriminals, their performance in dealing with these issues is the subject of considerable attention, explained The Huffington Post (Jan. 25, Loeb). Investors, consumers and NGOs alike are looking to boards for accountability in terms of company performance. Yet, a recent study found that public trust in boards of directors is lower than that of CEOs. A mere 44 per cent of survey participants claimed to have trust in a company's board—five per cent less than trust in CEOs. Influential constituencies are demanding that boards perform at exceptional levels while maintaining distinct independence from company executives. In order to remedy the current performance-expectation gap, boards should take a few key steps. For starters, boards should adopt some form of both internal and external assessments. Measurement criteria should span from trust to overall effectiveness at achieving board objectives. In order to ensure optimal independence, term limits should be instated and enforced to help safeguard against excessively friendly relationships between board members and executive leaders. Implementing improvements in a similar vein to the ones mentioned above can help boards work toward a future of increased transparency, which will hopefully translate to a rise in trust among powerful constituencies.
That some directors do themselves no favours (through poor behaviour, malfeasance and demonstrations of hubris) is self-evident. But all is not lost. The commentary includes several recommendations to enhance trust levels including scheduling meaningful evaluations, imposing term limits and ensuring independence of thought. Although not explicitly stated, high performing boards also reach agreement on the company's core purpose, the strategy to be pursued to achieve said purpose, and the values that will underpin behaviour standards, decision, and everything the company does and stands for.
Perhaps if more boards embraced these recommendations and worked with the company's best interests to the fore, the trust problem that generates so much tension (not to mention column inches) would gradually become a thing of the past. Is this expectation worth striving for, or do you think it is too ambitious?
English can be a confusing language. The same word can have different meanings in different contexts (by 'bear', do you mean the animal, taking up arms, or putting up with someone; and is a 'ruler' a measuring instrument or a monarch?). Meaning and usage matters; more so because it is not static. Language evolves, whether by design or in response to an evolutionary development. Some refinements improve our ability to communicate effectively, others to defy logic.
The understanding and usage of the terms 'governance' and 'corporate governance' are topical cases in point. While the term 'governance' is derived from the Greek root kybernetes meaning to steer, to guide, to pilot (typically a ship), a plethora of usages have emerged over time. Today, many different usages have become commonplace. These the oversight of managers and what they do; the activities of the board; and the framework within which shareholders exert control and boards operate. It is also used to describe the board itself ("we'll need to get the governance to make that decision"). The term has also been applied in an even broader context, the business ecosystem (i.e., system of governance). The most extreme example I have heard is, "Governance can mean almost anything, it is completely idiosyncratic; different for every organisation".
Things are made worse when two related but distinct concepts are conflated. Consider the definition of corporate governance and the practice of corporate governance. The former is relatively stable. Eells (1960) coined the term, to describe the structure and functioning of the corporate polity (the board). Later, Sir Adrian Cadbury (1992) added that 'corporate governance' is "the means by which companies are directed and controlled". The fundamental principle here is that corporate governance is a descriptor—the activity of the board. Compare that with the practice of corporate governance--how a board enacts corporate governance when it is in session. The means by which boards consider information and make decisions can and must be fluid depending on the situation at the time.
The wider context merits a brief comment—the rules under which companies and their boards operate (statutes, codes and regulations), and the consequential impact of the board's decisions. These are necessary, because they define the wider environment; what is allowed and what is not. In recent years, I've heard many people include regulations and codes within their understanding of corporate governance. Similarly with the consequential impact of the board's decisions beyond the boardroom. Are either of these corporate governance?
If you'll allow a sporting analogy, it's important to distinguish between the rules of the game, the game as played, and the final score. All are necessary, but only one is the game. To embrace an all-encompassing understanding suggests that corporate governance is ubiquitous, extending across the entirety of the company's operations and the functions of management, leadership and operations—not to mention the wider system of rules of regulations. This, I am convinced, takes us close to the root of the confusion that besets many directors. Every time I'm asked, I invoke Eells and Cadbury. A framework of laws and regulations is necessary, for these define the operating boundaries. But they are not corporate governance. In asserting that corporate governance is the means by which companies are directed and controlled, Cadbury was saying that corporate governance is the descriptor for the work of the board. And work, straightforwardly, is something to be practiced. Let's not lose sight of these distinctions. The continued 'sloppy' use of language serves only one purpose: to obfuscate.
ESG (environmental, social, governance), an indicator and measure of corporate priorities and performance, has become topical in business circles, very topical. Its emergence has coincided with a rising tide of concerns about the effects of the doctrine of shareholder maximisation, as espoused by Milton Friedman some fifty years ago. A bevy of academics, consultants and politicians have responded by jumping on a bandwagon; much has been written, arguments abound. The objective of much of this rhetoric seems to have been to establish a counterbalance to perceived excesses of capitalism (because capitalism is evil, apparently).
The idea of using a range of financial and non-financial measures to assess company performance is not new. It was normal practice until the early 1970s. But things began to change relatively quickly after Friedman's thesis was published. A broad church of managers, boards, shareholders and activists embraced the thesis (with evangelical zeal in some cases) to justify a primary, even exclusive, focus on profit maximisation. And with it, interest in other (non-financial) indicators of corporate performance waned—until the emergence of corporate social responsibility (CSR) and, more recently, ESG.
ESG has gained an enthusiastic following. Many proponents have argued that the widespread adoption of ESG principles could redress some of the imbalances and inequities that have become apparent in recent decades. Is that reasonable? Is ESG all it is cracked up to be?
Drucker's insight is salient (what gets measured gets managed), but the use of ESG as an appropriate measure of corporate performance doesn't sit that comfortably with me. Two things stand in the way:
If ESG contains such flaws, what other options might provide a better (more complete) indication of enduring company performance?
SEE (social, economic, environmental) merits close consideration. It reinstates the economic dimension to its rightful place, alongside the social and environmental dimensions. Thus, the three capitals that fuel sustained business performance, economic growth and societal well-being are re-united. If a company is to thrive over time (read: achieve and sustain high levels of performance, however measured), all three capitals need to be measured, managed and protected, as Christopher Luxon so ably asserted, in 2015.
And what of 'G'? Rightly understood, governance is about providing steerage and guidance (a lesson dating from the Greeks), the means by which companies are directed and controlled (hat tip to Sir Adrian Cadbury). As such, governance is a function performed—not a consequential outcome or result—and Drucker's maxim should be applied.
So, to the courageous question: has the time to SEE beyond ESG arrived? I think so.
Thoughts on corporate governance, strategy and effective board practice; our place in the world; and, other things that catch my attention.