Mike O'Donnell is a business manager, company director, family man and self-confessed techno-geek who writes a weekly column for the Dominion Post. Mike's comments can be provocative, cynical, irreverent and highly insightful—sometimes in the same column. Almost always though, his comments are entertaining and relevant. His latest contribution, which recounts a speech he delivered at the recent Institute of Directors annual conference, fits in the inspired and relevant category. Here's a piece from the column:
I see the role of directors as being threefold. First, to select and appoint the right CEO for the company. Second, to provide meaningful governance on issues like solvency, risk, remuneration and health and safety. Third, to help set a strategic direction that will deliver growth and help monitor its implementation.
In three points, Mike summed up the role of the board really well. However, I would alter the sequence, because the third point needs to come first. Without purpose and strategy, there is not much for the CEO to do, or the board to govern.
Another entry was added to the rather sad chronicle of Ross Asset Management yesterday. David Ross, the founder, has been struck off by the New Zealand Institute of Chartered Accountants. It is pleasing that the Institute's rules have such provisions. Membership of a professional body should be obligatory for all practitioners, to provide consumers of the services rendered with confidence. However, it should not be a right. It should be reserved for those that satisfy specified entry criteria (through formal assessment)—and continue to do so. Membership and responsibility go together, including a commitment to on-going professional development and the upholding of professional standards, amongst others.
The Institute of Directors in New Zealand (IoDNZ) is partway through a process of professionalisation, to bring governance into line with other professions. The chartered director proposal includes a tiered membership structure and a commitment by members to the maintenance of standards and on-going professional development. This is timely, as some directors have been in the news in recent months, for all the wrong reasons. Members will vote on the proposal at the upcoming AGM.
The IoDNZ proposal seems to be sound, except the accountability component is somewhat weak. Actions and consequences should go together. The IoDNZ constitution includes provisions to strike off members who act fraudulently or bring the Institute into disrepute. However, if the IoDNZ is seriously committed to upholding governance standards, then a mechanism is required whereby members are held accountable for their ongoing compliance with the proposal. If a member fails to demonstrate a commitment to on-going professional development for example, then a downward adjustment of membership level may be appropriate. I hope members see fit to consider the inclusion of such an accountability amendment before the proposal is adopted.
My doctoral research, to discover how boards can influence company performance outcomes, is continuing a pace. Currently, I have one more board meeting to observe, after which the twelve month cycle of boardroom observations will be complete. This major milestone signals a change in emphasis, towards data analysis, the testing of ideas and the drawing of conclusions—oh, and writing the thesis document! Although it'll be tight, I hope to complete the thesis and submit it for examination by Christmas.
The purpose of this post is to request some feedback please, to help me make sense of some emerging ideas. I'm mulling over a new conceptualisation of governance, one that challenges the widely-held view that governance and management should be kept separate. As alluded to in the paper I presented at ICMLG recently, the concept has the board fully engaged in the development of strategy.
The question that I would like some feedback on is: What underlying powers, behaviours and concepts do you think are necessary for such a conceptualisation of governance to work well? Five are mentioned in the paper, but you may have some other suggestions based on your experience. If you would like to share your ideas (supported with examples if you can), please contact me!
A blog article, with the catchy title How to double your company's profit: begin by refreshing your board of directors, appeared in Huffington Post today. The article is helpful because it highlights the importance of having a diverse board. Here's a snippet:
Imagine instead a board comprised of 10.7 people (the average board size) where directors of a variety of ages bring the relevant expertise and leadership experience that is needed, and have grown up in various regions of the world, in a variety of socio-economic conditions. Such a group, some with academic credentials or particular subject mastery, others having built and led innovative ventures, climbed the ranks of multinational corporations throughout the world, having life experiences in emerging markets, and playing and working with the latest technologies from the time they could crawl, can truly envision what's possible and also know what questions to ask management.
Korngold makes some great points—she is amongst an increasing number of people to suggest that better governance leads to better performance. Diversity in the boardroom is a good thing. However, a couple of her assumptions deserve comment:
Governance is complex, socially-dynamic and every board is unique in some way. Things that work in one instance may or may not have the same effect elsewhere. Notwithstanding these comments, I enjoy reading Korngold's articles. They add much richness to the discourse.
Do you use the SWOT tool in your organisation as a precursor to the strategy development process? SWOT (Strengths, Weaknesses, Opportunities and Threats) is a useful tool, but it has fallen out of favour in recent years, as organisations have struggled to deal with the 'laundry lists' generated during SWOT sessions. Also, other tools have become popular.
Many people have told me that SWOT is old (it is) and irrelevant (let's discuss this), and that newer tools do a better job. I agree, to a point. The trouble with most SWOT analyses is that they only go half-way. Identifying those internal and external things that are helpful or harmful to your organisation's success is useful if and only if something is done about them. The lists generated from SWOT sessions can be long, and complementary items often appear on each side of the ledger. Creating and resourcing effective action plans from such lists is simply too hard in most cases.
One modification that I have used for a couple of years now is to add a 'so what?' question to the analysis after the lists are assembled. For each strength, weakness, opportunity and threat, think about the impact or consequence of that item on the organisation—by asking 'So what?'. If the impact or consequence is high or significant, create an action to maximise (strength or opportunity) or minimise/mitigate (weakness or threat) it. If the impact or consequence is low or insignificant, simply put it to one side for now. This simple addition (let's call it SWOT 2.0) helps teams prioritise those things things that actually matter. It has transformed the usefulness of the tool (and the quality of the strategy) in every case that I am aware of.
One last word though: don't be lulled into thinking that SWOT, SWOT 2.0, PESTEL or any other tool is a panacea. They are just tools. They need to be used correctly, for the purpose for which they were designed. Often, it is wise to use a couple of tools, to ensure you get a well-rounded picture to base your strategy development work on.
One of the big temptations in the strategy development process is to jump into 'answer' mode too early. Jumping quickly to conclusions is a real and understandable temptation. We live in a high-paced world and we want answers. We want plans to achieve our goals—the sooner the better.
Many companies start the strategic planning process by jumping to the determination of goal (what do we want to achieve?) before leaping head-long into the question of how the goal will be achieved (what is our strategy? or what is our plan?). Sometimes, this process is informed by an environmental scan. Generally, the strategies that emerge from such processes are ill-conceived and readily defeated. I've lost count of the number so-called strategic plans that follow this pattern.
The crucial element that is often missing from the strategy development process is purpose: an answer to the 'why' question. Spending time with shareholders (or, their representatives at least), with customers and possibly with a wider group of stakeholders, to work out why the organisation exists is time well spent. A drug company needs to know it exists to defeat cancer (for example) long before any strategies to develop medications or build grand marketing plans are considered. People get onboard with causes not things. Imagine how different things might have been if Martin Luther King had uttered "I have a plan" in 1963.
'Why' needs to come before 'what', in business and in research. Owners, boards and trustees of not-for-profit agencies need to own the 'why' question and doggedly pursue a response. To ignore this maxim is to simply do stuff without due reason or cause—and that's hardly conducive to the building of a sustainable business or to conducting effective research.
I've been reading through some research papers and magazine articles today, motivated by Xero's active approach to succession in the boardroom (see previous post). I wanted to find out how the related task of CEO succession is managed by boards. My two word conclusion from today's reading: not well.
A recent Stanford research survey provides insight. Half of the directors surveyed by the Stanford researcher said that a CEO successor was being groomed. That sounds good, but what about the other half? Over the years, I've asked a lot of directors to list the important tasks of the board. Most say that hiring the right CEO is towards the top of the list, yet the Stanford survey reveals that half don't follow through with an adequate succession plan.
You would think that all boards would have a solid CEO succession plan, particularly as they carry overall responsibility for company performance, and strong leadership is crucial to strategy execution and company performance outcomes. I'm not sure why some boards overlook this important task. Are they too busy with other more pressing matters? Or are they too lazy? Or have they not thought about it? Perhaps shareholders can help, by asking questions at annual meetings to encourage boards to take CEO succession more seriously than many do now. I'm sure the payback to such enquiries will be palpable.
Xero is a young company with a clear mission: to become a global leader in on-line (read: cloud-based) accounting systems. While the company has some pretty serious competition, its stellar rise on the stock-market and ebullient CEO has seen it enter the consciousness of the general public in New Zealand, Australia and, increasingly, other countries as well.
Part of the company's success appears to be due to its mature and considered approach to governance, and succession in the boardroom in particular. Phil Norman was appointed to the chair prior to the company being listed. Phil is a startup specialist, he got the company underway. Subsequently, Phil was replaced by Sam Knowles who established Kiwibank and grew it to become a viable player in the New Zealand market. Sam, who chaired the Xero board through the company's initial expansion beyond New Zealand, oversaw the repositioning of the company, from a great little company from Wellington New Zealand (where?) to a growing global company. Recently, Sam left the board to be replaced by Chris Liddell. Chris has had a long and successful leadership career in large companies including General Motors, Microsoft and International Paper. He lives in New York and is well connected with the movers and shakers there. Two independent directors have just been appointed—San Francisco-based Bill Veghte and Australian-based Lee Hatton. Hatton is Xero's first female director. Both will bring a fresh perspective no doubt.
With the benefit of hindsight, it is easy to see that these appointments have been considered and intentional. Xero has sought specific individuals with specific capabilities to provide leadership in the boardroom. As new capabilities and connections have been required, changes have been made. Xero is trying to become a world-class company. If it succeeds (and even if it falls short), I suspect a future generation of MBA researchers will identify governance quality and succession in the boardroom will have been important building blocks. Regardless of how it plays out, startups and more mature companies would be well advised to take a look at Xero. The company's approach to leadership, governance and succession is refreshing.
Disclosure: While I am known to some current and former members of the Xero board, I do not own shares and do not have any commercial relationship with the company.
Do people that promote themselves heavily—by describing themselves in glowing terms; providing long introductions; and, embellishing their accomplishments—annoy you? People that behave like this are relatively easy to spot. They are often quite loud, and their large egos generally signal their presence.
Interestingly, a recently published article has suggested an inverse relationship between ego and knowledge—which suggests that those with large egos have little to contribute. This is somewhat alarming, as many corporate disasters over the last forty years can be traced back to failures of governance, fuelled by hubris and overactive egos. Just how knowledgeable were the directors in these cases? The message in the article is relevant for everyone in the business community, particularly those directors that see themselves as being above the law and beyond any form of accountability. How long will it take, and how many more lives will be lost, before someone takes a stand?
Every entrepreneur and active business owner that I know dreams of building a business capable of achieving sustained profitable growth over time. However, maintaining continuous profitable growth is hard, and there seems to be a wide gulf between the dream and the reality. Just ten per cent of companies manage to do it over a continuous ten year period. I haven't found any research that explains why companies experience such difficulty achieving sustained growth, although one research report I read recently suggested those companies that do achieve it appear to have three characteristics in common:
Interestingly, these three characteristics are increasingly being associated with effective governance: the determination of strategy and the setting of performance targets. While not mentioned in the report, the boards presumably implemented a structured monitoring regime as well.
These characteristics challenge conventional wisdom that you have to do more (diversify the product mix and/or enter new markets) to get more. They also enhance the credibility of the proposition that the board’s active involvement in strategy development and performance monitoring is crucial to a company achieving and sustaining profitable growth over time.
Thoughts on corporate governance, strategy and effective board practice; our place in the world; and, other things that catch my attention.