For over forty years now, researchers have been investigating boards to try to understand their contribution to business performance. The dominant logic has been to count things, perform statistical analyses and apply hypothetico-deductive science—to identify this elusive thing called "best practice". The latest group to pursue the "best practice" argument are the proxy advisory firms. Details their modus operandi are summarised in this blog, posted on the Harvard Law School site. 

A best practice approach—whereby if one does 'x' then 'y' occurs—sounds great. However, the reality is not as straightforward. As most directors know, every situation that a board deals with is, to some extent, unique. Boards are made up of people. The context within which boards exist, the company, is also a construction of people. Board structures and board activities that work in one context may fail in another.

The blog on the HLS site is helpful because recognises that one size does not fit all. It also exposes some of the practices promoted by proxy advisory firms for what they are: detrimental to performance. Notwithstanding this, boards can influence performance. While the blog on the HLS site has particular relevance to boards and shareholders of public companies, many of the suggestions are useful for boards of private companies as well. I commend it to you.

The leaders of two different companies contacted me this week to ask if I could facilitate a corporate strategy session for their organisations. Both are both respected, long-standing participants in their respective sectors. One is currently updating its strategy, and the other has some concerns over the performance of an important business unit:

• Derry*: The board and CEO have recently reviewed business performance, conducted an environment scan, identified options and developed a draft strategy. The request from the CEO is to facilitate a joint board/management session to challenge the assumptions; test linkages between purpose, strategic priorities and action plans; and, help the board reach the point of deciding whether to approve the proposed strategy or not.
  

• Terra*: The CEO is concerned about a steady decline in the fortunes of a business unit over several years. "We do good work, and customers like us, but we struggle to win new business. We seem to lack a differentiator." I asked about the purpose of the business as a whole, because steady decline over several years can be an indicator of a bigger problem. The CEO said that the rest of the business was doing well—the implication being that the corporate strategy is correct. It was his view that the problem is purely one of execution within the business unit.

While these two situations were quite different, they highlight an important dichotomy that seems to catch more than a few people out—the vital difference between strategic thinking and strategic planning, and the importance of doing both:

• Strategic thinking is the process of finding options. It's about the big picture, casting the net wide, to discover possibilities. It's not about solving problems or picking a winner.
  
• Strategic planning is the process of narrowing down options, of selecting the preferred one to achieve the business' goal, and of creating action plans. It's exactly about solving problems.

Derry has been through the thinking process and the planning process. Therefore, the discussion with the board and the CEO should be a real pleasure, because they have a context against which to conduct the debate. In contrast, the Terra CEO seems to have treated the troubled business unit in isolation from the rest of the company, and jumped to the conclusion that something is wrong within the unit. It could be, but I wonder whether the company has a bigger problem: whether the corporate strategy has some holes in it. Why has business declined? Is the once-strong market for the business unit's services still there? What part does/should the business unit play in the wider corporate strategy? The world may have moved on, so fixing a unit without grounding it in reality can be a waste of time and money. 

The process of thinking about the wider context, the market within which a business operates is vital. The temptation is to go straight into problem solving mode is powerful—everyone likes the satisfaction of having created a plan to solve a problem. However, this is rarely the best first step. My fear for Terra that any work on the business unit will simply paper over a bigger problem. I've suggested some questions for the CEO to ponder before he goes too much further. The next conversation will be very interesting. In the meantime, the Derry workshop is booked.

* Usual story: the company names have been changed, to protect the parties involved.

I've mused about the steady stream of IPO activity in New Zealand several times of late, most recently this morning. Expectations have been high. However, the soft response to Serko's listing, and nervous chatter on various news and social media sites, suggests that the supply-and-demand equation may have reached a tipping point. Could this be? 

I'm not convinced. Good investments should—and generally do—attract good support, and weaker ones should be put to the torch. At the risk of being labelled as having a somewhat simplistic viewpoint, I think the market has simply woken up, such that it will not blindly support weak proposals. If this is the case, I'd call the situation by its proper name: common sense.

Newly-listed Gentrack provided recent and aspiring IPOs with a salutary message yesterday. The investment community prefers solid profitable companies with growth potential. Surprise, surprise.

In the last year, several companies—including some who are yet to record a sustainable profit—have sought and gained a listing on the New Zealand stock market. The headlong rush to list seems to have been dominated by promises of huge growth and, therefore, good rewards at some point in the future. Some, who entered early, have had an amazing ride but are now getting a reality check, as I mused recently. However, many IPO companies carry a burden of debt into the IPO, which means some of the new capital is needed to tidy up the balance sheet.

In contrast, Gentrack has been operating for many years, has many customers, and is a proven performer with a track record of profits. It also has a credible plan and has signalled an intent to pay a dividend within twelve months. The company received a warm welcome when it listed yesterday.

Is the aura surrounding the high-tech sector and hype of stellar returns starting to lose its lustre? Maybe. However, I'm confident that the invisible hand of the market will redress any imbalances that have occurred as a result of the current lemming-like rush to list. It will be very interesting to see which companies come through the current gold rush fever well.

(Disclosure: I do not hold any shares in any of the companies mentioned in this muse.)

An important new piece of legislation--the Companies and Limited Partnerships Amendment bill—has just had its third reading in the New Zealand Parliament. It has been designed to hold directors that operate at or beyond the edges of moral and legal acceptability more directly accountable for their actions. The Bill affects the Companies Act 1993 and the Limited Partnerships Act 2008. Amongst the provisions, companies will be required to have at least one New Zealand-resident director, directors of limited partnerships will need to provide some personal information, and new offences for directors who act dishonestly or in bad faith will be created. 

Law firms MinterEllison and Bell Gully have published a helpful summary of the amendments on their respective websites (here and here). The Institute of Directors in New Zealand will probably provide some information to its members nearer the time the Bill comes into force. Directors, investors and other affected parties should become familiar with the amendments, even though most local companies and directors are unlikely to be directly affected by them. If you have any concerns, seek legal advice. 

I'm both thrilled and humbled by some news that arrived overnight. A paper that I prepared some time ago, The crucial importance of access to the advancement of governance research (read abstract), has passed through the double-blind review process and been accepted onto the programme of the 10th European Conference on Management, Leadership and Governance (ECMLG)! The conference is being held at VERN', in Zagreb, Croatia, in November.

The paper discusses the difficulties that governance researchers face when their research is limited to the analysis of secondary data—typically interviews, surveys and questionnaires. It suggests that if researchers study what boards actually do, by observing board meetings directly, then it should be possible to learn enough to provide an explanation of how boards influence company performance outcomes (or not). The paper also includes some preliminary insights, which emerged from a series of boardroom observations conducted as part of my doctoral research. It will be interesting to see how this paper is received. Hopefully, it will give folk the confidence to press on and try different approaches to corporate governance research, to discover if and how boards create value, or whether they simply impose cost.

The full paper will be available on the Research page immediately after it is presented at the conference.

Have you seen the new governance code that in being introduced in the UK later this year? It contains many good elements, and one that is quite scary. The new code will require (figuratively) directors to add a new line-item to their competencies: reading crystal balls. The new code seems to place a duty on directors to predict how long their company will remain viable. The so-called viability test is a big development, and one that may see directors running to check their insurances. While New Zealand and other jurisdictions utilise a solvency test (that directors do not trade recklessly and do not knowingly allow the company to trade while insolvent), this new development lifts director responsibility and accountability to a new level. 

Directors of businesses that operate near the edges of moral, ethical and legal acceptability should be concerned, and rightly so. It will be very interesting to see how this development shakes out, and whether the boards of well-run companies have anything to be concerned about or not. What is your view?

Things are looking rosy for the New Zealand economy—rosy enough that Paul Bloxham, Chief Economist at HSBC, reckons "New Zealand will be the rock star economy of 2014". An important driver appears to be continued strong demand for New Zealand's dairy and meat products, particularly from Asia where the move to protein-based consumption continues unabated—which reminded me of a speech that I heard eight to ten years ago, delivered by the then Chief Economist of Westpac Bank. The suggestion was that Chinese demand for coal and steel would wane, as massive infrastructure projects were completed. Demand would then shift to food, to feed the growing middle class. The corollary was that New Zealand could look forward to long-term demand for its primary exports, and the resultant economic growth from a steady stream of export receipts. The chickens seem to be coming home to roost.

This seems to be good news, so what should corporate boards do with it, if anything? Should boards move quickly to capture "their share" of what is obviously a growing international pie? Should more capital be applied to drive expansion into new areas, or should companies stick to their knitting? These are important questions. In the last seven days, I have been party to discussions with two successful companies that are seriously considering international expansion, to become exporters of services to Asia on the back on high primary sector demand. My initial response was to suggest several questions that their boards should ask and answer before any decisions are made:

• What is the actual opportunity?
• How does it fit with our current strategy?
• What do we know about the off-shore market that the locals don't?
• How transferrable is our capability? 
• What will the impact be on our established business? 
  
• How will it fit with the wishes of our shareholders?

The pursuit of opportunistic growth is often exciting. However, it is rarely sustainable. Boards need to stand back and look at the big picture—to understand the context within which they operate, check their strategy and understand how the so-called opportunity fits—before making any significant decisions. The pathway of history is littered with stories of companies—including some large, well-resourced ones—that have tried and failed to become exporters on the coattails of growth in another sector. However, if boards are adequately informed before they make important decisions about strategy and the application of capital, they stand a much greater chance of success. Growth opportunities abound, but context is crucial.

I want to tell you a short story, to demonstrate the crucial importance of providing great customer service, and reflect on implications for boards of directors. In mid-May, a small but important part of my website stopped working—the Twitter counter. This counter reports how many people have tweeted or retweeted links to any given blog post. It is a very useful indicator of whether a posting is of interest or not. I reported the issue to the website people. They quickly admitted there was a problem; told me that others had reported the problem; and, said they were working on a resolution. However, they kept my expectations in check by saying that they did not have an expected resolution date. All good so far. A few days later, a 20-second survey form arrived, asking for feedback on the customer service provided to date. I happily provided a positive response. Yesterday, another note arrived—this time to advise that the engineering team thought they had fixed the problem and could I please check my website. So, I checked and provided the requested feedback. Hopefully the problem is now fixed, and the update to the software will be deployed soon.

While we don't like things to break, sometimes they do. Given this, it's the putting right that counts. This is what I learnt about "the putting right" that counted from this experience:

• If there is a problem, admit it straight away
• Commit to finding a remedy, but be realistic about when and how that might occur
• Keep the customer informed of developments as they occur
  
• Ask for further feedback or information
• Tell the customer when the problem is resolved

There is a profound message here for boards of directors. It concerns communications. People talk. They tell their friends and colleagues about their experiences—good and bad—in ways that can't be controlled. Boards are somewhat aloof from the day-by-day activities of the companies they govern, yet the effect of poor customer service has the potential to directly ruin the board's day. However, if boards put effective reporting measures in place and ask appropriate probing questions, the chance of being blindsided by unforeseen problems is greatly reduced. Effective leadership and a healthy culture from the boardroom out through the organisation are crucial. Boards that do the hard yards in the boardroom should see the fruits of their labours become apparent—on the bottom line—soon enough.

The 3rd International Conference on Management, Leadership and Governance (ICMLG) will be held in Auckland, New Zealand on 12–13 February 2015. This conference attracts leading thinkers from around the world. It is a significant opportunity to share research findings; debate emerging ideas on leadership, governance and strategic and operational management; contribute to the body of knowledge; and, importantly, meet some great people! In case you are wondering, the conference is designed for scholars and practitioners with an interest in these important topics.

The call for papers has just been issued. I commend this conference to you, particularly if you undertake academic or commercial research, or if you are a doctoral candidate. I have delivered papers at the two previous conferences (click here and scroll down for details), and will be chairing a minitrack in Auckland.