The trend towards holding boards accountable for company performance appears to be alive and well, with news that shareholders plan to vote against two incumbent directors at listed company Rakon. It seems that shareholders are starting to lose confidence in the leadership of the business, after several years of poor financial performance. Rakon's share value has plummeted in recent times.
The board has led the development of strategy, but performance has floundered. Clearly, something has gone wrong. It could be that the linkage between strategy and the business' purpose was not tight; the strategy was not appropriate for the prevailing environmental conditions; the strategy was not implemented well; or, executive hubris may have stifled good decision-making. Regardless of the actual cause, the board should have monitored performance against strategy more closely. Adjustments should have been made as soon as discrepancies between planned and actual performance became apparent. Shareholders are right to hold the board accountable for performance in this case, because it was the board that created and approved the strategy, and committed the company's resources.
The calls for more diversity on company boards have become a cacophony. Researchers, commentators, shareholders, aspiring directors and wishful thinkers need to pause and take stock, lest political correctness, personal agendas and hearsay trump the real goal, that of driving company performance.
The most recent variant that I've seen is a call for increased diversity on selection panels, because this leads to more diverse appointments. Sorry, but I struggle with this. How will a more diverse panel result in a more diverse board (assuming of course that a more diverse board leads to increased company performance)? Surely, the primary goal of a selection panel is to appoint the best people to achieve the best result for the company and the shareholders—regardless of gender, creed, experience or any other 'diversity' attribute?
Many have jumped on the diversity bandwagon in recent years, presumably because a number of correlations between visible variables (notably gender, ethnicity, independent directors, split CEO/Chair, but there are others) and company performance have been identified. I agree that some correlations have been identified, but they are not universal across all cases by any means. In fact, the research results are mixed, and we must not forget that correlations are not causations.
The real challenge is to discover the underlying causal mechanism(s) that explain how boards actually influence company performance. I doubt the answer lies in the superficial correlations that have been observed to date. We need to dig deeper, beyond the current diversity arguments. We also need to admit that explaining how boards influence company performance is a very complex, socially dynamic problem—which means assertions that transient correlations are causal are unlikely to be correct.
The announcement this week, of Steve Ballmer's intention to retire as CEO of Microsoft within twelve months, sounds straightforward. However, when the announcement is read carefully, interesting questions of governance and strategy emerge. The following snippet, from Microsoft's own release, provides the insight:
“The board is committed to the effective transformation of Microsoft to a successful devices and services company,” Thompson said. “As this work continues, we are focused on selecting a new CEO to work with the company’s senior leadership team to chart the company’s course and execute on it in a highly competitive industry.”
The company has struggled to maintain the market dominance it once enjoyed, and a decision has been made to change the leader. Many commentators have proffered views about this, some of which appear here. Whether Ballmer quit of his own volition, or was pressured to do so, is a moot point.
The Board's expectation for the future is more clear—it expects the new CEO to craft strategy and implement successfully ("... selecting a CEO ... to chart the company's course and execute ..."). It seems that the Microsoft Board is not expecting to be involved in the development of strategy, despite the Board's primary role being to maximise company performance in accordance with shareholder wishes. If strategy creation is delegated to the CEO, what is the Board's role? It can only be monitoring and compliance. This is a very narrow, and outdated, view of governance. How does reviewing past performance ensure future success? It doesn't. Success is contingent on understanding the environment, selecting the most effective strategy and successful execution. And even then success is not guaranteed. You would have thought the Microsoft Board would have taken its role more seriously than to delegate this crucial task of strategy formulation to the CEO.
I have been working on a paper which explores issues surrounding the separation of governance and management. The topic is potentially quite controversial, because it questions the basis of most modern governance practice. Hopefully, the findings will be presented at a conference in the USA early next year.
The paper is needed because we have witnessed many corporate failures in the last decade, and autopsies suggest that a failure of governance was a contributing factor in many cases. Clearly, the separation of governance and management espoused by agency theory(*), and by many since, has provided no guarantee of success. Various defensive positions have been erected by Boards including lack of information; poor implementation of strategy; and, management fraud. Important questions lie just below the surface, including what role the Board should play, and whether a clear separation between governance and management is the best model to achieve the organisation's aims.
The answers to these questions have potentially far-reaching ramifications. I would appreciate hearing your views and experiences, to inform my research. If you can share links or references to any prior papers, that would be great as well. Please feel free to provide a (public) comment here, or, if you would prefer, contact me via email.
(*) The "traditional" view—that the roles of governance and management must be held separate—is based on agency theory. Agency was proposed by Jensen and Meckling in the 1970s. It has become the dominant theory of governance, in both research and practice. However, in the four decades since, no robust evidence to explain how such a model delivers better performance has emerged.
Several days ago, I mused about the Fonterra botulism scare, and asked why Fonterra had failed to respond well, especially when an exemplar crisis response case was available. Some eight days passed between the point that management recognised the problem and the point that the board became visible. Initial press briefings were messy (to say the least), and the public was left unsure of what was going on and whether Fonterra milk products were safe or not. The company appeared to be caught, like a rodent freezes in the glare of headlights, without a coherent response.
Since the initial tsunami of coverage, the board has appointed a high-level review panel to investigate what happened, how it happened and, presumably, make recommendations. With this action, Fonterra seemed to be getting its act together. However, there was another significant development today—one which raises a new series of questions. The head of the company's manufacturing division, Gary Romano, resigned.
The timing of Mr Romano's resignation is a bit strange. You'd normally expect staff to remain in their roles, pending the outcome of any review. However, Mr Romano has quit. Whether he jumped or was pushed is unclear. But that hasn't stopped the trial by media and finger pointing, as unproductive as it may be. The media needs to realise that it has an important role to play as an influencer. Rather than speculate and risk ruffling even more feathers, the media needs to adopt a more responsible attitude, by withholding speculative comment until the outcome of the review is known.
The shares of boutique brewer, Moa Group, slumped by over 20% today, on news that the company expects to miss its revenue forecast by 30%. The market had valued the business on the basis of future growth projections. However when targets are missed, consequences follow—as they did today. While the announcement would have been disappointing for the shareholders, the CEO's reaction was simply stunning: "We were misled".
Gosh, what an admission! Geoff Ross, CEO, has had a great run over the last few years, with the success of 42 Below, and more recently, Trilogy. Why did this doyen of the business and entrepreneurial community not see the 30% sales slump—just four months into the fiscal year—coming? Is "we were misled" an acceptable defence, or should the CEO and Board have seen the situation coming (through effective reporting and monitoring processes) and taken positive action earlier? "We were misled" sounds passive and dismissive. The latter option is more acceptable to shareholders.
Without wishing to be impetuous, the Moa Group board needs to take stock. The company strategy and goals need to be reviewed to ensure they continue to be realistic given market conditions; reporting and monitoring processes need to be refined; and, the board needs to become more actively engaged in the oversight of the business. Then, and probably only then, will the now-visible discrepancy (between forecast and actual performance) be addressed and shareholder confidence restored.
Notwithstanding this critique, I wish Moa Group well for the future. It's products are great!
I'm amazed at the things considered to be newsworthy sometimes. Let me give you an example. Telecom's IT subsidiary, Gen-i, has just announced the opening of a new data centre, and the trade press have picked up the story. A data centre is a facility used to house specialised equipment, from which services are provided. They are not dissimilar to a telephone phone exchange, power station or other capital intensive facility operated by utility companies. Apart from promotional value (to Gen-i, promoting it's wares), I fail to see how the opening of a facility is actually newsworthy. It's not as if customers visit data centres, as they do bank branches or retail outlets. Surely the long-since commoditised information technology market means the primary interest of customers is that the services they purchase work as promised? Who cares whether a service provider doubles the capacity of an existing facility, or opens a new one? Must be a slow news day...
How many directorships is it reasonable for any one director to hold at a given time? Recently, I met a gentleman at a function who introduced himself with the line, "I am a professional director, I sit on ten boards". Ten boards seems a lot. Is ten reasonable?
If we think what a commitment to ten boards looks like, the following picture emerges. If you assume that each board has a monthly meeting (of one day), and that directors spend one hour in preparation for each hour in the meeting, then a pool of ten boards means 20 days' effort each month. That's without allowing for committee meetings, crises, or any time to understand the company or the market within which it operates. This last factor (understanding the company and its markets) is crucial if a director expects to contribute to strategic discussions or assess proposals in any meaningful way.
On this analysis, directors with ten concurrent appointments are seriously "overboarded". They cannot hope to be effective. Think about it. You'd have enough trouble getting through the reading, let alone have time thinking, learning and assessing options. So, how many concurrent board appointments is reasonable? Experts suggest that a reasonable upper limit is four boards. Chairmen, with their heavier workloads, should limit themselves to three or possibly even two boards.
While such reductions are likely to be contentious in some quarters, some serious benefits are likely. These include a larger pool of directors; a more diverse set of contributions; higher levels of engagement; and, crucially, better decisions (less groupthink). Overall, directors would have more time to govern well. The only downside I can see is the reaction from the very directors who wish to protect their positions and status. But that's probably a fight worth having, don't you think?
Fonterra, dairy industry giant and also New Zealand's largest company, has been in the news of late, for all the wrong reasons. Fonterra processes raw milk and exports 97% the resultant products for further processing and consumption in countries around the world.
The cause of the recent events was a suspicious product test, which raised the possibility that the bacteria that can lead to botulism was present in a 38-tonne batch of whey product manufactured in early 2012. The whey product is used in the manufacture of infant milk formula, and botulism can be fatal. Understandably, the event became front page news, with flow-on ramifications in political, economic and tourism circles, very quickly.
At this point, I want to acknowledge that mistakes, unexpected events and crises happen. This is a fact of life. The test of one's mettle comes in the response.
On the surface, it would appear that Fonterra has failed to manage the crisis well, despite an exemplar case being widely available. In 1982, packets of the then market-dominant Tylenol product were laced with cyanide. Seven people died from unknowingly consuming poisoned capsules. Johnson & Johnson's response to the crisis was exemplary. They immediately withdrew every box of Tylenol from sale, established a 1-800 helpline and actively sought media coverage. While Johnson & Johnson took a short-term hit, they emerged stronger than before. Compare that with delays in reporting the possibility of the problem to the authorities, and seemingly poorly briefed representatives at press briefings. And where was the Chairman?
No doubt a review (or, more probably, several reviews) will be conducted to discover how the problem occurred; why it was not discovered earlier; what processing, communications, information sharing and other processes failed; and how the whole affair was managed. I hope that, in the process, someone thinks to look to other similar cases—like the Johnson and Johnson one—and to learn from them!
I had the privilege of working with a group of 23 wonderful people yesterday. The task was to present the 'strategy' day of the IoD five-day Company Director's Course, the Institute's flagship professional development programme. The course is designed to provide a solid grounding in governance and governance-related topics. Delegates usually have some governance experience, although some do not. The strategy component explores a range of topics including the importance of strategy; the strategic planning process and formation of strategy; the role of the board; and, the importance of implementation and monitoring.
As I worked with the delegates, I was reminded that the underlying foundations of strategic planning are actually very straightforward. Just four questions need to be answered:
For organisations, this means understanding the environment the organisation operates in, confirming the core purpose and strategic objective(s), and then selecting strategies and action plans to achieve the objective. That's all. The rest can (and should) be treated as tactical actions, to be completed by management as part of the business planning process.
One final point. The output of the process (the plan) should be as straightforward as the process used to create it. A coherent plan—that fits on one or two pages—is far more likely to be understood and supported, than a large document with many pages of tables, lists and detailed analyses.
Thoughts on corporate governance, strategy and the craft of board work; our place in the world; and, other things that catch my attention.