Gentrack's share price has taken a hit in recent days, following a profit warning. The announcement surprised many, because it came so soon after the company went public in June. Last week, the company announced that a project had been delayed, and today news emerged that the company knew of the delay before it completed its initial public offering. However, this extra piece of information was not declared at the time because "we didn't think it would have a revenue impact on us". Gosh, this is a big call. Does this mean that the company had been hiding something that should have been disclosed during the IPO process?
This brief case raises interesting questions of disclosure:
I sense a fine line here, between transparency (so that investors and prospective investors are informed), and commercial sensitivity (to shield information from competitors). Given the company went public just a few weeks ago, I think I'd be erring on the side of transparency. There's no joy in getting off-side with the market when you are just starting out on a rather public journey towards wealth creation.
A couple of months ago, I wrote a few articles about the head-long rush towards IPO listings that had been occurring in New Zealand, and asked whether the supply-and-demand equation had reached a tipping point. Since then, many of the companies that listed have suffered at the hands of the market. Some questioned whether the companies were fit to list in the first place. Yesterday, Brian Gaynor made his view plain:
The problem is that investment banks, private equity investors and other vendors have adopted an incredibly short-sighted, profit maximisation strategy.
I think Gaynor is on to something here. Rather than thinking about the core purpose of the company and a robust strategy to achieve that purpose, many of the vendors and private equity investors seem to be more interested in profit maximisation (realising a strong return on their own investment). If this assumption is correct, then another—potentially far worse—problem lies under the surface: did the pre-IPO board act in the best interests of the company (as required by the New Zealand statute) by bringing the company to IPO?
The strength of an economy is dependent on many things, including companies that deliver value to their customers, employment to their staff and profits to their owners over a sustained period. The greedy pursuit of quick profits might satisfy vendors and private equity investors at the time, but rarely is it beneficial to the wider economy or to society at large. However, the invisible hand of the market may be at work. The poor performance of the recent IPOs could actually be a salutary warning signal for vendors and private equity investors contemplating bringing their own company to IPO—to think carefully about their motivations.
Harking back to your childhood, do you remember asking "Are we there yet?" while travelling with your parents? I do, and sense my parents' negotiation skills and patience were tested each time one of their four sons opened their mouth.
Fast forward to 2014. I want to ask the question again, although in a different context: the debate over the value and contribution of inside and independent directors. The debate has been simmering away for years. On the current evidence, it shows no sign of abating or of being resolved. Two recently published articles highlight the problem. The case for independent directors made by Larry Putterman, and the suggestion that independent directors destroy shareholder value, have stimulated a fair bit of discussion. Which one is right? They both can't be, or can they? The tension is palpable.
Many corporate governance researchers—and practising directors and other commentators—seem to have a love affair with counting things and with finding a single "truth" about the way to achieve a desired result. Boards are made up of people who make choices, and they change their mind based on the circumstances before them. Therefore, every board is, to some extent at least, unique. What I can't understand is why we continue to think that a specific structure or composition might make one iota of difference to performance. Surely studies of boardroom behaviours, interactions and activities are more likely to lead us to a credible answer to the conundrum?
I've been asked to several times over the last month to explain or expand my views on advisory boards. It seems that some of the comments I've made in meetings and on this blog have set people thinking. That's not a bad thing in my view, but because boards are complex, things change, and the popular answer is not always the best answer (although it can be). The most recent discussion took place on a domestic flight last week. I happened to be seated next to a professional acquaintance. We struck up a good conversation on a range of topics. After a lull, he asked "So what have you got against advisory boards?" We had a good chat. Rather than replay that conversation here, I thought it might be helpful if I pulled up the following short piece to ponder. It was written in December 2013:
The matter of advisory boards has become topical in recent years, particularly amongst emerging companies seeking additional help. Advisory boards are established in many cases to provide advice and oversight on some sort of ongoing basis—the motivation being to access advice without forfeiting control or passing responsibility.
My view on advisory boards is "be careful, be very careful". If you want advice on a specific matter, buy it. However, if you want on-going assistance to set the direction of the company, spread the decision-making risk and to drive performance, then a board can be a helpful construct. But please, don't get advisory services confused with corporate governance.
This muse is the second in an occasional series: to ask some potentially provocative questions about the prevailing assumptions that surround boards and corporate governance. (The case for diversity was the first.)
The concept of a board of directors, and the practice of (typically absentee) company owners nominating representatives to look after their interests is not new. Indeed, the motivation for the concept—to protect and represent owners when ownership and control were separated—is well over a century old. However, an underlying assumption has developed alongside the core motivation, whereby a functional board (i.e., one meeting regularly and conducting 'corporate governance') is considered to be necessary if company is to grow and develop. Many consultants have successfully traded on this assumption in recent years; making a lot of money helping owners set up boards and governance practices—even though many of the boards and related practices they helped establish add little except cost.
The statutes of most Western countries require companies to have at least two directors (although only one is needed in New Zealand). A collective of directors is called a board. A board is a necessary requirement. But what of the practices of corporate governance? What if the owners work in the business on a day-to-day business? Is the formality of board meetings, reporting and and associated practices—and the administrative overhead—actually required? What value does it add? Is a functional board of directors always needed, let alone desirable?
When no separation exists between ownership and control, the underlying basis for formalised governance practices is not apparent: the shareholder (the owner, if you will) is directly present making decisions. Some of the tasks often associated with the board (setting direction, making major decisions, fiduciary responsibilities) are still required for sure, but these activities can readily be undertaken by the owner-manager. If an owner works directly in the business they own, and if they seek out experts (lawyers, accountants, industry experts, coaches, strategists, et cetera) for advice, what additional value is to be gained from adding the rigour of a formal governance framework? Would it not make more sense to limit the (formal) practices of corporate governance to those companies with absentee owners, and to those with aspirational owners who want share the decision-making risk?
Please note that this is not an argument against boards for all smaller businesses. If the entity is a company, a board is required. It is the formal practice of corporate governance that may not be.
I recently had the privilege of leading a strategy development session with the owner of a large logistics company. His motivation was straightforward: to establish a functional board to secure some additional expertise and to share the decision-making 'burden'. We had a great time together as we worked through the issues. To see the eyes open and pennies drop as the owner, a couple of his team and two outside advisors began to realise what might be possible with a functional board in place was a delight.
Contrast that experience with another recent discussion. The two owners of a successful and profitable business approached me for some advice after they were told "you need a board" by a consultant (whose business is to set up boards). They could not see the benefit of establishing a formal corporate governance framework given their aspirations. (Their stated intention was to continue to work in the business for the foreseeable future.) After discussion, I suggested they consider the option of surrounding themselves with expert advisors that they call on from time to time instead.
So, where does this leave us? We need to get our thinking straight: to understand when a functional board (i.e., one undertaking the practices of corporate governance) is necessary, when one is helpful, and when one is, quite frankly, a burden. Otherwise, we run the very real risk of treating the whole world as it it were a nail on the basis that we have a hammer in our hand. All that will do is squash some very capable owners under a burden of cost and compliance: a burden that they don't really need.
I will be returning to the UK and Europe in September and November to speak at conferences and attend meetings. If you would like to take advantage of me being in your neighbourhood, please contact me to arrange a meeting or book a speaking engagement. I'm happy to discuss anything relating to corporate governance, boards, strategy or company performance. My availability is as follows:
I look forward to hearing from you.
I have shared the following story twice in the last 24 hours. It resonated with those that heard it, so much so that I thought a wider audience might also appreciate it.
My wife provides a useful sounding board for my research work. However, she tells folk that she's no governance expert. I suspect she knows way more than she lets on. Here's why. While we were on vacation recently, we chatted about my doctoral research a couple of times. One time, out of the blue, she offered this analogy:
Aren't boards a bit like cakes? A cake only becomes a cake after the ingredients are combined and the mixture is baked. A cake cannot be explained by describing each of the individual ingredients, or even the mixed dough. Why pull something apart to explain it, when it only makes sense when it is complete?
I thought this was a really profound analogy. It provides a timely reminder that we need to think about boards and the context within which they operate—the company—in a holistic way, if the goal is to explain how they influence performance outcomes. A close inspection of individual attributes of boards won't give us that.
Thoughts on corporate governance, strategy and effective board practice; our place in the world; and, other things that catch my attention.