I was party to a rather interesting, and at times quite vigorous, discussion while working with 24 delegates at the Institute of Directors' Company Directors Course on Tuesday last week. My task was to present the strategy material, and to facilitate a wide-ranging conversation to help delegates understand the board's role in the respect of strategy.
The question that precipitated the discussion concerned information sharing and accountability: How and when should the board discover that there is a major problem with the performance of the business due to the approved strategy is not being achieved as expected? Should the board rely on the standard reporting process (and risk ignorance if management decided to remain silent), or should the board ask searching questions if things don't quite seem right? When I asked this question last week, one delegate suggested, almost immediately, that management should report any and all material information to the board. By implication, this position places the responsibility and accountability directly with management. Another delegate responded strongly with a counter view, by suggesting that the board should not simply "trust" management to decide what needed to be reported, but that it was sometimes necessary to ask searching questions. A vigorous 20-minute discussion ensued. Points and counter-points were exchanged, with some great supporting examples (which I cannot share unfortunately, due to the Chatham House rule).
Where the did discussion land? The majority of the group appeared to hold the view that, if directors are to add value, and to fulfil their duties to act in the best interests of the company, then it is their duty to discover the real state of affairs by asking searching questions—even though such a position requires them to be more fully engaged in the process of governance than a lesser "monitor based on what is reported" position would require. While my personal view is consistent with that of the majority of the group, I'm not at all sure whether such a position is representative of how the majority of boards actually act. The Christchurch City Council, Fonterra and Solid Energy cases all suggest the board relied on management reporting rather than on the asking of searching questions...
I would appreciate hearing what others think...
So, what exactly is governance?
One of the most common requests I get in my advisory and research work, and at speaking engagements, is to provide a definition of 'governance'. I think it keeps coming up because there's no universally accepted definition. To press the point, when Africa Zanella asked for a definition of governance on LinkedIn recently, her question generated over 50 replies.
Notwithstanding this, we need to try understand what governance is and what it is not. Here's my take (which also appears as one of the 50 replies): I have come to understand that governance is an activity. It has a purpose (what) and a process (how).
To be effective in governance, boards need to understand their purpose, and have a process through which to determine performance goals (develop a strategic plan, together with management) and oversee performance against plan (a monitoring regime). In contrast, the primary role of management is to implement the approved plan (having contributed to its development, with the board).
Hopefully, this view is helpful. Love to hear what you think!
The failure of governance that I commented on a couple of months ago has now provided the ratepayers of Christchurch with an unwanted headache. Reports have emerged today that outgoing CEO, Tony Maryatt, will leave the Christchurch City Council today with a large severance payout estimated to be in the order of $400,000. The severance payout will have been triggered by provisions in Mr Maryatt's employment contract, no doubt.
While the media, ratepayers and members of the public will raise their collective arms in horror at the scale of the severance payment, another less visible—but arguably more significant—factor actually merits more attention; that of accountability. Councillors need to think more carefully about their motivations and their actions. The common good must prevail over personal or party agendas.
With the local body elections upon us, voters would be well-advised to quiz candidates carefully, to satisfy themselves that each candidate understands governance; is committed to a creating a strong and effective team of leaders; and ultimately, is focussed on working productively towards the common goal of rebuilding the city of Christchurch.
The much maligned board review process needs to be overhauled because the complex, socially dynamic, endogenous nature of boards—and the idiosyncrasies of human nature—render it somewhat toothless in many cases:
Notwithstanding these challenges, the board is responsible for optimising business performance, on behalf of the owners. But how does one hold the board accountable, to ensure it performs well?
One approach to provide some bite could be to apply the "one-up" principle. It works well within organisations: the CEO is reviewed by the board, general managers are reviewed by the CEO, and so forth. However, the one-up principle is more notional for boards, so a variation is required. The audit process provides helpful guidance. In most companies, the owners appoint an Auditor (normally at the AGM), who is then responsible for providing a report to demonstrate that the accounts are a true and accurate record of performance. This is, in effect, a one-up process.
A similar process could be applied to board reviews, whereby a resolution is brought to the AGM to approve a Reviewer, who is charged with conducting a formal board review and reporting back to the next AGM. Such an approach would expose the review findings to the owners; give the owner's some teeth; and, enable the owners to hold directors accountable via the election process. It could be very threatening to some incumbent directors though...
One of the things I really enjoy when travelling is meeting people for the first time. My doctoral research journey provides a case in point. It has brought me into contact with many interesting people, including members of the international academic and governance communities. The conversations and experiences that I've been privileged to be part of have helped me gain new insights; form opinions; and, map out the next steps of my journey. The sights and sounds of unfamiliar cities, and the conversations with hotel staff, shopkeepers and other locals, have added context, colour and richness.
When I am in England and Europe in November, to present a paper at ECMLG'13, I hope to continue conversations started in Bangkok back in February; to start new conversations and build new relationships; and crucially, to help others grapple with the demanding topic of how governance can help improve business performance.
If you'd like to join the conversation or arrange a meeting, please contact me, so that we can find a date and time that works best for you. I'm available to meet anyone, anywhere.
Are you based in the UK or Europe, and do you need any assistance with governance or strategy? I will be presenting a paper at ECMLG'13 (European Conference on Management Leadership and Governance) in November. As the itinerary has me arriving in London the weekend before the conference, I have some time available for other meetings or speaking engagements, as follows:
If you would like to me to meet with you and your colleagues, or speak (in London or any other capital city), please contact me to let me know how I can help.
News arrived today that Massey University has seen fit to support my doctoral research by awarding a Doctoral Scholarship, worth $25,000 per annum. This is truly a blessing, and indicates that Massey sees value in my research. The funds will help offset costs associated with data collection (some of the boards I am observing require domestic and international travel). It also means that I can attend some highly regarded international conferences, to socialise my emergent ideas and solicit feedback. Overall, the scholarship means that the research can continue apace, which bodes well for a strong outcome. If you would like to learn more about my governance research, please contact me.
Thank you Massey University, I am deeply grateful for your support.
Well done Mr Palmer
I understand that the Chairman of Air New Zealand, Mr John Palmer, will retire at the upcoming annual general meeting, after twelve years in the role. Mr Palmer became Chair in 2001, when the airline was on its knees—essentially insolvent—save a bailout from the government of the day.
For ten years, Mr Palmer worked closely with now former CEO Rob Fyfe, to rebuild the organisation to become the strong, innovative and, importantly, profitable carrier that it is today. The journey was not always plain flying however. The test-flight tragedy in southern France cast a long shadow, and decisions to close engineering facilities (with the inevitable staff redundancies) and various routes would not have been easy. On the positive side of the ledger, new safety briefing videos, new uniforms, new cabin layouts, improved levels of service, and innovative fare structures have contributed to increased demand, and ultimately, better financial performance. Clearly, the company crafted an effective strategy, and implemented it well.
Mr Palmer has led well during his time as Chair, and his peers have recognised his not inconsiderable impact, by naming him the Chairman of the Year twice, in 2007 and 2009. Well done Mr Palmer, New Zealanders owe you a debt of gratitude.
Thoughts on corporate governance, strategy and boardcraft; our place in the world; and other topics that catch my attention.