Peter Crow
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Who should drive the development of corporate strategy?

29/10/2013

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The selection and implementation of strategies that enable a company to compete effectively appears to be crucial to value maximisation. Given this, who should drive the development of corporate strategy? The value that boards can contribute appears to lie in their active and ongoing involvement in the strategic management process—through the consideration of strategic options; the development of strategy; the making of strategic decisions; and, the adequate monitoring of strategy implementation and subsequent performance. It seems to improve the quality of environment scanning; minimise the chance of selecting poor strategies; and, improve decision-making. Assertiveness and knowledge about the business also appears to be important, even though many CEOs believe their boards do not fully understand the strategic drivers to their company's success. The question of who should drive the strategy development process is less clear however.

My recent research suggests there is a fine line between the board having an active involvement in strategic matters (seen as desirable), and the board being seen to impinge on management's delegated responsibility to implement strategy. While the development of strategy is now widely recognised as a major task of the board, all of the CEOs that I interviewed claimed to control the process of strategy development, whether their board was actively involved or not. Also, company performance appeared to be enhanced when the division of labour between board and management was clearly defined and efficiently implemented. Further, the boards of successful companies appear to enjoy strong relations with management; they seek to make consensus decisions together in order to achieve strategic goals; and, the amount of political interplay between individuals appears to be low. The key point is that the board and management work together in a positive manner, and that they are both actively involved in the process of defining and deciding where and how the company should be headed.
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When stamina and focus come together...

27/10/2013

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What's the best way to cope with (and survive!) a busier than normal work week? When I was out delivering pamphlets this afternoon—for Party-by-the-Lake, a Halloween alternative which is enjoyed by 3000 people in our local community—I found myself thinking about this very question, based on my own busy week ahead:
  • On Monday, I get to relax—with my wife—because it's Labour Day
  • On Tuesday, I fly to Dunedin for a board meeting, and home again afterwards
  • On Wednesday, I fly to Sydney Australia to collect data for my PhD research, after which I fly to Auckland New Zealand
  • On Thursday, I will collect more data, before flying home at the end of the day
  • On Friday, I have two CEO interviews scheduled, followed by a trip to visit my PhD supervisor to finalise details the trip to speak at ECMLG in Austria
  • On Saturday, I have a strategic planning workshop to attend (as a participant, not a facilitator)

This schedule will see me in four cities, in two countries, in four days. Does reading it make you feel a little tired? In all, the week will involve ten hours in the air; at least seven hours waiting in airport lounges; and, several early starts and late nights. It will be mentally and physically draining, I'm sure. Hopefully, I will still be compos mentis by the end of the week! While I'm somewhat out of practice with such busy international schedules, I expect to call on several habits that have served me well when dealing with similar schedules in the past:
  • Focus: Block out everything not related to the work directly ahead. Prepare well in advance of meetings, and review notes the evening before. Plan to arrive at airports and meeting venues early, to allow a little time to relax and refocus. Check email and social media websites daily (only), lest they divert your focus.
  • Physical care: Avoid alcohol and big meals if possible. Get outside and walk, every day. Drink plenty of water, and get as much sleep as possible (flights are great for this).
  • Stamina: Think about the week as a whole, not just the day or the few hours directly ahead, and pace yourself. A tough week is akin to running a 10,000 metre race, not a 100m metre sprint. A short focus will put you at risk of not making it through the week. Good levels of physical fitness is a real blessing here—which is why I try to get out on my bike two or three times every week—although this requires a pre-emptry commitment because, unfortunately, physical fitness can't simply be "turned on".

So there you have it, some of my techniques for dealing with a busier than normal schedule. How do you cope with such weeks?
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When "tongue-in-cheek" cuts close to the bone

23/10/2013

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A somewhat satirical opinion piece, written by Joe Bennett, caught my eye this morning. As I read it, over my morning coffee, I smiled, for the opinion piece is very well written. But afterwards, as I sipped on my coffee again, I winced, for the images conjured in Bennett's mind and exposed through prose, cut a little closer to the bone than many who are au fait with boards and governance would care to admit.

Most of the directors that I know, and boards that I am familiar with, work hard, as they seek to optimise business performance and build shareholder value. They read their board papers carefully and critically before meetings, prepare well and ask searching questions. They also spend time understanding the business of the business, so they can contribute meaningfully to strategic discussions, and make informed decisions about the strategic future of the business. In other words, they engage actively in the process of governance.

However, some (perhaps the majority?) directors and boards still don't engage in this way. They adopt a more passive modus operandi of monitoring past performance. They spend little, if any, time considering strategic options and marking out the future of the business. In extreme cases, they behave as Bennett suggests. Sadly, the self-serving, fat cat imagery described by Bennett will remain part of the psyche—for as long as it continues to describe how some boards behave at least. I long for the day that such imagery becomes folklore, of the way things used to be, but no longer are.
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On the separation of governance and management

18/10/2013

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The assumption that governance and management should be held separate has been a cornerstone of boardroom practice for decades. Statements like "We can't go there, that's management", and "Is that management or governance?" are commonplace in boardrooms. The assumption, which is based on the agency theory of governance, has dominated governance research as well. But I think the assumption is flawed. Allow me to explain:

Agency theory describes the situation where the board is a proxy for owners who are not involved in the day-to-day affairs of the business. The separation of owners and managers, as described in Fama and Jensen's seminal paper, can lead to conflict because the actions of managers can depart from those required to maximise returns to owners. Structures and control mechanisms can supposedly mitigate the problem of divergent objectives. Much research has been undertaken to understand this, to try to identify the best configuration through which to minimise the problem and optimise company performance. Correlations between observable variables have been produced (independent directors, board size and gender, amongst others), but no consistent improvements in, nor predictions of, company performance or value creation as a result of these mechanisms have been reported.

The dearth of any conclusive evidence to link separation of governance and management with performance should not be a surprise. Structures and controls cannot guarantee effective governance, nor can they assure any future company performance. In fact, an inspection of corporate failure data suggests that the separation of governance and management has been the source of much confusion. The various defensive screens that have been erected by boards in response to failures—including claims of paucity of information; poor implementation of strategy; and, management fraud—expose the shortcomings of the core assumption. Consequently, the question of whether a clear separation between governance and management is the best model through which to achieve the organisation's aims needs to be revisited.

I've been working on this issue for about 18 months now, as a core theme of my doctoral research. My thoughts are starting to take shape, to the extent that a paper I've written is being peer-reviewed for the International Conference on Management Leadership and Governance to be held in Boston, USA in early 2014. A copy of the abstract is available here. If you'd like to provide some feedback, I'd love to hear from you.
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When the Board and CEO hold different views...

18/10/2013

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Periodically (or perhaps more often than one would care to admit?), corporate boards and CEOs have differing opinions about how best to drive performance. Most of the time, one or other of two options follow: either the board holds sway—it is the "alpha male" who employs the CEO after all—or the CEO gets their way. At the end of the day, it probably doesn't matter who "wins" as such, so long as the parties can find common ground and reach agreement. The reaching of common ground may take time, but it needs to be found, for the good of the company. But what options are available if agreement is not achieved? The CEO could decide to fold, and implement the wishes of the board. This may mean implementing decisions that they don't support, a position which can be uncomfortable. Alternatively, the CEO could continue to press their case, albeit at the risk of upsetting the board and the losing its confidence. If the situation is bad enough, whereby the parties are and remain poles apart on a substantive issue, then the CEO needs to do the right thing by considering whether they can continue in the role.

The key to making meaningful progress is the organisation's core purpose and overall strategy. With a clearly stated purpose and an agreed strategy in place, then strategic options and various proposals that arrive at the board table can be debated in the context of an agreed reference point. Either they fit, or they don't. Without such reference points in place however, opinions and personal preferences, about how to drive performance, hold sway. And we know that our opinion is always right, don't we? This latter option, of operating a business without a clearly stated purpose and strategy, is a recipe for trouble. Yet many boards and CEO try to run their businesses without such reference points. Why? 
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What types of decisions should boards make?

11/10/2013

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One of the crucial tasks of a board of directors—as they discharge their duties to optimise the performance of the organisation in accordance with the shareholder's wishes—is to make decisions. While most directors and boards (that I have spoken with) agree with this viewpoint, there seems to be far less agreement about what sort of decisions this means boards should, and should not, make. Should boards only make strategic decisions (those that relate to the achievement of corporate objectives and affect the long term performance of the organisation), or is the making of important operational decisions acceptable?

I have been pondering this question for several months now, in the context of the data being collected for my doctoral research and the wider body of literature. I've concluded that boards should limit themselves to those decisions that have a direct impact on their duty (to optimise performance). As such, boards should make strategic decisions only. Boards that move beyond this and make operational decisions are, in effect, becoming involved in the operation of the organisation (the implementation of strategy)—which is dangerous because that is the job of management. Examples of strategically important decisions might include:
  • recruitment of a CEO
  • approval of corporate strategy / strategic plan
  • raising of new capital to fund the approved strategy

None of these decisions are straightforward. They require time; the gathering of (often) considerable amounts of information; high levels of cognitive ability to analyse and process options; and, wisdom and experience. Given this, an effective board, operating on the basis of optimising performance based on the making of strategic decisions and the monitoring of performance against strategy, may only make 2–4 strategic decisions per year. Does that sound reasonable or feasible? I'd value some feedback on this one!
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On the professionalisation of governance

8/10/2013

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The Institute of Directors in New Zealand is embarking on a metamorphosis, to transform itself from a membership organisation into a professional body. This is great news. While the Companies Act 1993 and various other statutes provide legal remedies for fraudulent behaviour, there is no mandatory framework to ensure high standards are maintained across the cohort of directors. In contrast, other professions—including doctors, lawyers and accountants (for example)—have had compulsory competency standards, continuing professional development and discipline measures in place for many years. The proposal, to introduce a Chartered Director framework, seeks to address this gap.

The Institute has invited me to join an External Review Group, which is being formed to provide an informed, independent and sensible external perspective. To be asked to contribute to the professionalisation of one's vocational group in this way is both exciting and humbling. I'm looking forward to it though, because this initiative is likely to have a significant impact on the practice of governance and, hopefully, business performance. 
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Maintaining contact with reality

2/10/2013

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Universities provide ideal conditions within which eccentric personalities—learned but oft socially-challenged individuals with a tenuous connection with the real world—tend to congregate. The article Academic Tumbleweeds summarises the situation eloquently. 

Over the years, I too have criticised those academics for whom the pursuit of knowledge is the end, because social ineptness, eccentricity and misguided thinking often follow. This is not to criticise universities per se, for they have a crucial role to play in society. By way of example, it is unhelpful, even perhaps unethical, for business school academics to pursue a neo-Marxist anti-business agenda—but that is how some, whose primary interest is the pursuit of knowledge, behave. It's almost a sport it seems.

One of my concerns in embarking on my journey was to avoid becoming caught by the stereotype—thus my decision to work from home and to intersperse other activities, in order to maintain contact with reality. These other activities have included a few teaching, facilitation and short advisory assignments, and a couple of board appointments. Is it a reasonable approach? No doubt the proof will come when the usefulness of my research is tested in the real world. Hopefully, it won't be found wanting and the somewhat derogatory academic tumbleweed label will not be required.
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Peter Crow PhD CMInstD

Company director | Board advisor
© COPYRIGHT 2001–23. TERMS OF USE & PRIVACY
Photos used under Creative Commons from ghfpii, BMiz, Michigan Municipal League (MML), Colby Stopa, MorboKat
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