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The ugly face of conflicted interests in local council governance raised it head in Wellington again today. In September, I suggested that it was time for Councils (and Councillors) to resolve the conflict of interest that exists when they appoint themselves to subsidiary company boards.
This morning, the Dominion Post published a front page article stating that Wellington City Councillors had voted to axe perks for board appointments. This sounds like a step in the right direction, however the decision will only become effective from the next term! Further, Councillors can (and probably will) still appoint themselves to plum roles. This smacks of cronyism and the feathering one's nest for personal gain. It's disappointing that the Council has not bitten the bullet by moving immediately to appoint independent directors to the Boards of subsidiary companies. The appointment of independent directors, through a robust appointment process, will achieve at least three positive outcomes:
Every day, news stories and articles from a plethora of sources arrive in my email inbox and news reader software. The deluge is self-inflicted—I need to read widely for my doctoral studies. Mind you, having a voracious appetite for general knowledge doesn't help much!
Every now and again, an article seems to lift itself off the screen, seemingly to attract extra attention as my eyes scan down the headings. Today, one such article was the "Top 100 global thinkers for 2012" list, published by Foreign Policy magazine. I looked at the FP list, because I was fascinated to know whether Aung San Suu Kyi of Burma or the Pakistani student Malala Yousafzai featured anywhere. To my surprise (and delight) both appeared in the top ten. It seems that, in 2012 at least, global influence is strongly correlated with politics and activism. With one exception (Sebastian Thrum—a computer scientist who has been working on the driverless car), the top ten are all activists or politicians fighting for various causes. It's not until you read further down the list that musicians, economists and business people start to appear. The point of this muse? Perhaps if you aspire to become globally influential, you should turn to politics in a volatile state, or embrace a vital cause. But most people motivated by these endeavours couldn't care less about fleeting appearances on "influence" lists. Rather, their primary motivation is the cause they've chosen the invest their hearts and souls in, and the enduring impact of their efforts. And therein lies a lesson for us all, as we ponder our role in society and contribution to it. UPDATE: more filings + latest business confidence results published since original post.
The annual and half-year reports emerging in the New Zealand market this week appear to be generally soft—perhaps indicating that the economy remains relatively fragile, and that strong economic growth may still be some way off.
While business confidence is reportedly improving, more strength is needed in the economy. What do you think the trigger to tip the economy from "fragile" to "strong" will be? Thanksgiving marks the beginning of the Holiday Season in the US. Sinter Klaas is not far away for Western Europeans (5 Dec). Indeed, today marks one month until Christmas Day. With the cooling of the weather in the Northern Hemisphere, and its warming in the Southern, many people start reflecting on the year past, and the year ahead. On their hopes and dreams, and on the giving and receiving of gifts.
In the spirit of the season, and the general theme of this blog, what might your corporate governance wish be this year?
I'd like to think that 2013 will herald a sea-change for governance; the year in which the boardroom troubles of recent years were consigned history; the year in which Boards got on with the business of growing companies, making them strong and improving societal wellbeing as a result. Gosh, that sounds grand. Is this too much to wish for, or is this something worth striving for? I've been conducting an informal survey in recent weeks—asking directors and managers about the importance of strategy, and the extent to which the Board of their company is involved in strategy formation.
The overwhelming majority of respondents have told me that the Board has a key role to play in [forming] strategy. However, after listening further and checking, I've discovered what appears to be a yawning gap between what respondents claim and what actually occurs in practice. Surprisingly few Boards actually spend much time on strategy at all. Rather, they concentrate on monitoring and controlling the past, on managing risk and on ensuring compliance. Why is there an intent–reality gap when it comes to governance and strategy? And why is it so large? Surely, if Boards have a key role to play in forming strategy, they would be directly and heavily involved in the process? When pressed, Board members said they expect management to form strategy, for consideration and approval (or otherwise) by the Board. In reality, they spend the bulk of their time reviewing business performance. Is this smart? Looking backward is hardly a good technique when the goal is to drive forward. If Boards are serious about maximising the performance and value of the organisation they govern, you would think they would spend the bulk of their time on strategy and the consideration of strategic options. What do you think is going on here? Is this another case of board members offering the so-called "correct" answer because they don't want to be shown up? Or does "consideration and approval" equate to "appropriate involvement"? Or is some other psycho-social interaction driving behaviour? I'd love to hear from you! What role should governance (especially Boards) play in sport? Should sporting codes be governed any differently than commercial businesses or not-for-profit agencies?
These questions are raised from time-to-time—often by the media and commentators, and especially when a team or code is not doing so well. Yet another case was reported today, this time concerning New Zealand Cricket. Dion Nash is reported as saying "the board is failing in its duty to lead the game in the right direction." Such criticisms are not new. The challenge is in finding and implementing the remedy. The moving parts that make up a sporting code are familiar—a board, administration, management, players (called workers, employees, volunteers in other contexts), spectators (customers, consumers). In my view, sporting codes are just another form of organisation, albeit with goals specific to their context. Therefore, they should embrace [sound] organisational constructs and practices, including governance. Dion Nash's call for the NZC Board to take control of the sport's destiny (and ultimately the Black Caps' performance) via sound top-level planning (strategy) has much merit. The development of strategy is now widely accepted in academic circles to be a major task of the Board. To do this effectively, Boards need to be comprised of people who understand the market and emerging trends, and understand and participate in the development of strategy. In NZC's case, that means appointing suitably knowledgeable and competent people to the Board, and soliciting well-structured contributions from various specialists. The time to act is now. But will the NZC Board be so bold as to make the necessary governance adjustments—for the good of the game? I had an interesting day at the office (so to speak) today. Today was the day I was scheduled to present and defend my PhD research proposal to the Confirmation Panel at Massey University. After a pleasant 90-minute drive to the campus, I arrived with sufficient time to collect my thoughts over a coffee before meeting with the panel. The presentation seemed to go OK, but the defence was tough going and I struggled to answer a few questions as well as I should have. The Panel identified several rather significant holes in the proposal, most notably around the proposed methodology and the linkage back to the research question. In their view, the proposal was far too ambitious—it described a "lifetime's work". The Panel also asked me to think hard about the type of contribution I hoped to make, because the proposal wasn't 100% clear. So, I have a fair bit of soul searching and critical thinking ahead—to get to grips with some of the Panel's comments and suggestions, prior to reconceptualising (the Panel's word) the proposal over the coming weeks.
Notwithstanding the criticisms, the Panel agreed the research was very worthwhile, and that I was capable. Consequently, they decided to confirm my enrolment, subject to the rework being completed. Yes! The panel's decision means I've achieved a major milestone in my doctoral journey—the status of a fully fledged doctoral candidate! Woo-hoo! I've been involved in several discussions about risk management recently, including one at a Business Leaders Forum hosted by Grant Thornton. Most of the discussions have centred on the struggles that Boards face in managing risk—and more specifically, ensuring they are adequately informed. In listening to people, I've discovered many Boards struggle in this area.
Let's tackle the second question first. In most organisations, management has the responsibility to implement strategy. Therefore, they also have the responsibility to identify and manage risk. In doing so, management should raise (with the Board) all risks that have the potential to compromise their implementation of strategy—together with mitigation plans. Anything with a strategic impact should be reported. If Boards are not receiving relevant risk information, they should go looking for it. That leads nicely to the first question. In my [direct though anecdotal] experience, most risk information tends to arrive via management. Though the common pathway, it is not without its problems. Many Risk Managers report up though the CEO. Even external Auditors tend to be retained by the CFO and report via the CEO. And therein lies the problem. Who decides what gets reported to the Board? Why would a CEO notify a risk that exposes him/her to extra work and/or uncomfortable questions from the Board? Oh, the foibles of human nature... Whereas most Boards receive risk information via the CEO, several of the high performing Boards that I've worked with seek and debate risk information directly—from staff, customers, outside advisors. They also do so in the context of strategy. Boards that open several channels are more likely to be adequately informed and, consequently, be better positioned to assess strategy implementation and ensure risks are managed effectively. Boards need to ensure that they are adequately informed, and the best way to do that is to work directly with a range of internal and external sources. While this approach sounds straightforward, it has the potential to cause angst amongst management if not handled well. The CEO should be kept fully informed of risk discussions, and, ideally, be present when external advisors make presentations to the Board. One final point. If risk mitigations are not being implemented effectively, and the achievement of strategy is being compromised as a result, then the Board should replace the CEO. Over the last 18 months, I have subscribed to what seems like an increasingly eclectic range of newsfeeds, on-line magazines, blogs and podcasts. Some of the material relates directly to my governance research (OK, quite a bit does), and some of the subscriptions are pure indulgences—to take my mind off the former. I've discovered that, in reading widely, I've learnt a little about a lot of things. Interestingly, some of the "unrelated" material has actually been helpful in terms of piecing together disconnected research ideas that I've had floating around. On the flip side, several of the subscriptions have turned out to be "noise" to me, so I've cancelled them.
One article that arrived in my Reeder application today was entitled The history of humans is the history of technology. Titles like this tend to catch my eye, if for no other reason than they are quite provocative. I quickly discovered the article was an interview with a writer I've not heard of before—Robin Sloan. Hope Mills, the author of the article, interviewed Robin Sloan via email. Yes, via email! In her introduction Mills writes: Robin Sloan is the kind of writer/thinker you want to take out for a beer and ply with questions. About writing. About reading. About life. He is frightfully creative and incredibly open-minded. He also happens to tell really good stories. Below is our conversation, conducted over email, about stories, technology, and giving up the iPhone. With an introduction like this, I was hooked. I read the article right through—twice—and have come away with much to ponder. If you can spare a few minutes over the weekend, grab yourself a coffee and read the article. It just might set you thinking as well. If it does, I'd love to hear what you got out of it. Many commentators—academics and practitioners alike—have suggested that corporate governance is an complex task. I agree. In the context of maximising company performance, Boards must satisfy many demanding (and often competing) priorities: the legal and compliance requirements of their jurisdiction; monitoring of company performance; management of risk; future directions (strategy); hiring (and sometimes firing) of the CEO. It's a busy job, and it's one that takes time and commitment to do well.
The steady stream of corporate failures in recent years, and board indiscretions, suggests many Boards are simply not doing their job well however. Why is this?
Researchers have investigated many aspects of governance, including structure, composition and boardroom behaviour, in an effort to understand how boards work and how they contribute to performance. Independent directors have been held up as crucial to maintaining distance from the CEO and overseeing performance effectively. Gender (and other) diversity has been promoted heavily in many quarters. The forming of a strong team through high levels of engagement and "desirable" behaviours has also been explored. As yet, none of the research has exposed any conclusive results in terms of increased company performance. In my view, the prevailing theory of governance (agency theory), which underpins most governance frameworks today, is flawed. It is an adversarial model that assumes management cannot be trusted and needs to be closely monitored. This theory (and various incarnations arising from it) has not delivered the results the original proponents expected—despite many decades of trying. Rather than continue to dogmatically pursue a flawed model, we need to move on. The goal posts need to be moved—from a focus on compliance, structure, composition and behaviour, to a focus on strategy and value. The notion of a strategic board suggests a focus on future performance and value maximisation; on engaging with management and other stakeholders to develop strategy (together, not in isolation); on high levels of engagement, to understand the business and the market; on critical thinking and an independence of thought; and, on robust debates which explore a wide range of strategic options (diversity to avoid groupthink). Imagine what Board meetings might be like if the focus changed. They'd probably last longer. There may be heated discussions. Directors would be read their papers before meetings, and they would be engaged. Necessarily, directors would sit on fewer Boards, because they'd be spending more time (making better decisions) on each one. But perhaps, if Boards were bold enough to change their focus, they might become more effective. Perhaps. Here's hoping. |
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