With 2018 consigned to history and holiday season break all but over, most business leaders and boards of directors are turning their attention to what the year ahead (and beyond) holds. Even a cursory glance reveals a plethora of issues that may have an impact on business continuity and, potentially, continuance.
Consider these indicators:
And that's just the start.
As is usual at this time of the year, business and governance commentators have stuck their collective necks out, promulgating a variety of predictions given the indicators (as real or imagined as each indicator may be); each behaving as if they possess levels of predictive insight beyond what a reasonably educated person might be able determine by tossing a coin. But do they? They cannot all be correct—in fact, none may be.
The challenge for boards, of course, is working out how to respond.
What is becoming increasingly clear is that boards have become confused by what's going on around them. Increasing numbers have grown quite tired of 'conventional wisdoms' and so-called 'best practices' (plurals intentional). Some have responded by taking defensive positions, and others are boldly trying things without first understanding the contextual relevance.
My response to enquiries from boards is straightforward: open your eyes to the possibilities, think and act strategically, but don't be impetuous.
Helping boards respond well typically involves sharing insights from research and practice; facilitating discussions; and providing contextually-relevant and evidence-based guidance. To this end, I will be travelling extensively again in 2019: the following international trips are confirmed in my diary, and more are pending:
If you would like to discuss options to lift the effectiveness of your board in 2019, please get in touch. I look forward to hearing from you.
Much has been written about the notion of value creation since the phrase became 'hot' in business circles several years ago. Today, one does not have to listen for long to hear questions such as "Does XYZ add value?' or "What's our value proposition?"The term is dropped into sentences hither and thither, flowing from the tongue freely, as if it were an old friend. This implies that 'value creation' is front-of-mind; something that is not only topical but also to be striven for.
But what is 'value creation', and how is value created? Here's one view:
Value creation is the primary aim of any business entity. Creating value for customers helps sell products and services, while creating value for shareholders, in the form of increases in stock price, insures the future availability of investment capital to fund operations. From a financial perspective, value is said to be created when a business earns revenue (or a return on capital) that exceeds expenses (or the cost of capital). But some analysts insist on a broader definition of "value creation" that can be considered separate from traditional financial measures. "Traditional methods of assessing organizational performance are no longer adequate in today's economy," according to ValueBasedManagement.net. "Stock price is less and less determined by earnings or asset base. Value creation in today's companies is increasingly represented in the intangible drivers like innovation, people, ideas, and brand."
This description, from Reference for Business, reveals that 'value' can mean different things to different people. As with many concepts within the social sciences and liberal arts (of which management and governance are expressions), context is crucial. Clarity of language is needed if leaders are to be effective and businesses are to prosper. Listeners and readers must be able to comprehend messages readily. The following questions provide a useful starting point for such an enquiry:
Rather than make assumptions or assertions (think how often have you heard people claim a 'unique value proposition'), put these questions to the beneficiaries (because, rightly understood, the 'value' of anything is determined by the recipient not the creator).
Start your enquiry at the 'top' of a company. Boards should sit with shareholders and ask (or propose, if the shareholder is unclear) what 'value' looks like to them. This is the 'core purpose' question. Responses might include increased share price; a long-term market position or business model; increased market share; a social priority; or some combination of these, or even something completely different. Senior managers and staff should meet with customers (or prospective customers) and ask the same question. Ask staff themselves as well: the motivations of employees are likely to be different from those of shareholders and customers. 'Great solutions' that 'add value' to are highly unlikely to hold any sway at all if the intended beneficiary does not recognise, or is not interested in, the 'value' that is supposedly being offered. As with strategy, boards need to take the high ground, by ensuring that value created for one recipient does not erode value elsewhere. Boards need to work with management and together become crystal clear about value in a holistic sense: what it is, who the recipient is, and how it is created.
Once the value matrix (what, to whom, how and why) is understood and agreed, the answers need to be communicated in a clear and concise manner, so that effort and expectations can be aligned accordingly.
Finally, a note to boards: You have an ongoing responsibility to ensure that purpose, strategy and managerial and operational activity are not only aligned, but also the desired value (outcome, strategic goal) is actually being achieved and that it is recognised by the intended recipients. The importance of ask probing questions cannot be overstated.
An earlier version of this article first appeared in 2015.
Ten days ago, I was in Vienna to attend the Global Peter Drucker Forum, as an observer and participant. However, at the last minute—actually, three days before the Forum—the organisers asked me to 'jump in' to cover for a panelist who was a withdrawal. The session, which was recorded, was entitled "Managing like you have skin in the game". I was asked to provide a boardroom perspective. My comments start at 41m 35s:
The third stopover of my trip across Western Europe sees me in the beautiful city of Vienna, for the Global Peter Drucker Forum on 28–29 November. This year, the organisers expanded the programme to include a half-day 'innovation leadership summit' (summarised here) and an afternoon of round table and workshop sessions (more on that later).
About 170 people gathered at the House of Industry, the headquarters of the Federation of Austrian Industries. The beautiful building was inaugurated by Franz Josef in 1911. The format of the summit was straightforward: three panel-based sessions—discussions that explored innovation from three perspectives. A lot of thought-provoking material was shared. Here's a few of the insights that stood out (for me, anyway):
A new innovation landscape
Julie Teigland, Regional Managing Partner of EY Germany, Switzerland and Austria, chaired the first session. Panel members included Curtis Carlson, Founder and CEO of The Practice of Innovation and former CEO of SRI (who developed SIRI); Rita McGrath, Professional at Columbia Business School; and Georg Kopetz, Co-founder of Executive Board TTTech.
Insights: McGrath kicked off the discussion by asserted that strategy and innovation "go together". We can't talk. about one without also discussing the other. 'Digital' is a game-changer because it undermines many of the obstacles (barriers to entry) of market-based contracting. Barriers to entry and the ability to scale are undermined. With it, a fundamental shift, from firms to markets, is underway.
Carlson picked up the discussion by asking whether entrepreneurship is the 'right' thing to be focused on. He noted that, since 1987, fewer than 20 per cent of startups have created any value at all. The problem is that entrepreneurs are pursuing two vital activities in the wrong order. The creation of value needs to precede entrepreneurship. When entrepreneurs focus first on value, then magic can, and often does, happen.
Kopetz entered the discussion by asserting the 'born digital' means 'born global'. There is no option. If you are operating in the electronic world, sovereign borders are meaningless. However, scaling is tough; and collaboration is necessary. Interestingly, nearly all major innovations and step changes occur outside major companies, despite such companies being better resourced the most start-ups.
Making innovation work
Denise Kenyon-Rouvinez, Director of the IMD Global Family Business Center, chaired the second session. Panel members included Betsey Zeigler, CEO of 1871; Alex Osterwalder, Entrepreneur and Business Model Innovator; Yoshi Takashige, VP Marketing Strategy and Vision at Fujitsu; and Hal Gregersen, Executive Director of the MIT Leadership Center and MIT Sloan School of Management.
Insights: Having set the scene in the first session, the purpose of this session was to 'talk dirty'. Innovation is most likely to occur when people crash into each other. When the do, they tell stories, share ideas and commit to dreams. The natural; outflow is an intelligent human-centric society; one that places people at the centre, not processes or things.
Gregersen added that the 'digital economy' emerged, in effect, from the convergence of globalisation, innovation and transformation. Being new, all of these elements operate on the edge of uncertainty. Success (in terms of establishing capability) is dependent on leaders being happy to be wrong, create uncomfortable spaces and remain quiet as they listen carefully for weak signals. Yet somewhat paradoxically, isolation (quiet) is the enemy of innovation; and discovery depends on contact.
Linda Hill, Professor of Business Administration at Harvard Business School chaired the third session just before lunch. Panel members included Vineet Nayar, CEO of Sampark Foundation; Peter Oswald, CEO of Mondi Group; Gilbert Rühl, CEO of Klöckner & Co SE; and Helmut Reisinger, CEO of Orange Business Services.
Insights: The purpose of this session was to listen to established chief executives as they offered coal-face insights about innovation, leadership and 'getting things done' in an increasing volatile world. A natural curiosity, combined with a well-developed propensity to both ask questions and listen carefully to answers, is crucial if the protagonistics are to be effective leaders.
Standing back, this Summit created space for interactions between delegates and with the speaker panel. As such it provided a wonderful 'on ramp' to the main event, the Global Peter Drucker Forum, but more on that soon.
My speaking and advisory tour of several European cities got off to a great start on Sunday evening. The first port of call was Stockholm. Liselotte Hägertz Engstam, an established director and board chair in the Nordics, hosted a seminar at Tändstickspalatset; a great venue. The theme was [the] Board's role in innovation strategy and governing new digital business models. Some 35–40 directors and board chairs with just over 100 board mandates between them, gathered to hear two speakers, namely, Stephanie Woerner and yours truly. The following paragraphs tell the story.
Digital business model and board contributions
Stephanie Woerner, a Research scientist at Sloan School of Management in Boston, explored value creation in the digital economy. She observed that many (most?) corporations were somewhat lumberous, offered rather average customer service and, tellingly, were ill-equipped to take advantage of emerging 'digital opportunities'. As such, they are at risk of losing out to younger, more nimble businesses. Woerner identified six questions that companies need to resolve if they are to compete effectively in the digital economy:
Then, Woerner spoke about digital savviness, making two points along the way. First, 62% of directors claim to be 'digital savvy' (and, presumably, ready to tackle emergent challenges), but only 24% are indeed savvy. Second, the presence of three digital savvy directors is sufficient to drive improved [financial] performance outcomes. With that, I sat up. How might a quantitative analysis be a reliable predictor of a contingent outcome? A person at the table I was seated at was similarly exercised. She interjected, asking what the term 'digital savvy' meant. "Great question. We used the experience and qualifications of board members as a proxy." Woerner went on the explain how this has been arrived at: a keyword analysis of resumés (searching for words such as technology, CIO, disruption, software). The presence of such words on a resumé was deemed sufficient to categorise someone as being digitally savvy. You could have heard a pin drop.
While Woerner's assertion (that boards need to be knowledgeable of emerging technology trends) is intuitively reasonable, the underpinning research appeared to be flawed. Others seemed to agree, suggesting it is more important for directors to have a curious mind, read widely and ask probing questions. Notwithstanding this, Woerner's core point was on the money: boards need to get up to speed with technological innovations and the opportunities they present.
Making a difference, from the boardroom
I spoke second, the task being to both build on Woerner's comments and add some insights of my own. I started by acknowledging today's reality, that change seems to be the only constant. Woerner set a great platform so there was no need to labour the point, except to say that directors need to work hard to keep up. Importantly, contemporary recommendations including so-called 'best practices' provide little assurance of better board practice much less improved firm performance.
An important duty of all boards is ensure the future performance of the governed company. If boards are to make a difference, they need to make informed decisions about the future direction of the company, and verify whether desired performance outcomes are actually being achieved or not. Four crucial questions that boards need to ask were tabled, these being:
After suggesting some practical considerations, I introduced the strategic governance framework, an option for more effective contributions (as revealed from my doctoral research and subsequently lauded by both practicing directors and scholars around the world).
The seminar presented two perspectives, namely, that directors need to become a lot more digital savvy if they are to contribute effectively in the boardroom, and that effectiveness is a function of director capability, board activity and underlying behavioural characteristics of directors, not what they look like.
Board readiness to lead well in the emerging 'digital' world is a concern—made worse given boards tend to pay much more attention to historical performance than wrestling with the [largely unknown] future. This is the elephant in the room. 'Digital' is but a symptom, I suspect. If boards are to have any hope of influencing firm performance, what they do in the boardroom (i.e., corporate governance) needs to change.
In a couple of weeks, I'll be in England and Europe, for the third and final time this year. The schedule includes attendance at two conferences, delivery of two keynotes and a bevy of meetings, as follows:
While the schedule is fairly full, some gaps remain for additional meetings (in London).
If you would like to meet, please get in touch. I'd be glad to discuss any aspect of boards, corporate governance or effective board practice; explore a research idea; or respond to (future) speaking or advisory enquiries.
In business, as in life, the task of exerting control is commonly perceived as being one of exercising limits; of saying 'no' and imposing constraints. Such perceptions are well-founded. Check these verb usages of 'control', lifted straight from the dictionary:
If you have spent much time in boardrooms, you'll know that director behaviour tends to be consistent with these definitions, more so if the chief executive is ambitious or entrepreneurially-minded (the two attributes are not necessarily the same). When asked, board justification for exercising caution is straightforward: to keep the chief executive honest and to keep things 'on track'.
Such an understanding—holding management to account—seems admirable. Monitoring and supervising management is one key task (of four) of corporate governance after all. But does a strong hand actually lead to better outcomes? More pointedly, how might the exercise of restraint and limits advance the purposes of the company (noting the board is responsible for ensuring performance goals are achieved)? Such conduct is analogous to applying the brake when the intention is to drive on. A growing body of academic and empirical evidence suggests that a strong hand, like increased compliance, may actually counter-productive.
Rather than persist with what is demonstrably a problematic approach, it might be more fruitful for boards to consider another perspective. What if control is re-conceived in positive terms (namely, constructive control), whereby the board's mindset is to provide guidance (think: shepherd or coach) by ensuring the safety of the company and steering management to stay focused on agreed purpose and strategy? Might this deliver a better outcome?
Emerging research (here, but contact me to learn more) suggests the answer is 'yes'. Strongly-engaged and strategically competent boards that display high levels of situational awareness as they debate issues from multiple perspectives and make informed decisions in the context of the long-term purpose of the company can make a difference. Constructive control is one of five important behavioural characteristics of effective boards identified in this research.
Research is a funny thing. On one hand, experience can be greatly helpful: knowing what one is looking for or expecting to see is a boon. On the other, experience can be a hinderance: knowledge often resulting in bias and preconception, and the very real possibility of missing vital clues. This is one of the great dilemmas for board and governance research.
Some forty years have now passed since researchers started investigating boards in earnest. That an answer to the question of the role of the board and how they influence firm performance (i.e., what corporate governance is and how it is practiced) remains elusive is an indictment on the research community. Directors and boards need clear and well-founded guidance so they can become effective in role.
Medical research is conducted by medics; cultural research is conducted by anthropologists; and, engineering research is conducted by engineers, so why is board research typically conducted by academics with little if any business experience? How might a researcher who has never been inside a boardroom hope to recognise the normative practices of board meetings? Or that a subtle interaction between two directors might actually be material to a pending decision?
That most board and governance researchers have never been in a boardroom or served as a director is alarming. Yes, gaining access to observe boards directly is difficult to achieve. But to restrict board and governance research to counting isolated attributes of boards from outside the boardroom is folly. To be useful, recommendations need to account for the socially-dynamic nature of boards and the behaviours of directors (both of which can only be reliably discerned through direct observation).
If the question of explaining how boards influence firm performance is to be answered, three things are needed:
After a longish hiatus—nearly four months—Musings is back. Thank you to regular readers and supporters who have asked about the radio silence. The explanation is straightforward: a busy period of speaking and advisory engagements, research and board work left precious little time to ponder.
But that is history now. My intention is to pick up where I left off in early August, by posting on topical matters and emerging trends; challenging orthodoxy and, importantly, exploring how boards might become more effective in their pursuit of high firm performance and sustainable wealth creation.
Thank you for your interest in Musings. Your feedback and commentary is appreciated.
What can Plato, a philosopher who lived over 2400 years ago possibly teach the leaders of modern companies? After all, the modern form of company only came into being in the last few hundred years, two millenia after Plato died. As it happens, when it comes to strategy and decision-making, Plato can teach us a lot—a point made by the author of this article. Here's an excerpt:
Plato likened the guidance of a state to the navigation, piloting, and crewing of a ship at sea. The analogy holds for the strategist and a war effort. The strategist is the navigator with skills that few others have but he may not always be the captain who leads the crew, those that must actually carry out the strategy. Strategy is not responsive to constant or wild adjustments; the hand on the rudder must be subtle and steady; the mind behind it focused on the north star of the political end state. It is for this reason that one could expect that the navalist’s mind more easily grasps the nature of strategy than that of the continentalist. For centuries, ship’s captains engaged in strategy both military and diplomatic with little guidance and no recourse to seek more just by the nature of communications and the distance that a ship could carry them.
This is one of the best summaries that I have read in a long time. Though written in the context of naval strategy and referring to Plato, the roles and tasks described here are directly applicable to companies and boards. The author writes that strategy (strategos: the art of command) is something developed at senior levels, with the long-term purpose (north star) in mind. The captain's job is to implement the strategy. Teamwork between the strategist and the captain is both expected and crucial.
The correspondence to companies and boards is stark. 'Guidance' (first sentence) corresponds to governance (kybernetes: to steer, to guide to pilot), for example. The senior-most decision-maker is the board of directors; the chief executive is 'the captain'. In naval terms, the best chance of making progress towards the 'north star' occurs when the strategist and captain collaborate closely—and so it is with the modern corporation.
Thoughts on corporate governance, strategy and effective board practice; our place in the world; and, other things that catch my attention.