ESG (environmental, social, governance), an indicator and measure of corporate priorities and performance, has become topical in business circles, very topical. Its emergence has coincided with a rising tide of concerns about the effects of the doctrine of shareholder maximisation, as espoused by Milton Friedman some fifty years ago. A bevy of academics, consultants and politicians have responded by jumping on a bandwagon; much has been written, arguments abound. The objective of much of this rhetoric seems to have been to establish a counterbalance to perceived excesses of capitalism (because capitalism is evil, apparently). 

The idea of using a range of financial and non-financial measures to assess company performance is not new. It was normal practice until the early 1970s. But things began to change relatively quickly after Friedman's thesis was published. A broad church of managers, boards, shareholders and activists embraced the thesis (with evangelical zeal in some cases) to justify a primary, even exclusive, focus on profit maximisation. And with it, interest in other (non-financial) indicators of corporate performance waned—until the emergence of corporate social responsibility (CSR)  and, more recently, ESG.

SEE (social, economic, environmental) merits close consideration. It reinstates the economic dimension to its rightful place, alongside the social and environmental dimensions. Thus, the three capitals that fuel sustained business performance, economic growth and societal well-being are re-united. If a company is to thrive over time (read: achieve and sustain high levels of performance, however measured), all three capitals need to be measured, managed and protected, as Christopher Luxon so ably asserted, in 2015. 

And what of 'G'? Rightly understood, governance is about providing steerage and guidance (a lesson dating from the Greeks), the means by which companies are directed and controlled (hat tip to Sir Adrian Cadbury). As such, governance is a function performed—not a consequential outcome or result—and Drucker's maxim should be applied.

So, to the courageous question: has the time to SEE beyond ESG arrived? I think so.

A situation developing at Hutt City Council (a local council not far from where I live) is instructive for boards everywhere. It concerns a proposal to make a grant to Hutt Valley Tennis, a tennis club, to assist with the redevelopment of its tennis facility. The entity and the size of the grant, $850,000, are largely immaterial. What is significant about the matter is that one of the Hutt City councillors is married to the president of Hutt Valley Tennis (a potential conflict of interest, perhaps?), and that the decision required a casting vote by the Mayor to break a deadlock. The local newspaper has just reported the matter, and a newspaper columnist has chimed in offering an opinion as well.

On the conflict of interest: Questions have been raised as to whether Councillor Milne had a conflict of interest, because his wife is the President of the organisation that stands to benefit from the proposal. Milne registered his interest but denied there was a conflict of interest because his wife is a volunteer, and neither he nor his wife has a financial interest in it. But financial interest is not the appropriate test. A more appropriate test is whether the person can reasonably be expected to make an independent and objective decision, or other factors might lead to bias. Hutt Valley Tennis identified a potential conflict, and Milne registered interest. Yet Milne proceeded to participate in the decision-making anyway. On this matter, Milne appears to have missed a vital point: perception is reality (i.e., conflicts are assessed by others, not self). If there was any doubt at all, caution should have been exercised. To argue that there was not an actual conflict is inappropriate, some might suggest arrogant. Better for Milne to have removed any doubt by excusing himself from the discussion (by leaving the room), especially as he had already declared an interest. He should not have participated in the decision either. Standing one step back, the Mayor is not beyond scrutiny in this matter. Why did he not ask Milne to leave the discussion, and why was Milne not excluded from the decision?

On decision thresholds: Local councils, like company boards, make decisions in the collective. This means that every resolution results in either a 'yes' or a 'no' decision (notwithstanding any deferral or request for more information). In local government, the minimum threshold for a binding decision is typically a simple majority, with the Mayor holding a casting 'vote' in the cases of a deadlock. But is a sensible means of collective decision-making? What of the downstream effects and consequences? To proceed following a split decision raises all sorts of questions, not the least of which is the opposed councillors' commitment to uphold (or undermine) the decision. A better threshold is consensus, whereby every councillor (director, in the case of boards) has space to speak for or against a proposal, and debate points, on the understanding that they support the decision afterwards (because their warrant requires them to act in the best interests of the entire constituency). If consensus cannot be reached, it is better to defer the decision, pending more information and/or discussion. 

In 2014, I observed that aspects of corporate governance and board work had not changed much in 25 years. Having just re-read the book that informed that conclusion (Making it Happen, by John Harvey-Jones), I've been reflecting on the relevance of the author's comments in today's world, especially ruminations on board effectiveness and three defining hallmarks of a successful director:

​My recent observations and empirical research suggest that Harvey-Jones' hallmarks remain as relevant today as when they were first proposed, three decades ago. But that is just my view. What is your experience? ​

For years, independence has been held up as a desirable—even necessary—attribute of boards; the moot being that independent directors are a prerequisite if boards are to consider information objectively and make high quality decisions. In practice, the listing rules of most stock exchanges state that at least two directors must satisfy independence criteria, and many directors' institutes promote independence as a desirable attribute.

But does the presence of independent directors actually lead to improved business performance? Notable investor, Warren Buffett, has his doubts.

Buffett took the opportunity at the annual meeting of Berkshire Hathaway, an investment firm, to question the merit of appointing independent directors. He said that many independent directors cow-tow to the chief executive, an assertion that is tantamount to suggesting that the balance of 'power' and 'control' lies with the chief executive not the board. If this is correct, directors are not acting in the best interests of the company (as the law requires). Thus, independence becomes meaningless. 

Long-standing research(*) suggests that, as with other static attributes of boards (board size and the board's  'diversity' quotient are topical examples), structural (or, technical) independence per se provides little if any guarantee that board decisions will be of high quality, much less assurance that the board will be effective or that high performance will be sustained. Much storied cases, such as, HSBC (USA), Mainzeal (New Zealand), Carillion (UK) and CBA (Australia), amongst many others, make the point plain. 

If the board's role in value creation is not dependent on structural attributes (in any predictable sense), should independence be set aside? Not completely. Independence can be helpful, if it means independence of thought; directors who are capable of critical thinking and who exercise both a strategic mindset and wisdom, as they seek to make sense of incomplete data in a dynamic environment. But even this proposal is limited: independence of thought is hardly a silver bullet. Context is crucial. Shareholders and boards must be careful not to fall into the trap of thinking about corporate governance or board effectiveness in deterministic or formulaic terms. 

If boards are to have any chance of exerting influence from the boardroom, directors need to embrace an holistic understanding of how best to work together as they assess information, make decisions and verify whether the desired outcomes of prior decisions are achieved or not. For this, the actions of boards (function) trumps what they look like (form). Emerging research suggests that board effectiveness has three dimensions, namely, the capability of directors (technical expertise, sector knowledge, wisdom, maturity);  what the board does when it meets (determine purpose, strategy and policy, monitor and supervise management, provide an account to shareholders and other stakeholders); and how directors behave (individually and collectively). 

(*) see Larcker & Tayan (2011) Corporate governance matters, for example. 

I'm in London for the weekend, an interlude between inter alia commitments hosted by the Institute of Public Administration (a masterclass for board chairs, in Dublin); Lagercrantz Associates (a workshop, in Stockholm); and the Baltic Institute of Corporate Governance (a masterclass and the BICG conference keynote, in Vilnius). 

To work with people across cultures, countries and contexts is a great privilege. Discussions reveal differences in perspective and approach. Yet, some things are consistent, transcending borders and cultures. One example is 'good governance'. Directors everywhere want to know how to achieve good governance.

This is a tough request. The problem is that 'good' is a moral qualifier, implying someone or something is morally excellent, virtuous or even righteous. But that is not all it means. A quick check in any dictionary reveals at least 39 other definitions! Which one does a person have in mind they ask for help to achieve 'good governance' or 'good corporate governance'? And what about other directors around the table. Do they have the same understanding or not?

Pragmatically, corporate governance is the means by which companies are directed and controlled (Cadbury, 1992), that is, it describes the work of the board. The objective is to produce an agreed level of performance (however measured). 'Effectiveness' is a more appropriate qualifier than goodness. If something is effective it is adequate to accomplish a purpose; producing an intended result. 

Returning to the question of how to achieve good governance. After reminding the enquirer that so-called best practices offer little guarantee of success (which one is best anyway), I usually steer the discussion away from goodness towards effectiveness (performance), and suggest that Bob Garratt's Learning Board matrix, and the Strategic Governance Framework are useful starting points for a lively discussion at the board table.

But in recent times, company secretaries have assumed greater roles including speaking at meetings; exerting influence over decision-making processes, even to the point of presenting papers; and speaking for the board in the market square. This has been encouraged by associations representing company secretaries with the term 'governance professional'. Times are changing, for sure, but are these developments sound? Most of the contributions listed here come dangerously close to the secretary acting, or being seen to act, as a director. 

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. 

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.

But what is 'value creation', and how is value created? Here's one view:

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. ​

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:

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.