English can be a confusing language. The same word can have different meanings in different contexts (by 'bear', do you mean the animal, taking up arms, or putting up with someone; and is a 'ruler' a measuring instrument or a monarch?). Meaning and usage matters; more so because it is not static. Language evolves, whether by design or in response to an evolutionary development. Some refinements improve our ability to communicate effectively, others to defy logic.
The understanding and usage of the terms 'governance' and 'corporate governance' are topical cases in point. While the term 'governance' is derived from the Greek root kybernetes meaning to steer, to guide, to pilot (typically a ship), a plethora of usages have emerged over time. Today, many different usages have become commonplace. These the oversight of managers and what they do; the activities of the board; and the framework within which shareholders exert control and boards operate. It is also used to describe the board itself ("we'll need to get the governance to make that decision"). The term has also been applied in an even broader context, the business ecosystem (i.e., system of governance). The most extreme example I have heard is, "Governance can mean almost anything, it is completely idiosyncratic; different for every organisation".
Things are made worse when two related but distinct concepts are conflated. Consider the definition of corporate governance and the practice of corporate governance. The former is relatively stable. Eells (1960) coined the term, to describe the structure and functioning of the corporate polity (the board). Later, Sir Adrian Cadbury (1992) added that 'corporate governance' is "the means by which companies are directed and controlled". The fundamental principle here is that corporate governance is a descriptor—the activity of the board. Compare that with the practice of corporate governance--how a board enacts corporate governance when it is in session. The means by which boards consider information and make decisions can and must be fluid depending on the situation at the time.
The wider context merits a brief comment—the rules under which companies and their boards operate (statutes, codes and regulations), and the consequential impact of the board's decisions. These are necessary, because they define the wider environment; what is allowed and what is not. In recent years, I've heard many people include regulations and codes within their understanding of corporate governance. Similarly with the consequential impact of the board's decisions beyond the boardroom. Are either of these corporate governance?
If you'll allow a sporting analogy, it's important to distinguish between the rules of the game, the game as played, and the final score. All are necessary, but only one is the game. To embrace an all-encompassing understanding suggests that corporate governance is ubiquitous, extending across the entirety of the company's operations and the functions of management, leadership and operations—not to mention the wider system of rules of regulations. This, I am convinced, takes us close to the root of the confusion that besets many directors. Every time I'm asked, I invoke Eells and Cadbury. A framework of laws and regulations is necessary, for these define the operating boundaries. But they are not corporate governance. In asserting that corporate governance is the means by which companies are directed and controlled, Cadbury was saying that corporate governance is the descriptor for the work of the board. And work, straightforwardly, is something to be practiced. Let's not lose sight of these distinctions. The continued 'sloppy' use of language serves only one purpose: to obfuscate.
Today marks the beginning of a lull following a busy programme of international and domestic commitments since early February. Over a 110-day period, I have spent time in Australia (four times), England (twice), the US (twice), Germany (twice), Ireland, Sweden and Lithuania—and at home in New Zealand; interacting with over 520 directors, chairs and chief executives from 19 countries. Formal and informal discussions at conferences, seminars, masterclass sessions, education workshops, dinners, advisory engagements and board meetings were instructive to understanding what's currently top-of-mind for boards around the world. The following notes are a brief summation of my observations. I hope you find them useful.
Diversity and inclusion: These topics continue to dominate governance discussions in many countries. But, and noticeably, the discourse has matured somewhat over the last six months. The frequency with which the rather blunt (and often politically-motivated) instruments of gender and quota is mentioned is starting to subside, as directors and nomination committees start to realise the importance of diverse perspectives and options to inform strategic thinking and strategising. Long may this continue, as board effectiveness is dependent on what boards do, not what they look like.
Big data and AI: What a hot topic! Globally, boards are being encouraged by, inter alia, futurists, academics and consultants to get on board (if you'll excuse the pun) with the promise that developments in this area will change the face of decision-making and improve corporate governance. Some assert that these developments will obviate the need for board of directors in just a few years. The directors I spoke with agree that these tools can help managers make sense of complex data to produce information, even knowledge. But these same directors have significant reservations when it comes to strategic decision-making. Automated systems are poor substitutes for humans when it comes to making sense of (even recognising) contextual nuances, non-verbal cues and other subtleties. Unless and until this changes, the likelihood that boards will continue to be comprised of real people engaged in meaningful discussion remains high.
Corporate governance codes: The number of corporate governance codes introduced in markets has been steadily rising over the last decade. Most western nations, and a growing number of Asian and developing nations, have implemented codes to supplement statutory arrangements. Many directors and institutions around the world continue to look to proclamations that the UK is the vanguard when it comes to corporate governance thinking and related guidance: the recently-updated UK corporate governance and stewardship codes are held up as evidence of good practice. While the quality of board work in the UK has improved over the last decade, a strong compliance focus continues the pervade director thinking—across the business community in the UK and beyond. The reason is stark: codes are little more than rulebooks. Further, rules don't drive performance, they define boundaries. The more time boards spend either complying with the rules or finding ways to get around them, the less time is left for what actually matters, company performance. In many discussions over the past few months, I've pointed people to the ground-breaking work of contributors such as Bob Tricker, Sir Adrian Cadbury and Bob Garratt. These doyens provided much-needed impetus to help boards understand their responsibility for company performance. The emergent opportunity for regulators and directors' institutions is to consider alternative responses to ineptitude and malfeasance: instead of creating more rules all the time, why not hold boards to account to the existing statutes, most of which seem to be eminently suitable?
Best practice: Many individual directors (and boards collectively) are starting to move beyond 'best practice' as an aspirational goal. Further, directors and boards are demanding to hear educators and thinkers who are also practicing directors, not trainers delivering off-the-shelf courses. Context is everything. The evidence? When a director asks to explore the difference between theory and practice you know something in his prior experience has missed the mark. Practising directors know that the board is a complex and socially-dynamic entity, and that the operational environment is far from static. Directors' institutes, consulting firms and trainers need to stake stock and move beyond definitive 'best practice' claims, lest they be left behind and become monuments to irrelevance. Enough said.
Governance remains a fashionable topic: If I had a dollar every time I've heard 'governance' promoted as a career in recent months, or the term used in discussions (including, sadly, often inappropriately), I would be really well off. But the act of invoking a term during a discussion is no panacea to whatever situation is being discussed. More capable directors are needed to contribute to the effective governance of enterprises, of that I am sure. But the established pattern of selecting directors from a pool of seemingly successful executives—as if a reward—is folly. The findings from a growing number of failure studies from around the world attest to this. The role of a director is quite different from that of a manager or executive. Managers and executives have hierarchical authority and decisions are made by individuals. In contrast, directors lead by influence and decisions are always collective. The challenge for those aspiring to receive a board appointment is to set their managerial mindset aside, to enable a more strategic mindset and commitment to the tenet of collective responsibility to emerge.
Standing back from these interactions, the board landscape seems troubled. But I remain hopeful. Progress is being made (albeit more slowly than many would wish) and a pattern is slowly emerging. Increasing numbers of directors are acknowledging that the board's primary role is to ensure performance goals are achieved, and that the appropriate motivation for effective boardroom contributions is service, not self.
The challenge is to press on. If the number of requests from those wanting to understand what capabilities are needed in directors, what boards need to do before and during board meetings, and desirable behavioural characteristics is any indication, boards are getting more serious about making a difference—and that points to a brighter future. If a tipping point can be reached, arguments centred on board structure and composition that have dominated the discourse can be consigned to their rightful place: history. I look forward to that day.
I have just returned home from a busy but most invigorating week on the East Coast of the United States. The purpose of the trip was two-fold. First, to invest in myself by attending a course; and second, to participate in a series of meetings and discussions to explore matters relating to boards, board effectiveness and how high performance might be achieved.
The following paragraphs summarise some of my learnings. If you want to know more, please get in touch.
If you would like to discuss any aspect of this summary, challenge my observations, or explore implications for your board, please get in touch, I'd be delighted to hear from you..
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.
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:
From entering the business lexicon less than quarter of a century ago, 'corporate governance' has come a long way. Prior to 2000, the term was rarely mentioned in business discussions much less amongst the general public. Boards and directors directed the affairs of the firm, and that was it. Now the term is ubiquitous. Its usage has changed over time as well: from describing the functioning of the board of directors, the term is now used to describe all manner of corporate activity, much of which bears little if any semblance to the board or governance at all.
The proclivity to use the terms 'governance' and 'corporate governance' has trickled down from big business to now infect family-controlled firms. Well-intentioned but inappropriate usage—notably advisers (typically, but only accounting firms) making assertions such as "You need governance"—has had unintended consequences. When attention is diverted away from running and overseeing the business to "implement governance" (whatever that means or entails) without justification, costs have a tendency to go up not down, and a whole new set of problems including confusion, consternation and strained relationships often follow.
Over the last two decades, I've had the privilege of working with the directors and shareholders of hundreds of family-controlled firms, ranging from 'mom and pop' operations to much larger (multi-hundred million dollar) enterprises. Awareness of (and interest in) governance has become palpable, more so if a director has just read an article or heard a talk from an expert purporting a 'best practice' governance solution. Yet directors know that a single answer rarely works everywhere. Context is crucial in business; every situation is, to a greater or lesser extent, unique. As a consequence, the universal application of a formulaic 'best practice' solution does not make much sense. Recognition of this gives rise to many questions, especially from the shareholders and directors of family-controlled firms. Here is a selection of the more frequently asked ones:
These questions are typical of those that have been front-of-mind for the directors and shareholders of the family-controlled firms that I've interacted with in recent months. Curiously, questions about social interaction, boardroom behaviour and family dynamics (the human dimensions) are asked far less often. This, despite the board being a collective of directors—people—who are required to work together in the best interests of the firm. Boards that resolve these so-called 'soft' questions tend to be more effective. But more on that next time.
This article is the first of three on the topic of 'Governance in family-controlled companies'. The second, which explores undue influence and the impact of family dynamic is available here. A final instalment, which will make suggestions to improve board effectiveness, will follow in late 2018. Boards wanting to discuss matters raised in these articles should get in touch directly to arrange a private briefing.
The chattering class has been very active of late, responding vociferously as case after case of corporate failure and misstep has come to light. Carillion plc and the venerable Institute of Directors (both UK), AMP (Australia) and Fletcher Building (New Zealand) are the latest examples that have resulted in consternation and angst.
That seemingly strong and enduring organisations continue fail (or have significant missteps) on a reasonably regular basis is a cause for much concern; the societal and economic consequences are not insignificant. Many commentators (primarily, but by no means exclusively, the media) have responded by berating company leaders (the board and management specifically), placing 'blame' squarely at their feet. This is a reasonable: ultimate responsibility for firm performance lies with the board after all.
Calls for tighter regulation and stiffer codes abound. Yet the geographical spread of these failures implies that local statutes probably aren't a significant contributory factor. The responses of the boards have been telling: some have circled the wagons (a demonstration of hubris?), others have cast out the chairman or chief executive (diverting blame elsewhere?), and some individuals have simply walked away.
At this point, it would be easy to join the chattering class; to stand on the margins and berate all and sundry. But let's not go there. Instead, let's try to identify repeated patterns of activity may have contributed to the situations, in search of learnings. Several things that stand out:
The role of the auditor: Most if not all of the firms mentioned above were attested by their respective auditors to have been operating satisfactorily. Yet they were not, clearly. Whether the auditors were in cahoots with management or the board, failing to discharge their duty to provide an accurate assessment or, even, inept remains to be seen. Regardless, something is amiss. To date, few commentators have called out the audit profession as being an accessory (Nigel Kendall is a notable exception).
Business knowledge: Remarkably few of the directors of the companies identified here seem to understand the business of the business they were governing. Many directors are recruited for their technical skills (notably, legal and accounting expertise), but few if any have any significant experience in the sector that the business operates in—research by McKinsey shows that one director in six possess such knowledge. How any board can make informed decisions when most of its directors do not understand the wider operating context well is perplexing—it would struggle to detect important though weak signals, much less understand the implications of them.
Board involvement in strategy: The boards of all of the firms identified here relied heavily on management to prepare strategy. Directors backed themselves to ask questions in response to proposals when they were presented. While most directors are capable and well-intentioned, such a heavy reliance on management is unwise. If the board is not involved in the development of strategy in some way, as many researchers and commentators recommend, the likelihood of the board understanding what it is being asked to approve and subsequently providing adequate steerage and guidance is low.
If boards are to learn from the failure cases noted here (amongst others), the first and, frankly, most pressing priority is to mitigate apparent weaknesses and focus on what matters. My research suggests that high levels of firm performance are contingent on several factors including:
Some commentators have suggested that the success of the board is entirely a matter of luck. I disagree. While outcomes are not guaranteed, my doctoral research and experience shows that boards can exert influence beyond the boardroom, including on firm performance, but only if they focus on 'the right things'. Unless and until boards start taking their responsibility for the performance for the company seriously the hope of much changing remains, sadly, dim.
Larry Fink, co-founder and CEO of influential investment firm Blackrock may have just moved the goalposts.
Writing in his annual letter to CEOs, Fink argued that companies think beyond shareholder maximisation, a maxim that has dominated investor thinking since the early 1970s. Companies need to determine their raison d'être, their reason for being, towards which all effort should be aligned. Fink could not have been more clear:
Without a sense of purpose, no company, either public or private, can achieve its full potential. Ultimately, it will provide subpar returns to the investors who depand on it to finance their retirement, home purchase, or higher education.
Fink directly associates strategy, board and purpose—and in so doing Blackrock's expectations are spelt out. Simply, boards need to take their responsibility to ensure the long-term performance of the companies they governs much more seriously. Specifically, the board should both determine and agree several things, namely, the reason for the company's existence (its purpose); how the purpose will be achieved (strategy); and, how the progress towards the agreed purpose and strategy will be monitored, verified and reported.
Together, this is corporate governance.
To have such an influential firm speak so boldly is wonderful. Mind you, I am rather biased: my research findings and experience working directly with boards over many years now is consistent with Fink's assertions.
I commend the letter to all boards. Two rather obvious questions boards may wish to discuss having read it:
I've arrived in Brussels, having travelled directly from New Zealand via London Heathrow (thanks Air New Zealand) and the the Eurostar, to attend a two-day conference on corporate governance and board practice. The conference is run under the aegis of EIASM, the European Institute of Advanced Studies in Management, of which I'm a member. My name is on two of the papers to be presented (links are posted on the Research page).
Approximately 50 delegates have gathered from around the world (24 countries?) for two days of discussions and presentations. Most of the delegates are leading academics in the fields of board and governance research, although there were a few (including me) who span the so-called academy–practice divide. This was my third attendance at this event. Previously, I went to the twelfth edition (Brussels) and the thirteenth edition (Milan), where my paper received the best paper award.
The core theme of the fourteen edition is digitalisation and, specifically, the emergent impact of the so-called digital economy on boards and effective practice. A triumvirate of leading thinkers (Lee Howell, World Economic Forum; Tom Donaldson, Wharton Business School; and, Bob Garratt, Fidelio Partners UK) will lead a keynote session on the second morning. Other topics to feature on the programme include updates on board diversity research, shareholder relations, board responses to crises, strategic control and a direct challenge to the way board research is conducted.
I'll post summaries of the key learnings. Stay tuned for end-of-day updates.
The effectiveness of company boards has become a hot topic in recent years, especially as the general public has become aware of various failures, missteps, poor practice, hubris and ineptitude, but also as attention has increasingly moved from the chief executive to the boardroom in search of high company performance.
The role of the company director is not for the faint-hearted. Market forces, technical innovations and human factors all contribute to a complex and dynamic operating environment. Directors need to consider and make sense of information from multiple sources, and make informed decisions in the best interests of the company. It goes without saying that directors and boards need to maintain a continuous learning mindset if they are to keep up to date and contribute effectively.
In a few days, I'll be in Sydney, Australia (18–20 September), to work with directors committed to the ideal of high performance. While the main objective of the visit is to present the first day of a new three-day course entitled "The effective director", I have time available to attend other meetings to share ideas and discuss emerging trends in corporate governance, strategic management and related topics of interest.
If you'd like to get together while I'm in Sydney, please let me know. I have some free time and would be delighted to meet informally over coffee, or in a boardroom setting with you and your director colleagues.
Thoughts on corporate governance, strategy and effective board practice; our place in the world; and, other things that catch my attention.