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.
Buffett's solution is to recommend that directors need to have skin in the game. But if they do, what is their motivation likely be? Will the holding of shares lead to directors becoming more effective?
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.
My intention is to pursue more meaningful exchanges of ideas elsewhere. Challenging problems (how boards influence company performance, for example) need devoted time and space for critical thought and analysis. They cannot be resolved in 140 characters.
If you are interested, my thoughts on a range of topical matters including inter alia corporate governance, board effectiveness, strategy, the board's role in company performance and the compliance–performance dilemma will continue to be shared online, on LinkedIn, this blog and in published articles. Please read and debate them with your colleagues, and share your thoughts (especially strong or opposing views!). If you have a question or a request, ask and I'll respond promptly.
If you have a preference for in-person discussions, as many directors do, I am available to explore topics of interest, either publicly at conferences or other forums, or privately at workshops or confidential briefings.
Over the last twenty years, I have spent countless hours serving on and advising boards, and thinking about governance and the characteristics of effective boards. To have been invited to work with boards around the world as they have sought to realise the full potential of the enterprises they govern has been a real privilege. But with such privilege comes responsibility—the importance of standing back from time-to-time to take stock and reflect on learnings cannot be overstated, which is exactly what I have been doing over the last few days.
Two things in particular stand out just now. First, boards are increasingly aware that ultimate responsibility for enterprise performance lies with the board itself (not the CEO); and second, social media is starting to get in the way of effective learning.
That awareness is trending upwards is great news. But the supplementary question of how high performance is achieved and sustained remains problematic. The market is awash with best practice recommendations and supposedly definitive guidance ("five ways to...."), many of which have been implemented diligently. But alas, company failures continue to be blots on the landscape.
Directors want reliable guidance, but many directors struggle to sort the wheat from the chaff. They say that the plethora of often discordant information is more a hindrance than it is helpful. Privately, some admit that they have become confused about the purpose of the board, what corporate governance is and how it should be practiced. Others have suggested that the question itself (of the board's role in achieving high enterprise performance) is 'wicked', meaning it is easy to describe, but really difficult if not impossible to solve due to incomplete or contradictory information and a highly contextual setting—a moving target camouflaged in a landscape that is far from static.
The other thing that has become relatively clear in recent times is the role and impact of social media: it seems to be getting in the way of meaningful debate on big questions and wicked problems. Yes, news feeds and the 'like' button can be additive, but self-proclaimed experts offering opinions disguised as 'solutions' generally add little except noise and clutter. If progress is to be made, more reliable guidance is needed to help boards focus on what actually matters—enterprise performance. For this, researchers need to go to the source (the boardroom), to discover, analyse and report what really happens when the board is in session, including what boards do; how decisions are made; and how power is wielded and influence is exerted. Interviews, surveys and the quantitive analysis of large datasets all have their place, but the direct (and ideally, long-term) observation of boards in action is the gold standard. Researchers, advisors and directors need to continue to pursue meaningful dialogue—not sound bites—both with each other and at conferences and other interactive forums (workshops and masterclasses, for example) to explore situations, discover what works (and what doesn't) and, crucially, understand the contextual limitations and nuances of various options. A commitment to read widely and critically is also important.
Press on we must; the question of how boards influence enterprise performance is far too important to ignore. Tough problems need time and space for critical thought and analysis. Thus my decisions to step away from Twitter and to change my use of LinkedIn—to create more space for critical thinking and analysis. My hope is that what emerges will be of some use to helping boards address something that has remained constant: responsibility for enterprise performance starts—and ends—with the board.
The company secretary, a role defined in law in most jurisdictions, is an important actor in company boardrooms; a servant of the board with a mandate to ensure the smooth running of the board and its activities. Specific tasks include supporting the chair and chief executive in assembling board documentation; ensuring effective communications between key actors and external parties; recording and publishing minutes of meetings; and providing process support to the board as and when needed. Such a role seems clear.
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.
But the company secretary is not a director.
Rightly understood, the role of board secretary should—indeed must—remain one of servant to the board, not part of the board. If governance is a profession (a debatable point, given almost anyone can be a director and professional standards are not enforced), then it is directors not secretaries who are the rightful claimants of the title 'governance professional'. Some other questions boards may wish to consider are:
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.
Thoughts on corporate governance, strategy and effective board practice; our place in the world; and, other things that catch my attention.