We live in a fast-paced world, where the only constant seems to be change itself. Nine months ago, messages promoting the latest and greatest scheme (or product or idea) bombarded our senses daily, imploring us to embrace something better. Hope prevailed. Now, with the outbreak and impact of coronavirus, the situation is quite different.
Despite the ebbing and flowing of seasons and circumstances, even the onset of crises, some things remain remarkably constant; stable despite great turbulence and the best intentions of enthusiastic advocates to move things along. The corporate boardroom is one such example.
Earlier this year, during the early days of the coronavirus, I re-read Making it Happen, Sir John Harvey-Jones' reflections on leadership. Harvey-Jones, a successful businessman and industrialist, was perhaps best known for leadership of British firm ICI, culminating in his chairmanship from 1982 to 1987. His insights are timeless; arguably still relevant today, 32 years after they were first written. To illustrate the point, here is a selection of salient comments Harvey-Jones made about boards in 1988:
Do any of these points sound familiar? They probably do, because, sadly, many of Harvey-Jones' observations are still prevalent today. Given the duties of directors, why are some boards still reluctant to embrace change when circumstances change, or a crisis strikes?
Is it time your board took stock, not only of the company's strategy and business model, but of itself?
The professionalisation (sorry, a horrible word) of governance has been a topic of discussion for many years. Some directors, when describing what they do, prepend the adjective form of the word, to indicate their full-time paid work is a [company] director, and to indicate their commitment to 'professional' standards (the implication being that some are not). Others abhor such usage.
Many directors are diligent and highly engaged in their work. So why the felt need to professionalise? Studies of company and board failures reveal a consistent pattern of contributory factors, including hubris and overconfidence among directors; low levels of board-management transparency; lack of a critical attitude, genuine independence, appropriate expertise and relevant knowledge in the boardroom; and, tellingly, low levels of commitment by directors. Consequently, public confidence is mixed.
If the practice of governance is to become highly regarded, standards need to be lifted and applied. But can or should governance (that is, the practice of directing) be elevated to the status of 'profession', as medicine, law and accountancy are? And what, exactly, is a professional director? How is one different from an 'ordinary' director (or any other type of director)? What difference might professionalism make? Are better outcomes any more likely? In considering these questions, let's first define some terms:
Individuals wanting to become a medical doctor, for example, must first successfully complete several years of university-level training, after which they become a trainee intern, are provisionally registered and start to practice. A commitment to the Hippocratic oath is necessary. Doctors are also required to formally register with an approved institution, pass professional member- and fellow-level exams and complete approved professional development (on-going). Usually, a formal disciplinary process is available if an individual is found to have flouted professional standards. Law is similar, and accountancy too. On this measure, it's clear that doctors (and lawyers and accountants) are professionals; stakeholders (patients, clients) can have confidence in their work.
But what of directors and governance? Two observations are relevant. First, almost anyone can become a director, and do so with no training! In most jurisdictions, any person over a specified age (18 years old in New Zealand), who is not an undischarged bankrupt nor is before the courts, may become a director. That's it! There is no mandatory training requirement, nor is membership of a professional body or ongoing professional development necessary. Second, many directors' institutions around the world have, over the past few decades, sought to promote governance as a profession. Their good work has resulted in charters being established, and members being invited to commit to ongoing professional development and to operate in accordance with a code of ethics. But these well-intended efforts have been met with mixed success to date. Optionality seems to be part of the problem. Variable quality training programmes, and ambiguity around the primary purpose of the institution appear to have been contributing factors too.
If governance is to become recognised as a profession, as many have argued is needed, minimum standards need to be instituted, and optionality withdrawn. Prospective directors should be required to complete approved (formal) training and pass exams; serve as an intern; gain (and maintain) formal membership of an approved institution; and commit to continuing professional development. Flawed understandings of the role of the director and what corporate governance is and how it should be practiced need to be corrected too, and the power games, hubris and ineptitude apparent in some boardrooms rectified.
But, in the end, the question of professionalising governance remains contentious. Some experienced directors don't see the need, believing they are competent. Others don't want to be scrutinised. And some directors and observers continue to argue fervently in favour, because they think the likelihood of better outcomes should be much higher.
What do you think?
I returned today from two overnight trips (both were to attend board meetings, meet shareholders and discuss various company matters with management). It was great to get out and about again—to sit together around a board table, meet staff and see the businesses operating following the constraints imposed by the Covid-19 lockdown.
While I was away, a Netherlands-based colleague sent a note saying she'd just started reading through Musings, from the beginning. Why someone would go back and read all of my writings since March 2012 is beyond me, but she has chosen to do so. She said that while many writings resonated, one piece in particular stood out as being as relevant today as when it was first written, in 2012.
Amongst other things waiting for my attention [having arrived overnight] was this article, originally posted by Tony Schwartz on the HBR Blog Network. The article set me thinking. Why are we, in this so-called modern age of productivity, so busy trying to fit so much in to our lives? We use electronic diaries to keep track and save time, but they've come to rule our lives. We seem to be constantly running; going faster, but getting nowhere.
Chantal's comment, and my subsequent re-reading of this piece, set me thinking once again about the impact of speed and busyness on decision quality.
How can any director make effective contributions in the boardroom if they are so busy, or moving so quickly, that they do not have time to consider the wider context? The prospect of an electronically-enabled world sounds enticing to many. But is it built on a solid foundation? Are board decisions any better than before?
Directors owe a duty of care to ensure the enduring success of the company governed. For that, they need to create space to think deeply and critically about longer-term options. They ignore this maxim at their peril.
Earlier this week, I had the privilege of framing a discussion on board decision-making with a group of board directors and Digoshen Impact Partners. (Digoshen is a global learning platform to empower experienced and aspiring directors.) The following comments summarise the key points mentioned during this week's session.
At the core, the board of director's main job is to ensure the performance of the enterprise it governs. For that, the board needs to consider information, ask questions and make decisions, strategic decisions. This sounds straightforward. But many boards struggle; and more so in a highly-dynamic environment. For example:
Given these research findings, it's little wonder effectiveness is low. The seemingly unending trail of missteps and company failures tells a sorry story. But boards have options; they hold the ultimate decision-making power and, therefore, are by no means powerless. Boards intent on achieving high levels of decision effectiveness may wish to embrace the following suggestions (discussed during the session):
One final point. Boards are social groups that operate within a stratified social setting, the company and more broadly the wider marketplace. Thus, the actions and outcomes that follow are contingent on many external factors. Things can (and do) change quickly. Therefore, boards need to keep their eyes open, to ensure they have contextually relevant information to hand to make an informed decision; and to remain diligent after the decision, to ensure the expected benefits of the decision are in fact realised.
This musing is based on a session summary I co-authored (original posted on the Digoshen website).
Last week, Scott Arrol, CEO of NZHIT (New Zealand's peak body for those involved the digital health sector), got in touch to ask a few questions about the contribution of boards during times of crisis—a topical subject! The primary challenge for boards in such times is working out how to respond. The playbook that may have served well in the past is, probably, of little use now that the operating context has been flipped on its head. Despite this, the board remains responsible for business performance, so respond it must.
During our conversation (which was recorded, see below), we touched on the following points:
If you'd like to explore any of these or related points further, please get in touch.
The rapid spread of the COVID-19 virus has shaken communities and commercial activity around the world, to the very core. Since late February, strict restrictions on human movement both between countries and, now, within communities have been imposed, in the hope of containing the virus and, in one case, of eradicating it. The scale of the impact on lives, social structures and economic activity has yet to be measured, but it will be large, I suspect. The scars will remain tender for some time in many cases.
Unsurprisingly, many people have been inventive in response to the situation they now find themselves in. Neighbours are meeting at a distance, and internet traffic has grown exponentially as people have taken up online entertainment options and relied heavily on social media to keep in touch with each other. All of this is to be expected; humans are social beings, after all.
The vacuum left from the pausing of economic activity has been filled by creative thinkers and opportunists offering all manner of webinars, 'best practice' check lists and other forms of guidance to help individuals, groups and businesses reconfigure their lives and businesses. The Internet is now awash with them. Some are well-informed and helpful, but most of the ones I've seen are little more than attention-seeking noise.
My own work patterns have changed too, mainly as a result of the restrictions on movement now in place. These include using electronic communications tools such as video conferencing in place of in-person board, coaching and other client meetings; and the telephone and email to keep in touch with colleagues and clients. The following points summarise my experiences as I have sought to govern at distance this past month:
One final point. These are my experiences. Some may be familiar, others less so. Regardless, if you have any questions or comments, please get in touch. If you are prepared to add your experiences, as similar or different as they may be, I'd be delighted to hear them and am sure others would be too. Please leave a reply below.
The global onset of the COVID-19 virus has precipitated a wide range of reactions in the community, from ambivalence to anxiety. Many governments have stepped in to support their citizens. Some have imposed community-wide lockdowns and social distancing protocols in an effort to break the spread of the contagion; others have implemented rigorous testing and quarantine regimes to identify and isolate those affected.
Business leaders have been considering their options too. Working from home has become a 'thing', as has the use of video conferencing and other online tools. Amongst the many responses, one in particular caught my eye this week: proposals by the directors' institutes of several countries—notably Australia, New Zealand and Britain, and Germany and others as well—to temporarily suspend director liability in the case of insolvency.
Superficially, this sounds like a reasonable idea. When a force majeure event strikes, the impact on sales, working capital and jobs may be very significant. The effect may be immediate, especially if the company is prevented from trading due to a lockdown. If the affected company cannot restructure its cost base, draw on financial reserves or secure finance quickly, business continuity will be at risk. Insolvency may follow, and all jobs will be lost. Thus goes the argument. But on the flip side (there always is one), the suspension of director liability and allowance to trade whilst insolvent may open the door for abuse, despite the honourable intention of keeping the economy functioning.
Insolvency has always been a red line for boards and companies. This proposal makes it porous, by absolving directors of responsibility for trading while insolvent. Some questions worth considering as lawmakers assess the proposal:
While a force majeure event can catch even the most well-run companies out, those with strong balance sheets and highly-engaged boards are better placed to respond well. They probably do not need the protection of the proposed provision, because they are more likely to have a robust risk assessment and mitigation framework in place, and strategic risks will have been assessed at most board meetings. But those companies being run close to the wire, or with inadequately engaged boards or weaker systems, may be caught flat footed. And if they are, what then? Should directors be protected, or be held to account?
Lawmakers need to tackle these types of questions, and resolve ambiguities thoroughly. If they don't, expect scurrilous directors to exploit the inevitable loopholes—to defend against other, board-induced, problems such as ineptitude, incompetence, negligence or malfeasance, for example.
Enquiry is appropriate, regardless of the catalyst, because sunlight, as they say, is a great disinfectant.
Information (and mis-information) about the spread of COVID-19 around the world is clogging our airwaves, inboxes and social media feeds as quickly as the virus itself is spreading. But amongst it all, there are some things we can hold as self-evident. Many people are suffering, some are dying. New phrases are entering the lexicon, such as, social distancing (should be physical distancing, I think) and self isolation. Governments are responding with a variety of controls to limit movement. Borders have been closed, and lockdowns are being imposed in some areas. Airlines have reduced capacity, grounding fleets. Many businesses, especially SMEs, are in turmoil. People are on edge—lives have been put on hold.
While COVID-19 has spooked many people, not to mention the stock markets and wider economy, life must go on—and it will, albeit with some adjustments, of course.
The challenge for those who direct the affairs of companies—boards—is one of governing well in the face of what is, patently, a very different environment from that which existed even two weeks ago.
Businesses face continuity and safety risks every day. Routinely, staff and managers spot, assess, prioritise and respond to operational risks every day; that is their job. But when risks have strategic implications (i.e., an occurrence is likely to have a major effect on strategy execution, future business success or even company viability), the board must become involved. COVID-19 is one such risk. The board needs to understand the potential short- and longer-term impact (using information from credible sources and tools such as scenario planning, for example), consider various options and make informed decisions.
Some practical questions that the board may wish to consider include:
One final point. COVID-19 is no longer a strategic risk. It is upon us. Boards everywhere need to deal with it as well as they can, given the most reliable information available, with the best interests of the company to the fore. That means providing close support to management; more so if big decisions are needed, such as releasing staff or partial closures. However, and most importantly, boards should not panic. Neither should the board react to suggestions being advanced by some that an event such as the COVID-19 outbreak should be seen as a catalyst to redefine corporate governance. Corporate governance remains corporate governance—the means by which the company is directed and controlled. What might be appropriate though is a review, to consider how the board practices corporate governance. But that should wait until the current crisis in in hand. Fix the problem first, then learn from it.
A kerfuffle has broken out on the East Coast of the US, between Lucian Bebchuk, an esteemed professor at Harvard University, and Martin Lipton, partner at New York law firm Wachell, Lipton, Rosen & Katz. Specifically, Lipton has mounted a strong attack on an article published by Bebchuk (a critical examination of 'stakeholder governance'). That Lipton has objected should not be surprising. After all, he is a lawyer with vested interests and he has a long record of promoting stakeholder governance.
This is what Bebchuk asserted:
Stakeholderism, we demonstrate, would not benefit stakeholders as its supporters claim. To examine the expected consequences of stakeholderism, we analyze the incentives of corporate leaders, empirically investigate whether they have in the past used their discretion to protect stakeholders, and examine whether recent commitments to adopt stakeholderism can be expected to bring about a meaningful change. Our analysis concludes that acceptance of stakeholderism should not be expected to make stakeholders better off.
Lipton's counter to these assertions was strident:
We reject Professor Bebchuk's economic, empirical and conceptual arguments. They are ill-conceived and ignore real-world challenges companies and directors face today.
This debate exposes something awkward—that when partisans announce their views people react, especially if they denounce other perspectives. This tactic may well pique interest and sell column inches, but it rarely results in viable outcomes that can be sustained over time.
My own research, and experience both as an advisor and serving company director, suggests that either-or argumentation, a characteristic of determinism, is deeply flawed. To pursue profit as an exclusive goal inevitably results in selfishness and inequity. Similarly, the pursuit of priorities espoused by ESG proponents introduces a another, and not insignificant, risk—of exposing the companies and the economy more generally to an 'Icarus moment'.
Larry Fink, Chairman and CEO of Blackrock, summed things up well in his January 2019 letter:
Profits are in no way inconsistent with purpose—in fact, profits and purpose are inextricably linked. Profits are essential if a company is to effectively serve all of its stakeholders over time—not only shareholders, but also employees, customers, and communities. Similarly, when a company truly understands andexpresses its purpose, it functions with the focus and strategic discipline that drive long-term profitability. Purpose unifies management, employees, and communities. It drives ethical behaviour and creates an essential check on actions that go against the best interests of stakeholders.
Fink's position highlights that a balanced perspective is probably 'best'. But how might it be achieved? The pathway may be hiding in plain sight. If the board is to fulfil its duty to ensure value is created over time, it needs to look well beyond selfish interests and motivations. This means considering the wider context within which the company operates, creating a viable strategy, determining appropriate 'performance' measures and only then governing accordingly.
Bebchuk was brave to call out the messianic assertions of the stakeholder capitalism camp. Perhaps Lipton might take stock, and meet with Bebchuk—the purpose being to explore the nuances of each other's views, in search of a more balanced understanding of the purpose of companies and role of the board.
Leadership is topical in most spheres of human endeavour; companies are no exception. To encourage others to achieve great things is the stuff of effective leaders. The most successful are widely-lauded. But leadership can take many forms, of course. Cast your eye over the last 100 years or so and you'll discern leadership in action in different ways. The era of the titan (Rockerfeller, Carnegie and Morgan being notable examples) saw leaders exert control over companies powerfully. The emergence of the management class in the inter-war years saw the emphasis change, the efficient operation of companies came to the fore. Since the turn of the century and the entry of corporate governance into the business lexicon, leadership has taken another form: the oversight of companies from the boardroom.
Often, perhaps typically, leadership is understood to be an individual endeavour; a person exerting influence. But leadership has a collective dimension too—the board of directors is an instructive case. While individuals (directors, trustees) contribute to board discussion and process, it is the board (not directors) that decides. Leadership in this context is, exclusively, collective.
Collective leadership requires a different approach. Directors need to work together to reach consensus for a start. This article has some more great tips that boards may wish to consider as they seek to lead effectively:
How does your board measure up? More pointedly, does your board even know the effect of its decisions? Nearly thirty years ago, the challenge of explaining board influence over company performance was famously described by Sir Adrian Cadbury, a doyen of corporate governance, as being "a most difficult of question". Thankfully, some progress has been made in recent years, as researchers have entered the boardroom to conduct long-term observational studies of boards in session, and leaders such as Charles Hewlett have shared insights from their experience. While robust explanations remain elusive, one thing is now clear: neither the structure nor composition of the board is a direct predictor of its effectiveness, let alone company performance. If boards are to contribute effectively in the future, they need think, act and behave differently.
Thoughts on corporate governance, strategy and effective board practice; our place in the world; and, other things that catch my attention.