This entry is a little more personal than most posted here. But, if you'll allow the indulgence... Yesterday started out like many others before it: a mix of client and administration work, video calls across timezones, director commitments and writing (The craft of board work is coming along nicely). I 'logged off' a little later than usual—around midnight—having just completed a two-hour video call with members of the Global Peter Drucker Society (advance planning for the 2022 edition of the Global Peter Drucker Forum to be held in Vienna late this year). Tired but satisfied after a long day, I prepared for bed. And as I did, my mind wandered. March 24th was significant for some reason. Then I remembered; it was Musings' birthday! Yes, ten years ago, on 24 March 2012, I stepped, with some trepidation, into the blogosphere. That first step? A three-line post. My motivation was straightforward, to share thoughts and test ideas on corporate governance, strategy and board effectiveness. At the time, I had just started on my doctoral journey (a milestone achieved in 2016). A platform to engage with academics and global leaders—and to let off steam from time to time—was going to be helpful, I thought. And so it was, and continues to be. Today, some 712 posts later, Musings has entered middle-age. From tentative first steps, to now a library of comments on professional (corporate governance, strategy, and the craft of board work), philosophical and personal topics. Whether the thinking underpinning the articles has improved over time or not is for readers to determine. Hopefully, a progression is evident. And, while the frequency with which posts have appeared has declined a little in recent years, my desire remains as it was in 2012: that each post proved valuable to at least one person. If that was achieved, the effort was worthwhile. Looking back over the decade, I have been most fortunate to have met and learned from many great thinkers, leaders and doyens of corporate governance and strategy. I have also had the privilege of serving aspiring and established directors, and boards, across five continents. Musings has been an enabler. The support and encouragement shown as I have pursued my passion—to help boards realise the potential of the organisations they govern—has made a great difference to me. Hopefully, it has been beneficial to others as well. Thank you. And, in case you are wondering, Musings, will continue to be published, for as long as readers show interest.
1 Comment
December is a significant month for many peoples around the world. It is the month in which two of the three great Abrahamic faiths have a major festival (Jews, Hannukah; Christians, Christmas), and the Japanese observe Omisoka. For others not professing a faith, December is significant to the extent that it marks the end of the Julian calendar. Each of these observances is distinctive, but a common thread runs through them: celebration and dedication. Yes, December is a time to reflect on the year gone and give thanks, and to ponder what lies ahead. Through this muse, I too wish to give thanks, to the many board directors, business leaders and students that I have had the good fortune to work with during 2021—both in person in New Zealand, and via video link in the United Kingdom, the European Union, the Caucasus region, North America and the Caribbean, India, several African and Middle Eastern countries, and closer to home in Australia. I have learnt a lot, and hope others have derived value from the interactions. Thank you. Peering into 2022, the prospect of travelling internationally to work in person with boards and students is enticing. Once the coronavirus situation stabilises, border restrictions are relaxed and travel becomes viable again, I will accept bookings. But in the meantime, I have decided to take on a new project. For over two decades now, I’ve had the privilege of working with aspiring and established directors on five continents, helping them wrestle with problems, consider opportunities, make decisions and learn what it means to be an effective director. Over the same period, two friends have encouraged—even nagged—me to consolidate my ideas, experiences and insights into a book. And each time it has been mentioned, I have pushed the idea away, citing lack of head space. But circumstances have changed in 2021 and the time now seems right to reconsider the prospect of writing 50,000 words about governance and the craft of board work. So, that is what I will attempt in 2022. (*) The image shows the Marsden Cross, which marks the location of the first Christian mission settlement in New Zealand, and the spot Samuel Marsden preached the first Christian service, on 25 December, 1814.
Every year, at about this time, sages and futurists of various stripes peer out from their sanctuaries to offer opinions of what the future holds. Many speak or write deterministically, as if they have been blessed with special powers to know or postulate the future with great accuracy. Pronouncements are read with great anticipation by many, and embraced as if categorical. But some commentators are more circumspect; their contingent expressions reveal great maturity and wisdom. “Forecasting is always a hazardous business. … no one can claim that the future is entirely inscrutable.” One does not need to look far to see examples of the difficulties faced by those charged with forecasting and strategising. Over the last two years, for example, undertones of fear and stasis have been prominent. People and companies have frozen in response to pronouncements and dictates from national leaders. Economic and social priorities have been set to one side; the main—nay, only—focus has been on the pesky virus known as Covid19. First, borders were closed and populations were locked down, in an effort to flatten the curve. Some even tried to eliminate the virus. Then, recognising their folly, leaders embraced vaccination to reduce the effects of the virus. Most recently, mandates have seen populations divided into two classes, the vaccinated and the un-vaxxed. Naysayers have jumped in, but many of their predictions have proven to be wrong as well. Meanwhile, economies have struggled and the social fabric has frayed. Amidst this backdrop, boards remain responsible for the performance of the companies they govern. Of those who recognise this (and not all do), some boards wait, perplexed by the unknowns, and others strike out, believing they can control the future, despite a plethora of externalities. Neither response is particularly wise. High performing boards and leadership teams recognise that things change, often unexpectedly. They remain vigilant, watching for weak signals that might portend the emergence of something significant. They hold options open for as long as possible. Then, when it is time, they act, decisively. The types of questions high performing boards ask (and keep asking) include:
While some of these questions may be difficult to answer, boards must persevere. Even partial answers are likely to indicate a more reliable way forward than the lazy option of blindly pursuing the supposedly categorical predictions of mediums, sages and futurists.
News of a new variant of the coronavirus emerged this week. B.1.1.529 (now Omicron, a moniker assigned by the World Health Organization) was first isolated by scientists in South Africa. Already, it has been detected in several neighbouring countries and in the United Kingdom, Belgium, Czechia, Hong Kong, Germany, Australia and Israel. Governments are reportedly “scrambling to protect their citizens from a potential outbreak". These responses are supposedly to protect but also, undoubtedly, to buy time. Given the experiences since the coronavirus disease was first detected and subsequently declared to be a global pandemic, the reactions to the latest variant are hardly surprising. News agencies and social media commentators have been up to their usual antics; newsfeeds are abuzz. Fear is a powerful catalyst, of course. But reliable guidance to indicate whether Omicron is more or less contagious, and more or less virulent, is yet to emerge. For example, the two cases in Australia are asymptomatic and both people are fully vaccinated. A calm response is needed. Another interesting aspect of the current situation is the response to those who first alerted the world to what they had discovered. When virologists in South Africa openly shared the results of their advanced gene sequencing tests, others (especially in so-called advanced economies) were quick to point the finger. They accused several countries in southern Africa of being the source of the outbreak, and ostracised them by banning travel—even from countries with no recorded cases—demonstrating the blame game is alive and well. Effective leaders (boards) do not get caught up in the blame game. They take another path:
Then, having prepared and decided upon a course of action, effective boards remain engaged. They keep their eyes open, scanning for weak signals that might portend danger. If danger strikes, they engage immediately and fully—supporting the executive response but remaining calm at all times. Is your board well-equipped to lead in an event that threatens the company’s prosperity or viability? And what is the likelihood it will oversee an appropriate response? Will it work calmly with the executives as a conjoint team to assess the situation and activate an appropriate response, or will it remain aloof and descend into finger pointing (perhaps because directors are more interested in protecting their personal reputation)? If there is any chance of the latter, consideration should be given to replacing the board with directors who are prepared to take their duties more seriously.
The invisible hand, Adam Smith opined, is a metaphor for self-corrective power in systems. If one party within a system, or one part of a system, becomes too strong or dominant then, sooner or later, an alternative will emerge, to restore equilibrium. Regardless of whether it is applied personally (think: bodily effects of obesity), in politics (extreme ideologies), or at population (demographic and social inequities) or even planetary level (geological stresses), the maxim holds, it seems. In business, the self-corrective power is the market. If price is perceived to be too high, or too low; workplace culture or employment conditions are unhealthy; product or service quality does not meet expectations; or, return on funds invested is too low, prospective customers (staff, suppliers, shareholders) respond—they seek alternatives. This inherent power, held by those who interact within the system, has underpinned sustainable commerce for centuries, even millennia. And yet some governments and para-governmental agencies find it necessary to intervene, through the creation of rules. But such interventions are usually costly, and they rarely achieve enduring equilibrium. Inevitably, those with decision-making power within companies find ways around what they perceive to be unreasonable barriers to sustainable prosperity. Please don't misconstrue this observation as a wholesale rejection of rules. It is not. Rather, it is a plea for regulators and boards to take stock. What is the minimum regulatory or policy framework to facilitate commerce and ensure fairness; the point beyond which effort will naturally be diverted, resulting in inefficiencies? Consider stakeholder capitalism as a case in point. Advocates argue a more stringent regulatory framework is required to ensure the value created by companies is 'shared equitably'. This seems fair. But what if an external stakeholder group influences company strategy in a direction different from that which the board and management have agreed is appropriate? Where does accountability lie is such a situation? Should external stakeholder groups be held to account if they ‘force’ certain practices and policies onto a company that impair the performance of the business and lead to in value erosion? The more time spent satisficing the expectations of external stakeholders, including complying with regulatory requirements, the less time remains to pursue agreed goals and sustainable performance. If company leaders—boards in particular—focus resolutely on the pursuit of agreed strategy, and on the achievement and reporting of results across the three critical dimensions, namely, social (staff, client, supplier satisfaction, which includes fair pay, good relations, etc.); environmental (impact, minimising footprint) and economic (financial return to shareholders), prosperity should follow. But if leaders trade recklessly; abuse staff or suppliers, price goods and services above what is reasonable, or disregard the environment, the company they govern deserves to struggle or, in severe situations, fail. Regardless, the invisible hand will have made its presence felt. What more should anyone expect?
As summer gives way to autumn in the Northern Hemisphere—and soon winter—so various externalities that frame the work of boards and enduring performance of companies continue to press in. Topical externalities include climatic change; shifting geo-political forces; technological disruptions; diversity, equity and inclusion demands; ever-increasing levels of regulation; the emergence of ESG; and, stakeholder capitalism. The challenge for all directors and boards, whether they acknowledge it or not (or even notice or care!), is to respond well in the face of what is patently a dynamic environment—to ensure the fiduciary duty they accepted when agreeing to serve as a director is fulfilled. Steerage and guidance—the essence of corporate governance—requires every director, and the board collectively, to be alert, to both set a course and to respond well in the face of externalities. The mind’s eye needs to be looking ahead, to ensure the reason for the journey remains clear, and that decisions are made in the context of advancing towards the objective. Quite how that should be achieved is the underlying question that has driven my life’s work. Following an extended break from writing—a consequence of dealing with the passing of our patriarch—I have ‘arrived’ back at my desk to think and write again, about organisational performance, governance, strategy and the craft of board work. If you have a question, or would like to learn more about a particular aspect of board work or the impact boards can have on organisational performance, please let me know! If we are to journey far, we need to explore relevant topics and learn together.
Tennis is a wonderful game; almost anyone can play. From schoolchildren to elite professional players, the sport is exhilarating; the excitement is often palpable. One of the reasons tennis is attractive is that it is straightforward. The boundaries between acceptable and unacceptable play are, usually, well marked. The ball is served, and if is returned and bounces within the boundaries, play continues. If not, the score is adjusted and play is restarted with another serve. But, neither the net nor the lines play the game, players do; winning or losing is the result of two players (or four, if doubles) having played against each other within the playing space. The distinction in tennis between the rules, the playing of the game, and the score at the end has strong parallels in governance. Boards are charged with playing the game (that is, governing—providing steerage and guidance, in pursuit of an agreed goal) within the boundaries of various statutes, regulations and policies (the rules). The 'result' is company performance, which is usually reported in the annual report and any other reports to legitimate stakeholders. As with the distinction in tennis, neither the statutes or regulations, nor the annual report are the game. The 'game' is governance, and it is played by the board. Statutes and regulations are necessary, without doubt, but they are no more governance than rules are tennis. Another facet of tennis is the player ranking table, which identifies comparisons between players at a population level. The very best players feature at the top; lesser players, further down. Positioning on the ranking table can be a source of motivation for players (to train harder, to embrace various tactics to improve their performance, for example), But position alone does not improve playing standards, player skill or on-court conduct. And so it is with boards and governance. The position a company occupies on a ranking table (adherence to corporate governance standards or ESG metrics, for example) provides a comparative indication of how the company measures up against others. But that is all—to read in more is folly. The likelihood of ranking companies by corporate governance scores improving standards [compliance], for example, is about as tenuous as ranking tennis players improves player conduct. Why so? Standards and rules are thresholds; boundaries that distinguish between acceptable and unacceptable. Nothing more, and nothing less. Tennis players wanting to improve their game focus on fitness, technique, strategy and tactics. Similarly, companies intent on improving performance need to focus their attention and efforts on purpose, strategy and execution.
News of Emmanuel Faber's dismissal as executive chairman of Danone, a French food conglomerate, has caused quite a stir. Mr Faber, a fervent proponent of stakeholder capitalism and ESG, had led the company for seven years. Since 2017, he has held both the chair and chief executive roles (a situation disfavoured by many investors, academics and advisors due to concentration of power risk). Though charismatic and influential, the record shows that company performance has languished under Mr Faber's leadership, and staff turnover increased too. Clearly, something was amiss. Sustained pressure from activist investors, disgruntled by Danone's performance (relative to its competitors, over several years), finally elicited in a response. The Danone board decided to separate the chairman and chief executive roles; Faber would remain chairman of the board and a new chief executive would be recruited. But this attempt by Faber to placate the activists while also retaining power was received poorly. Faber was, in the eyes of the activists, a lead actor and, therefore, a big part of the problem. He had to go they thought. Realising this, the board ousted Faber. Proponents of both stakeholder capitalism and shareholder capitalism have taken Faber's demise as an opportunity to come out from their respective corners to argue the merits of their favoured ideology. The purpose of this muse is not to add to that discourse; it is to consider another matter brought in to view by the case at hand: that of misalignment. If a Chief Executive acts against the direction of the board (or without the board's knowledge), or if a board is disunited over a strategically important matter (purpose or strategy, especially), company performance (however measured) will inevitably suffer. Danone is a case in point. Matters of misalignment, either amongst directors or between the board and chief executive, need to be resolved promptly. Similarly, if purpose and strategy are clear, coherent and agreed, but subsequent implementation is poor or ineffective (the saying–seeing gap), the board probably has a leadership problem. Attempts to satisfy all interests—appeasement—rarely achieve satisfactory or enduring outcomes, as Neville Chamberlain discovered in 1938–1939. Directors need to be alert (individually and collectively, as a board); united in their resolve to pursue agreed goals; and, their tolerance for underperformance must be low. If the board is complacent in the face of misalignment or poor strategy execution, and it does not act, it becomes part of the problem. Sooner or later, shareholders will notice, and it is reasonable to expect they will act, to protect their investment.
Have you ever wondered what it would be like to travel in a plane without any knowledge of where you might be headed? While this prospect may excite some, the idea of flying without a destination or purpose in mind beggars belief for most people. Successful air travel is predicated on knowing the destination; a precursor to the pilot creating a flight plan to make the journey and arrive safely. Air travel is, generally, safe and straightforward when this principle is applied. But things can go wrong, and if they do, pilots must be ready to respond well. For that, years of training and accumulated experience are vital. And vigilance too: continuously reading onboard and external signals to verify progress, and to spot and respond to any emerging problems. Successful governance is directly analogous. Knowledge of the destination and how to get there (purpose and strategy) is vital, as is constant monitoring of both the general direction (to verify progress is being made towards the desired goal) and the current situation (to detect any emerging problems). Boards are, in general, reasonably good at reading and understanding the current situation. But they are not nearly as good when it comes to general direction. Knowledge and agreement around the ultimate goal, how to get there and how progress might be measured remains problematic. If directors and boards lack clarity on these matters, their ability to govern well and ensure the performance of the company into the future is lost. The consequential risks are high. Chances are, the board and the company will be knocked around—moving but not making progress, just like a cork in a washing machine. Does your board have this in hand?
Recently, during a meeting with a company director, I was asked if I'd be interested in seeing the company’s production facilities, to provide context for an upcoming assignment. Context is everything, so I gladly accepted the offer. As we walked, we chatted about a wide range of things. At one point, I asked how things were going since the board's decision to embrace a strategy to become a higher-performing business. His response was as telling as it was succinct: They say ‘high performance’, but all I see is ‘average’. The melancholic admission was unexpected, but not surprising. Apparently, the most recent board report showed that staff turnover had been creeping up, and engagement scores were trending downwards. And yet the atmosphere in the boardroom was sanguine when I visited. Clearly, something was amiss. This vignette highlights one of the great challenges in business—strategy execution; ensuring that strategy planned becomes strategy executed. Regardless of the motivation for creating them, intentions and strategies are not worth the paper they are written on if desired outcomes are not achieved. When things go wrong, the problem can often be traced back to one or both of two things: lack of will (the "won't" barrier), and lack of know-how (the "can't" barrier). Both are indicators of a failure of leadership; a failure to equip staff, and motivate and engage them to embrace the call to action. But the root cause may lie elsewhere. If strategy implementation is OK but expected outcomes do not follow, the problem is more likely to be one of governance. This is because ultimate responsibility for organisational performance [outcomes] stops in the boardroom, not the executive suite. Some may challenge this, on the basis that the executive is responsible for running the business and implementing the strategy. They are, but for the avoidance of doubt, responsibility of determining purpose, setting overall strategy and ensuring results are achieved lies with the board of directors. There’s no getting away from it: the buck stops at the top. If there is a gap between what the board says it wants, and what is subsequently observed as reality, the likelihood of great outcomes is low. The ‘saying–seeing’ gap must be bridged, and the board needs to own this. Here are some questions the board may wish to consider:
So, to the direct question: Is your board across this?
|
SearchMusingsThoughts on corporate governance, strategy and boardcraft; our place in the world; and other topics that catch my attention. Categories
All
Archives
February 2024
|