I'm looking forward to looking forward with some great Australian leaders in Brisbane, QLD on Thu 19 May. I'll be talking about emerging trends including the board's role in value creation; the importance of setting a clear purpose for the business; board involvement in strategy; how to drive performance through the chief executive, in reality; and, telling a few stories along the way. Look forward to seeing you there! Two events have been scheduled on Thu 19 May: breakfast and dinner. The breakfast event is almost booked out. However, some seats at the dinner event are still available. If you want to hear about emerging trends in governance and board practice, and their application in a family business context, click here to read more information and to register.
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Fonterra has been doing it tough lately. That the company's board and management is under pressure is patently obvious. Fonterra needs to respond, but how? Is Fonterra simply a victim of a perfect storm, or could the current problems have been avoided (or at least their effect minimised)? Some background. Fonterra is New Zealand's largest company, responsible for 25% of the country's GDP. The company, a co-operative, sells milk products around the world. It sells, largely, commodity products and, therefore, is exposed to commodity pricing fluctuations. The prices Fonterra is receiving for its milk products has fallen significantly in recent times, down to US$2176 per tonne (whole milk powder) at the latest GlobalDairyTrade auction on 3 May 2016—less than half what it was two to three years ago (the price averaged US$5000 per tonne in 2013). As a consequence, the price Fonterra pays to its farmer-suppliers has tumbled, from highs of over $8.00 per kilo of milk solids to now $3.90 per kilo. During the good times, farmers were actively encouraged to convert land from other types of farming to dairy farms. Many did so, funded by debt. Banks supported these conversions, given the high milk prices. However, few realised that milk prices follow oil prices very closely (the correlation value is something like 0.95 and the lag is measured in weeks). As oil prices dropped, milk commodities followed, and predictably so. Now, many farmers are running up huge losses, and yet Fonterra continues to encourage more supply which, inevitably, will make the problem worse not better. If the company stopped investing in monolithic bulk plants, it would free up hundreds of millions of dollars immediately. That money could be used to support suppliers with better prices, or to make some serious moves further up the value chain, as Tatua and others have already proved is realistically achievable. So, where to from here? From the outside looking in, Fonterra has several options worthy of investigation. Here's a few suggestions to get things underway:
If the Fonterra board is serious to driving company performance, for the good of all shareholders and the economy more generally, it needs to gather off-site with management urgently for several days. Sleeves need to be rolled up and egos left outside the room, to sort out why Fonterra exists (purpose); formulate a high-level strategy; and, develop a realistic recovery plan. Strong external facilitation will be required (probably a couple of capable independent facilitators with dairy sector, strategy and governance backgrounds) to work through some fairly tough issues. If this can be achieved, the company (and, therefore, the shareholders and suppliers) and the country will be better for the effort.
After several years of paying high milk prices to its farmer-suppliers, Fonterra has hit hard times. International demand for milk products has slumped. On the supply side, prices paid to farmer-suppliers have tumbled. Some have said the problem is primarily related to changing demand especially in China, whereas others have suggested that Fonterra is complicit having stimulated supply to 'feed' its massive processing plants. To make matters worse, Fonterra has started losing farmer-suppliers to its competitors and it seems to be exercising "considerable discretion" with payment terms as well. The latest commentary, an interview on Paul Henry's breakfast show today, lay out some of the challenges in plain English. Click here to watch the video clip. (disclosure: James Lockhart is my doctoral supervisor, but had no prior knowledge of this interview.) The situation, which has been brewing for a several years, is messy to say the least. Other companies including Tatua and Open Country Dairy seem to coping much better. This begs several questions including whether the Fonterra board and management are actually in control; whether the corporate strategy is sound or not; and, whether the company has the financial and managerial resources to respond effectively. While I'm nowhere near close enough answer these questions, the old saying "where there's smoke there's fire" seems to apply.
Are you based in or near London or Paris? Do you want to learn more about board effectiveness, corporate governance and how boards can exert influence from and beyond the boardroom? If so, please read on. In a few weeks I will be visiting London (24–31 May) and Paris (1–4 June) to speak with directors and trust board members about board practices, board effectiveness and emerging trends in corporate governance; share the results of my latest research; attend meetings; and, to present a paper at the EURAM conference. If you have a question (perhaps along the lines of these ones below) or a request and would like to take advantage of my proximity, please get in touch. I'd be delighted to hear from you and to schedule a meeting.
If you've answered 'yes' to any of these questions...you know what to do. I am at your service.
What is it with the equinox? In the six days that have passed since the equinox announced the changing of the seasons, my phone and email box have been running hot. A stream of enquiries and requests from business leaders in Australasia, the UK, Western Europe, South-east Asia and the Middle East have arrived. I have been asked to speak at conferences and major events, provide guidance to boards and management groups, discuss the findings from latest research, facilitate strategy workshops, and to lead director development workshops. That some many people have decided to reach out is truly an honour. Thank you. Several visits to major cities around the world have now been scheduled to fulfil commitments, as follows:
If you have an interest in corporate governance, strategic management or a related topic and want to take advantage of my proximity(*), please contact me. I would be delighted to hear from you to understand your situation and to arrange to meet you in person or to schedule an event. (*) If you would like to schedule a meeting or an event but the venues and dates listed do not fit your timetable, please reach out anyway, so that we can discuss an alternate arrangement that does suit your requirements.
About 25 years ago, I remember seeing, for first time, a rather compelling video on competitive strategy. Michael E Porter, a Harvard professor, spoke about competitive strategy and sustainable competitive advantage. He said that competitive advantage (and, therefore, business success) was largely a matter of deciding whether to pursue a cost (price) or differentiation strategy. More recently, others have suggested that every product/service/company needs to have a unique selling proposition (USP) or a point of difference. Fast forward to 2016. Is this pathway still viable? In a crowded world, new entrants come and go, all the time. Barriers to entry for new products and services are getting lower. In this environment, how realistic is it to think that any USP might actually be unique, let alone sustainably so? Also, a product that is different or cheaper is of little consequence if no one buys it. Difference is important, but not in the way most people think (unique features &c.). Difference works only until someone copies you. Then you are the same. Your difference, your USP, is no longer unique. Further, at a population level, product or service success doesn't depend on price or feature set. Most customers don't care what products or services do. They do care about the what difference it will make to them. This challenge is arguably even more important at a company level (i.e., corporate strategy). So, next time your board and management team convenes a strategic thinking workshop, as part of a strategy development process, change the playing field. Ask you facilitator to write these two questions on the whiteboard—and to keep coming back to them throughout the session.
You might be surprised at the result.
Earlier this year, Lloyd Russell of TCB Solutions and Deb Coren of AMPLIFI Governance contacted me to discuss an event they were planning in their home town of Brisbane, Australia. They wanted me to deliver some talks and share some insights on the evolution of governance—with a specific focus on family-owned businesses. After learning more about their plans I was thrilled to accept the invitation. With that, planning got underway. Two events have now been scheduled on Thu 19 May, one in the morning and the other in the evening. If you are a family or private business owner; or an independent director, advisor or partner, then this event may be of interest. Click on the image for more information and to register (a new browser page will open).
One Saturday morning, about fifteen years ago, my elderly father-in-law and I sat in the morning sun, sharing a few stories over a cup of tea. He was asking about my then burgeoning advisory business and family life. I was interested in hearing him reflect on his experiences in business, particularly his career-long journey with the same employer—from a junior staff member to, eventually, chief executive. As he spoke, Bill reminded me that he only ever had one employer, and that although he had been blessed to contribute at many levels he had only ever completed one job interview, that being when he first got a job. He went on to talk about the power of team over individual, and of loyalty to both your employer and your own principles. Much has changed since he retired in 1984, not the least of which has been the erosion of the values that served as Bill's North Star throughout his career. Today, most things are negotiable. For many, the motivation has changed, from providing service (to the employer) to self-service. Never has this been more apparent in the everyday behaviours of staff, particularly the younger generation. If we don't get want we want, or if we get a better offer elsewhere, we act. That staff and customers are more interested in self(ie) has huge implications for productivity and value creation in the longer-term. While team productivity is a matter for the chief executive, value creation is the responsibility of the board on behalf of the shareholder. How is your board wrestling with this? Does your board regularly allocate time to understand the changing environment, consider strategic options and make strategic decisions? Companies that expect to thrive in the future need to address the emergent challenge of 'self(ie)'. The best place to start the discussion is in the boardroom.
One of the enduring challenges that directors face every time they meet together as a board concerns decision-making. How do directors make smart decisions when 1). they often lack crucial information, and 2). the environment is fundamentally both complex and dynamic? The answer lies in the group of directors' (the board's) ability to make decisions, as one. Why so? Legally, the board is a collective of directors. Individual directors make contributions to discussions and debates, but not decisions. It is the board that makes decisions. This transition—from the singular (individual directors, contributions, inputs) to the collective (the board as one whole, decisions, outputs)—occurs when directors meet (i.e., in board meetings, when the board is in session). If the transition is to occur well, all of the directors must be actively engaged their work—working together towards the decision, as one. Group decisions are much harder to make than individual decisions. Reaching agreement can be a minefield, especially if information is missing, trust is low or if directors are more interested (sometimes covertly) in pursuing multiple agendas or representing constituencies rather than acting the best interests of the company (as the law requires). How can boards get past this challenge, to make effective decisions on a reasonably consistent basis? Recently, CGMA (Chartered Global Management Accountant, a joint-venture between AICPA and CIMA) tackled this question head on. Their report has just been released. You can read a copy of the executive summary here, or the full report here. The authors make eight key recommendations for effective group decision-making:
I commend this report to you, especially if effective decision-making has been a challenge for your board over the past year or so. Share it with your board colleagues and ask the chairman to schedule a discussion at an upcoming board meeting. If nothing else, you'll bring the expectation of effective decision-making out into the open. Or, the board may find that some behaviours or expectations need to be adjusted, and that a formal board review is appropriate. The discussion may also expose some larger but hitherto hidden issues including that the board may not be clear on the purpose or the strategy of the organisation. If this is discovered, some external advice and assistance may be in order. Regardless of the discussion and the outcome, I suspect it will time well spent.
The much storied Yahoo Inc. continues to consume column inches (or, pixels if you consume your news online). From bold beginnings, Yahoo has endured a mixed career as an Internet search engine business. Current chief Marissa Mayer has had her fair share of headlines as well, including some stinging criticisms over some of her management decisions. Now, with a proxy fight looming, Yahoo has issued this release, which has been reported by Ronald Brausch on Dealpolitik (and no doubt others). The release and associated commentaries make interesting reading, especially for students of corporate governance, strategic management and firm performance: For example, the release implies that ownership of the new strategic plan lies with the CEO. Consider these two statements:
These statements raise a really interesting question. They imply that control lies with management. Does ultimate responsibility for firm performance not lie with the board of directors? Why has the board chosen to stand a little aloof from this? Are these statements simply examples of sloppy copywriting within Yahoo and on Brausch's part, or does control over the company strategy actually lie with the CEO? While I have no doubt that some investors are keen to gain partial or complete control of the company (as Brausch reports), the commentary suggests that a more pressing challenge needs to be addressed if Yahoo is to become great again. The question of whether the board or the CEO is calling the shots and, therefore, is actually in control needs to be resolved, and quickly.
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