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    Corporate governance practices: one size does not fit all

    Governance Performance
    For over forty years now, researchers have been investigating boards to try to understand their contribution to business performance. The dominant logic has been to count things, perform statistical analyses and apply hypothetico-deductive science—to identify this elusive thing called "best practice". The latest group to pursue the "best practice" argument are the proxy advisory firms. Details their modus operandi are summarised in this blog, posted on the Harvard Law School site. 

    A best practice approach—whereby if one does 'x' then 'y' occurs—sounds great. However, the reality is not as straightforward. As most directors know, every situation that a board deals with is, to some extent, unique. Boards are made up of people. The context within which boards exist, the company, is also a construction of people. Board structures and board activities that work in one context may fail in another.

    The blog on the HLS site is helpful because recognises that one size does not fit all. It also exposes some of the practices promoted by proxy advisory firms for what they are: detrimental to performance. Notwithstanding this, boards can influence performance. While the blog on the HLS site has particular relevance to boards and shareholders of public companies, many of the suggestions are useful for boards of private companies as well. I commend it to you.
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    How does [strategic] thinking differ from planning?

    Leadership Management Performance Strategy
    The leaders of two different companies contacted me this week to ask if I could facilitate a corporate strategy session for their organisations. Both are both respected, long-standing participants in their respective sectors. One is currently updating its strategy, and the other has some concerns over the performance of an important business unit:
    • Derry*: The board and CEO have recently reviewed business performance, conducted an environment scan, identified options and developed a draft strategy. The request from the CEO is to facilitate a joint board/management session to challenge the assumptions; test linkages between purpose, strategic priorities and action plans; and, help the board reach the point of deciding whether to approve the proposed strategy or not.
    • Terra*: The CEO is concerned about a steady decline in the fortunes of a business unit over several years. "We do good work, and customers like us, but we struggle to win new business. We seem to lack a differentiator." I asked about the purpose of the business as a whole, because steady decline over several years can be an indicator of a bigger problem. The CEO said that the rest of the business was doing well—the implication being that the corporate strategy is correct. It was his view that the problem is purely one of execution within the business unit.

    While these two situations were quite different, they highlight an important dichotomy that seems to catch more than a few people out—the vital difference between strategic thinking and strategic planning, and the importance of doing both:
    • Strategic thinking is the process of finding options. It's about the big picture, casting the net wide, to discover possibilities. It's not about solving problems or picking a winner.
    • Strategic planning is the process of narrowing down options, of selecting the preferred one to achieve the business' goal, and of creating action plans. It's exactly about solving problems.

    Derry has been through the thinking process and the planning process. Therefore, the discussion with the board and the CEO should be a real pleasure, because they have a context against which to conduct the debate. In contrast, the Terra CEO seems to have treated the troubled business unit in isolation from the rest of the company, and jumped to the conclusion that something is wrong within the unit. It could be, but I wonder whether the company has a bigger problem: whether the corporate strategy has some holes in it. Why has business declined? Is the once-strong market for the business unit's services still there? What part does/should the business unit play in the wider corporate strategy? The world may have moved on, so fixing a unit without grounding it in reality can be a waste of time and money. 

    The process of thinking about the wider context, the market within which a business operates is vital. The temptation is to go straight into problem solving mode is powerful—everyone likes the satisfaction of having created a plan to solve a problem. However, this is rarely the best first step. My fear for Terra that any work on the business unit will simply paper over a bigger problem. I've suggested some questions for the CEO to ponder before he goes too much further. The next conversation will be very interesting. In the meantime, the Derry workshop is booked.

    * Usual story: the company names have been changed, to protect the parties involved.
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    Has the IPO supply-and-demand equation reached a tipping point?

    Governance Performance
    I've mused about the steady stream of IPO activity in New Zealand several times of late, most recently this morning. Expectations have been high. However, the soft response to Serko's listing, and nervous chatter on various news and social media sites, suggests that the supply-and-demand equation may have reached a tipping point. Could this be? 

    I'm not convinced. Good investments should—and generally do—attract good support, and weaker ones should be put to the torch. At the risk of being labelled as having a somewhat simplistic viewpoint, I think the market has simply woken up, such that it will not blindly support weak proposals. If this is the case, I'd call the situation by its proper name: common sense.
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    Actual performance trumps promises, actually

    Management Performance Strategy
    Newly-listed Gentrack provided recent and aspiring IPOs with a salutary message yesterday. The investment community prefers solid profitable companies with growth potential. Surprise, surprise.

    In the last year, several companies—including some who are yet to record a sustainable profit—have sought and gained a listing on the New Zealand stock market. The headlong rush to list seems to have been dominated by promises of huge growth and, therefore, good rewards at some point in the future. Some, who entered early, have had an amazing ride but are now getting a reality check, as I mused recently. However, many IPO companies carry a burden of debt into the IPO, which means some of the new capital is needed to tidy up the balance sheet.

    In contrast, Gentrack has been operating for many years, has many customers, and is a proven performer with a track record of profits. It also has a credible plan and has signalled an intent to pay a dividend within twelve months. The company received a warm welcome when it listed yesterday.

    Is the aura surrounding the high-tech sector and hype of stellar returns starting to lose its lustre? Maybe. However, I'm confident that the invisible hand of the market will redress any imbalances that have occurred as a result of the current lemming-like rush to list. It will be very interesting to see which companies come through the current gold rush fever well.

    (Disclosure: I do not hold any shares in any of the companies mentioned in this muse.)
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    Amendments to the Companies Act 1993: How will they affect you?

    Governance
    An important new piece of legislation--the Companies and Limited Partnerships Amendment bill—has just had its third reading in the New Zealand Parliament. It has been designed to hold directors that operate at or beyond the edges of moral and legal acceptability more directly accountable for their actions. The Bill affects the Companies Act 1993 and the Limited Partnerships Act 2008. Amongst the provisions, companies will be required to have at least one New Zealand-resident director, directors of limited partnerships will need to provide some personal information, and new offences for directors who act dishonestly or in bad faith will be created. 

    Law firms MinterEllison and Bell Gully have published a helpful summary of the amendments on their respective websites (here and here). The Institute of Directors in New Zealand will probably provide some information to its members nearer the time the Bill comes into force. Directors, investors and other affected parties should become familiar with the amendments, even though most local companies and directors are unlikely to be directly affected by them. If you have any concerns, seek legal advice. 
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    Paper accepted for international conference

    Conferences Governance Phd Research
    I'm both thrilled and humbled by some news that arrived overnight. A paper that I prepared some time ago, The crucial importance of access to the advancement of governance research (read abstract), has passed through the double-blind review process and been accepted onto the programme of the 10th European Conference on Management, Leadership and Governance (ECMLG)! The conference is being held at VERN', in Zagreb, Croatia, in November.

    The paper discusses the difficulties that governance researchers face when their research is limited to the analysis of secondary data—typically interviews, surveys and questionnaires. It suggests that if researchers study what boards actually do, by observing board meetings directly, then it should be possible to learn enough to provide an explanation of how boards influence company performance outcomes (or not). The paper also includes some preliminary insights, which emerged from a series of boardroom observations conducted as part of my doctoral research. It will be interesting to see how this paper is received. Hopefully, it will give folk the confidence to press on and try different approaches to corporate governance research, to discover if and how boards create value, or whether they simply impose cost.

    The full paper will be available on the Research page immediately after it is presented at the conference.