July 2014 - Peter Crow | Helping boards govern with impact

Published on: 30 July 2014

On corporate governance: circa 2012 and 2014. What's changed?

I got a little bit fed-up with writing today, so I decided to read back through Musings, to see how the corporate governance discussion has changed over the last couple of years. Sadly, many of the topics discussed two years ago are still being discussed. Sure, the prevalence of articles about boardroom performance seems to be waxing, and the number of quota-based gender proposals has waned somewhat. That a very similar set of topics is being discussed is a shame. It suggests we are making slow progress. The following muse, originally written in October 2012, illustrates the point fairly well.

Have you noticed the rising tide of news stories about corporate governance in recent months? While some have highlighted the fraudulent behaviours of some boards and directors, most of the articles have focussed on efforts to improve the quality of governance around the world.

Much of the current discussion is focussed on regulation and diversity. Some regulators, including those in Singapore, believe that good regulatory frameworks are key to investor confidence. Many others, including Hong Kong's Exchange HKEx and noted academic Dr Richard Leblanc, are promoting diversity as a means of improving the quality of governance. I applaud these moves, but question whether regulation and diversity are the variables that will reliably deliver the main goal of good governance: better company performance. Regulation, for example, is a compliance tool not a growth tool. While they provide important safeguards for shareholders and stakeholders, they don't help companies to grow.

My conclusion, having reading hundreds of research reports and peer-reviewed articles, is that behavioural factors, social context and an active involvement in strategic decision-making are far more important than regulatory, structural or composition factors. As such, this is where our efforts to improve governance performance should lie. Ultimately though, the bottom line remains the same. Shareholders—whether professional investors or small business owners—need to know that the board is fulfilling its mandate to maximise company performance. If regulation or diversity helps achieve that, then well and good. If not, then let's move our attention to other factors—quickly—for the good of our economy and society.

Published on: 30 July 2014

Diversity and performance...adding some context

Several days ago, I mused about one of the most coherent arguments for diversity that I have read for a long time—you can read it here—so much so that I applied Leigh's thesis to boardrooms. However, I forgot to include an important link to an older post that discusses some other elements that appear to be important if boards are to have an influence on the achievement of company performance outcomes. Sorry, hopefully this short post makes amends!

Published on: 30 July 2014

What is "corporate governance culture", and how is it relevant?

Ah, culture, an oft misunderstood and sometimes misrepresented word. In the last few decades, a lot has been said about culture in business. Drucker's comment, that culture eats strategy for breakfast, is widely quoted. Given the importance of strategy to the achievement of objectives, culture must be really important!

Many of us know about culture, but what is it? You might like to read what others think culture is before you read on, because I have just come across a rather troubling variation: corporate governance culture. Yes, that's right. Corporate governance culture. It's mentioned here. Craft makes some good points in his article, but this term seems to imply that boards have their own culture, which leaves open the possibility that the rest of the company has a different one. That doesn't sound right.

Craft suggests that the vital relationship between culture, strategy and performance is at the heart of good governance. We nearly agree. I suggest that the vital relationship between culture, strategy and boards is at the heart of effective performance. Same elements—different arrangement. But then Craft moves on, and in so doing he loses me:

The only way in which a company is able to ensure that it is delivering the right type of business growth is through performance analysis and appraisal.

Really? Performance analysis and appraisal are both rearward facing activities. How does looking backward only ("the only way...") help if you want to go forward? Bob Garratt's book, The Fish Rots from the Head, tells us most of what we need to know. Culture starts at the top, in the boardroom, and it pervades outwards from there. If boards expect to influence the achievement of company performance outcomes, they need to engender a company-wide culture and wrestle directly with strategy (which is "the art of command" after all). So, let's leave cute terms like "corporate governance culture" where they belong—on the cutting room floor.

Published on: 25 July 2014

The case for diversity in boardrooms

Over the past few years, I have read many articles propounding the benefits of diversity in the corporate boardroom. Much research has been conducted by well-regarded scholars and consultancy firms, and some great results have been achieved. Many correlations between a diversity variable (gender, race, religion, socio-economic, other) and some aspect of board or company performance have been identified. However, most of the articles also claim—either directly, or, more often, tacitly—that improved outcomes occur because the board is diverse.

To say that company performance improves because there is a woman on the board (for example) is akin to claiming that red cars go faster because they are red. Such claims stretch things a bit far. They are also patronising to women. There is a world of difference between a correlation and causality. The debate needs to move from talking about the correlation between diversity and performance (most but not all research supports this linkage), to investigating why and how diversity is helpful to improved performance.

One of the most coherent arguments for diversity that I have read in a long time was made by Andrew Leigh, Australian Federal MP, recently. A copy of his speech, delivered at a Progressive Policy Institute meeting in Washington, D.C., is available here. Leigh says that diversity opens hearts and minds to possibilities—a wide breadth of experience and thought is what is important, if high quality outcomes are the goal. In essence, Leigh's thesis is that better outcomes occur when diverse experiences and thought are brought to bear, not because some flavour of diversity is present. I agree. The challenge now is to apply Leigh's argument to board research, to discover what underlying mechanisms are necessary to effective governance and improved business performance.

Published on: 24 July 2014

Boards: talking with shareholders is not optional

I've been on vacation this week, in Perth, Western Australia, with my wife. One of the things that we enjoy while away is to read newspapers that we wouldn't normally see at home, especially the local newspaper. This routine gives us a different perspective on what's going on in the world at large, which serves to broaden our horizons. I try to get my hands on a print copy of the The Australian when in Australia, and often read online versions of the New York Times and The Times as well.

The commentary pieces and investigative articles published in major newspapers are often quite thought-provoking—particularly when one is relaxing over a coffee and a muesli breakfast. For example, this article, published in the New York Times today, caught my eye. It highlights the difficulties that investors are having in talking with the boards of the companies they own (or, more correctly, part-own). I was stunned. Why would any director who is serious about their contribution not talk to the people to whom they are responsible and accountable? It smacks of hubris. More importantly, what can be done to remedy this problem?

Published on: 15 July 2014

Boards and performance: Just how far have we come in 15 years?

I was fascinated to read this post on CorpGov.net today. James McRitchie looks back at corporate governance, boards and company performance outcomes over the last 15 years. His summary provides some great insights into how far we have travelled as directors, researchers and consultants. Unsurprisingly, some contemporary topics were not discussed to any great extent in the past: diversity, technology and strategy, for example. Sadly, many of the issues that pressed in on boards in the past are still alive and well today. These include fraud, compliance, reputation, shareholder issues, and a propensity to look backwards, amongst others.

So, how far have we actually come in 15 years? We have travelled some distance for sure, but not as far as many of us would like to think, I suspect. The compliance requirements today are greater than in the past. Directors seem to have a greater awareness of their responsibilities and commitment to their work now. However, many directors and boards are still grasping at straws—protecting their reputations, focussing on compliance, keeping management honest—rather than looking forward, to the things that actually make a difference to performance and wealth creation. Clearly, corporate governance remains a work in progress.

What will boards and corporate governance look like in 15 years time? Who knows. However, if we can work out how boards influence performance and if we can work out how to motivate directors to concentrate on the things that matter, then there's a chance that value-creating boards might even become commonplace. Is that worth striving for?