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  • Published on

    Hyundai: navigating along a pot-holed road

    Governance Leadership Performance
    The rather smooth road along which Hyundai has been travelling in recent years just got bumpy:
    • Yesterday, reports emerged of some rather shonky decision-making in the Hyundai boardroom, whereby a major land transaction was approved by the board, even though it did not know the ($10B!) price tag. The market reacted by stripped $8B off the value of the company's shares. Strike one.
    • Today, it was the workers turn. Over three-quarters of the workforce walked off the job, in protest. The union had been negotiating employment terms and conditions, and had been stonewalled by "cost issues". It now turns out the cost issues may have been related to the land transaction. Strike two.

    Claims (that the land purchase will enhance brand value) and counter-claims (that the Chairman wields outsized influence) are circulating. Whereas the company has performed well in recent times, things may not have been as rosy on the inside as they seemed to be from the outside. Clearly, Hyundai has struck a nasty section of potholed road. The board and shareholders face some difficult decisions:
    • Will the directors admit their rather large mistake and at least offer their resignations?
    • Will the management team, who successfully pulled the wool over the board's eyes, now respect the authority of the board?
    • Will the shareholders step in and shake-up the board?

    One hopes the shareholders, board and management might set their egos and inherent response (save face) to one side, to create and implement a plan to repair a now-damaged brand image. This nasty series of potholes will not be fatal to Hyundai's long-term prospects if the three parties act quick and smartly, and do so together as one. However, if they don't strike three may not be too far away.
  • Published on

    And so the CEO remuneration escalator continues...upwards

    Governance Leadership Performance Societal Wellbeing
    The latest round of annual reporting in New Zealand confirms that the size of CEO remuneration packages are continuing to track upwards. Reports from SkyTV, Ebos and others suggest that the now well-established trend shows no signs of slowing down.

    The concept of executives (actually, all staff) receiving remuneration commensurate with their performance and the value they add to the corporation sits comfortably with me. However, the steady spiral upwards of CEO packages, at what seems to be an unchecked rate, may be the harbinger of a longer term problem: that any linkage between the package, actual performance and market forces is lost. If boards are truly focussed on the optimisation of performance in accordance with the wishes of shareholders, then boards need to ask the following three questions every year:
    • Is value being delivered by the CEO? 
    • What is the company prepared to pay for that value?
    • Are alternative CEOs available if the incumbent declines any package offered?

    I am sure that the first and second questions are being asked by boards: the evidence is in the packages. However, I suspect the third question gets much attention. If a board was exploring its options, the likelihood of being captured by the CEO (or their reputation at least) should be much lower. While easy answers are unlikely to exist, boards need to grapple with these matters, by asking and acting on all three questions. Until they do, the law of supply-and-demand is likely to prevail, and the upward trend is likely to continue unabated, possibly to the detriment of long-term shareholder value.
  • Published on

    What should boards do when vital information is withheld?

    Governance Management Performance
    Decisions about major transactions, or matters that might be material to the future prospects of a company, are usually reserved for the board of directors. This is appropriate, because directors have a duty of care—to the company they govern and to the shareholders that own the company. In fulfiling their duties, directors must ensure they are adequately informed regarding the affairs of the company, so that decisions can be made in the best interests of the company and, ultimately, the shareholders. 

    This all seems straightforward and tidy, but is it always so? Unfortunately not—well not at Hyundai anyway. Recently, the Hyundai board of directors approved a bid to buy a large and valuable parcel of land—without actually knowing the price! Claims by management that the bid price was "top secret" and therefore could not declared seem to have been accepted by the board:
    While boards of the three firms discussed and approved bidding for the plot in the capital's high-end Gangnam district to house a headquarters complex, hotel and automotive theme park, the bid price was not shared with directors as it was deemed to be confidential, three of the directors said. The Hyundai Motor and Kia Motors boards unanimously approved making a bid for the Korea Electric Power (KEPCO) land, two directors said.
    The making of strategically important decisions without vital information borders on reckless trading. That such a large transaction would be approved without knowledge of the price defies normal logic. That $8B of market value has been wiped off Hyundai should come as no surprise.

    Why did the Hyundai board make the decision without knowing the bid price? If the board carries the ultimate responsibility for company performance and business value, it should know everything that is material to a decision. If information is missing, the board should insist on it being provided, and to defer any decision until the information is provided. That management thought that the board could not be trusted with knowledge of the bid price, and the board let management get away with it, is an indicator that there are some fundamental problems with the corporate governance systems at Hyundai. The directors need to take a good long look at themselves and the way they operate, and seriously consider whether they are fit to carry on.
  • Published on

    Is competition always good and are monopolies always "bad"?

    Governance Language Performance Readings Strategy
    What a great question. Throughout my business career, of over thirty years now, the prevailing answer has been 'yes'. However, Peter Thiel reckons the answer to both parts of the question is or at least should be 'no'.

    Thiel's thesis, that competition is for losers, and this response to it will get you thinking... Boards and regulators might need to take note.
  • Published on

    Where should the accountability benchmark be placed?

    Governance Leadership Performance
    Corporate boards and executive managers have endured some criticism of late, as yet another wave of reports of incompetence, fraud and hubris have reached the public domain. Some directors have been lambasted for their actions, while others have avoided any direct consequences. Clearly, this raises an interesting question of consistency. Where should the accountability benchmark for acceptable director performance be placed? 

    My sense is that directors need to think very carefully about why they are appointed and what duties they must fulfil having accepted any appointment. All directors have a duty of care and a duty of loyalty—to the company or to the shareholders (depending on the jurisdiction) and not to themselves. This means that the director role is a servant role, of serving the best interests (of the company/shareholders). In fulfilling these duties, directors need to ensure they are adequately informed and well-intentioned, lest the wool is pulled over their eyes or they make decisions that are not consistent with their duties. The role of the director bears a weighty responsibility, so directors need to take their appointments seriously. Most do, but some, clearly, flout the boundaries of moral and ethical acceptability. 

    Directors need to be beyond reproach, and clear demarcations of what is acceptable—and what is not—need to be established. The challenge, of course, is holding directors to this level of performance, in the public domain and through any legal processes that may be required.
  • Published on

    Another example of directors escaping guilt: has justice been served?

    Governance Performance Societal Wellbeing
    More news on the Feltex front today: a judge has just cleared the directors of liability for disclosure failures. I have discussed the sorry story of Feltex before. That the directors were charged seemed to be fair, given the seemingly strong evidence that something was awry. However, the judge has now issued their reserved judgement. Many will be surprised that, in the face of incriminating emails and other evidence that directors knew there was a problem with the business fundamentals, the decision was not guilty. However, and interestingly, the judge did note "some justification" for the criticisms of the prospectus upon which the case was based.

    Is this a case of well-heeled directors being able to rally a strong defence to protect their reputations, or was no wrong done? Regardless, the decision has been made, and with it a potentially dangerous precedent has been established—that the standard of accountability for directors may actually be quite low. While this is good news for directors, I'm not sure it is good news for shareholders, or for society more generally.