Should directors receive performance-based pay for their contributions?

This is an interesting question. Performance-based pay has become commonplace amongst senior executives and sales staff in the last decade or so. The model is straightforward: perform well (by achieving agreed objectives) and get paid a commission, be awarded stock or receive recognition via some sort of bonus. Performance standards are generally set by a more senior manager. The system seems to work reasonably well. However, an increasing trends in recent years is the implementation of similar performance based reward systems in the boardroom. But is this smart? Do performance-based pay systems motivate the "right" behaviours amongst directors?

Whereas management and staff are directly responsible for implementing strategy and achieving performance goals that are determined by a more senior party, the Board is not. In addition to their role being quite different (to determine strategy, monitor performance and manage risk), the link between what Boards do and company performance is tenuous, at best. Simply, we do not understand how Boards contribute to performance. Further, Boards are endogenous—they largely set their own agenda and determine the company's objectives. In establishing performance-based pay systems for themselves, Boards are immediately conflicted. One way of ensuring performance-based payments are made is to set artificially low targets (for example). I'm not sure this is a good way of maximising company performance, or motivating healthy behaviours, but it is a way of being paid(!)

My preference is towards rewarding directors through fixed fee payments for their contribution. If they are contributing, they receive their fee. This would be the default. However, if they are not contributing effectively, this should become known through a formal Board review process. Shareholders should have access to review documentation, and only re-appoint directors that are contributing. 

This sounds remarkably easy on paper, however the topic of today's muse is hotly contested amongst practitioners and academics alike. What's your view?

Note: This Muse is somewhat different from many previous entries. Whereas most prior entries record aspects of my doctoral journey, or make suggestions about a range of topics, this Muse simply poses a question: "What is the purpose of economic growth?"

I'm raising this question now because I realised, while re-reading some PhD notes today, that a statement that appears several times in my papers is heavily loaded. The statement is: "High company performance is an important contributor to economic growth and societal wellbeing". Today, for the first time, I realised this statement somehow assumes that economic growth and societal wellbeing are some how "good", and therefore worthy of pursuit. But why? What is the purpose of economic growth? What is the underlying driver?

Before you get too excited, I'm certainly not devaluing economic growth as such. Rather I'm asking why we humans pursue it. I don't have a clear answer right now, but I will ponder this question over the coming days, do some reading, and try to form some views.

To kick the discussion off, Benjamin Friedman, the political economist, writing in 2006, asserted that "Economic growth—meaning a rising standard of living for the clear majority of citizens—more often than not fosters greater opportunity, tolerance of diversity, social mobility, commitment to fairness, and dedication to democracy. Ever since the Enlightenment, Western thinking has regarded each of these tendencies positively, and in explicitly moral terms."

What do you think? I love to hear your ideas—considered, wacky or otherwise!

One of the promises (or more correctly, one of the aspirational goals) I made when setting out on my doctoral journey was to read widely—particularly in "off-topic" areas. My reason was selfish: to expand my horizons, maintain a sense of sanity and (hopefully) trigger some new ideas, because the sheer volume of on-topic material is enough to intimidate even the most ardent student.

However when I paused for a few days after completing the confirmation process, I realised that progress towards my "read widely" goal had stalled somewhat. In the daily routine of reading about governance, strategy, research methodologies, philosophy, and the theory of knowledge creation, I'd lost sight of the bigger goal.

Having realised what had happened, I decided an active remedy was required. To this end I have explicitly reserved an hour a day to read off-topic material. Further, I have decided to embrace the novel genre (for the first time in my adult life!), and specifically the so-called modern classics. A search engine provided the starting point: To Kill a Mockingbird. Next in line is yet to be determined, so if you have any suggestions, please let me know!

Over the last 6–12 months, a steady stream of articles, blogposts and on-line discussions calling for Boards to become more "tech-aware" have appeared. I've read many of these, and have concluded that the drivers for many can be grouped into one of two categories:

• IT Managers and technology professionals have become frustrated that their reports and their proposals to implement new systems are not understood or approved by the Board.
• Boards have been caught out (often at considerable cost to the company through project failure, customer impact or balance sheet stress) because they've approved technology programmes or investments that fail to deliver as promised, or simply are not aligned with agreed corporate objectives.

The time to bridge the chasm between what the Board needs from IT and what IT delivers has long-since past. Calls for Boards to become tech-aware need to be addressed. However, there appears to be a problem that needs to be called out: what does "becoming tech-aware" actually mean? And how does a Board achieve such a state? Rather than simply call out the problem, or brow-beat directors with standards (ISO 38500, for example), companies need to make progress on these questions. Several options are available.

Seek IT-expertise when making new Board appointments: The recruiting of IT-experts (former CIOs for example) can provide an immediate gains, particularly to help Boards understand trends, and reports and proposals from management. However, this option can backfire if appointees are inclined towards detail, jargon-laced statements, and the ardent promotion of the latest trends and fads.

Require the CEO and management to ensure all papers (reports and proposals) explicitly state business and strategic impacts: This is an outstanding option, and one that all Boards and CEOs should actively pursue. If management wants support for investments, then it is their responsibility to package proposals in such a way that the risks are made plain, and that impact on business performance and strategic goals is made explicitly clear. Boards have a role to play, by specifying how information needs to be presented in order to be most useful.

Boards request and schedule presentations from external specialists: The pace of technology change—and the business and strategic impacts that follow—continues unabated. If Boards are to maximise the value of the organisation effectively, they need to understand emerging trends and developments. Rather than secure this knowledge from staff (and run the risk of only hearing what management wants to say), Boards should seek contributions directly, just as they (should) seek any other strategic market comment, risk or audit advice. The goal is to gain a broader perspective, to inform the debate and the selection of strategic options.

It should go without needing to be said, but for completeness, these options are not mutually exclusive. In fact, a combinatory approach, with all three options in place, is likely to raise the chances of a strong outcome.

The ugly face of conflicted interests in local council governance raised it head in Wellington again today. In September, I suggested that it was time for Councils (and Councillors) to resolve the conflict of interest that exists when they appoint themselves to subsidiary company boards.

This morning, the Dominion Post published a front page article stating that Wellington City Councillors had voted to axe perks for board appointments. This sounds like a step in the right direction, however the decision will only become effective from the next term! Further, Councillors can (and probably will) still appoint themselves to plum roles. This smacks of cronyism and the feathering one's nest for personal gain.

It's disappointing that the Council has not bitten the bullet by moving immediately to appoint independent directors to the Boards of subsidiary companies. The appointment of independent directors, through a robust appointment process, will achieve at least three positive outcomes:

• Remove the conflict of interest that exists when Councillors appoint and pay themselves
• Ensure the best possible skills are recruited to maximise business performance
• (Begin to) restore public confidence in civic administration 

Every day, news stories and articles from a plethora of sources arrive in my email inbox and news reader software. The deluge is self-inflicted—I need to read widely for my doctoral studies. Mind you, having a voracious appetite for general knowledge doesn't help much!

Every now and again, an article seems to lift itself off the screen, seemingly to attract extra attention as my eyes scan down the headings. Today, one such article was the "Top 100 global thinkers for 2012" list, published by Foreign Policy magazine. I looked at the FP list, because I was fascinated to know whether Aung San Suu Kyi of Burma or the Pakistani student Malala Yousafzai featured anywhere. To my surprise (and delight) both appeared in the top ten.

It seems that, in 2012 at least, global influence is strongly correlated with politics and activism. With one exception (Sebastian Thrum—a computer scientist who has been working on the driverless car), the top ten are all activists or politicians fighting for various causes. It's not until you read further down the list that musicians, economists and business people start to appear.

The point of this muse? Perhaps if you aspire to become globally influential, you should turn to politics in a volatile state, or embrace a vital cause. But most people motivated by these endeavours couldn't care less about fleeting appearances on "influence" lists. Rather, their primary motivation is the cause they've chosen the invest their hearts and souls in, and the enduring impact of their efforts. And therein lies a lesson for us all, as we ponder our role in society and contribution to it.