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    Hiding in plain sight

    Accountability Corporate Governance Decision Making Effectiveness Governance Performance
    A kerfuffle has broken out on the East Coast of the US, between Lucian Bebchuk, an esteemed professor at Harvard University, and Martin Lipton, partner at New York law firm Wachell, Lipton, Rosen & Katz. Specifically, Lipton has mounted a strong attack on an article published by Bebchuk (a critical examination of 'stakeholder governance'). That Lipton has objected should not be surprising. After all, he is a lawyer with vested interests and he has a long record of promoting stakeholder governance.
    This is what Bebchuk asserted:
    Stakeholderism, we demonstrate, would not benefit stakeholders as its supporters claim. To examine the expected consequences of stakeholderism, we analyze the incentives of corporate leaders, empirically investigate whether they have in the past used their discretion to protect stakeholders, and examine whether recent commitments to adopt stakeholderism can be expected to bring about a meaningful change. Our analysis concludes that acceptance of stakeholderism should not be expected to make stakeholders better off. 

    Furthermore, we show that embracing stakeholderism could well impose substantial costs on shareholders, stakeholders, and society at large. Stakeholderism would increase the insulation of corporate leaders from shareholders, reduce their accountability, and hurt economic performance. In addition, by raising illusory hopes that corporate leaders would on their own provide substantial protection to stakeholders, stakeholderism would impede or delay reforms that could bring meaningful protection to stakeholders. Stakeholderism would therefore be contrary to the interests of the stakeholders it purports to serve and should be opposed by those who take stakeholder interests seriously.
    Lipton's counter to these assertions was strident:
    We reject Professor Bebchuk's economic, empirical and conceptual arguments. They are ill-conceived and ignore real-world challenges companies and directors face today.

    As we have discussed, new laws—such as federal legislation of the type proposed by Elizabeth Warren—are likely to sweep far too broadly and risk substantial destruction of corporate value. They are also unnecessary if companies and investors embrace stakeholder capitalism as contemplated by The New Paradigm and as adumbrated by the actions Professor Bebchuk condemns.

    We recommend that companies and boards monitor and review their stakeholder and ESG profiles as a matter of increasing priority, and engage regularly with their major investors on these issues.
    This debate exposes something awkward—that when partisans announce their views people react, especially if they denounce other perspectives. This tactic may well pique interest and sell column inches, but it rarely results in viable outcomes that can be sustained over time. 
    My own research, and experience both as an advisor and serving company director, suggests that either-or argumentation, a characteristic of determinism, is deeply flawed. To pursue profit as an exclusive goal inevitably results in selfishness and inequity. Similarly, the pursuit of priorities espoused by ESG proponents introduces a another, and not insignificant, risk—of exposing the companies and the economy more generally to an 'Icarus moment'. 
    Larry Fink, Chairman and CEO of Blackrock, summed things up well in his January 2019 letter:
    Profits are in no way inconsistent with purpose—in fact, profits and purpose are inextricably linked. Profits are essential if a company is to effectively serve all of its stakeholders over time—not only shareholders, but also employees, customers, and communities. Similarly, when a company truly understands andexpresses its purpose, it functions with the focus and strategic discipline that drive long-term profitability. Purpose unifies management, employees, and communities. It drives ethical behaviour and creates an essential check on actions that go against the best interests of stakeholders.
    Fink's position highlights that a balanced perspective is probably 'best'. But how might it be achieved? The pathway may be hiding in plain sight. If the board is to fulfil its duty to ensure value is created over time, it needs to look well beyond selfish interests and motivations. This means considering the wider context within which the company operates, creating a viable strategy, determining appropriate 'performance' measures and only then governing accordingly. 
    Bebchuk was brave to call out the messianic assertions of the stakeholder capitalism camp. Perhaps Lipton might take stock, and meet with Bebchuk—the purpose being to explore the nuances of each other's views, in search of a more balanced understanding of the purpose of companies and role of the board.
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    Succession planning or disloyalty?

    Accountability Corporate Governance Decision Making Ethics Performance
    Dave Rennie, a rugby coach from New Zealand, has just been appointed as coach of the Australian national team, the Wallabies. This appointment has raised eyebrows, not only because of the passport the appointee carries, but because of the appointment process. 
    It turns out the Rugby Australia had been speaking with Rennie for six months prior to the appointment being announced. Superficially, this appears to have been a smart move on Rugby Australia's part; a succession planning exemplar. But was it, or was it an act of disloyalty against the incumbent, Michael Cheika? The incumbent only made his intentions clear during rugby's showpiece, the Rugby World Cup, vowing to resign if the Wallabies did not win the William Webb Ellis Cup. Cheika and Raelene Castle, chief executive of Rugby Australia, were hardly the best of buddies, for sure. But when does strength in leadership (Castle has form) cross the line, becoming bullying?
    This case exposes an interesting dilemma for boards of directors. When does the board's duty of loyalty to the incumbent chief executive cease? Is it reasonable, for example, to publicly support the incumbent while also scheming in the shadows to replace him or her? If the board finds itself in a position of lacking confidence in the chief executive (regardless of the reason), it owes a moral duty to both the chief executive and the organisation for which it is responsible to act both swiftly and with integrity. Rugby Australia appears to have done neither. While Castle probably operated within the law (she is on record as saying that formal contract negotiations did not take place until after the Rugby World Cup), the moral high ground was forfeited long ago. And that, sadly, places both Castle and the Rugby Australia in a rather awkward position.
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    Leading from the boardroom: a collective imperative

    Accountability Corporate Governance Decision Making Effectiveness Governance Leadership Research
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    Leadership is topical in most spheres of human endeavour; companies are no exception. To encourage others to achieve great things is the stuff of effective leaders. The most successful are widely-lauded. But leadership can take many forms, of course. Cast your eye over the last 100 years or so and you'll discern leadership in action in different ways. The era of the titan (Rockerfeller, Carnegie and Morgan being notable examples) saw leaders exert control over companies powerfully. The emergence of the management class in the inter-war years saw the emphasis change, the efficient operation of companies came to the fore. Since the turn of the century and the entry of corporate governance into the business lexicon, leadership has taken another form: the oversight of companies from the boardroom.
    Often, perhaps typically, leadership is understood to be an individual endeavour; a person exerting influence. But leadership has a collective dimension too—the board of directors is an instructive case. While individuals (directors, trustees) contribute to board discussion and process, it is the board (not directors) that decides. Leadership in this context is, exclusively, collective.
    Collective leadership requires a different approach. Directors need to work together to reach consensus for a start. This article has some more great tips that boards may wish to consider as they seek to lead effectively:
    • Good leaders focus more on character than ability. Where does your board recruitment practice put its energy?
    • Effective leaders are open to learning from others. When did your board last undertake a professional development session, together?
    • Effective leaders are marked out by a spirit of appreciation and thankfulness. Does your executive team know that you appreciate their work and the results they achieve? What about staff, clients and other stakeholders?
    • Effective leaders are self-aware. Does your board assess this, or is hubris a problem?
    • Effective leaders choose to get on the solution side very quickly. To dwell on problem definition and compliance is to vote for stasis not progress.
    How does your board measure up? More pointedly, does your board even know the effect of its decisions? Nearly thirty years ago, the challenge of explaining board influence over company performance was famously described by Sir Adrian Cadbury, a doyen of corporate governance, as being "a most difficult of question". Thankfully, some progress has been made in recent years, as researchers have entered the boardroom to conduct long-term observational studies of boards in session, and leaders such as Charles Hewlett have shared insights from their experience. While robust explanations remain elusive, one thing is now clear: neither the structure nor composition of the board is a direct predictor of its effectiveness, let alone company performance. If boards are to contribute effectively in the future, they need think, act and behave differently.
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    How does your board rate on the 'trust' scale?

    Accountability Governance Leadership Performance Societal Wellbeing
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    Trust is one of those social building blocks that is crucial for getting things done with others. Board work by no means exempt. When directors a faced with making strategically-important decisions, they must rely on information from and interaction with their board colleagues, the chief executive and any other advisors who may have been invited to contribute. Then, after consideration and having made a decision, the board needs to follow through, by ensuring the decision is implemented well. But, and sadly, the  levels of trust both between directors and with external stakeholder groups is often lower than what is needed for effective decision-making. The following comments, originally published in 2016 by EpsenFuller (subsequently acquired by ZRG Partners), make the point deftly:
    Board directors today face a variety of challenges. Whether it is a case of corruption or the increasing threat of cybercriminals, their performance in dealing with these issues is the subject of considerable attention, explained The Huffington Post (Jan. 25, Loeb). Investors, consumers and NGOs alike are looking to boards for accountability in terms of company performance. Yet, a recent study found that public trust in boards of directors is lower than that of CEOs. A mere 44 per cent of survey participants claimed to have trust in a company's board—five per cent less than trust in CEOs. Influential constituencies are demanding that boards perform at exceptional levels while maintaining distinct independence from company executives.
    That some directors do themselves no favours (through poor behaviour, malfeasance, hubris and  failing to complete actions, for example) is self-evident. But all is not lost. High levels of performance are possible—if all of the directors commit to working together (both as a board and with management) and reach agreement on the company's core purpose; the strategy to be pursued to achieve the agreed purpose; how performance will be measured; and the values that will underpin behaviour standards, decisions, and everything the company does and stands for.
    Perhaps if more boards embraced this mindset (working together), with the company's best interests to the fore, the trust problem that generates so much tension (not to mention column inches) would gradually become a thing of the past. Is this expectation worth striving for, or do you think it is too ambitious?
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    Is corporate governance a framework, or something to be practiced?

    Corporate Governance Decision Making Director Development Value Creation
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    English can be a confusing language. The same word can have different meanings in different contexts (by 'bear', do you mean the animal, taking up arms, or putting up with someone; and is a 'ruler' a measuring instrument or a monarch?). Meaning and usage matters; more so because it is not static. Language evolves, whether by design or in response to an evolutionary development. Some refinements improve our ability to communicate effectively, others to defy logic.
    The understanding and usage of the terms 'governance' and 'corporate governance' are topical cases in point. While the term 'governance' is derived from the Greek root kybernetes meaning to steer, to guide, to pilot (typically a ship), a plethora of usages have emerged over time. Today, many different usages have become commonplace. These include the oversight of managers and what they do; the activities of the board; and the framework within which shareholders exert control and boards operate.  It is also used to describe the board itself ("we'll need to get the governance to make that decision"). ​The term has also been applied in an even broader context, the business ecosystem (i.e., system of governance). The most extreme example I have heard is, "Governance can mean almost anything, it is completely idiosyncratic; different for every organisation".
    Things are made worse when two related but distinct concepts are conflated. Consider the definition of corporate governance and the practice of corporate governance. The former is relatively stable. Eells (1960) coined the term, to describe the structure and functioning of the corporate polity (the board). Later, Sir Adrian Cadbury (1992) added that 'corporate governance' is "the means by which companies are directed and controlled". The fundamental principle here is that corporate governance is a descriptor—the activity of the board. Compare that with the practice of corporate governance--how a board enacts corporate governance when it is in session. The means by which boards consider information and make decisions can and must be fluid depending on the situation at the time.
    The wider context merits a brief comment—the rules under which companies and their boards operate (statutes, codes and regulations), and the consequential impact of the board's decisions. These are necessary, because they define the wider environment; what is allowed and what is not. In recent years, ​I've heard many people include regulations and codes within their understanding of corporate governance. Similarly with the consequential impact of the board's decisions beyond the boardroom. Are either of these corporate governance?
    If you'll allow a sporting analogy, it's important to distinguish between the rules of the game, the game as played, and the final score. All are necessary, but only one is the game. To embrace an all-encompassing understanding suggests that corporate governance is ubiquitous, extending across the entirety of the company's operations and the functions of management, leadership and operations—not to mention the wider system of rules of regulations. This, I am convinced, takes us close to the root of the confusion that besets many directors. Every time I'm asked, I invoke Eells and Cadbury. A framework of laws and regulations is necessary, for these define the operating boundaries. But they are not corporate governance. In asserting that corporate governance is the means by which companies are directed and controlled, Cadbury was saying that corporate governance is the descriptor for the work of the board. And work, straightforwardly, is something to be practiced. Let's not lose sight of these distinctions. The continued 'sloppy' use of language serves only one purpose: to obfuscate. 
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    SEEing beyond ESG

    Accountability Corporate Governance Decision Making Performance
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    ESG (environmental, social, governance), an indicator and measure of corporate priorities and performance, has become topical in business circles, very topical. Its emergence has coincided with a rising tide of concerns about the effects of the doctrine of shareholder maximisation, as espoused by Milton Friedman some fifty years ago. A bevy of academics, consultants and politicians have responded by jumping on a bandwagon; much has been written, arguments abound. The objective of much of this rhetoric seems to have been to establish a counterbalance to perceived excesses of capitalism (because capitalism is evil, apparently). 
    The idea of using a range of financial and non-financial measures to assess company performance is not new. It was normal practice until the early 1970s. But things began to change relatively quickly after Friedman's thesis was published. A broad church of managers, boards, shareholders and activists embraced the thesis (with evangelical zeal in some cases) to justify a primary, even exclusive, focus on profit maximisation. And with it, interest in other (non-financial) indicators of corporate performance waned—until the emergence of corporate social responsibility (CSR)  and, more recently, ESG.
    ESG has gained an enthusiastic following. Many proponents have argued that the widespread adoption of ESG principles could redress some of the imbalances and inequities that have become apparent in recent decades. Is that reasonable? Is ESG all it is cracked up to be?
    Drucker's insight is salient (what gets measured gets managed), but the use of ESG as an appropriate measure of corporate performance doesn't sit that comfortably with me. Two things stand in the way:
    • First, only two of the three elements measure company performance (E and S illuminate a company's commitment to various environmental and social goals). The third, G, measures something else: the (supposed) performance of the governance function (i.e., the board).
    • Second, the ESG construct relegates economic performance to such an extent that it is not mentioned. But it remains important: economic performance is necessary if an enterprise is to endure over time.
    If ESG contains such flaws, what other options might provide a better (more complete) indication of enduring company performance?
    SEE (social, economic, environmental) merits close consideration. It reinstates the economic dimension to its rightful place, alongside the social and environmental dimensions. Thus, the three capitals that fuel sustained business performance, economic growth and societal well-being are re-united. If a company is to thrive over time (read: achieve and sustain high levels of performance, however measured), all three capitals need to be measured, managed and protected, as Christopher Luxon so ably asserted, in 2015. 
    And what of 'G'? Rightly understood, governance is about providing steerage and guidance (a lesson dating from the Greeks), the means by which companies are directed and controlled (hat tip to Sir Adrian Cadbury). As such, governance is a function performed—not a consequential outcome or result—and Drucker's maxim should be applied.
    So, to the courageous question: has the time to SEE beyond ESG arrived? I think so.