Archive - Peter Crow | Helping boards govern with impact

Published on: 20 November 2019

Succession planning or disloyalty?

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.

Published on: 16 November 2019

Leading from the boardroom: a collective imperative

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.

Published on: 15 October 2019

How does your board rate on the 'trust' scale?

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?

Published on: 11 October 2019

Is corporate governance a framework, or something to be practiced?

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. 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 (intentionally, or otherwise).

Published on: 1 July 2019

SEEing beyond ESG

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.

Published on: 18 June 2019

Who decides whether interests are conflicted?

A situation developing at Hutt City Council (a local council not far from where I live) is instructive for boards everywhere. It concerns a proposal to make a grant to Hutt Valley Tennis, a tennis club, to assist with the redevelopment of its tennis facility. The entity and the size of the grant, $850,000, are largely immaterial. What is significant about the matter is that one of the Hutt City councillors is married to the president of Hutt Valley Tennis (a potential conflict of interest, perhaps?), and that the decision required a casting vote by the Mayor to break a deadlock. The local newspaper has just reported the matter, and a newspaper columnist has chimed in offering an opinion as well.

On the conflict of interest: Questions have been raised as to whether Councillor Milne had a conflict of interest, because his wife is the President of the organisation that stands to benefit from the proposal. Milne registered his interest but denied there was a conflict of interest because his wife is a volunteer, and neither he nor his wife has a financial interest in it. But financial interest is not the appropriate test. A more appropriate test is whether the person can reasonably be expected to make an independent and objective decision, or other factors might lead to bias. Hutt Valley Tennis identified a potential conflict, and Milne registered interest. Yet Milne proceeded to participate in the decision-making anyway. On this matter, Milne appears to have missed a vital point: perception is reality (i.e., conflicts are assessed by others, not self). If there was any doubt at all, caution should have been exercised. To argue that there was not an actual conflict is inappropriate, some might suggest arrogant. Better for Milne to have removed any doubt by excusing himself from the discussion (by leaving the room), especially as he had already declared an interest. He should not have participated in the decision either. Standing one step back, the Mayor is not beyond scrutiny in this matter. Why did he not ask Milne to leave the discussion, and why was Milne not excluded from the decision?

On decision thresholds: Local councils, like company boards, make decisions in the collective. This means that every resolution results in either a 'yes' or a 'no' decision (notwithstanding any deferral or request for more information). In local government, the minimum threshold for a binding decision is typically a simple majority, with the Mayor holding a casting 'vote' in the cases of a deadlock. But is a sensible means of collective decision-making? What of the downstream effects and consequences? To proceed following a split decision raises all sorts of questions, not the least of which is the opposed councillors' commitment to uphold (or undermine) the decision. A better threshold is consensus, whereby every councillor (director, in the case of boards) has space to speak for or against a proposal, and debate points, on the understanding that they support the decision afterwards (because their warrant requires them to act in the best interests of the entire constituency). If consensus cannot be reached, it is better to defer the decision, pending more information and/or discussion.

Thankfully, the Hutt City Council has recognised the situation for what it is. The council has decided to nullify the initial decision and reconsider the proposal next week. Milne has announced that he will not participate.

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