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    EIASM'17: Day two summary

    Conferences Governance Research
    The 14th edition of the Corporate Governance Workshop convened by the European Institute of Advanced Studies in Management (EIASM) was held in Brussels, Belgium this week. A summary of the key insights from the second day follows below (click here to read the day one summary).
    • Messrs Bob Garratt (world-class governance thinker and practitioner), W. Lee Howell (World Economic Forum) and Thomas Donaldson (Wharton Business School, Philadelphia) opened the second day with a shared keynote. There were so many insights from this session that I've reported them separately.
    • Gerrit Sarens (KU, Leuven and Belgian company director) summarised findings from a lengthy study, a critical evaluation of the role of the board of directors in crisis detection and response. Informed by the analysis of 17 cases, Sarens observed that boards often fail to discern the onset of a crisis: they were quick to discern and act on an emergent crisis in just three of the 17 cases studied. This blindness (the board did not detect the onset of a crisis in 14 of the 17 cases studied) prompts some rather awkward question: why? While each case was different, Sarens noticed a consistent pattern of behaviour and practice across the 14 boards including hubris and overconfidence; low levels of board–management transparency; lack of critical attitude and genuine independence, appropriate expertise and relevant knowledge; and, tellingly, a low level of commitment.
    • Most of the other papers and presentations on the second day were reductivist studies of board and director attributes: detailed statistical analyses of typically quantitative data collected from public sources and databases. Sadly these studies added little to what is already known: that the structure and composition of board is, largely, immaterial to effective board practice and business performance. During the afternoon session, one colleague made a particularly telling observation: "I'm getting frustrated. The dominant theme of board research needs to change, from searching for regular patterns of what boards should look like, to understanding and explaining the contextually relevant (and contingent) relationship between boards and business performance". I've been beating a similar drum for a while now: if we are to understand how boards contribute to business performance (read: fulfil the value creation mandate), then researchers need to get inside the boardrooms of successful companies to see what those boards actually do and don't do.
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    EIASM'17: Keynote

    Accountability Decision Making Ethics Governance Leadership Strategy
    Unlike previous editions of the EIASM corporate governance workshop that I've attended, the 2017 keynote session was delivered by three luminaries, not one. W. Lee Howell, Bob Garratt and Tom Donaldson—men of considerable gravitas in their respective fields—led the keynote session together. Each spoke separately, and a panel discussion followed.
    Lee Howell opened the session with a telling quote: "Being right too soon is socially irresponsible" (Heinlein). This quote, a reference to impetuous decision-making on the basis of seemingly-strong (and sometimes quite weak) evidence, notes a common weakness amongst strong leaders, more so in complex environments. Though not named explicitly, Howell's opening comments carried strong implications for those advocating diversity in boardrooms and other structural 'remedies'.
    Howell followed by describing the efforts of the World Economic Forum (the Davos meeting in particular) to improve decision-making quality in the face of rapid change, technological advancements, globalisation and high levels of cultural and social complexity.  He said that WEF is intentionally pursuing four priorities to achieve the desired outcome—these being
    • to provide a trusted platform (i.e., Davos) for leaders to gather and exchange ideas in search of better outcomes;
    • to promote meaningful multi-stakeholder relationships (recognition that business, government and civil society are not independent);
    • to advance systems leadership; and,
    • to respond to the fourth industrial revolution.
    Howell's comments set the scene. Though provocative in the minds of some, the assertion that business is not independent from government and civil society was generally accepted across the largely academic audience. The implications for boards are not insignificant.
    Bob Garratt spoke next. He opened with a strong critique—that corporate governance as we have known it is dead. Though aimed more so at the practitioner, regulator and director institute communities, this opening gambit had the effect of capturing the attention of everyone in the room. The implication, of course, is that if the understanding of corporate governance is somehow wrong, then much current research may actually be futile—a point that Garratt and I have discussed and are in strong agreement.
    Whereas corporate governance was conceived as a term to describe the effective work of the board of directors as it seeks to drive business performance, Garratt noted the demise of the term, to now one closely associated with the task of compliance and the associated activity box-ticking (though this is generally denied by directors when they are interviewed). In an oblique reference to his new book, Garratt asserted that the rot must be stopped. Continuing, he noted four international trends that boards need to respond to if the value creation mandate that they can and should be pursuing is to be realised—specifically,
    • inclusive capitalism;
    • the rise of the global middle class;
    • a growing acceptance that other people's learning and values are key to effective organisations; and,
    • the urgent need to re-establiah professionalism in boardrooms.
    The third speaker was Tom Donaldson. He mounted a challenge to boards and directors, arguing that they need to embrace 'second order values thinking' as a means of moving beyond short-termism, hubris and self-centred decision-making. The critical difference between first order and second order values is that first order values tend to be non-intrinsic, whereas second order values are intrinsic. Interestingly, most management theorists think in terms of first order values. 
    Donaldson closed with a strong challenge. Noting that boards of directors are uniquely positioned to act on the basis of intrinsic values, openly and without double-speak, Donaldson called on boards to embrace an inclusivity, meaning to act beyond pure and unadulterated self-interest. A strong call, one Peter Drucker and Henry Mintzberg would both have endorsed.
    Together, these three speakers' comments had the effect of shining much-needed light on the ills of normative board practices (read: corporate governance). Helpfully though, the speakers did not stop their criticism of board practice. They suggested possible solutions, and supported them with strong arguments. Directors and directors' institutes could do far worse than to investigate these ideas and test their relevance and applicability.
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    EIASM'17: Day one summary

    Accountability Conferences Diversity Governance Research
    The 14th edition of the Corporate Governance Workshop convened by the European Institute of Advanced Studies in Management (EIASM) was held in Brussels, Belgium this week. A summary of the key insights from the first day follows below (click here to read the day two summary).
    • Laura Georg (Norwegian University of Science and Technology) provided the opening keynote, speaking on "Governance of Cybersecurity". After presenting some historical context, Georg laid out some current realities for all to see. First, she noted a tension between technological advancement (what is possible) and societal expectation (what is acceptable). Second, most (91 per cent) board members do not know how to read, much less interpret) cybersecurity reports provided by management. Third, the impact of a successful cyber attack, on the value of intangible assets in particular (often 60 per cent of the value of the balance sheet), is poorly understood. The takeout is stark: there is a real disconnect between those involved with the technicalities and the board of directors. More specifically, most management teams are not reporting to their boards effectively, [reporting and risk] standards are yet to emerge and, tellingly, the impact of a cyber event on firm performance is not being adequately discussed much less addressed. These factors need to be resolved, with urgency, if boards are to ensure the sustainable performance of the company.
    • Michael Hilb's (University of Fribourg, Switzerland) presentation, on the "Governance of Digitalisation" raised some interesting questions for boards, the most pressing of which is "How should boards keep up to date, respond and act in response to the seemingly incessant bow wave that is 'digitalisation'?" Whereas many boards understand business performance primarily in financial terms and measured approaches to risk, the advancement of digitalisation (ed. whatever that means) demands that boards extend their purview. Greater foresight (to see into the future, event to the point of prediction) and strategic competence (to make sense of options, leading to informed and appropriate decisions) is needed. Further, the ubiquity of reach provided by the Internet renders traditional national boundaries mute, enabling a 'winner-take-all' mindset. Though his focus was specifically on the board's response to digitalisation, the conclusions drawn by Hilb were eerily similar to those within the strategic governance framework that emerged from my doctoral research.
    • Martin Bugeja (University of Technology, Sydney) provided an update on the Australian shareholder 'say on pay' regulations introduced a few years ago. The framework, designed to enable shareholders to exert some influence over executive remuneration, requires shareholders to vote on executive remuneration at the annual meeting. Depending on the result, shareholders have the power to censure the board and, potentially, remove the board. If 25 per cent of the shareholding opposes the remuneration proposal, then a 'strike' is registered and the board is required to take action. If the proposal is opposed again the following year, a second 'strike' is registered and a 'spill' vote is taken, whereby the shareholders may remove the board of directors. Bugeja reported that approximately seven per cent of remuneration proposals receive a strike each year. However, some interesting (and perhaps unintended) consequences are starting to play out. Whereas behaviours change and adjustments are made following a first strike, the board's typical response to a second strike is to take no action—preferring instead to await a spill vote and to 'expect' to be returned by major shareholders. Though this smacks of hubris, the reality is that only one board has 'suffered' the ignomy of a spill vote since the regulation was introduced. Bugeja concluded that the intent of the Australian 'say on pay' framework is good but it does not seem to be working as intended in practice. 
    • Hilde Fjellvaer (Trondheim Business School, Norway) and Cathrine Seierstad (Queen Mary University, London) spoke on progress towards female membership of company boards a decade on from the introduction of the 40 per cent quota (females on the boards of publicly listed firms) in Norway in 2007. They reported that firms complied with the quota as required but did little no more. With hindsight, this should not have been surprising; the pool of suitable female director candidates was small. Indeed, a small group of females received many appointments, some individuals holding nine or more concurrent appointments. Subsequently, the average number of concurrent appointments has dropped (to below four) as the pool of potentially suitable female director candidates has enlarged. Notwithstanding this, the percentage of females on the boards of publicly-held firms has stalled at 40–41 per cent. The  percentage of females on the boards of privately-held firms has remained low as well—15 per cent a decade ago and 17 per cent now. Fjellvaer and Seierstad noted that while the observable expression of diversity has stalled, boardroom behaviours are changing. Directors say they explore a wider range of options before making strategic decisions, and higher levels of teamwork are apparent than in the past. However, and importantly, any link to increased firm performance attributable to the presence of female directors remains elusive.
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    Emergent corporate governance thinking

    Conferences Director Development Governance Research
    I've arrived in Brussels, having travelled directly from New Zealand via London Heathrow (thanks Air New Zealand) and the the Eurostar, to attend a two-day conference on corporate governance and board practice. The conference is run under the aegis of EIASM, the European Institute of Advanced Studies in Management, of which I'm a member. My name is on two of the papers to be presented (links are posted on the Research page).
    Approximately 50 delegates have gathered from around the world (24 countries?) for two days of discussions and presentations. Most of the delegates are leading academics in the fields of board and governance research, although there were a few (including me) who span the so-called academy–practice divide. This was my third attendance at this event. Previously, I went to the twelfth edition (Brussels) and the thirteenth edition (Milan), where my paper received the best paper award.
    The core theme of the fourteen edition is digitalisation and, specifically, the emergent impact of the so-called digital economy on boards and effective practice. A triumvirate of leading thinkers (Lee Howell, World Economic Forum; Tom Donaldson, Wharton Business School; and, Bob Garratt, Fidelio Partners UK) will lead a keynote session on the second morning. Other topics to feature on the programme include updates on board diversity research, shareholder relations, board responses to crises, strategic control and a direct challenge to the way board research is conducted. 
    I'll post summaries of the key learnings. Stay tuned for end-of-day updates.
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    The pursuit of high board performance

    Conferences Governance Research
    Picture
    Plans and preparations for my next set of international commitments are coming together well.  I'll be on the road for two-thirds of November to fulfil five speaking engagements; attend two conferences; lead a one-day learning workshop; fulfil two advisory commitments; and, attend a miscellany of meetings. The key dates are:
    • ​Sydney (1st & 2nd)
    • Wellington (3rd)
    • Brussels (5th to 7th)
    • London (8th to 10th, and 14th)
    • Rochester (13th)
    • Vienna (15th to 18th)
    A common theme runs through these commitments: the pursuit of high board performance. 
    The talks will explore several aspects of board practice including the board's role in strategy; emerging trends;  the mechanism of corporate governance; and, the defining characteristics of an effective director and board. The learning workshop (entitled The effective director) is part of the Governance Institute of Australia's new capability development programme. The conferences are the European Institute of Advanced Studies in Management, in Brussels (I'm presenting a paper), and the Global Peter Drucker Forum,  in Vienna. ​
    In case you are wondering, there are still a few gaps in the schedule in each location for additional meetings. Please contact me if you would like to arrange a meeting while I'm in your area.
    If you'd like to know more about any of contributions, please get in touch. (Note: As is my normal practice, conference summaries will be posted on this blog soon after each event, so do check back if you are interested). 
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    Hitting the nail, squarely, on the head

    Accountability Decision Making Diversity Governance Performance Research Tough Questions
    Picture
    Bob Tricker just did it again.
    Long the doyen of corporate governance (Sir Adrian Cadbury used the term "father of corporate governance"), Tricker has just posted this article, a stinging critique of several emergent ideas that, through repetitive use, have permeated thinking and are becoming accepted as conventional wisdom. Risk, culture and diversity are singled out as populist memes. Yet robust evidence to support the notion that any of these memes are directly contributory to effective governance—let alone company performance—in any predictable manner is yet to emerge. Tricker's timing is, once again, exemplary.
    Thankfully, Tricker offers far more than a straightforward critique. He reminds readers that the purpose of the board of directors is to govern:  
    The governance of a company includes overseeing the formulation of its strategy and policy making, supervision of executive performance, and ensuring corporate accountability.
    The purpose of a profit-oriented company is also made clear (a point famously made by Friedman):
    To create wealth, by providing employment, offering opportunities to suppliers, satisfying customers , and meeting shareholders' expectations.
    In calling out this matter, Tricker has hit the nail on the head—the effect of which is to place those motivated by the promulgation of unfounded memes in a rather awkward position. I am with Tricker; our understanding of corporate governance needs to be reset. Rather than pursue new memes (a perfectly adequate definition was established over fifty years ago), boards need to discover how to practice corporate governance effectively. Tricker (Corporate governance: Principles, policies and practices), Garratt (The fish rots from the head) and a few others provide excellent guidance as to how this might be achieved.
     (Disclosure: The two books named in this article are the ones that I refer to most often when working with boards. I commend them to you.)