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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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    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.)
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    Building director capability: observations from the field

    Accountability Decision Making Governance Performance
    The opportunity to work with new and aspiring directors to build capability is something I find most gratifying. Regardless of whether the task is to facilitate an established course (Institute of Directors' Company Directors Course), pilot a new one (Governance Institute of Australia's The Effective Director Course) or run a private workshop with a board, the sense of fulfilment amongst directors as they grapple with situations, gain new insights from their colleagues and learn more about the role of the director is often quite palpable. However, the learning experience is by no means a one-way street. I also expect to (and do!) gain new insights. Here are some of the themes that have been apparent in the sessions I've led this year:
    • The importance of a learning mindset is increasingly accepted. While the concept of governance is both straightforward and stable (the root word is kybernetes, meaning to steer, to guide, to pilot), the practice of governance (i.e., what boards do and how directors behave) is inherently complex and quite dynamic—even more so when the incessant march of new ideas and technologies is added to the mix. Directors need to commit to a programme of continuous learning if they are to remain current and make relevant contributions. Anecdotal comments shared in workshops this year indicate that some directors now allocate as many as five hours outside the boardroom for every hour in board meetings. In addition to reading and understanding board papers, these directors say they read widely about emerging ideas, trends, technologies and good board practice recommendations, to ensure a sufficiency of knowledge about the market/sector the company they govern operates in and new opportunities.
    • Traditional models of board–management interaction based on separation are breaking down. Historically, the board was conceived as a proxy, positioned between absentee shareholders and managers. The underlying assumption (agency theory) was that managers had different priorities from shareholders, so the board had an important role to keep potentially miscreant managers in check. In practice, a clear separation between the functions of corporate governance and management, including the appointment of independent directors were thought to be important for more objective decision-making. However, these recommendations are increasingly being questioned by both directors and emerging research. Proximity may actually be more conducive to effective contributions and higher quality decisions than separation and distance.
    • Compliance demands continue to dominate the agenda. Regardless of emergent calls for boards to intentionally contribute to strategic management in pursuit of future goals (purpose), the dominant focus of many boards remains one of compliance—to interrogate historical business performance (last month's management and finance reports, sound familiar?) and check that regulatory requirements are being met. While the task of monitoring and supervision should by no means be ignored, the protection of professional and personal reputation continues to be a more important consideration for many directors than company performance.
    • Composition remains a priority for many boards and shareholders. Many boards and shareholders continue to be enthralled by board composition, in search of the 'best' configuration. The number of directors, independence and diversity have all been argued to be important at various times. However, none of these (or any other observable factors) are directly predictive of better performance outcomes. Rather, effective directorship is function of board activity and director behaviour. 
    For more information about these or related topics, or to discuss implications for practice, please get in touch.
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    Understanding Friedman, 47 years on

    Accountability Decision Making Governance Performance
    In September 1970, The New York Times Magazine published an article that subsequently became a catalyst, a touchpaper even, for a step change in the understanding of the purpose of business and, as a consequence, the priorities of managers and boards of directors. Milton Friedman, an economist and Nobel laureate, argued that the doctrine of 'shareholder primacy' should prevail over that of 'social responsibility'.
    The article garnered much attention (becoming seminal along the way) especially amongst those shareholders, directors and managers for whom the maximisation of profit was of primary (read: exclusive), interest. ​The statement most commonly used to justify the profit maximisation doctrine is right at the end of the article:
    "There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase profits"
    Superficially, this statement is pretty clear: the purpose of business is profit and nothing else matters. But this statement is incomplete, a portion of a longer sentence. To stop reading at 'increase profits' is to read Friedman out of context. The complete sentence is as follows:
    "There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase profits so long as it stays within the rules of the game, which is to say, engages in free and open competition without deception or fraud."
    Friedman was clear. He argued that the maximisation of profit is an important priority of companies, and he argued that this is not, and cannot be, an unbounded endeavour—much less an exclusive one. The proviso followed without as much as a comma—the pursuit of profit needs to occur within the context of prevailing law and regulation (rules of the game), competition and fair play. That Friedman's guidance was so clear begs a rather awkward question: Why has it been misinterpreted by so many shareholders and boards?
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    Purpose & strategy: In pursuit of performance

    Accountability Decision Making Governance Performance Strategy
    Picture
    One of the joys of my 'work' is that I get to journey with boards and executive managers as they wrestle with some pretty challenging questions. Whether the journey involves briefings, phone discussions, meetings over coffee, professional development sessions or facilitated workshops, the goal is generally consistent: to gain understanding, in pursuit of increased effectiveness and, ultimately, better business performance.
    By way of example, I was recently invited to work assist ChildFund New Zealand (*), a social enterprise committed to the ideal of eradicating child poverty. The board and senior managers gathered in a modest setting—the administration office—to strip back the layers and, in so doing, re-discover the organisation's reason for being (purpose) and develop strategy to achieve the identified purpose. The intention was to reach agreement in principle on the core elements by the end of the day, so management could form up a coherent strategy document for discussion with the board and subsequent approval. 
    We got underway at 9.00am, as planned. Some 116 man-hours of focussed and, at times, intense effort later, it was 5.00pm. I won't mention what was discussed or decided, other than to say agreement was reached on most of the big questions. Once the strategy elements are drafted up into a suitable document and approved (there will be a couple of iterations between management and the board to tidy up loose ends, no doubt), attention will move to implementation. The ChildFund board intends to use the approved strategy as a frame, to both resource management and hold it to account (which will include monitoring strategy implementation and verifying that the expected outcomes and benefits are actually being achieved).
    Tips for effective purpose and strategy workshops:
    • Comfort zone: Purpose and strategy workshops can be draining, because they 'force' people to think about the future, often beyond the square. If possible, book an external venue to minimise disruptions (not possible for ChildFund).
    • Preparation: Workshops can be incredibly fulfilling, leading to a real sense of achievement, but only if participants have prepared well beforehand.
    • Structure: A straightforward agenda and a proven framework (not to mention good food and coffee!) let participants know what's coming up.
    • Mindset: High levels of engagement and critical thinking are needed if the group is to explore, discover, listen and debate effectively; maintaining an open mind in search of shared understanding.
    • Facilitation: The use of an external facilitator (who is committed to the goal but neutral on the result) enables the entire group to concentrate on the goal or task at hand.
    • Scope: The importance of resolving purpose and strategy cannot be understated. Purpose without strategy is, simply, an aspirational vision; and, strategy without purpose leads to busyness and wasted resources. 
    (*) It is not my usual practice to name clients! However, when one of the ChildFund NZ directors posted a picture on social media of the board and managers gathered around a whiteboard, the occurrence of the workshop and my involvement became public. Regardless, the details of the discussion remain confidential.