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    On 'corporate governance': Is our understanding flawed?

    Accountability Decision Making Governance Performance Tough Questions
    ​One of the enduring questions of my career as a board advisor and company director is this:
    • When and how did our predeliction for the term 'corporate governance' emerge?
    ​My father was a company director, of a large processor in the dairy sector for fifteen years. He hadn't heard of the term until six months before he retired in 2001, when a young director who had recently joined the board started using the term. To that point, my father thought that directors governed and provided direction, and he was not alone.
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    A search back in time reveals that Eells (a researcher) was the first to use the term—in 1960—to describe the functioning of the polity (the board). Then, silence reigned until 1977 when the term appeared in HBR and subsequently in 1980 in academic journals. Yet since 2000, when the term entered the public's consciousness (perhaps as a result of media reports of hubris, incompetence, moral failures and fraud amongst directors), usage has exploded.
    ​Today, the term's usage has become so commonplace and distorted that a correction is needed.
    ​Corporate governance--the act of steering, guiding and piloting—describes what boards [should] do when in session. It does not describe and is not a proxy for the board itself, nor any other party or activity outside the boardroom. Regulators (to set rules), proxy advisers (lobbyists on behalf of shareholders and other interests), and shareholder meetings (communications) are all important, but none is corporate governance.
    Rob Campbell, your call to address this misunderstanding is both timely and most welcome. Directors institutes, business schools and consultants should take note, lest the expectations of the market, regulators and shareholders—not to mention directors themselves—wander further away from their original purpose, which is to pursue business performance in the best interests of the company and on behalf of shareholders.
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    The 'perfect' board size??

    Accountability Governance Leadership Performance
    What is the 'perfect' size for a board of directors? The debate has waxed and waned for years. Shareholders, nominating committees, researchers and boards themselves have asked a range of questions as they have tried to address the conundrum:
    • ​How many directors are required to get the work of the board done?
    • What is the ideal balance between quality and quantity?
    • At what point does cost become a burden (vs. value)?​
    Answers to these questions have proved to be elusive. The reason? Context. Every situation that boards need to consider is, to some extent at least, unique. Consequently, a broad range of skills and expertise is needed in the boardroom, to address different issues that come up at different times. A configuration that works well for one situation may not work well elsewhere. Consider these vignettes:
    • What about a small board of three or four directors? One small board that I was on (four directors) was great at making decisions quickly, which was helpful for the fast-moving context within which the high-growth company operated. However, we really struggled when one director was absent. On several occasions, we found ourselves reaching for external help because vital skills were not present at the table. The board discussed the matter at length. A decision was made to petition the shareholders for a larger director's fees pool, a cheaper and more effective option that paying external advisors for assistance. Sadly, the petition was never presented: the company was acquired soon thereafter.
    • What about a bigger board, to deal with a range of complex issues? Last year, I was asked to evaluate a board with eighteen (yes, eighteen) directors. When they were asked about board meetings and board practices, the directors said that meetings "took forever", that group dynamics were "overly complex" and that several directors were "passengers": clues that something was wrong. After further discussion, including the desire to move in a new direction (purpose and strategy were MIA), one of the recommendations to emerge was to ask shareholders to consider reducing the board size to nine directors, via a 24-month transition period of fourteen directors. The recommendation was accepted, and both board effectiveness and company performance improved as a result.
    These two cases demonstrate some of the typical challenges faced by small and large boards. While the best answer to the title question is 'it depends', a sweet spot does exist. Boards with between six and nine directors is about right—as Tracy Hickman reports—because board effectiveness seems to peak somewhere in this range. My research suggests bears this out. Boards with fewer than six directors have great dynamics and decisions are generally made quickly. However, small boards often struggle to deal with an array of strategic options, decisions and monitoring tasks. In contrast, group dynamics start to become unwieldy when the board size reaches double digits. Big boards are also expensive to run and the risk of passenger-directors increases markedly!
    ​If you'd like to know more about how to improve board effectiveness, or want to schedule a board review, please get in touch.
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    Strategy without purpose is, actually, just a collection of activities

    Accountability Decision Making Governance Leadership Strategy
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    Do you know why your company exists, it's raison d'etre? Can you provide a clear and succinct response to the question, or does the question leave you somewhat flummoxed? When I ask the question of others (it's usually the first thing I ask when leading a strategy development workshop), the most common response is a description of what the company does. But this does not answer the question! 
    Most people (especially your staff, customers and suppliers) don't care what your company does, they want to know why. You need to be able to tell the story. This article, published by Harvard Business Review sums it up nicely. Here are some questions for your board to consider:
    • Does your company have a single, clearly-stated purpose?
    • Is the purpose consistent with the wishes of shareholders?
    • Is your company's strategy demonstrably linked to achieving the agreed purpose?
    • Has the purpose been communicated throughout the company?
    • Do people (the board, management, staff) buy in to it?
     Directors need to get their collective heads around these questions. It's a matter of leadership, and of accountability. Let me know if you need any assistance with this, I'd be delighted to help.
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    Governing Apple is nothing like governing a fledgling company

    Accountability Decision Making Governance Performance Research
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    What is it with corporate governance? Thirty years ago, the term hardly rated a mention in business magazines—let alone general conversation. Now, corporate governance is seen by many (tacitly at least) as a panacea for all manner of corporate ills and director recalcitrance. The pursuit of best practice models (the one-size-fits-all approach) has become commonplace, even though the operating context of and challenges faced by small and medium companies are fundamentally different from those of publicly listed corporations. 
    Mak Yuen Teen, an associate professor of the NUS Business School and corporate governance expert thinks the one-size-fits-all approach is myopic and has just gone on record on the matter. Furthermore, many commentators, regulators and serving directors seem to have lost sight of Sir Adrian Cadbury's commentary, that corporate governance is primarily about the performance of the business. My experience, in research and as a serving director bears this out.
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    ECMLG'15: Performance evaluation systems for corporate directors

    Accountability Conferences Governance Management Performance Research
    Demands on boards to ensure desired company performance outcomes are achieved have led to increased scrutiny of directors and director effectiveness in recent years. Performance evaluation systems (PES) have emerged as a tool of choice to assess director performance. However, the influence of such systems on business performance is largely unknown.
    ​Marie-Josée Roy reported the findings of a recent Canadian study that examined PES closely, in an attempt to bridge the knowledge gap. Roy's survey-based study of 89 large Canadian companies identified three distinct types of PES (exemplar, formal, minimalist—definitions of which were provided in her supporting paper). The typology was based on descriptions provided by survey respondents. Her analysis revealed some interesting correlations, including that boards with an exemplar PES were more likely to be involved in important board roles of strategy and monitoring, and were more likely to be effective in these roles.
    While ​Roy's study was helpful in that it provided empirical evidence on board performance evaluation systems, it did not resolve the crucial question of how, in actuality, an effective PES might work. Survey respondents can (and often do) provide answers of convenience. Sadly, knowledge of whether any PES in use is actually useful (or not) for improving director and board performance remains largely unanswered. Other approaches to research, including longitundinal observations of boards in action and (probably) pyschological assessments are likely to be required if tangible progress is to be made. Even then, another even more vexing question—of whether improved board effectiveness leads to improved company performance—lies in wait.
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    The board chair's dilemma: what would you do?

    Accountability Decision Making Ethics Governance Performance
    Each month, Julie Garland McLellan, non-executive director and board consultant, invites several people to respond to a tricky board or governance situation. This month (Oct'15 issue), she crafted a challenging relationship dilemma with an ethical twist, and I was asked to provide a response. Thanks for inviting me to contribute Julie. The dilemma and my response are replicated here:
    The dilemma:
    ​Ximena chairs a government utility business that operates large primary industrial processes and is also involved in construction of new assets. Safety is a key issue and the board have zero appetite for any physical harm to staff, contractors or innocent bystanders. As board Chair Ximena also chairs the remuneration committee and has recently incorporated some nominations work into the charter and activities to better support the government with their desire to involve boards in director succession planning.
    The HR Director recently asked Ximena for a meeting at which she told Ximena that staff were concerned by the CEO’s activities outside of work. Specifically the CEO is involved in White Collar Boxing and the HR director feels this is not appropriate given the culture of the workplace and the visible support the organisation, and many other government companies, has given to anti-domestic violence campaigns. The HR Director also checked the terms of the company’s key man insurance policy and discovered that this would be voided for injuries or death resulting from action sports activities that include boxing. The HR Director has asked that Ximena talk to the CEO about ceasing his involvement with the sport.
    Ximena is concerned but cautious. She knows that the CEO, who was brought in from commercial industry, and the HR Director, a long serving public sector employee, have often differed in their opinions and that, whilst both are professional, there is scant respect and less regard between them. But she has to admit that a boxing CEO might not sit well with the ‘A Fight is Never Right’ campaign the company has just sponsored.
    Is this the CEO’s private business or an issue for the company and its board: What should Ximena do?
    ​
    Peter's response:
    ​Broadly, Ximena has four options:
    1. To ignore the HR Director’s appeal, by pushing back. However, this may see the issue ‘leaked’ to the public domain, especially given the HRD’s lack of respect towards to the CEO. If this were to occur, the board may be faced with a bigger problem - a damage control action. This option also provides tacit endorsement of the CEO’s actions.
    2. A private conversation will enable Ximena to hear the CEO’s perspective, ask questions and make suggestions. The CEO may not see the matter as a problem! Contingent on the quality of the working relationship, the chairman should be able explore options, present the wider perspective and reach an agreement over how best to proceed.
    3. To ask the CEO to meet with a board committee does two things. It signals to the CEO that the board is treating the matter seriously, in pursuit of a workable solution. However, it also sets a precedent whereby staff can approach the board directly. Staff need to take their concerns to the CEO first.
    4. To launch a full (presumably formal) investigation. This is probably an over-reaction.

    The most tenable option is probably the private conversation. While legal private activities are not and should not be the concern of the company, activities that may be considered to be incompatible with the company’s purposes, values or culture, or may call the company’s reputation into question or bring it into disrepute need to be curbed - particularly as the CEO is a highly visible role. Through their actions, they set the cultural tone of the organisation.
    Notwithstanding which option is eventually selected, the tension between the CEO and the HRD is a problem that needs to be resolved. The scant respect and regard is a harbinger of low trust, empathy and teamwork; thus rendering the working relationship difficult, at best. Whether the two parties are able to work together productively in the future is probably moot, especially as the HRD went around the CEO to the chairman directly. The HR Director probably needs to consider her tenure with the business.
    If you want to understand more about these options, or if you think you might need assistance with a challenging board situation, please get in touch.