Accountability - Peter Crow | Helping boards govern with impact

Published on: 28 September 2015

New VW CEO wants a new strategy. Why?

An interesting development hit the press today: Matthias Mueller, the incoming chief executive of Volkswagen AG, reportedly wants to embrace a new strategy for the beleaguered group. That an incoming chief executive wants to put his mark on the business is not particularly newsworthy, it is commonplace.

The interesting piece is the board's response. Will it entertain a new strategy, or will it assert its authority as the top-most decision-making authority? The challenge for the VW board is to decide whether the existing strategy is satisfactory and well-implemented (notwithstanding the scandal relating to the US market emission standards), or whether the company's strategy is flawed.

Given the strong financial performance over recent years, the more likely of the two options is that the strategy is OK. If this is correct, the board's decision becomes a straightforward assessment of power. Who is in control, the board or the chief executive?

Published on: 27 September 2015

Stepping beyond the summer of (boardroom) malaise. But how?

In recent months, news of another round of corporate scandals (Mintzberg thinks 'syndrome' is a better descriptor) have dominated our newspapers and Internet news feeds. All seem to be failures of corporate governance: HSBC, FIFA, Toshiba and, most recently, Volkswagen. While failure is nothing new, why have these failures occurred and why now? What's happening (or, more probably, not happening) in our corporate boardrooms at the moment?

While each case is to some extent unique, an interesting pattern starts to emerge if we stand back a little and take a holistic view of several failures together: a well-regarded business, with both a strong trading record over an extended period and great brand equity commensurate with its public reputation, hits turbulence leading to failure or scandal. Questions are asked, investigations follow, significant irregularities are exposed and fingers are pointed. Eventually the spotlight is turned onto the board. All roads lead to Rome, after all.

The seemingly steady flow of failures has seen a great malaise descend over the business and investor community during the northern summer. Measures developed to reduce the incidence of failure (including the OECD corporate governance principles and various in-country codes) have not had the intended effect. Indeed, they have rung hollow. To the casual observer, the situation seems to be bad, possibly hopeless. However, glimmers of hope are starting to appear.

In the past six weeks, I have asked all of the director groups that I have spent time with for their opinion—as a litmus test of sorts. A strong majority of the 350+ directors across several countries (England, Eire, USA, New Zealand and Australia) say things need to change. Most think that current conceptions of board practice and corporate governance are not helpful if the goal of business is value creation; and that strategy needs to feature more prominently on the board's agenda. While most of the commentary is anecdotal, it is consistent with emerging research.

Could this small sample of emerging and established directors of mid-size businesses be the vanguard of change? I've begun exploring ideas with several boards—on the assumption that the answer is yes. However, this is a case of the more the merrier so please get in touch if you want to 'join the party'.

Published on: 24 September 2015

Volkswagen emissions debacle: portent of a bigger problem?

News that Volkswagen AG has been systematically pulling the wool over the eyes of its customers, regulators and the stock market has resulted in a predictable and rightful backlash this week. The stock price has plummeted, the brand reputation is in tatters and the chief executive is gone (albeit with a stellar severance package and not before attempting to deflect blame towards others).

The crisis raises all manner of issues, and many different levels. That the board apparently knew nothing of the problem is a bitter pill to swallow. Why not? Was the board asleep at the wheel, or was something else amiss? That it then made all manner of comments heightened the concern.

Once the emission cloud settles and people gather to understand the root cause, the folk at Volkswagen could do far worse than to look in the mirror—and specifically at how corporate governance is practised. That the two-layer board structure lacked knowledge suggests either ignorance (the board was asleep) or collusion. Neither option covers the boards in glory.

Might this sad case take us closer to a tipping point, of finally admitting the extant conception of corporate governance (a compliance framework of processes and controls, predominantly) is conducive to neither long-term business performance nor value creation? And, if so, will action be taken to embrace new conceptions of corporate governance, board practice and value creation? For the good of all stakeholders and society more generally, I hope the answer is yes.

Are you troubled by the Volkswagen experience? If you want to explore new conceptions of corporate governance that are informed by robust research and real-world experience, and test their applicability in your boardroom, please get in touch. I stand ready to help.

Published on: 18 September 2015

"Involve the non-executive director in strategy"

The board's involvement in strategy has been hotly debated in some quarters in recent years, especially as the focus of attention for business performance has moved from the chief executive to the board. Is strategy the domain of management, or of the board?

Thankfully, the extreme options (strategy is totally the responsibility of management or imposed by the board) are no longer widely supported. The discourse seems to be coalescing on the more collaborative options of a board-led, managment-led or a joint development process—although the merits of which one of these is 'best' continue to be debated.

Once directors and managers understand what strategy is (check the graphic), a decision to actively involve the board seems obvious. If the purpose of the board is to ensure the long-term performance of the company, in accordance with the wishes of shareholders, why wouldn't the board roll up its sleeves?

An increasing number of commentators are now nailing their colours to the mast on this point. For example, this article, published in Director (the Institute of Directors' magazine), recommends that all non-executive directors (NEDs) should be actively looking at all strategy options and be making strategic decisions. I couldn't agree more, but would add that all directors (not just NEDs) should be involved in the process, together. While this recommendation demands more of directors, emerging research seems to suggest the approach is not without merit.

Published on: 12 September 2015

On the role of the company secretary

This recently published summary of a meeting held to discuss the role of the company secretary caught my eye today. The company secretary has an important supporting role (preparing reports including compliance reports, recording minutes and managing the processes of the board) in most companies. However, some meeting participants appeared to suggest that a greater role was appropriate:

The meeting followed the publication of ICSA’s report The Company Secretary: Building trust through governance, which found that company secretaries ‘make a significant contribution to board performance’, supporting ICSA’s wish to reinstate the legal requirement for all large private companies to have company secretaries. The topics that were discussed at the roundtable included governance, messaging, tone, teaching, acting as the ‘radar’ of a company and being the ‘bridge’ between the company and stakeholders.

This conception is helpful, except that it perpetrates the widely-held view that corporate governance is a conformance activity. However, the responsibility to act in the best interests of the company in pursuit of shareholder wishes lies with the board. Thus, a conformance conception provides the wrong basis upon which to understand board and company secretarial contributions.

Someone needs to have their finger on the pulse in terms of strategy, monitoring, process and shareholder communications. Ideally, these are tasks for the board as it discharges its duties. In those cases where the board is weak, aloof or less than fully engaged, these tasks tend to fall on the company secretary (or even the chief executive in some cases): the requisite processes and compliance tasks still need to be performed. Thus the thinking of many in the governance community including those cited in this report it would seem.

An expanded conception of the company secretary role may remedy the symptoms (and serve the interests of company secretaries hoping to elevate themselves), but it does not address the root cause. The focus needs to be on the board, its roles and its contribution to business performance. Candid discussions around the board table and, potentially, with shareholders will probably be necessary. However, the benefits of resolving the board's role are likely to be many including that the company secretary would be released to perform their role as first conceived: to provide an outstanding administration and support service.

Published on: 11 September 2015

Getting over ourselves: a crucial competence for directors?

Board meetings are uncompromising places of work and decision-making. Not only are boards themselves inherently socially-dynamic (they are make up of people, after all!), but every situation is different and directors meet infrequently and they generally need to act on incomplete data.

Consequently, decision-making effectiveness is largely dependent on directors working well together when the board is in session. However, that is much easier said than done. In fact, recent research suggests that we humans struggle to understand the minds of others, even though we think we are good at it. This renders group dynamics difficult, at best.

One of the biggest barriers to understanding is egocentrism—we can't get over ourselves. We over-estimate knowledge and capability, including that of others to understand what we say or mean. The problem is exacerbated by the technological world of electronic mail (which strips out tone and meaning), and even more so the abbreviated 140-character world of Twitter and text messages.

If directors are to make effective contributions in boardrooms they need to get over themselves. Older and more experienced directors are not exempt from this problem—they are just as prone to making assumptions as their younger or less experienced colleagues.

Techniques that might be helpful for directors wanting to make effective contributions include meeting together in social settings to learn more about each other; asking questions during board meetings with open hands and a humble spirit; careful (reflective) listening, to limit assumptions and check understanding; and, the demonstration of a collective empathy amongst directors. Perhaps it might even be helpful to appoint a psychologist onto the board! Please note this is not a categorical list—if you have evidence-based suggestions, please feel free to share them.

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