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    Brevity and clarity are necessary, but are they sufficient?

    Accountability Corporate Governance Governance Leadership Strategy
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    GE, a company with a strong history of success including a reputation of being the world's best-run firm, has hit turbulent times. Profit forecasts have dropped by half in the past two years, with the inevitable knock-on effect on the share price. It seems that the size and complexity of the business, and probably some poor decisions in the past, is proving to be a challenge for the board and its ability to fulfil its duties.
    Consider the following indicators, reported in an article published in The Economist:
    • There is no consistent measure of performance
    • Some divisions use flattering definitions of key words, notably 'profit'
    • Performance is not assessed on a geographical basis
    • Little attention is given to total capital employed
    • Sustainability of debt levels are hard to determine
    • Strength of GE's financial arm is unclear
    • Risks to GE shareholders are difficult to calibrate
    • Accuracy of balance sheet is unknown
    How the GE board can make meaningful decisions given these indicators, much less lead the firm intentionally into the future, is hard to imagine. Sadly, this is not a unique case. Wells Fargo, Wynyard Group and, most recently, Carillion are examples of companies that have suffered through poor reporting, weak engagement and the seeming inability of the board to make courageous decisions.
    Fortunately, boards finding themselves in a similar situation are not without options. If they are prepared to retake control of the firm they govern (which will probably require some decisive actions; brevity and clarity of reporting being necessary but insufficient) and take an active interest in its strategic future, then the likelihood of actually making a difference is greatly enhanced.
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    Carillion: A messy but not unexpected fall from grace

    Accountability Corporate Governance Decision Making Governance Performance
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    Another once proud company has just suffered the indignation of failure. Carillion plc, the UK's second-largest facilities management and construction services conglomerate, collapsed on 16 January 2018, after bankers withdrew their support. The fate of hundreds of contracts with public sector agencies, and thousands of jobs were left in the lurch (although some emergency measures have since been put in place).
    Though tragic, Carillion's demise should not have been a surprise to anyone for it did not occur as a result of a single external catastrophic event. Consider these indicators:
    • Chairman Philip Green had previously been censured for breach of trust and maladministration.
    • The company's 2016 annual report showed debts (current plus non-current liabilities) of £2.8B; well above then current assets (£1.7B)
    • The company issued multiple profit warnings in 2017.
    • Executive remuneration clawback provisions were not exercised by the board; rather, the board sought to change the rules.
    • Demonstrations of executive hubris were apparent throughout 2016 and 2017.
    • Questions about the state of the business were asked in the House of Commons in July 2017.
    These indicators, which are not dissimilar to those of other failures (here and here), raise many questions viz. board performance, including questions of accountability; the board's supervision of management (or lack thereof); malfeasance and ineptitude in the boardroom; the efficacy of 'best practice' recommendations; and, the role of auditors. Why the Carillion board failed to act on the indicators listed here (and others not yet public, no doubt) is a matter for due process to uncover. The investigations should not be limited to the boardroom or even executive management. Other questions worthy of consideration include:
    • Did the directors act continuously and completely in accordance with the seven duties specified in the UK Companies Act?
    • What role did 'best practice' corporate governance codes and guidance play, if any?
    • Why did Carillion's customers, including the UK Government, award contracts to a company that had issued multiple profit warnings? Clearly, contracts were awarded either without adequate due diligence, or the findings from due diligence were ignored.
    Hopefully, the investigations now commencing will result in one or more people actually being held to account. Practical guidance to help boards focus on what actually matters (firm performance) is also needed, if boards are to step beyond conventional wisdom (which is clearly not working), and the damage that inevitably occurs when boards are diverted by spurious (and typically discordant) recommendations that appeal to symptoms or populist ideals is to be limited. 
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    Blackrock speaks: A new dawn rising?

    Accountability Corporate Governance Director Development Governance Performance Research
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    Larry Fink, co-founder and CEO of influential investment firm Blackrock may have just moved the goalposts. 
    Writing in his annual letter to CEOs, Fink argued that companies think beyond shareholder maximisation, a maxim that has dominated investor thinking since the early 1970s. Companies need to determine their raison d'être, their reason for being, towards which all effort should be aligned. Fink could not have been more clear:
    Without a sense of purpose, no company, either public or private, can achieve its full potential. Ultimately, it will provide subpar returns to the investors who depand on it to finance their retirement, home purchase, or higher education.
    Fink directly associates strategy, board and purpose—and in so doing Blackrock's expectations are spelt out. Simply, boards need to take their responsibility to ensure the long-term performance of the companies they governs much more seriously. Specifically, the board should both determine and agree several things, namely, the reason for the company's existence (its purpose); how the purpose will be achieved (strategy); and, how the progress towards the agreed purpose and strategy will be monitored, verified and reported.
    Together, this is corporate governance.
    To have such an influential firm speak so boldly is wonderful. Mind you, I am rather biased: my research findings and experience working directly with boards over many years now is consistent with Fink's assertions. 
    I commend the letter to all boards. Two rather obvious questions boards may wish to discuss having read it:
    • How might boards to put these above-mentioned assertions into practice? The mechanism-based model of corporate governance that I emerged from my work with high-growth company boards is one option. 
    • Will Fink's missive portend a new dawn for board practice and effective corporate governance? While it's a little too early to know, I certainly hope so. Every bit of pressure brought to bear helps.
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    Talk, yes. Progress? I'm less sure.

    Accountability Corporate Governance Decision Making Governance Performance
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    The annual deluge of articles summarising on the year gone and predicting (promoting?) future priorities is in full swing. Examples include diversity surveys, lists of board priorities and cybersecurity predictions, amongst many others. While these articles make interesting reading, most of the 'predictor' ones should be taken with a grain of salt; the summaries of past practice and current thinking are more helpful. 
    The recently published PwC Annual Corporate Directors Survey (2017 edition) is an example of the former. It offers helpful insights about what US-based directors of large companies currently think about various board and corporate governance matters. The survey results suggest that levels of awareness amongst directors—in relation to gender diversity on boards, working relationships (both between directors and with shareholders), accountability and alignment in particular—are increasing. That the trend line is moving upwards and to the right is good news. However, demonstrable progress, in the form of better business outcomes remains resolutely elusive. This begs a rather awkward question: Why?
    One possibility is that boards are spending precious time on the 'wrong' things. Little if any focus on company performance and strategy is apparent in PwC analysis; the inherent implication being that those surveyed assign responsibility for strategy to management. What's worse, a significant percentage of directors accept what is put in front of them. Critical assessment and vigorous debate is rare.
    The PwC results cast a dark pall over the performance of US-based directors and boards. They suggest that many have lost sight of their statutory obligation, which is that responsibility for company performance lies with them. This assessment is consistent with first-hand observations of boards in action, including my own, which reveal that the dominant focus of many boards is compliance (monitoring historical performance and checking regulatory ​requirements are satisfied). The protection of professional and personal reputation is a very powerful motivation for many directors, more so than ensuring the performance of the company it seems.
    If boards are to become more effective in fulfilling their value-creation mandate, directors need to hold tight to their core responsibility and concentrate on what actually matters—which is to govern in accordance with prescribed duties, and with the long-term purpose and performance of the company to the fore. Necessarily, effective steerage and guidance requires the board to be discerning and committed to the task, using reliable governance practices in pursuit of better outcomes, lest they be diverted by spurious (and often discordant) recommendations that appeal to symptoms or populist ideals. ​How might this be achieved?
    Returning to first principles, one option is to re-conceptualise corporate governance; as a multi-faceted mechanism that is activated by competent, functional boards. The mechanism itself is straightforward: an integrative assembly comprised of strategic management tasks (the board's responsibility to influence the performance of the business places it at the epicentre of strategic decision-making and accountability), relationships (with the executive, shareholders and legitimate stakeholders) and five behavioural characteristics of directors (details). ​The harmonious exercise of the five behavioural characteristics in particular provides a platform for motivated directors to interact well, and for the board to make forward looking, informed, strategically-relevant decisions in a timely manner. 
    A mechanism-based understanding of corporate governance provides an alternative pathway to achieve more effective outcomes from those promoted by conventional wisdom. Specifically, it provides a framework to focus the board's attention on what actually matters; outlining the tasks, interactions and behavioural characteristics that are conducive to effective contributions. Significantly, those aspects of corporate governance orthodoxy that have demonstrably failed to have a beneficial impact are challenged. For example,  board structure and composition recommendations are set to one side, as well as any notional separation between the board and management; an uncomfortable consequence for some.
     If you would like to know more, including how to deploy such a proposal in practice, please get in touch.
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    Too many irons in the fire?

    Chairman Corporate Governance Effectiveness Governance Integrity Research Time Management

    Periodically I hear directors introduce themselves with "I'm a professional director". Sometimes, they add "I sit on NN Bboards", where NN could be as high as eight or even ten (boards). Wow. Presumably this means all of their income comes from director fees, and somehow more Boards is better or more prestigious. Am I impressed? Not really.

    The core role of any director is to maximise the performance of the company they serve. But how can they do this effectively if they spread their time across as many as eight or ten boards? Ten boards means a maximum of two days per company each month. In this scenario, how can any director possibly understand the issues and strategic options sufficiently well to contribute effectively around the board table? 

    Governing a company is demanding. It takes time to understand the issues. Can a director have too many irons in the fire? The stories starting to emerge in the media suggest the answer is a clear "yes".

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    The Three C's of Effective Boards

    Accountability Chairman Corporate Governance Governance

    Earlier this week I attended a dinner function with 16 others, to hear a well-regarded Director and Chairman share his thoughts and experiences about leading the Board of a high-growth company. Amongst some great insights, he suggested three areas that Boards of high-growth companies need to focus on closely:

    • Capital: Boards need to ensure the company has sufficient capital to fund its growth plan. Otherwise, growth will be limited by available funds, and that inevitably means slower growth, and may mean important market opportunities are missed.
    • Capability: Boards need to ensure the company has sufficient people capability to execute its growth plans. That means recruiting a CEO capable of leading the company effectively, both now and in the future. It also means encouraging the CEO to recruit high capability people into key roles, lest the growth of the company outstrip the manager's ability to execute.
    • Culture: Driving growth is often hard work, so everyone needs to be on-board. The Board needs to ensure (through the CEO), that everyone is working to the same goal, and that they are signed up to an agreed set of brand/company values. People who can't sign up should be given the opportunity to "get off the bus".

    Sounds easy on paper! What do you think?