Decision Making - Peter Crow | Helping boards govern with impact

Published on: 18 June 2019

Who decides whether interests are conflicted?

A situation developing at Hutt City Council (a local council not far from where I live) is instructive for boards everywhere. It concerns a proposal to make a grant to Hutt Valley Tennis, a tennis club, to assist with the redevelopment of its tennis facility. The entity and the size of the grant, $850,000, are largely immaterial. What is significant about the matter is that one of the Hutt City councillors is married to the president of Hutt Valley Tennis (a potential conflict of interest, perhaps?), and that the decision required a casting vote by the Mayor to break a deadlock. The local newspaper has just reported the matter, and a newspaper columnist has chimed in offering an opinion as well.

On the conflict of interest: Questions have been raised as to whether Councillor Milne had a conflict of interest, because his wife is the President of the organisation that stands to benefit from the proposal. Milne registered his interest but denied there was a conflict of interest because his wife is a volunteer, and neither he nor his wife has a financial interest in it. But financial interest is not the appropriate test. A more appropriate test is whether the person can reasonably be expected to make an independent and objective decision, or other factors might lead to bias. Hutt Valley Tennis identified a potential conflict, and Milne registered interest. Yet Milne proceeded to participate in the decision-making anyway. On this matter, Milne appears to have missed a vital point: perception is reality (i.e., conflicts are assessed by others, not self). If there was any doubt at all, caution should have been exercised. To argue that there was not an actual conflict is inappropriate, some might suggest arrogant. Better for Milne to have removed any doubt by excusing himself from the discussion (by leaving the room), especially as he had already declared an interest. He should not have participated in the decision either. Standing one step back, the Mayor is not beyond scrutiny in this matter. Why did he not ask Milne to leave the discussion, and why was Milne not excluded from the decision?

On decision thresholds: Local councils, like company boards, make decisions in the collective. This means that every resolution results in either a 'yes' or a 'no' decision (notwithstanding any deferral or request for more information). In local government, the minimum threshold for a binding decision is typically a simple majority, with the Mayor holding a casting 'vote' in the cases of a deadlock. But is a sensible means of collective decision-making? What of the downstream effects and consequences? To proceed following a split decision raises all sorts of questions, not the least of which is the opposed councillors' commitment to uphold (or undermine) the decision. A better threshold is consensus, whereby every councillor (director, in the case of boards) has space to speak for or against a proposal, and debate points, on the understanding that they support the decision afterwards (because their warrant requires them to act in the best interests of the entire constituency). If consensus cannot be reached, it is better to defer the decision, pending more information and/or discussion.

Thankfully, the Hutt City Council has recognised the situation for what it is. The council has decided to nullify the initial decision and reconsider the proposal next week. Milne has announced that he will not participate.

Published on: 7 June 2019

Hallmarks of 'successful' directors

In 2014, I observed that aspects of corporate governance and board work had not changed much in 25 years. Having just re-read the book that informed that conclusion (Making it Happen, by John Harvey-Jones), I've been reflecting on the relevance of the author's comments in today's world, especially ruminations on board effectiveness and three defining hallmarks of a successful director:

First, directors must feel responsible for the future of the company. When something goes wrong, you should feel a degree of worry and concern and want to contribute to its resolution.
Second, directors must be able to influence the general direction of both the board and its decisions. Diversity of thought is beneficial: groupthink (and other variants of #metoo thinking) has no place in a boardroom. You must be able to influence others to change their mind from time-to-time—and be prepared to consider other arguments and change your mind as well.
Third, a director's contribution must be constructive. Have you read and understood the board papers? Have you asked questions before the meeting. Are your comments during the meeting helpful or destructive? Do you challenge ideas with honesty, integrity and in good faith? Do you help move the debate forward, building on the ideas of others, or do you reiterate comments of others and foster ill-will?

Are these hallmarks still applicable in today's fast-paced, technically-savvy world?

Some commentators assert that board effectiveness is the result of compliance with corporate governance codes and various structural forms. Others, including me, place a heavier emphasis on the capabilities and behaviours of directors on the basis that the board is a social group: men and women who need to work together. (That is not to say compliance is inappropriate. It is necessary but it is not sufficient.)

My recent observations and empirical research suggest that Harvey-Jones' hallmarks remain as relevant today as when they were first proposed, three decades ago. But that is just my view. What is your experience?

Published on: 17 May 2019

Understanding 'independence'

For years, independence has been held up as a desirable—even necessary—attribute of boards; the moot being that independent directors are a prerequisite if boards are to consider information objectively and make high quality decisions. In practice, the listing rules of most stock exchanges state that at least two directors must satisfy independence criteria, and many directors' institutes promote independence as a desirable attribute.

But does the presence of independent directors actually lead to improved business performance? Notable investor, Warren Buffett, has his doubts.

Buffett took the opportunity at the annual meeting of Berkshire Hathaway, an investment firm, to question the merit of appointing independent directors. He said that many independent directors cow-tow to the chief executive, an assertion that is tantamount to suggesting that the balance of 'power' and 'control' lies with the chief executive not the board. If this is correct, directors are not acting in the best interests of the company (as the law requires). Thus, independence becomes meaningless.

Buffett's solution is to recommend that directors need to have skin in the game. But if they do, what is their motivation likely be? Will the holding of shares lead to directors becoming more effective?

Long-standing research(*) suggests that, as with other static attributes of boards (board size and the board's 'diversity' quotient are topical examples), structural (or, technical) independence per se provides little if any guarantee that board decisions will be of high quality, much less assurance that the board will be effective or that high performance will be sustained. Much storied cases, such as, HSBC (USA), Mainzeal (New Zealand), Carillion (UK) and CBA (Australia), amongst many others, make the point plain.

If the board's role in value creation is not dependent on structural attributes (in any predictable sense), should independence be set aside? Not completely. Independence can be helpful, if directors think critically and exercise both a strategic mindset and wisdom, as they seek to make sense of incomplete data in a dynamic environment. But even this proposal is limited: independence of thought (also called ‘diversity of thought’) is hardly a silver bullet. Better to pursue cognitive diversity, to ensure a range of different approaches to tackling problems. Context is crucial too: shareholders and boards must be careful not to fall into the trap of thinking about corporate governance or board effectiveness in deterministic or formulaic terms.

If boards are to have any chance of exerting influence from the boardroom, directors need to embrace an holistic understanding of how best to work together as they assess information, make decisions and verify whether the desired outcomes of prior decisions are achieved or not. For this, the actions of boards (function) trumps what they look like (form). Emerging research suggests that board effectiveness has three dimensions, namely, the capability of directors (technical expertise, sector knowledge, wisdom, maturity); what the board does when it meets (determine purpose, strategy and policy, monitor and supervise management, provide an account to shareholders and other stakeholders); and how directors behave (individually and collectively).

(*) see Larcker & Tayan (2011) Corporate governance matters, for example.

Published on: 7 April 2019

Is 'good' governance to be desired?

I'm in London for the weekend, an interlude between inter alia commitments hosted by the Institute of Public Administration (a masterclass for board chairs, in Dublin); Lagercrantz Associates (a workshop, in Stockholm); and the Baltic Institute of Corporate Governance (a masterclass and the BICG conference keynote, in Vilnius).

To work with people across cultures, countries and contexts is a great privilege. Discussions reveal differences in perspective and approach. Yet, some things are consistent, transcending borders and cultures. One example is 'good governance'. Directors everywhere want to know how to achieve good governance.

This is a tough request. The problem is that 'good' is a moral qualifier, implying someone or something is morally excellent, virtuous or even righteous. But that is not all it means. A quick check in any dictionary reveals at least 39 other definitions! Which one does a person have in mind they ask for help to achieve 'good governance' or 'good corporate governance'? And what about other directors around the table. Do they have the same understanding or not?

It's little wonder that directors have become confused about the role and purpose of the board.

Pragmatically, corporate governance is the means by which companies are directed and controlled (Cadbury, 1992), that is, it describes the work of the board. The objective is to produce an agreed level of performance (however measured). 'Effectiveness' is a more appropriate qualifier than goodness. If something is effective it is adequate to accomplish a purpose; producing an intended result.

Returning to the question of how to achieve good governance. After reminding the enquirer that so-called best practices offer little guarantee of success (which one is best anyway), I usually steer the discussion away from goodness towards effectiveness (performance), and suggest that Bob Garratt's Learning Board matrix, and the Strategic Governance Framework are useful starting points for a lively discussion at the board table.

Once directors acknowledge that high company performance is the appropriate goal, and that success is a function of effectiveness more so than goodness, they start to ask more relevant questions, such as, "What actually matters?" and, "How do I as a director and we as a board become more effective?"

Published on: 28 February 2019

The important role of company secretary: Changing times?

The company secretary, a role defined in law in most jurisdictions, is an important actor in company boardrooms; a servant of the board with a mandate to ensure the smooth running of the board and its activities. Specific tasks include supporting the chair and chief executive in assembling board documentation; ensuring effective communications between key actors and external parties; recording and publishing minutes of meetings; and providing process support to the board as and when needed. Such a role seems clear.

But in recent times, company secretaries have assumed greater roles including speaking at meetings; exerting influence over decision-making processes, even to the point of presenting papers; and speaking for the board in the market square. This has been encouraged by associations representing company secretaries with the term 'governance professional'. Times are changing, for sure, but are these developments sound? Most of the contributions listed here come dangerously close to the secretary acting, or being seen to act, as a director.

But the company secretary is not a director.

Rightly understood, the role of board secretary should—indeed must—remain one of servant to the board, not part of the board. If governance is a profession (a debatable point, given almost anyone can be a director and professional standards are not enforced), then it is directors not secretaries who are the rightful claimants of the title 'governance professional'. Some other questions boards may wish to consider are:

The company secretary's modus operandi needs to founded on service, discretion and trust, not power. Is this reasonable, or do you disagree?
How does your board secretary actually operate? How should they?

Published on: 16 January 2019

Will board effectiveness improve in 2019?

With 2018 consigned to history and holiday season break all but over, most business leaders and boards of directors are turning their attention to what the year ahead (and beyond) holds. Even a cursory glance reveals a plethora of issues that may have an impact on business continuity and, potentially, continuance.

Consider these indicators:

Rampant economies that have powered much of the global growth over the last decade may be running out of steam. Many Asian 'tiger' economies are growing less rapidly than before, Apple and other tech giants have issued warnings, indicating that a correction may be just around the corner.
Populism and nationalism are no longer words heard only in political and academic hallways.
The climate is changing.
Medical and social developments are impacting the lives of untold millions around the world.
Disruptive technologies and business models are fundamentally changing commerce.
Weaponising of biological 'forces' to reshape nations, economies and mindsets.
March 29, 2019 is shaping as a watershed date for Britons and Europeans in particular, but also others.
The US-China trade war and disquiet in the Middle East have the potential to disrupt international trade.
The emergence and potential impact of identity politics and various lobby movements (#MeToo and #GilletsJaune are two examples amongst many).
In several countries, general and/or local government elections are occupying the minds of many.

And that's just the start.

As is usual at this time of the year, business and governance commentators have stuck their collective necks out, promulgating a variety of predictions given the indicators (as real or imagined as each indicator may be); each behaving as if they possess levels of predictive insight beyond what a reasonably educated person might be able determine by tossing a coin. But do they? They cannot all be correct—in fact, none may be.

The challenge for boards, of course, is working out how to respond well.

What is becoming increasingly clear is that boards have become confused by what's going on around them. Increasing numbers have grown quite tired of 'conventional wisdoms' and so-called 'best practices' (plurals intentional). Some have responded by taking defensive positions, and others are boldly trying things without first understanding the contextual relevance.

My response to enquiries from boards is straightforward: open your eyes to the possibilities, think and act strategically, but don't be impetuous. Check the current context, because things change, often in unexpected ways. Helping boards respond well typically involves sharing insights from research and practice; facilitating discussions; and providing contextually-relevant and evidence-based guidance. If you want to discuss options to respond well to a changing world around you, or lift the effectiveness of your board, please get in touch.

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