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    EIASM'16: Day two summary

    Accountability Decision Making Governance Research Strategy
    The 13th edition of the Corporate Governance Workshop convened by the European Institute of Advanced Studies in Management (EIASM) was hosted by SDA Bocconi in Milano, Italy. Approximately 50 leading thinkers and researchers from over 20 countries gathered to explore emerging trends in the fields of board practice and corporate governance. Nearly 50 presentations were accepted onto the two-day programme. Highlights from the second day follow, together with some overall reflections (highlights from the first day are posted in a separate summary):
    • Emmanuel Zenou (Burgundy, France) discussed the relationship between board capital (i.e., director expertise, experience, reputation and ties with other firms) and innovation. This presentation was of special interest to me, given my long-standing view that boards need to be involved in strategic management if they are to have influence on firm performance. Zenou asserted that innovation is a key element for helping firms gain competitive advantage and expand market share and, therefore, the intensity of (commitment to) innovation is an important predictor of future firm performance. This is intuitively attractive at a management level, but what of the board's contribution to innovation? Does that matter? Zenou discussed this, saying that firms with high innovation intensity have appointed directors with specific skills, and that different forms of innovation require different profiles of directors. More specifically, advanced education (especially a doctoral degree or an education in law); experience in manufacturing, marketing, international business and people management; and, extensive networks with directors and leaders in other firms were all identified as being helpful. Interesting, experience in finance was negative, suggesting that the propensity to appoint accountants and finance experts might be counterproductive if innovation is a important priority. Zenou's paper suggests that board expertise a more important indicator of performance than structure or composition per se. This is consistent with my research findings
    • Several people spoke about the roles of the chief financial officer and executive compensation in business, especially in the context of international business (Frederic Altfeld, France) and 'say on pay' (Will Mackay, Australia) and board compensation committees (Hugh Grove, USA). The general theme to emerge from this group of speakers was that the chief financial officer has an important role to play as an enabler (but explicitly as a leader) and that executive compensation perceptions of often (and unfortunately) uncoupled from reality. Expanding this second point, Mackay said that the problem with published executive compensation details was the lag between when the package and associated key performance indicators were negotiated and when the results (the pay) was reported. The primary problem is that the media has no memory. This point places a crucial responsibility on boards, to ensure that appropriate context is provided for payments made to executives—especially in the case where the executive has been paid well great historical performance but the company has entered a period of tougher trading conditions when the pay is reported in the annual report.
    Overall, the conference provided a wonderful forum for leading board and corporate governance researchers from around the world (especially Europe, but also North America and Asia) to get together to share ideas and discuss emerging trends. The collaboration produced some wonderful debates; strong agreement that less is known about corporate governance than what most researchers and consultants (especially) claim to know; and, an invitation to return in 2017 (which I will probably accept). However, there was one notable disappointment: mine was the only presentation informed by observations of what boards actually do. Researchers and consultants need to get off their backsides and get inside boardrooms if they are to truly understand corporate governance and provide credible recommendations of what boards should do in practice.
    ​More personally, I was approached by three different people to collaborate on a few different projects, which was gratifying. Two approaches in particular led to further exchanges over lunch and dinner: one to synthesise the learning from my board observation studies (the board's influence on firm performance) with research into psychological factors and group decision-making, and the other to dig into the performance of local government councils (this second project is of special relevance given an independent assessment project I'm currently involved with). Where these will lead remains to be determined. However the fact that people around the world are starting to realise that we need to understand how boards can be a source of value creation (because this relationship is simply not understood now, despite what most consultants claim) was heartening. I look forward to the journey in the coming months, including return visits to UK, Finland, The Netherlands and Italy in early 2017.
    If you wish to know more about the conference; receive papers on topics of interest; or, pose a question or commission some applied research, please get in touch. I'd be delighted to hear from you and to serve you.
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    EIASM'16: Day one summary

    Accountability Decision Making Ethics Governance Research
    The 13th edition of the Corporate Governance Workshop convened by the European Institute of Advanced Studies in Management (EIASM) was hosted by SDA Bocconi in Milano, Italy. Approximately 50 leading thinkers and researchers from over 20 countries gathered to explore emerging trends in the fields of board practice and corporate governance. Nearly 50 presentations were accepted onto the two-day programme. Highlights from three of the papers presented on the first day are summarised here (highlights from the second day are posted in a separate summary):
    • Alessandro Merendino (Coventry University) opened the conference with a very interesting presentation on the subject of the governance of mega-events. His case (the 2016 Rio Olympics) provided some very interesting insights about how mega-events are governed. The analysis of 43 in-depth interviews (with very senior managers and board members) revealed considerable structural complexity, partially dictated by political drivers at both the country and the Olympic Games organisation levels. Surprisingly (given a clear purpose was established—to deliver the Games), the primary focus of the system of corporate governance lay firmly on the monitoring end of the conformance–performance. However, when other factors including that the roles of president of Rio16 and the chairman of the board were held by the same person, and the other board directors were appointed by the chairman are factored in, the strong compliance focus is perhaps less surprising. The preservation of personal reputation appears to have been a far more significant moderator of the behaviour and decision-making than the successful delivery of the Games. Given these insights, it is little wonder why the pre-Olympic planning often runs late, and the Games invariably end up costing far more than originally anticipated (leaving the host city with a long-term debt burden). Consequently, those considering 
    • Jari Melgin (Finland) delivered a powerful paper that revealed some great insights about decision rights and where power actually lies (in the boardroom or the executive suite?). Thresholds of decision rights determine the boundaries of power between board and management. If decision thresholds are too lax for example, boards may not properly represent shareholder interests. Similarly, if decision thresholds are too tight or too extensive, then powers transform boards into management teams. He summarised the results of an extensive research project. A core funding was that the  power to make decisions (of various types but especially strategic decisions) has 'formal' (stated decision rules: what is supposed to happen) and 'real' (what actually happens) characteristics. Decision control can be stratified into hard law, soft law (codes, etc), articles (company specific rules) and board rules layers. Melgin concluded that 'board rules' are especially significant because they provide guidance to the board in the case that a decision fits within the boundaries of hard and soft law and articles but the basis and delegation (for the decision) is still not clear.  
    • Joanna Pousset (Barcelona) presented an interesting talk on conflict amongst corporate elites (i.e., between directors and the chief executive). Using the largest construction company in Europe (VINCI), Pousset described a series of conflicts that have entered the public domain, in an attempt to understand the intrinsic motivations of boards and executives during times of conflict. Pousset conducted an extensive analysis of media reports to build a picture of each conflict (there were several). She concluded that CEO duality (whether the CEO and chairman roles were held separately or by the same person) was a material factor. This finding was in stark contrast with a large body of research that shows that CEO duality is not a reliable indicator of board or board performance, at any level. That the analysis had arrived at this point was worrisome. Why the chairman or CEO was not approached for their perspective, even to support or refute the analysis, beggared belief.
    In sum, the day revealed a mix of interesting insights and concerns. In particular, one long-held concern (that many researchers continue to conduct research based on the analysis of publicly-available quantitative data) was upheld. Why researchers continue to investigate boards and corporate governance from a distance (outside the boardroom) is a mystery to me. If we are to truly understand what boards do, how decisions are made and influence is exerted by boards from and beyond the boardroom, then researchers need to adopt the recommendations of others: that direct observations are crucial to the gaining of reliable insights.
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    Wells Fargo: Is "We're sorry" sufficient?

    Accountability Decision Making Ethics Governance Leadership
    You must give newly appointed Wells Fargo Chief Executive Officer Tim Sloan credit. No sooner had disgraced former CEO John Stumpf left the building, Sloan delivered a speech to all employees to apologise for the scandal that had beset the company. That Sloan delivered an apology  is a good first step on the path towards redemption (the company boasts a long and proud history), even though "we're sorry for the pain" appears to be an apology for the angst employees faced rather than the fake accounts action itself. 
    Two things are especially notable in this case:
    • The board has been remarkably silent. This scandal rocked the entire firm, not to mention confidence in the banking sector. Why has the board not been more visible? Yes, Stumpf is gone. But why has the chairman not spoken yet? Did the board know of the decisions and activities that perpetrated the scandal? If so, why has accountability not reached to the boardroom? If not, why not? To be ignorant of something this big suggests the board may have not been making adequate enquiries. Were probing questions being asked of the chief executive, or was the boardroom a more passive environment?
    • The appointment of an insider (Sloan is a 29-year company veteran) to the position vacated by Stumpf (and to the board) is curious to say the least. Sloan would have been aware of the fake accounts scandal. An 'Acting Chief Executive' appointment (to provide leadership while a full recruitment process proceeded) would have been a better move. The appointment certainly raises questions about the level of due diligence and the recruitment process the board utilised prior to making the appointment.
    That Stumpf's (and now Sloan's) boss has both remained silent and appointed from within is very telling. 
    (Note to the Wells Fargo board: If you want to talk further, in total confidence, here are my contacts details.)
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    Wynyard Group: What went wrong?

    Accountability Decision Making Governance Leadership
    Former sharemarket darling, Wynyard Group, was put into voluntary administration this week. The announcement was made via a notification to the share market and notice on the company website.
    The company was highly-valued, well-funded and governed by seemingly capable directors. Its products, software systems to assist in crime fighting, were seemingly in demand—evidenced by strong revenue growth since an IPO in 2013. Milford Asset Management, a shareholder, valued the company at nearly $120M at the time of the IPO. But Wynyard failed to make money, then or since. The result was inevitable: the company became caught in an ever-deepening hole that, in the end, was too deep to climb out from. When last traded, the notional value of the company had fallen to less than $40M. Now that the liquidator is involved, the residual share value is (close to) zero.
    What went wrong?
    Whereas some failures reported this year appear to have been grounded on hubris or fraudulent behaviour, such motivations do not appear to have been significant at Wynyard Group. The failure appears to have been more straightforward. Indicators have been visible for some time as well. Ultimately, the actions (or inaction?) of the board of directors need to be placed under scrutiny.
    The company's business model was characterised by infrequent high-value sales (read: a lumpy revenue profile). The company also employed lots of highly-capable software engineers and other technical specialists. Effective cash management is crucial in such companies. Superficially, the company appears to have been carrying too much cost, suggesting that it took on expense too far ahead of the revenue curve. The company does not appear to have had a backup plan to be activated if revenue expectations were not realised (in either the expected timeframe or manner). 
    ​The market seemed to know there was a problem (track the share price over the last 18–24 months), yet the situation was allowed to continue seemingly without any major corrective action being taken. The company burned through over $140 million of shareholder funds. It's little wonder that the investors became bitter.
    Why were the problems not addressed by the board much earlier? Was the board (which included several high-profile directors, three of whom resigned in May and June 2016) not in control as it should have been? Though present, were directors asleep at the wheel rather, in effect adopting a passive style of oversight—in contrast to that conceptualised by Eells, Cadbury, Garratt and others?  Was the board captured by an optimistic outlook and charismatic management? More pointedly, who was actually in control? The early indications suggest that the company was being controlled by management—ineffectively so, as is now patently clear—usurping the board's statutory role.
    What can we learn?
    That Wynyard Group has now joined (unwittingly) a rather long list of companies of interest to governance researchers and MBA classes (adding case example of what not to do) is clear. This case will also, no doubt, be played out in the business media and by 'experts' in the days to come. In the meantime and regardless of whether Wynyard is wound up or continues to trade in some form, the case provides salutary lessons for boards elsewhere:
    • First, directors should realise they have a duty to act in the best interests of the company, not the shareholders, employees, managers, suppliers or any other party. This includes not allowing the company to trade recklessly and, importantly, making tough decisions if required. If the viability of the company is at risk, the board is duty-bound to act.
    • Second, directors need to make appropriate enquiries and ask probing questions, to ensure they clearly understand the business of the business (a weak point of many directors). Active engagement and adequate knowledge are crucial foundations not only to the formulation and approval of strategy (a responsibility of the board) but also effective decision-making including strategic decisions.
    • Thirdly, to what extent is the conformance–performance dilemma in hand? Is the board spending adequate time on forward-facing performance-related matters (especially strategy), or (as is more common than many directors admit when surveyed) is most of the board's time being spent on compliance and conformance matters?
    • Other considerations include whether the directors are strategically competent, actively engaged and operating with a sense of purpose. Also, does the board possess the collective efficacy thought to be necessary to work together and exert control constructively? 
    Boards should discuss these and related matters periodically, to ensure they are appropriately focussed on (and adequately equipped to pursue) the value creation mandate. A formal, externally-facilitated board and governance assessment (providing an outside perspective) should offer useful insights as well, so long as any recommendations arising are acting on.
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    Essential qualities of a director?

    Accountability Decision Making Governance Performance Research
    Recently, an article was posted on the ICSA: The Governance Institute website, describing 5 essential qualities of a non-executive director. The author lists the following five 'core qualities' and suggests these need to form the basis of evaluations when companies are appointing non-executive directors:
    • Big picture thinker
    • Governance knowledge
    • Independent mindset
    • Ambassador potential
    • Energy and commitment
    This is a good list and several of the items are intuitively appealing. However, having read the article a few times now and compared these suggestions with the findings from my own research and others elsewhere, I am not sure all of these qualities are actually 'essential'. This set me thinking, leading to some supplementary questions:
    • Why have these five qualities been singled out?
    • The fourth quality, 'ambassador potential', stands out as being somewhat different from the others. While some level of ambassadorial capability is desirable in the chairman (because they are usually the spokesman), I struggle to understand why it might be crucial in directors who do not speak for the company. The quality may be more usefully categorised as a desirable item.
    • The title of the article suggests these are essential qualities of non-executive directors. But what of executive directors? Do they possess different qualities? The law makes no distinction between executive and non-executive directors. If a board is to be effective, big picture thinking; knowledge of board practices (i.e., governance knowledge); an independent mindset; and, energy and commitment are more likely to be essential qualities for all directors.
    • What of other qualities that have been suggested as being highly important including competence (to understand the business of the business and complex information); the ability to deal with ambiguity and change; vigorous debate; and, teamwork and trust, for example?
    • Though not stated explicitly, the use of 'essential' implies these qualities are universally applicable. Given the complex and socially dynamic nature of corporate governance, companies and markets, is this reasonable?
    • How might possession of these qualities translate into a beneficial impact on business performance?
    Though progress has been made in recent years, these questions demonstrate our knowledge abut boards is far from complete. We still have much to learn about how boards actually work; how they should work; and, crucially, whether boards can influence company performance through the decisions made in the boardroom (or not). If answers to these very difficult questions can be found, they will probably have significant implications including perhaps to a new understanding of corporate governance and updated guidance for board practices, director recruitment and on-going director development. While some directors may struggle to come to terms with such implications, the flow-on effects for sustainable business performance, economic growth and societal well-being are likely to be significant.
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    Making an impact on performance, from the top

    Accountability Decision Making Governance Leadership Performance
    One of the great challenges all business leaders face is the question of how to make an impact on the overall performance of the firm they lead. Boards are no exception. Effective boards are comprised of capable people who assess situations, make strategic decisions, and oversee management to ensure goals are achieved.
    The challenge of leading well and making an impact on business performance is very real, especially in today's environment of fluid work patterns and declining levels of employee loyalty. Boards are responsible for company performance, yet they do not run companies directly (that is the job of the chief executive). How might boards respond to ensure firm performance goals are actually achieved?
    Here are some considerations:
    • Boards need to accept that responsibility for overall business performance lies with them, not the chief executive.
    • The overall purpose of the business (i.e., its reason for being) must be both clearly defined (board responsibility) and well communicated (chief executive responsbility).
    • A carefully crafted strategy (to achieve the purpose) needs to be developed (ideally, by the board and management, together) and implemented.
    • Business systems and processes need to be optimised to expedite effective collaboration; teamwork; and, ensure the information that people need to do their job effectively is available when they need it. 
    The importance of this last consideration should not be underestimated: if employees cannot collaborate effectively because crucial information is missing or hard to access, overall performance will suffer—period. The impact on employee morale, productivity and the bottom line is likely to be very significant.
    The board needs to know how the business is performing relative to the agreed strategy, and the whether expected outcomes and associated benefits are being achieved (or not). Financial reports only tell part of the story. Employee engagement is an important though often overlooked indicator. If your board isn't sure whether employees are fully engaged, it needs ask the chief executive some probing questions; request a staff engagement survey; seek regular updates from senior managers (in addition to the chief executive); or, pursue some combination of these and other options (*). If employee engagement is low or any inconsistencies are discovered, weak information flows or ineffective collaboration within the company and/or with customers are likely to be contributing factors—a starting point for further investigation and subsequent decision-making.
    ​
    (*) Boards that lack direct expertise to actively pursue these suggestions themselves should seek independent advice from a seasoned expert, to help them understand what might be possible, establish benchmarks and inform future board decisions. A long-time colleague of mine, Michael Sampson, is one such person. He is an expert in the fields of workforce collaboration, teamwork and new approaches to work. Michael also speaks at conferences around the world and has written several books. ​I commend him to you.