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    And so the CEO remuneration escalator continues...upwards

    Governance Leadership Performance Societal Wellbeing
    The latest round of annual reporting in New Zealand confirms that the size of CEO remuneration packages are continuing to track upwards. Reports from SkyTV, Ebos and others suggest that the now well-established trend shows no signs of slowing down.

    The concept of executives (actually, all staff) receiving remuneration commensurate with their performance and the value they add to the corporation sits comfortably with me. However, the steady spiral upwards of CEO packages, at what seems to be an unchecked rate, may be the harbinger of a longer term problem: that any linkage between the package, actual performance and market forces is lost. If boards are truly focussed on the optimisation of performance in accordance with the wishes of shareholders, then boards need to ask the following three questions every year:
    • Is value being delivered by the CEO? 
    • What is the company prepared to pay for that value?
    • Are alternative CEOs available if the incumbent declines any package offered?

    I am sure that the first and second questions are being asked by boards: the evidence is in the packages. However, I suspect the third question gets much attention. If a board was exploring its options, the likelihood of being captured by the CEO (or their reputation at least) should be much lower. While easy answers are unlikely to exist, boards need to grapple with these matters, by asking and acting on all three questions. Until they do, the law of supply-and-demand is likely to prevail, and the upward trend is likely to continue unabated, possibly to the detriment of long-term shareholder value.
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    What should boards do when vital information is withheld?

    Governance Management Performance
    Decisions about major transactions, or matters that might be material to the future prospects of a company, are usually reserved for the board of directors. This is appropriate, because directors have a duty of care—to the company they govern and to the shareholders that own the company. In fulfiling their duties, directors must ensure they are adequately informed regarding the affairs of the company, so that decisions can be made in the best interests of the company and, ultimately, the shareholders. 

    This all seems straightforward and tidy, but is it always so? Unfortunately not—well not at Hyundai anyway. Recently, the Hyundai board of directors approved a bid to buy a large and valuable parcel of land—without actually knowing the price! Claims by management that the bid price was "top secret" and therefore could not declared seem to have been accepted by the board:
    While boards of the three firms discussed and approved bidding for the plot in the capital's high-end Gangnam district to house a headquarters complex, hotel and automotive theme park, the bid price was not shared with directors as it was deemed to be confidential, three of the directors said. The Hyundai Motor and Kia Motors boards unanimously approved making a bid for the Korea Electric Power (KEPCO) land, two directors said.
    The making of strategically important decisions without vital information borders on reckless trading. That such a large transaction would be approved without knowledge of the price defies normal logic. That $8B of market value has been wiped off Hyundai should come as no surprise.

    Why did the Hyundai board make the decision without knowing the bid price? If the board carries the ultimate responsibility for company performance and business value, it should know everything that is material to a decision. If information is missing, the board should insist on it being provided, and to defer any decision until the information is provided. That management thought that the board could not be trusted with knowledge of the bid price, and the board let management get away with it, is an indicator that there are some fundamental problems with the corporate governance systems at Hyundai. The directors need to take a good long look at themselves and the way they operate, and seriously consider whether they are fit to carry on.
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    Is competition always good and are monopolies always "bad"?

    Governance Language Performance Readings Strategy
    What a great question. Throughout my business career, of over thirty years now, the prevailing answer has been 'yes'. However, Peter Thiel reckons the answer to both parts of the question is or at least should be 'no'.

    Thiel's thesis, that competition is for losers, and this response to it will get you thinking... Boards and regulators might need to take note.
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    Where should the accountability benchmark be placed?

    Governance Leadership Performance
    Corporate boards and executive managers have endured some criticism of late, as yet another wave of reports of incompetence, fraud and hubris have reached the public domain. Some directors have been lambasted for their actions, while others have avoided any direct consequences. Clearly, this raises an interesting question of consistency. Where should the accountability benchmark for acceptable director performance be placed? 

    My sense is that directors need to think very carefully about why they are appointed and what duties they must fulfil having accepted any appointment. All directors have a duty of care and a duty of loyalty—to the company or to the shareholders (depending on the jurisdiction) and not to themselves. This means that the director role is a servant role, of serving the best interests (of the company/shareholders). In fulfilling these duties, directors need to ensure they are adequately informed and well-intentioned, lest the wool is pulled over their eyes or they make decisions that are not consistent with their duties. The role of the director bears a weighty responsibility, so directors need to take their appointments seriously. Most do, but some, clearly, flout the boundaries of moral and ethical acceptability. 

    Directors need to be beyond reproach, and clear demarcations of what is acceptable—and what is not—need to be established. The challenge, of course, is holding directors to this level of performance, in the public domain and through any legal processes that may be required.
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    Another example of directors escaping guilt: has justice been served?

    Governance Performance Societal Wellbeing
    More news on the Feltex front today: a judge has just cleared the directors of liability for disclosure failures. I have discussed the sorry story of Feltex before. That the directors were charged seemed to be fair, given the seemingly strong evidence that something was awry. However, the judge has now issued their reserved judgement. Many will be surprised that, in the face of incriminating emails and other evidence that directors knew there was a problem with the business fundamentals, the decision was not guilty. However, and interestingly, the judge did note "some justification" for the criticisms of the prospectus upon which the case was based.

    Is this a case of well-heeled directors being able to rally a strong defence to protect their reputations, or was no wrong done? Regardless, the decision has been made, and with it a potentially dangerous precedent has been established—that the standard of accountability for directors may actually be quite low. While this is good news for directors, I'm not sure it is good news for shareholders, or for society more generally.   
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    BAM2014: Reflections

    Conferences Governance Research Strategy
    So, the 28th Annual British Academy of Management Conference is now over. Something approaching 800 delegates (total attendees, including late registrations) have considered over 650 papers, workshops and symposia over the last three days, on three adjacent sites centred on the Belfast Waterfront complex. Overall, the conference was well-run—although not without some interesting nuances. A few reflections, based on my experience: 
    • That the organisers successfully marshalled delegates to twenty-something meeting rooms spread across the three sites—in half-hour slots—was a sight to behold!
    • There was only one plenary session—the opening—to bring all of the delegates together and to reinforce the conference theme. Also, the opening was scheduled after lunch on day one, and there were no other plenary sessions throughout the conference. My experience at other conferences is that the opening welcome and keynote address typically occurs at the beginning of the first day, and a plenary keynote is delivered as first scheduled session each following day of the conference. It provides a very useful means of pulling people together to reinforce the conference: a sense of purpose if you will. I hope the organisers of future BAM conferences consider adopting the more traditional programme.
    • The catering was pretty good. Finger-food was the order of the day for morning and afternoon breaks and for lunch. While there weren't enough seats, the food was such that delegates could eat standing without too much difficulty.
    • While the number parallel tracks (24 from memory?) meant that delegates had a wide range of topic and paper choices at any given point, the unwanted effect (from my perspective and many others that I spoke to) as that the audiences for many papers were small. I would rather that the conference organisers set a higher bar on paper selection (select fewer, higher quality papers) and run fewer parallel tracks, but over a full three days.
    • The conference is an academic-cum-research conference. Consequently, many of the papers were quite theoretical with only tenuous practical application. This served to highlight the chasm that often exists between research and practice. One way of minimising this chasm might be to call applied research papers and case studies. In so doing, a broader audience of managers and executives might find value in attending the conference, to hear about emerging trends that they can utilise in practice in their own environment.
    • The breaks between sessions enabled much interaction between delegates. I was able to take advantage of this as well, to meet several esteemed thinkers and to bounce ideas around.

    Next year, the conference will be held in Portsmouth, on the south coast of England. I've marked my diary.