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    When the Board and CEO hold different views...

    Governance Management Performance Strategy
    Periodically (or perhaps more often than one would care to admit?), corporate boards and CEOs have differing opinions about how best to drive performance. Most of the time, one or other of two options follow: either the board holds sway—it is the "alpha male" who employs the CEO after all—or the CEO gets their way. At the end of the day, it probably doesn't matter who "wins" as such, so long as the parties can find common ground and reach agreement. The reaching of common ground may take time, but it needs to be found, for the good of the company. But what options are available if agreement is not achieved? The CEO could decide to fold, and implement the wishes of the board. This may mean implementing decisions that they don't support, a position which can be uncomfortable. Alternatively, the CEO could continue to press their case, albeit at the risk of upsetting the board and the losing its confidence. If the situation is bad enough, whereby the parties are and remain poles apart on a substantive issue, then the CEO needs to do the right thing by considering whether they can continue in the role.

    The key to making meaningful progress is the organisation's core purpose and overall strategy. With a clearly stated purpose and an agreed strategy in place, then strategic options and various proposals that arrive at the board table can be debated in the context of an agreed reference point. Either they fit, or they don't. Without such reference points in place however, opinions and personal preferences, about how to drive performance, hold sway. And we know that our opinion is always right, don't we? This latter option, of operating a business without a clearly stated purpose and strategy, is a recipe for trouble. Yet many boards and CEO try to run their businesses without such reference points. Why? 
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    On the separation of governance and management

    Governance Management Performance Phd Research Strategy
    The assumption that governance and management should be held separate has been a cornerstone of boardroom practice for decades. Statements like "We can't go there, that's management", and "Is that management or governance?" are commonplace in boardrooms. The assumption, which is based on the agency theory of governance, has dominated governance research as well. But I think the assumption is flawed. Allow me to explain:

    Agency theory describes the situation where the board is a proxy for owners who are not involved in the day-to-day affairs of the business. The separation of owners and managers, as described in Fama and Jensen's seminal paper, can lead to conflict because the actions of managers can depart from those required to maximise returns to owners. Structures and control mechanisms can supposedly mitigate the problem of divergent objectives. Much research has been undertaken to understand this, to try to identify the best configuration through which to minimise the problem and optimise company performance. Correlations between observable variables have been produced (independent directors, board size and gender, amongst others), but no consistent improvements in, nor predictions of, company performance or value creation as a result of these mechanisms have been reported.

    The dearth of any conclusive evidence to link separation of governance and management with performance should not be a surprise. Structures and controls cannot guarantee effective governance, nor can they assure any future company performance. In fact, an inspection of corporate failure data suggests that the separation of governance and management has been the source of much confusion. The various defensive screens that have been erected by boards in response to failures—including claims of paucity of information; poor implementation of strategy; and, management fraud—expose the shortcomings of the core assumption. Consequently, the question of whether a clear separation between governance and management is the best model through which to achieve the organisation's aims needs to be revisited.

    I've been working on this issue for about 18 months now, as a core theme of my doctoral research. My thoughts are starting to take shape, to the extent that a paper I've written is being peer-reviewed for the International Conference on Management Leadership and Governance to be held in Boston, USA in early 2014. A copy of the abstract is available here. If you'd like to provide some feedback, I'd love to hear from you.
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    What types of decisions should boards make?

    Governance Management Performance Phd Research Strategy
    One of the crucial tasks of a board of directors—as they discharge their duties to optimise the performance of the organisation in accordance with the shareholder's wishes—is to make decisions. While most directors and boards (that I have spoken with) agree with this viewpoint, there seems to be far less agreement about what sort of decisions this means boards should, and should not, make. Should boards only make strategic decisions (those that relate to the achievement of corporate objectives and affect the long term performance of the organisation), or is the making of important operational decisions acceptable?

    I have been pondering this question for several months now, in the context of the data being collected for my doctoral research and the wider body of literature. I've concluded that boards should limit themselves to those decisions that have a direct impact on their duty (to optimise performance). As such, boards should make strategic decisions only. Boards that move beyond this and make operational decisions are, in effect, becoming involved in the operation of the organisation (the implementation of strategy)—which is dangerous because that is the job of management. Examples of strategically important decisions might include:
    • recruitment of a CEO
    • approval of corporate strategy / strategic plan
    • raising of new capital to fund the approved strategy

    None of these decisions are straightforward. They require time; the gathering of (often) considerable amounts of information; high levels of cognitive ability to analyse and process options; and, wisdom and experience. Given this, an effective board, operating on the basis of optimising performance based on the making of strategic decisions and the monitoring of performance against strategy, may only make 2–4 strategic decisions per year. Does that sound reasonable or feasible? I'd value some feedback on this one!
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    On the professionalisation of governance

    Governance Performance Research
    The Institute of Directors in New Zealand is embarking on a metamorphosis, to transform itself from a membership organisation into a professional body. This is great news. While the Companies Act 1993 and various other statutes provide legal remedies for fraudulent behaviour, there is no mandatory framework to ensure high standards are maintained across the cohort of directors. In contrast, other professions—including doctors, lawyers and accountants (for example)—have had compulsory competency standards, continuing professional development and discipline measures in place for many years. The proposal, to introduce a Chartered Director framework, seeks to address this gap.

    The Institute has invited me to join an External Review Group, which is being formed to provide an informed, independent and sensible external perspective. To be asked to contribute to the professionalisation of one's vocational group in this way is both exciting and humbling. I'm looking forward to it though, because this initiative is likely to have a significant impact on the practice of governance and, hopefully, business performance. 
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    Maintaining contact with reality

    Performance Phd Readings Research
    Universities provide ideal conditions within which eccentric personalities—learned but oft socially-challenged individuals with a tenuous connection with the real world—tend to congregate. The article Academic Tumbleweeds summarises the situation eloquently. 

    Over the years, I too have criticised those academics for whom the pursuit of knowledge is the end, because social ineptness, eccentricity and misguided thinking often follow. This is not to criticise universities per se, for they have a crucial role to play in society. By way of example, it is unhelpful, even perhaps unethical, for business school academics to pursue a neo-Marxist anti-business agenda—but that is how some, whose primary interest is the pursuit of knowledge, behave. It's almost a sport it seems.

    One of my concerns in embarking on my journey was to avoid becoming caught by the stereotype—thus my decision to work from home and to intersperse other activities, in order to maintain contact with reality. These other activities have included a few teaching, facilitation and short advisory assignments, and a couple of board appointments. Is it a reasonable approach? No doubt the proof will come when the usefulness of my research is tested in the real world. Hopefully, it won't be found wanting and the somewhat derogatory academic tumbleweed label will not be required.
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    When things go wrong, should one ask or wait to be told?

    Governance Management Performance Research Strategy
    I was party to a rather interesting, and at times quite vigorous, discussion while working with 24 delegates at the Institute of Directors' Company Directors Course on Tuesday last week. My task was to present the strategy material, and to facilitate a wide-ranging conversation to help delegates understand the board's role in the respect of strategy.

    The question that precipitated the discussion concerned information sharing and accountability: How and when should the board discover that there is a major problem with the performance of the business due to the approved strategy is not being achieved as expected? Should the board rely on the standard reporting process (and risk ignorance if management decided to remain silent), or should the board ask searching questions if things don't quite seem right? When I asked this question last week, one delegate suggested, almost immediately, that management should report any and all material information to the board. By implication, this position places the responsibility and accountability directly with management. Another delegate responded strongly with a counter view, by suggesting that the board should not simply "trust" management to decide what needed to be reported, but that it was sometimes necessary to ask searching questions. A vigorous 20-minute discussion ensued. Points and counter-points were exchanged, with some great supporting examples (which I cannot share unfortunately, due to the Chatham House rule).

    Where the did discussion land? The majority of the group appeared to hold the view that, if directors are to add value, and to fulfil their duties to act in the best interests of the company, then it is their duty to discover the real state of affairs by asking searching questions—even though such a position requires them to be more fully engaged in the process of governance than a lesser "monitor based on what is reported" position would require. While my personal view is consistent with that of the majority of the group, I'm not at all sure whether such a position is representative of how the majority of boards actually act. The Christchurch City Council, Fonterra and Solid Energy cases all suggest the board relied on management reporting rather than on the asking of searching questions...

    I would appreciate hearing what others think...