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    On change-friendly CEOs and the preservation of reputation

    Governance Management Performance Research Strategy
    I posted a link to an interesting article about change-friendly CEOs on LinkedIn earlier today. The posting seems to have struck a chord with several correspondents—both on LinkedIn and via direct message—so I thought some additional comments would not be amiss. 

    One correspondent suggested that interest in recruiting 'change-friendly' CEOs is nothing new, that advertisements have called for such attributes and capabilities for many years. I agree, because I've seen many similarly written advertisements as well.

    So why is the Heidrick & Struggles report news? I suspect it's because there is a yawning gap between desire and reality: advertisements call for one thing, yet recruitment processes and decisions prioritise something quite different.

    In my experience, many directors—particularly of larger, widely-held companies—seem to be more interested in preserving their reputations than in embracing change. They tend to make 'safe' choices that don't rock the boat too much. Rather than making choices that will enhance the company's future position, directors often make safer choices, to minimise the chance of failure and any resulting damage to their reputations. Protecting against failure can be smart, but when the mitigation of risk results in staying within safe harbours, the only loser is the company itself. How can a company succeed in a competitive market if it does no innovate or change in response to changing environmental conditions?

    The Heidrick & Struggles report is timely. It demonstrates that people are now talking about the right things. But when will Boards and shareholders take note of such reports, and adopt a more positive approach to recruitment, corporate strategy and company growth? Soon, I hope.
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    What corporate governance can learn from earthquakes

    Governance Management Performance Research Societal Wellbeing Strategy
    New Zealand endured a swarm of earthquakes earlier this week. The largest, at 6.5 on the Richter scale, caused damage and disruptions in Wellington. The CBD was 'shut down' for a day while damage was assessed and the area made safe. Thankfully, no one was seriously hurt. This morning, reports emerged that at least one heritage-listed building was too badly damaged for tenants to return. This highlights an interesting dilemma. We strive to preserve (and in some cases occupy) the past—hoping for the best—yet we need to plan for the future, lest unexpected events cause serious consequences.

    There are striking parallels between heritage buildings and corporate governance. Most directors know they are responsible for maximising company performance, yet most boards spend the majority of their time monitoring historical performance—looking backwards!
    Just as it is very difficult to drive safely if you spend most of your time looking through the rearview mirror, boards cannot hope to govern effectively if they spend the majority of their time reviewing reports and financial results. A glance to check progress should be sufficient. Directors need to take heed of this and change their focus, lest they inadvertently miss danger signs and run off the road as it were. Emerging research (including my current doctoral research, and an earlier project) suggests that time spent considering strategic options, developing strategy and making strategically important decisions—together with the executive—is time well spent.

    The earthquake event this week provided a wakeup call to building owners and occupiers in Wellington. An admiration of the past is not always the best option. Modern structures are needed to support modern society. Perhaps the experience gained through the earthquake can catalyse a change in the boardroom as well—from monitoring the past to planning for the future. Or am I hoping for too much?
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    Is long service helpful or is it a hindrance?

    Governance Management Performance Research
    An article that was published the Wall Street Journal this week—highlighting long service on corporate boards—has got me thinking. The author, Joann Lublin, provided a list of 28 directors who have served at least 40 years on a company board. That's right, on the same board. Gosh, that's seriously long service.

    In the last 40 years, much has changed in the business world including at least one oil shock (1973); a major stock market crash (1987); the emergence of the Internet and on-line commerce (mid-90s); and, a global financial crisis (2007–08). Yet through all of this time, some 28 men have continued to serve as directors on the same board.

    Is such long service helpful, or is it a hindrance? Superficially, we tend to applaud long service. It can be very helpful, particularly when difficult decisions need to be made. Long-serving directors are more likely to be able to draw on some prior experience—in terms of the situation, the decision made and the resultant outcomes—to help them make a more informed and appropriate decision this time around. However, things change, so experiences from years ago may not actually be that helpful in today's environment. Also, long serving directors can (and often do) become stale, and, as they do, their decision-making has a tendency to become more reserved.

    It is my view that a mix of fresh blood (for innovation) and longer-serving directors (for experience and continuity) is crucial to effective decision-making. Nobody is indispensable, despite appearing to be so at certain times. Ten to twelve years service is a reasonable upper limit, beyond which the value of one's contribution falls away. I found myself getting stale after eight or so years on a board that I served on during the 2000s, despite the organisation consistently exploring new innovations and strategic options. Based on this experience, how directors can continue to be effective contributors for three or four decades is beyond my comprehension. While I don't support compulsory upper limits on service, perhaps it is time for Boards and shareholders to look at their recruitment and appointment policies—for the good of the organisation and its stakeholders.
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    A failure of corporate governance in local government

    Governance Management Performance Societal Wellbeing
    A tragedy unfolded in Christchurch today. The CEO of the City Council, Mr Tony Marryatt, was stood down by Mayor Bob Parker, due to ongoing problems with the issuing of building consents. The problems, which have been discussed in the public domain for some time, are due in part to the increased number of applications arising from the rebuild of Christchurch buildings post the devastating earthquakes of 2011 and 2012.

    Mayor Parker took action in because, in his own words, crucial information failed to reach the governance team. Gosh, this is serious. On the surface, the statement presents the Mayor as being decisive in response to a significant problem. However, under the surface, the statement exposes a problem relating to information flow and expectation. In the governance contexts that I am familiar with, the Board is responsible for ensuring it has all the information it needs to enable a decision to be made. Yet in this case, it appears that the Mayor (at least) expected information "to be provided".

    If the information the Mayor now describes as being crucial was not provided, then one of two things will have occurred. The CEO may have chosen not to provide it (as implied by the Mayor's comments), or the Council may have failed in its duty to ask the right questions to elicit the information. Either way, the failure of governance is laid bare. Rather than start by blaming the CEO (I'm not suggesting he is blameless), the Mayor and Councillors should reflect on their own conduct, to determine whether they have discharged their civic duty to the full extent expected under their warrants. If they have, then well and good. If not, then perhaps they too should stand down.
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    On coping with growth...what is the Board's role?

    Governance Management Performance Strategy
    There have been several interesting developments at sharemarket darling Diligent Board Member Services recently—developments that merit discussion and comment. Last week, Diligent, a high-growth, publicly-listed company, announced that it had incorrectly recognised some revenues relating to new customer agreements. Then, at the AGM held this week, the Board announced that no dividend should be paid in 2013—despite strong revenue growth and cash reserves—and that consideration is being given to dual market listings. Individually, these announcements seem relatively uneventful. However, when read together, they raise some interesting questions of governance:
    • What role is the Board actually fulfilling as the company copes with growth?
    • Does the Board really understand how the executive is progressing in terms of strategy implementation and the management of risk?
    • Why did the Board's Audit Committee not detect the revenue recognition error, particularly as the scale of the error was not insignificant?
    • How clearly defined are the company's strategy and governance practices?

    High rates of growth naturally present challenges for most companies, and this latest series of announcements suggest Diligent is by no means exempt. All power to the Board though, because it has recognised that it is experiencing stresses and strains, and it seems to be committed to resolving them. It will be very interesting to see how the Board responds, particularly in terms of the strategic decisions it makes to redeploy resources and adjust processes, in order to secure the next stage of business growth.
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    Report: Most company failures are failures of governance

    Governance Performance Research Strategy
    A recent study, conducted by UK firm Reputability LLP, has found that failures of governance are at the seat of most company failures. A lack of [governance] skill and an inability to influence management were cited as the root cause of 88% of the failure cases studied. Gosh, that's nearly nine out of every ten failures attributable to poor governance! Information asymmetry, a tendency to rely on quantitative data (numbers) and poor 'soft' skills were identified contributing factors. The full report is available, for a fee, here.

    This report is an indictment on governance. It clearly exposes an underlying problem with governance. Boards, in general, are not operating effectively. I'm not particularly surprised by the findings of this study. Most corporate Boards operate within a framework called 'agency theory', whereby an adversarial relationship between the owner's representatives (the Board) and management exists. The Board sees its role as that of a policeman, to monitor and control management, in order to protect the interests of the owner(s). In such situations, trust is typically low, reputations are carefully protected, and information is shared carefully and sometimes under duress.

    The tragedy is that agency theory remains the dominant governance framework—in the western world at least—despite a seemingly endless body of evidence that shows companies are not well served by it. Perhaps this report might prompt Boards and shareholders to take stock, and consider other governance frameworks whereby Boards and management actually work together to maximise performance. After all, the evidence is compelling. Is that asking too much?