Research - Peter Crow | Helping boards govern with impact

Published on: 13 June 2015

IGW'15: "Much ado about nothing?"

Prof. Silke Machold delivered the second keynote talk at the International Governance Workshop in Barcelona. Machold, who has been researching boards for many years, is a researcher that I admire—for she has been able to gain access to boardrooms to observe boards in action. Here's a summary of her rather wide-ranging commentary on companies and corporate governance:

If we look back through history, a steady progression from city states, through church states to nation states is apparent. The latest development is large corporations, some of which are as large as nations (Apple is as big—in revenue/GDP terms—as Austria, for example). While size often begets influence, scale does not necessarily mean that corporations are 'good' or beneficial to society.
Myths: That the shareholder maximisation value is always 'good', and that shareholders are owners (I commented on this recently). If shareholders were owners, then they could enter the place the company operates from and they could take possession of the company's assets. Just imagine doing that if you were a Walmart or Tesco owner—you'd be arrested for theft or shop-lifting!
The strong focus on earnings, and board and managerial propensity towards short-termism is, in essence, 'fishing with dynamite'. While it is this dangerous, what's worse is that it is a self-fulfilling prophecy.
They way we tend to look at boards—as decorations (Mace, 1970) or as engaged actors (Huse, 2007)—is somewhat simplistic. Machold has observed boards that are or have been both active and passive at different times.
In respect of conflict in the boardroom, Machold called out two different types of conflict, one of which is healthy and the other which is not. Cognitive conflict (thinking about and debating problems is good) whereas affective conflict (debating personalities and emotions is destructive). Boards and management teams need to discover how to pursue CC.
Machold walked into the diversity discussion by suggesting some types of diversity are good and others are probably not as good. Personality diversity is probably unhelpful, because the tendency is to focus on personality differences rather than debate problems. Machold suggested that boards and recruitment committees should include personality profiling within their recruitment process because better cognitive debate is more likely to occur amongst directors with similar personalities (than directors with a considerable personality diversity).

Machold summarised her talk by suggesting that much has been said and claimed over the years, and that much of it had led to people getting quite excited about factors and attributes that, quite frankly probably are immaterial—thus the title of her talk: Much ado about nothing.

Published on: 12 June 2015

IGW'15: Gender diversity on boards

The topic of gender diversity on boards has received a lot attention in recent years. Researchers, interest groups and the media have chased various agendas. Much has been written and many claims have been made. However, compelling conclusions remain elusive. The topic received more attention during the first session of the second day of the International Governance Workshop in Barcelona.

Three speakers presented the results of their research, conducted in the Polish and Spanish contexts. The studies explored variations on the theme of the impact of women on various financial and non-financial measures. All of the studies were quantitative analyses, conducted using publicly available data and statistical techniques. I have been critical of the use of such techniques for social research in the past. Reductivist approaches rarely provide insight beyond straightforward correlations. Sadly, I heard nothing to suggest otherwise in these talks.

The challenge for board research is to move beyond the 'big three' assumptions--ontological reductionism, that a single objective reality might exist, and that a constant conjunction between variables constitutes a causal explanation—are inapplicable to board research, because boards and the context within which they exist, companies, are social constructions. Rather, the more demanding route, of qualitative research that explores boards in situ is more likely to reveal explanations that shareholders and director nomination committees can rely on.

I remain convinced that women and people from a diverse range of background affect board practice. However, simple empirical research is not the appropriate pathway to understand and explain whether this is correct is not. More subtle approaches, that consider the context and behavioural nuances of individual directors appears to be crucial.

Published on: 11 June 2015

IGW'15: Opening Keynote

The second International Governance Workshop got underway at Toulouse Business School, Barcelona Campus on Thursday 11 June 2015. Professor Morten Huse, an esteemed corporate governance scholar from Norway, provided the opening day keynote. Huse has been studying boards for a long time—the mid 1970s—so when he speaks, people tend to listen. Here's four of the points from his talk:

Huse's talk set the scene for a lively debate through the balance of the conference. It will be very interesting to see how this develops.

The dominant logic of modern boards—independence and opportunism—has not delivered any significant value to shareholders over time. Rather, it has driven short-termism, strong norms of privacy and mis-trust.
The conception of corporate governance as a set of rules and regulations to keep management honest needs to be replaced. Instead, boards need to think and behave in terms of becoming value-creating teams.
A fundamental shift is starting to occur, if you look closely: Evidence is starting to emerge to suggest that boards that lead, seek to create value and are involved in the strategic management process are more likely to make positive and meaningful contributions. However, this is not guaranteed, as boards are comprised of people and complex interactions, and external forces exert influence as well.
Huse suggested that a common language is required. Too often, a speaker says 'X' only to find that other directors hear 'X', 'Y' or even 'Z'. He went on to overlay a common language and important board tasks over the value creation process (the value chain, if you will).

Published on: 10 June 2015

International Governance Workshop: starts tomorrow

The annual International Governance Workshop, hosted by the Toulouse Business School, starts tomorrow in Barcelona. Although only in its second year, this conference is an important gathering because it has attracted many of the world's leading corporate governance and board researchers. To be in the same room as these people, to hear them present and debate the results of emergent research is truly an honour. In contrast to the scale of the ICGN annual conference, the IGW is more intimate and more focussed. However, the programme of topics to be explored is no less significant.

Session summaries will be posted here, as usual, so you can keep up to date. My paper will be delivered on Thursday afternoon.

Published on: 8 June 2015

Reflections: International Corporate Governance Network conference

The twentieth annual conference should be recorded in the annals of the International Corporate Governance Network as being a successful conference. From small beginnings twenty years ago, when 49 hardy souls met, the ICGN annual conference has grown ten-fold. Nearly 500 delegates assembled (from close to 50 countries) at the Guildhall in London to listen, share and, importantly, to exchange experiences.

While all of the speakers and panel members were of a high calibre, Alderman Alan Yarrow, Bob Monks and Martin Wolf stood out. Drawing on their vast experience, each of these gentlemen offered perspectives and insight that many of the younger delegates are unlikely to have considered previously.
The unspoken conception of corporate governance that seems to pervade the conference (as something that helps investors get what they want) surprised me. My understanding of corporate governance concerns the way boards of directors work, both in oversight of management and in pursuit of desired outcomes. This surprise may simply have been one of perspective—many of the delegates and speakers are members of the investor community, whereas much of my experience is from within the boardroom.

Another surprise was the disparity between who I thought might attend this conference and who actually did. The delegate list was dominated by institutional investor and industry body representatives, advisors and lawyers with some academics to boot. However, there were precious few serving company directors in attendance. Serving directors are a (the?) crucial cog in the corporate governance ecosystem. Perhaps the organisers might wish to consider how to redress this imbalance at future conferences.
The matters of trust (between directors on a board, and between shareholders and the board) and reputation were visible throughout the conference, and rightly so. That big business suffers a troublesome reputation amongst the general populace was noted publicly and it was discussed further over the tea-cups—although whether any remedial actions are forthcoming remains to be seen.
The conference was well-organised and well-run, and the venue was, simply, stunning.
The organisation (which prefers to think of itself as a network actually, it's less hierarchical) appears to be in good health. Kerrie Waring is a capable leader. She and her team clearly have the best interests of the organisation, and its goal of lifting the standard of corporate governance, at heart.
More personally, I met some amazing people (including some that, to this point, had been but names or acronyms on social media exchanges) and had some very helpful discussions. My intention was to watch and to take it in. That others saw it fit to invite me to join their discussions was humbling indeed.

Was the conference worthwhile? If the quality of the insight, discussions and relationships are any indication, the answer must be 'yes'! Consequently, the 21st edition is already marked my diary.

Published on: 5 June 2015

ICGN'15: Inside the boardroom black box

For many of us, the boardroom is an opaque structure, whereby those on the outside can only but guess what might (or might not) happen on the inside. And that's the way many directors like it: strong norms of privacy and claims of confidentiality are held up as defences against such things as professionalism and accountability. While many boards try to do their job well, some directors are victims of hubris, arrogance, laziness and, in some more extreme cases, a perception of being above or beyond the law (the slippery slope that often leads to fraudulent activity). It's little wonder that the level of distrust (of directors) is at an all-time high.

The second plenary of the second day of the ICGN conference tackled the topic of what does (well, should) happen in boardrooms. The panel prized open the corner of the blackbox.Here's some of the takeouts from the discussion:

Directors, you need to think about who you represent (Clue: the constituency that put you there is not the correct answer).
Many boards focus on risk (at the expense of future performance, value creation and shareholder wishes) far too much.
All boards have a culture, but not all board cultures are aligned with corporate culture.
Groupthink is an ever-present problem for boards. Diversity can help.
The highest standards of integrity and probity are crucial, and especially so for the chairman. If either of these are compromised or perceived by others to be compromised, then the director concerned needs to leave the board, immediately.
High levels of trust between directors and with the chief executive are crucial, to provide a suitable foundation for vigorous debate to occur.
Boards need reliable / accurate / unfiltered information to make informed decisions. That which is received via the chief executive is, often, biassed in some way. The panel thought board–staff conversation was to be encouraged (within an agreed framework or protocol) as a means of eliciting a more complete picture.
"What happens in the boardroom stays in the boardroom".

My experience, both as a serving director and as a silent observer is that the characteristics listed above are probably necessary to board effectiveness. However, they are by no means sufficient nor do they necessarily guarantee business performance outcomes will be achieved.

I was surprised that little attention was paid by the panel to time splits (compliance / monitoring / forming future strategy) or to the importance of strategy as a board agenda item. This would have been useful guidance for serving directors. However, it is probably a touchy subject. Most directors 'know' how much time they perhaps should spend on strategy (and they'll 25–40 per cent if asked), whereas most boards actually spend far less time on this activity (typically five per cent). Perhaps this discrepancy is a source of embarrassment to directors and, therefore, it does not get discussed. Notwithstanding this, this discussion as probably the most useful of the conference to date—because it was about boards and what boards [should] do (ie. corporate governance).

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