Research - Peter Crow | Helping boards govern with impact

Published on: 26 November 2014

That composition will be the #corpgov story of 2015: Really?

Sorry folks, but I have just seen red. Rich Fields, a correspondent at Tapestry Networks, has just proclaimed that board composition will be the big corporate governance story in 2015. I'm surprised, really surprised.

For well over a decade now, the academic and practitioner communities have been exploring a wide range of board structure and composition options, in search of a causal link with business performance. Many attributes of boards and directors have been investigated including gender; CEO duality; independent director; board size; and, diversity, amongst others. Positive, neutral and negative associations have been reported in the research. Earlier this week, I wrote a thought piece on independent directors, and offered the following conclusion:

A variety of conclusions are apparent in the research. Cause has not been established. It's a bit like saying that female directors cause companies to perform better. Increasingly, people are realising that board performance is more likely to be contingent on what directors do in certain situations than on who they are or any specific board structure or composition. Like gender, the independence attribute is likely to be a proxy for something else. We need to discover what that might be, so it can be used to qualify the suitability of director candidates and inform board performance assessments.

Respectfully, I suggest Mr Fields needs to think a little harder about what is known already and what is yet to be discovered. Aspects of composition may be topical, but to suggest that board composition will be the hot topic is rather myopic. We need to move on, and turn over some other rocks, elsewhere.

Published on: 22 November 2014

What difference do independent directors actually make?

I see the Italians have updated their corporate governance code. The new code, most of which comes into effect on 1 January 2015, requires, amongst other things, publicly listed companies to have at least two independent directors. This sounds like a good move; one which is consistent with codes elsewhere, including New Zealand and Australia for example. The basis for requiring at least two independent directors (also called outside directors in some jurisdictions) on the boards of publicly-listed companies sounds robust: independence is said to be conducive to improved decision-making and to transparency, and two directors have more chance of exerting influence than one lone voice.

But what of the holy grail question? Do independent directors enhance business performance?

Many practitioners think that the approach to discussions, debate and decision-making by independent directors is more deliberate and objective (than executive/insider directors), primarily because independent directors are thought to be less emotionally involved in the day-to-day business and that they have less to gain or lose. Over the last three years, I have read upwards of 50 research papers on independent, non-executive and outsider directors. While the research is not unequivocal, the general tenor seems to bear practitioner perceptions out.

However, the impact of independent directors on business performance far less clear cut. A variety of conclusions are apparent in the research. Cause has not been established. It's a bit like saying that female directors cause companies to perform better. Increasingly, people are realising that board performance is more likely to be contingent on what directors do in certain situations than on who they are or any specific board structure or composition. Like gender, the independence attribute is likely to be a proxy for something else. We need to discover what that might be, so it can be used to qualify the suitability of director candidates and inform board performance assessments. Only then will the writers of codes be able to move beyond the reasonably blunt instrument currently in use: proxies.

Published on: 16 November 2014

ECMLG2014: Closing reflections

The 10th European Conference on Management, Leadership and Governance is over. The conference organiser, Academic Conferences International, and the host, VERN' University, did a great job hosting the event in Zagreb, Croatia. I now have returned to London, ahead of some meetings with researchers and business people before flying home later in the week. Some reflections on the conference:

Conference numbers were steady when compared to the last couple of years. However, the quality of the papers, and the quality of the questions and informal discussions was up on recent years.
Notwithstanding the generally high standard, several papers should never have been accepted on to the programme. The session that I chaired was one of those that suffered in this regard: one speaker mounted a personal crusade on the topic of corruption. He vehemently rebutted questions and comments from the floor during question time even though those asking the questions and making the comments had supporting references (and the presenter did not). I hope the organisers work a little harder on the review process in the future, to ensure this type problem does not occur again. It lowers the tone of the conference unnecessarily.
The divide between what researchers know and what practitioners think they know is wide. It seems academic researchers continue to be quite cautious in terms of their approaches to knowledge creation, and practitioners are quite cavalier (making claims without any robust supporting evidence). This is particularly apparent in the corporate governance space, where practitioners are quite happy to claim a causal link between various structural responses (women on boards, number of independent directors) and company performance, even though the research community has produced conflicting evidence in each case.
Personally, I was able to test several aspects of my current research, both in the paper that I presented, and informally over food and drink. The feedback was really helpful to the refinement process. Also, I received several approaches to collaborate on some projects in the future which is quite exciting.
I was pleasantly surprised at the state of the Croatian economy, the openness of the people, and the general condition of Zagreb. The Berlin Wall came down 25 years ago, signalling the fall of communism in central and eastern Europe. While the Croats have embraced western ways in the cities at least, they seem to have done so without losing their rich heritage. The resultant meld appears to be quite rich.

Sharp-eyed readers will notice that I have not reflected on my own paper, or on the session that I chaired. The reason for this is straightforward. It's pretty hard to offer anything approaching an objective critique of one's own paper, and the prospect of making comprehensive notes (to inform the blog summary) when also chairing the session is 'too hard'. If you would like a report on the session or my paper, or would like any other information about the conference, please contact me.

Next year, the conference is being hosted by the Military Academy in Lisbon, Portugal. I met Luis and Carlos when they announced the location and the date (12–13 November 2015). They are great guys and, if the professionalism and commitment they demonstrated in Zagreb is any indication, the 11th edition of the conference promises to be a fantastic event.

Published on: 15 November 2014

ECMLG2014: The importance of values to performance (day 2 keynote)

Jadranka Ivankovic, a Croatian businesswoman and VERN' University scholar, opened the second day of ECMLG 2014 with an important message: that values, and a strong values-set, are often the difference between success and failure in business.

Speaking from an informed point of view (as a member of the Management Board of Podravka, a food manufacturing company), Ivankovic provided a timely reminder that the best strategy and management systems alone provide no guarantee of business success. Rather, successful business performance requires hard (management: plans, systems, actions, results) and soft (leadership: attitudes, values, culture, behaviours) expertise, at least.

Ivankovic outlined how Podravka went through the process of creating, adopting and embedding a set of values in the very heart of the company. Something like 500 of the 5000 staff were directly involved, in focus groups; in informal discussions; in presentations and in communicating and championing the adopted values once they were agreed by the board. She suggested that the most successful companies are values-driven, and that if a company truly values its values set, there is actually only one boss: the values!

While Ivankovic's message was not ground-breaking per se, it provided a timely reminder that businesses are actually constructions of people, and that without committed people, aligned to a common way of thinking, behaving and acting, then business success can be only but a dream.

Published on: 15 November 2014

ECMLG2014: Boards need to start valuing information as an asset

Nina Evans, of University of South Australia, presented an interesting paper on the importance of information as an asset to business. In so doing, she commented on the difficulties that managers often have in justifying the effective management of information assets.

Information assets are intangible resources used in business including all tacit and explicit knowledge and information that is generated by, held by and used by the business. Information assets can be stored in a plethora of forms including in a person's mind; in hard or electronic format; and, on computers or in libraries. They are one of just four classes of asset (and therefore, levers) that managers have available to drive business performance (physical assets, information assets, human assets (people) and financial assets).

Evans suggested that if information assets are managed well, then operating costs can be significantly reduced, and business credibility can be increased. However, many managers treat information assets as being within the domain of the information technology department of businesses, and technical people often like to 'control' access. Further, while executive managers and boards often ask about the status of the other asset classes, they rarely enquire about the status of the information assets of the business. She went on to suggest that several barriers exist:

Lack of awareness of the value that information assets can deliver
Poor enabling systems
That information assets are highly contextual—that a piece of information might have high value today but low value tomorrow
Poor management and communication capability within the technology teams (particularly the CIO), to demonstrate how the effective management of information assets can enhance the achievement of business strategy and company performance

Evans closed by sharing the results of some preliminary quantitative analysis work. She said that companies that manage their information assets well stand to gain at least $20,000 per employee per year in direct operating benefit. This means that a 1000-person company can expect to add at least $20,000,000 per annum to its bottom line, if the information assets are managed well. If this is correct, this is huge! Nina Evans and I had a preliminary conversation after her talk. It would appear that a collaborative project, to combine Evan's work with my board performance research, may well generate some useful guidance for boards and executives in the future. Watch this space!

Published on: 15 November 2014

ECMLG2014: Enterprise Architecture, a bridge to business performance?

Marco Halen (Aalto University, Finland) is an interesting character. Like me, he came to research after a successful business career—in his case via information technology. He was the CIO of a major company before he embarked on a PhD recently, and his subject expertise is enterprise architecture.

Marco's paper was enlightening. He said that enterprise architecture is not well understood, but that those that do have a view think it has or is something to do with the IT department. From my very basic understanding, enterprise architecture is something that is discussed amongst IT-types and that it lacks any real credibility beyond the technical departments of companies.

Halen asserted that enterprise architecture (EA) can be valuable to business, if it is reconceptualised as a bridge that spans between corporate purpose and strategy, and technology and information systems. However, any move towards effectiveness requires leadership. The CIO, who is commonly the 'owner' of EA, needs to work hard to reposition EA from an IT framework to a business framework; one that exists for the sole purpose of supporting and enabling strategy implementation.

The unanswered question is how? The board and the executive of most companies are busy people. Proposals to implement yet another framework are unlikely to gain any tangible traction or support unless they demonstrably advance the business towards the achievement of its goals and objectives. Halen implied that the CIO needs to take a deep breath, learn a new language (of business); begin speaking in terms of strategy and performance; release EA to business executives; and reposition the EA experts as service providers to business (cf. fiefdom builders and cost centres).

Halen's preliminary work is interesting, in that it provides a solid base from which to develop some alternative models; do some empirical research; test some ideas; and, potentially, improve business performance. If EA can be reconceptualised as a bridge as Halen proposes, then it stands a chance of becoming adopted more widely as a useful management tool. If not, the most likely outcome is that EA will be consigned to the scrap heap of esoteric ideas that have emerged from the IT department—solutions looking for a problem. I look forward to seeing how Halen develops his ideas.

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