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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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    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...
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    On meeting people, and learning from them

    Conferences Governance Management Performance Phd Research Strategy
    One of the things I really enjoy when travelling is meeting people for the first time. My doctoral research journey provides a case in point. It has brought me into contact with many interesting people, including members of the international academic and governance communities. The conversations and experiences that I've been privileged to be part of have helped me gain new insights; form opinions; and, map out the next steps of my journey. The sights and sounds of unfamiliar cities, and the conversations with hotel staff, shopkeepers and other locals, have added context, colour and richness.

    When I am in England and Europe in November, to present a paper at ECMLG'13, I hope to continue conversations started in Bangkok back in February; to start new conversations and build new relationships; and crucially, to help others grapple with the demanding topic of how governance can help improve business performance.

    If you'd like to join the conversation or arrange a meeting, please contact me, so that we can find a date and time that works best for you. I'm available to meet anyone, anywhere.
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    Well done Mr Palmer

    Governance Management Performance Strategy
    I understand that the Chairman of Air New Zealand, Mr John Palmer, will retire at the upcoming annual general meeting, after twelve years in the role. Mr Palmer became Chair in 2001, when the airline was on its knees—essentially insolvent—save a bailout from the government of the day.

    For ten years, Mr Palmer worked closely with now former CEO Rob Fyfe, to rebuild the organisation to become the strong, innovative and, importantly, profitable carrier that it is today. The journey was not always plain flying however. The test-flight tragedy in southern France cast a long shadow, and decisions to close engineering facilities (with the inevitable staff redundancies) and various routes would not have been easy. On the positive side of the ledger, new safety briefing videos, new uniforms, new cabin layouts, improved levels of service, and innovative fare structures have contributed to increased demand, and ultimately, better financial performance. Clearly, the company crafted an effective strategy, and implemented it well.

    Mr Palmer has led well during his time as Chair, and his peers have recognised his not inconsiderable impact, by naming him the Chairman of the Year twice, in 2007 and 2009. Well done Mr Palmer, New Zealanders owe you a debt of gratitude.
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    Shareholders to hold board accountable

    Governance Management Performance Strategy
    The trend towards holding boards accountable for company performance appears to be alive and well, with news that shareholders plan to vote against two incumbent directors at listed company Rakon. It seems that shareholders are starting to lose confidence in the leadership of the business, after several years of poor financial performance. Rakon's share value has plummeted in recent times.

    The board has led the development of strategy, but performance has floundered. Clearly, something has gone wrong. It could be that the linkage between strategy and the business' purpose was not tight; the strategy was not appropriate for the prevailing environmental conditions; the strategy was not implemented well; or, executive hubris may have stifled good decision-making. Regardless of the actual cause, the board should have monitored performance against strategy more closely. Adjustments should have been made as soon as discrepancies between planned and actual performance became apparent. Shareholders are right to hold the board accountable for performance in this case, because it was the board that created and approved the strategy, and committed the company's resources.