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    Leading from the boardroom: a collective imperative

    Accountability Corporate Governance Decision Making Effectiveness Governance Leadership Research
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    Leadership is topical in most spheres of human endeavour; companies are no exception. To encourage others to achieve great things is the stuff of effective leaders. The most successful are widely-lauded. But leadership can take many forms, of course. Cast your eye over the last 100 years or so and you'll discern leadership in action in different ways. The era of the titan (Rockerfeller, Carnegie and Morgan being notable examples) saw leaders exert control over companies powerfully. The emergence of the management class in the inter-war years saw the emphasis change, the efficient operation of companies came to the fore. Since the turn of the century and the entry of corporate governance into the business lexicon, leadership has taken another form: the oversight of companies from the boardroom.
    Often, perhaps typically, leadership is understood to be an individual endeavour; a person exerting influence. But leadership has a collective dimension too—the board of directors is an instructive case. While individuals (directors, trustees) contribute to board discussion and process, it is the board (not directors) that decides. Leadership in this context is, exclusively, collective.
    Collective leadership requires a different approach. Directors need to work together to reach consensus for a start. This article has some more great tips that boards may wish to consider as they seek to lead effectively:
    • Good leaders focus more on character than ability. Where does your board recruitment practice put its energy?
    • Effective leaders are open to learning from others. When did your board last undertake a professional development session, together?
    • Effective leaders are marked out by a spirit of appreciation and thankfulness. Does your executive team know that you appreciate their work and the results they achieve? What about staff, clients and other stakeholders?
    • Effective leaders are self-aware. Does your board assess this, or is hubris a problem?
    • Effective leaders choose to get on the solution side very quickly. To dwell on problem definition and compliance is to vote for stasis not progress.
    How does your board measure up? More pointedly, does your board even know the effect of its decisions? Nearly thirty years ago, the challenge of explaining board influence over company performance was famously described by Sir Adrian Cadbury, a doyen of corporate governance, as being "a most difficult of question". Thankfully, some progress has been made in recent years, as researchers have entered the boardroom to conduct long-term observational studies of boards in session, and leaders such as Charles Hewlett have shared insights from their experience. While robust explanations remain elusive, one thing is now clear: neither the structure nor composition of the board is a direct predictor of its effectiveness, let alone company performance. If boards are to contribute effectively in the future, they need think, act and behave differently.
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    How does your board rate on the 'trust' scale?

    Accountability Governance Leadership Performance Societal Wellbeing
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    Trust is one of those social building blocks that is crucial for getting things done with others. Board work by no means exempt. When directors a faced with making strategically-important decisions, they must rely on information from and interaction with their board colleagues, the chief executive and any other advisors who may have been invited to contribute. Then, after consideration and having made a decision, the board needs to follow through, by ensuring the decision is implemented well. But, and sadly, the  levels of trust both between directors and with external stakeholder groups is often lower than what is needed for effective decision-making. The following comments, originally published in 2016 by EpsenFuller (subsequently acquired by ZRG Partners), make the point deftly:
    Board directors today face a variety of challenges. Whether it is a case of corruption or the increasing threat of cybercriminals, their performance in dealing with these issues is the subject of considerable attention, explained The Huffington Post (Jan. 25, Loeb). Investors, consumers and NGOs alike are looking to boards for accountability in terms of company performance. Yet, a recent study found that public trust in boards of directors is lower than that of CEOs. A mere 44 per cent of survey participants claimed to have trust in a company's board—five per cent less than trust in CEOs. Influential constituencies are demanding that boards perform at exceptional levels while maintaining distinct independence from company executives.
    That some directors do themselves no favours (through poor behaviour, malfeasance, hubris and  failing to complete actions, for example) is self-evident. But all is not lost. High levels of performance are possible—if all of the directors commit to working together (both as a board and with management) and reach agreement on the company's core purpose; the strategy to be pursued to achieve the agreed purpose; how performance will be measured; and the values that will underpin behaviour standards, decisions, and everything the company does and stands for.
    Perhaps if more boards embraced this mindset (working together), with the company's best interests to the fore, the trust problem that generates so much tension (not to mention column inches) would gradually become a thing of the past. Is this expectation worth striving for, or do you think it is too ambitious?
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    SEEing beyond ESG

    Accountability Corporate Governance Decision Making Performance
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    ESG (environmental, social, governance), an indicator and measure of corporate priorities and performance, has become topical in business circles, very topical. Its emergence has coincided with a rising tide of concerns about the effects of the doctrine of shareholder maximisation, as espoused by Milton Friedman some fifty years ago. A bevy of academics, consultants and politicians have responded by jumping on a bandwagon; much has been written, arguments abound. The objective of much of this rhetoric seems to have been to establish a counterbalance to perceived excesses of capitalism (because capitalism is evil, apparently). 
    The idea of using a range of financial and non-financial measures to assess company performance is not new. It was normal practice until the early 1970s. But things began to change relatively quickly after Friedman's thesis was published. A broad church of managers, boards, shareholders and activists embraced the thesis (with evangelical zeal in some cases) to justify a primary, even exclusive, focus on profit maximisation. And with it, interest in other (non-financial) indicators of corporate performance waned—until the emergence of corporate social responsibility (CSR)  and, more recently, ESG.
    ESG has gained an enthusiastic following. Many proponents have argued that the widespread adoption of ESG principles could redress some of the imbalances and inequities that have become apparent in recent decades. Is that reasonable? Is ESG all it is cracked up to be?
    Drucker's insight is salient (what gets measured gets managed), but the use of ESG as an appropriate measure of corporate performance doesn't sit that comfortably with me. Two things stand in the way:
    • First, only two of the three elements measure company performance (E and S illuminate a company's commitment to various environmental and social goals). The third, G, measures something else: the (supposed) performance of the governance function (i.e., the board).
    • Second, the ESG construct relegates economic performance to such an extent that it is not mentioned. But it remains important: economic performance is necessary if an enterprise is to endure over time.
    If ESG contains such flaws, what other options might provide a better (more complete) indication of enduring company performance?
    SEE (social, economic, environmental) merits close consideration. It reinstates the economic dimension to its rightful place, alongside the social and environmental dimensions. Thus, the three capitals that fuel sustained business performance, economic growth and societal well-being are re-united. If a company is to thrive over time (read: achieve and sustain high levels of performance, however measured), all three capitals need to be measured, managed and protected, as Christopher Luxon so ably asserted, in 2015. 
    And what of 'G'? Rightly understood, governance is about providing steerage and guidance (a lesson dating from the Greeks), the means by which companies are directed and controlled (hat tip to Sir Adrian Cadbury). As such, governance is a function performed—not a consequential outcome or result—and Drucker's maxim should be applied.
    So, to the courageous question: has the time to SEE beyond ESG arrived? I think so.
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    Who decides whether interests are conflicted?

    Accountability Corporate Governance Decision Making Governance Leadership
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    A situation developing at Hutt City Council (a local council not far from where I live) is instructive for boards everywhere. It concerns a proposal to make a grant to Hutt Valley Tennis, a tennis club, to assist with the redevelopment of its tennis facility. The entity and the size of the grant, $850,000, are largely immaterial. What is significant about the matter is that one of the Hutt City councillors is married to the president of Hutt Valley Tennis (a potential conflict of interest, perhaps?), and that the decision required a casting vote by the Mayor to break a deadlock. The local newspaper has just reported the matter, and a newspaper columnist has chimed in offering an opinion as well.
    On the conflict of interest: Questions have been raised as to whether Councillor Milne had a conflict of interest, because his wife is the President of the organisation that stands to benefit from the proposal. Milne registered his interest but denied there was a conflict of interest because his wife is a volunteer, and neither he nor his wife has a financial interest in it. But financial interest is not the appropriate test. A more appropriate test is whether the person can reasonably be expected to make an independent and objective decision, or other factors might lead to bias. Hutt Valley Tennis identified a potential conflict, and Milne registered interest. Yet Milne proceeded to participate in the decision-making anyway. On this matter, Milne appears to have missed a vital point: perception is reality (i.e., conflicts are assessed by others, not self). If there was any doubt at all, caution should have been exercised. To argue that there was not an actual conflict is inappropriate, some might suggest arrogant. Better for Milne to have removed any doubt by excusing himself from the discussion (by leaving the room), especially as he had already declared an interest. He should not have participated in the decision either. Standing one step back, the Mayor is not beyond scrutiny in this matter. Why did he not ask Milne to leave the discussion, and why was Milne not excluded from the decision?
    On decision thresholds: Local councils, like company boards, make decisions in the collective. This means that every resolution results in either a 'yes' or a 'no' decision (notwithstanding any deferral or request for more information). In local government, the minimum threshold for a binding decision is typically a simple majority, with the Mayor holding a casting 'vote' in the cases of a deadlock. But is a sensible means of collective decision-making? What of the downstream effects and consequences? To proceed following a split decision raises all sorts of questions, not the least of which is the opposed councillors' commitment to uphold (or undermine) the decision. A better threshold is consensus, whereby every councillor (director, in the case of boards) has space to speak for or against a proposal, and debate points, on the understanding that they support the decision afterwards (because their warrant requires them to act in the best interests of the entire constituency). If consensus cannot be reached, it is better to defer the decision, pending more information and/or discussion. 
    Thankfully, the Hutt City Council has recognised the situation for what it is. The council has decided to nullify the initial decision and reconsider the proposal next week. Milne has announced that he will not participate.
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    Advisory boards: A good thing, or no?

    Accountability Corporate Governance Effectiveness Entrepreneur Governance Tough Questions
    Several times in recent weeks, I have been asked about advisory boards. Individually, none of the requests are especially remarkable. But when several questions are posed in close succession (such as those listed below), by people in several different countries including Australia, New Zealand, the United States and Ireland, it may be timely (again) to review the phenomenon.
    • What is an advisory board?
    • I'm running a company and it's going gang-busters; but a consultant said I should set up a[n advisory] board. Why, and should I take this recommendation seriously?
    • What does an advisory board do anyway?
    • What is the relationship between an advisory board and a real board? 
    • Could you (me), given your 'governance expertise', chair my advisory board?
    The spate of enquiries set me thinking. Advisory boards have, at various times, been both topical and the source of much confusion and debate. But why the heightened level of interest at this time? Has the recently-published HBR article on shadow boards been a catalyst, or is something else going on? It's almost impossible to tell, except to observe that the person posing the question—usually an entrepreneur or a founding group—wants to know more. Either they've read or heard about advisory boards, or been advised by someone that they 'need' one (their accountant, a firm specialising in establishing advisory boards, some other consultant). The recommendation is typically justified on the basis that advisory boards are a stepping stone, "before taking on a full board". The implication is that the entrepreneur or founding group does not have to give up control. And therein lies a common misunderstanding: that an advisory board provides a bridge to, or is a substitute for, a board of directors. It is not (*).
    Before going any further, let's lay down some definitions:
    • A director is a person who acts as a director of a company and fulfils various (specified) duties, as defined in the [company] law. This definition is universal. Collectively, a group of directors is called a board of directors. Although the name (director) is reserved in the statute, the name itself is not as important as the function the person is performing. Regardless of the term used, if a person is doing things that a director would normally be expected to do, they can be deemed to be a director. If the entity is a company then it must have at least one director (some jurisdictions require at least two), which means it has a board already. But that is not to say that the normative practices of corporate governance (the provision of steerage and guidance, monitoring and supervising management, etc.) are apparent, or even necessary (most statutes do not mention the word 'governance').
    • An advisor is someone who is retained (typically from outside the company) to provide advice that the recipient may, at their sole discretion, accept or reject. In a company context, the person or group seeking the advice could be a manager, a company founder/entrepreneur, a director or the board of directors. Examples include a lawyer;  a coach; a tax, IT or AI specialist; or an industry expert.
    • An advisory board is a term of convenience that has entered the lexicon in the past decade or so, usually in the context of smaller size companies. It is typically used to describe a group of advisors who meet periodically—even regularly—to consider questions and provide advice.
    Turning now to the question posed in the title of this muse: Are advisory boards a good thing? The answer depends on the purpose and function of the group of advisors (let's not use the term 'board' just now):
    • ​If the group is formed to discuss a situation and provide specialist advice, that is little different from the retention of a lawyer or any other subject matter expert. This can be a good thing—depending on the quality of the advice provided, of course!
    • ​If the group meets regularly, and especially if meetings are conducted (or tasks performed) in a manner normally associated with a board of directors, then the group may be exposing itself to additional risks. Indicators include an advisory board charter, the appointment of a board chair, a regular meeting schedule with an agenda and minutes (which are subsequently checked and approved at a later meeting) and the consideration of reports produced by a manager (or management). If such indicators are present, the group may be, in the eyes of the law, acting as if it is a board of directors (and the duties and responsibilities that entails). Thus the terms 'deemed directors' and 'shadow board' prevalent in various jurisdictions.
    It's important to note that the 'deemed director' / 'shadow board' risk is borne by the advisor(s), not the manager, entrepreneur or company. But it is easily mitigated. Here are some suggestions:
    • ​When a manager (entrepreneur, director, board) seeks advice, advisors should request a terms of reference or an engagement letter that clearly defines the type of advice sought, and by whom; the advisory period; the expected deliverables; and the fee to be paid. After the advice is provided (or the advisory period lapses), the advisor(s) should be released.
    • The term 'advisory board' should not be used, ever. To do so implies regularity and conduct normally characteristic of a board of directors.
    • If external advice is required from several advisors, call the group for what it is, a group of advisors (or some other informal descriptor).
    • Meetings should be called and run by the manager (entrepreneur, director, board).
    • The person or group seeking the advice may elect to take notes for his/her/their own record, but these should not be described or circulated as 'minutes'.
    While this is not an exhaustive list of mitigations, they are globally applicable.
    The bottom lines? (Yes, there are two)
    • Managers (entrepreneurs, directors, boards) can and should continue to seek specialist advice from external parties from time to time.
    • Advisors should avoid being enthralled by the prospect of joining an advisory board—the risks are not worth it. Win the business, provide the advice, move on.
    (*) If the entity is a company, a board needs to be in place from day one, regardless of whether advice is sought from third parties or not. The role of the board (i.e., corporate governance) typically includes setting corporate purpose and strategy; policymaking; advising, monitoring and supervising management; holding management to account for performance and compliance with relevant statutes; and providing an account (from both a performance and a compliance perspective) to shareholders and legitimate stakeholders. The formality with which these functions are enacted is, appropriately, contextual. Click here for more information.
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    Hallmarks of 'successful' directors

    Accountability Corporate Governance Decision Making Effectiveness Governance Performance Value Creation
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    In 2014, I observed that aspects of corporate governance and board work had not changed much in 25 years. Having just re-read the book that informed that conclusion (Making it Happen, by John Harvey-Jones), I've been reflecting on the relevance of the author's comments in today's world, especially ruminations on board effectiveness and three defining hallmarks of a successful director:
    • First, directors must feel responsible for the future of the company. When something goes wrong, you should feel a degree of worry and concern and want to contribute to its resolution.
    • Second, directors must be able to influence the general direction of both the board and its decisions. Diversity of thought is beneficial: groupthink (and other variants of #metoo thinking) has no place in a boardroom. You must be able to influence others to change their mind from time-to-time—and be prepared to consider other arguments and change your mind as well.
    • Third, a director's contribution must be constructive. Have you read and understood the board papers? Have you asked questions before the meeting. Are your comments during the meeting helpful or destructive? Do you challenge ideas with honesty, integrity and in good faith? Do you help move the debate forward, building on the ideas of others, or do you reiterate comments of others and foster ill-will?
    Are these hallmarks still applicable in today's fast-paced, technically-savvy world?
    Some commentators assert that board effectiveness is the result of compliance with corporate governance codes and various structural forms. Others, including me, place a heavier emphasis on the capabilities and behaviours of directors on the basis that the board is a social group: men and women who need to work together. (That is not to say compliance is inappropriate. It is necessary but it is not sufficient.)
    ​My recent observations and empirical research suggest that Harvey-Jones' hallmarks remain as relevant today as when they were first proposed, three decades ago. But that is just my view. What is your experience? ​