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    Notes from a nomad in Europe

    Accountability Conferences Corporate Governance Governance Leadership Research Strategy
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    My speaking and advisory tour of several European cities got off to a great start on Sunday evening. The first port of call was Stockholm. Liselotte Hägertz Engstam, an established director and board chair in the Nordics, hosted a seminar at Tändstickspalatset; a great venue. The theme was [the] Board's role in innovation strategy and governing new digital business models. ​Some 35–40 directors and board chairs with just over 100 board mandates between them, gathered to hear two speakers, namely, Stephanie Woerner and yours truly. The following paragraphs tell the story.
    Digital business model and board contributions
    Stephanie Woerner, a Research scientist at Sloan School of Management in Boston, explored value creation in the digital economy. She observed that many (most?) corporations were somewhat lumberous, offered rather average customer service and, tellingly, were ill-equipped to take advantage of emerging 'digital opportunities'. As such, they are at risk of losing out to younger, more nimble businesses. Woerner identified six questions that companies need to resolve if they are to compete effectively in the digital economy:
    • What is your digital threat?
    • What business model is best for your enterprise's future?
    • What is your digital competitive advantage?
    • How will you connect with your prospective clients?
    • What capabilities are needed to reinvent the enterprise?
    • Do you have the leadership to make it happen?
    Then, Woerner spoke about digital savviness, making two points along the way. First, 62% of directors claim to be 'digital savvy' (and, presumably, ready to tackle emergent challenges), but only 24% are indeed savvy. Second, the presence of three digital savvy directors is sufficient to drive improved [financial] performance outcomes. With that, I sat up. How might a quantitative analysis be a reliable predictor of a contingent outcome? A person at the table I was seated at was similarly exercised. She interjected, asking what the term 'digital savvy' meant. "Great question. We used the experience and qualifications of board members as a proxy." Woerner went on the explain how this has been arrived at: a keyword analysis of resumés (searching for words such as technology, CIO, disruption, software). The presence of such words on a resumé was deemed sufficient to categorise someone as being digitally savvy. You could have heard a pin drop.
    While Woerner's assertion (that boards need to be knowledgeable of emerging technology trends) is intuitively reasonable, the underpinning research appeared to be flawed. Others seemed to agree, suggesting it is more important for directors to have a curious mind, read widely and ask probing questions. Notwithstanding this, Woerner's core point was on the money: boards need to get up to speed with technological innovations and the opportunities they present.
    ​Making a difference, from the boardroom
    I spoke second, the task being to both build on Woerner's comments and add some insights of my own. I started by acknowledging today's reality, that change seems to be the only constant. Woerner set a great platform so there was no need to labour the point, except to say that directors need to work hard to keep up. Importantly,  contemporary recommendations including so-called 'best practices' provide little assurance of better board practice much less improved firm performance.
    An important duty of all boards is ensure the future performance of the governed company. If boards are to make a difference, they need to make informed decisions about the future direction of the company, and verify whether desired performance outcomes are actually being achieved or not. Four crucial questions that boards need to ask were tabled, these being:
    • Are we doing the right things? (explores context, purpose and strategy)
    • Is strategy being actioned as expected? (explores implementation)
    • Are expected benefits being achieved? (verifies performance by way of outcomes, not just effort)
    • Are we making good decisions? (tests efficacy of board's decision-making)
    After suggesting some practical considerations, I introduced the strategic governance framework, an option for more effective contributions (as revealed from my doctoral research and subsequently lauded by both practicing directors and scholars around the world).
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    ​Insights
    The seminar presented two perspectives, namely, that directors need to become a lot more digital savvy if they are to contribute effectively in the boardroom, and that effectiveness is a function of director capability, board activity and underlying behavioural characteristics of directors, not what they look like.
    Board readiness to lead well in the emerging 'digital' world is a concern—made worse given boards tend to pay much more attention to historical performance than wrestling with the [largely unknown] future. This is the elephant in the room. 'Digital' is but a symptom, I suspect. If boards are to have any hope of influencing firm performance, what they do in the boardroom (i.e., corporate governance) needs to change.
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    Re-conceiving 'control', as a constructive mechanism

    Accountability Corporate Governance Decision Making Governance Performance Tough Questions
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    In business, as in life, the task of exerting control is commonly perceived as being one of exercising limits; of saying 'no' and imposing constraints. Such perceptions are well-founded. Check these verb usages of 'control', lifted straight from the dictionary:
    • to exercise restraint or direction over; dominate; command
    • to hold in check; curb
    • to test or verify (scientific experiment)
    • to eliminate or prevent the flourishing or spread of
    If you have spent much time in boardrooms, you'll know that director behaviour tends to be consistent with these definitions, more so if the chief executive is ambitious or entrepreneurially-minded (the two attributes are not necessarily the same). When asked, board justification for exercising caution is straightforward: to keep the chief executive honest and to keep things 'on track'.
    Such an understanding—holding management to account—seems admirable. Monitoring and supervising management is one key task (of four) of corporate governance after all. But does a strong hand actually lead to better outcomes? More pointedly, how might the exercise of restraint and limits advance the purposes of the company (noting the board is responsible for ensuring performance goals are achieved)? Such conduct is analogous to applying the brake when the intention is to drive on. A growing body of academic and empirical evidence suggests that a strong hand, like increased compliance, may actually counter-productive.
    Rather than persist with what is demonstrably a problematic approach, it might be more fruitful for boards to consider another perspective. ​What if control is re-conceived in positive terms (namely, constructive control), whereby the board's mindset is to provide guidance (think: shepherd or coach) by ensuring the safety of the company and steering management to stay focused on agreed purpose and strategy? Might this deliver a better outcome? 
    Emerging research (here, but contact me to learn more) suggests the answer is 'yes'. Strongly-engaged and strategically competent boards that display high levels of situational awareness as they debate issues from multiple perspectives and make informed decisions in the context of the long-term purpose of the company can make a difference. Constructive control is one of five important behavioural characteristics of effective boards identified in this research.
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    Picking up the #corpgov & #boardpractice discussion

    Accountability Corporate Governance Governance Leadership Research
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    After a longish hiatus—nearly four months—Musings is back. Thank you to regular readers and supporters who have asked about the radio silence. The explanation is straightforward: a busy period of speaking and advisory engagements, research and board work left precious little time to ponder.
    ​But that is history now. My intention is to pick up where I left off in early August, by posting on topical matters and emerging trends; challenging orthodoxy and, importantly, exploring how boards might become more effective in their pursuit of high firm performance and sustainable wealth creation. 
    Thank you for your interest in Musings. Your feedback and commentary is appreciated.
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    Towards a better understanding of corporate governance

    Accountability Corporate Governance Director Development Research
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    Research is a funny thing. On one hand, experience can be greatly helpful: knowing what one is looking for or expecting to see is a boon. On the other, experience can be a hinderance: knowledge often resulting in bias and  preconception, and the very real possibility of missing vital clues. This is one of the great dilemmas for board and governance research.
    Some forty years have now passed since researchers started investigating boards in earnest. That an answer to the question of the role of the board and how they influence firm performance (i.e., what corporate governance is and how it is practiced) remains elusive is an indictment on the research community. Directors and boards need clear and well-founded guidance so they can become effective in role.
    Medical research is conducted by medics; cultural research is conducted by anthropologists; and, engineering research is conducted by engineers, so why is board research typically conducted by academics with little if any business experience? How might a researcher who has never been inside a boardroom hope to recognise the normative practices of board meetings? Or that a subtle interaction between two directors might actually be material to a pending decision?
    ​That most board and governance researchers have never been in a boardroom or served as a director is alarming. Yes, gaining access to observe boards directly is difficult to achieve. But to restrict board and governance research to counting isolated attributes of boards from outside the boardroom is folly. To be useful, recommendations need to account for the socially-dynamic nature of boards and the behaviours of directors (both of which can only be reliably discerned through direct observation).
    If the question of explaining how boards influence firm performance is to be answered, three things are needed: 
    • Researchers need to get inside boardrooms, to observe boards in action. (What directors actually do can be quite different from what they say they do when interviewed.)
    • Research needs to be conducted through the lens of experience.
    • Recommendations need to be holistic, accounting for both the activities of boards (what they do) and behaviours of directors (individually and collectively). That the structure and composition of boards is, relatively speaking, far less important.
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    Companies, boards and strategy—and Plato?

    Accountability Corporate Governance Governance Leadership Strategy
    What can Plato, a philosopher who lived over 2400 years ago possibly teach the leaders of modern companies? After all, the modern form of company only came into being in the last few hundred years, two millenia after Plato died. As it happens, when it comes to strategy and decision-making, Plato can teach us a lot—a point made by the author of this article. Here's an excerpt:
    Plato likened the guidance of a state to the navigation, piloting, and crewing of a ship at sea. The analogy holds for the strategist and a war effort. The strategist is the navigator with skills that few others have but he may not always be the captain who leads the crew, those that must actually carry out the strategy. Strategy is not responsive to constant or wild adjustments; the hand on the rudder must be subtle and steady; the mind behind it focused on the north star of the political end state. It is for this reason that one could expect that the navalist’s mind more easily grasps the nature of strategy than that of the continentalist. For centuries, ship’s captains engaged in strategy both military and diplomatic with little guidance and no recourse to seek more just by the nature of communications and the distance that a ship could carry them.  ​​
    This is one of the best summaries that I have read in a long time. Though written in the context of naval strategy and referring to Plato, the roles and tasks described here are directly applicable to companies and boards. The author writes that strategy (strategos: the art of command) is something developed at senior levels, with the long-term purpose (north star) in mind. The captain's job is to implement the strategy. Teamwork between the strategist and the captain is both expected and crucial. ​
    The correspondence to companies and boards is stark. 'Guidance' (first sentence) corresponds to governance (kybernetes: to steer, to guide to pilot), for example. The senior-most decision-maker is the board of directors; the chief executive is 'the captain'. In naval terms, the best chance of making progress towards the 'north star' occurs when the strategist and captain collaborate closely—and so it is with the modern corporation.
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    The wildcard in family-controlled firms: undue influence

    Accountability Corporate Governance Decision Making Family Business Management
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    The limited liability company is a great construct; an efficient vehicle for commerce, through which to pursue an overall aim (purpose) and to distribute wealth (however defined) over an extended period. What's more, mixed levels of ownership are possible; greater economies of scale are attainable (beyond what a sole trader or entrepreneur could typically achieve); and, importantly for absentee shareholders, liability is limited to the extent of the capital invested. 
    Though they offer many benefits, the limited liability company is not without flaws—it is a social construction after all, and a complex dynamic one at that. The motivations, priorities and interests of various interested parties (shareholders, directors, managers and staff, amongst others) are often different. Contexts change, and egos can get in the way as well. Left unbridled, differences can fester, morale can suffer and, in more extreme cases, the company can be torn apart. Wynyard Group and Carillion are two recent example but there are many others. Family firms are not immune to such challenges. In fact, when the wildcard of family dynamics is added to the mix, family firms are actually more, not less, susceptible. Though not always visible, the spectre of undue influence often lurks as a contributing factor, as the following discussion reveals:
    Failure to differentiate the roles of 'shareholder' and 'director': Let's start with some definitions. A shareholder is a person or entity that owns shares in a company. Ownership of shares affords certain rights, such as, selecting directors, receiving dividends and participating in major decisions. But those rights do not extend to running the business. That is the responsibility of managers, a delegation via the directors. In family firms, the roles of shareholder, director and manager can become blurred, especially when an influential family member holds multiple roles.​
    The most common expression of undue influence that I've seen over the years relates to decision-making at the board table: a director with a significant shareholding 'expects' to influence significant decisions in their favour because they own a large parcel of shares. The important distinction that is lost (sometimes it is 'conveniently' neglected) in such situations is that the board meeting is not a proxy for a shareholder meeting. Shareholders and directors vote differently. Shareholder voting is conducted on a 'one vote per share' basis, whereas each director has a single vote at the board table. Regardless of whether directors hold shares or not, every director has an equal say.
    If situations like this arise, they need to be nipped in the bud. If they are not, board meetings become a farce; the other directors puppets. This is far from acceptable, especially when the duty of acting in the best interests of the company (not any particular shareholder) is factored in. In most cases that I have observed, attempts to exert such [undue] influence tends to stem from ignorance and a desire to do what they think is fair, not malice. Usually, a quiet discussion with the director concerned is often all that is needed to resolve the matter. Another family member or an outsider (an independent director if there is one, or some other trusted advisor) are useful candidates for this task.
    Treating the company as little more than a personal bank account:​ If I had a dollar for each time I've seen this in family firms... Recently, while observing a board meeting as part of an advisory engagement, a director asked, "Why are we always so short of cash when we are supposedly highly profitable?". The discussion that followed was both enlightening and disturbing—and, sadly, it was not the first time that I'd heard it play out. One director with banking access had been buying personal items with company funds and, from time to time, had been taking 'petty cash' for personal use. He saw nothing wrong with this because "it's my firm anyway".
    If a director or shareholder uses company funds to acquire personal items, or uses the company bank account as if it were their own, they are acting in their own interests (whatever those may be). Their actions may put the viability of the company at risk as well. Neither of these motivations is permissible in law. Any shareholder wanting money from the company needs to ask the company, not just take it (that's theft!). Valid payment options include shareholder salaries (payment for effort/services rendered), dividends (a share of the profits), donations (but these may be taxable) and director's fees. ​The company may also agree to lend money to the shareholder. Regardless of the motivation or the payment option, a written policy which outlines the rules and conditions pertaining to payments to shareholders can help mitigate misunderstandings.
    Employment of family members and related matters: ​Another expression of undue influence is the situation in which a family member 'pulls rank' to secure employment for themselves or another family member. While any family member may nominate anyone else (including other family members), to foist a particular person onto a manager is completely unreasonable. If managers are to be held accountable for performance, they  need to be free to make reasonable employment decisions themselves, in accordance with employment policy. In family firms, it is a good idea to add a section entitled 'Employment of family members' in the policy, to set out the rules the be applied whenever a family member is being considered for a role. 
    While none of these examples of undue influence is unique to family firms, they are usually more visible (and often more destructive) in family firms. Once discovered, they need to be resolved. If not, family relationships can become strained, even to the point of breaking down. Actions that families might consider taking to prevent or at least mitigate the types of problems summarised here include:
    • ​A set of written policies, that specify various operating boundaries. Employment of family members and payments to family members are two areas in which policies can be especially beneficial.
    • A shareholder's agreement, which specifies how family members will interact with the company in matters relating to the company including acquiring and disposing of shares, employment, major decisions, dividends and voting rights, amongst others.
    • A functional board of directors (and associated governance framework), to set strategy, approve policy and oversee the operation of the firm (in accordance with the approved strategy and policy).
    • A communications framework, which outlines both the frequency and form of communications between the company and shareholders (and other stakeholders including non-shareholding family members).
    Boards wanting to explore matters mentioned here should get in touch directly to arrange a private briefing.
    This article is the second of three on the topic, 'Governance in family-controlled companies'. The first explored some items that are currently front-of-mind for many directors and shareholders of family-controlled firms. The third article, which will present recommendations to improve board effectiveness, will follow in late 2018.