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    Blackrock speaks: A new dawn rising?

    Accountability Corporate Governance Director Development Governance Performance Research
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    Larry Fink, co-founder and CEO of influential investment firm Blackrock may have just moved the goalposts. 
    Writing in his annual letter to CEOs, Fink argued that companies think beyond shareholder maximisation, a maxim that has dominated investor thinking since the early 1970s. Companies need to determine their raison d'être, their reason for being, towards which all effort should be aligned. Fink could not have been more clear:
    Without a sense of purpose, no company, either public or private, can achieve its full potential. Ultimately, it will provide subpar returns to the investors who depand on it to finance their retirement, home purchase, or higher education.
    Fink directly associates strategy, board and purpose—and in so doing Blackrock's expectations are spelt out. Simply, boards need to take their responsibility to ensure the long-term performance of the companies they governs much more seriously. Specifically, the board should both determine and agree several things, namely, the reason for the company's existence (its purpose); how the purpose will be achieved (strategy); and, how the progress towards the agreed purpose and strategy will be monitored, verified and reported.
    Together, this is corporate governance.
    To have such an influential firm speak so boldly is wonderful. Mind you, I am rather biased: my research findings and experience working directly with boards over many years now is consistent with Fink's assertions. 
    I commend the letter to all boards. Two rather obvious questions boards may wish to discuss having read it:
    • How might boards to put these above-mentioned assertions into practice? The mechanism-based model of corporate governance that I emerged from my work with high-growth company boards is one option. 
    • Will Fink's missive portend a new dawn for board practice and effective corporate governance? While it's a little too early to know, I certainly hope so. Every bit of pressure brought to bear helps.
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    Talk, yes. Progress? I'm less sure.

    Accountability Corporate Governance Decision Making Governance Performance
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    The annual deluge of articles summarising on the year gone and predicting (promoting?) future priorities is in full swing. Examples include diversity surveys, lists of board priorities and cybersecurity predictions, amongst many others. While these articles make interesting reading, most of the 'predictor' ones should be taken with a grain of salt; the summaries of past practice and current thinking are more helpful. 
    The recently published PwC Annual Corporate Directors Survey (2017 edition) is an example of the former. It offers helpful insights about what US-based directors of large companies currently think about various board and corporate governance matters. The survey results suggest that levels of awareness amongst directors—in relation to gender diversity on boards, working relationships (both between directors and with shareholders), accountability and alignment in particular—are increasing. That the trend line is moving upwards and to the right is good news. However, demonstrable progress, in the form of better business outcomes remains resolutely elusive. This begs a rather awkward question: Why?
    One possibility is that boards are spending precious time on the 'wrong' things. Little if any focus on company performance and strategy is apparent in PwC analysis; the inherent implication being that those surveyed assign responsibility for strategy to management. What's worse, a significant percentage of directors accept what is put in front of them. Critical assessment and vigorous debate is rare.
    The PwC results cast a dark pall over the performance of US-based directors and boards. They suggest that many have lost sight of their statutory obligation, which is that responsibility for company performance lies with them. This assessment is consistent with first-hand observations of boards in action, including my own, which reveal that the dominant focus of many boards is compliance (monitoring historical performance and checking regulatory ​requirements are satisfied). The protection of professional and personal reputation is a very powerful motivation for many directors, more so than ensuring the performance of the company it seems.
    If boards are to become more effective in fulfilling their value-creation mandate, directors need to hold tight to their core responsibility and concentrate on what actually matters—which is to govern in accordance with prescribed duties, and with the long-term purpose and performance of the company to the fore. Necessarily, effective steerage and guidance requires the board to be discerning and committed to the task, using reliable governance practices in pursuit of better outcomes, lest they be diverted by spurious (and often discordant) recommendations that appeal to symptoms or populist ideals. ​How might this be achieved?
    Returning to first principles, one option is to re-conceptualise corporate governance; as a multi-faceted mechanism that is activated by competent, functional boards. The mechanism itself is straightforward: an integrative assembly comprised of strategic management tasks (the board's responsibility to influence the performance of the business places it at the epicentre of strategic decision-making and accountability), relationships (with the executive, shareholders and legitimate stakeholders) and five behavioural characteristics of directors (details). ​The harmonious exercise of the five behavioural characteristics in particular provides a platform for motivated directors to interact well, and for the board to make forward looking, informed, strategically-relevant decisions in a timely manner. 
    A mechanism-based understanding of corporate governance provides an alternative pathway to achieve more effective outcomes from those promoted by conventional wisdom. Specifically, it provides a framework to focus the board's attention on what actually matters; outlining the tasks, interactions and behavioural characteristics that are conducive to effective contributions. Significantly, those aspects of corporate governance orthodoxy that have demonstrably failed to have a beneficial impact are challenged. For example,  board structure and composition recommendations are set to one side, as well as any notional separation between the board and management; an uncomfortable consequence for some.
     If you would like to know more, including how to deploy such a proposal in practice, please get in touch.
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    Global Drucker Forum: Standing amidst giants

    Accountability Conferences Decision Making Ethics Governance Leadership Performance Research Strategy
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    I had the distinct privilege of attending the 9th Global Peter Drucker Forum in Vienna this week. Approximately 500 people attended the two day forum held in Aula der Wissenschften (Hall of Sciences). The programme included fifteen plenary sessions and a parallel session (four tracks). The very full programme was run to time; a Swiss watch operated with Germanic efficiency, in the birthplace of Drucker.
    Many global authorities in strategy, innovation, entrepreneurship and related addressed those in attendance (and many more utilising the live feed option). Presenters included Richard Straub; Angelica Kohlmann; Jenny Darroch; Hal Gregersen; Roger L. Martin; Anil K. Gupta; Bill Fischer; Rita Gunther McGrath; Sidney Finkelstein; Tammy Erickson and Carlotta Perez, and more. The forum produced many insights; the following commentary merely a portion lifted from my 28 pages of notes:
    Richard Straub, President of the Peter Drucker Society, set the scene by noting that Drucker, a man genuinely interested in the bigger 'why' questions, maintained a strong focus on business performance. He avoided cookie-cutter 'solutions', a reflection perhaps that such solutions don't work within the dynamic and social context of modern organisations. Straub went on to say that management is most accurately conceived as a liberal art [to be understood holistically], not as a social science that can be reduced to constituent elements.
    Lisa Hershman, DeNovo Group, posed the question, "How do we generate growth and ensure more people participate in it?" This was not a veiled call to embrace left-leaning socialist ideals and anti-business practices, but rather a clarion call for 'inclusive capitalism'. (I've been using an equivalent term in speeches in the last couple of years: 'capitalism with a heart'.) Hershman noted that around half of the young people in the United States say they prefer socialism over capitalism. This, she said, is a clear indication that something is wrong. Business leaders have become too focussed on themselves and shareholders, to the exclusion of others. This collapse of confidence needs to be addressed by business leaders. If it is not, companies are likely to find it increasingly difficult to recruit motivated and capable young people. Why? Because they are not interested in working for poor leaders who they do not believe in, much less aspire to.
    Jenny Darroch, Dean, US Peter Drucker School, explored the essence of an effective business and societal ecosystem. She described five key interests (characteristics), namely, a functioning society, where all can participate; recognition that management is a liberal art, not a simplistic of formulaic process; that self-management is important, because neither the state nor business 'owes' people work; that performance [actually] matters; and, 'transdisciplinarity' (i.e., looking beyond the immediate context, sector, role, team) is crucial. These comments set a solid platform for what was to follow.
    Hal Gregersen, MIT Leadership Center, spoke on the important topics of community and communication. He asserted that isolation is the number one enemy of innovation. The world is far too complex for one person acting alone to be effective. Leaders that sit in their office and wait for input are far less effective that the best leaders, who actively seek to reduce (to zero, if they can) barriers in pursuit of the best possible information to understand current reality and what might be possible, so as to inform effective decision-making. The best leaders also encourage dissent, inviting people to both ask and respond to uncomfortable questions, because they want to discover what is wrong and what can be improved. Asking the right questions and, importantly, getting authentic responses (but not necessarily simple answers) depends on being in the right place (read: with staff, customers, in the market) and inviting people to challenge the status quo.
    Roger L. Martin, Rotman School of Management, built on Gregersen's comments by observing the prevalence of certitude (that sense of 'being right' common amongst leaders especially so-caleld alpha males and queen bees. Rather than stridently asserting preferences and blindly applying models (which are often wrong because they are simplifications of reality), Martin recommended that leaders reframe their statements as follows. "I'm modelling the world, but my model is incomplete. What can you add?" Great leaders pursue multiple models, combining and building to make something better (note, a better solution not a compromise). According to Martin, this always leads to better outcomes.
    Several speakers addressed the question of whether growth is actually an imperative. No speaker spoke against growth or its optionality. Rather than almost assumed the answer is 'yes', and moved quickly to consider how growth might be achieved. Anil Gupta, for example, noted that China is responsible for 27 per cent of global carbon dioxide emissions, and India 6.6 per cent. He opined that if India is to grow out of poverty then growth must be coloured—green—to avoid killing the very people it seeks to lift out of poverty. The recommended route is to industrialise, but to do so with smart technology to avoid the avoid the environmental mistakes (and their negative consequences) experienced by China and others. 
    Martin Reeves, Boston Consulting Group, added that while growth is necessary, it is beomcing increasingly elusive. As a consequence, companies operating in developed nations need to change their focus. Rather than growth at any cost, companies need to discover and pursue the right type of growth. Invoking Aristotle, Reeves observed that companies that embrace both economic and social goals (oikonomic companies) do better in the long term. Specific recommendations (boards and directors, take note) include:
    • Define purpose
    • Diversify guiding metrics (beyond financial measures)
    • Emphasise the future
    • Invest in technology 'front to back'
    • Retrain employees
    • [Re]shape the future of work
    • Foster ecosystems
    • Embrace a new (inclusive) narrative for growth
    Allyson Stewart-Allen, International Marketing Partners, and Julia Hobshawn, Editorial Intelligence, sounded a warning, arguing that the unfettered pursuit of connectedness—networking in pursuit prosperity, health and whatever else—has a dark side: info-besity. An over-reliance on social media networks have the unwanted effect of starving people of what actually matters: deep socail connections. People are human beings, not human doings, and social connections matter much more than activity masquerading as social connectedness. Pointedly, sustainable relationships and business sustainability is dependent on people, and their interaction and curiosity not social media. I found myself thinking, "Isn't this obvious?". Maybe so, but a quick glance around the room suggested maybe not: almost everyone within eyesight has their eyes down, using a smart device as the speakers continued.
    Joseph Ogutu, Safaricon, and Haiyang Wang, China–India Institute, provided insights from a developing nation perspective. Whereas many Westerners perceive social disparity to be limited in developing nations, the reality is somewhat different. Disparity between people groups in developing nations is actually higher than in developed nations. Further, many African nations have de-industrialised since gaining independence. The speakers made strong calls for developing nations to embrace manufacturing as a means of achieving the economic growth needed to lift millions out of abject poverty. While many entrepreneurs and investors stand ready to fund initiatives, local communities need to pursue partnerships, lest they suffer new forms of dependency.
    Steve Blank, entrepreneur, and Bill Fischer, IMD, observed that the pressures faced by chief executives in the twenty-first century are different from those in the twentieth century. Then, if CEOs met the expectations of their boards (however expressed) and responded to competitive pressures, then they were reasonably safe in their role. But things have become more complex since the turn of the century. Two additional forces have emerged, namely, activist investors (read: corporate raiders) and disruption. If CEOs are to respond well to this new reality, they need to become comfortable with ambiguity and chaos. Helpfully, Blank and Fischer offered four additional suggestions to enhance leadership effectiveness in the twenty-first century:
    • Working out loud (prototyping, sharing and testin ideas early)
    • Ambient awareness (narrow specialists area problem)
    • Quantified self and gamification (enumerate wherever possible)
    • Collective wisdom (no one person has all the answers)
    Rita Gunther McGrath, Columbia Business School, introduced the forum to a tool to help leaders and investors undertsnad the future growth prospects of any given company. The 'ImaginationPremium' is, simply, a ratio of a company's market capitalisation and value from operations. If the imagination premium is high (but not too high to become hype—Tesla), the sustainable growth is likely. Conversely, low ratios suggest growth is unlikely. The extreme case of a ratio less than 1 suggests shrinkage.
    On strategy, innovation and disruption. Several speakers outlined cases to demonstrate that a coherent, longer-term strategy is actually more, not less, important in times of change and disruption. They noted that well-formed strategy, not detailed plans (often, incorrectly, called strategic plans), helps lift the gaze of both leaders and staff above immediate technologies and disruptions, to focus on purpose, the customer and longer-term goals.
    General observations. Standing back a little, the investment to attend was well-spent. To be amidst giants, and chat with some of them (all were accessible and none pretentious) was a privilege and an honour—I learnt a lot. The only disappointment from my perspective concerned the speaking roster. While about 20–25 per cent of the speakers were world-class (both content and delivery), a similar percentage were disappointing. The lesser speakers either repeated what others had said, or their presentations were thinly-veiled sales pitches. Upwards of ten attendees, including some speakers, voiced similar concerns in private. My hope for future editions is that the organisers review speaker candidates more closely, to ensure a consistently high standard. Stepping beyond that, the general calibre of the forum (organisation, content, delivery) was very high. My intention is to return to Vienna in November 2018, for the the 10th edition of the Global Peter Drucker Forum. Hopefully, I'll be able to share the platform, offering some insights relevant to the theme.
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    EIASM'17: Keynote

    Accountability Decision Making Ethics Governance Leadership Strategy
    Unlike previous editions of the EIASM corporate governance workshop that I've attended, the 2017 keynote session was delivered by three luminaries, not one. W. Lee Howell, Bob Garratt and Tom Donaldson—men of considerable gravitas in their respective fields—led the keynote session together. Each spoke separately, and a panel discussion followed.
    Lee Howell opened the session with a telling quote: "Being right too soon is socially irresponsible" (Heinlein). This quote, a reference to impetuous decision-making on the basis of seemingly-strong (and sometimes quite weak) evidence, notes a common weakness amongst strong leaders, more so in complex environments. Though not named explicitly, Howell's opening comments carried strong implications for those advocating diversity in boardrooms and other structural 'remedies'.
    Howell followed by describing the efforts of the World Economic Forum (the Davos meeting in particular) to improve decision-making quality in the face of rapid change, technological advancements, globalisation and high levels of cultural and social complexity.  He said that WEF is intentionally pursuing four priorities to achieve the desired outcome—these being
    • to provide a trusted platform (i.e., Davos) for leaders to gather and exchange ideas in search of better outcomes;
    • to promote meaningful multi-stakeholder relationships (recognition that business, government and civil society are not independent);
    • to advance systems leadership; and,
    • to respond to the fourth industrial revolution.
    Howell's comments set the scene. Though provocative in the minds of some, the assertion that business is not independent from government and civil society was generally accepted across the largely academic audience. The implications for boards are not insignificant.
    Bob Garratt spoke next. He opened with a strong critique—that corporate governance as we have known it is dead. Though aimed more so at the practitioner, regulator and director institute communities, this opening gambit had the effect of capturing the attention of everyone in the room. The implication, of course, is that if the understanding of corporate governance is somehow wrong, then much current research may actually be futile—a point that Garratt and I have discussed and are in strong agreement.
    Whereas corporate governance was conceived as a term to describe the effective work of the board of directors as it seeks to drive business performance, Garratt noted the demise of the term, to now one closely associated with the task of compliance and the associated activity box-ticking (though this is generally denied by directors when they are interviewed). In an oblique reference to his new book, Garratt asserted that the rot must be stopped. Continuing, he noted four international trends that boards need to respond to if the value creation mandate that they can and should be pursuing is to be realised—specifically,
    • inclusive capitalism;
    • the rise of the global middle class;
    • a growing acceptance that other people's learning and values are key to effective organisations; and,
    • the urgent need to re-establiah professionalism in boardrooms.
    The third speaker was Tom Donaldson. He mounted a challenge to boards and directors, arguing that they need to embrace 'second order values thinking' as a means of moving beyond short-termism, hubris and self-centred decision-making. The critical difference between first order and second order values is that first order values tend to be non-intrinsic, whereas second order values are intrinsic. Interestingly, most management theorists think in terms of first order values. 
    Donaldson closed with a strong challenge. Noting that boards of directors are uniquely positioned to act on the basis of intrinsic values, openly and without double-speak, Donaldson called on boards to embrace an inclusivity, meaning to act beyond pure and unadulterated self-interest. A strong call, one Peter Drucker and Henry Mintzberg would both have endorsed.
    Together, these three speakers' comments had the effect of shining much-needed light on the ills of normative board practices (read: corporate governance). Helpfully though, the speakers did not stop their criticism of board practice. They suggested possible solutions, and supported them with strong arguments. Directors and directors' institutes could do far worse than to investigate these ideas and test their relevance and applicability.
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    EIASM'17: Day one summary

    Accountability Conferences Diversity Governance Research
    The 14th edition of the Corporate Governance Workshop convened by the European Institute of Advanced Studies in Management (EIASM) was held in Brussels, Belgium this week. A summary of the key insights from the first day follows below (click here to read the day two summary).
    • Laura Georg (Norwegian University of Science and Technology) provided the opening keynote, speaking on "Governance of Cybersecurity". After presenting some historical context, Georg laid out some current realities for all to see. First, she noted a tension between technological advancement (what is possible) and societal expectation (what is acceptable). Second, most (91 per cent) board members do not know how to read, much less interpret) cybersecurity reports provided by management. Third, the impact of a successful cyber attack, on the value of intangible assets in particular (often 60 per cent of the value of the balance sheet), is poorly understood. The takeout is stark: there is a real disconnect between those involved with the technicalities and the board of directors. More specifically, most management teams are not reporting to their boards effectively, [reporting and risk] standards are yet to emerge and, tellingly, the impact of a cyber event on firm performance is not being adequately discussed much less addressed. These factors need to be resolved, with urgency, if boards are to ensure the sustainable performance of the company.
    • Michael Hilb's (University of Fribourg, Switzerland) presentation, on the "Governance of Digitalisation" raised some interesting questions for boards, the most pressing of which is "How should boards keep up to date, respond and act in response to the seemingly incessant bow wave that is 'digitalisation'?" Whereas many boards understand business performance primarily in financial terms and measured approaches to risk, the advancement of digitalisation (ed. whatever that means) demands that boards extend their purview. Greater foresight (to see into the future, event to the point of prediction) and strategic competence (to make sense of options, leading to informed and appropriate decisions) is needed. Further, the ubiquity of reach provided by the Internet renders traditional national boundaries mute, enabling a 'winner-take-all' mindset. Though his focus was specifically on the board's response to digitalisation, the conclusions drawn by Hilb were eerily similar to those within the strategic governance framework that emerged from my doctoral research.
    • Martin Bugeja (University of Technology, Sydney) provided an update on the Australian shareholder 'say on pay' regulations introduced a few years ago. The framework, designed to enable shareholders to exert some influence over executive remuneration, requires shareholders to vote on executive remuneration at the annual meeting. Depending on the result, shareholders have the power to censure the board and, potentially, remove the board. If 25 per cent of the shareholding opposes the remuneration proposal, then a 'strike' is registered and the board is required to take action. If the proposal is opposed again the following year, a second 'strike' is registered and a 'spill' vote is taken, whereby the shareholders may remove the board of directors. Bugeja reported that approximately seven per cent of remuneration proposals receive a strike each year. However, some interesting (and perhaps unintended) consequences are starting to play out. Whereas behaviours change and adjustments are made following a first strike, the board's typical response to a second strike is to take no action—preferring instead to await a spill vote and to 'expect' to be returned by major shareholders. Though this smacks of hubris, the reality is that only one board has 'suffered' the ignomy of a spill vote since the regulation was introduced. Bugeja concluded that the intent of the Australian 'say on pay' framework is good but it does not seem to be working as intended in practice. 
    • Hilde Fjellvaer (Trondheim Business School, Norway) and Cathrine Seierstad (Queen Mary University, London) spoke on progress towards female membership of company boards a decade on from the introduction of the 40 per cent quota (females on the boards of publicly listed firms) in Norway in 2007. They reported that firms complied with the quota as required but did little no more. With hindsight, this should not have been surprising; the pool of suitable female director candidates was small. Indeed, a small group of females received many appointments, some individuals holding nine or more concurrent appointments. Subsequently, the average number of concurrent appointments has dropped (to below four) as the pool of potentially suitable female director candidates has enlarged. Notwithstanding this, the percentage of females on the boards of publicly-held firms has stalled at 40–41 per cent. The  percentage of females on the boards of privately-held firms has remained low as well—15 per cent a decade ago and 17 per cent now. Fjellvaer and Seierstad noted that while the observable expression of diversity has stalled, boardroom behaviours are changing. Directors say they explore a wider range of options before making strategic decisions, and higher levels of teamwork are apparent than in the past. However, and importantly, any link to increased firm performance attributable to the presence of female directors remains elusive.
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    Hitting the nail, squarely, on the head

    Accountability Decision Making Diversity Governance Performance Research Tough Questions
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    Bob Tricker just did it again.
    Long the doyen of corporate governance (Sir Adrian Cadbury used the term "father of corporate governance"), Tricker has just posted this article, a stinging critique of several emergent ideas that, through repetitive use, have permeated thinking and are becoming accepted as conventional wisdom. Risk, culture and diversity are singled out as populist memes. Yet robust evidence to support the notion that any of these memes are directly contributory to effective governance—let alone company performance—in any predictable manner is yet to emerge. Tricker's timing is, once again, exemplary.
    Thankfully, Tricker offers far more than a straightforward critique. He reminds readers that the purpose of the board of directors is to govern:  
    The governance of a company includes overseeing the formulation of its strategy and policy making, supervision of executive performance, and ensuring corporate accountability.
    The purpose of a profit-oriented company is also made clear (a point famously made by Friedman):
    To create wealth, by providing employment, offering opportunities to suppliers, satisfying customers , and meeting shareholders' expectations.
    In calling out this matter, Tricker has hit the nail on the head—the effect of which is to place those motivated by the promulgation of unfounded memes in a rather awkward position. I am with Tricker; our understanding of corporate governance needs to be reset. Rather than pursue new memes (a perfectly adequate definition was established over fifty years ago), boards need to discover how to practice corporate governance effectively. Tricker (Corporate governance: Principles, policies and practices), Garratt (The fish rots from the head) and a few others provide excellent guidance as to how this might be achieved.
     (Disclosure: The two books named in this article are the ones that I refer to most often when working with boards. I commend them to you.)