Tags

  • Published on

    Building director capability: observations from the field

    Accountability Decision Making Governance Performance
    The opportunity to work with new and aspiring directors to build capability is something I find most gratifying. Regardless of whether the task is to facilitate an established course (Institute of Directors' Company Directors Course), pilot a new one (Governance Institute of Australia's The Effective Director Course) or run a private workshop with a board, the sense of fulfilment amongst directors as they grapple with situations, gain new insights from their colleagues and learn more about the role of the director is often quite palpable. However, the learning experience is by no means a one-way street. I also expect to (and do!) gain new insights. Here are some of the themes that have been apparent in the sessions I've led this year:
    • The importance of a learning mindset is increasingly accepted. While the concept of governance is both straightforward and stable (the root word is kybernetes, meaning to steer, to guide, to pilot), the practice of governance (i.e., what boards do and how directors behave) is inherently complex and quite dynamic—even more so when the incessant march of new ideas and technologies is added to the mix. Directors need to commit to a programme of continuous learning if they are to remain current and make relevant contributions. Anecdotal comments shared in workshops this year indicate that some directors now allocate as many as five hours outside the boardroom for every hour in board meetings. In addition to reading and understanding board papers, these directors say they read widely about emerging ideas, trends, technologies and good board practice recommendations, to ensure a sufficiency of knowledge about the market/sector the company they govern operates in and new opportunities.
    • Traditional models of board–management interaction based on separation are breaking down. Historically, the board was conceived as a proxy, positioned between absentee shareholders and managers. The underlying assumption (agency theory) was that managers had different priorities from shareholders, so the board had an important role to keep potentially miscreant managers in check. In practice, a clear separation between the functions of corporate governance and management, including the appointment of independent directors were thought to be important for more objective decision-making. However, these recommendations are increasingly being questioned by both directors and emerging research. Proximity may actually be more conducive to effective contributions and higher quality decisions than separation and distance.
    • Compliance demands continue to dominate the agenda. Regardless of emergent calls for boards to intentionally contribute to strategic management in pursuit of future goals (purpose), the dominant focus of many boards remains one of compliance—to interrogate historical business performance (last month's management and finance reports, sound familiar?) and check that regulatory requirements are being met. While the task of monitoring and supervision should by no means be ignored, the protection of professional and personal reputation continues to be a more important consideration for many directors than company performance.
    • Composition remains a priority for many boards and shareholders. Many boards and shareholders continue to be enthralled by board composition, in search of the 'best' configuration. The number of directors, independence and diversity have all been argued to be important at various times. However, none of these (or any other observable factors) are directly predictive of better performance outcomes. Rather, effective directorship is function of board activity and director behaviour. 
    For more information about these or related topics, or to discuss implications for practice, please get in touch.
  • Published on

    Understanding Friedman, 47 years on

    Accountability Decision Making Governance Performance
    In September 1970, The New York Times Magazine published an article that subsequently became a catalyst, a touchpaper even, for a step change in the understanding of the purpose of business and, as a consequence, the priorities of managers and boards of directors. Milton Friedman, an economist and Nobel laureate, argued that the doctrine of 'shareholder primacy' should prevail over that of 'social responsibility'.
    The article garnered much attention (becoming seminal along the way) especially amongst those shareholders, directors and managers for whom the maximisation of profit was of primary (read: exclusive), interest. ​The statement most commonly used to justify the profit maximisation doctrine is right at the end of the article:
    "There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase profits"
    Superficially, this statement is pretty clear: the purpose of business is profit and nothing else matters. But this statement is incomplete, a portion of a longer sentence. To stop reading at 'increase profits' is to read Friedman out of context. The complete sentence is as follows:
    "There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase profits so long as it stays within the rules of the game, which is to say, engages in free and open competition without deception or fraud."
    Friedman was clear. He argued that the maximisation of profit is an important priority of companies, and he argued that this is not, and cannot be, an unbounded endeavour—much less an exclusive one. The proviso followed without as much as a comma—the pursuit of profit needs to occur within the context of prevailing law and regulation (rules of the game), competition and fair play. That Friedman's guidance was so clear begs a rather awkward question: Why has it been misinterpreted by so many shareholders and boards?
  • Published on

    Purpose & strategy: In pursuit of performance

    Accountability Decision Making Governance Performance Strategy
    Picture
    One of the joys of my 'work' is that I get to journey with boards and executive managers as they wrestle with some pretty challenging questions. Whether the journey involves briefings, phone discussions, meetings over coffee, professional development sessions or facilitated workshops, the goal is generally consistent: to gain understanding, in pursuit of increased effectiveness and, ultimately, better business performance.
    By way of example, I was recently invited to work assist ChildFund New Zealand (*), a social enterprise committed to the ideal of eradicating child poverty. The board and senior managers gathered in a modest setting—the administration office—to strip back the layers and, in so doing, re-discover the organisation's reason for being (purpose) and develop strategy to achieve the identified purpose. The intention was to reach agreement in principle on the core elements by the end of the day, so management could form up a coherent strategy document for discussion with the board and subsequent approval. 
    We got underway at 9.00am, as planned. Some 116 man-hours of focussed and, at times, intense effort later, it was 5.00pm. I won't mention what was discussed or decided, other than to say agreement was reached on most of the big questions. Once the strategy elements are drafted up into a suitable document and approved (there will be a couple of iterations between management and the board to tidy up loose ends, no doubt), attention will move to implementation. The ChildFund board intends to use the approved strategy as a frame, to both resource management and hold it to account (which will include monitoring strategy implementation and verifying that the expected outcomes and benefits are actually being achieved).
    Tips for effective purpose and strategy workshops:
    • Comfort zone: Purpose and strategy workshops can be draining, because they 'force' people to think about the future, often beyond the square. If possible, book an external venue to minimise disruptions (not possible for ChildFund).
    • Preparation: Workshops can be incredibly fulfilling, leading to a real sense of achievement, but only if participants have prepared well beforehand.
    • Structure: A straightforward agenda and a proven framework (not to mention good food and coffee!) let participants know what's coming up.
    • Mindset: High levels of engagement and critical thinking are needed if the group is to explore, discover, listen and debate effectively; maintaining an open mind in search of shared understanding.
    • Facilitation: The use of an external facilitator (who is committed to the goal but neutral on the result) enables the entire group to concentrate on the goal or task at hand.
    • Scope: The importance of resolving purpose and strategy cannot be understated. Purpose without strategy is, simply, an aspirational vision; and, strategy without purpose leads to busyness and wasted resources. 
    (*) It is not my usual practice to name clients! However, when one of the ChildFund NZ directors posted a picture on social media of the board and managers gathered around a whiteboard, the occurrence of the workshop and my involvement became public. Regardless, the details of the discussion remain confidential. 
  • Published on

    On effectiveness: How is your board tracking?

    Accountability Decision Making Governance Performance
    Whether or not one is consciously aware of it on a daily basis, time marches inexorably on. Indeed, 60 per cent of 2017 is now consigned to history.
    That time marches on is a healthy reminder of the value of ongoing reflection, especially at the board table. It's really important for boards to understand and respond to actual performance in the context of agreed strategy, and to nip any variances in the bud early. To that end, how is your company tracking towards goals established for the year? And how is your board performing? Here's a few questions to kick start the board's reflections:
    • Is the company's approved strategy being implemented as expected?
    • Are the expected results being achieved?
    • Are the expected benefits being realised?
    • How effective has the board itself been in both fulfilling its duties and adding value?
    Beyond these questions, it may be helpful to think slightly more broadly. Earlier this year, I wrote several articles (below) to highlight some of the challenges that directors said they had struggled with 2016, none of which are independent from the questions above. As several boards have been in touch recently to discuss points mentioned in the articles (thank you), it seems appropriate to re-publish the links, as a resource for other boards reflecting on company performance and board effectiveness.
  • Published on

    ICSA annual conference: reflections

    Accountability Conferences Governance
    Picture
    I'm seated at Heathrow, homebound after a busy week attending the ICSA: The Governance Institute annual conference in London, and a bevy of other commitments. The following comments reflect on two busy days spent at the ICSA conference. The intention is not to provide comprehensive reportage, but rather to bring forward notable points (from my perspective anyway!). As always, please feel free to get in touch if you have a question or would like more information.
    • The conference, held at ExCeL London, was attended by over 700 delegates (a record, I'm told), drawn from the professions of company director; company secretary; executive management; board support services ; and, external consulting/advisory services and providers. 
    • Sir David Wootten, former Lord Mayor of London, provided the opening remarks. He reminded delegates of the importance of the role of the board of directors, especially in times of great change. Then, he identified five important factors to be borne in mind when leading change from the 'top', namely, the application of common sense; the impact of unintended consequences; caution in selecting allies; perseverance, to ensure the end is actually achieved; and, standards, as a baseline for performance. Although brief, Wootten's comments provided an excellent foundation for what was to follow.
    • The keynote delivered by Lord Owen got under many people's skin, as rightly so. Lord Owen, chairman of the Daedalus Trust, addressed the dangers of hubris—especially but not only in the boardroom. He distinguished between hubris and narcissism (the former a more tenable term), and opined that the personality of CEOs and chairs often change when they take up their roles. An 'intoxication of power' ensues, leading to all sorts of negative consequences. Lord Owen proposed that all CEOs and board chairs should be subjected to a formal review (of their tenure, not only their performance) at least once every five years. He added that the assessment should be conducted by independent assessors.
    • My session was well attended (over 140 people in the room). Speaking about strategy and the board's involvement therein, I asserted that the board needs to invest heavily in strategic management if they wish to influence the future performance of the company they govern. I drew on my doctoral research and other sources, including real-life experiences. The positive feedback was both gratifying and humbling.
    • Andrew Kakabadse (Henley Business School) delivered a summary of recent research about boards and board effectiveness. He noted that tension is good and conflict is bad. Worryingly, Kakabadse observed that just 33 per cent of all boards were engaged, cohesive and able to reach shared conclusions. (I smiled, Kakabadse's interview-based research findings were consistent with the conclusions to emerge from the direct observations made during my doctoral research.) Kakabadse went on to say that many boards are constrained by dysfunctional relationships, noting that 75 per cent of all chair–chief executive relationships are dysfunctional in some way—scary stuff.
    • I also had the opportunity to chat with a few of the exhibitors displaying their wares alongside the sessions. All of the people that I spoke with were passionate about their products and services. However, and disappointingly, many of the software providers present appeared to be still 'stuck' in the mindset of electronic board packs. That an electronic set of board papers can save a director a couple of kilograms is helpful, but what of enhancing the core role of the board—decision-making? When will we start to see cognitive systems that enhance decision-making and board performance?
    Overall, the conference provided a valuable forum for company directors, secretaries and others who support the work of boards to learn, compare notes and meet others in similar situations. 
    Please contact me if would like more information.
  • Published on

    Who[ber] took their eye off the ball?

    Accountability Decision Making Governance Performance Strategy
    Picture
    So, Travis Kalanick has left the building, no longer the chief executive of Uber, the company he co-founded. The company, which makes money through the use of a ride sharing application, has grown rapidly in recent years. From a good idea, the company has become a colossus valued at over US$65 billion. Kalanick deserves credit for Uber's rise. However, Uber's reputation is not without tarnish; reports of a toxic culture, sexism and several scandals have blotted its copybook. The co-founder's pugnacious style hasn't helped either. 
    Uber's widely-reported missteps raises some challenging questions about the role and function of the board of directors; questions that are strikingly similar to those asked following the Wells Fargo fake accounts scandal and the collapse of Wynyard Group, both in 2016:
    • Why was shareholder direct pressure necessary for action to be taken?
    • Why did the board not act earlier? The problems were not a secret (they had been widely reported over many months) and several managers have departed recently (a strong signal of underlying problems).
    • To whom did the board think it was accountable, or was accountability not a consideration?
    • In law, directors get one vote each, so why did one director (the CEO) wield so much control over the board? (That debate occurred within the boardroom, from one director anyway, is acknowledged.)
    Uber was founded on a strong vision and its grew rapidly. The board was technically diverse and debate did occur in the boardroom at times, yet the evidence suggests that board lost its way and became ineffective.
    Though tragic, the Uber situation is instructive for directors and boards elsewhere. Power seems to have been a significant factor.  ​If directors are serious about fulfilling their duties well—especially acting in the company's best interests and pursuing the future performance of the business—some shared understandings are crucial:
    • A commitment to pursue the agreed purpose of the company
    • A clear and coherent corporate strategy (to achieve the agreed purpose)
    • The role and function of the board (i.e., the practice of corporate governance)
    • A commitment to the tenet of collective responsibility
    • A strong and healthy workplace culture
    However, the presence of these factors is insufficient in terms of predicting effectiveness or performance. Ultimately, the effectiveness of any board is a function of what the board does and how directors behave. Research is starting to understand the mechanism of corporate governance, but causality remains elusive. Directors take their eyes off these considerations at their peril.