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    Improving board effectiveness: Let's meet, in Sydney

    Accountability Conferences Decision Making Governance Research
    If I had a dollar for every time questions of board effectiveness and how to drive performance from the boardroom has been discussed in my hearing, I'd be well off. My role in answering these questions will continue in Sydney at the end of the month.
    • The organisers of the Governance Institute of Australia annual conference (28–29 November) have invited me to be a panelist alongside Simon Pordage and Amanda Wilson. I am looking forward to serving the Australian board and governance community in this way. The topic that the panel will be wrestling with, "The pursuit of productivity", promises for a lively discussion!
    • Following the conference, I will remain in Sydney for two days (30 November and 1 December) for private meetings with directors, boards and other leaders. If you would like to meet to explore good corporate governance; how to respond to emerging challenges in your business; or, the results of my latest research and the implications for more effective board practice, I'd be delighted to sit with you. Please get in touch to schedule a meeting.
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    About turn, Mrs May?

    Accountability Diversity Governance
    After initially standing strong, sustained lobbying and public commentary seems to have had an affect on British Prime Minister, Theresa May. News has emerged that the PM has backed down on an earlier pledge to introduce 'employee directors'. This is an interesting development. The Institute of Directors and unions (understandably) were supportive of the proposal. However, many business leaders expressed wonderment.
    Corporate governance has entered troubled waters, without question. But to suggest or even believe that  structural changes might lead to better outcomes, without considering the function of boards holistically is short-sighted, at best—regardless of what any enquiry might determine. But let us not pre-empt the process now underway. The political process owes as much, to its constituency and, more generally, to the British economy. What do you think?
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    Who (should have) the most say on the boards of family businesses?

    Accountability Decision Making Family Business Governance
    I arrived back in New Zealand this morning from six productive days in London (client and new business meetings) and three days in Milan (EIASM conference: day one and day two summaries). My first morning back is typically consumed attending to any non-urgent mail (envelopes and packages, not email) that may have arrived. Today was no different. Then the phone rang. The person on the other end, a director named Simon (not his real name) wanted some advice. He was struggling to settle a dispute that had been simmering in a family business boardroom for a couple of months. Tempers were starting to become frayed.
    The board in question comprised six directors, three of whom were also shareholders (one was the managing director). The other three (including Simon) were independent directors. The dispute arose when one of the non-executive directors (who held approximately 28 per cent of the company's shares) disagreed with the other directors on a strategically important issue. After some discussion, Simon revealed that the director expected to influence the decision "commensurate with my shareholding". The other directors were not sure how to proceed. Thankfully, they sought external guidance before things got out of hand.
    This vignette is not uncommon in family-owned businesses (regardless of size, sector or complexity). It occurs when when non-executive directors want to exert 'power' and the board as a whole is not adequately informed about its duties and responsibilities. Unchecked it has the potential to cause significant damage. Fortunately, and notwithstanding the social tensions, the issue is far from insoluble. 
    ​While debate (including vigorous debate) is to be encouraged in the boardroom (the research literature has associated vigorous debate with higher quality decision-making), directors need to understand that no one director necessarily has any more (or less) power than any other. When it comes to decision-making, all have an equal 'say'—one vote—because the board being a collective of peers required to make decisions together.
    ​Problems can occur if non-executive directors attempt to wield 'power' through their shareholding, even though shareholding has no relevance in the boardroom at all. Non-executive directors can (sometimes conveniently) lose sight of this, especially when an issue of importance to them is being debated or they hold strongly-held views on an issue. In the heat of the moment, they can confuse their director and shareholder decision rights (one vote per director v. one vote per share, respectively). Director decision rights apply when the board is in session (during board meetings). In contrast, shareholder decision rights apply in shareholder meetings only (e.g., the annual general meeting). Directors need to both comprehend this distinction and act accordingly, if the board is to be a place of productive decision-making.
    If you'd like to know more, about decision-making in the boardroom or any other aspect of good board practice, please let me know. I'd be delighted to serve you.
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    EIASM'16: Day two summary

    Accountability Decision Making Governance Research Strategy
    The 13th edition of the Corporate Governance Workshop convened by the European Institute of Advanced Studies in Management (EIASM) was hosted by SDA Bocconi in Milano, Italy. Approximately 50 leading thinkers and researchers from over 20 countries gathered to explore emerging trends in the fields of board practice and corporate governance. Nearly 50 presentations were accepted onto the two-day programme. Highlights from the second day follow, together with some overall reflections (highlights from the first day are posted in a separate summary):
    • Emmanuel Zenou (Burgundy, France) discussed the relationship between board capital (i.e., director expertise, experience, reputation and ties with other firms) and innovation. This presentation was of special interest to me, given my long-standing view that boards need to be involved in strategic management if they are to have influence on firm performance. Zenou asserted that innovation is a key element for helping firms gain competitive advantage and expand market share and, therefore, the intensity of (commitment to) innovation is an important predictor of future firm performance. This is intuitively attractive at a management level, but what of the board's contribution to innovation? Does that matter? Zenou discussed this, saying that firms with high innovation intensity have appointed directors with specific skills, and that different forms of innovation require different profiles of directors. More specifically, advanced education (especially a doctoral degree or an education in law); experience in manufacturing, marketing, international business and people management; and, extensive networks with directors and leaders in other firms were all identified as being helpful. Interesting, experience in finance was negative, suggesting that the propensity to appoint accountants and finance experts might be counterproductive if innovation is a important priority. Zenou's paper suggests that board expertise a more important indicator of performance than structure or composition per se. This is consistent with my research findings
    • Several people spoke about the roles of the chief financial officer and executive compensation in business, especially in the context of international business (Frederic Altfeld, France) and 'say on pay' (Will Mackay, Australia) and board compensation committees (Hugh Grove, USA). The general theme to emerge from this group of speakers was that the chief financial officer has an important role to play as an enabler (but explicitly as a leader) and that executive compensation perceptions of often (and unfortunately) uncoupled from reality. Expanding this second point, Mackay said that the problem with published executive compensation details was the lag between when the package and associated key performance indicators were negotiated and when the results (the pay) was reported. The primary problem is that the media has no memory. This point places a crucial responsibility on boards, to ensure that appropriate context is provided for payments made to executives—especially in the case where the executive has been paid well great historical performance but the company has entered a period of tougher trading conditions when the pay is reported in the annual report.
    Overall, the conference provided a wonderful forum for leading board and corporate governance researchers from around the world (especially Europe, but also North America and Asia) to get together to share ideas and discuss emerging trends. The collaboration produced some wonderful debates; strong agreement that less is known about corporate governance than what most researchers and consultants (especially) claim to know; and, an invitation to return in 2017 (which I will probably accept). However, there was one notable disappointment: mine was the only presentation informed by observations of what boards actually do. Researchers and consultants need to get off their backsides and get inside boardrooms if they are to truly understand corporate governance and provide credible recommendations of what boards should do in practice.
    ​More personally, I was approached by three different people to collaborate on a few different projects, which was gratifying. Two approaches in particular led to further exchanges over lunch and dinner: one to synthesise the learning from my board observation studies (the board's influence on firm performance) with research into psychological factors and group decision-making, and the other to dig into the performance of local government councils (this second project is of special relevance given an independent assessment project I'm currently involved with). Where these will lead remains to be determined. However the fact that people around the world are starting to realise that we need to understand how boards can be a source of value creation (because this relationship is simply not understood now, despite what most consultants claim) was heartening. I look forward to the journey in the coming months, including return visits to UK, Finland, The Netherlands and Italy in early 2017.
    If you wish to know more about the conference; receive papers on topics of interest; or, pose a question or commission some applied research, please get in touch. I'd be delighted to hear from you and to serve you.
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    EIASM'16: Day one summary

    Accountability Decision Making Ethics Governance Research
    The 13th edition of the Corporate Governance Workshop convened by the European Institute of Advanced Studies in Management (EIASM) was hosted by SDA Bocconi in Milano, Italy. Approximately 50 leading thinkers and researchers from over 20 countries gathered to explore emerging trends in the fields of board practice and corporate governance. Nearly 50 presentations were accepted onto the two-day programme. Highlights from three of the papers presented on the first day are summarised here (highlights from the second day are posted in a separate summary):
    • Alessandro Merendino (Coventry University) opened the conference with a very interesting presentation on the subject of the governance of mega-events. His case (the 2016 Rio Olympics) provided some very interesting insights about how mega-events are governed. The analysis of 43 in-depth interviews (with very senior managers and board members) revealed considerable structural complexity, partially dictated by political drivers at both the country and the Olympic Games organisation levels. Surprisingly (given a clear purpose was established—to deliver the Games), the primary focus of the system of corporate governance lay firmly on the monitoring end of the conformance–performance. However, when other factors including that the roles of president of Rio16 and the chairman of the board were held by the same person, and the other board directors were appointed by the chairman are factored in, the strong compliance focus is perhaps less surprising. The preservation of personal reputation appears to have been a far more significant moderator of the behaviour and decision-making than the successful delivery of the Games. Given these insights, it is little wonder why the pre-Olympic planning often runs late, and the Games invariably end up costing far more than originally anticipated (leaving the host city with a long-term debt burden). Consequently, those considering 
    • Jari Melgin (Finland) delivered a powerful paper that revealed some great insights about decision rights and where power actually lies (in the boardroom or the executive suite?). Thresholds of decision rights determine the boundaries of power between board and management. If decision thresholds are too lax for example, boards may not properly represent shareholder interests. Similarly, if decision thresholds are too tight or too extensive, then powers transform boards into management teams. He summarised the results of an extensive research project. A core funding was that the  power to make decisions (of various types but especially strategic decisions) has 'formal' (stated decision rules: what is supposed to happen) and 'real' (what actually happens) characteristics. Decision control can be stratified into hard law, soft law (codes, etc), articles (company specific rules) and board rules layers. Melgin concluded that 'board rules' are especially significant because they provide guidance to the board in the case that a decision fits within the boundaries of hard and soft law and articles but the basis and delegation (for the decision) is still not clear.  
    • Joanna Pousset (Barcelona) presented an interesting talk on conflict amongst corporate elites (i.e., between directors and the chief executive). Using the largest construction company in Europe (VINCI), Pousset described a series of conflicts that have entered the public domain, in an attempt to understand the intrinsic motivations of boards and executives during times of conflict. Pousset conducted an extensive analysis of media reports to build a picture of each conflict (there were several). She concluded that CEO duality (whether the CEO and chairman roles were held separately or by the same person) was a material factor. This finding was in stark contrast with a large body of research that shows that CEO duality is not a reliable indicator of board or board performance, at any level. That the analysis had arrived at this point was worrisome. Why the chairman or CEO was not approached for their perspective, even to support or refute the analysis, beggared belief.
    In sum, the day revealed a mix of interesting insights and concerns. In particular, one long-held concern (that many researchers continue to conduct research based on the analysis of publicly-available quantitative data) was upheld. Why researchers continue to investigate boards and corporate governance from a distance (outside the boardroom) is a mystery to me. If we are to truly understand what boards do, how decisions are made and influence is exerted by boards from and beyond the boardroom, then researchers need to adopt the recommendations of others: that direct observations are crucial to the gaining of reliable insights.
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    Wells Fargo: Is "We're sorry" sufficient?

    Accountability Decision Making Ethics Governance Leadership
    You must give newly appointed Wells Fargo Chief Executive Officer Tim Sloan credit. No sooner had disgraced former CEO John Stumpf left the building, Sloan delivered a speech to all employees to apologise for the scandal that had beset the company. That Sloan delivered an apology  is a good first step on the path towards redemption (the company boasts a long and proud history), even though "we're sorry for the pain" appears to be an apology for the angst employees faced rather than the fake accounts action itself. 
    Two things are especially notable in this case:
    • The board has been remarkably silent. This scandal rocked the entire firm, not to mention confidence in the banking sector. Why has the board not been more visible? Yes, Stumpf is gone. But why has the chairman not spoken yet? Did the board know of the decisions and activities that perpetrated the scandal? If so, why has accountability not reached to the boardroom? If not, why not? To be ignorant of something this big suggests the board may have not been making adequate enquiries. Were probing questions being asked of the chief executive, or was the boardroom a more passive environment?
    • The appointment of an insider (Sloan is a 29-year company veteran) to the position vacated by Stumpf (and to the board) is curious to say the least. Sloan would have been aware of the fake accounts scandal. An 'Acting Chief Executive' appointment (to provide leadership while a full recruitment process proceeded) would have been a better move. The appointment certainly raises questions about the level of due diligence and the recruitment process the board utilised prior to making the appointment.
    That Stumpf's (and now Sloan's) boss has both remained silent and appointed from within is very telling. 
    (Note to the Wells Fargo board: If you want to talk further, in total confidence, here are my contacts details.)