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    The Toshiba case: Is it time to re-think our understanding of corporate governance?

    Accountability Decision Making Ethics Governance Leadership Performance
    These seemingly innocuous statements are telling: Fix the compliance and the problem will be fixed. Yet history (Olympus, HSBC, FIFA, amongst many others) shows otherwise. Neither the 'monitor and comply' conception of corporate governance, nor the 'advise and monitor' variant espoused by many corporate governance codes and directors' institutes have achieved the desired outcomes. Yet, many boards dogmatically pursue such conceptions. 
    The problem seems to be more fundamental. The contemporary conception of corporate governance seems to be flawed. Consider these statements, which highlight the problem:
    How many more failures will it take to realise that additional layers of regulation and compliance-oriented boards that operate as policemen don't actually add value? How many more failures will it take to acknowledge that a new understanding of corporate governance and appropriate board practice might be appropriate? Emerging research seems to suggest that when boards adopt a strategic orientation, and corporate governance is re-conceived as a value-creating mechanism, increased performance is not only possible—it is potentially sustainable. Please get in touch if you'd like to know more.
    The now very public overstatement of profits at Toshiba (approximately US$1.22bn over six years) has led to the downfall of the chief executive, Mr Hisao Tanaka (below), and seven other senior managers, all of whom were also board directors. The share price has taken a 25 per cent hit and the company's reputation is in tatters. What a mess. At least there is a modicum of accountability and remorse, something sadly lacking in many other cases including HSBC and Lombard Finance. 
    Thankfully, people have begun thinking about what needs to change. So far, the response has followed a predictable course: The possibility of appointing independent directors to replace the disgraced directors has been mooted. Will this structural response be enough to fix the problem? Maybe, but I'm not convinced. Compliance responses rarely lead to sustainable change. (The compelling case is Sarbanes–Oxley: created post-Enron, it did little to prevent the GFC.) 
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    Success attributed to board: Lessons for all

    Accountability Decision Making Governance Leadership Research Strategy
    How valuable is a board of directors to the performance of the business it governs? Does it influence business performance; or does it act as a policeman, "simply" monitoring the chief executive; and, do we even know? Many have attempted to answer this question. More often than not, the responses have been based on statistical analyses of secondary data (surveys, questionnaires, public data). Descriptions of what actually occurs in the boardroom typically remain hidden. Insights from direct observations of boards in action or from first-hand interviews are rare, so it pays to take note when they become available—as occurred when Nigel Bamford, chief executive of fireplace manufacturer Escea went on record this week. His comments, reported here, provide some interesting insights for boards to consider:
    The Bamford interview provides a much-needed glimpse into the boardroom of a successful company. However, and thankfully, the Escea experience is not unique. The insights are consistent with emerging research about what boards need to do if they are to exert influence on business performance. Consequently, important questions for your own board to consider include:
    • The Escea board meets monthly, for two hours per meeting. Despite this small amount of time spent together, the board manages to monitor past performance and look ahead. This suggests that the chairman has a disciplined approach to meeting protocol, and that the board has at least one eye on the future success of the business.
    • The board is comprised of directors with "a whole range of different perspectives and different disciplines". Decision quality appears to have benefited as a consequence.
    • That the board is comprised of three company founders and two external directors suggests that technical independence (as promoted in many corporate governance codes) is not necessary for board effectiveness including effective decision-making.
    • The emphasis in Bamford's comments is on debate and diversity of thought. Gender and other forms of observable diversity were not mentioned.
    • The Chief Executive expects the board to 'add value' by challenging proposals and driving the decision-making process.
    • A one-size-fits-all approach to board practice and corporate governance is not appropriate.
    • While the Escea board looks ahead, strategy was not explicitly mentioned. Whether the board works with management on the development of strategy, or critiques strategic options and proposals presented by management is unclear.
    Bamford's final comment is perhaps the most telling. "In time, a board is useful for all businesses of reasonable scale and ambition." Two important lessons emerge from it:
    • Formalised boards and board practices are helpful once ambitious (growth oriented) businesses have achieved reasonable scale, and if attention is focussed on the future.
    • Formalised board structures and practices are not always necessary (beyond statutory requirements), especially very small businesses where the same person or group of people both own the company shares and manage the business. Meet your statutory requirements but don't burden the business with unnecessary corporate governance and board practices. They are not required.
    • How might the insights discussed here help your board lift its performance in pursuit of business success and value creation?
    • Might a discussion at your next board meeting, to consider the appropriateness of your current board practices be useful? 
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    An interesting twist in the Hanover Finance case

    Accountability Decision Making Governance Performance
    The demarcation between the responsibilities of directors and promoters and those of shareholders was made plain in the Hanover Finance case today. The Financial Markets Authority filed a civil suit against six named parties (five directors and one shareholder), following the collapse of the business several years ago, and a decision by the Serious Fraud Office to abandon criminal charges. The FMA has been pursuing the parties for a couple of years. Now, today, an $18M out of court settlement has been announced. However, there is a catch.
    Five of the six parties (the directors, excluding the named shareholder) were named. The sixth party, well-known businessman Eric Watson, refused to admit he was a promoter of the company (as claimed by the FMA). Consequently, he has avoided being named as a party to the settlement. Thus, the decision demonstrates the distinction between the responsibilities of directors (to make decisions and bear consequences) and those of shareholders (liability is limited to loss of equity).
    One final point. The response of the directors was interesting, to say the least. The directors continue to deny any liability for wrong-doing—even though they agreed to the settlement. Huh? A company has failed. The directors knowingly made major decisions including the issuance of prospectus documentation and they promoted the prospectus. Agreement to settle (funded by insurers, no doubt) implies culpability at some level you would think. Yet liability is denied. Doesn't that sound a bit odd?
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    Are #corpgov statutes and compliance codes detrimental to business performance?

    Accountability Decision Making Governance Performance Societal Wellbeing
    Every now and again a thought piece really sets me thinking—like this one, which arrived in a mail feed over the weekend:
    Most people like the comfort of having rules to follow. Rules give us a clear understanding of what is expected. Obey the rules and we feel safe, confident in our actions, and assured of positive outcomes. However, excessive focus on rules can make us arrogant and judgmental.
    Hard law (that is, statutes and compliance codes) seems to be the de rigueur response to major corporate indiscretion. Sarbanes–Oxley, Dodd–Frank and the UK Corporate Governance Code are but three recent examples. These measures set fairly well defined expectations in terms of how boards are supposed to operate. However, they don't ensure performance. They add cost as (most) companies seek to conform, or they lead to evasive practice). 
    Might the strong focus on regulation, statutes and compliance codes actually be bad for business performance and economic growth, especially as most directors and boards operate ethically and well within accepted social and societal norms? How might the risk–cost balance change if there were fewer rules to divert directors' attention away from value creation?
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    REDUX: Towards a 'strategic board'

    Accountability Decision Making Diversity Governance Performance Research Strategy
    Many commentators—academics and practitioners—agree that corporate governance is complex and difficult to get right. In the context of maximising business performance, boards must satisfy many demanding (and competing) priorities including shareholder expectations; legal and compliance requirements; the management of risk; the determination of future direction; and, the hiring (and sometimes firing) of the chief executive. Directing is a busy job, and it is one that takes time and commitment to do well. The steady stream of boardroom 'fails' in recent years (HSBC and Christchurch City Council amongst many others) and indiscretions (FIFA) suggests many boards are not doing their job as well as they need to. Why is this?
    • Are director's schedules too full to give each board the necessary time and effort?
    • Are boards defaulting to the arguably 'easier' task of performance monitoring, and disregarding strategy and future value?
    • Are directors simply not asking the right questions?
    • Is the safety of consensus thinking suppressing the debating of diverse options?
    Many aspects of boards and board practice have been studied in recent decades including structure, composition and boardroom behaviour in an effort to understand how boards work and how they might contribute to performance. Independent directors have been held up as being crucial to boards maintaining distance from the chief executive and to the effective oversight of performance. Gender (and other) diversity has been promoted heavily in many quarters. The forming of a strong team through high levels of engagement and desirable behaviours has also been explored. As yet, none of the research has exposed any conclusive results in terms of increased company performance and value creation.
    Imagine what board meetings might be like if the focus changed. They'd probably last longer. Directors would read their papers before meetings, and they would be actively engaged. There may be heated discussions. Necessarily, directors would sit on fewer boards. But perhaps, if boards were bold enough to change their focus, they might become more effective. Perhaps. Here's hoping.
    The original version of this muse, posted in December 2012, is available here.
    The prevailing theory of board–management interaction (agency theory) that underpins much of the current understanding of how boards work (or should work) appears to be flawed. It assumes that management is opportunistic and cannot be trusted and, therefore, needs to be closely monitored. Yet none of the structural provisions based on the theory (independence, incentives, various structures) have been causative to increased performance, despite considerable effort over many years.
    Rather than continue to dogmatically pursue a flawed model, we need to move on. The goal posts need to be shifted—from a focus on compliance, structure and composition to a focus on value creation. The notion of a strategic board suggests a focus on future performance and strategy; on high levels of engagement to understand the business and the market; on critical thinking and an independence of thought; and, on robust debates which explore a wide range of strategic options (diversity of thought being considered crucial to avoid consensus thinking). 
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    Directors: Are you paying attention?

    Accountability Decision Making Governance Performance
    This call might not be popular in some quarters. However, emerging research appears to suggest that attentiveness (by way of active engagement in board practices, and strategic management tasks in particular) is crucial if directors are to have any hope of making a difference to the future prospects of the company they are charged with governing.
    If teamwork and effectiveness in the boardroom is important to you, it is likely to be important to your colleagues as well. Does your board have an established protocol on such matters? If not, a good starting point might be to schedule a discussion at an upcoming board meeting. 
    The board is the ultimate decision-making body in every company—it holds the mandate to optimise company performance in accordance with the wishes of shareholders, and it is the shareholders to whom the board must provide an account for their actions (or inaction). This is a weighty responsibility, especially when you consider the plethora of internal and external factors that can affect company performance. 
    Yet some directors seem to be more interested in collecting appointments than in adding value. Things can change in the blink of an eye. Consequently, directors need to be attentive (by guarding against distractions, tiredness and having too many irons in the fire especially) if they hope to fulfil the responsibility delegated to them by shareholders.