Accountability - Peter Crow | Helping boards govern with impact

Published on: 29 June 2015

What makes a CEO succession plan appropriate?

Succession plans are an appropriate tool to mitigate risks associated with the departure of a key executive. However, they are not normally this prescriptive ("chairman...has taken over as CEO in accordance with the company's succession plan"). To name the chairman in the succession plan does not seem to be appropriate. It is hardly in the best interests of the company. What about other executives or an external candidate? While directors filling roles temporarily—and even gaining a permanent appointment—is not without precedent (Ralph Norris at Air New Zealand being one notable case), the decision of the Coalfire board to pre-empt a contestable process seems to be somewhat short-sighted.

An appropriate chief executive succession plan usually outlines the process by which the board will approach the task of filling a vacancy, including how decisions about the appointment of an acting chief executive will be made and how the board will work with the acting chief executive in the interim. However, smart boards go further than this. They work hard to identify potentially suitable candidates from amongst the executive often many months (sometimes years) before the vacancy occurs. The Coalfire case is unusual in that the chairman was named in the succession plan. One presumes this decision was made when the board thought the chairman was the best and most suitable candidate. However, that decision was made at some point in the past. Whether the chairman continues to be the best candidate does not appear to have been tested. I wonder what the shareholders are thinking just now (*).

(*) My condolences to the family and friends of Rick Dakin at this time of his unexpected passing. This muse reflects on the decison-making and succession planning practices of the board both before and after the event of his passing. It is not intended to lessen Dakin's impact on the business nor the magnitude of his loss.

Of all of the roles within a modern corporation, the role of chief executive probably ranks as 'the most important'. Although the board carries the ultimate responsibility for the performance of the company, the chief executive is the standard bearer—they hold and cast the company's vision. The chief executive is also accountable to the board for the implementation of the company's strategy. Consequently, the role is crucial to the long-term performance of the company—an unexpected departure can leave a company floundering while a replacement is sought.

Published on: 19 June 2015

EURAM'15 Keynote: "I am a revolutionist!"

Wałęsa continued by looking to the future. He challenged—hard—both the communist system that dominated the Eastern bloc and the capitalist system that dominates the West. He asserted that to replace one form of evil with another was not good. Rather, European unity should be the goal, but that requires people to get together to talk and to listen. Wałęsa stressed the importance of values as a crucial foundation to enduring peace.

Wałęsa's talk was inspirational, to the extent that the impact of his contributions on the lives of ordinary Polish people and the wider Eastern bloc has been huge. However, Wałęsa's rhetoric, while eloquent, strayed a little at times. Some of his comments were thinly-veiled political statements that, in another context, could have been interpreted as calls to action. Notwithstanding this, one of his calls, for a new generation of leaders to rise up to continue to fight to freedom and unity was clear and unambiguous. It's a pity that more business leaders and company directors were not present to hear it! Although unstated, the implication of Wałęsa's call was clear: leaders need to know when to lead and when to let go.

Wałęsa started with the claim "I am a revolutionist!" He regaled the largely academic audience with stories of 'great divisions'; of 200 men who fought for change against 200,000 Soviet soldiers with little success; and, of the tipping point provided by a papal appointment and subsequent visit. Within a year of Pope John Paul II's appointment, Wałęsa had gathered over two million supporters. Change became possible. "I want you to believe." Soviet soldiers watched the rallies as the people cheered for their Polish Pope. They even made the sign of the cross across their chests, something that surprised Wałęsa but gave him hope that change might be possible. Indeed it was, and indeed is happened.

Delegates at the European Academy of Management conference were treated to an inspirational keynote speech by Lech Wałęsa, co-founder of Solidarity, Nobel Peace Prize winner and former President of Poland. His comments, in Polish, were translated by a very impressive translator.

After speaking for 45 minutes, Wałęsa answered audience questions for another 45 minutes (he skilfully avoided answering any provocative questions, including one about Vladimir Putin). All too soon, the allotted 90 minutes was up. Wałęsa needed to catch a plane. He remains in demand as an international speaker on politics and history.

Published on: 19 June 2015

EURAM'15: Corporate governance, firms and boards of directors

Two interesting papers, that explored various aspects of chairman effectiveness and CEO succession, were presented during the late-morning session of the first day of EURAM2015:

Tien Nguyen, a doctoral candidate from the University of Sydney, presented preliminary results of her research on the influence of board chairman on firm performance. She suspected that share ownership was material to any influence, so designed a quantitative study to analyse some industry data. The preliminary analysis (which considers share ownership, tenure, prior industry experience and intra-industry networks) suggests the prior industry experience and share ownership are crucial to firm performance. However, Nguyen qualified her comments that the analysis is incomplete and that the results will be limited to correlations not explanations. For that a new [qualitative] study will be required, to look at 'how' and 'why' influence in exerted by the chairman, and the conditions under which such influence might be effective.
Ljiljana Erakovic, Associate Professor at the University of Auckland, described the findings of a recent case study which explored CEO succession at New Zealand's flagship airline, Air New Zealand. She and her team interviewed all of the directors that have served over a twelve year period, to understand how CEO succession was handled and to provide guidance to boards. The analysis of the interview data identified that a clearly defined and agreed recruitment process; and strong cultural fit between the candidate and the company; and, the early on-boarding of prospective external candidates into senior roles (almost as a try-before-you-buy) appeared to be crucial to the successful appointments and tenures of CEO's Sir Ralph Norris, Rob Fyfe and, most recently, Christopher Luxon. Erakovic suggested that the learning from this case is that chances of successful CEO appointments are enhanced if boards focus their attention on a few key things, including starting into the succession and recruitment process early, as early as eighteen months before the outgoing CEO leaves the company.

Published on: 19 June 2015

EURAM'15: Is it time for a new paradigm?

Professor Thomas Clarke, of UTS Sydney, opened the corporate governance track of the European Academy of Management 2015 conference by discussing both the history and the future of board research. In so doing, he asked the question as to whether boards and board research were on the cusp of a paradigm shift.

Looking back 83 years, Clarke called on the memory of Berle and Means, and their oft-cited work that explored the separation of ownership and control. Berle and Mean envisaged a collective and collaborative approach (between shareholders, boards and managers) to the achievement of various business goals. The article has been accorded seminal status by many researchers, yet it has been largely usurped in more recent times by agency theory (one of the most debilitating ideologies of moderns time, according to Clarke), a contribution that conceives an individual and separatist view where shareholder primacy is the primary (even only) goal.

In looking ahead, Clarke asserted that new a model is required because the world is on the cusp of a massive disruption caused by climate change. A continuation of the extant approaches will simply accelerate the demise of many economies. In calling for a zero-emission post-carbon economy, Clarke said that boards of directors have a key role to play. However, they need to be farsighted, determined and courageous. He called out Chandler (1967) and Stout (2012) as highly influential thinkers in this regard, and contrasted their theses with that of the more commonly cited Jensen and Meckling (1976) (who promoted agency theory).

The challenge for boards in the future is to return to the ideas of Berle and Means, for history suggests that their ideas were largely correct. Whereas the 19th Century was characterised by production and the 20th Century by marketing and consumption; the 21st Century will, more than likely be characterised by sustainability. Boards need to embrace this if they are to oversee the fundamental changes needed to make the transition. Whether boards will be prepared to look inwards, to re-invent themselves and the way they work is the first challenge to be surmounted. Clarke's thesis suggests that failure to act on this initial point may consign boards and the very companies they oversee to the very place they wish to avoid—the scrapheap.

Published on: 14 June 2015

IGW'15: What place does regulation have in #corpgov?

The session that followed the challenging commentary of Silke Machold explored the place and role of regulation in corporate governance and, more specifically, in decision-making:

Ilya Okhmatovsky, a Russian based in Canada, observed that much attention and scrutiny on corporate governance usually follows scandals and abuses from within the boardroom. However the regulatory response that inevitably follows—hard law and additional compliance requirements—rarely results in better decision-making or company performance outcomes. In fact, the direct regulation of decision-making appears to be impractical (and potentially, nonsensical) because it constrains board autonomy and innovation, and it often leads to another round of subversive activity. Okhmatovsky suggested that a balance between external regulation (to outlaw certain actions and conduct) and internal policies (aligned to the purpose of the company) is more likely to lead to the performance outcomes desired by boards and shareholders. He has recently commenced a study to determine whether his hypothesis is supported in reality, or not. I look forward to reading the results in due course.
Jean–Phillipe Denis, a Parisian scholar, asked whether the company failures experienced around 2000 (Enron, Worldcom, etc.) and 2007–2008 (GFC) were, in fact, predictable events Drawing on the title of the movie, Denis looked back to the future. He suggested that equity inevitably becomes overvalued, and that many boards, shareholders and regulators do not learn from the past as they should. Further, Denis noted that provisions built on an agency theory of board–management interaction did not prevent the circa–2000 failures. Nor did the responses to those failures (Sarbanes–Oxley) prevent the GFC. Consequently, what hope should we have that the most recent set of measures (Dodd–Frank and UK Corporate Governance code, amongst others) might prevent failures in the future?

Neither speaker argued for more regulation, not did they argue for less. Rather, the challenge was a call to learn from the past and to do things differently. The thought-provoking proposal left delegates with much to ponder.

Published on: 12 June 2015

IGW'15: Governance in emerging markets (panel discussion)

A panel of three very capable thinkers offered conference delegates insights into boards; board practice; and, continuing tensions between calls for corporate governance reforms in emerging markets, vibrant cultural differences and inconsistent capital market pressures. a summary of the insights and comments offered by panel members Thomas Clarke (UTS, Australia), Anderson Seny Kan (Université de Toulouse, France) and David Zoogah (Morgan State University, Baltimore, USA) follow:

Clarke observed the many emerging markets had, in fact, emerged. They have become powerful in their own right. However, varieties of capitalism exist (the BRICS economies were compared and contrasted), all of which stand in contrast to the Anglo–American model of hard legal and regulatory structures, and market oriented corporate governance.
Seny Kan suggested the boards are 'social spaces' and that culturally appropriate tools are required to 'govern' such spaces. The emergence of post-colonialism has seen a marked reaction against colonial forces in many cases, thus leading to some very stressed and complicated situations. A regime of practices may be required to 'normalise' practices within each economy, but not to (re)impose Anglo models that simply don't fit the cultural context particularly well.
Zoogah took a slightly different perspective, by comment on something he called the 'natural resource curse'. The catalyst for the entry of many big firms into so-called third world emerging economies has been natural resources. this has brought employment and economic growth, however in many cases the modus operandi has been exploitation not endowment. Firms have failed to embrace the grand challenge of tidying up, or by sharing the wealth created in any equitable manner.

While the three panel speakers observed many idiosyncrasies between emerging markets and with developed Anglo–American economies, a common thread emerged during the discussion. In most cases exogenous forces have held much of the power but this is starting to change. The role of the company in each economy is pivotal, both to the effective and fair operation of markets, and to contribute to the well-being of all citizens.

While the panel members did not explicitly focus their comments directly on corporate governance, the linkages and implications for boards were clear: that company leaders and boards have a crucial role to play in the development of emerging economies, and that role needs to be taken seriously.

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