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    Making smart decisions in the boardroom, on less-than-complete information

    Decision Making Governance Leadership Research Strategy
    One of the enduring challenges that directors face every time they meet together as a board concerns decision-making. How do directors make smart decisions when 1). they often lack crucial information, and 2). the environment is fundamentally both complex and dynamic? The answer lies in the group of directors' (the board's) ability to make decisions, as one.
    Why so? Legally, the board is a collective of directors. Individual directors make contributions to discussions and debates, but not decisions. It is the board that makes decisions. This transition—from the singular (individual directors, contributions, inputs) to the collective (the board as one whole, decisions, outputs)—occurs when directors meet (i.e., in board meetings, when the board is in session). If the transition is to occur well, all of the directors must be actively engaged their work—working together towards the decision, as one. 
    Group decisions are much harder to make than individual decisions. Reaching agreement can be a minefield, especially if information is missing, trust is low or if directors are more interested (sometimes covertly) in pursuing multiple agendas or representing constituencies rather than acting the best interests of the company (as the law requires).
    How can boards get past this challenge, to make effective decisions on a reasonably consistent basis?
    Recently, CGMA (Chartered Global Management Accountant, a joint-venture between AICPA and CIMA) tackled this question head on. Their report has just been released. You can read a copy of the executive summary here, or the full report here.  ​The authors make eight key recommendations for effective group decision-making:
    • Build greater trust
    • Value the non-financial data
    • Extract relevant data
    • Promote collaboration
    • Incentivise the medium- and long-term, too
    • Engage external stakeholders
    • Review the outcomes
    • Be patient
    I commend this report to you, especially if effective decision-making has been a challenge for your board over the past year or so. Share it with your board colleagues and ask the chairman to schedule a discussion at an upcoming board meeting. If nothing else, you'll bring the expectation of effective decision-making out into the open. Or, the board may find that some behaviours or expectations need to be adjusted, and that a formal board review is appropriate. The discussion may also expose some larger but hitherto hidden issues including that the board may not be clear on the purpose or the strategy of the organisation. If this is discovered, some external advice and assistance may be in order. 
    Regardless of the discussion and the outcome,  I suspect it will time well spent.
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    The 'call' of the digital boardroom

    Decision Making Governance Performance Time Management
    Much has been made of the value of board 'going digital' in recent years. Many software-based systems have been produced including offerings from Boardpad, Diligent, Boardpacks and Board Management, amongst others. The benefits of these systems are reasonably self-evident: improved coordination and management of board reports, reduced administrative costs and improved security, not to mention far less weight to carry to and from meetings.
    However, 'going digital' is not without its challenges. Some perhaps less credible claims have been made about software-based systems for boards, leading to misplaced optimism. Take the promise of increased engagement for example. Glance around the table at your next meeting. How many directors are listening intently, fully engaged in the discussion, and how many are covertly checking their devices for messages? Engagement with devices and systems has certainly gone up, but what of engagement between directors and with the topic at hand?
    In my experience (hundreds of board meetings over the last fifteen years, as a director or an observer), the task of direction is a full-time commitment requiring total concentration, especially if the board is large and/or the topic at hand is complex. It's a tough job, with a hidden twist to boot. While directors attend board meetings, they don't make decisions—boards do. If directors are to do their job well, they need to express their opinions and concerns; ask questions; debate topics; listen carefully (to hear both what is being said and what is not being said); and, depending on arguments raised, they may need to gather more information and modify their opinions. Messages on electronic devices can wait.
    ​While computer- or tablet-based board productivity systems can improve the administrative aspects of board meetings (and greatly so), directors cannot afford to be at their beck and call. They provide no substitute for discussion, debate and collaboration as directors meet together to carefully consider important matters and make decisions. Let's not forget that.
    [Postscript: Technology and devices are appealing. I get that. I'm happy to support the introduction of any system that improves director effectiveness. The challenge for directors is to learn how to use systems well, so they can concentrate on what they are actually there for—to make decisions.]
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    Accountability. Is it too much to ask?

    Accountability Decision Making Ethics Governance Performance
    History is littered with many stories of corporate successes and, sadly, almost as many failures. Why do some companies perform well over the long term while others become abject failures? Is it, as Jim Collins remarked in Good to great, a matter of luck, or is some other factor at play? While luck and environmental factors can be influential, I suspect there's more to it. A common thread that seems to weave its way through many of the success (Ford, GE, Johnson & Johnson, Xero, Facebook) and failure stories (Pan-Am, Enron, WorldCom, Satyam, and Toshiba, amongst many others) is captured in the title of this posting: Accountability.
    All directors hold, by law, a fiduciary responsibility. In Australia, New Zealand (where I live) and many other commonwealth countries, that responsibility is to the company. In the USA, it is to shareholders. Tellingly, it is never to self (despite some directors behaving as if it was!). If directors are to serve shareholders (who appoint them) and also the wider stakeholder community well, moral fortitude ​is a requirement, as is competence and engagement.
    The role of the director is one of service; of acting (read: considering information and making decisions) in the best interests of another party; and, ultimately, of being accountable for decisions made. Consequently, directors cannot afford to be asleep at the board table, nor be selfish in decision-making. Performance, accountability and ethics needs to take precedence over reputation and prestige.
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    When is the best time for a board to ask probing questions? Now.

    Accountability Decision Making Governance Performance
    Image description
    As a director, where does 'risk' feature in your considerations? Is risk something that gets close attention only when a major proposal is being considered around the board table or when a significant and unforeseen problem occurs? Away from major events, is risk something associated with a register of items (that receives cursory attention)? And whose job is it to identify and manage risk in a company, anyway?
    Should boards rely on management to report both accurately and well, or do boards need to probe? If boards wait on management, as happened at the Christchurch Council a few years ago, the board is entirely dependent on the propensity of management to report risks both accurately and in a timely manner. If they do, well and good. If not, the consequences can be dire.
    Boards have a duty of care to ensure resources are applied well and that expected results are achieved. Verification is a crucial—to ensure projects are on track, that expected outcomes are being achieved, that material risks are being identified and that satisfactory mitigations are established. ​To monitor is insufficient.
    To remain silent and to rely on management reporting (only) is to abdicate one's responsibility. Take this current case, a project that has been allowed to run 100 per cent over budget. What got in the road of objective scrutiny? Hubris, ineptitude, incompetence or something more sinister? Might this problem have been avoided if hard questions were asked early on? Directors need to remember their fiduciary duty. The priority is to serve the company, not self. 
    Directors need to be as cunning as foxes, checking and probing from several angles, in case a problem lies in wait. The best time to ask probing questions is 'now', before it's too late.
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    The scope of corporate governance: an analogy

    Decision Making Governance
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    It seems a question I posed last week, which asked whether our understanding of corporate governance might be flawed, struck a chord. Many readers replied via email and LinkedIn, and two picked up the phone to discuss the matter further. The general tenor of the feedback was supportive, which is gratifying. However, one person said they were confused by the corporate governance rhetoric. They suggested that an analogy might be useful, to help them (and others) make sense of various claims and counter-claims.
    The best analogy that I know of is parliament (House of Commons, House of Representatives, Congress). When the House in session, Members meet together in the debating chamber to speak, debate and make decisions on various issues. Most people would agree that this is governance in action—parliamentarians working as a collective, presumably with some purpose in mind. But is this the extent of governance, or does the scope reach beyond the debating chamber? Take the following examples. Are these closely related activities governance?
    • The preparation of draft legislation.
    • Officials who enact decisions and statutes. 
    • Parliamentarians meeting outside the House, to promote points of view and test ideas.
    • The election of parliamentarians.
    Few readers would have difficulty in giving these activities their correct names: drafting of statutes, implementation, lobbying and selection. None of these activities are governance. Intuitively, we know that the governance of our country only occurs in one place, the debating chamber, and even then only when the House is in session. ​Assuming the analogy is fair, why is the scope of corporate governance viewed so differently by so many?
    Is this analogy helpful? If you know of another that works well for you, please feel free to share it, so we can all learn from the exchange.
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    Are you onboard or overboard?

    Accountability Decision Making Governance Performance Strategy Tough Questions
    This muse is the second in an occasional series being written over the holiday period entitled Tough questions about boards. The first muse considered the question of board size. This one looks at board commitment, by asking the question:
    • How many directorships is it 'reasonable' for a competent director to hold at any one time?
    The number of concurrent board appointments is a touchy topic for some directors, especially those who think in terms of turning and contributing 'on-the-fly'. How any director can expect to make meaningful a contribution without reading reports and thinking critically about the matters at hand well in advance of the actual board meeting is beyond me. I've written about this before. Then, I suggested that four concurrent directorships (of mid-cap publicly-listed or privately-held companies) was a reasonable upper limit for any director that hoped to make a meaningful contribution to board discussions, decision-making and, ultimately, company performance.
    The feedback at the time suggested the commentary struck a nerve, and that change was coming. Now, two years on, I'm not so sure. A conversation with a colleague earlier this week leads me to believe not much has changed. The colleague recounted a conversation he had with a director who off-handedly said that ten boards was her working maximum. "Beyond that, things get a bit hectic", she apparently said. Imagine that: ten boards! She must have a big brain to hold the details of ten companies, and know something about time management that most of us don't. However, that director is not alone, ​if the stories in this article are any indication. 
    Why do boards and shareholders continue to ask busy people, including so-called celebrity directors, to join their boards when there are literally hundreds of highly competent director candidates (with sufficient space in their diary to learn the business well and make a meaningful contribution) available to choose from? Have they/we lost sight of why boards exist and of their role in value creation? On the evidence above, perhaps we have.