Diversity - Peter Crow | Helping boards govern with impact

Published on: 7 November 2017

EIASM'17: Day one summary

The 14th edition of the Corporate Governance Workshop convened by the European Institute of Advanced Studies in Management (EIASM) was held in Brussels, Belgium this week. A summary of the key insights from the first day follows below (click here to read the day two summary).

Laura Georg (Norwegian University of Science and Technology) provided the opening keynote, speaking on "Governance of Cybersecurity". After presenting some historical context, Georg laid out some current realities for all to see. First, she noted a tension between technological advancement (what is possible) and societal expectation (what is acceptable). Second, most (91 per cent) board members do not know how to read, much less interpret) cybersecurity reports provided by management. Third, the impact of a successful cyber attack, on the value of intangible assets in particular (often 60 per cent of the value of the balance sheet), is poorly understood. The takeout is stark: there is a real disconnect between those involved with the technicalities and the board of directors. More specifically, most management teams are not reporting to their boards effectively, [reporting and risk] standards are yet to emerge and, tellingly, the impact of a cyber event on firm performance is not being adequately discussed much less addressed. These factors need to be resolved, with urgency, if boards are to ensure the sustainable performance of the company.
Michael Hilb's (University of Fribourg, Switzerland) presentation, on the "Governance of Digitalisation" raised some interesting questions for boards, the most pressing of which is "How should boards keep up to date, respond and act in response to the seemingly incessant bow wave that is 'digitalisation'?" Whereas many boards understand business performance primarily in financial terms and measured approaches to risk, the advancement of digitalisation (ed. whatever that means) demands that boards extend their purview. Greater foresight (to see into the future, event to the point of prediction) and strategic competence (to make sense of options, leading to informed and appropriate decisions) is needed. Further, the ubiquity of reach provided by the Internet renders traditional national boundaries mute, enabling a 'winner-take-all' mindset. Though his focus was specifically on the board's response to digitalisation, the conclusions drawn by Hilb were eerily similar to those within the strategic governance framework that emerged from my doctoral research.
Martin Bugeja (University of Technology, Sydney) provided an update on the Australian shareholder 'say on pay' regulations introduced a few years ago. The framework, designed to enable shareholders to exert some influence over executive remuneration, requires shareholders to vote on executive remuneration at the annual meeting. Depending on the result, shareholders have the power to censure the board and, potentially, remove the board. If 25 per cent of the shareholding opposes the remuneration proposal, then a 'strike' is registered and the board is required to take action. If the proposal is opposed again the following year, a second 'strike' is registered and a 'spill' vote is taken, whereby the shareholders may remove the board of directors. Bugeja reported that approximately seven per cent of remuneration proposals receive a strike each year. However, some interesting (and perhaps unintended) consequences are starting to play out. Whereas behaviours change and adjustments are made following a first strike, the board's typical response to a second strike is to take no action—preferring instead to await a spill vote and to 'expect' to be returned by major shareholders. Though this smacks of hubris, the reality is that only one board has 'suffered' the ignomy of a spill vote since the regulation was introduced. Bugeja concluded that the intent of the Australian 'say on pay' framework is good but it does not seem to be working as intended in practice.
Hilde Fjellvaer (Trondheim Business School, Norway) and Cathrine Seierstad (Queen Mary University, London) spoke on progress towards female membership of company boards a decade on from the introduction of the 40 per cent quota (females on the boards of publicly listed firms) in Norway in 2007. They reported that firms complied with the quota as required but did little no more. With hindsight, this should not have been surprising; the pool of suitable female director candidates was small. Indeed, a small group of females received many appointments, some individuals holding nine or more concurrent appointments. Subsequently, the average number of concurrent appointments has dropped (to below four) as the pool of potentially suitable female director candidates has enlarged. Notwithstanding this, the percentage of females on the boards of publicly-held firms has stalled at 40–41 per cent. The percentage of females on the boards of privately-held firms has remained low as well—15 per cent a decade ago and 17 per cent now. Fjellvaer and Seierstad noted that while the observable expression of diversity has stalled, boardroom behaviours are changing. Directors say they explore a wider range of options before making strategic decisions, and higher levels of teamwork are apparent than in the past. However, and importantly, any link to increased firm performance attributable to the presence of female directors remains elusive.

Published on: 18 October 2017

Hitting the nail, squarely, on the head

Bob Tricker just did it again.

Long the doyen of corporate governance (Sir Adrian Cadbury used the term "father of corporate governance"), Tricker has just posted this article, a stinging critique of several emergent ideas that, through repetitive use, have permeated thinking and are becoming accepted as conventional wisdom. Risk, culture and diversity are singled out as populist memes. Yet robust evidence to support the notion that any of these memes are directly contributory to effective governance—let alone company performance—in any predictable manner is yet to emerge. Tricker's timing is, once again, exemplary.

Thankfully, Tricker offers far more than a straightforward critique. He reminds readers that the purpose of the board of directors is to govern:

The governance of a company includes overseeing the formulation of its strategy and policy making, supervision of executive performance, and ensuring corporate accountability.

The purpose of a profit-oriented company is also made clear (a point famously made by Friedman):

To create wealth, by providing employment, offering opportunities to suppliers, satisfying customers , and meeting shareholders' expectations.

In calling out this matter, Tricker has hit the nail on the head—the effect of which is to place those motivated by the promulgation of unfounded memes in a rather awkward position. I am with Tricker; our understanding of corporate governance needs to be reset. Rather than pursue new memes (a perfectly adequate definition was established over fifty years ago), boards need to discover how to practice corporate governance effectively. Tricker (Corporate governance: Principles, policies and practices), Garratt (The fish rots from the head) and a few others provide excellent guidance as to how this might be achieved.

(Disclosure: The two books named in this article are the ones that I refer to most often when working with boards. I commend them to you.)

Published on: 30 May 2017

Does it matter what directors look like?

Guest blog: Dr James Lockhart (College of Business, Massey University, New Zealand)

During the late 1990s and early 2000s the hot topic in corporate governance was independent directors. Independent directors, it was proposed at the time, were the very panacea for performance improvement. It didn't really matter what the problem was the solution was independent directors, preferably a majority of them—and fast!

Much effort went into defining an independent director and veritable lists emerged of the much needed characteristics and attributes, especially concerning ownership (the lack thereof); earnings from ownership (the lack thereof); or, employment or former employment (the lack thereof). Sadly, in all that enthusiasm the single most important attribute—independence of thought—was seldom mentioned.

Fast forward a decade: now its diversity’s turn. Diversity, it is now proposed, is the panacea for improvement. Just like independent directors in the past (where no systemic evidence emerged supporting the assumption that independent directors actually improve performance) business is besieged with the idea that diversity on boards will enhance performance. All of the board diversity research conducted to date has been from outside the boardroom. We know that because there have been only four longitudinal studies conducted within the boardroom—one in Norway by Morton Huse; one by a serving board member (no conflicts there); one by a British colleague (Silke Machold); and, one by Peter Crow.

So what is being measured? Just like the independent director research, the diversity research has reduced the boardroom to a simple input-output model. Diversity then refers to the measurable appearance of directors, such as, skin colour, ethnicity, sex, age, qualifications, professional backgrounds, and so on with a focus on sex, colour and age. But does diversity of appearance produce a diversity of opinion? Does diversity of appearance produce different strategic decisions that would not have been considered or not approved in the absence of such diversity on boards?

Given that we don't know how effective men are in the boardroom, it is implausible to argue that we know the effectiveness of women. That is not to suggest we don't need more women on boards—we do. But the focus of the discussion ought to be one of building better boards, boards that are focused on wealth creation, and boards that deliver the company’s aspirations.

As with the independent director argument that preceded it, repetition seems to matter—if something is repeated often enough it will eventually be believed. The discussion is being fuelled by the post-modern/neo-Marxist views currently dominating the B-school landscape, one that will acknowledge diversity everywhere other than amongst Caucasians. And with that, the point is lost. The focus of corporate governance should be on performance, in organisations where the thinking folder is overflowing, not what people look like.

About Dr James Lockhart:
James is a Senior Lecturer at Massey University’s Business School, and a credentialed and practising company director. He teaches and researches in strategic management and corporate governance, and is responsible for the delivery of the College’s business internship and professional practice (Management) courses. He currently holds two directorships; is on the Defence Employers Support Council; and, is a Chartered Member of the Institute of Directors in New Zealand.

Published on: 1 February 2017

Twelve months on: How much progress have we made?

Just over twelve months ago (6 January 2016 to be exact), I wrote this muse, a reflection on both the state of corporate governance and the usage of the term. At that time, confusion over the use of the term 'corporate governance' was common, and the profession of director was shadowed somewhat by several high profile failures and missteps. The blog post seemed to hit a nerve, triggering tens of thousands of page views and searches within Musings; many hundreds of comments, questions, debates and challenges (including some from people who took personal offence that the questions were even asked); and, speaking requests from around the world. That many people were asking whether corporate governance had hit troubled waters and were searching for answers to improve board effectiveness was reassuring.

That was twelve months ago. How much progress has been made since?

At the macro level, seismic geo-political decisions; the rise of populism and the diversity agenda; and, risks of many types, especially terrorism and cyber-risk have altered the landscape. Also, new governance codes and regulations have been introduced to provide boundaries and guidance to boards. Yet amongst the changing landscape something has remained remarkably constant: the list of corporate failures or significant missteps emanating, seemingly, from the boardroom continues to grow unabated. Wynyard Group and Wells Fargo are two recent additions; there are many others.

Sadly, companies and their boards continue to fail despite good practice recommendations in the form of governance codes and (supposedly) increasing levels of awareness of what constitutes good practice. This is a serious problem: it suggests that, despite the best efforts of many, progress has been limited. Clearly, ideas and recommendations are not in short supply, but what of their efficacy—do they address root causes or only the symptoms? And what of the behaviours and motivations of directors themselves, and the board's commitment to value creation (cf. value protection or, worse still, reputation protection)?

That the business landscape is and will continue to be both complex and ever-changing is axiomatic. If progress is to be made, shareholders need to see tangible results (a reasonable expectation, don't you think?), for which the board is responsible. If the board is to provide effective steerage and guidance, it needs to be discerning, pursuing good governance practices over spurious recommendations that address symptoms or populist ideals. How might this be achieved?

An important priority for boards embarking on this journey towards effectiveness and good governance is to reach agreement on terminology, culture, the purpose of the company and the board's role in achieving the agreed purpose. If agreement can be reached, at least then the board will have a solid foundation upon which to assess options, make strategic decisions and, ultimately, pursue performance.

Published on: 15 November 2016

About turn, Mrs May?

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?

Published on: 20 July 2016

Guidance for coping with change

In 1970, Alvin Toffler's book Future Shock was published. It quickly became a bestseller. Toffler died recently, triggering a series of articles and reflections (including this one published in the New York Times) about his life and 'the book'. Toffler had an amazing ability to look well ahead of almost all of us, to think critically, and to make some sense of it all. Consider these observations by Manjoo in his reflection:

Alvin Toffler ... warned that the accelerating pace of technological change would soon make us all sick.

Yet in rereading Mr. Toffler’s book, as I did last week, it seems clear that his diagnosis has largely panned out, with local and global crises arising daily from our collective inability to deal with ever-faster change.

That societies are racing with great speed to embrace new ideas and innovations, yet without the ability to cope with the consequences of high rates of change, might be one of the great problems of our age. Perhaps those in influential positions in society have a responsibility to shift their gaze, from their own ambitions towards altruistic ideas that serve the greater good? This is by no means a call to embrace utopian principles nor uniformity because we are all different. Much pragmatism is needed if society is to continue to endure.

Leaders—of all types but especially business leaders, company directors, politicians and academics—could do well by (re)reading Future Shock. We need to talk about stuff, because we all have much to learn.

Tags