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    Directors, you are accountable—the Supreme Court says so

    Accountability Ethics Governance Performance
    Is the worm starting to turn? After many years of relative calm—save a small number of judgements including this example from the New Zealand finance sector—directors seem to be facing increased levels of scrutiny, including being held accountable for actions (or inaction).
    A new judgement, by the Supreme Court in England, places a stake in the ground for British companies. The seven judges determined (unanimously) that directors were responsible for their actions, and that where those actions were fraudulent directors should be held personally accountable. No doubt some directors will throw their arms up in horror, asking how they could possibly know everything in order to make informed decisions. Yet directors are responsible for the overall operation and performance of the business they govern. Therefore, directors have a duty of care to become informed before they make a decision. 
    The Jetivia–Bilta judgement provides a timely reminder to directors. Precedents have now been set in several countries. The buck stops with us (yes, I am a director too). Directors need to ponder the implications carefully. Thankfully, those who are not happy to carry the responsibility and accountability that goes with every appointment have an 'out'—they can (and should) resign.
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    Should the threshold for director elections be increased?

    Ethics Leadership Strategy
    Most of the elections and meeting resolutions that I have been involved in over the past 35 years have used 50% as the acceptance threshold. Gain the support of at least half of the decision-makers and the proposal is accepted or candidate appointed. While this is an easy threshold to understand (more people support the idea or person than don't), the possibility of a large pool (sometimes close to half) of people who are opposed means that the post-decision period can be filled with angst and opposition.
    I've long wondered whether a higher threshold might be appropriate, especially when voting for company directors and making major (read: strategic) decisions. In other words, big decisions need widespread support. If a director candidate or a proposal fails to gain the support of most of those with decision rights, then clearly the body is not in strong agreement. Two of the social enterprises that I have been involved with for many years work this way: one uses 66% and the other 75% as their decision threshold. Yes, sometimes it takes a little longer to get agreement, but the time-to-benefits is usually much less because people are more united. Overall, the approach has served the enterprises, and those they serve, well.
    The question of decision thresholds was raised in the business press recently. Seventy per cent was mooted as a possible threshold. Might such a proposal have legs? Would directors would be more likely to think and act in the best interests of the company? Candidates and those promoting various proposals would need to work harder to gain more widespread support, that's for sure. Decision timeframes would probably blow out; director candidates and strategy proposals might need to be more populist to garner the widespread support needed to breech the threshold; and, necessary but unpopular proposals might fail to attract the required levels of support thus putting unnecessary pressure on people, resources and possibly business viability.
    While these downsides might seem daunting, the idea of raising the decision threshold on major decisions (like director elections and the approval of strategy, for example) might be worth some consideration. After all, the more united a group can be, the more likely it is of achieving its goal and, therefore, realising the expected benefits. What do you think?
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    Petrobras initiates #corpgov review, albeit from the inside

    Accountability Ethics Governance Performance
    Petrobras, Brazil's state-owned oil company, hit the headlines today, saying that it intends to revise its governance and organisational management model. The company has had problems with corruption and, just recently, employed a governance, risk and compliance (GRC) officer, its first.
    Interestingly, the review will be conducted by a "group of executives with experience in various areas of the company". This sounds reasonable enough, until you consider that the stated problem is corruption. The review is being conducted by the very people that may (or may not) have been involved. How much confidence should one place in the internal panel isolating the problem(s) and, having done so, the Petrobras board making changes to get its house in order? Usually, such reviews are conducted by external parties, if they are to be afforded any credibility.
    This will be interesting to watch.
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    ICMLG'15: Day one wrap

    Conferences Ethics Governance Language Leadership Management Performance Research
    The first day of ICMLG2015 has been completed, with a very pleasant dinner cruise on Auckland Harbour. The three-hour cruise gave delegates time to enjoy the view back to the city across one of the world's great harbours; to get to know each other better; and, to reflect on the conference to date. The conversations were upbeat—both for the venue and logistics (thanks AUT and Massey) and the topical nature of the presentations and discussion on Day 1. The following points provide the tiniest of glimpses into some of the conversations and thinking so far:
    • Is 'good enough' actually good enough? Many academic researchers pursue high degrees of precision, whereas most consumers (business leaders and boards in this case) are happy to gain insights and a general sense. Several of the delegates, encouraged by Phil O'Reilly's keynote, have openly questioned whether business schools should come down from their ivory towers. Good stuff!
    • Can we go faster? Research needs to change gear, to get ahead of the curve. Instead of reporting what has occurred, researchers need to provide guidance for leaders and for board practice, to explain what can happen to business performance if certain activities or events occur.
    • Does the researcher have a role 'within' the research? Much quantitative/positivist research has the researcher as an external bystander, whereas qualitative/interpretivist research approaches often expect the researcher to position themselves 'within the research'. The risks of the latter are many, but the relevance of much of the research produced by the former is questionable. the research agenda needs to move beyond simply counting things or describing things. I think a middle ground exists. However, explanatory research inspired by realism is not well understood in business schools—yet.
    • The chasm between business and research simply must be bridged. That many businesses do not think of contacting business schools to commission research is an indictment on business schools, not business. Business researchers need to possess business experience and acumen, so they know what they are looking at when they investigate business phenomena. More work—much more—is needed on this score.
    • Are business researchers tantalisingly close to a breakthrough? Thomas Kuhn (The structure of scientific revolutions) spoke about this decades ago. Much research simply builds, incrementally, on what has gone before. Assumptions are reinforced, myths perpetrated and are mistakes legitimised. However, every so often, a step-change occurs. Kuhn called it a paradigm shift. Several of the delegates think that business research—and board and governance research in particular—is on the cusp of such a paradigm shift.
    In addition, many new relationships were formed, ideas for collegial working groups were discussed and several invitations were issued for cross-border and multinational cooperation. (Gosh, that sounds like the OECD or the United Nations!) I'm looking forward to seeing and hearing how the discussion builds and develops on Day 2, starting with Andrea Thompson's keynote.
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    ICMLG'15: Does ethics have any place in effective corporate governance?

    Accountability Ethics Governance Performance Research
    Patricia Grant of AUT, New Zealand, posed a very interesting question this afternoon. For some time now, she has been wondering whether ethics might be an important element in the oft-discussed but poorly understood relationship between what boards do and business performance.
    The seemingly standard response to corporate or systemic failures in recent decades has been to introduce a new layer or new type of structure or compliance framework. For example: Following the failures of the early 2000s (Enron, MCI Worldcom et al), Messrs Sarbanes and Oxley sponsored a new statute in the USA. While the intent was good, the implementation was terrible. In effect, the statute imposed a new set of compliance demands and overheads. A new generation of consulting businesses (to either implement or avoid Sarbox) followed not long after. Further, and worse, Sarbox did nothing in terms of preventing the GFC because, human nature being what it is, directors and executives eventually found ways to circumvent the provisions.
    Grant suggested that regulators and boards need to move beyond structural responses to failure because such responses can't be relied on to work consistently and effectively. She added that researchers, regulators and boards need to look at behavioural responses and, more specifically, at the ethics and moral motivations of directors. It turns out these dimensions have not received much attention. Grant has decided to dig into this. However, two rather demanding challenges need to be resolved before much more progress can be made:
    • While all directors (individually) have a moral or ethical compass to guide their decision-making, how does one go about making a group decision when there might be as many different moral compasses guiding the process as people in the room?
    • What exactly is 'ethics'? (yes, it does mean different things to different people, so a common understanding needs to be discovered and agreed.)
    The audience seemed to agree that Grant might be on to something quite significant. If you'd like to help Grant, or offer your board as a participant, please contact me and I'll put you in touch with Grant. If her idea gets some traction, it could spawn a whole new field of research, and move the expectations of and on directors to quite a different place. And that could be exciting or scary, depending on your frame of reference.
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    Does NZX have a serious conflict of interest?

    Ethics Governance Performance
    Image description
    Reports have emerged that the company that operates the New Zealand stock exchange, NZX Limited, has initiated a review of its own operating policies and processes—with a particular focus on conflicts of interest (and perceived conflicts). The review is timely, because NZX seems to have begun operating beyond what might be considered reasonable for a market operator. 
    So, what's the problem? Let's start by looking at NZX itself. Here's how NZX describes its business activity:
    NZX builds and operates capital, risk and commodity markets and the infrastructure required to support them. We provide high quality information, data and tools to support business decision making. We aim to make a meaningful difference to wealth creation for our shareholders and the individuals, businesses and economies in which we operate.
    This seems reasonable. NZX owns infrastructure, operates markets (including regulation) and provides information. However, what is not stated is that NZX also runs a funds management business line. Therein lies the problem (or the perceived problem), because the funds management business invests in companies that are themselves listed on the exchange.
    If you'll allow a sporting analogy: NZX sets the rules, provides the playing field, referees the game and is a player as well. Player coaches are common in sport, but player/referees? 
    Some might respond by saying this is a great example of the capitalist system in operation. It might be. But I can't help but wonder whether NZX is operating right at the very edge of what might be considered to be ethically and morally reasonable. Consequently, I look forward to reading the results of the review.