Governance - Peter Crow | Helping boards govern with impact

Published on: 10 January 2017

Helping entrepreneurs understand the role of the board

Entrepreneurs—that group of individuals who put their resources and, often, their reputation on the line, in pursuit of a big dream—are interesting people. Some are brash and larger than life; others are quieter and more considered. Despite variations in style and personality, one common thread that binds entrepreneurs is the importance of leveraging (often limited) resources to best advantage to maximise the chance of seeing their dream realised. One important and oft-overlooked resource is the board of directors. Some of the questions I've heard entrepreneurs ask include:

What is a board, what is corporate governance and why even have a board?
What role can the board of directors play in the success of entrepreneurial businesses?
Don't boards just get in the way most of the time?
What viable models exist, to ensure the board adds value?
How should the board–manager relationship be managed?
How can I leverage the board's knowledge without them 'getting in the way'?

I will be in Brisbane Australia on Tue 7 February 2017 to help entrepreneurs and directors of entrepreneurial businesses explore these questions. The Brisbane branch of Entrepreneurs' Organisation, a global network of more than 10,000 business owners in 42 countries, has invited me to deliver a talk and to host a workshop for members. The title of the two sessions are as follows:

The board as a value-creating engine (talk over breakfast)
Boards, corporate governance and so on—what does it all mean, and who cares? (morning workshop)

If you would like to know more, follow the link, or get in touch with the team at EO Brisbane Events.

Published on: 4 January 2017

Emergent challenges for boards of directors in 2017

The action of turning the calendar to welcome a new year generally sees commentators spring into print, creating lists of trends, predictions and recommendations for their field of interest. This year has been no exception, with many contributions in the areas of boards, board practice and corporate governance including by the CEO of Diligent Corporation, EY, KPMG, the Institute of Directors and Martin Lipton, amongst others. Some of the suggestions are specific to a jurisdiction or an operating context and some, when read together, are contradictory. How should boards and directors decide what is important and how their time should be allocated? Which commentaries are most relevant, and what issues do boards need to pay closest attention to?

Rightly understood, the role of the board is to govern: to provide steerage and guidance to ensure desired company goals (purpose) are achieved (i.e., to practice corporate governance). The board needs to give its full attention to this demanding task, lest it become a cost centre—simply monitoring management—or, worse, subservient to management. The following suggestions provide a starting point for boards wishing to improve effectiveness in 2017:

The pursuit of value (embrace a performance orientation): The board of directors carries the ultimate responsibility for business performance. This is understood in law, but what of practice? When surveyed or interviewed, many directors say that business performance is a high priority of the board. However, a quick review of how boards actually spend their time reveals a slightly different story: most boards seem to be more concerned with compliance, monitoring and control activities—the avoidance of corporate and reputational risk. If the board is to fulfil its responsibilities well, it needs to become a source of value creation (cf. value protection or risk avoidance). This means allocating sufficient time to the consideration of corporate purpose and strategy, and ensuring that all strategic decisions are taken, explicitly, in the context of the agreed purpose and strategy. (This is not to say that performance monitoring should be ignored. Rather, boards need to ask management to report actual performance against agreed strategy and strategic priorities, so that the board can determine whether desired outcomes are being achieved or not. If the CEO's report is written in this way, the board can take it as read, rather than waste time interrogating each section.)

Understand and respond to the complex risk landscape: In recent years, many correspondents have encouraged boards and directors to become more savvy in specific risk areas. These have included climate change, cybersecurity and disruptive technologies, amongst others. While calls for specific expertise to be added to the board are not inappropriate per se, the more pressing challenge for boards in 2017 is to embrace an increasingly complex risk landscape holistically. Directors, collectively, need to be able to identify major risks to the business (i.e., the achievement of strategy and desired performance goals) on an on-going basis and, having understood them, make informed decisions to maximise the chance of achieving the agreed strategy and goals. This is not to ask directors to be experts on all emerging risks in a dynamic landscape. That is wasteful and, probably, futile. Boards need to stay focussed on the big picture—the determination and achievement of strategy. In so doing, boards should seek out experts (notice the plural) from outside the company (this is important, otherwise, the board risks being captured by management), to address the board directly and debate the likelihood and appropriate response options to emergent risks. This additional source of information should enhance both the board's consideration of strategic options and the quality of the strategic decisions that follow.

Accountability: Many companies have suffered at the hands of sanguine and, sometimes, fraudulent managers and ineffective boards (because they are not sufficiently engaged or informed) in the past. Sadly, more examples emerged in 2016 to suggest that some boards continue to flout their responsibilities: Wynyard Group and Wells Fargo being two of them. It is little wonder that 2016 saw further rises in shareholder activism. At the core, the problem is social; one of behaviour and expectation. If boards are to contribute effectively, to minimise the chance of corporate failure, one or both of two accountabilities—the board holding management to account and the board providing an account to shareholders—must be addressed. Directors are appointed by shareholders, and boards are responsible for both ensuring the on-going performance of the company they are charged with governing and providing an account to shareholders. While a strategic mindset is crucial (the value creation imperative), the underlying attribute needs to be one of service: the board and management working harmoniously together, as a team in service of the company.

These suggestions are offered for the consideration of boards seeking to make effective contributions in 2017 and beyond. While this short list is neither exhaustive nor intended to replace any other list, it may provide a useful basis for debate at a board meeting. The three suggestions—drawn from personal observations of boards in action, interactions with directors and readings—seek to establish an overall context to assist boards consider emerging trends and strategic opportunities, and so govern effectively in an increasingly complex world. If you would like to discuss the applicability of these suggestions to your situation, please get in touch.

Published on: 2 January 2017

The gift of time: use it to your advantage

One of the great joys of the holiday season is the opportunity it presents to let the mind wander, both to relax and recharge after a busy year, and to draw strength for the year ahead. Whether out walking, chatting with friends, completing personal projects or, more simply, sitting and reading, the time and space afforded by the lull in both business activity and the associated flow of correspondence is one to be savoured.

Amongst the books and papers that I have read recently, the edited summary of a speech by Admiral James Stavridis at the National Defence University convocation in 2011 stood out. (Stavridis retired from the US Navy in 2013. He is now Dean of the Fletcher School of Law and Diplomacy at Tufts University.) Stavridis offered the class of 2012 three keys to successful leadership in the 21st-century: read, think, write. The straightforward though wide-ranging message contained some real gems, applicable to leaders from many walks of life, especially those involved in demanding and fluid environments. Here are a few of the standout comments:

"The quintessential skill of an officer [leader] it to bring order out of chaos."

"Reading is the rock upon which you will build the rest of your career."

"We must think our way to success in incredibly complex scenarios."

"After you read and think, I would argue you must write. Writing is essential in communicating what we have learned, as well as allowing others to challenge our views and thus make them stronger."

"Diversity of capabilities, capacities, and responses to any challenge should be seen as a strength, not a weakness, but only if action and tools can be used synergistically."

Stavridis said that collaboration, an innovative mindset and a preparedness to move quickly in response to emergent opportunities are crucial attributes if leaders are to meet and successfully overcome complex situations. The keys—of reading, thinking and writing—provide the foundation. However, a comprehensive approach is still needed: to bring together and synergise the talents of a variety of people from many different quarters, because no one person has all the insights let alone answers.

The parallels between the military examples mentioned by Stavridis and the business context are striking. If military campaigns are to be successful, generals must understand complex and fluid situations, deal with emergent opportunities and challenges, and make decisions promptly. Similarly, company success is contingent in no small measure on the effectiveness of the board as a decision-making team.

Despite the seemingly unending demands that press in, the most valuable asset in the director's arsenal remains: the gift of time. How will you use it to your advantage over the next twelve months?

Published on: 24 December 2016

On corporate governance: The importance of a common understanding

Corporate governance—the concept and the practice—has been the subject of much debate over the past two or three decades, especially as researchers, shareholders and the public have sought to make sense of the extent and meaning of the term and the appropriate role of the board.

A cacophony of ideas and understandings have now pervaded our academies and directors' institutes (including that the scope of corporate governance extends well beyond the boardroom to include the whole of the organisation). As a concequence, the appropriate role of the board is not clear. Is it one of oversight and control, or is the pursuit of performance more important? The answer to this question is dependent on one other: What exactly is corporate governance? Many directors have become confused about these questions and, as a result, the appropriate role and contribution of the board.

Thankfully, a straightforward answer is at hand.

The term 'corporate governance' was coined just 56 years ago by Richard Eells, an academic. He used the term to describe "the structure and functioning of the corporate polity" (the board of directors). Sir Adrian Cadbury added that corporate governance is "the means by which companies are directed and controlled". In other words, corporate governance is an overarching term to encapsulate what boards (should) do as corporate goals are pursued. Corporate governance frameworks (such as those proposed by Tricker and Garratt) provide the underlying detail: they describe how the board should steer and guide the company it is responsible for governing.

Directors expecting to make effective contributions in 2017 and beyond would be well-advised to consider this what–how distinction very carefully: a common (and agreed) understanding is crucial if the board is to work harmoniously and decision-making is to be effective.

Published on: 24 December 2016

Seasons greetings!

Christmas Eve is upon us, signalling both the end of the work year for many (including me) and, importantly, one of the most significant days on the Christian calendar.

Before stepping away from my desk and client projects for a few days, I want to express gratitude to the thousands of people around the world who sought advice, attended courses, listened to talks or asked questions during 2016. Thanks also to an anonymous readership: the website received over 382,000 page views (double last year)—a level of interest beyond my wildest imagination. I count it a great privilege to have had the opportunity to serve so many boards and directors. Thank you for your encouragement and support.

Looking to 2017, my commitment to serve boards and directors intent on realising the performance of the companies they govern is strong. To this end, if you have a question or a request, please let me know and I'll respond in the first few days of 2017. In the meantime, my best wishes to you and your family. Kia kaha.

Published on: 15 December 2016

Benefits and costs of virtual AGMs

The annual general meeting (of shareholders) is an important forum in company life; shareholders can engage with the company directly, and the board of directors is duty-bound to provide an account. Typically, such engagement includes hearing reports about the company's performance (typically the outgoing financial year) and outlook; asking questions; and, importantly, making important decisions including, inter alia, the election of directors who will be charged with overseeing the company (making decisions and ensuring performance) until the next annual meeting.

Despite the importance of the annual meeting, attendances have been declining in recent years. For example, Tony Featherstone, a commentator with the Australian Institute of Company Directors, recently observed that attendances have declined by 25 per cent over the decade to 2015. Others have noticed similar declines. Reasons for declining attendances are many and varied. While the lack of time and the tyranny of distance are commonly cited, a perceived inability to influence the decision-making process is a big turn-off for many shareholders, especially those who perceive that voting has been stitched up before the meeting.

Some commentators have suggested that new approaches are needed if shareholders are to be re-engaged. One alternative that has garnered widespread interest is the 'virtual annual meeting' to replace the in-person meeting. Tony Featherston and Anthony Hilton have both argued the case recently.

Superficially, the concept of a virtual annual meeting sounds great. Shareholders who cannot attend the annual meeting in person can particpate via an electronic channel. They can listen to presentations, ask questions and vote—and they can do so without incurring the time and cost of travelling to attend in person. But does remote attendance constitute acceptable engagement? Shareholders attending virtual meetings often cannot 'see' or interact directly with other remote participants. Consequently, the balance of power can (and does) shift from its rightful place (the shareholders) to the head table (the board of directors). The casuality is debate.

The challenge for shareholders is to resolve whether the benefits of the virtual annual meeting outweigh the more traditional in-person meeting. Both formats have their strengths and weaknesses. Does the virtual meeting (a group of people sitting at remote locations with computers or tablets and collaboration software) enhance genuine participation (cf. attendance) as is claimed, or is the construct a thinly-veiled attempt by the board or management to assert control and constrain healthy debates at annual meetings? And what of accountability? Where does that lie and, importantly, where should it lie? The answer is analogous to the quantity vs. quality debate.

The annual meeting is the sole opportunity for shareholders to hear from the board and to hold it accountable. Accountability rightly includes answering questions and responding to challenges from those to whom the account is being provided. Boards should not be exempt from such scrutiny. Caveat emptor.

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