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    The South Canterbury Finance case: How blind is the law?

    Governance Management Performance
    Earlier this week, the Chief Executive and two former directors of South Canterbury Finance, the failed finance company, faced Justice Heath to hear his verdict relating to New Zealand's largest ever fraud case. Some $1.6B was owed to creditors when SCF collapsed in 2010. Justice Heath found one director guilty on five charges, and he acquitted the other director and the Chief Executive on all of the charges they faced. In his decision (all 258 pages), the judge blamed the former chairman (Alan Hubbard, who was killed in a car crash some time after the collapse), who appeared to rule with a dominant hand.

    What I cannot fathom in this case is how one director can be found guilty of knowingly making false statements and the chairman can be blamed for ruling with a dominant hand, yet another director was not found guilty. Clearly, the director adjudged to be guilty was not happy. The board is a collective of directors, so decisions should be decisions of the board—surely the prospectus was considered and approved by the board and not an individual? That the board is one is what we teach on the Institute of Directors' Company Directors Course and elsewhere. 

    This judgement raises some interesting issues relating to the law (that I don't profess to understand) that are relevant for practice. I have requested a copy of Judge Health's decision, and plan to read it over the coming week, because clearly I am missing something.
  • Published on

    CEO pay: one in four think that time is more important the money

    Governance Management Performance Societal Wellbeing Time Management
    The rather sensitive matter of CEO pay has raised its head (again) today. Stories of ever-larger packages have appeared in the news columns with metronomic regularity in recent years. However, change may be on the horizon. According to the findings of a new survey conducted by Strategic Pay, one in four CEOs would take a pay cut if offered other benefits, including more time with family.

    Clearly, some CEOs think that time is more important than money; that there is more to life than work.

    These findings suggest that the runaway train that is CEO pay may not be boundless after all, although some CEOs will dispute them, no doubt. However, knowledge of these results creates an opportunity for boards to initiate a much needed conversation—for the health of the CEO and the good of the company.
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    In London: available to speak, or for meetings, workshops et al

    Conferences Governance Performance Research
    My next trip to the London and Europe is just over five weeks away (10 Nov to 19 Nov), to speak at a conference and to attend meetings. I have some space in my diary, so if you think you might need some assistance with corporate governance or strategy and want to take advantage of me being in your area, please contact me to discuss your requirements. I am available to speak; run a workshop; discuss insights from my latest research; or address other corporate governance, strategy and business performance matters of interest to you.

    Available dates:
    • Mon 10 Nov: available afternoon and evening, in London
    • Wed 12 Nov: available morning, in Zagreb Croatia
    • 13–14 Nov: attending European Conference on Management, Leadership and Governance (Zagreb)
    • 16–19 Nov: available, in London, or surrounding cities and towns

    I look forward to hearing from you soon.
  • Published on

    The Alternative Board: caveat emptor

    Governance Leadership Management Performance
    I have just stumbled across a new conceptualisation of governance, one that looks great on the surface but may actually be troublesome underneath. It's called The Alternative Board.

    The concept is that of "DIY governance", whereby owners and managers of small and medium businesses join a membership organisation to share ideas and provide support. Similar organisations abound in the market; BNI and Chambers of Commerce being two well-established examples. However, when one looks a little more closely, The Alternative Board has some unusual characteristics:
    • The organisation is actually a franchise business headquartered in the USA
    • A press release issued today states that members "act as boards of directors for each other"

    Membership of an organisation that provides assistance and collegial support is a good thing, although prospective members may baulk when they consider that this is not a classical break-even membership organisation that exists for the good of the members. The primary motivation seems to be the generation of profits for the owners—that's why franchises exist after all. Owners of smaller businesses that utilise a partnership or sole trader ownership structure can decide what they think about this and whether the proposition delivers value or not.

    Stepping past this first point, there is a larger and potentially more troublesome question for those who operate their business as a company. Advisors that perform tasks similar to those of boards of directors can be deemed to be directors. As such, well-meaning members may, unknowingly and unwittingly, become bound by the Companies Act (and amendments) and the legal duties of directors.

    Given these characteristics, and the implications of them, my recommendation to owners and managers who are considering whether or not to become members of The Alternative Board is this: Do your homework first. Caveat emptor.
  • Published on

    And so the CEO remuneration escalator continues...upwards

    Governance Leadership Performance Societal Wellbeing
    The latest round of annual reporting in New Zealand confirms that the size of CEO remuneration packages are continuing to track upwards. Reports from SkyTV, Ebos and others suggest that the now well-established trend shows no signs of slowing down.

    The concept of executives (actually, all staff) receiving remuneration commensurate with their performance and the value they add to the corporation sits comfortably with me. However, the steady spiral upwards of CEO packages, at what seems to be an unchecked rate, may be the harbinger of a longer term problem: that any linkage between the package, actual performance and market forces is lost. If boards are truly focussed on the optimisation of performance in accordance with the wishes of shareholders, then boards need to ask the following three questions every year:
    • Is value being delivered by the CEO? 
    • What is the company prepared to pay for that value?
    • Are alternative CEOs available if the incumbent declines any package offered?

    I am sure that the first and second questions are being asked by boards: the evidence is in the packages. However, I suspect the third question gets much attention. If a board was exploring its options, the likelihood of being captured by the CEO (or their reputation at least) should be much lower. While easy answers are unlikely to exist, boards need to grapple with these matters, by asking and acting on all three questions. Until they do, the law of supply-and-demand is likely to prevail, and the upward trend is likely to continue unabated, possibly to the detriment of long-term shareholder value.
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    Hyundai: navigating along a pot-holed road

    Governance Leadership Performance
    The rather smooth road along which Hyundai has been travelling in recent years just got bumpy:
    • Yesterday, reports emerged of some rather shonky decision-making in the Hyundai boardroom, whereby a major land transaction was approved by the board, even though it did not know the ($10B!) price tag. The market reacted by stripped $8B off the value of the company's shares. Strike one.
    • Today, it was the workers turn. Over three-quarters of the workforce walked off the job, in protest. The union had been negotiating employment terms and conditions, and had been stonewalled by "cost issues". It now turns out the cost issues may have been related to the land transaction. Strike two.

    Claims (that the land purchase will enhance brand value) and counter-claims (that the Chairman wields outsized influence) are circulating. Whereas the company has performed well in recent times, things may not have been as rosy on the inside as they seemed to be from the outside. Clearly, Hyundai has struck a nasty section of potholed road. The board and shareholders face some difficult decisions:
    • Will the directors admit their rather large mistake and at least offer their resignations?
    • Will the management team, who successfully pulled the wool over the board's eyes, now respect the authority of the board?
    • Will the shareholders step in and shake-up the board?

    One hopes the shareholders, board and management might set their egos and inherent response (save face) to one side, to create and implement a plan to repair a now-damaged brand image. This nasty series of potholes will not be fatal to Hyundai's long-term prospects if the three parties act quick and smartly, and do so together as one. However, if they don't strike three may not be too far away.