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    Corporate governance practices: one size does not fit all

    Governance Performance
    For over forty years now, researchers have been investigating boards to try to understand their contribution to business performance. The dominant logic has been to count things, perform statistical analyses and apply hypothetico-deductive science—to identify this elusive thing called "best practice". The latest group to pursue the "best practice" argument are the proxy advisory firms. Details their modus operandi are summarised in this blog, posted on the Harvard Law School site. 

    A best practice approach—whereby if one does 'x' then 'y' occurs—sounds great. However, the reality is not as straightforward. As most directors know, every situation that a board deals with is, to some extent, unique. Boards are made up of people. The context within which boards exist, the company, is also a construction of people. Board structures and board activities that work in one context may fail in another.

    The blog on the HLS site is helpful because recognises that one size does not fit all. It also exposes some of the practices promoted by proxy advisory firms for what they are: detrimental to performance. Notwithstanding this, boards can influence performance. While the blog on the HLS site has particular relevance to boards and shareholders of public companies, many of the suggestions are useful for boards of private companies as well. I commend it to you.
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    Has the IPO supply-and-demand equation reached a tipping point?

    Governance Performance
    I've mused about the steady stream of IPO activity in New Zealand several times of late, most recently this morning. Expectations have been high. However, the soft response to Serko's listing, and nervous chatter on various news and social media sites, suggests that the supply-and-demand equation may have reached a tipping point. Could this be? 

    I'm not convinced. Good investments should—and generally do—attract good support, and weaker ones should be put to the torch. At the risk of being labelled as having a somewhat simplistic viewpoint, I think the market has simply woken up, such that it will not blindly support weak proposals. If this is the case, I'd call the situation by its proper name: common sense.
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    Paper accepted for international conference

    Conferences Governance Phd Research
    I'm both thrilled and humbled by some news that arrived overnight. A paper that I prepared some time ago, The crucial importance of access to the advancement of governance research (read abstract), has passed through the double-blind review process and been accepted onto the programme of the 10th European Conference on Management, Leadership and Governance (ECMLG)! The conference is being held at VERN', in Zagreb, Croatia, in November.

    The paper discusses the difficulties that governance researchers face when their research is limited to the analysis of secondary data—typically interviews, surveys and questionnaires. It suggests that if researchers study what boards actually do, by observing board meetings directly, then it should be possible to learn enough to provide an explanation of how boards influence company performance outcomes (or not). The paper also includes some preliminary insights, which emerged from a series of boardroom observations conducted as part of my doctoral research. It will be interesting to see how this paper is received. Hopefully, it will give folk the confidence to press on and try different approaches to corporate governance research, to discover if and how boards create value, or whether they simply impose cost.

    The full paper will be available on the Research page immediately after it is presented at the conference.
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    Amendments to the Companies Act 1993: How will they affect you?

    Governance
    An important new piece of legislation--the Companies and Limited Partnerships Amendment bill—has just had its third reading in the New Zealand Parliament. It has been designed to hold directors that operate at or beyond the edges of moral and legal acceptability more directly accountable for their actions. The Bill affects the Companies Act 1993 and the Limited Partnerships Act 2008. Amongst the provisions, companies will be required to have at least one New Zealand-resident director, directors of limited partnerships will need to provide some personal information, and new offences for directors who act dishonestly or in bad faith will be created. 

    Law firms MinterEllison and Bell Gully have published a helpful summary of the amendments on their respective websites (here and here). The Institute of Directors in New Zealand will probably provide some information to its members nearer the time the Bill comes into force. Directors, investors and other affected parties should become familiar with the amendments, even though most local companies and directors are unlikely to be directly affected by them. If you have any concerns, seek legal advice. 
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    New job requirement: Ability to read a crystal ball

    Governance Leadership Performance
    Have you seen the new governance code that in being introduced in the UK later this year? It contains many good elements, and one that is quite scary. The new code will require (figuratively) directors to add a new line-item to their competencies: reading crystal balls. The new code seems to place a duty on directors to predict how long their company will remain viable. The so-called viability test is a big development, and one that may see directors running to check their insurances. While New Zealand and other jurisdictions utilise a solvency test (that directors do not trade recklessly and do not knowingly allow the company to trade while insolvent), this new development lifts director responsibility and accountability to a new level. 

    Directors of businesses that operate near the edges of moral, ethical and legal acceptability should be concerned, and rightly so. It will be very interesting to see how this development shakes out, and whether the boards of well-run companies have anything to be concerned about or not. What is your view?
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    Boardroom decisions: The crucial importance of context

    Governance Leadership Management Performance Strategy
    Things are looking rosy for the New Zealand economy—rosy enough that Paul Bloxham, Chief Economist at HSBC, reckons "New Zealand will be the rock star economy of 2014". An important driver appears to be continued strong demand for New Zealand's dairy and meat products, particularly from Asia where the move to protein-based consumption continues unabated—which reminded me of a speech that I heard eight to ten years ago, delivered by the then Chief Economist of Westpac Bank. The suggestion was that Chinese demand for coal and steel would wane, as massive infrastructure projects were completed. Demand would then shift to food, to feed the growing middle class. The corollary was that New Zealand could look forward to long-term demand for its primary exports, and the resultant economic growth from a steady stream of export receipts. The chickens seem to be coming home to roost.

    This seems to be good news, so what should corporate boards do with it, if anything? Should boards move quickly to capture "their share" of what is obviously a growing international pie? Should more capital be applied to drive expansion into new areas, or should companies stick to their knitting? These are important questions. In the last seven days, I have been party to discussions with two successful companies that are seriously considering international expansion, to become exporters of services to Asia on the back on high primary sector demand. My initial response was to suggest several questions that their boards should ask and answer before any decisions are made:
    • What is the actual opportunity?
    • How does it fit with our current strategy?
    • What do we know about the off-shore market that the locals don't?
    • How transferrable is our capability? 
    • What will the impact be on our established business? 
    • How will it fit with the wishes of our shareholders?

    The pursuit of opportunistic growth is often exciting. However, it is rarely sustainable. Boards need to stand back and look at the big picture—to understand the context within which they operate, check their strategy and understand how the so-called opportunity fits—before making any significant decisions. The pathway of history is littered with stories of companies—including some large, well-resourced ones—that have tried and failed to become exporters on the coattails of growth in another sector. However, if boards are adequately informed before they make important decisions about strategy and the application of capital, they stand a much greater chance of success. Growth opportunities abound, but context is crucial.