Tags

  • Published on

    The emerging role of the board in business performance

    Accountability Governance Leadership Research Speaking Engagements
    Fifty leading board researchers, directors and company secretaries assembled in London this week to consider the topic Corporate governance for a changing world: capturing long-term value. The event was hosted by Tomorrow's Company and Frank Bold, at Cass Business School. I had the privilege of joining the discussion.
    Dr Roger Barker, Deputy-Director at the Institute of Directors, provided the catalyst for a lively discussion amongst the attendees. He offered some rather provocative comments about boards, short-termism and business performance in the longer-term, as follows:
    • The current [conformance oriented] corporate governance model does not appear to be particularly conducive to longer-term thinking nor value creation.
    • Despite challenges and concerns raised amongst a broad constituency, many people who work in The City (of London) think that the current system of corporate governance is 'good'—they do not recognise short-termism as a problem.
    • Executive pay is essentially an issue of balancing short-term financial engineering against longer-term value creation.
    • Despite efforts by legislators, regulators and stock exchanges (not to mention the OECD itself), the notion of a one-size-fits-all model of company law and corporate governance is not well suited to all types and sizes of companies.
    Several interesting thoughts emerged from the group and plenary discussions that ensued:
    • That the predilection with short-termism is 'probably' the antithesis of sustained business performance over time.
    • That the conformance–performance pendulum has probably swung too far towards conformance. A renewed focus on company performance and longer-term value creation is needed.
    • Despite the best intentions of the authors, codes and associated regulations have not delivered any meaningful business value.
    • The shareholders and boards need to return to basics by focussing on (and agreeing) the purpose of the company and the strategy by which or through which the purpose will be pursued. [This point was music to my ears, for it is consistent with my research findings.]
    I came away from the meeting in good spirits. That a group of influential academics, researchers, directors and company secretaries are both in agreement that the current model of corporate governance is problematic (flawed, even?) and that a new model perhaps via purpose and strategy might offer hope if boards are to make meaningful contributions in pursuit of longer-term value creation and a sustainable future.
    The informal discussion and private comments over drinks after the roundtable session served to reinforce these points; especially that well-intentioned leaders are committed to realising the potential of the businesses they lead or govern and that there is a hunger for 'answers'. My hope is that these messages are both transmitted and heard amongst a wide constituency, and that people get on board. I am committed to playing my part. If you have questions or would like to know more, please get in touch.
  • Published on

    Are the latest OECD #corpgov principles an opportunity lost?

    Accountability Decision Making Ethics Governance Leadership Performance
    Finance Ministers from the twenty most powerful trading nations, the G20, have endorsed a new set of corporate governance principles published by the OECD. The principles provide recommendations on matters including shareholder rights, executive remuneration, financial disclosure, the behaviour of institutional investors and how stock markets should function.
    The OECD principles have been promoted as contributing to more effective corporate governance. That sounds good—but what does 'effective corporate governance' mean and why might it be important? The OECD preamble offers this guidance:
    Good corporate governance is not an end in itself. It is a means to create market confidence and business integrity, which in turn is essential for companies that need access to equity capital for long term investment.  
    Wow, this suggests that corporate governance is a mechanism to protect investors and markets. The responsibility of the board for business performance is not mentioned—thus implying that  corporate governance is not a performance-based mechanism through which to pursue wealth creation. Rather it is positioned as a conformance tool to manage agency costs. What is the likelihood of boards spending time thinking about the purpose of the company, strategy or future performance if they are beholden to a set of conformance-oriented principles? 
    Sadly, it would be appear that these latest OECD principles represent an opportunity lost—for medium-sized and privately-held companies at least.
  • Published on

    "Rise but seldom..."

    Accountability Governance Leadership Management Performance Societal Wellbeing
    In November 1787, George Washington offered this advice in a letter to his nephew Bushrod:
    “Rise but seldom—let this be on important matters—and then make yourself thoroughly acquainted with the subject. Never be agitated by more than a decent warmth, & offer your sentiments with modest diffidence—opinions thus given, are listened to with more attention than when delivered in a dictatorial stile. The latter, if attended to at all, although they may force conviction, is sure to convey disgust also.”
    What profound advice. Could it still be relevant in the always-on and rather selfish culture that has pervaded the twenty-first century? We live in a world infested by sound-bites in search of ears. Sadly, many offer little more than noise. The paucity of in-depth or critical thought is stark, yet we continue on—often blindly—in pursuit of change.
    If real progress is to be made to effect change, whether it be in the halls of power, boardrooms, executive suites or on the factory floor, might a 'rise but seldom' philosophy offer more hope than the prevailing sound-bite culture? On Washington's example, the answer could be 'yes'.
  • Published on

    Cybersecurity: is it time for a Goldilocks conversation?

    Accountability Decision Making Governance Leadership Performance
    Cybersecurity is getting lots of airtime at present, often for all the wrong reasons. Reports of leaks, hacks, and data breaches pervade news sites on an almost daily basis it seems. Sadly, many news articles are sensationalist: but that is what sells the news, I guess.
    Many studies have been conducted to try to understand the problem—most of which seem to offer little when it comes to meaningful recommendations for directors seeking to mitigate business risk. Consequently, most studies and reports go in one ear and other the other.
    However, a recent study by the Ponemon Institute does make interesting reading (link here). The purpose of the study was to determine if boards of directors are a help or hindrance to creating a strong cybersecurity posture. Significant differences between how boards and IT security folk perceive risk (especially cybersecurity risk) were exposed. The technical people tend to talk it up (validly or otherwise), whereas directors typically consider cybersecurity as one risk amongst many others. That directors and technical people have quite different perceptions about cybersecurity is hardly a surprise. However, it does highlight an operational problem. The perception gap has the potential to see either too much or too little invested in appropriate risk mitigation measures. Either way, the impact on the overall performance of the business is likely to be significant. How might this be addressed?
    Perhaps the answer lies in a candid Goldilocks meeting, whereby directors, executives and IT security folk meet together (for as long as it takes), to discuss and reach agreement on two things:
    • Understand cybersecurity from a risk perspective
    • The nature of cybersecurity risk and how it might be addressed
    A Goldilocks meeting should have the effect of ensuring that the board is suitably informed about cybersecurity matters, and the IT security people should gain an appreciation of the balance of the risks the board needs to consider. An appropriate action plan, agreed between the parties and based on a common understanding, could ensue.
    To have the board, executives and technical people working together with an agreed purpose and outcome in mind, rather than talking past each other as is typical in many cases I have witnessed, might sound fanciful. However, it's bound to do wonders for morale and culture. Perhaps it might be the most beneficial outcome!
  • Published on

    Boardroom behaviours: What role culture?

    Accountability Ethics Governance Leadership Performance Strategy
    I've been reading back through some older Musings this week, to review (and smile at) ideas that were front-of-mind a couple of years ago. Which ones have been superceded or discredited; which has been forgotten; and, which are still topical?
    This one, on boardroom motivations and habits, appears to still be topical today—perhaps even more so than when it was written in April 2012. How so? I was party to a discussion on boardroom behaviour today and a question of culture was raised. To what extent might culture drive conduct and ultimately business performance? The results of a recent survey conducted by Grant Thornton suggest that culture is a huge factor in corporate governance and strategy. There is much evidence to suggest that good business performance is an outcome of 'good' culture (here's one piece).
    However, culture is complex. Consequently, when one of the discussants said that a senior leader at ASIC is looking for policies and procedures to support [a positive] culture in boardrooms I was bemused, to say the least. How might one successfully codify—much less 'legislate'—culture, in pursuit of good conduct and presumably good business performance? 
    A long time ago, Drucker famously said that culture eats strategy for breakfast. Might the corollary be that a well-written code of ethical conduct that is periodically discussed, agreed and pursued by directors trump any attempt to 'legislate' any particular culture into being?
    Compliance-based regimes rarely achieve much more than to incur expense, resentment and, sometimes, avoidance. That is well-known. However, while codes are by no means fool-proof they can be helpful if every director 'signs up' and willingly embraces them. My research suggests that the key lies with director behaviour and social interactions in the boardroom, not the code per se. 
    That said, why all boards that are serious about creating a positive culture both within the boardroom and the wider business they govern have not implemented a suitable code of conduct is beyond me. It is a matter of accountability. Perhaps boards that decline to travel this path have not realised that the fish rots from the head!
  • Published on

    Director's fees: Please sir, can we have some more?

    Accountability Decision Making Ethics Governance Leadership Performance Strategy
    The results of the annual director remuneration survey are in. (Read the media release here, and press reports here and here.) Fees have climbed about four per cent in the last twelve months, slightly ahead of CPI. The survey results also indicate that director workload has increased by 41 per cent over the same period.
    A cursory analysis suggests that the workload increase is, to a large extent, a consequence of increased compliance requirements: more rules and regulations. While a 'more work, more pay' argument is eminently justifiable, is it fair? Moves to increase directors' fees as a consequence of increased compliance workload may deliver an unintended consequence: a back-to-the-future experience. Boards are likely to become more defensive and cautious, contributing relatively little to what they are there for—the pursuit of company performance.
    Rather than peg directors fees to time and compliance activity, it might be more productive to ask whether company value (however that might be expressed) is growing as a consequence of board contributions. Many leading commentators (Bob Monks, Bob Garratt, Morten Huse and Richard Leblanc, amongst others) have suggested that boards need to become more strategic, by looking to the future. Yet statutes and regulations cannot be ignored. Boards and shareholders need to wrestle with this tension. Questions of strategy, decision-making, division of labour, accountability and ethics need to be debated and resolved. Ultimately, viable resolutions are most likely to emerge from a joint commitment to the long-term purpose of the company.
    The board needs to drive company performance in pursuit of shareholder wishes, while also ensuring that statutory and regulatory requirements are appropriately satisfied. If the board demonstrably leads the company forward, and does so in accordance with both the agreed purpose of the company and relevant statutes, shareholders are unlikely to baulk at proposals to reward the contributions of directors appropriately.