Leadership - Peter Crow | Helping boards govern with impact

Published on: 13 June 2015

IGW'15: "Much ado about nothing?"

Prof. Silke Machold delivered the second keynote talk at the International Governance Workshop in Barcelona. Machold, who has been researching boards for many years, is a researcher that I admire—for she has been able to gain access to boardrooms to observe boards in action. Here's a summary of her rather wide-ranging commentary on companies and corporate governance:

If we look back through history, a steady progression from city states, through church states to nation states is apparent. The latest development is large corporations, some of which are as large as nations (Apple is as big—in revenue/GDP terms—as Austria, for example). While size often begets influence, scale does not necessarily mean that corporations are 'good' or beneficial to society.
Myths: That the shareholder maximisation value is always 'good', and that shareholders are owners (I commented on this recently). If shareholders were owners, then they could enter the place the company operates from and they could take possession of the company's assets. Just imagine doing that if you were a Walmart or Tesco owner—you'd be arrested for theft or shop-lifting!
The strong focus on earnings, and board and managerial propensity towards short-termism is, in essence, 'fishing with dynamite'. While it is this dangerous, what's worse is that it is a self-fulfilling prophecy.
They way we tend to look at boards—as decorations (Mace, 1970) or as engaged actors (Huse, 2007)—is somewhat simplistic. Machold has observed boards that are or have been both active and passive at different times.
In respect of conflict in the boardroom, Machold called out two different types of conflict, one of which is healthy and the other which is not. Cognitive conflict (thinking about and debating problems is good) whereas affective conflict (debating personalities and emotions is destructive). Boards and management teams need to discover how to pursue CC.
Machold walked into the diversity discussion by suggesting some types of diversity are good and others are probably not as good. Personality diversity is probably unhelpful, because the tendency is to focus on personality differences rather than debate problems. Machold suggested that boards and recruitment committees should include personality profiling within their recruitment process because better cognitive debate is more likely to occur amongst directors with similar personalities (than directors with a considerable personality diversity).

Machold summarised her talk by suggesting that much has been said and claimed over the years, and that much of it had led to people getting quite excited about factors and attributes that, quite frankly probably are immaterial—thus the title of her talk: Much ado about nothing.

Published on: 12 June 2015

IGW'15: Gender diversity on boards

The topic of gender diversity on boards has received a lot attention in recent years. Researchers, interest groups and the media have chased various agendas. Much has been written and many claims have been made. However, compelling conclusions remain elusive. The topic received more attention during the first session of the second day of the International Governance Workshop in Barcelona.

Three speakers presented the results of their research, conducted in the Polish and Spanish contexts. The studies explored variations on the theme of the impact of women on various financial and non-financial measures. All of the studies were quantitative analyses, conducted using publicly available data and statistical techniques. I have been critical of the use of such techniques for social research in the past. Reductivist approaches rarely provide insight beyond straightforward correlations. Sadly, I heard nothing to suggest otherwise in these talks.

The challenge for board research is to move beyond the 'big three' assumptions--ontological reductionism, that a single objective reality might exist, and that a constant conjunction between variables constitutes a causal explanation—are inapplicable to board research, because boards and the context within which they exist, companies, are social constructions. Rather, the more demanding route, of qualitative research that explores boards in situ is more likely to reveal explanations that shareholders and director nomination committees can rely on.

I remain convinced that women and people from a diverse range of background affect board practice. However, simple empirical research is not the appropriate pathway to understand and explain whether this is correct is not. More subtle approaches, that consider the context and behavioural nuances of individual directors appears to be crucial.

Published on: 12 June 2015

IGW'15: A portfolio concept of board roles in SMEs

The paper offered some interesting insights relating to the emergence of corporate governance as a system within SMEs, and highlighted the need for a holistic, integrated consideration of board roles and board research, one that takes the company objectives and configuration into account. The research, to understand what this insight might actually mean is continuing apace.

A team of researchers from Spain, France and New Zealand have been collaborating on an interesting project: one of understanding how board roles and contributions change in different firm circumstances. Khlif, Karoui and Ingley have identified five 'roles' that appear to emerge as firm circumstances change in two dimensions, as follows:

The difference in the way the boards work (in terms of performing control, service, strategy and mediating tasks) appears to vary quite markedly when the difference between ownership and directorship is high (the directors are not owners), and when the difference between ownership and management is high (the managers and directors are not the same people).

Published on: 11 June 2015

IGW'15: Opening Keynote

The second International Governance Workshop got underway at Toulouse Business School, Barcelona Campus on Thursday 11 June 2015. Professor Morten Huse, an esteemed corporate governance scholar from Norway, provided the opening day keynote. Huse has been studying boards for a long time—the mid 1970s—so when he speaks, people tend to listen. Here's four of the points from his talk:

Huse's talk set the scene for a lively debate through the balance of the conference. It will be very interesting to see how this develops.

The dominant logic of modern boards—independence and opportunism—has not delivered any significant value to shareholders over time. Rather, it has driven short-termism, strong norms of privacy and mis-trust.
The conception of corporate governance as a set of rules and regulations to keep management honest needs to be replaced. Instead, boards need to think and behave in terms of becoming value-creating teams.
A fundamental shift is starting to occur, if you look closely: Evidence is starting to emerge to suggest that boards that lead, seek to create value and are involved in the strategic management process are more likely to make positive and meaningful contributions. However, this is not guaranteed, as boards are comprised of people and complex interactions, and external forces exert influence as well.
Huse suggested that a common language is required. Too often, a speaker says 'X' only to find that other directors hear 'X', 'Y' or even 'Z'. He went on to overlay a common language and important board tasks over the value creation process (the value chain, if you will).

Published on: 9 June 2015

On strategy: "A palette of plans"

Every now and then, a great article crosses my desk—one that seems to lift itself off the page, as if to command attention. This is one such article. Writing in The Economist, Schumpter comments on an idea promoted by Boston Consulting Group: that dexterity is increasingly important in today's fast-paced world. The assertion is that modern companies need to be adept at skipping nimbly between strategies or types of strategies (or to commit to multiple strategies simultaneously). Five types of strategy are identified, as follows:

Classical: find a niche and develop a plan to achieve dominance
Adaptive: try many things and back those that work
Visionary: the 'blue-ocean' approach of creating a new market based on a compelling idea
Shaping: partnering with others to achieve both scale and reach
Renewal: whole reshaping of the business (often to defend against pending failure)

The article makes plan the challenge moving between strategies, especially with management reputations and careers on the line. One option to resolve this challenge might be for boards to focus directly on leadership and strategy because the task of developing strategy has become so important to business success. A return to the historical conception of strategy--strategos, the art of command—is appropriate. (Many business academics and boards of directors consider strategy to be an important task of the chief executive.) If boards become more strategic, by contributing expertise and challenging strategic options, then 'ownership' of both strategy and the outcomes that flow is likely to move to where it actually belongs--in the boardroom.

Published on: 6 June 2015

Martin Wolf at ICGN'15: "Let a hundred flowers bloom"

Martin Wolf CBE, Associate Editor and Chief Economics Commentator at the Financial Times, delivered a rousing keynote talk to wrap up the final day of the ICGN annual conference. After observing that the limited liability, joint-owned corporation had been the cause and consequence of almost all economic activity over the last two hundred years, Wolf posed and commented on four questions. He qualified his comments by saying that he expected they might raise some profound questions. Indeed, some of Wolf's comments were controversial—the evidence being the questions asked by some members of the audience after he finished speaking.

What is a limited liability corporation? They are a semi-permanent entity designed to outlast small-medium enterprises (because founders retire—the corner store conundrum) and markets, and they are a construct for the consolidation of relational and implicit contracts. Their genius is the importation of older hierarchical forms (to get things done) into the market system. With scale comes efficiency, endurance and effectiveness (but not always!).

What is their purpose? The apparent purpose of the LLC is to generate economic value. However, this is insufficient. Wolf asserted that LLCs should also pursue a wider remit, by seeking to 'add value' in social terms (through the provision of payments for services rendered—wages and salaries—for example).

What is their operational goal? The oft-quoted goal, of maximising shareholder returns, is far too simplistic, according to Wolf. It is selfish and can only lead to failure elsewhere in society. Rather, the operational goal of LLCs needs to include ethical constraints to protect all participants and in so doing ensure the good of society (at no point did Wolf pursue or even imply any form of Marxist agenda).

Who should control them? Economically, shareholders bear residual risks following corporate activity and, therefore, shareholders should possess control rights. Wolf challenged this commonly-held view as folly because shareholders are unable to exert full control over the affairs of the corporation. Managers may manipulate the affairs of the company, sometimes to the detriment of shareholders and other stakeholders. Short-term incentives, implemented to motivate managers towards the maximisation of shareholder returns, rarely position the company for longer-term success.

Wolf concluded by saying that LLCs are a wonderful construct. However, he went on to say that the two associated doctrines (of shareholder control and value maximisation) are unhelpful because they are too short-sighted. He told the shareholders in the room that "it is in your interest not to control the corporation completely". Other parties—large bondholders, for example—also bear residual risks. Why would they not have decision rights?

Wolf's comments were demonstrably controversial (amongst some of the audience at least). However, the poor reputation of big business amongst the general populace suggest Wolf's comments might be closer to the 'truth' than what many in the audience might care to admit.

Wolf closed with this demanding challenge: A better approach might be "to let a hundred flowers bloom", so that the best [control] model might rise up and be applied for a given situation—the beneficiary being society at large.

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