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    We talk about value creation, a lot, but what is it?

    Accountability Governance Leadership Performance Strategy
    Much has been written about the notion of value creation in recent times. The phrase is used in commerce, especially by directors, managers, consultants, researchers and facilitators, amongst others. If you listen into board meetings, discussions between managers, sales meetings, product development workshops and planning sessions, questions like "Does XYZ add value?', "How is value created?" and "What is our value proposition?" are likely to be asked. These pop up often, which suggests that value creation is recognised as being something important to be striven for. However (and alarmingly), different people have rather different ideas of what value creation is or might be. Worse still, their ideas are often based on incorrect assumptions!
    We talk about value creation as we would an old friend, yet in many cases we lack a common understanding of what 'it' is! Here's one suggestion, from the Reference for Business:
    Value creation is the primary aim of any business entity. Creating value for customers helps sell products and services, while creating value for shareholders, in the form of increases in stock price, insures the future availability of investment capital to fund operations. From a financial perspective, value is said to be created when a business earns revenue (or a return on capital) that exceeds expenses (or the cost of capital). But some analysts insist on a broader definition of "value creation" that can be considered separate from traditional financial measures. "Traditional methods of assessing organizational performance are no longer adequate in today's economy," according to ValueBasedManagement.net. "Stock price is less and less determined by earnings or asset base. Value creation in today's companies is increasingly represented in the intangible drivers like innovation, people, ideas, and brand."
    This paragraph exposes the nub of the problem. We assume we know what it is. Several simple but incredibly powerful questions need to be asked and answered before business leaders can hope to allocate people and resources effectively in pursuit of business goals:
    • Who is the recipient of the intended value?
    • What is valuable to them?
    • How can this value be created?
    • How will it be measured?
    Rather than make assumptions (think how often have you heard sales people use "unique value proposition"), boards and managers need to seek clear answers to these questions from the beneficiaries of the value that is to be created (because value is determined by the recipient not the creator). Expect to hear several answers to these questions, because 'value' means different things to different people.
    Starting at the 'top' of a company, boards should sit with shareholders and ask (or propose, if the shareholder is unclear) what 'value' looks like to them. Responses might include increased share price, a long-term market position or business model, increased market share or something completely different. This is the 'core purpose' question. Similarly, managers and staff need to sit with customers (or prospective customers) and ask the same question. Staff also need to be asked: their motivations are likely to be different from those of shareholders and customers. 'Great solutions' that 'add value' to customers / staff / shareholders are highly unlikely to do either if customers / staff / shareholders do not recognise, or are not interested in, the value that is supposedly being offered. As with strategy, boards need to take the high ground, by ensuring that value created for one recipient does not erode value elsewhere. Boards need to become crystal clear about value in a holistic sense: what it is, who the recipient is, and how it is created. 
    Once the value matrix (what and to whom) is understood and agreed, the answers need to be communicated in a clear and concise manner, so that effort and expectations can be aligned accordingly. Finally, the board has an ongoing role: to ask probing questions at board meetings, to ensure the required alignment (between purpose, strategy, strategy implementation and value) is actually in place and that the expected value is actually being created and delivered to the intended recipients.
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    Boards: ask different questions, and delight in the possible

    Accountability Governance Leadership Management Performance Strategy
    We live in a paradoxical world. Rates of change are increasing, yet we want certainty. Times to market are reducing, yet we still want instant gratification. Zafer Achi and Jennifer Garvey Berger explored these paradoxes recently. They acknowledged that searches for certainty are "only natural", and that managers spend much of their time "managing the probable". However, the world is a social place. People make choices and things change, often unexpectedly. Consequently, the best laid plans can fail completely, leaving managers exposed and potentially out of a job. Achi and Berger suggest that the frame of reference used by most managers, of managing the probable, is a big part of the problem. Rather than managing the probable, they suggest that managers need to "lead the possible". They offered three recommendations to help managers make the change (see article for details):
    • Ask different questions
    • Take multiple perspectives
    • See systems
    These recommendations have the potential to change the way managers think, make decisions and lead. While reading the article, I couldn't help but think that the recommendations also have application in the boardroom. However, the adoption of 'possibility' thinking would up-end board practices in many cases. Boards that spend most of their time monitoring past performance and controlling the activities of the chief executive would probably be quite uncomfortable, even though the recommendations are neither earth-shattering nor inconsistent with the role and responsibility of the board (to maximise performance in accordance with the wishes of shareholders). Maybe its time for directors to take stock.
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    Changes at Diligent. I'm confused.

    Accountability Governance Leadership Performance Strategy
    Diligent Board Member Services has just announced the appointment of former McKinsey partner Brian Stafford as chief executive. Stafford takes over from outgoing chief Alex Sodi, "who will become chief product strategy officer and remain on the board". This second part of the announcement caught me by surprise and, quite frankly, confused me.
    I'm not sure I'd want to be in Stafford's shoes just now. The former chief executive is now both his boss (a director) and one of his staff. Consequently, the moral ownership of strategy implementation, and of product strategy in particular, is unclear to say the least. Why the Diligent board chose to structure the company in this way, and why Stafford agreed to the appointment given the challenges of 'above-and-below' reporting is beyond me. I can't see how this sort of anomaly is conducive to a high trust and high performance work environment.
    Perhaps a 'better' approach might have been for Sodi to perform one or other of the two roles (director or strategy office), or to leave the company. If any readers have any insights as to why Diligent made these decisions, or how the new structure might add value to the business, I would love to hear them!
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    Should the threshold for director elections be increased?

    Ethics Leadership Strategy
    Most of the elections and meeting resolutions that I have been involved in over the past 35 years have used 50% as the acceptance threshold. Gain the support of at least half of the decision-makers and the proposal is accepted or candidate appointed. While this is an easy threshold to understand (more people support the idea or person than don't), the possibility of a large pool (sometimes close to half) of people who are opposed means that the post-decision period can be filled with angst and opposition.
    I've long wondered whether a higher threshold might be appropriate, especially when voting for company directors and making major (read: strategic) decisions. In other words, big decisions need widespread support. If a director candidate or a proposal fails to gain the support of most of those with decision rights, then clearly the body is not in strong agreement. Two of the social enterprises that I have been involved with for many years work this way: one uses 66% and the other 75% as their decision threshold. Yes, sometimes it takes a little longer to get agreement, but the time-to-benefits is usually much less because people are more united. Overall, the approach has served the enterprises, and those they serve, well.
    The question of decision thresholds was raised in the business press recently. Seventy per cent was mooted as a possible threshold. Might such a proposal have legs? Would directors would be more likely to think and act in the best interests of the company? Candidates and those promoting various proposals would need to work harder to gain more widespread support, that's for sure. Decision timeframes would probably blow out; director candidates and strategy proposals might need to be more populist to garner the widespread support needed to breech the threshold; and, necessary but unpopular proposals might fail to attract the required levels of support thus putting unnecessary pressure on people, resources and possibly business viability.
    While these downsides might seem daunting, the idea of raising the decision threshold on major decisions (like director elections and the approval of strategy, for example) might be worth some consideration. After all, the more united a group can be, the more likely it is of achieving its goal and, therefore, realising the expected benefits. What do you think?
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    Diversity: what is the endgame?

    Governance Leadership Performance Societal Wellbeing
    Diversity is a topic that has gotten under people's skin, and rightly so. Much has been written, spoken and argued in recent times. Many blog rolls and column-inches have been expended by people arguing for or against various physical incarnations of diversity in the executive suite and boardroom. Clearly, the 'diversity' seed has sprouted. But for what purpose? What is the endgame? And, what should the endgame be?
    Many have argued that that the presence of women on boards is causative to increased business performance; others have argued that no such causation exists. Actually, the academic research is mixed: it shows positive, neutral and negative correlations. This should be of no surprise. That such a blunt stick (a single observable attribute: gender) might make a consistent difference in a complex, socially-dynamic system defies belief. I have mused on this in the past. 
    Thankfully, the argument is now starting to mature, beyond the physical aspects of diversity (gender, race, ethnicity, age, etc.) to the identification of underlying attributes and qualities of capable executives and directors, to understand how directors contribute and work together. However, another question lies in wait: the 'so what?' question. What is the purpose of appointing women onto boards and increasing the apparent diversity in executive suites? Is the motivation political (equality)? Or to maximise profit for shareholders? Or is there some other sustainable driver that needs to be brought into focus?
    Businesses exist to provide a product or service and, in so doing, provide a (hopefully!) healthy return to those who invested in the business in the first place. Is this the endgame? It might be for some. However, as diversity for diversity's sake is not sustainable, neither is profit for profit's sake. Shareholders do not live in isolation from others in the community. If shareholders 'win' (through the accumulation of profits), it stands to reason that losers will emerge elsewhere.
    The challenge for all of us to to lift our gaze beyond simple measures like the number of women on boards or quotas and, if we dare, beyond profit as the primary measure of business performance, to think about the endgame. Phil O'Reilly, CEO of Business New Zealand, recently said that the purpose of capitalism is greater than profit (although that is a reasonable and necessary output). He said that the objective was strong communities. Could that be the endgame we need to focus our attention on?
  • Published on

    On consultants and selling #corpgov short

    Accountability Governance Leadership Performance
    Why do consultants spend so much time on hobby horses, promoting their own capabilities and frameworks? Shouldn't the focus be on thinking about and promoting options that are genuinely in the best interests of the clients and marketplace they seek to serve? Take this example, which suggests that good governance is built on good information and data governance. The author cites several technical frameworks and acronyms (COSO and COBIT are mentioned), none of which I understand. 
    That a strong focus on standards and frameworks might be sufficient to ensure good governance (an oft cited but rarely defined term) is misleading in the least. Necessary maybe, but sufficient? No. The root of governance emerges from the Greek word kubernetes, which means to steer or pilot, typically a ship. This suggests governance is an activity associated with movement; with setting direction, navigating or guiding something—presumably towards a longer-term or major goal, or at least with a purpose in mind.
    I have no doubt that frameworks are necessary within organisations to support regular business activity. However, to imply that good governance (and, presumably, business performance, although the author makes no mention of this) will emerge from the application of standards and compliance frameworks is misleading. Looking backward (monitoring) or to standards (compliance) may satisfy egos that work is being performed, but to think that either will drive performance is folly. Compliance with standards can only ever achieve one of two things: compliance or dissidence. Compliance-based frameworks (Sarbanes-Oxley, amongst others) did little to prevent the GFC of 2007–08. Some say the focus on compliance may have contributed to the failures. If businesses expect to achieve certain desired outcomes, the board needs to look to the future by building appropriate plans (strategy); providing resources to the chief executive; and, monitoring and verifying the agreed strategy is being implemented and expected performance targets achieved.
    Consultants that continue to promote compliance-based technical frameworks as 'solutions' and associate them with 'good governance' are, quite frankly, doing their clients a disservice. Business leaders need to test consulting proposals thoroughly, by asking how (ask for specifics, don't accept general statements) the suitor's proposal will assist with the achievement of the business's strategy. This will probably be threatening to some consultants—but if it moves the focus onto business performance and economic growth, wouldn't that be a good thing?