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    If directors get serious about strategy, what are the consequences?

    Governance Leadership Management Performance Strategy
    If you listen carefully, you can hear it. A drumbeat, almost inaudible at first but getting louder now, has been beating a new tune in corporate boardrooms: that directors need to get serious about strategy. If the recently published NACD Blue Ribbon Commission's report is any indication, the era of boards meeting to review past performance and satisfy their compliance obligations (as their sole responsibility) may be drawing to a close. 
    While I was initially non-commital, the BRC should be applauded for its report, and the NACD congratulated for having the courage to commission it. That the BRC has produced a set of strong recommendations is great news for shareholders, the markets and other parties interested in effective corporate governance and the achievement of great company performance outcomes. However, the recommendations are not without consequences: 
    • Directors will need to become more active in learning about the business of the business they govern. That will mean spending more time in the market; more time in the business; and, more time reading and critically analysing information from a wide range of sources. 
    • Directors will need to become adept at strategic thinking and more comfortable with the strategic management process. This may mean that the balance of expertise around board tables needs to change; from legal, compliance and accounting towards innovation and strategy.
    • Directors will need to revisit whether independence and distance (between the board and the Chief Executive) is actually the best basis of board practice. History—actually, the agency theory—has taught us that independence and separation are good, even though no one has produced any research to demonstrate that independence drives performance. If these recommendations are embraced, collaboration may become the order of the day.
    • Alpha-male and queen-bee CEOs may well be threatened by the board encroaching on 'their space'. However, there is no suggestion here that the board should take strategy away from them. The paper I presented in Boston (copy on the Research page) earlier this year discusses this.
    These consequences will place downward pressure on the number of boards that any given director can sit on at any one time, without doubt. Three concurrent board appointments is probably a reasonable maximum for any one director, and possibly two if one appointment was a chairmanship. However, that may introduce a whole new set of concerns, not the least of which might be requests—from directors more interested in earning than serving—to shareholders to increase the size of the directors' fees pool! Notwithstanding this, I hope directors and boards take heed of the calls to action—for they are beating loudly now. 
    Finally, my current research work, and experience in practice, suggests that the calls to action make very good sense. They are likely to lead to better company performance outcomes—but if they are followed.
  • Published on

    Are investors too easily satisfied?

    Governance Leadership Performance Strategy
    Accounting firm PwC has just released its 2014 survey of investor perspectives and board performance. You can get a copy here. The survey findings indicate that investors are generally happy with some things and less so with others. Here are the top points:
    • Investors are happy with the way boards assess strategy, oversee risk and maintain board expertise
    • Investors are not happy with the assessment of director performance, shareholder engagement or management incentive schemes; and they would like to see more diversity in the boardroom
    • The top three risk concerns are cyber risk, climate change risk and KPIs relating to risk management
    The report makes good reading. In all likelihood, it provides an accurate summary of what investors currently think (or at say they think—this is a survey after all). On the flip side, the most surprising and, frankly, most disheartening news is that investors are most interested in visible attributes (gender, composition, et al) and activities (assess, oversee) of boards. These findings suggest that if the board conforms with certain structural and composition 'requirements' and that boards do certain things, then investors are happy.
    My experience—gained as an investor, a company director and a corporate governance researcher—tells me that the top priority for boards should be company performance. However it is not mentioned in the report. The only item that comes close is the satisfaction in the way boards assess strategy—and yet most boards that I've observed or sat on spend most of their time monitoring and controlling the Chief Executive! Do investors, who typically do not attend board meetings, really know if or how boards assess strategy?
    From these findings at least, it would seem that company performance and value creation (growth) is not that important to investors. Is that the reality? If it is, then investors are too easily satisfied. However, if investors are interested in company performance (I think they are, they probably just didn't say so in the survey), then they need to appoint directors whose top priority is to drive business performance, in order to assure a positive return to the very investors that put them there.
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    On succession planning: Yes, but three years out?

    Governance Leadership Management Performance Strategy
    Acer Computer, once a strong and proud manufacturer and exporter of personal computer products, has been doing it tough lately. Record losses in the last few years, as the company has struggled to adjust its strategy to the shift from desktop computers to mobile devices, have seen the company chew through three chairmen in fairly quick succession. There have been arguments between the CEO and the board over strategy as well. What has gone wrong? Apart from missing the market shift to mobile devices, I wonder whether the company has run out of ideas and has become stale. The last three chairmen have been company stalwarts for example, steeped in the culture and history of the business. Realistically, how much fresh thinking would you expect to emerge in such environments?

    Now the founder has stepped in. A outsider CEO has been appointed, for the first time, to lead the company—and to become the chairman in three years' time. This first part of this is good; it should see the introduction of some new strategic options, but only if the founder (who has come out of retirement to occupy the chair) allows it to be so. However, the second part—of anointing a leader three years before the fact, in an industry sector characterised by rapid change and tectonic shifts, is a huge call. I would have thought it made much more sense to recruit the new CEO and then recruit a new (and probably but not necessarily independent) chairman in twelve months' time. This would give the incoming CEO time to get underway, begin to deliver on the confidence the founder has placed in him, without the additional burden of preparing to add the chairman role at the beginning of year three. What say the new CEO is no good? What say a different skills and expertise mix is required to lead the board effectively in the future? The founder has, in effect, closed off the possibility of introducing new thinking around the board table—even though this seems to have been one of his aims. 

    Complex businesses need highly capable leaders: two good heads are almost universally better than one. Keeping one's options open, to react and respond to changing market forces is smart. Painting one self into a corner is not. Notwithstanding this, the founder can exert influence as he wishes. My view—that the longer-term future of the business, and of the value to shareholders in particular, may have been better served with a succession plan that revolved around two separate appointments—probably doesn't count for much. 

    What do you think?
  • 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

    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.
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    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.