Tags

  • Published on

    On entrepreneurs, boards and influence

    Governance Leadership Management Performance
    Since Robin Williams' passing earlier this week, I've been pondering the gifted–troubled tension that many highly capable people struggle with. Williams was a gifted actor, yet he had a troubled private life. He wasn't unique in that regard: Alan Turing, John Nash (A Beautiful Mind) and many others were similarly afflicted.

    As I pondered this, something dawned on me: many entrepreneurs face the same tension. They are great optimists, yet they often harbour a darker side. They have more ideas than most of us have hot breakfasts. However, many don't listen or take guidance well. They are happy in public, but some, privately, actually lack confidence and self-esteem. Consequently, the oversight of companies led by entrepreneurs can be a big challenge for boards: one of influence. How does a board get the most out of the entrepreneur, without suppressing their optimism? How about motivation? Zach Cutler's insightful summary, of five things that happy entrepreneurs take the time to do, provides a really good starting point for boards:
    • Give money
    • Treat everyone with respect
    • Don't sweat the small stuff
    • Try to utilise the company platform to help the community
    • Display gratitude

    If boards can find ways of supporting these things that motivate entrepreneurs, then they may find it easier to focus their enthusiasm and optimism—onto the things that actually matter for the growth and development of the company, not just those things that grab the entrepreneur's attention today.
  • Published on

    On capitalism, stock markets and wealth creation

    Governance Leadership Performance
    The steady stream of new listings on the New Zealand Stock Exchange in recent months has been fascinating to watch; the behaviours of the participants especially so. Stock markets are, by their very nature, bastions of capitalism; a central place for sellers and buyers to trade stocks in the pursuit of personal or corporate wealth. The New Zealand market is no exception.

    The New Zealand market is operated by NZX Limited, itself a publicly traded stock. Yesterday, when NZX reported its six-month result ($7m profit on $31.2m revenue), the CEO touted for more listings. This should not be surprising, as more participants means more revenues. High company performance is generally recognised as being good, because important economic and societal benefits flow from high company performance—as long as the profits stay in the system. Yet when one looks under the covers, a large portion of the profits being generated by NZX may actually be leaving the system.

    The largest NZX shareholder (39%) is New Zealand Central Securities Nominees Limited, a trading company owned by the Reserve Bank of New Zealand. This means nearly 40% of all dividends paid by NZX go to the government; they leave the system. Is this good? Rather than an exchange that generates large profits—much of which end up in the governments coffers—wouldn't the market be better served by one that operates on a cost-recovery basis, whereby all participants pay a recovery levy to play? Given NZX's inherent efficiency, fees could be reduced by 22% without difficulty. This would leave more money in the hands of the participating companies—where it is most needed to grow and develop the economy. Such an approach seems to be more conducive to capitalist ideals and, importantly, improved societal wellbeing don't you think?
  • Published on

    The inside/independent director tension: are we there yet?

    Governance Leadership Performance Research
    Image description
    Harking back to your childhood, do you remember asking "Are we there yet?" while travelling with your parents? I do, and sense my parents' negotiation skills and patience were tested each time one of their four sons opened their mouth.

    Fast forward to 2014. I want to ask the question again, although in a different context: the debate over the value and contribution of inside and independent directors. The debate has been simmering away for years. On the current evidence, it shows no sign of abating or of being resolved. Two recently published articles highlight the problem. The case for independent directors made by Larry Putterman, and the suggestion that independent directors destroy shareholder value, have stimulated a fair bit of discussion. Which one is right? They both can't be, or can they? The tension is palpable.

    Many corporate governance researchers—and practising directors and other commentators—seem to have a love affair with counting things and with finding a single "truth" about the way to achieve a desired result. Boards are made up of people who make choices, and they change their mind based on the circumstances before them. Therefore, every board is, to some extent at least, unique. What I can't understand is why we continue to think that a specific structure or composition might make one iota of difference to performance. Surely studies of boardroom behaviours, interactions and activities are more likely to lead us to a credible answer to the conundrum?
  • Published on

    Advisory boards and deemed directors: redux

    Governance Leadership Management Performance
    I've been asked to several times over the last month to explain or expand my views on advisory boards. It seems that some of the comments I've made in meetings and on this blog have set people thinking. That's not a bad thing in my view, but because boards are complex, things change, and the popular answer is not always the best answer (although it can be). The most recent discussion took place on a domestic flight last week. I happened to be seated next to a professional acquaintance. We struck up a good conversation on a range of topics. After a lull, he asked "So what have you got against advisory boards?" We had a good chat. Rather than replay that conversation here, I thought it might be helpful if I pulled up the following short piece to ponder. It was written in December 2013:
    The matter of advisory boards has become topical in recent years, particularly amongst emerging companies seeking additional help. Advisory boards are established in many cases to provide advice and oversight on some sort of ongoing basis—the motivation being to access advice without forfeiting control or passing responsibility.

    However, vital differences between boards of directors and advisors to boards are not well understood, such that advisors may be deemed to be directors (or officers) anyway. Kevin McCaffrey made this point at a symposium earlier this month (see point #4). The matter has also been discussed on the Institute of Directors' discussion page on LinkedIn.

    As a further illustration, the Employment Relations Authority has reportedly imposed maximum penalties against a business owner and her advisor in relation to an employment matter. While this case appears to involve malpractice, it highlights the point of this post—that advisors can be (and increasingly are) deemed to be accountable in the eyes of the law. Caveat emptor.
    My view on advisory boards is "be careful, be very careful". If you want advice on a specific matter, buy it. However, if you want on-going assistance to set the direction of the company, spread the decision-making risk and to drive performance, then a board can be a helpful construct. But please, don't get advisory services confused with corporate governance.
  • Published on

    Is a functional board of directors always necessary?

    Governance Leadership Performance
    This muse is the second in an occasional series: to ask some potentially provocative questions about the prevailing assumptions that surround boards and corporate governance. (The case for diversity was the first.)​
    Picture
    The concept of a board of directors, and the practice of (typically absentee) company owners nominating representatives to look after their interests is not new. Indeed, the motivation for the concept—to protect and represent owners when ownership and control were separated—is well over a century old. However, an underlying assumption has developed alongside the core motivation, whereby a functional board (i.e., one meeting regularly and conducting 'corporate governance') is considered to be necessary if company is to grow and develop. Many consultants have successfully traded on this assumption in recent years; making a lot of money helping owners set up boards and governance practices—even though many of the boards and related practices they helped establish add little except cost.
    The statutes of most Western countries require companies to have at least two directors (although only one is needed in New Zealand). A collective of directors is called a board. A board is a necessary requirement. But what of the practices of corporate governance? What if the owners work in the business on a day-to-day business? Is the formality of board meetings, reporting and and associated practices—and the administrative overhead—actually required? What value does it add? Is a functional board of directors always needed, let alone desirable?
    When no separation exists between ownership and control, the underlying basis for formalised governance practices is not apparent: the shareholder (the owner, if you will) is directly present making decisions. Some of the tasks often associated with the board (setting direction, making major decisions, fiduciary responsibilities) are still required for sure, but these activities can readily be undertaken by the owner-manager. If an owner works directly in the business they own, and if they seek out experts (lawyers, accountants, industry experts, coaches, strategists, et cetera) for advice, what additional value is to be gained from adding the rigour of a formal governance framework? Would it not make more sense to limit the (formal) practices of corporate governance to those companies with absentee owners, and to those with aspirational owners who want share the decision-making risk?
    Please note that this is not an argument against boards for all smaller businesses. If the entity is a company, a board is required. It is the formal practice of corporate governance that may not be. ​
    I recently had the privilege of leading a strategy development session with the owner of a large logistics company. His motivation was straightforward: to establish a functional board to secure some additional expertise and to share the decision-making 'burden'. We had a great time together as we worked through the issues. To see the eyes open and pennies drop as the owner, a couple of his team and two outside advisors began to realise what might be possible with a functional board in place was a delight.
    Contrast that experience with another recent discussion. The two owners of a successful and profitable business approached me for some advice after they were told "you need a board" by a consultant (whose business is to set up boards). They could not see the benefit of establishing a formal corporate governance framework given their aspirations. (Their stated intention was to continue to work in the business for the foreseeable future.) After discussion, I suggested they consider the option of surrounding themselves with expert advisors that they call on from time to time instead. ​
    So, where does this leave us? We need to get our thinking straight: to understand when a functional board (i.e., one undertaking the practices of corporate governance) is necessary, when one is helpful, and when one is, quite frankly, a burden. Otherwise, we run the very real risk of treating the whole world as it it were a nail on the basis that we have a hammer in our hand. All that will do is squash some very capable owners under a burden of cost and compliance: a burden that they don't really need.
  • Published on

    What is "corporate governance culture", and how is it relevant?

    Governance Leadership Performance Strategy
    Ah, culture, an oft misunderstood and sometimes misrepresented word. In the last few decades, a lot has been said about culture in business. Drucker's comment, that culture eats strategy for breakfast, is widely quoted. Given the importance of strategy to the achievement of objectives, culture must be really important! 

    Many of us know about culture, but what is it? You might like to read what others think culture is before you read on, because I have just come across a rather troubling variation: corporate governance culture. Yes, that's right. Corporate governance culture. It's mentioned here. Craft makes some good points in his article, but this term seems to imply that boards have their own culture, which leaves open the possibility that the rest of the company has a different one. That doesn't sound right.

    Craft suggests that the vital relationship between culture, strategy and performance is at the heart of good governance. We nearly agree. I suggest that the vital relationship between culture, strategy and boards is at the heart of effective performance. Same elements—different arrangement. But then Craft moves on, and in so doing he loses me:
    The only way in which a company is able to ensure that it is delivering the right type of business growth is through performance analysis and appraisal.
    Really? Performance analysis and appraisal are both rearward facing activities. How does looking backward only ("the only way...") help if you want to go forward? Bob Garratt's book, The Fish Rots from the Head, tells us most of what we need to know. Culture starts at the top, in the boardroom, and it pervades outwards from there. If boards expect to influence the achievement of company performance outcomes, they need to engender a company-wide culture and wrestle directly with strategy (which is "the art of command" after all). So, let's leave cute terms like "corporate governance culture" where they belong—on the cutting room floor.