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    On FMA's investigation of St Laurence: the right decision?

    Governance Leadership Performance
    There was an interesting development in the long-running St Laurence story yesterday. St Laurence, once a darling amongst finance companies in New Zealand, collapsed in 2010 under a mountain of debt, falling liquidity and, potentially, misrepresentations. The case has been investigated by the Financial Markets Authority (FMA). However, the FMA issued this announcement yesterday. Rather than pursue a court action, based on a breach of the Securities Act 1978, the FMA has issued a formal warning to the directors and closed the file.

    I am disappointed by this decision by the FMA. While it's probably the right decision from a pragmatic perspective, an important principle remains untested. Whether the directors were incompetent, negligent, unlucky or fraudulent should be determined. The answer makes a huge difference to the investors that lost millions, and, crucially, to any companies and owners that might consider any of the directors for a future appointment onto their own board.
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    The small question of control: A new "shareholder spring"?

    Governance Leadership Management Performance Strategy
    The question of who calls the shots in companies has been vexed for many years. On paper, the shareholders should have the final say, after all they own the company. However, the reality of what really happens is not so straightforward. Company ownership is widely held in many cases—particularly amongst publicly-listed companies—so forming a common view amongst shareholders is difficult at best. Consequently, boards and CEOs have considerable scope to seize control, in order to pursue their own aims.

    My observation is that shareholders are relatively happy to accept this situation when the going is good. However, when times are tough, or when the board or management pursues strategies that are not popular with shareholders, shareholders need to become more active. Shareholders need to ensure that boards represent their interests and that they deliver the results that shareholders want. It seems that some shareholders are starting to do just that, for a new "shareholder spring" appears to be occurring. Will it make a difference? Who knows. One thing seems clear though: passive shareholders will get their comeuppance.
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    Who should be in "control"—the CEO or the Board?

    Governance Leadership Management Performance
    Power is an interesting dimension of human behaviour. It can (and often does) bring out the best and the worst in us, and in those around us. The question of where power could or should be held has been the topic of much debate—wars even—over the centuries.

    In the modern corporate context, the CEO generally occupies the alpha male (queen bee) position in a company, especially in jurisdictions where the CEO and Chair roles are combined. In such cases, the board is relegated to the relatively passive position of making those decisions it has to, and to monitoring performance. Many CEOs like it this way—they are happy to hold the power and privilege that go with the position.

    An increasing number of calls, in academia and practice, are starting to challenge the status quo. However, calls for the board to take responsibility and be accountable for business performance, by becoming more involved in direction setting and strategy development, may have an unintended consequence: a power struggle. Power struggles are generally negative, because they move one's attention from the overall goal (business performance) to a lesser goal (being in control).
    • How should such matters be resolved?
    • Should the CEO remain in control?
    • Should the board usurp power? 
    • Is a collegial position achievable or sustainable?

    I'd value your thoughts on these important questions!
  • Published on

    Boards: a timely call for courage

    Governance Leadership Management Performance Strategy
    I had the pleasure of working with 24 outstanding business leaders and company directors yesterday—delegates on the IoD Company Director's Course. The topic of the day was strategy, as it always is on the second day of the course. My task was to lead the day and provoke discussion and debate, as part of the learning experience. The entire course is run under The Chatham House Rule, so delegates can speak freely and use real-world examples without fear of sensitive information being made public. However, some of the themes and conclusions that emerged from the discussion can be mentioned:
    • Boards need to be involved in the development of strategy, in some way.
    • A standard lexicon is crucial, so that everyone knows and understands what is meant when certain words are used. (We had a lengthy discussion on the question, "What is strategy?")
    • Boards owe a duty of care to ask probing questions of management, to satisfy themselves as to what is really going on.
    • Business is complex and strategy development is not straightforward. Things change, and sometimes tough choices need to be made, often without complete information.

    As we worked through the day, it became clear that the delegates had a realistic view of how boards and business actually work, and they recognised that there is often a gap between [tidy] theory and [somewhat messy] practice. The separation of governance and management, first espoused by Berle and Means in 1932 and now accepted dogma for companies in the Anglosphere, may not be the best model, for example. The discussion reminded me of a timely call made in an article that appeared in The Conference Board Review recently:
    Unfortunately, despite the theory on how boards are supposed to work, the reality is considerably messier. Reinvigorating boards with curiosity and courage would be a very good place to start fixing what is broken.
    Hopefully, delegates are able take away something from the course to ponder and challenge their status quo and some of the accepted maxims of governance. Boards cannot afford to remain as "parsley on fish—decorative but useless" (Irving Olds, Chairman, US Steel 1940–1952). If the behaviours and comments of the CDC delegates this week are any indication, curiosity and courage may be about to re-enter our boardrooms.
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    NACD Commission on strategy: An increased role for the board?

    Governance Leadership Performance Strategy
    The National Association of Corporate Directors (NACD) has announced the establishment of a commission to make recommendations about the "board's role in recalibrating the enterprise's corporate strategy in response to market forces". The decision, to consider the topic and present guidance, is a positive step towards more effective governance in the USA.

    For some time now, researchers have suggested that strategy needs to be part of the board's remit, although a consistent interpretation of what that means remains unclear. Some directors and consultants think boards should be actively involved in the process. Others disagree. Clearly, there are several options to be considered, along a spectrum:
    • Management drives the entire strategy development process, and the board, at best,  rubber-stamps the result.
    • The board simply approves strategy developed by management. This is the default option for many companies today.
    • The board speaks into the strategy development process, but it remains largely controlled by management.
    • The board is an active participant in the development of strategy, together with management.
    • The board drives the strategy development process, albeit with considerable input from management.
    • The board imposes strategy on management.

    Irrespective of the recommendations that Commission presents later in the year, boards are responsible and accountable for business performance, and board contributions need to be recalibrated accordingly. I await the outcome of the NACD process with interest.
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    CEO salaries are supposedly out of control. So what?

    Governance Leadership Performance Societal Wellbeing
    A blog entry on the Reuters page today makes interesting reading. "Supersize" CEO salaries have caught the attention of legislators, in California at least, with proposals to apply a punitive tax regime. It seems some people have had enough, or is this a case of a legislature seeing a revenue gathering opportunity?

    CEO salaries have been steadily climbing ahead of inflation and most other economic measures for years, particularly so in the US in the last decade. Market forces seem to have been at work, whereby reputations are on the line, and boards have offered increasingly large deals, to attract new CEOs and to retain good ones. No doubt some high-performing CEOs have seen this and demanded big numbers as well. For example, Mark Adamson, CEO of Fletcher Building, seems to be demanding more. Not all CEOs have the same outlook however. In the same article, Mark Powell, CEO of The Warehouse, a very successful retailer in New Zealand, seems to be somewhat embarrassed by his salary package.

    The topic of supersize salaries is an easy target for journalists, mates having a drink, the unions, and others. However, when all is said and done, does it actually matter? If a company is socially responsible and the CEO is creating considerable shareholder value, then probably not. However, if the company is flagrantly abusing its staff, suppliers or customers, then it probably does matter. My preference is to let the invisible hand of market forces determine the outcome. If a gross imbalance or inequity occurs, a correction will follow, sooner or later. Hopefully it won't be so late that the society collapses though.