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    Notes from a nomad in Europe

    Accountability Conferences Corporate Governance Governance Leadership Research Strategy
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    My speaking and advisory tour of several European cities got off to a great start on Sunday evening. The first port of call was Stockholm. Liselotte Hägertz Engstam, an established director and board chair in the Nordics, hosted a seminar at Tändstickspalatset; a great venue. The theme was [the] Board's role in innovation strategy and governing new digital business models. ​Some 35–40 directors and board chairs with just over 100 board mandates between them, gathered to hear two speakers, namely, Stephanie Woerner and yours truly. The following paragraphs tell the story.
    Digital business model and board contributions
    Stephanie Woerner, a Research scientist at Sloan School of Management in Boston, explored value creation in the digital economy. She observed that many (most?) corporations were somewhat lumberous, offered rather average customer service and, tellingly, were ill-equipped to take advantage of emerging 'digital opportunities'. As such, they are at risk of losing out to younger, more nimble businesses. Woerner identified six questions that companies need to resolve if they are to compete effectively in the digital economy:
    • What is your digital threat?
    • What business model is best for your enterprise's future?
    • What is your digital competitive advantage?
    • How will you connect with your prospective clients?
    • What capabilities are needed to reinvent the enterprise?
    • Do you have the leadership to make it happen?
    Then, Woerner spoke about digital savviness, making two points along the way. First, 62% of directors claim to be 'digital savvy' (and, presumably, ready to tackle emergent challenges), but only 24% are indeed savvy. Second, the presence of three digital savvy directors is sufficient to drive improved [financial] performance outcomes. With that, I sat up. How might a quantitative analysis be a reliable predictor of a contingent outcome? A person at the table I was seated at was similarly exercised. She interjected, asking what the term 'digital savvy' meant. "Great question. We used the experience and qualifications of board members as a proxy." Woerner went on the explain how this has been arrived at: a keyword analysis of resumés (searching for words such as technology, CIO, disruption, software). The presence of such words on a resumé was deemed sufficient to categorise someone as being digitally savvy. You could have heard a pin drop.
    While Woerner's assertion (that boards need to be knowledgeable of emerging technology trends) is intuitively reasonable, the underpinning research appeared to be flawed. Others seemed to agree, suggesting it is more important for directors to have a curious mind, read widely and ask probing questions. Notwithstanding this, Woerner's core point was on the money: boards need to get up to speed with technological innovations and the opportunities they present.
    ​Making a difference, from the boardroom
    I spoke second, the task being to both build on Woerner's comments and add some insights of my own. I started by acknowledging today's reality, that change seems to be the only constant. Woerner set a great platform so there was no need to labour the point, except to say that directors need to work hard to keep up. Importantly,  contemporary recommendations including so-called 'best practices' provide little assurance of better board practice much less improved firm performance.
    An important duty of all boards is ensure the future performance of the governed company. If boards are to make a difference, they need to make informed decisions about the future direction of the company, and verify whether desired performance outcomes are actually being achieved or not. Four crucial questions that boards need to ask were tabled, these being:
    • Are we doing the right things? (explores context, purpose and strategy)
    • Is strategy being actioned as expected? (explores implementation)
    • Are expected benefits being achieved? (verifies performance by way of outcomes, not just effort)
    • Are we making good decisions? (tests efficacy of board's decision-making)
    After suggesting some practical considerations, I introduced the strategic governance framework, an option for more effective contributions (as revealed from my doctoral research and subsequently lauded by both practicing directors and scholars around the world).
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    ​Insights
    The seminar presented two perspectives, namely, that directors need to become a lot more digital savvy if they are to contribute effectively in the boardroom, and that effectiveness is a function of director capability, board activity and underlying behavioural characteristics of directors, not what they look like.
    Board readiness to lead well in the emerging 'digital' world is a concern—made worse given boards tend to pay much more attention to historical performance than wrestling with the [largely unknown] future. This is the elephant in the room. 'Digital' is but a symptom, I suspect. If boards are to have any hope of influencing firm performance, what they do in the boardroom (i.e., corporate governance) needs to change.
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    Picking up the #corpgov & #boardpractice discussion

    Accountability Corporate Governance Governance Leadership Research
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    After a longish hiatus—nearly four months—Musings is back. Thank you to regular readers and supporters who have asked about the radio silence. The explanation is straightforward: a busy period of speaking and advisory engagements, research and board work left precious little time to ponder.
    ​But that is history now. My intention is to pick up where I left off in early August, by posting on topical matters and emerging trends; challenging orthodoxy and, importantly, exploring how boards might become more effective in their pursuit of high firm performance and sustainable wealth creation. 
    Thank you for your interest in Musings. Your feedback and commentary is appreciated.
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    Companies, boards and strategy—and Plato?

    Accountability Corporate Governance Governance Leadership Strategy
    What can Plato, a philosopher who lived over 2400 years ago possibly teach the leaders of modern companies? After all, the modern form of company only came into being in the last few hundred years, two millenia after Plato died. As it happens, when it comes to strategy and decision-making, Plato can teach us a lot—a point made by the author of this article. Here's an excerpt:
    Plato likened the guidance of a state to the navigation, piloting, and crewing of a ship at sea. The analogy holds for the strategist and a war effort. The strategist is the navigator with skills that few others have but he may not always be the captain who leads the crew, those that must actually carry out the strategy. Strategy is not responsive to constant or wild adjustments; the hand on the rudder must be subtle and steady; the mind behind it focused on the north star of the political end state. It is for this reason that one could expect that the navalist’s mind more easily grasps the nature of strategy than that of the continentalist. For centuries, ship’s captains engaged in strategy both military and diplomatic with little guidance and no recourse to seek more just by the nature of communications and the distance that a ship could carry them.  ​​
    This is one of the best summaries that I have read in a long time. Though written in the context of naval strategy and referring to Plato, the roles and tasks described here are directly applicable to companies and boards. The author writes that strategy (strategos: the art of command) is something developed at senior levels, with the long-term purpose (north star) in mind. The captain's job is to implement the strategy. Teamwork between the strategist and the captain is both expected and crucial. ​
    The correspondence to companies and boards is stark. 'Guidance' (first sentence) corresponds to governance (kybernetes: to steer, to guide to pilot), for example. The senior-most decision-maker is the board of directors; the chief executive is 'the captain'. In naval terms, the best chance of making progress towards the 'north star' occurs when the strategist and captain collaborate closely—and so it is with the modern corporation.
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    The board of directors: a family business perspective

    Accountability Corporate Governance Decision Making Director Development Family Business Governance Leadership Management
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    From entering the business lexicon less than quarter of a century ago, 'corporate governance' has come a long way. Prior to 2000, the term was rarely mentioned in business discussions much less amongst the general public. Boards and directors directed the affairs of the firm, and that was it. Now the term is ubiquitous. Its usage has changed over time as well: from describing the functioning of the board of directors, the term is now used to describe all manner of corporate activity, much of which bears little if any semblance to the board or governance at all.
    The proclivity to use the terms 'governance' and 'corporate governance' has trickled down from big business to now infect family-controlled firms. Well-intentioned but inappropriate usage—notably advisers (typically, but only accounting firms) making assertions such as "You need governance"—has had unintended consequences. When attention is diverted away from running and overseeing the business to "implement governance" (whatever that means or entails) without justification, costs have a tendency to go up not down, and a whole new set of problems including confusion, consternation and strained relationships often follow.
    Over the last two decades, I've had the privilege of working with the directors and shareholders of hundreds of family-controlled firms, ranging from 'mom and pop' operations to much larger (multi-hundred million dollar) enterprises. Awareness of (and interest in) governance has become palpable, more so if a director has just read an article or heard a talk from an expert purporting a 'best practice' governance solution. Yet directors know that a single answer rarely works everywhere. Context is crucial in business; every situation is, to a greater or lesser extent, unique. As a consequence, the universal application of a formulaic 'best practice' solution does not make much sense. Recognition of this gives rise to many questions, especially from the shareholders and directors of family-controlled firms. Here is a selection of the more frequently asked ones:
    • Do we actually need a board?  If the business is a company, yes. But remember that a board is, straightforwardly, a term used to describe the directors collectively.
    • Do we need governance? This question often masks another question: whether the 'practices' of governance are always required. The answer to both is 'it depends'. If all of the directors are also managers and shareholders, and all of the shareholding is held by serving directors (as is generally the case in small firms), then the practice of meeting regularly as a board to set strategy and policy, hold management to account and provide an account to shareholders is redundant. However, once a modicum of separation between shareholding, directors and managers starts to emerge (i.e., some shareholders are no longer directors, or vice versa; or some directors do not work in the business), then its makes sense to embrace board meetings and associated reporting. Another trigger for establishing normative governance practices is the appointment of an independent director.
    • We've been told to appoint at least one independent director, because that is best practice. Is it? Not necessarily. Independence has long been held out as a proxy for better decision-making. For example, most stock markets specify a minimum number of independent directors if the company is to be listed. Yet no categorical link between independence and decision quality, much less better firm performance has been found. However, that is not to say that shareholders should avoid appointing an independent director. If the board lacks some important expertise or needs an extra perspective, an external appointment can be incredibly helpful to the quality of board deliberations and decisions.
    • Our accountant has offered to be a director. Should we take up the offer? Probably not, because to do so introduces an inherent conflict of interest. The accountant (or, accounting firm) is a servant of management, charged with providing specialist financial and reporting expertise. If he/she also sits on the board, then they are, in effect, monitoring themselves, 'marking their own work'', so to speak. Boards that lack financial acumen (for example) should seek such expertise from an external director; there are plenty of highly-skilled people with the requisite technical and governance expertise available. 
    • We are not sure that our 'independent' director is acting in our best interests. What options do we have? First, every director has a duty to act in the best interests of the company, not the shareholder or any other party. If a director, regardless of whether they hold shares or not, demonstrates biases for a particular stakeholder or appears to lack independent judgement, the matter should be raised with them. If the behaviour continues, consider releasing them. 
    • How often should the board meet? There is no hard and fast rule, other than the legal requirement for the board to meet at least once per year. Practically speaking however, the recommended frequency is "as often as is needed to fulfil duties". The boards of family-controlled businesses domiciled in the UK, New Zealand and Australia tend to meet once per month or once every two months, whereas the boards of US-based firms typically meet quarterly. 
    • We've been told to create an advisory board. Is this a good idea?​ No. 
    These questions are typical of those that have been front-of-mind for the directors and shareholders of the family-controlled firms that I've interacted with in recent months. Curiously, questions about social interaction, boardroom behaviour and family dynamics (the human dimensions) are asked far less often. This, despite the board being a collective of directors—people—who are required to work together in the best interests of the firm. Boards that resolve these so-called 'soft' questions tend to be more effective. But more on that next time.
    This article is the first of three on the topic of 'Governance in family-controlled companies'. The second, which explores undue influence and the impact of family dynamic is available here. A final instalment, which will make suggestions to improve board effectiveness, will follow in late 2018. Boards wanting to discuss matters raised in these articles should get in touch directly to arrange a private briefing.
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    Brevity and clarity are necessary, but are they sufficient?

    Accountability Corporate Governance Governance Leadership Strategy
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    GE, a company with a strong history of success including a reputation of being the world's best-run firm, has hit turbulent times. Profit forecasts have dropped by half in the past two years, with the inevitable knock-on effect on the share price. It seems that the size and complexity of the business, and probably some poor decisions in the past, is proving to be a challenge for the board and its ability to fulfil its duties.
    Consider the following indicators, reported in an article published in The Economist:
    • There is no consistent measure of performance
    • Some divisions use flattering definitions of key words, notably 'profit'
    • Performance is not assessed on a geographical basis
    • Little attention is given to total capital employed
    • Sustainability of debt levels are hard to determine
    • Strength of GE's financial arm is unclear
    • Risks to GE shareholders are difficult to calibrate
    • Accuracy of balance sheet is unknown
    How the GE board can make meaningful decisions given these indicators, much less lead the firm intentionally into the future, is hard to imagine. Sadly, this is not a unique case. Wells Fargo, Wynyard Group and, most recently, Carillion are examples of companies that have suffered through poor reporting, weak engagement and the seeming inability of the board to make courageous decisions.
    Fortunately, boards finding themselves in a similar situation are not without options. If they are prepared to retake control of the firm they govern (which will probably require some decisive actions; brevity and clarity of reporting being necessary but insufficient) and take an active interest in its strategic future, then the likelihood of actually making a difference is greatly enhanced.
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    Global Drucker Forum: Standing amidst giants

    Accountability Conferences Decision Making Ethics Governance Leadership Performance Research Strategy
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    I had the distinct privilege of attending the 9th Global Peter Drucker Forum in Vienna this week. Approximately 500 people attended the two day forum held in Aula der Wissenschften (Hall of Sciences). The programme included fifteen plenary sessions and a parallel session (four tracks). The very full programme was run to time; a Swiss watch operated with Germanic efficiency, in the birthplace of Drucker.
    Many global authorities in strategy, innovation, entrepreneurship and related addressed those in attendance (and many more utilising the live feed option). Presenters included Richard Straub; Angelica Kohlmann; Jenny Darroch; Hal Gregersen; Roger L. Martin; Anil K. Gupta; Bill Fischer; Rita Gunther McGrath; Sidney Finkelstein; Tammy Erickson and Carlotta Perez, and more. The forum produced many insights; the following commentary merely a portion lifted from my 28 pages of notes:
    Richard Straub, President of the Peter Drucker Society, set the scene by noting that Drucker, a man genuinely interested in the bigger 'why' questions, maintained a strong focus on business performance. He avoided cookie-cutter 'solutions', a reflection perhaps that such solutions don't work within the dynamic and social context of modern organisations. Straub went on to say that management is most accurately conceived as a liberal art [to be understood holistically], not as a social science that can be reduced to constituent elements.
    Lisa Hershman, DeNovo Group, posed the question, "How do we generate growth and ensure more people participate in it?" This was not a veiled call to embrace left-leaning socialist ideals and anti-business practices, but rather a clarion call for 'inclusive capitalism'. (I've been using an equivalent term in speeches in the last couple of years: 'capitalism with a heart'.) Hershman noted that around half of the young people in the United States say they prefer socialism over capitalism. This, she said, is a clear indication that something is wrong. Business leaders have become too focussed on themselves and shareholders, to the exclusion of others. This collapse of confidence needs to be addressed by business leaders. If it is not, companies are likely to find it increasingly difficult to recruit motivated and capable young people. Why? Because they are not interested in working for poor leaders who they do not believe in, much less aspire to.
    Jenny Darroch, Dean, US Peter Drucker School, explored the essence of an effective business and societal ecosystem. She described five key interests (characteristics), namely, a functioning society, where all can participate; recognition that management is a liberal art, not a simplistic of formulaic process; that self-management is important, because neither the state nor business 'owes' people work; that performance [actually] matters; and, 'transdisciplinarity' (i.e., looking beyond the immediate context, sector, role, team) is crucial. These comments set a solid platform for what was to follow.
    Hal Gregersen, MIT Leadership Center, spoke on the important topics of community and communication. He asserted that isolation is the number one enemy of innovation. The world is far too complex for one person acting alone to be effective. Leaders that sit in their office and wait for input are far less effective that the best leaders, who actively seek to reduce (to zero, if they can) barriers in pursuit of the best possible information to understand current reality and what might be possible, so as to inform effective decision-making. The best leaders also encourage dissent, inviting people to both ask and respond to uncomfortable questions, because they want to discover what is wrong and what can be improved. Asking the right questions and, importantly, getting authentic responses (but not necessarily simple answers) depends on being in the right place (read: with staff, customers, in the market) and inviting people to challenge the status quo.
    Roger L. Martin, Rotman School of Management, built on Gregersen's comments by observing the prevalence of certitude (that sense of 'being right' common amongst leaders especially so-caleld alpha males and queen bees. Rather than stridently asserting preferences and blindly applying models (which are often wrong because they are simplifications of reality), Martin recommended that leaders reframe their statements as follows. "I'm modelling the world, but my model is incomplete. What can you add?" Great leaders pursue multiple models, combining and building to make something better (note, a better solution not a compromise). According to Martin, this always leads to better outcomes.
    Several speakers addressed the question of whether growth is actually an imperative. No speaker spoke against growth or its optionality. Rather than almost assumed the answer is 'yes', and moved quickly to consider how growth might be achieved. Anil Gupta, for example, noted that China is responsible for 27 per cent of global carbon dioxide emissions, and India 6.6 per cent. He opined that if India is to grow out of poverty then growth must be coloured—green—to avoid killing the very people it seeks to lift out of poverty. The recommended route is to industrialise, but to do so with smart technology to avoid the avoid the environmental mistakes (and their negative consequences) experienced by China and others. 
    Martin Reeves, Boston Consulting Group, added that while growth is necessary, it is beomcing increasingly elusive. As a consequence, companies operating in developed nations need to change their focus. Rather than growth at any cost, companies need to discover and pursue the right type of growth. Invoking Aristotle, Reeves observed that companies that embrace both economic and social goals (oikonomic companies) do better in the long term. Specific recommendations (boards and directors, take note) include:
    • Define purpose
    • Diversify guiding metrics (beyond financial measures)
    • Emphasise the future
    • Invest in technology 'front to back'
    • Retrain employees
    • [Re]shape the future of work
    • Foster ecosystems
    • Embrace a new (inclusive) narrative for growth
    Allyson Stewart-Allen, International Marketing Partners, and Julia Hobshawn, Editorial Intelligence, sounded a warning, arguing that the unfettered pursuit of connectedness—networking in pursuit prosperity, health and whatever else—has a dark side: info-besity. An over-reliance on social media networks have the unwanted effect of starving people of what actually matters: deep socail connections. People are human beings, not human doings, and social connections matter much more than activity masquerading as social connectedness. Pointedly, sustainable relationships and business sustainability is dependent on people, and their interaction and curiosity not social media. I found myself thinking, "Isn't this obvious?". Maybe so, but a quick glance around the room suggested maybe not: almost everyone within eyesight has their eyes down, using a smart device as the speakers continued.
    Joseph Ogutu, Safaricon, and Haiyang Wang, China–India Institute, provided insights from a developing nation perspective. Whereas many Westerners perceive social disparity to be limited in developing nations, the reality is somewhat different. Disparity between people groups in developing nations is actually higher than in developed nations. Further, many African nations have de-industrialised since gaining independence. The speakers made strong calls for developing nations to embrace manufacturing as a means of achieving the economic growth needed to lift millions out of abject poverty. While many entrepreneurs and investors stand ready to fund initiatives, local communities need to pursue partnerships, lest they suffer new forms of dependency.
    Steve Blank, entrepreneur, and Bill Fischer, IMD, observed that the pressures faced by chief executives in the twenty-first century are different from those in the twentieth century. Then, if CEOs met the expectations of their boards (however expressed) and responded to competitive pressures, then they were reasonably safe in their role. But things have become more complex since the turn of the century. Two additional forces have emerged, namely, activist investors (read: corporate raiders) and disruption. If CEOs are to respond well to this new reality, they need to become comfortable with ambiguity and chaos. Helpfully, Blank and Fischer offered four additional suggestions to enhance leadership effectiveness in the twenty-first century:
    • Working out loud (prototyping, sharing and testin ideas early)
    • Ambient awareness (narrow specialists area problem)
    • Quantified self and gamification (enumerate wherever possible)
    • Collective wisdom (no one person has all the answers)
    Rita Gunther McGrath, Columbia Business School, introduced the forum to a tool to help leaders and investors undertsnad the future growth prospects of any given company. The 'ImaginationPremium' is, simply, a ratio of a company's market capitalisation and value from operations. If the imagination premium is high (but not too high to become hype—Tesla), the sustainable growth is likely. Conversely, low ratios suggest growth is unlikely. The extreme case of a ratio less than 1 suggests shrinkage.
    On strategy, innovation and disruption. Several speakers outlined cases to demonstrate that a coherent, longer-term strategy is actually more, not less, important in times of change and disruption. They noted that well-formed strategy, not detailed plans (often, incorrectly, called strategic plans), helps lift the gaze of both leaders and staff above immediate technologies and disruptions, to focus on purpose, the customer and longer-term goals.
    General observations. Standing back a little, the investment to attend was well-spent. To be amidst giants, and chat with some of them (all were accessible and none pretentious) was a privilege and an honour—I learnt a lot. The only disappointment from my perspective concerned the speaking roster. While about 20–25 per cent of the speakers were world-class (both content and delivery), a similar percentage were disappointing. The lesser speakers either repeated what others had said, or their presentations were thinly-veiled sales pitches. Upwards of ten attendees, including some speakers, voiced similar concerns in private. My hope for future editions is that the organisers review speaker candidates more closely, to ensure a consistently high standard. Stepping beyond that, the general calibre of the forum (organisation, content, delivery) was very high. My intention is to return to Vienna in November 2018, for the the 10th edition of the Global Peter Drucker Forum. Hopefully, I'll be able to share the platform, offering some insights relevant to the theme.