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    Bridging the ‘saying–seeing’ gap

    Accountability Conferences Corporate Governance Decision Making Effectiveness Governance Management Performance Strategy Value Creation
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    Recently, during a meeting with a company director, I was asked if I'd be interested in seeing the company’s production facilities, to provide context for an upcoming assignment. Context is everything, so I gladly accepted the offer. As we walked, we chatted about a wide range of things. At one point, I asked how things were going since the board's decision to embrace a strategy to become a higher-performing business. His response was as telling as it was succinct:
    They say ‘high performance’, but all I see is ‘average’.
    The melancholic admission was unexpected, but not surprising. Apparently, the most recent board report showed that staff turnover had been creeping up, and engagement scores were trending downwards. And yet the atmosphere in the boardroom was sanguine when I visited. Clearly, something was amiss.
    This vignette highlights one of the great challenges in business—strategy execution; ensuring that strategy planned becomes strategy executed. Regardless of the motivation for creating them, intentions and strategies are not worth the paper they are written on if desired outcomes are not achieved.
    When things go wrong, the problem can often be traced back to one or both of two things: lack of will (the "won't" barrier), and lack of know-how (the "can't" barrier). Both are indicators of a failure of leadership; a failure to equip staff, and motivate and engage them to embrace the call to action. But the root cause may lie elsewhere. If strategy implementation is OK but expected outcomes do not follow, the problem is more likely to be one of governance. This is because ultimate responsibility for organisational performance [outcomes] stops in the boardroom, not the executive suite. Some may challenge this, on the basis that the executive is responsible for running the business and implementing the strategy. They are, but for the avoidance of doubt, responsibility of determining purpose, setting overall strategy and ensuring results are achieved lies with the board of directors. There’s no getting away from it: the buck stops at the top.
    If there is a gap between what the board says it wants, and what is subsequently observed as reality, the likelihood of great outcomes is low. The ‘saying–seeing’ gap must be bridged, and the board needs to own this. 
    Here are some questions the board may wish to consider:
    • Are the expected beneficial outcomes clearly defined and agreed, as part of the strategy approval process?
    • Are the expected outcomes explicitly aligned with approved corporate strategy, purpose and values?
    • What measurement and reporting mechanisms will be used to monitor effort and verify progress?
    • Is staff culture (how we do things around here) and engagement consistent with corporate values?
    • Are the lines of communication throughout the organisation wide open, to create an environment whereby concerns and problems can be reported without fear or favour, and dealt with early?
    • Is the board prepared to hold the chief executive directly accountable for progress and results, as the approved strategy is implemented?​
    So, to the direct question: Is your board across this?
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    Global Peter Drucker Forum: Day 2 highlights

    Accountability Conferences Ethics Governance Leadership Management Societal Wellbeing
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    The 2018 edition of the Global Peter Drucker Forum was convened in Vienna, Austria this week. This post summarises insights from the second day (click here for insights from Day 1). I didn't take as many notes on the second day, preferring instead to sit, listen and dwell on what was said. (I also missed a couple of sessions, one to finalise my own preparations to speak; another to spend time privately with a two inspirational thinkers.) However, there were, for me, two speakers that really stamped their mark on the day, as follows:
    Hermann Hauser,​ director of Amadeus Capital Partners and chair of the European Innovation Council, delivered a strong message, arguing that humanity is on the cusp of an inflection point (moving beyond evolution to design thinking) that has the potential to 'change everything' in the reasonably near future. He identified four significant disrupters:
    • Artificial intelligence and machine learning: Allows for smart processes and removal of menial work
    • Block chain and smart contracts: Enables automated [process] execution to be designed into systems
    • Synthetic biology: Enables biological patterns of life to be modified, at the will of man
    • Quantum computing: Nascent technology with the potential to render security systems useless
    The implications of these disrupters are, frankly, rather daunting. Synthetic biology offers the prospect of defeating disease, but at what cost? Quantum computing has the potential to render electronic security systems useless. One doesn't have to be a rocket scientist to realise the massive implications for commerce, banking and warfare. Researchers and technologists are committed to bringing these capabilities to market. But at what cost to humanity? The ethical implications are not insignificant. Recognising this, Hauser suggested that the state has an important role to play, to ensure appropriate regulatory boundaries and safeguards are established. But it must act quickly, before the genie gets out. 
    Martin Wolf, chief economics editor of the Financial Times, spoke passionately about the role of the state; in his view, the single-most important institution in human history. I first heard Wolf speak a few years ago. He left a strong impression on me then, and did so again as he spoke. Addressing the question of how states can 'work better', Wolf named several important roles that the state 'must' fulfil par excellence:
    • To ensure society is both collective and inclusive (no one left behind)
    • To provide a fair and effective judicial system
    • To underpin the monetary system
    • To regulate and control sovereign borders
    • To finance innovation (in effect R&D, not product development)
    • To regulate and guide economic activity
    • To protect the commons
    • To collaborate with other states, to ensure stability of 'global' governance
    • To establish the laws, roles, purposes and legitimate operations of all business
    Such roles need to be implemented with aplomb. Failure to do so will inevitably lead to anarchy, in Wolf's view.
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    Global Peter Drucker Forum: Day 1 observations

    Accountability Conferences Entrepreneur Leadership Management Research Strategy
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    The 2018 edition of the Global Peter Drucker Forum, the tenth annual gathering of leaders, philosophers and students of management was convened in Vienna, Austria this week, at the Hofburg, the Imperial Palace. The location was a wonderful, historical backdrop for two full days of discussions and debates on topical issues directly relevant to managers and leaders around the world.
    Overall, the purpose of the Forum is to share expertise and build capability in line with Peter Drucker's philosophies. This year, the theme was management . the human dimension. It was the second time I have attended the Forum. The decision to do so was relatively straightforward; made soon after I had the opportunity to stand amongst giants in November 2017. As was the case then, the programme followed a reasonably conventional format dominated by panel-based discussions and plenaries. One major difference from last year though was the scale of the event. Some 500 people attended in 2017. The tenth anniversary edition took a step up, to enable 1000 people to join the conversation. This led to some quite different dynamics at a personal level (notably that it was much more difficult to find people or to access the speakers). As a consequence, some intimacy was lost. But this is a minor point, especially when viewed in the context of a very well-run event.
    The following three summaries, presented in no particular order, provide a glimpse of the ideas shared and learnings from the first day. (If you would like to know more, please get in touch.)
    Business and society:​ Four panelists including Jean-Dominique Senard, CEO of Michelin Group, and Yves Doz, Emeritus Professor of Strategic Management at INSEAD, shared their thoughts on the importance of holding business and society together (the implication being that business and society have, or are at risk of, drifting apart). Key takeaways:
    • Whereas the people challenge during the industrial revolution was to manage staff (think, human resources), the challenge of our time as we proceed through the knowledge revolution is how to inspire staff (think, people).
    • Organisational purpose and underlying values are core to motivation and behaviour. These must be clearly established and inculcated throughout the firm (and even beyond), starting with the board of directors. If either purpose or values are ambiguous, or if people don't buy into them, the natural response is that people will offer their effort (at best), not their hearts and minds. The resultant firm performance can only be mediocrity. 
    • Collaboration, both within the firm and with others (think, ecosystem) is necessary if a firm is to scale quickly.
    • Most established businesses know they need to put people in the middle—but they struggle to implement the change needed to put this into practice.
    • Perhaps counterintuitively, 'legacy' businesses are often much more able to 'win', despite startups having greater mindshare and seeming to be better funded (Hyundai and BMW v. Tesla, for example).
    • Change is a constant now. Therefore, chief executives must operate from the perspective of leadership, not management.
    • Economic liberalism needs to be refined (to end the excesses of self-centred capitalism). If it is not, expect government intervention, through taxation and regulation. 
    Human questions, machine answers: Hal Gregersen kicked off this session with some stark predictions:
    • 15% of the jobs currently available will be removed in the future, due to automation
    • 60% of the jobs currently available will be substantially altered by technology
    The insight from the first of these numbers is that predictions of cataclysmic job-loss and unemployment are little more than scaremongering. However, the second number demonstrates that the impact of technology on work will continue to be very significant into the future. But we need to get past the numbers for focus on what actually matters: it is people.
    People everywhere need to become more adept at using computers, especially for menial and repetitive tasks, and, even more importantly, people need to be taught to be some computers can never be: humans; empathetic, curious, social beings. As humans, our ability to thrive in a world seemingly falling head-long into the embrace of AI is to ensure we ask the 'right questions', many of which will be social, ethical and spiritual.
    Other speakers added that capabilities need to prevail over skills. This might sound like semantics, but the difference between the two is both significant and important. Curiosity, situational awareness, contextual understanding and creativity are far more important than operational or tactical skills, for example. Such capabilities need to be nurtured and exercised, lest they become like unused muscles—atrophied.
    Re-engaging the humanities: The aim of this fascinating session was to argue the merit of re-connecting humans with the humanities. The starting point for the discussion was an assertion that humanity's adoption of technology has come at a great cost: mankind is rapidly losing touch with what makes him distinct from other species. Simply, the pursuit of technological 'solutions' has seen many lose sight of the meaning of life. 
    Humans are social beings, and meaning is revealed through interaction and insight. Unlike molecules that behave in a consistent manner when they are heated (cooled) or put under pressure, humans do not. As a consequence, if organisations are to thrive in the future, conceptions need to change. Rather than using deterministic and mechanistic models to understand and explain organisations and performance, a biological 'ecosystem' may provide a more instructive. In this context, the term 'ecosystem' means a community of organisms that interact contingently and their physical environment. While such communities have defining characteristics, 'success' is dependent on many factors, and it is neither predictable or guaranteed.
    A summary of observations and insights from second day is available here.
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    The wildcard in family-controlled firms: undue influence

    Accountability Corporate Governance Decision Making Family Business Management
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    The limited liability company is a great construct; an efficient vehicle for commerce, through which to pursue an overall aim (purpose) and to distribute wealth (however defined) over an extended period. What's more, mixed levels of ownership are possible; greater economies of scale are attainable (beyond what a sole trader or entrepreneur could typically achieve); and, importantly for absentee shareholders, liability is limited to the extent of the capital invested. 
    Though they offer many benefits, the limited liability company is not without flaws—it is a social construction after all, and a complex dynamic one at that. The motivations, priorities and interests of various interested parties (shareholders, directors, managers and staff, amongst others) are often different. Contexts change, and egos can get in the way as well. Left unbridled, differences can fester, morale can suffer and, in more extreme cases, the company can be torn apart. Wynyard Group and Carillion are two recent example but there are many others. Family firms are not immune to such challenges. In fact, when the wildcard of family dynamics is added to the mix, family firms are actually more, not less, susceptible. Though not always visible, the spectre of undue influence often lurks as a contributing factor, as the following discussion reveals:
    Failure to differentiate the roles of 'shareholder' and 'director': Let's start with some definitions. A shareholder is a person or entity that owns shares in a company. Ownership of shares affords certain rights, such as, selecting directors, receiving dividends and participating in major decisions. But those rights do not extend to running the business. That is the responsibility of managers, a delegation via the directors. In family firms, the roles of shareholder, director and manager can become blurred, especially when an influential family member holds multiple roles.​
    The most common expression of undue influence that I've seen over the years relates to decision-making at the board table: a director with a significant shareholding 'expects' to influence significant decisions in their favour because they own a large parcel of shares. The important distinction that is lost (sometimes it is 'conveniently' neglected) in such situations is that the board meeting is not a proxy for a shareholder meeting. Shareholders and directors vote differently. Shareholder voting is conducted on a 'one vote per share' basis, whereas each director has a single vote at the board table. Regardless of whether directors hold shares or not, every director has an equal say.
    If situations like this arise, they need to be nipped in the bud. If they are not, board meetings become a farce; the other directors puppets. This is far from acceptable, especially when the duty of acting in the best interests of the company (not any particular shareholder) is factored in. In most cases that I have observed, attempts to exert such [undue] influence tends to stem from ignorance and a desire to do what they think is fair, not malice. Usually, a quiet discussion with the director concerned is often all that is needed to resolve the matter. Another family member or an outsider (an independent director if there is one, or some other trusted advisor) are useful candidates for this task.
    Treating the company as little more than a personal bank account:​ If I had a dollar for each time I've seen this in family firms... Recently, while observing a board meeting as part of an advisory engagement, a director asked, "Why are we always so short of cash when we are supposedly highly profitable?". The discussion that followed was both enlightening and disturbing—and, sadly, it was not the first time that I'd heard it play out. One director with banking access had been buying personal items with company funds and, from time to time, had been taking 'petty cash' for personal use. He saw nothing wrong with this because "it's my firm anyway".
    If a director or shareholder uses company funds to acquire personal items, or uses the company bank account as if it were their own, they are acting in their own interests (whatever those may be). Their actions may put the viability of the company at risk as well. Neither of these motivations is permissible in law. Any shareholder wanting money from the company needs to ask the company, not just take it (that's theft!). Valid payment options include shareholder salaries (payment for effort/services rendered), dividends (a share of the profits), donations (but these may be taxable) and director's fees. ​The company may also agree to lend money to the shareholder. Regardless of the motivation or the payment option, a written policy which outlines the rules and conditions pertaining to payments to shareholders can help mitigate misunderstandings.
    Employment of family members and related matters: ​Another expression of undue influence is the situation in which a family member 'pulls rank' to secure employment for themselves or another family member. While any family member may nominate anyone else (including other family members), to foist a particular person onto a manager is completely unreasonable. If managers are to be held accountable for performance, they  need to be free to make reasonable employment decisions themselves, in accordance with employment policy. In family firms, it is a good idea to add a section entitled 'Employment of family members' in the policy, to set out the rules the be applied whenever a family member is being considered for a role. 
    While none of these examples of undue influence is unique to family firms, they are usually more visible (and often more destructive) in family firms. Once discovered, they need to be resolved. If not, family relationships can become strained, even to the point of breaking down. Actions that families might consider taking to prevent or at least mitigate the types of problems summarised here include:
    • ​A set of written policies, that specify various operating boundaries. Employment of family members and payments to family members are two areas in which policies can be especially beneficial.
    • A shareholder's agreement, which specifies how family members will interact with the company in matters relating to the company including acquiring and disposing of shares, employment, major decisions, dividends and voting rights, amongst others.
    • A functional board of directors (and associated governance framework), to set strategy, approve policy and oversee the operation of the firm (in accordance with the approved strategy and policy).
    • A communications framework, which outlines both the frequency and form of communications between the company and shareholders (and other stakeholders including non-shareholding family members).
    Boards wanting to explore matters mentioned here should get in touch directly to arrange a private briefing.
    This article is the second of three on the topic, 'Governance in family-controlled companies'. The first explored some items that are currently front-of-mind for many directors and shareholders of family-controlled firms. The third article, which will present recommendations to improve board effectiveness, will follow in late 2018.
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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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    Boards and strategy: taking in the long view

    Accountability Decision Making Governance Management Performance Strategy
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    During the last month, I have had the privilege of working with four different boards and management groups, helping them wrestle with why the company they govern exists (its purpose, or reason for being) ahead of formulating strategy to pursue the agreed purpose. All four engagements have been invigorating, revealing many insights and much passion (and debate!) within the assembled groups. 
    However, three troubling signs became apparent amidst the boards' commitment to the cause. These signs, which are not uncommon, have the potential to stymie the quality of the resultant strategy and management's ability to implement the approved strategy. The following comments highlight the issues:
    • A propensity for detail: Most of the discussions quickly devolved to specific examples and detailed aspects of the company's products, customers and staff: the perception being that more detail is helpful for effective implementation and to mitigate risk. This is not uncommon: strong leaders like solving problems. However, humans tend of overestimate their ability to predict the future, and boards and managers are no exception. Further, implementation is a task for management, to be actioned after purpose is determined, strategy formulated and resources appropriated. Also, a strong focus on detailed elements has the unwanted effect of taking the gaze away from the big picture, the wider context within which the company operates, and in so doing introducing new risk not mitigating it. Left unchecked, the resultant strategy is more characteristic of a detailed list of activities than a high-level, contextually relevant overview of how resources will be deployed to achieve the agreed purpose.
    • Confusion over the board–management nexus: The usage of the term governance over the last 15–20 years has become widespread (in both appropriate and inappropriate contexts). Usage has reached the point that 'governance' has become a panacea for all manner of corporate ills including poor company performance. The board–management relationship has become clouded, with the two parties claiming or denying tasks, often based on a poor understanding of what governance actually is. If the board and management are to work well together, a well-defined of division of labour is required, to allocate to tasks explicitly to the board, to management, or to both.
    • Shortening the horizon, to reduce the odds of failure: This sign is closely related to the first one. If those responsible for formulating strategy are not looking well into the future, identifying emerging trends and possible responses, they are doing themselves and their company a gross disservice. Audacious goals and Roger L. Martin's words are ringing in my ears: "True strategy is about placing bets and making hard choices. The objective is not to eliminate risk but to increase the odds of success." 
    The temptation to embrace detail, confuse the roles of the board and management and shorten the view remain very real challenges for companies around the world. If boards are to fulfil their responsibilities well, a clear sense of purpose supported by a coherent strategy is vital—regardless of the company's size, sector or span of operations.
    The great news is that increasing numbers of boards are starting to realise that material benefits are available if they contribute directly to both the process of determining purpose and formulating strategy. However, boards have some way to go before the value they have the potential of adding is actually realised, if the evidence of the past month is any indication.