Tags

  • Published on

    Mixed mid-year reporting signals (UPDATED)

    Governance Management
    UPDATE: more filings + latest business confidence results published since original post.

    The annual and half-year reports emerging in the New Zealand market this week appear to be generally soft—perhaps indicating that the economy remains relatively fragile, and that strong economic growth may still be some way off.
    • Ecoya's revenue is up 16%, while EBITDA remains in the red
    • Rangitira reported that operating earnings of $3.3M for the six months to 30 Sept 2012, down from $4.4M for the corresponding period in 2011.
    • Sanford's profit fell and sales growth stalled.
    • PharmacyBrands appears to be growing, but the bulk of the growth has come from acquisitions.
    • In contrast Air New Zealand has provided guidance that it is on track to double its pretax earnings.
    • Argosy boosted its first-helf result by 29% (albeit on the back of an in-house merger)
    • TOWER (the insurer) reported a 67% increase in net profit after tax.

    While business confidence is reportedly improving, more strength is needed in the economy. What do you think the trigger to tip the economy from "fragile" to "strong" will be? 
  • Published on

    The governance intent–reality gap (trap)

    Governance Management Research Strategy
    I've been conducting an informal survey in recent weeks—asking directors and managers about the importance of strategy, and the extent to which the Board of their company is involved in strategy formation.

    The overwhelming majority of respondents have told me that the Board has a key role to play in [forming] strategy. However, after listening further and checking, I've discovered what appears to be a yawning gap between what respondents claim and what actually occurs in practice. Surprisingly few Boards actually spend much time on strategy at all. Rather, they concentrate on monitoring and controlling the past, on managing risk and on ensuring compliance.

    Why is there an intent–reality gap when it comes to governance and strategy? And why is it so large? Surely, if Boards have a key role to play in forming strategy, they would be directly and heavily involved in the process? When pressed, Board members said they expect management to form strategy, for consideration and approval (or otherwise) by the Board. In reality, they spend the bulk of their time reviewing business performance. Is this smart? Looking backward is hardly a good technique when the goal is to drive forward.

    If Boards are serious about maximising the performance and value of the organisation they govern, you would think they would spend the bulk of their time on strategy and the consideration of strategic options. What do you think is going on here? Is this another case of board members offering the so-called "correct" answer because they don't want to be shown up? Or does "consideration and approval" equate to "appropriate involvement"? Or is some other psycho-social interaction driving behaviour? I'd love to hear from you!
  • Published on

    On Boards and the management of risk

    Governance Management Strategy
    I've been involved in several discussions about risk management recently, including one at a Business Leaders Forum hosted by Grant Thornton. Most of the discussions have centred on the struggles that Boards face in managing risk—and more specifically, ensuring they are adequately informed. In listening to people, I've discovered many Boards struggle in this area. 
    • How do Boards know all relevant risks are being notified?
    • How big (or small) should risks be before they are reported? What is relevant?

    Let's tackle the second question first. In most organisations, management has the responsibility to implement strategy. Therefore, they also have the responsibility to identify and manage risk. In doing so, management should raise (with the Board) all risks that have the potential to compromise their implementation of strategy—together with mitigation plans. Anything with a strategic impact should be reported. If Boards are not receiving relevant risk information, they should go looking for it.

    That leads nicely to the first question. In my [direct though anecdotal] experience, most risk information tends to arrive via management. Though the common pathway, it is not without its problems. Many Risk Managers report up though the CEO. Even external Auditors tend to be retained by the CFO and report via the CEO. And therein lies the problem. Who decides what gets reported to the Board? Why would a CEO notify a risk that exposes him/her to extra work and/or uncomfortable questions from the Board? Oh, the foibles of human nature... 

    Whereas most Boards receive risk information via the CEO, several of the high performing Boards that I've worked with seek and debate risk information directly—from staff, customers, outside advisors. They also do so in the context of strategy. Boards that open several channels are more likely to be adequately informed and, consequently, be better positioned to assess strategy implementation and ensure risks are managed effectively.

    Boards need to ensure that they are adequately informed, and the best way to do that is to work directly with a range of internal and external sources. While this approach sounds straightforward, it has the potential to cause angst amongst management if not handled well. The CEO should be kept fully informed of risk discussions, and, ideally, be present when external advisors make presentations to the Board.

    One final point. If risk mitigations are not being implemented effectively, and the achievement of strategy is being compromised as a result, then the Board should replace the CEO.
  • Published on

    Towards a "strategic board"

    Governance Management Research Strategy
    Many commentators—academics and practitioners alike—have suggested that corporate governance is an complex task. I agree. In the context of maximising company performance, Boards must satisfy many demanding (and often competing) priorities: the legal and compliance requirements of their jurisdiction; monitoring of company performance; management of risk; future directions (strategy); hiring (and sometimes firing) of the CEO. It's a busy job, and it's one that takes time and commitment to do well.

    The steady stream of corporate failures in recent years, and board indiscretions, suggests many Boards are simply not doing their job well however. Why is this?
    • Are director's schedules too full to give each Board the necessary time and effort?
    • Are Boards defaulting to the arguably "easier" task of risk management and performance monitoring, and taking their eye of strategy and future value?
    • Are directors simply not asking the right questions?
    • Is the safety of groupthink dominating the challenge of debating diverse options?

    Researchers have investigated many aspects of governance, including structure, composition and boardroom behaviour, in an effort to understand how boards work and how they contribute to performance. Independent directors have been held up as crucial to maintaining distance from the CEO and overseeing performance effectively. Gender (and other) diversity has been promoted heavily in many quarters. The forming of a strong team through high levels of engagement and "desirable" behaviours has also been explored. As yet, none of the research has exposed any conclusive results in terms of increased company performance. 

    In my view, the prevailing theory of governance (agency theory), which underpins most governance frameworks today, is flawed. It is an adversarial model that assumes management cannot be trusted and needs to be closely monitored. This theory (and various incarnations arising from it) has not delivered the results the original proponents expected—despite many decades of trying.

    Rather than continue to dogmatically pursue a flawed model, we need to move on. The goal posts need to be moved—from a focus on compliance, structure, composition and behaviour, to a focus on strategy and value. The notion of a strategic board suggests a focus on future performance and value maximisation; on engaging with management and other stakeholders to develop strategy (together, not in isolation); on high levels of engagement, to understand the business and the market; on critical thinking and an independence of thought; and, on robust debates which explore a wide range of strategic options (diversity to avoid groupthink). 

    Imagine what Board meetings might be like if the focus changed. They'd probably last longer. There may be heated discussions. Directors would be read their papers before meetings, and they would be engaged. Necessarily, directors would sit on fewer Boards, because they'd be spending more time (making better decisions) on each one. But perhaps, if Boards were bold enough to change their focus, they might become more effective. Perhaps. Here's hoping.
  • Published on

    Critical thinkers: crucial to social & economic progress

    Governance Management Research Societal Wellbeing Strategy
    I had the privilege of attending the inaugural Gender Diversity Summit in Auckland yesterday. Approximately 90 delegates—the majority of whom were female leaders from business and academia—assembled to discuss diversity in company C-suites and board rooms. It was an interesting day, and I'm pleased I responded to the invitation to attend. The full participation of women in the senior echelons of business and governance is a topic that needs robust research, critical thought and vigorous debate, to ensure we understand what we are trying to achieve and, crucially, why. If such rigour is not applied, the outcomes of these types of initiatives will naturally reflect the wishes of the most eloquent protagonists.

    That leads me nicely to the point of this post. An opinion piece caught my eye while reading the New Zealand Herald in the cab to the Summit venue. Peter Lyons, an Economics teacher at St Peter's College in Epsom, Auckland, wrote a very good article about the important role of critical thinkers in society. Lyons asserted that corporate-speak and populist techno-babble has taken over our society, yet it does us no good. He went on to say critical thinkers are crucial to social and economic progress, because they rise above the status quo and they ask the hard questions like "why?" and "what if?".

    Lyons' article was as refreshing as it was timely. Having re-read the article a couple of times, and pondered the discussion at the Summit, I've come to realise we have a rather large blind spot in our society. We naturally drift towards conformity and populist viewpoints, lest we be ostracised by offering alternative views. Somehow, we need to overcome this tendency if our society is to grow and develop. But how? At the risk of grossly oversimplifying things, one option might be to turn to Mr Lyons' profession for help. If philosophy was reintroduced as a core subject in our high school classrooms—to teach the emerging generation how to think critically—I suspect a broader range of options would be debated and better decisions would ensue. And that can only be good for social and economic progress.
  • Published on

    Strategy & Thought-leadership: take #2

    Governance Management Phd Research Strategy
    The motivation for my blogpost on 24 October—in which I asked where thought-leadership for strategy should lie—was to gather feedback to test a couple of ideas lurking in the depths of my PhD considerations. Several people have since contacted me directly to share their thoughts, which has been very helpful. Thank you to those people! 

    I also posted the same question on the Boards & Advisors Group over at LinkedIn, in an effort to broaden the pool of people who might like to comment. Many have, and a great conversation has emerged. I suggest you have a look there if you are interested in this topic, because a solid discourse is unfolding right now...