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    ECMLG 2014: Welcome function tonight, sessions from Thursday morning

    Conferences Governance Leadership Management Phd Research
    The 10th European Conference on Management Leadership and Governance starts tonight with a welcome function for delegates. This year the conference is being hosted by VERN' University, in Zagreb, Croatia. I am rested after the long flight from New Zealand via London, and am looking forward to hearing about the latest developments in management, leadership and corporate governance research over the next two days. 
    Please check back regularly if you are interested in the discussion. I will post session summaries here during the conference, and use the #ECMLG2014 hashtag on Twitter to announce new postings. The full conference programme is available here. If you are interested in a particular session, please let me know and I will do my best to attend and report on it for you.
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    What is the real purpose of business?

    Governance Management Performance Research Societal Wellbeing
    Does the question posed in the title of this musing have a straightforward, even profound‚ answer? I would have thought so. In fact, when I am asked this question—as happens on a fairly regular basis—my reply is that the purpose of business is to provide a return to the shareholders, whether by way of a dividend or a capital gain, or both. The shareholders own the asset (the business), so it seems fair that they receive a reward for making the asset available. I've thought this for the long time, on the basis that the shareholders are the ones that put up the money in the first place. Staff, suppliers and others receive payments for services rendered and products supplied at the time they are provided.
    However, if companies become selfish and get too greedy, by trying to maximise profit at the expense of almost anything else, as some do, then cries of protest can be expected from some quarters. Do cry-ers have a point? Maybe, but not if they are promoting some form of social engineering, whereby profits are distributed to others beyond the shareholder base. Businesses exist for the purpose of making money for their shareholders. They are not social clubs for a wide group of so-called stakeholders. Others disagree, I know, but the purpose of a for-profit business is to make a profit! Otherwise, the business would be a not-for-profit agency.
    It would seem to me that, in the context of an open market, those companies that achieve dominant positions are very good at what they do. Yet no business is exempt from the invisible hand. The self-regulating behaviour of the market described by Smith over 200 years ago remains in control. It will have an effect, perhaps sooner rather than later if boards and shareholders get too greedy with profit maximisation.
    So, back to the question. What is the real purpose of any business? To make a profit for its shareholders, and those that do this well, in an ethical manner, can and should expect to operate successfully for many years.
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    If directors get serious about strategy, what are the consequences?

    Governance Leadership Management Performance Strategy
    If you listen carefully, you can hear it. A drumbeat, almost inaudible at first but getting louder now, has been beating a new tune in corporate boardrooms: that directors need to get serious about strategy. If the recently published NACD Blue Ribbon Commission's report is any indication, the era of boards meeting to review past performance and satisfy their compliance obligations (as their sole responsibility) may be drawing to a close. 
    While I was initially non-commital, the BRC should be applauded for its report, and the NACD congratulated for having the courage to commission it. That the BRC has produced a set of strong recommendations is great news for shareholders, the markets and other parties interested in effective corporate governance and the achievement of great company performance outcomes. However, the recommendations are not without consequences: 
    • Directors will need to become more active in learning about the business of the business they govern. That will mean spending more time in the market; more time in the business; and, more time reading and critically analysing information from a wide range of sources. 
    • Directors will need to become adept at strategic thinking and more comfortable with the strategic management process. This may mean that the balance of expertise around board tables needs to change; from legal, compliance and accounting towards innovation and strategy.
    • Directors will need to revisit whether independence and distance (between the board and the Chief Executive) is actually the best basis of board practice. History—actually, the agency theory—has taught us that independence and separation are good, even though no one has produced any research to demonstrate that independence drives performance. If these recommendations are embraced, collaboration may become the order of the day.
    • Alpha-male and queen-bee CEOs may well be threatened by the board encroaching on 'their space'. However, there is no suggestion here that the board should take strategy away from them. The paper I presented in Boston (copy on the Research page) earlier this year discusses this.
    These consequences will place downward pressure on the number of boards that any given director can sit on at any one time, without doubt. Three concurrent board appointments is probably a reasonable maximum for any one director, and possibly two if one appointment was a chairmanship. However, that may introduce a whole new set of concerns, not the least of which might be requests—from directors more interested in earning than serving—to shareholders to increase the size of the directors' fees pool! Notwithstanding this, I hope directors and boards take heed of the calls to action—for they are beating loudly now. 
    Finally, my current research work, and experience in practice, suggests that the calls to action make very good sense. They are likely to lead to better company performance outcomes—but if they are followed.
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    The South Canterbury Finance case: How blind is the law?

    Governance Management Performance
    Earlier this week, the Chief Executive and two former directors of South Canterbury Finance, the failed finance company, faced Justice Heath to hear his verdict relating to New Zealand's largest ever fraud case. Some $1.6B was owed to creditors when SCF collapsed in 2010. Justice Heath found one director guilty on five charges, and he acquitted the other director and the Chief Executive on all of the charges they faced. In his decision (all 258 pages), the judge blamed the former chairman (Alan Hubbard, who was killed in a car crash some time after the collapse), who appeared to rule with a dominant hand.

    What I cannot fathom in this case is how one director can be found guilty of knowingly making false statements and the chairman can be blamed for ruling with a dominant hand, yet another director was not found guilty. Clearly, the director adjudged to be guilty was not happy. The board is a collective of directors, so decisions should be decisions of the board—surely the prospectus was considered and approved by the board and not an individual? That the board is one is what we teach on the Institute of Directors' Company Directors Course and elsewhere. 

    This judgement raises some interesting issues relating to the law (that I don't profess to understand) that are relevant for practice. I have requested a copy of Judge Health's decision, and plan to read it over the coming week, because clearly I am missing something.
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    On succession planning: Yes, but three years out?

    Governance Leadership Management Performance Strategy
    Acer Computer, once a strong and proud manufacturer and exporter of personal computer products, has been doing it tough lately. Record losses in the last few years, as the company has struggled to adjust its strategy to the shift from desktop computers to mobile devices, have seen the company chew through three chairmen in fairly quick succession. There have been arguments between the CEO and the board over strategy as well. What has gone wrong? Apart from missing the market shift to mobile devices, I wonder whether the company has run out of ideas and has become stale. The last three chairmen have been company stalwarts for example, steeped in the culture and history of the business. Realistically, how much fresh thinking would you expect to emerge in such environments?

    Now the founder has stepped in. A outsider CEO has been appointed, for the first time, to lead the company—and to become the chairman in three years' time. This first part of this is good; it should see the introduction of some new strategic options, but only if the founder (who has come out of retirement to occupy the chair) allows it to be so. However, the second part—of anointing a leader three years before the fact, in an industry sector characterised by rapid change and tectonic shifts, is a huge call. I would have thought it made much more sense to recruit the new CEO and then recruit a new (and probably but not necessarily independent) chairman in twelve months' time. This would give the incoming CEO time to get underway, begin to deliver on the confidence the founder has placed in him, without the additional burden of preparing to add the chairman role at the beginning of year three. What say the new CEO is no good? What say a different skills and expertise mix is required to lead the board effectively in the future? The founder has, in effect, closed off the possibility of introducing new thinking around the board table—even though this seems to have been one of his aims. 

    Complex businesses need highly capable leaders: two good heads are almost universally better than one. Keeping one's options open, to react and respond to changing market forces is smart. Painting one self into a corner is not. Notwithstanding this, the founder can exert influence as he wishes. My view—that the longer-term future of the business, and of the value to shareholders in particular, may have been better served with a succession plan that revolved around two separate appointments—probably doesn't count for much. 

    What do you think?
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    CEO pay: one in four think that time is more important the money

    Governance Management Performance Societal Wellbeing Time Management
    The rather sensitive matter of CEO pay has raised its head (again) today. Stories of ever-larger packages have appeared in the news columns with metronomic regularity in recent years. However, change may be on the horizon. According to the findings of a new survey conducted by Strategic Pay, one in four CEOs would take a pay cut if offered other benefits, including more time with family.

    Clearly, some CEOs think that time is more important than money; that there is more to life than work.

    These findings suggest that the runaway train that is CEO pay may not be boundless after all, although some CEOs will dispute them, no doubt. However, knowledge of these results creates an opportunity for boards to initiate a much needed conversation—for the health of the CEO and the good of the company.