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    On boards, #Brexit, bravado...and reality

    Accountability Decision Making Ethics Governance Performance
    News emerged today that many FTSE 250 company boards had made no contingency plans for a possible #Brexit decision. As Alice Korngold notes in her article, this highlights serious deficiencies in relation to risk management, board process and board composition. Korngold is right to challenge boards on this exposure. But does Korngold go far enough? Most of the concerns expressed are framed in the context of a traditional understanding of boards and corporate governance: monitoring the executive and managing various risks.
    Directors carry important duties, to the company and shareholders. In addition to acting in the company's best interests, directors have an important responsibility to deliver value to shareholders (in whatever form might be agreed). This means that monitoring the executive and managing risks is insufficient. More is required. Boards also need to make important decisions to set the company on a path towards a desired future state.
    An increasing percentage of directors say they are involved in strategy (read the surveys), suggesting boards do take their responsibilities seriously. However, observations of boards in session (i.e., board meetings) suggests that a gap exists between claimed and actual behaviour. Korngold's commentary adds to those concerns. That some boards are not performing the 'basics' of monitoring performance and managing risk adequately—let alone driving future performance—is problematic. What confidence can shareholders have that boards are considering strategic options and determining an appropriate strategy to achieve the company's purpose? The bluff and bravado that has permeated the discourse needs to be replaced with an authentic commitment to drive business performance. Is this too much to ask?
    Looking to the future, if the result of the British plebiscite does little more than motivate boards to take the future performance of the company more seriously, then it will have been a worthwhile exercise. Until then, Barton and Wiseman's observations are likely to remain—sadly—resoundingly accurate.
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    On diversity in the boardroom: A brief update

    Accountability Diversity Governance Performance Research
    The matter of diversity in corporate boardrooms has been the topic of much debate in recent years. Some people have claimed that the die is cast: that the presence of women (or some other group) in the boardroom leads to increased business performance. Others are less convinced. I have contributed to the debate on a few occasions, both as a panelist and in print. You can read some of my comments here and here, or use the search box to find other articles on diversity.
    While the debate goes on in the trenches, some commentators have begun to stand back, to offer a more holistic perspective. Jeff Jacoby, for example, has just written this article, published in the The Boston Globe. His balanced summary highlights various aspects of the debate. Two sentences stand out:
    "The evidence that more female board members means higher corporate profits is murky at best."
    "Either way, what no study has managed to nail down is causation."
    With these comments and others in the article, Jacoby has put his finger on the core of the issue. Board effectiveness (especially any relationship between board attributes and subsequent firm performance) is a complex issue. No one structure, composition or set of behaviours fits all situations (much less all companies). 
    Looking ahead, the challenge is two-fold. First, everyone who is interested and capable of making an effective contribution in the boardroom needs to be encouraged to offer themselves as a serious director candidate. Shareholders (or their nomination committees) need to work hard to find and appoint the best candidates—regardless of any physical attribute or notional diversity variable. The ability to govern well in the team environment must be the compelling basis of assessment. Second, the rhetoric needs to continue to mature, beyond the blunt instrument of observable characteristics to focus the subtleties of what actually matters—the capabilities of directors (individually and collectively) and the quality of boardroom interaction and debate as boards consider options; make strategic decisions; and, pursue performance goals in the context of the agreed purpose of the company.
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    The real purpose of the board in family-owned businesses

    Accountability Family Business Governance Guest Post Performance Strategy
    Guest blog: Lloyd Russell (TCB Solutions, Brisbane, Australia)
    ​Family-owned businesses constitute a special category of company—made different by the familial influence that often pervades decision-making and operations. Consequently, directing within this environment can be challenging, especially for external directors.
    The challenges associated with family influence can be mitigated somewhat if the family members know why they might want to recruit external directors, and the purpose of the family business is defined and agreed. Each director needs to understand the business of the business well if contributions are to be effective. This does not mean that directors need to be fonts of technical knowledge. Rather, they need to understand the business’ strategy, supply chain, business model, core competencies and operational mechanisms.
    ​The question of what family members want from the business and the board, and especially from external directors needs to be answered. In some cases, the family simply wants added expertise and independent contributions in pursuit of agreed performance goals. However, it is more common for expectations to ‘creep’ beyond this because of the inherent complexities of the three overlapping frames of family business: family, business and ownership. As a consequence, external directors can find themselves snared in all manner of (often unstated) expectations beyond the boardroom.
    ​Families considering adding one or more external directors need to become ‘board ready’. This is where sound rational discussion often meets emotional attachment and passion! As an accredited family business advisor I take significant time to understand the dynamics and prepare the family for this important step, which is often a massive leap of faith for many families. A good rule of thumb when writing director profiles is to think in terms of 40% IQ, 50% EQ and 10% SQ. Why? In addition to being technically competent, external directors need to be both aware of and sensitive to family and personal dynamics, and they need to understand the family legacy. 
    ​Influential family members may or may not own shares; may or may not be directors; and, they may or may not work in the business on a day-to-day basis. These variations often lead to quite different expectations. Managing the family’s expectations is critical because directors have a legal obligation to the business first and foremost. The board’s main priority is to deliver on agreed strategic priorities. However, family members often expect more from external directors including (but not limited to):
    • Family member accountability
    • Improving family relationships and reducing family conflict
    • Increasing individual dividends
    • Mentoring family members within and external to the business
    • Preparing the business for inter-generational transfer
    ​As a result, the family and potential directors should conduct due diligence, to understand and clarify expectations in order to minimise the chance of unpleasant surprises at a later point. On the flip-side, ​the addition of external directors can be incredibly rewarding. While there is no ‘silver bullet’, the appointment of external directors can lead to a dynamic boardroom and, ultimately, a highly valuable family-owned business.
    ​
    About Lloyd Russell:
    ​Lloyd is a fourth generation family business member and an accredited family business advisor. He is based in Brisbane while servicing clients throughout Australia and internationally. He is a specialist in family business strategy and governance with a particular focus on inter-generational transfer; has over 30 years’ experience in senior management; and, is an accredited neuroscience practitioner.
    Contact Lloyd by phone +61 413 549 748 or by email lloyd@tcbsolutions.com.au
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    Do you hear the people sing?

    Accountability Decision Making Governance Performance
    I'm in London this week, meeting business leaders and board advisors, listening to their stories and sharing a few of my own. Already, after just 24 hours, a strong theme is starting to emerge. A drum that I have been beating for several years now can be heard reverberating amongst the streets of the City and beyond.
    Though faint at first, expectations are starting to move. Increasingly, shareholders, commentators and even some directors are beginning to voice concerns about what boards actually do. Many boards have operated in a perfunctory manner for years—the oversight of management has been a convenient diversion. However, the amount of the red tape boards have to deal with is lifting the stakes. The expectations on boards are rising. Last week, in Brisbane, many of the 220 directors that I addressed said that boards should spend more time on firm performance. Today, in London, the suggestion that compliance-based regimes do nothing for value creation and that boards need to allocate much more time to strategy was voiced in every meeting I attended. Next week, in Paris, who knows?
    Are we on the cusp of a paradigm change? Is the stirring anthem of the république gaining momentum? Perhaps. That directors are now realising that more time must be invested doing what shareholders appointed them to do—setting strategy and steering companies towards agreed performance goals—should be music to one's ears. Might we even be witnessing a 'back to the future' moment, as directors and boards embrace Cadbury's plea: that corporate governance is the means by which companies are directed and controlled, with a performance objective in mind? I hope so.  
  • Published on

    Selecting company directors: The board is not Noah's Ark

    Accountability Diversity Governance Performance
    Is the diversity discourse that has pervaded board and shareholder discussions in recent years showing signs of maturing? It seems to be. Thankfully, most correspondents have moved past blunt claims—including that the presence of <diversity variable>  leads directly (i.e., causative) to increased firm performance. While researchers have demonstrated that the presence of women on boards, for example, has been associated with more civil language and higher levels of engagement and critical thought, direct links to firm performance remain elusive. The reality is far more subtle: many underlying factors affect performance—some occurring inside the boardroom and some outside.
    While progress is being made, concerns over the motivations of 'diversity' proponents remain. Is the goal to achieve increased board effectiveness (however that might be measured), or is a political or social agenda being played out? The challenge of selecting the 'best' company directors is far too important to be left in the hands of those with political or social agendas. I know several white male directors (all of known are highly qualified and eminently suitable as company directors) who have been told they do not meet notional diversity criteria.
    How should directors be selected? One option might be to base your decision on guidance provided by Warren Buffett (see Berkshire Hathaway's 2006 Annual Report):
    In selecting a new director, we were guided by our long-standing criteria, which are that board members be owner-oriented, business-savvy, interested and truly independent. I say “truly” because many directors who are now deemed independent by various authorities and observers are far from that, relying heavily as they do on directors’ fees to maintain their standard of living. 
    Charlie and I believe our four criteria are essential if directors are to do their job—which, by law, is to faithfully represent owners. Yet these criteria are usually ignored. Instead, consultants and CEOs seeking board candidates will often say, “We’re looking for a woman,” or “a Hispanic,” or “someone from abroad,” or what have you. Over the years I’ve been queried many times about potential directors and have yet to hear anyone ask, “Does he think like an intelligent owner?” 
    Enough said, don't you think?
  • Published on

    Moving beyond 'USP' and 'point of difference'

    Decision Making Governance Leadership Performance Strategy
    A couple of weeks ago, I met with a recently appointed chief executive who wanted to test some ideas in his quest to identify the company's USP (unique sales proposition) and, therefore, its point of difference. Paul's concern was that the company was operating in a crowded and competitive marketplace without a coherent strategy, and that success was dependent on standing out. We had a fascinating conversation—the essence of which is repeated here because Paul's question seems to be topical (I have just come off a phone call with a chairman (different company) who posed a very similar question). ​
    I asked Paul to describe the company and summarise the present reality. He recounted the company's past successes, current capabilities, market position and strong product line. Then he said that market share had drifted downwards in recent years. After sipping my coffee, I asked Paul why the company existed. He looked blankly at me as if I had come down in the last rain shower. "To make a healthy profit, of course".
    "Of course", I said. "I expected to hear that. But doesn't every company have that goal? How does being different serve this goal, especially when barriers to entry are so low these days that difference is only temporary, at best?
    "Apart from serving our collective egos, that you have something different (or even unique) to offer is of little consequence to most busy people. It matters even less when a competitor offers something seemingly similar for a lower price. When this happens, it's a race to the bottom—and that's dumb. Shouldn't your motivation be to make a difference and help your clients achieve their goals? With this in mind, might a better objective be to identify your company's 'point of impact'? In my experience, people choose to embrace your ideas and buy your product because they believe in you and what you represent. Imagine the response if MLK had uttered "I have a plan"—that speech would have been a footnote, gathering dust in the annals of history. But he didn't."
    The conversation moved to other matters. Then, as we finished our coffees, Paul smiled knowing that he had some work to do. I wished him well and we parted ways.
    Do you know why your company exists? The next time your board and executive gathers to review strategy and set future goals, start by asking this question. I respectfully suggest that you don't move on until a lucid answer is both determined and agreed.