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    ICMLG'15: Voluntary disclosure

    Conferences Governance Performance
    Syelia Md Zaini, a researcher from Waikato University, presented an interesting paper on voluntary disclosure in developing Asian nations. Voluntary disclosure has been associated with increased market capitalisation and with the expectations of investors, yet the understanding of how voluntary disclosure works and why it might be important is fairly limited.
    Zaini's paper is a work-in-progress, part of her doctoral research. So far, she has analysed prior research to identify why companies have adopted voluntary disclosure practices. These include corporate governance requirements; peer pressure; and, accounting and auditing regulations. All of these drivers are compliance orientations: which suggests that voluntary disclosure may not be that voluntary! Zaini hopes to build on her current work, to answer the important 'so what' question. If she can achieve that, the answers could have quite meaningful implications for businesses motivated by growth. I look forward to reading her findings.
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    Who should control your business, and who actually does?

    Accountability Governance Management Performance Strategy
    Have you ever pondered the question of who actually controls your business on a day-to-day basis? Many chief executives have told me that they do. They say they have a large hand in the strategy; the culture; and, the policies and procedures, and that these things determine what the business is and what it does. But do they? Does this view match the reality?
    I've long held the view that businesses should be controlled by just two things. The first is strategy, the expression of how the overall objective of the business is to be achieved and against which all effort is aligned. In most businesses, strategy is expressed in commercial terms, based on whatever purpose the shareholders have laid out. The second controlling influence is the customer, or it should be. Customers are crucial because they "feed" the top line, without which the business has no future.
    The challenge for boards and chief executives is to ensure that all of the resources at their disposal (people, systems, product and service portfolio, finances) are aligned in pursuit of the agreed strategy. The benefits of doing so are almost self-evident, so much so that you would think all businesses would operate in this manner. But sadly, many don't.
    If you will allow me to relate an actual experience—one that probably happens more often than most chief executives and company directors realise. Recently, having opened a managed funds account with a large provider, my wife and I found ourselves with the frustrating problem of being forced to change the password to gain access to the on-line system. Here's the exchange with the financial services advisor:
    Me: We have discovered an annoying “feature” of the ABC programme: the “forced change” on user passwords. To be forced to change your password every few months is jolly annoying, to the point of arrogance on the part of ABC company. We are not forced to change our password with the bank. We can see no justification to impose such a regime on a look-only user account. Can you please talk to your people and get this setting changed. 
    Advisor: This is a feature determined by the provider of the on-line platform; and it is across all client accounts. ABC company has been approached on this several times but their IT security people are unable to make exceptions at the individual customer level.
    Another client logs in only rarely and has the same frustration. I suggested that I diarise to generate the account summary at around the same time it’s being system-generated, and email it through. What do you think of that as a work-around? I agree it’s irritating; I log in several times a day so the password refresh isn’t the same issue for me, as it is when you’re logging in maybe only every few weeks or in response to a system-generated prompt.
    M: Thank you for chasing our question through to an answer. It’s disappointing when “IT security people” get to drive the business and the customer experience eh! Your suggested work around is fine with us, on the proviso that it does not cause you any untoward extra work or hassle. One report per quarter will be fine. Is that OK?
    A: Hi, that sounds fine.
    FYI, I had the same thought about who drives the business: we have new printers with card swipes to unlock the print queue, for “security” and cost savings purposes, and also “print anywhere” capability. OK, I suppose, up to a point; but some IT person decided that the tray for standard white copy paper will be tray 3 (second-lowest) not tray 1 (highest, as it’s always been – and easiest to reach down to), and locked it into the printer in a way we can’t alter the settings locally. Letterhead and continuation paper (used in much lower quantities) are in trays 1 and 2, not trays 2 and 3 which would make more practical sense. So we are all (apart from the IT person, who thinks this is very orderly but who never uses our printer) inconvenienced both in terms of having to reach down all the time to replenish tray 3, but also having to go through and reconfigure many standard documents that will otherwise print on the wrong paper. I imagine that when the next printer comes along, there will be a new IT person and we’ll now be squatting down to replenish tray 4!
    The message is stark: that faceless people in back rooms often have more influence over business performance and perception than what executives and boards realise. They make decisions that seem reasonable. However, most of these decisions are made in isolation, without reference to customer or strategy. The consequences of decisions that detract from the customer experience and are inconsistent with the corporate strategy can be quite damaging. If customers start walking away, where does that leave the business?
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    Qualities of directors and boardroom behaviours that actually make a difference

    Accountability Governance Leadership Performance Research
    Have shareholders worked out that the appointment of women to corporate boards per se is not a ticket to improved business performance? The challenge of lifting representation has been embraced by many groups across the Western World, including the 25 Percent Group. Yet the numbers are not stacking up in the way many had hoped. While some countries have implemented quota systems, conclusive evidence is yet to emerge to show that, by adding one or more women to a corporate board, business performance will increase.
    Diversity amongst directors makes sense, because a mix of backgrounds and experiences tends to produce a wider range of options for consideration. If the debate is healthy and vigorous, higher quality decisions can follow. However, women should not be appointed for political or social reasons. The conversation needs to move on, beyond simple numbers and the presence of absence of XX and XY chromosome pairs, or any other specialist technical skill for that matter. Physical attributes and technical skills are inputs (only), their presence does not produce results.
    Researchers and professional directors need to dug deeper, to discover the qualities and behaviours of directors that are likely to contribute to better outcomes. In other words, what directors do and how they think in boardrooms. If we can discover these qualities and the social interactions that flow from them(*), and nurture their expression in boardrooms, then increased business performance might not only be possible, but perhaps sustainable. The likelihood of a mix of male and female directors is pretty high as well, I would have thought.
    (*) This is the essence of my doctoral research. Details will emerge during 2015. Contact me if you want to be notified when papers and articles are available.
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    Does NZX have a serious conflict of interest?

    Ethics Governance Performance
    Image description
    Reports have emerged that the company that operates the New Zealand stock exchange, NZX Limited, has initiated a review of its own operating policies and processes—with a particular focus on conflicts of interest (and perceived conflicts). The review is timely, because NZX seems to have begun operating beyond what might be considered reasonable for a market operator. 
    So, what's the problem? Let's start by looking at NZX itself. Here's how NZX describes its business activity:
    NZX builds and operates capital, risk and commodity markets and the infrastructure required to support them. We provide high quality information, data and tools to support business decision making. We aim to make a meaningful difference to wealth creation for our shareholders and the individuals, businesses and economies in which we operate.
    This seems reasonable. NZX owns infrastructure, operates markets (including regulation) and provides information. However, what is not stated is that NZX also runs a funds management business line. Therein lies the problem (or the perceived problem), because the funds management business invests in companies that are themselves listed on the exchange.
    If you'll allow a sporting analogy: NZX sets the rules, provides the playing field, referees the game and is a player as well. Player coaches are common in sport, but player/referees? 
    Some might respond by saying this is a great example of the capitalist system in operation. It might be. But I can't help but wonder whether NZX is operating right at the very edge of what might be considered to be ethically and morally reasonable. Consequently, I look forward to reading the results of the review.
  • Published on

    What's actually more important: Longer-term value creation or shorter-term gains?

    Accountability Governance Leadership Performance
    Big box retailer, The Warehouse Group, is experiencing a bit of turbulence just now. The company has had a dream run over the past couple of decades. From its genesis as a single-store, The Warehouse Group has grown to become New Zealand's largest retailer. However, some tensions are starting to emerge. Some investors (actually, funds managers) are not happy.
    The company is currently rebuilding its business model to meet emerging customer and market demands. In 2011, the company embarked on a five-year 'turnaround' strategy under Group CEO Mark Powell. The strategy, which involves both acquisitions and a major refit programme in existing stores in order to provide enduring longer-term returns and capital growth, was approved by the board and it was well signalled to shareholders and the market. Yet some shareholders are making their expectations of ongoing share price growth and dividend returns quite clear.
    The emergent tension has the potential to be a major distraction for the board and management. Clearly there are two views on the table. The pressing priority for the company is that the shareholders, board and management are united in their pursuit of one agreed strategy. So, which view should prevail?
    I'd like to suggest that the longer-term view needs to prevail, because that's the agreed strategy and it's probably the option that better suits the best interests of the company. However, I am not a funds manager trying to eek the most out of my 'product', the investment in the business. Ultimately though, if they are not satisfied with the performance of the business, the funds managers have several choices available including these three (amongst others, no doubt):
    • Make representations to the board and ask the board to review the strategy
    • Seek to appoint new directors to represent their interests in the boardroom
    • Offer their holdings for sale and pursue their interests elsewhere
    What do you think is an appropriate course of action, and why?
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    When publicly-listed companies miss revenue forecasts

    Accountability Governance Performance Research
    When publicly-listed companies miss their revenue forecasts, as Wynyard Group and Orion Health both did recently, the stock market generally responds by discounting the share price. That's because the 'value' attached to the business is a mathematical calculation involving both current inherent value (generally represented by customers, intellectual property and other assets) and future value (expected revenue). 
    Knowing this, some companies announce somewhat optimistic forecasts, both to challenge sales and delivery teams, and to send signals to the market. When forecasts are achieved, everyone is happy. However, if forecasts are not met, the natural reaction of the market is to back out the value. Sometimes the market reacts quite strongly, especially if the share price has climbed significantly on the back of optimistic forecasts, press release statements and marketplace hyperbole. This raises some interesting ethical questions:
    • Are share price movements simply the natural forces of the market at work in response to stimuli including forecast information?
    • Is any further action required to protect various parties from the vagaries of optimist forecasts?
    • What sort of guidance should publicly-listed companies provide to the market, or should companies remain silent on future revenue and profit expectations? 
    • What constitutes 'realistic guidance'?
    I don't have any strong views on these questions at present, other than to suggest they seem to be important to the smooth functioning of the market. Therefore, they probably deserve some air time. Depending on the responses to these questions, I may initiate some further research and develop some recommendations.