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    On Microsoft, governance and strategy

    Governance Management Performance Strategy
    The announcement this week, of Steve Ballmer's intention to retire as CEO of Microsoft within twelve months, sounds straightforward. However, when the announcement is read carefully, interesting questions of governance and strategy emerge. The following snippet, from Microsoft's own release, provides the insight:

    “The board is committed to the effective transformation of Microsoft to a successful devices and services company,” Thompson said. “As this work continues, we are focused on selecting a new CEO to work with the company’s senior leadership team to chart the company’s course and execute on it in a highly competitive industry.” 

    The company has struggled to maintain the market dominance it once enjoyed, and a decision has been made to change the leader. Many commentators have proffered views about this, some of which appear here. Whether Ballmer quit of his own volition, or was pressured to do so, is a moot point.

    The Board's expectation for the future is more clear—it expects the new CEO to craft strategy and implement successfully ("... selecting a CEO ... to chart the company's course and execute ..."). It seems that the Microsoft Board is not expecting to be involved in the development of strategy, despite the Board's primary role being to maximise company performance in accordance with shareholder wishes. If strategy creation is delegated to the CEO, what is the Board's role? It can only be monitoring and compliance. This is a very narrow, and outdated, view of governance. How does reviewing past performance ensure future success? It doesn't. Success is contingent on understanding the environment, selecting the most effective strategy and successful execution. And even then success is not guaranteed. You would have thought the Microsoft Board would have taken its role more seriously than to delegate this crucial task of strategy formulation to the CEO. 
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    Governance and management: is a clear separation best?

    Governance Management Performance Phd Research
    I have been working on a paper which explores issues surrounding the separation of governance and management. The topic is potentially quite controversial, because it questions the basis of most modern governance practice. Hopefully, the findings will be presented at a conference in the USA early next year.

    The paper is needed because we have witnessed many corporate failures in the last decade, and autopsies suggest that a failure of governance was a contributing factor in many cases. Clearly, the separation of governance and management espoused by agency theory(*), and by many since, has provided no guarantee of success. Various defensive positions have been erected by Boards including lack of information; poor implementation of strategy; and, management fraud. Important questions lie just below the surface, including what role the Board should play, and whether a clear separation between governance and management is the best model to achieve the organisation's aims.

    The answers to these questions have potentially far-reaching ramifications. I would appreciate hearing your views and experiences, to inform my research. If you can share links or references to any prior papers, that would be great as well. Please feel free to provide a (public) comment here, or, if you would prefer, contact me via email.

    (*) The "traditional" view—that the roles of governance and management must be held separate—is based on agency theory. Agency was proposed by Jensen and Meckling in the 1970s. It has become the dominant theory of governance, in both research and practice. However, in the four decades since, no robust evidence to explain how such a model delivers better performance has emerged.
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    On Fonterra: the expected finger pointing has begun 

    Governance Management Performance
    Several days ago, I mused about the Fonterra botulism scare, and asked why Fonterra had failed to respond well, especially when an exemplar crisis response case was available. Some eight days passed between the point that management recognised the problem and the point that the board became visible. Initial press briefings were messy (to say the least), and the public was left unsure of what was going on and whether Fonterra milk products were safe or not. The company appeared to be caught, like a rodent freezes in the glare of headlights, without a coherent response. 

    Since the initial tsunami of coverage, the board has appointed a high-level review panel to investigate what happened, how it happened and, presumably, make recommendations. With this action, Fonterra seemed to be getting its act together. However, there was another significant development today—one which raises a new series of questions. The head of the company's manufacturing division, Gary Romano, resigned.

    The timing of Mr Romano's resignation is a bit strange. You'd normally expect staff to remain in their roles, pending the outcome of any review. However, Mr Romano has quit. Whether he jumped or was pushed is unclear. But that hasn't stopped the trial by media and finger pointing, as unproductive as it may be. The media needs to realise that it has an important role to play as an influencer. Rather than speculate and risk ruffling even more feathers, the media needs to adopt a more responsible attitude, by withholding speculative comment until the outcome of the review is known.
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    Is "we were misled" an acceptable defence?

    Governance Management Performance Strategy
    The shares of boutique brewer, Moa Group, slumped by over 20% today, on news that the company expects to miss its revenue forecast by 30%. The market had valued the business on the basis of future growth projections. However when targets are missed, consequences follow—as they did today. While the announcement would have been disappointing for the shareholders, the CEO's reaction was simply stunning: "We were misled".

    Gosh, what an admission! Geoff Ross, CEO, has had a great run over the last few years, with the success of 42 Below, and more recently, Trilogy. Why did this doyen of the business and entrepreneurial community not see the 30% sales slump—just four months into the fiscal year—coming? Is "we were misled" an acceptable defence, or should the CEO and Board have seen the situation coming (through effective reporting and monitoring processes) and taken positive action earlier? "We were misled" sounds passive and dismissive. The latter option is more acceptable to shareholders.

    Without wishing to be impetuous, the Moa Group board needs to take stock. The company strategy and goals need to be reviewed to ensure they continue to be realistic given market conditions; reporting and monitoring processes need to be refined; and, the board needs to become more actively engaged in the oversight of the business. Then, and probably only then, will the now-visible discrepancy (between forecast and actual performance) be addressed and shareholder confidence restored. 

    Notwithstanding this critique, I wish Moa Group well for the future. It's products are great!
  • Published on

    Why is the opening of a data centre newsworthy?

    Management Performance
    I'm amazed at the things considered to be newsworthy sometimes. Let me give you an example. Telecom's IT subsidiary, Gen-i, has just announced the opening of a new data centre, and the trade press have picked up the story. A data centre is a facility used to house specialised equipment, from which services are provided. They are not dissimilar to a telephone phone exchange, power station or other capital intensive facility operated by utility companies. Apart from promotional value (to Gen-i, promoting it's wares), I fail to see how the opening of a facility is actually newsworthy. It's not as if customers visit data centres, as they do bank branches or retail outlets. Surely the long-since commoditised information technology market means the primary interest of customers is that the services they purchase work as promised? Who cares whether a service provider doubles the capacity of an existing facility, or opens a new one? Must be a slow news day...
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    On director effectiveness and "overboarding"

    Governance Performance Research Strategy
    How many directorships is it reasonable for any one director to hold at a given time? Recently, I met a gentleman at a function who introduced himself with the line, "I am a professional director, I sit on ten boards". Ten boards seems a lot. Is ten reasonable?

    If we think what a commitment to ten boards looks like, the following picture emerges. If you assume that each board has a monthly meeting (of one day), and that directors spend one hour in preparation for each hour in the meeting, then a pool of ten boards means 20 days' effort each month. That's without allowing for committee meetings, crises, or any time to understand the company or the market within which it operates. This last factor (understanding the company and its markets) is crucial if a director expects to contribute to strategic discussions or assess proposals in any meaningful way.

    On this analysis, directors with ten concurrent appointments are seriously "overboarded". They cannot hope to be effective. Think about it. You'd have enough trouble getting through the reading, let alone have time thinking, learning and assessing options. So, how many concurrent board appointments is reasonable? Experts suggest that a reasonable upper limit is four boards. Chairmen, with their heavier workloads, should limit themselves to three or possibly even two boards. 

    While such reductions are likely to be contentious in some quarters, some serious benefits are likely. These include a larger pool of directors; a more diverse set of contributions; higher levels of engagement; and, crucially, better decisions (less groupthink). Overall, directors would have more time to govern well. The only downside I can see is the reaction from the very directors who wish to protect their positions and status. But that's probably a fight worth having, don't you think?