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    Every stick has two ends

    Accountability Corporate Governance Decision Making Effectiveness Performance Tough Questions
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    To suggest that the COVID-19 pandemic is the news story of the year is, as they say, a bit of an understatement. And it is easy to understand why. The personal, community and economic impact has been dramatic. Many thousands of people have died; untold millions have lost their jobs or soon will; community life has been put on hold; and economic activity has, largely, ground to a halt.
    As of today (14 April), nearly 2,000,000 people are known to have been infected by the SARS-CoV-2 virus. The actual number is unknown, but it will be far greater, without doubt. About 120,000 deaths have been linked to the virus as well—although most were due to co-morbidities. Only a small portion of the reported fatalities were directly due to COVID-19 (data from Italy suggests 12 per cent).
    Understandably, most of the reportage has concentrated on the headline numbers, decisions by politicians, and the public health response. But personal stories have featured too. As you would expect, partisan biases are also on display: Trump has been slammed and Ardern lauded. 
    Despite the seemingly strong alignment apparent across the reportage, the picture being painted is far from complete (the situation is still developing, after all), and it may not be accurate either. ​Underlying data may be misunderstood, misinterpreted or missing. Yet decisions need to be made, and decisions have consequences, just as sticks have two ends.
    The challenge for politicians is no different from that boards of directors face all the time. The best and most effective boards are those who seek counsel from a diverse range of perspectives (including competing options) before they make a decision.
    This article, positioned prominently on the front page of the Dominion Post today, highlights the emerging situation in New Zealand and the challenge for political decision-makers. It is well worth reading, as much for the language used as the story itself. The first sentence in the print edition read, "A group of public health experts has broken ranks on the Government's lockdown strategy ...". (The online edition was subsequently edited, at 8.28am, to read, "A group of public health experts has challenged the Government's public health strategy ..."​.) The cited experts argue that, with the border secure, various restrictions in place can (should) be relaxed, to enable people to return to a level of normalcy. This view is at odds with the advice the government seems to be relying on, but it remains valid as an option nonetheless and, therefore, merits consideration. 
    Whether the government decides to balance the best interests of the economy and society, or to hold tightly to the current course, should become clear soon. Regardless, its decisions will have consequences, just as every stick has two ends. Politicians, as boards of directors, ignore this truism at their peril.
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    Governing at distance: one director's experiences

    Decision Making Effectiveness Governance Performance
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    The rapid spread of the COVID-19 virus has shaken communities and commercial activity around the world, to the very core. Since late February, strict restrictions on human movement both between countries and, now, within communities have been imposed, in the hope of containing the virus and, in one case, of eradicating it. The scale of the impact on lives, social structures and economic activity has yet to be measured, but it will be large, I suspect. The scars will remain tender for some time in many cases. 
    Unsurprisingly, many people have been inventive in response to the situation they now find themselves in. Neighbours are meeting at a distance, and internet traffic has grown exponentially as people have taken up online entertainment options and relied heavily on social media to keep in touch with each other. All of this is to be expected; humans are social beings, after all.
    The vacuum left from the pausing of economic activity has been filled by creative thinkers and opportunists offering all manner of webinars, 'best practice' check lists and other forms of guidance to help individuals, groups and businesses reconfigure their lives and businesses. The Internet is now awash with them. Some are well-informed and helpful, but most of the ones I've seen are little more than attention-seeking noise.
    My own work patterns have changed too, mainly as a result of the restrictions on movement now in place. These include using electronic communications tools such as video conferencing in place of in-person board, coaching and other client meetings; and the telephone and email to keep in touch with colleagues and clients. The following points summarise my experiences as I have sought to govern at distance this past month:
    • Online board meetings are hard work. Zoom has become, overnight, 'the' tool of choice for teams and workgroups who need to meet together. I have used zoom many times since the lockdown, including numerous one-on-one interactions, two board meetings, a panel interview and discussions associated with a CEO recruitment. The one-on-one interactions and the panel interview were very productive. But the board meetings were more demanding: one was reasonably productive, the other was hard going. Let me explain:
      • In one board meeting, the chief executive, board secretary and directors all connected in from different locations—no two people we seated together. This meant that everyone was interacting with the computer screen. Also, the participants all know each other well; they are a tight unit, underpinned by high levels of trust and confidence in each other. The meeting was three hours long (a little shorter than the normal in-person meeting). The shorter-than-usual agenda was dominated by matters associated with the crisis, and the chair stopped the meeting every hour so participants could stretch, grab a drink and use the bathroom. These things (everyone connecting remotely, a tight agenda, comfort breaks, trust and confidence) laid a foundation for a focussed discussion and some good decisions. However, looking at a computer screen for three hours was both physically and mentally demanding, especially when using headphones or earbuds. My concentration reserves were exhausted by the end of the meeting. Also, interaction between the chair and board secretary, who normally sit beside each other, required a few conscious interruptions, whereas normally such exchanges did not interrupt discussion at all.
      • In the other meeting, the chair and one of the directors were located remotely from the remainder of the directors and the business manager. Some of the directors had not previously used video-conferencing in a group situation. The directors seated together looked at the computer screen when the chair was speaking, but otherwise they tended to look and interact with each other. Also, the computer screen the group was using was located in an open office space. While no one else was in the room for much of the meeting, three or four people did pop their heads in and, once, a person used the room as a thoroughfare. The two main observations from this experience were that the two directors located away from the others did not engage as fully as they normally do, and that interaction quality was compromised due to both the unfamiliar surroundings and the interruptions. 
    • Technical challenges can get in the way. Brief sound delays or video outages break meeting flow, and people, naturally, loose concentration quickly. If distortion and background noise are to be minimised, good equipment and connections are a 'must'. I've also found that if people place their laptop or tablet (or, worse, their phone) on a table-top, the result can be disconcerting—the view up people's noses makes concentration difficult! It is far better to place the device on top of a box or pile of books to lift the camera to eye level. 
    • ​Most things take (me) longer. I have led three video conference meetings in the last week or so, two of which were scheduled board meetings. Though unintended, my behaviours were a little bit different from that in in-person meetings. Differences included summarising the discussion more often; calling on people by name to draw them out (normally, a visual cue was sufficient); and adopting a more formal approach to meeting protocols, especially moving and putting resolutions. Consequently, meeting flow was impaired somewhat, relative to in-person experiences at least.
    • Business productivity is down, not up. Managers have told me that everyday interactions are proving more difficult as a result of people being in different locations, and that supply chains are not running smoothly because movement is restricted (despite logistics being named as an essential service). Also, operational staff are taking more care as they go about their work; observing distancing (curiously the 2m distance requirement is often closer to 3–4m in practice!) and personal hygiene protocols. Consequently, goods are not arriving when expected and business processes are taking longer than normal, with the follow-on impact on productivity.
    • Most boards will (probably) revert to type. ​The human condition is driven by social interaction—we are not created solitary creatures. Yet the COVID-19 outbreak has forced us apart—social distancing (actually, physical distancing as I noted several days ago). Various correspondents have predicted that working from home will become normal, permanently; and that videoconferencing will supplant in-person exchanges. I am not convinced of either. The human need to be together is too powerful. Also, communication effectiveness is constrained when you can't see another person's eyes or gestures, or have a brief side discussion with a colleague. Almost all of the directors and executives I have spoken with over the past ten days have said they are looking forward to returning to a level of normalcy, which, for them, specifically means in-person interactions.
    One final point. These are my experiences. Some may be familiar, others less so. Regardless, if you have any questions or comments, please get in touch. If you are prepared to add your experiences, as similar or different as they may be, I'd be delighted to hear them and am sure others would be too. Please leave a reply below.
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    Governing well, in the face of a crisis

    Accountability Corporate Governance Decision Making Governance Performance Value Creation
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    Information (and mis-information) about the spread of COVID-19 around the world is clogging our airwaves, inboxes and social media feeds as quickly as the virus itself is spreading. But amongst it all, there are some things we can hold as self-evident. Many people are suffering, some are dying. New phrases are entering the lexicon, such as, social distancing (should be physical distancing, I think) and self isolation. Governments are responding with a variety of controls to limit movement. Borders have been closed, and lockdowns are being imposed in some areas. Airlines have reduced capacity, grounding fleets. Many businesses, especially SMEs, are in turmoil. People are on edge—lives have been put on hold.
    While COVID-19 has spooked many people, not to mention the stock markets and wider economy, life must go on—and it will, albeit with some adjustments, of course.
    The challenge for those who direct the affairs of companies—boards—is one of governing well in the face of what is, patently, a very different environment from that which existed even two weeks ago.
    Businesses face continuity and safety risks every day. Routinely, staff and managers spot, assess, prioritise and respond to operational risks every day; that is their job. But when risks have strategic implications (i.e., an occurrence is likely to have a major effect on strategy execution, future business success or even company viability), the board must become involved. COVID-19 is one such risk. The board needs to understand the potential short- and longer-term impact (using information from credible sources and tools such as scenario planning, for example), consider various options and make informed decisions.
    Some practical questions that the board may wish to consider include:
    • Has management made changes to the work environment (including remote working options, physical barriers, closing sites, etc.) to ensure the safety of all staff, customers, suppliers and any visitors?
    • What additional financial resources need to be released to support continued business operations, and how will they be provided?
    • What is the likely impact on short- and longer-term income, and do any adjustments need to be made to reduce operating expenses (including, potentially, suspending or releasing staff) to maintain viability?
    • What capital projects can be deferred to release funds to support working capital demands?
    • ​Should the board itself use on-line meeting or video conferencing tools instead of meeting in person?
    • Should the board meet more frequently, rolling its sleeves up in support of management and for more timely decision-making?
    One final point. COVID-19 is no longer a strategic risk. It is upon us. Boards everywhere need to deal with it as well as they can, given the most reliable information available, with the best interests of the company to the fore. That means providing close support to management; more so if big decisions are needed, such as releasing staff or partial closures. However, and most importantly, boards should not panic. Neither should the board react to suggestions being advanced by some that an event such as the COVID-19 outbreak should be seen as a catalyst to redefine corporate governance. Corporate governance remains corporate governance—the means by which the company is directed and controlled. What might be appropriate though is a review, to consider how the board practices corporate governance. But that should wait until the current crisis in in hand. Fix the problem first, then learn from it.
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    Hiding in plain sight

    Accountability Corporate Governance Decision Making Effectiveness Governance Performance
    A kerfuffle has broken out on the East Coast of the US, between Lucian Bebchuk, an esteemed professor at Harvard University, and Martin Lipton, partner at New York law firm Wachell, Lipton, Rosen & Katz. Specifically, Lipton has mounted a strong attack on an article published by Bebchuk (a critical examination of 'stakeholder governance'). That Lipton has objected should not be surprising. After all, he is a lawyer with vested interests and he has a long record of promoting stakeholder governance.
    This is what Bebchuk asserted:
    Stakeholderism, we demonstrate, would not benefit stakeholders as its supporters claim. To examine the expected consequences of stakeholderism, we analyze the incentives of corporate leaders, empirically investigate whether they have in the past used their discretion to protect stakeholders, and examine whether recent commitments to adopt stakeholderism can be expected to bring about a meaningful change. Our analysis concludes that acceptance of stakeholderism should not be expected to make stakeholders better off. 

    Furthermore, we show that embracing stakeholderism could well impose substantial costs on shareholders, stakeholders, and society at large. Stakeholderism would increase the insulation of corporate leaders from shareholders, reduce their accountability, and hurt economic performance. In addition, by raising illusory hopes that corporate leaders would on their own provide substantial protection to stakeholders, stakeholderism would impede or delay reforms that could bring meaningful protection to stakeholders. Stakeholderism would therefore be contrary to the interests of the stakeholders it purports to serve and should be opposed by those who take stakeholder interests seriously.
    Lipton's counter to these assertions was strident:
    We reject Professor Bebchuk's economic, empirical and conceptual arguments. They are ill-conceived and ignore real-world challenges companies and directors face today.

    As we have discussed, new laws—such as federal legislation of the type proposed by Elizabeth Warren—are likely to sweep far too broadly and risk substantial destruction of corporate value. They are also unnecessary if companies and investors embrace stakeholder capitalism as contemplated by The New Paradigm and as adumbrated by the actions Professor Bebchuk condemns.

    We recommend that companies and boards monitor and review their stakeholder and ESG profiles as a matter of increasing priority, and engage regularly with their major investors on these issues.
    This debate exposes something awkward—that when partisans announce their views people react, especially if they denounce other perspectives. This tactic may well pique interest and sell column inches, but it rarely results in viable outcomes that can be sustained over time. 
    My own research, and experience both as an advisor and serving company director, suggests that either-or argumentation, a characteristic of determinism, is deeply flawed. To pursue profit as an exclusive goal inevitably results in selfishness and inequity. Similarly, the pursuit of priorities espoused by ESG proponents introduces a another, and not insignificant, risk—of exposing the companies and the economy more generally to an 'Icarus moment'. 
    Larry Fink, Chairman and CEO of Blackrock, summed things up well in his January 2019 letter:
    Profits are in no way inconsistent with purpose—in fact, profits and purpose are inextricably linked. Profits are essential if a company is to effectively serve all of its stakeholders over time—not only shareholders, but also employees, customers, and communities. Similarly, when a company truly understands andexpresses its purpose, it functions with the focus and strategic discipline that drive long-term profitability. Purpose unifies management, employees, and communities. It drives ethical behaviour and creates an essential check on actions that go against the best interests of stakeholders.
    Fink's position highlights that a balanced perspective is probably 'best'. But how might it be achieved? The pathway may be hiding in plain sight. If the board is to fulfil its duty to ensure value is created over time, it needs to look well beyond selfish interests and motivations. This means considering the wider context within which the company operates, creating a viable strategy, determining appropriate 'performance' measures and only then governing accordingly. 
    Bebchuk was brave to call out the messianic assertions of the stakeholder capitalism camp. Perhaps Lipton might take stock, and meet with Bebchuk—the purpose being to explore the nuances of each other's views, in search of a more balanced understanding of the purpose of companies and role of the board.
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    Succession planning or disloyalty?

    Accountability Corporate Governance Decision Making Ethics Performance
    Dave Rennie, a rugby coach from New Zealand, has just been appointed as coach of the Australian national team, the Wallabies. This appointment has raised eyebrows, not only because of the passport the appointee carries, but because of the appointment process. 
    It turns out the Rugby Australia had been speaking with Rennie for six months prior to the appointment being announced. Superficially, this appears to have been a smart move on Rugby Australia's part; a succession planning exemplar. But was it, or was it an act of disloyalty against the incumbent, Michael Cheika? The incumbent only made his intentions clear during rugby's showpiece, the Rugby World Cup, vowing to resign if the Wallabies did not win the William Webb Ellis Cup. Cheika and Raelene Castle, chief executive of Rugby Australia, were hardly the best of buddies, for sure. But when does strength in leadership (Castle has form) cross the line, becoming bullying?
    This case exposes an interesting dilemma for boards of directors. When does the board's duty of loyalty to the incumbent chief executive cease? Is it reasonable, for example, to publicly support the incumbent while also scheming in the shadows to replace him or her? If the board finds itself in a position of lacking confidence in the chief executive (regardless of the reason), it owes a moral duty to both the chief executive and the organisation for which it is responsible to act both swiftly and with integrity. Rugby Australia appears to have done neither. While Castle probably operated within the law (she is on record as saying that formal contract negotiations did not take place until after the Rugby World Cup), the moral high ground was forfeited long ago. And that, sadly, places both Castle and the Rugby Australia in a rather awkward position.
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    How does your board rate on the 'trust' scale?

    Accountability Governance Leadership Performance Societal Wellbeing
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    Trust is one of those social building blocks that is crucial for getting things done with others. Board work by no means exempt. When directors a faced with making strategically-important decisions, they must rely on information from and interaction with their board colleagues, the chief executive and any other advisors who may have been invited to contribute. Then, after consideration and having made a decision, the board needs to follow through, by ensuring the decision is implemented well. But, and sadly, the  levels of trust both between directors and with external stakeholder groups is often lower than what is needed for effective decision-making. The following comments, originally published in 2016 by EpsenFuller (subsequently acquired by ZRG Partners), make the point deftly:
    Board directors today face a variety of challenges. Whether it is a case of corruption or the increasing threat of cybercriminals, their performance in dealing with these issues is the subject of considerable attention, explained The Huffington Post (Jan. 25, Loeb). Investors, consumers and NGOs alike are looking to boards for accountability in terms of company performance. Yet, a recent study found that public trust in boards of directors is lower than that of CEOs. A mere 44 per cent of survey participants claimed to have trust in a company's board—five per cent less than trust in CEOs. Influential constituencies are demanding that boards perform at exceptional levels while maintaining distinct independence from company executives.
    That some directors do themselves no favours (through poor behaviour, malfeasance, hubris and  failing to complete actions, for example) is self-evident. But all is not lost. High levels of performance are possible—if all of the directors commit to working together (both as a board and with management) and reach agreement on the company's core purpose; the strategy to be pursued to achieve the agreed purpose; how performance will be measured; and the values that will underpin behaviour standards, decisions, and everything the company does and stands for.
    Perhaps if more boards embraced this mindset (working together), with the company's best interests to the fore, the trust problem that generates so much tension (not to mention column inches) would gradually become a thing of the past. Is this expectation worth striving for, or do you think it is too ambitious?