Tags

  • Published on

    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

    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?
  • Published on

    The Fonterra crisis: a failure to learn from past lessons?

    Governance Management Performance Research Societal Wellbeing Strategy
    Fonterra, dairy industry giant and also New Zealand's largest company, has been in the news of late, for all the wrong reasons. Fonterra processes raw milk and exports 97% the resultant products for further processing and consumption in countries around the world.

    The cause of the recent events was a suspicious product test, which raised the possibility that the bacteria that can lead to botulism was present in a 38-tonne batch of whey product manufactured in early 2012. The whey product is used in the manufacture of infant milk formula, and botulism can be fatal. Understandably, the event became front page news, with flow-on ramifications in political, economic and tourism circles, very quickly. 

    At this point, I want to acknowledge that mistakes, unexpected events and crises happen. This is a fact of life. The test of one's mettle comes in the response.

    On the surface, it would appear that Fonterra has failed to manage the crisis well, despite an exemplar case being widely available. In 1982, packets of the then market-dominant Tylenol product were laced with cyanide. Seven people died from unknowingly consuming poisoned capsules. Johnson & Johnson's response to the crisis was exemplary. They immediately withdrew every box of Tylenol from sale, established a 1-800 helpline and actively sought media coverage. While Johnson & Johnson took a short-term hit, they emerged stronger than before. Compare that with delays in reporting the possibility of the problem to the authorities, and seemingly poorly briefed representatives at press briefings. And where was the Chairman?

    No doubt a review (or, more probably, several reviews) will be conducted to discover how the problem occurred; why it was not discovered earlier; what processing, communications, information sharing and other processes failed; and how the whole affair was managed. I hope that, in the process, someone thinks to look to other similar cases—like the Johnson and Johnson one—and to learn from them!
  • Published on

    On strategy: keep it straightforward

    Governance Management Performance Strategy
    I had the privilege of working with a group of 23 wonderful people yesterday. The task was to present the 'strategy' day of the IoD five-day Company Director's Course, the Institute's flagship professional development programme. The course is designed to provide a solid grounding in governance and governance-related topics. Delegates usually have some governance experience, although some do not. The strategy component explores a range of topics including the importance of strategy; the strategic planning process and formation of strategy; the role of the board; and, the importance of implementation and monitoring.

    As I worked with the delegates, I was reminded that the underlying foundations of strategic planning are actually very straightforward. Just four questions need to be answered:
    • When are we now?
    • Where do we want to go?
    • How do we get there?
    • How will we know?

    For organisations, this means understanding the environment the organisation operates in, confirming the core purpose and strategic objective(s), and then selecting strategies and action plans to achieve the objective. That's all. The rest can (and should) be treated as tactical actions, to be completed by management as part of the business planning process. 

    One final point. The output of the process (the plan) should be as straightforward as the process used to create it. A coherent plan—that fits on one or two pages—is far more likely to be understood and supported, than a large document with many pages of tables, lists and detailed analyses.
  • Published on

    On change-friendly CEOs and the preservation of reputation

    Governance Management Performance Research Strategy
    I posted a link to an interesting article about change-friendly CEOs on LinkedIn earlier today. The posting seems to have struck a chord with several correspondents—both on LinkedIn and via direct message—so I thought some additional comments would not be amiss. 

    One correspondent suggested that interest in recruiting 'change-friendly' CEOs is nothing new, that advertisements have called for such attributes and capabilities for many years. I agree, because I've seen many similarly written advertisements as well.

    So why is the Heidrick & Struggles report news? I suspect it's because there is a yawning gap between desire and reality: advertisements call for one thing, yet recruitment processes and decisions prioritise something quite different.

    In my experience, many directors—particularly of larger, widely-held companies—seem to be more interested in preserving their reputations than in embracing change. They tend to make 'safe' choices that don't rock the boat too much. Rather than making choices that will enhance the company's future position, directors often make safer choices, to minimise the chance of failure and any resulting damage to their reputations. Protecting against failure can be smart, but when the mitigation of risk results in staying within safe harbours, the only loser is the company itself. How can a company succeed in a competitive market if it does no innovate or change in response to changing environmental conditions?

    The Heidrick & Struggles report is timely. It demonstrates that people are now talking about the right things. But when will Boards and shareholders take note of such reports, and adopt a more positive approach to recruitment, corporate strategy and company growth? Soon, I hope.
  • Published on

    What corporate governance can learn from earthquakes

    Governance Management Performance Research Societal Wellbeing Strategy
    New Zealand endured a swarm of earthquakes earlier this week. The largest, at 6.5 on the Richter scale, caused damage and disruptions in Wellington. The CBD was 'shut down' for a day while damage was assessed and the area made safe. Thankfully, no one was seriously hurt. This morning, reports emerged that at least one heritage-listed building was too badly damaged for tenants to return. This highlights an interesting dilemma. We strive to preserve (and in some cases occupy) the past—hoping for the best—yet we need to plan for the future, lest unexpected events cause serious consequences.

    There are striking parallels between heritage buildings and corporate governance. Most directors know they are responsible for maximising company performance, yet most boards spend the majority of their time monitoring historical performance—looking backwards!
    Just as it is very difficult to drive safely if you spend most of your time looking through the rearview mirror, boards cannot hope to govern effectively if they spend the majority of their time reviewing reports and financial results. A glance to check progress should be sufficient. Directors need to take heed of this and change their focus, lest they inadvertently miss danger signs and run off the road as it were. Emerging research (including my current doctoral research, and an earlier project) suggests that time spent considering strategic options, developing strategy and making strategically important decisions—together with the executive—is time well spent.

    The earthquake event this week provided a wakeup call to building owners and occupiers in Wellington. An admiration of the past is not always the best option. Modern structures are needed to support modern society. Perhaps the experience gained through the earthquake can catalyse a change in the boardroom as well—from monitoring the past to planning for the future. Or am I hoping for too much?