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    On coping with growth...what is the Board's role?

    Governance Management Performance Strategy
    There have been several interesting developments at sharemarket darling Diligent Board Member Services recently—developments that merit discussion and comment. Last week, Diligent, a high-growth, publicly-listed company, announced that it had incorrectly recognised some revenues relating to new customer agreements. Then, at the AGM held this week, the Board announced that no dividend should be paid in 2013—despite strong revenue growth and cash reserves—and that consideration is being given to dual market listings. Individually, these announcements seem relatively uneventful. However, when read together, they raise some interesting questions of governance:
    • What role is the Board actually fulfilling as the company copes with growth?
    • Does the Board really understand how the executive is progressing in terms of strategy implementation and the management of risk?
    • Why did the Board's Audit Committee not detect the revenue recognition error, particularly as the scale of the error was not insignificant?
    • How clearly defined are the company's strategy and governance practices?

    High rates of growth naturally present challenges for most companies, and this latest series of announcements suggest Diligent is by no means exempt. All power to the Board though, because it has recognised that it is experiencing stresses and strains, and it seems to be committed to resolving them. It will be very interesting to see how the Board responds, particularly in terms of the strategic decisions it makes to redeploy resources and adjust processes, in order to secure the next stage of business growth.
  • Published on

    Report: Most company failures are failures of governance

    Governance Performance Research Strategy
    A recent study, conducted by UK firm Reputability LLP, has found that failures of governance are at the seat of most company failures. A lack of [governance] skill and an inability to influence management were cited as the root cause of 88% of the failure cases studied. Gosh, that's nearly nine out of every ten failures attributable to poor governance! Information asymmetry, a tendency to rely on quantitative data (numbers) and poor 'soft' skills were identified contributing factors. The full report is available, for a fee, here.

    This report is an indictment on governance. It clearly exposes an underlying problem with governance. Boards, in general, are not operating effectively. I'm not particularly surprised by the findings of this study. Most corporate Boards operate within a framework called 'agency theory', whereby an adversarial relationship between the owner's representatives (the Board) and management exists. The Board sees its role as that of a policeman, to monitor and control management, in order to protect the interests of the owner(s). In such situations, trust is typically low, reputations are carefully protected, and information is shared carefully and sometimes under duress.

    The tragedy is that agency theory remains the dominant governance framework—in the western world at least—despite a seemingly endless body of evidence that shows companies are not well served by it. Perhaps this report might prompt Boards and shareholders to take stock, and consider other governance frameworks whereby Boards and management actually work together to maximise performance. After all, the evidence is compelling. Is that asking too much? 
  • Published on

    Nailing down core purpose...properly

    Governance Management Performance Readings Societal Wellbeing Strategy
    The core purpose of most organisations is to maximise its performance—whether it be a not-for-profit agency, a government department, a faith-based group, a health provider, a commercial enterprise, or any other organisation. The definition of performance differs from organisation to organisation differs, of course. NFPs measure performance in terms of services provided, whereas commercial enterprises generally measure performance in terms of wealth creation, for example.

    Notwithstanding this honourable goal of maximising performance, many organisations struggle to perform as they'd like. Often, regulatory frameworks and internal confusion (over purpose, strategy and operational priorities) divert attention and resources away from the "business" of the organisation. Why is this? I'd like to suggest that many organisations are not entirely clear about why they exist—even though they think they are.

    When I'm asked to help an organisation with its performance, one of the first things I ask about is core purpose. Sometimes a clear statement is provided, but only sometimes. More tellingly though, the underlying values and belief system—upon which behaviour is based—is generally not nailed down. Organisations are complex, socially dynamic entities, and even the best laid plans can be readily undermined by dissenting (and sometimes well meaning) individuals or groups. And therein lies a root cause. High performance is generally contingent on having a clear purpose and an agreed set of values to guide behaviour and decision-making. Just ask the CEO of any successful enterprise.
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    On changing the face of local government...

    Governance Societal Wellbeing Strategy
    Have you ever wondered how the money paid to local councils is spent? Or, more importantly, whether it is spent wisely? These are important questions of governance. Many column-inches have been written on these questions over the years. However, I continue to be troubled by these questions because, on the surface, there is much wastage, and that wastage is inhibiting economic development and improvements in societal well-being. Here's two examples from New Zealand:
    • Christchurch, the garden city devastated by a series of major earthquake events: The City Council and the Regional Council have become engaged in an accusatory finger pointing battle which is paralysing progress towards the rebuilding of the city. Having two agencies overseeing the same geographical area—albeit with different remits—is hardly conducive to an effective, coordinated rebuild of the city.
    • Wellington, the capital city: The "city" is actually four cities (Wellington, Porirua, Hutt, Upper Hutt), all of which are separately governed with local council structures and costs. This piecemeal approach to local government has provided jobs for four Mayors, four sets of Councillors, four CEOs and four duplicated sets of staff and services. Oh, the wastage.

    These models—the two-tier agency model (City and Regional Councils) and the multiple-small-agency model (Wellington)—are hardly conducive to the cost-effective provision of infrastructure services. How can any city hope to be a strong and vital contributor an economy when there is bickering and fighting within? A body cannot hope to survive with two heads. A family (city) divided cannot prevail. The role of local government is local infrastructure. Far too much money is wasted on duplicated effort; and on middle management, communications and so-called consultants. Lots of activity (seemingly) but little in the way of tangible progress.

    Thankfully, moves are afoot to reform local government. Wellington looks like following Auckland's lead (of one civic agency), although agreement on the best model is yet to be achieved. A smaller, coordinated civic agency can only be good for economic growth and societal well-being. If less money is spent on excess and duplication, more money should remain in the pockets of local businesses (to drive growth) and citizens (improve their well-being). The face of local government needs to change—the finger pointing and power games have gone on long enough. 
  • Published on

    On vision, core purpose and related matters

    Management Performance Research Strategy
    What role does "vision" have in the modern organisation? Is such a thing still relevant and, if so, who should "own" it? The question of vision has been a bit of a hobby-horse of mine for over a decade now, particularly when I've been asked to help with strategic planning. A discussion on the Institute of Directors group page over at LinkedIn brought the issue to the surface again this week.
     
    I must admit to being a doubter when the wave of books, seminars, consulting engagements promoting the vision and mission statements first flowed across the business community in the 1990s. While considerable money and effort was expended on the creation of some quite wonderful statements, many of which were printed and displayed for all to see, the gains in productivity and business performance were questionable in most cases.

    Vision is typically expressed as some aspirational sense of what an organisation seeks to achieve (a big goal, if you will). It addresses "what", a key question that all stakeholders need answered. But people don't get behind things or targets, they get behind causes. It should come as no surprise therefore that vision "leaks", and that staff are naturally sceptical, particularly when vision statements are too ambitious as many are. 

    Vision alone is not sufficient however. For sustained effort, people need to know "what" and "why". Core purpose is much better, because it addresses both questions. Core purpose incorporates the vision (what) and the underlying driver/cause (why). A good statement of core purpose is succinct, self-evident and realistic. It should be developed by the Board because, ultimately, the Board is responsible for the purpose of the organisation, on behalf of the shareholders. The core purpose should be owned by everyone. Notwithstanding this, the challenge of motivating the people and aligning their effort to move the organisation towards the core purpose is no easy task. I guess that's one reason why good CEOs are paid so much! 
  • Published on

    Should non-executive directors own company shares?

    Governance Performance Research Strategy
    I've often pondered the question posed in the subject line—not only from a personal perspective, but also from an independence/critical thinking perspective. This is a vexed topic, because many owners wish to occupy a seat in the boardroom themselves, either to influence company growth and development (a healthy motivation), or simply to keep an eye on their asset (not so good).

    The key issues to be grappled with when considering the question are influence and independence. Will the holding of shares influence the director to make certain decisions differently than if they did not own shares? The owning of company shares (by directors) is probably advantageous to engagement and commitment—so long as independence in decision-making is preserved, and decisions are made in the best interests of the company. However, if the answer is "yes" or "maybe", then the best answer to the topic question is probably "no". Either the non-executive director should not own company shares, or if they wish to continue to own company shares, they should consider resigning their position.

    The reasoning for my conclusion is as follows. Directors are required to act in the best interests of the company (in New Zealand, at least). In so doing, a primary task of a director is to make decisions. If a director was to make a different decision based on their ownership of shares, then clearly their decision-making is influenced (and potentially conflicted) by that ownership. Arguably, they are no longer acting in the company's best interests, but those of the shareholder, of which they are one. In such cases, the director is no longer meeting the legislative requirement. I wonder how many directors, particularly of smaller companies, inadvertently find themselves in this position?