A Cruel and Unusual Punishment?

Although he has been in the role unofficially for at least a month, Geni-i boss Chris Quin yesterday took over formally as Acting CEO of Telecom for a couple of months, between Paul Reynolds’ departure last Friday and Simon Moutter’s arrival on 1 September.

It’s not unusual to appoint a senior executive into the Acting CEO’s role. But this is the first time I can remember a board appointing someone known to have been a candidate for the role, and one who publicly acknowledged his “disappointment” at having missed out, when he sent a note to his employees on the announcement of Mr Moutter’s appointment.

I know nothing of the Board’s thinking on this, but this seems an unusual strategy: “Chris, here’s the prize you really wanted. Try the seat for a couple of months. Once you get comfortable and used to it, we’ll snatch it back from you.” 

On the other hand, there’s always a risk for a Board that values and wants to retain a senior executive who has failed to win the top job: importing an outsider for a short time, over the head of Chris and any other internal candidates who also missed out, might have been an even greater risk.

I have great respect for the Telecom Board, and its Chair Mark Verbiest ... which makes me wonder whether he doesn’t have a rather more devious plan: “Here, Chris, try the hot seat for a couple of months: by that time, I think you’ll realise you’re having much more fun where you are.”

Regardless of what the Board was thinking, let’s wish Chris well in his brief tenancy of the Corner Office at Telecom.

Disclosure: 

I chair the NZ Telecommunications Forum, the technical working body of the industry. This role does not involve direct interaction with either the board or executive leadership of any of the main telcos and the opinions in today's musing are based solely on my own observations after reading publicly available information.

It's the little things that count

A tip of the hat to Auckland International Airport Arrivals this morning.

Arriving on SQ from a week in Jakarta, we parked at one of the more distant gates. Doors were open at midday. After walking to Customs, with a stop at Duty Free, collecting my suitcase, clearing MAF, re-checking my bag to Wellington and following the Green Line for 10 minutes to the Domestic terminal, I was in the lounge 35 minutes later.

By my count, five organisations contributed to that - after I'd left SQ's care. Each of them had only to complete a small routine task, and the combination of all five made for a very good experience of arriving home. So often quality is a matter of getting lots of little things right, rather than one big thing, isn't it? Yet how often is the entire experience spoiled by one of those links failing to get it right first time?

As an afterthought, when I arrived at the domestic lounge, I was told that Wellington's weather was marginal and "We're sending the flights off one by one," which made me wonder if a bunch of former fighter jockeys has taken over the airline while I was away, and if they're now operating formation departures to solve peak hour congestion??

Charles Darwin and the Insurance Company Board

As a New Zealand taxpayer – and therefore collectively on the hook for a possible $0.5 – $1.0 billion support package (read ‘bailout’) – I was delighted to see that the Government has appointed an experienced insurance professional, John Pritchard, to the board of AMI Insurance.

It may come as a surprise – as it did to me when I read AMI’s latest annual report – to find that not one of the existing board members appears to have a background in either insurance or risk … unless you count the ownership of racehorses in the latter category. I know, and have considerable respect for, some of the directors: an outstanding retired banker, a leading former retailer, a successful market gardener, and so on. But nobody about whom I could find any experience in the industry in which AMI operates.

Going one step deeper, the Chief Executive’s own earlier career was mainly in banking, not insurance. When you look at the executive management team, you see Heads of Customer Division, Customer Experience, Marketing and Products, all of which helps us to understand how the company has been so successful in growing market share over the last decade, from a relatively small Christchurch-based insurer to one of the leaders nationwide.

However, nobody in the top team has a title that suggests deep involvement in risk management. You have to delve to what appears to be at least third tier to find someone described as Actuarial Team Leader.

I doubt whether anybody could have foreseen the destruction caused by the seismic bombs that hit Christchurch last September and more tragically on 22 February. But a part of risk management is about assessing events of low probability but high impact.

Much of AMI’s business was, not surprisingly, centred on Christchurch, where it had acquired a large share of the House and Contents insurance market, and a disproportionate concentration of its portfolio. And I have read that its reinsurance rates were among the industry’s lowest. Not being from the industry, I wouldn’t have a clue about appropriate reinsurance levels, but I do understand a little about concentration of risk.

What bothers me is that I’m not convinced that anybody else on the board would have had much more knowledge, so would not have been in a strong position to ask whether the reinsurance rates were too low for the high concentration of the company’s exposure.

My daytime business is ‘Building boards into leading teams’, and I’m the last person to suggest that everyone at the board table should come from the same industry background. To the contrary, I believe that having a range of backgrounds and perspectives is vital in achieving effective board oversight. However, having nobody at the board table with a background in the industry seems to defy common sense – because directors must be sure they are receiving the information they need in order to make good decisions. If you don’t have somebody with experience, you won’t know what you don’t know.

Without knowing the background, I can only make some assumptions about AMI’s board practices and (lack of) evolution. The Chairman has been on the board for about twenty years and several of the other directors have been there for a long time, while the CEO was appointed more than 15 years ago.

I’d imagine that some of those relationships had grown quite comfortable during the good times of rapid growth. One of the dangers when this happens is that a director who wants to ask hard questions, challenging the strategy and management’s assumptions, can feel increasingly uncomfortable and isolated if he (at AMI they’re all ‘he’) starts to ‘rock the boat.’ This is why it’s so important that a healthy board culture doesn’t just accept, but insists on dissenting views being aired.

I’d also guess that, as the business grew rapidly, the board’s priorities reflected its experience in growing businesses and satisfying customers, and didn’t focus adequately on changes to its risk exposures or concentration of its portfolio.

The lack of board turnover, combined with the directors' industry backgrounds, seems to have resulted in a failure to grasp the increasing significance of such agenda items, in line with AMI's changing position in a rapidly changing world. As Charles Darwin observed (see my earlier post on his anniversary a couple of years ago):

• It is not the strongest of the species that survive, nor the most intelligent, but the ones most responsive to change.

A failure to recognize this at AMI’s board table over many years may well cost you and me up to a billion dollars. Let’s hope Mr Pritchard can make enough of a difference to prevent this from happening.

Is banking any different from other industries?

I returned home recently from a week working with the Global Corporate Governance Forum (an arm of the International Finance Corporation, which in turn is a unit of the World Bank: see www.gcgf.org) in Indonesia, where we delivered a “Training of Trainers” (ToT) programme, aimed at teaching directors of banks to provide Corporate Governance training to others in their sector.

One of the first things that struck me was the calibre and influence of the 23 participants. Most were senior Indonesian bankers, with some from the Philippines and two from the Institute of Directors in Thailand. One introduced himself by telling us his family owned the bank where he was chief executive, another was a respected company director from the Philippines and a third a former director of the Central Bank of Indonesia. The overall awareness of global banking regulation and understanding of corporate governance principles and practice were also impressive.

While we were preparing, one of my fellow faculty members posed a question that made me stop and think: "Are the principles of corporate governance for banking any different from those in other industries?" This raised the further question of whether banks are fundamentally different from other types of business. I think that two aspects do make banks different:

• The first is that every business is connected in some way to at least one bank, and
• Second, unlike most industries, banks conduct a huge amount of business with each other as well as with the rest of the economy, so the failure of any major bank will likely weaken its competitors too.

As a result, if we assume the purpose of good corporate governance as being, in Sir Adrian Cadbury's words 'to align the interests of individuals, corporations and society', I'd argue that the principles of good corporate governance apply in banking as in any other sector - but that they're even more vital in banking. This is largely because of this interconnectedness and inter-dependence. Just think 2008-2009...

With this as a start point, I believe that our GCGF faculty was well motivated to make the ToT week a success. We were well supported with the new 'Governing Banks' Supplement to the usual GCGF corporate governance training manuals. This was the Supplement's first outing, so one of my tasks was to adapt some of the generic presentations to incorporate the banking-related material. While it required long hours and very early mornings of intensive preparation for each day (think ‘Just in Time’ delivery - in a services context!), it all came together. I greatly appreciated the quality of the background information in the Supplement, which meant I did not have to do much of my own research or sourcing of information.

Our teaching faculty consisted of a specialist in adult learning, Mary Jo Larson, who teaches at Columbia University; Sidharta Utama, an experienced director and respected expert in corporate governance in Indonesia, who teaches at Universitas Indonesia and who chairs the Board of Management for the Indonesian Institute of Company Directors; and me.

We were in good company; the participants were largely complimentary at the end of the week; and I for one learned a great deal from the faculty and the attendees!

The key task now is to build on the success and energy for this first programme - supporting the local efforts to spread the training in Indonesia, increasing the reach of the Indonesian Institute, and running further courses while the memories remain fresh. I look forward to all of that.

A small bouquet

A small bouquet today for the vigilance of New Zealand's much-maligned AvSec employees - those people who run the scanners, and tickle you under the armpits with their metal detectors when you're getting onto a flight: I've just returned from a 10 day overseas trip, with repeated baggage checks through Singapore and Abu Dhabi on the way back.

After 24 hours en route, I reached the scanner at CHC, for the final leg to WLG... "May I look in your bag please sir." In my carry-on was the old Swiss Army knife that I always travel with (you never know when you'll find a horse with a stone trapped in its hoof), but invariably - until now, it seems - I've made sure it was in my checked baggage. I know I used it in Dubai earlier in the week (I can't remember why... a camel with an embedded stone?) and I must have dropped it back into the wrong bag.

Even better, Mr AvSec let me keep my knife - it's within domestic flight tolerances, but not international (no - I didn't ask the logic of that).

And what does this have to do with a corporate governance blog? Not a lot, except to show yet again the triumph of substance over form: Homeland Security departments can develop all the questionnaires, body scanners and x-ray strip technology they like, but unless someone actually looks at the screen it seems a futile investment of effort, overtime and taxpayers' dollars.

Long live balanced risk assessment... and those of us who fly regularly.

Travel safely.

I'm only a director... Yeah, right.

Auckland mayor John Banks was quoted recently as dismissing his involvement in one company’s troubles with the explanation, “I’m only a director.”

How much should a director know? How responsible should he or she be for what goes on in the company?

It's quite reasonable that non-executive directors (who by definition don’t work in the company day-to-day) don’t have the detailed operational knowledge that we would expect of the chief executive and senior management.

I’m no lawyer, but the Companies Act seems quite clear: the board is responsible for management of the company. Even when the board delegates management to the chief executive, as normally happens in larger companies, the board remains responsible. So it’s understandable that, when a company runs into difficulties, all directors - including the non-executives - come under the microscope.

It may come as a surprise, but the courts won’t normally try to second-guess the commercial decisions a board makes: it’s not a crime to make poor decisions - we’ve all done that - or sometimes even to go broke. However, what the judges will consider is whether, in making those decisions - good or bad - the directors complied with their legal obligations.

In most cases, the main test for directors (section 137) is whether they have acted with “the care, diligence and skill that a reasonable director would exercise in the same circumstances.” Where I think that bar has been lifted a little in recent years is in what we expect a reasonable director to do. At the very least, the days of what we used to refer to as a “sleeping director” (the one who lends his or her respected name to the company’s letterhead and shows up for the annual general meeting, but makes little further contribution) are - or should be - past.

More positively, thanks to some recent cases, we have a few pointers about how the courts define a “reasonable director.” Among these,

• A “reasonable director” is one who turns up at board meetings - anyone who’s been around for a while will know that this is not a universal attribute of all directors. It’s no defence that you missed the meeting where the board took a bad decision. The logic here seems to be that the company has a right to the wisdom of its directors, so they in turn have a responsibility to show up. We can all applaud that one.

• A “reasonable director” is one who takes an active interest in the affairs of the company, and asks for the information he or she needs, to understand the company’s business and financial position. They have a duty of diligence and care to make sure - within reason - that the information they receive is complete and accurate. The longer I sit at board tables, the more I realise that one of the most important skills of a good director is the ability to ask good, thoughtful, questions, and to understand the issues well enough to ask the follow-up, “So, if that’s the case...”

From what I understand of directors’ duties, and of the courts’ attitude, I don’t think Mr Banks’ alleged comments would provide him much legal defence... Or even whether they’d sway that other jury, public opinion.

Biting back? When, and how?

In the last few weeks I’ve seen two sad episodes of former employees taking shots at their former boss or their successor. When do you “kick and tell”?

If you want people to know they can trust you, and perhaps to consider offering you a senior role in the future, the simple answer is, “Never”.

The first case that caught my eye was an ex-employee of a multi-national organization, who, in my view, took advantage of his high-profile communications background to celebrate, via his blog, the transfer of a former work colleague out of a very visible management position, into a more internally focused role. His colourful language included references to “this person’s malicious self-service” and “hundreds of venomous emails...” I expect you can fill-in the rest.

I have met the blogger and his target and I understand that they might not get on, professionally or otherwise. But this public e-flogging seems likely to ricochet, as well as damage its target:

• The target (the bloggee?) is tarred by one person’s allegations, which are now stored on hundreds of servers, and there’s no realistic right of reply (call me outdated, but has the idea of “natural justice” totally disappeared?). As a result of this blog, is there any realistic hope that this accusation can ever really be buried? Surely the better approach - if the writer had been genuinely well-intentioned - would have been to raise it with the individual in person, or if that didn’t work, confidentially with the person’s boss, the CEO?

• For the blogger, on the other hand, I’d recommend that any potential employer or client should read his blog post and think carefully of what might happen if they too were to fall out later. As a result, the new employer or client might well ask themselves, “Why take the risk?”

So, no winners from this.

Then, a couple of weeks ago, at the height of Telecom’s troubles with its new mobile network, the company’s former CEO, Theresa Gattung, indulged in the print version of kicking her successor with heavy boots while he was bruised and flat on the canvas.

Of course she will have insights that most of us don’t and probably there will be some truth in her analysis of the issues. But one thing she should have learned in her time as CEO is that it’s easy to offer gratuitous solutions from the touchline; it’s much harder to apply them when you’re on the field (what the Americans call a “Monday-morning quarterback”).

Among her more headline-grabbing comments was rather disingenuous criticism of her successor’s salary, which you could read as either sour grapes or simple envy - neither of which fits well with a former chief of the country’s largest listed company.

I don’t expect Ms Gattung needs to look for another job, since she was well remunerated in New Zealand terms - even if the amount was, as she noted, far less than that of her successor. So perhaps the fallout for her won’t amount to much. Her comments may even help to sell a few more copies of her memoirs. But a Board looking for a chief executive, or for another Board member, would hope that confidentiality and loyalty will endure beyond the term in office.

From a practical governance perspective, what goes on in the Boardroom isn’t usually that sensitive - you could publish much of it without a second thought. However, if you’re concerned that you might be misquoted or taken out of context later, you will inevitably lose the spontaneity and full, open discussion that are so valuable in getting to good decisions.

So, again, if someone shows a tendency to “reveal all”, a Board might be inclined to ask, “Why take the risk?”

Many years ago, an executive headhunter had a sketch on his wall: an outline of the lower half of a wading bird. The caption read, “Remember that the toes you tread on today are attached to the feet, that are joined to the legs, that support the backside you may have to kiss tomorrow.”

Tread softly.