The little things

I was unavoidably overseas this week, so I was away for an important Board meeting, where we were due to make a big decision that we’ve been building up to for over a year. I was keen to take part, so I had arranged for the Board secretary to call me from the boardroom conference phone so that I could join in. He had my mobile phone number and email address as well, in case of problems.

At the time the Board meeting was due to begin - an anti-social hour of the morning for me - I was ready, board papers open, questions prepared, waiting for the call. Nothing.

After 15 minutes, I texted the Board secretary. Nothing.

20 minutes later, I had a text saying they’d rung twice, but the hotel hadn’t picked up the phone, and the Chairman had (understandably) decided to get on with the meeting... and he doesn’t then like to be disturbed. A little later, when the Board adjourned for a cup of tea, I finally received a call from the Board secretary, who had got through this time, to give me a run-down on the discussion, and I was able to ask a few further questions.

We probably didn’t lose much in practice, other than about three hours’ sleep for me. But as I headed to breakfast a couple of hours later I saw the irony in my role as chair of the Board’s Audit & Risk Committee: one risk I hadn’t factored on Thursday morning was that a five-star international hotel wouldn’t answer its phone at 4.30am.

So often, in the end, it’s the little things that get you.

The chairman as 'super-CEO', or something else?

Earlier this month I saw a friend who had just been appointed the independent chairman in a medium sized business. As he went on about what he hoped to achieve, how he had a clear picture of what he wanted to do with the company, and so on, I sensed that he was falling into the classic trap of confusing the role of the chair with that of the chief executive - and perhaps saw it as some type of super-CEO position, or in his words the ‘ultimate decision-maker’.

For those who've never been in the position, this is a common misconception. When you look at the role of chair for the first time, it can be tempting to think that you’ve finally made it. But this can soon change: one of the first things you learn is that it's not your job to run the company. As an independent member of the Board - even as the Chair - you don’t have any executive authority of your own. (Having been in the CEO's position, I also know how frustrating, and potentially undermining, it is to work with a chairman who can't leave the place, or your office, alone!)

I don’t want to disillusion any budding Board chairs, but the reality is that you’re not the boss: under good governance practice, you are ‘first among equals’, with any formal decisions still coming from the full Board; you’re the chair of the Board as long as you have the confidence of your fellow Board members. One of the most useful ways I heard it described, when I was first appointed chair of a small Board, was that you are the chair of the Board... you are NOT chair of the Company.

While the CEO’s job is to run the company, yours is to run the Board so that it can add value and give the CEO the best possible chance to succeed. As an aside, a useful reality check on whether the Board is adding value is to ask at the end of any Board meeting, ‘Is the organization better off now than it was at the beginning of the day?’ If the answer is ‘No’ or even ‘I don’t know’, a valid response might be, ‘So, remind me again why we met today.’

I was thinking how to identify some of the practical attributes that make a successful Board chair, when I came across this short article from Harvard Business, called ‘Leading when you don’t have formal authority’.

The article describes what an effective project manager or independent contractor needs, when he or she doesn’t have authority to give orders or conduct performance reviews of the people they work with, but whose performance will determine their success (and attributes you'll see in almost every effective Board chair):

• Letting your enthusiasm be contagious;
• Demonstrating excellence without wearing your ego on your sleeve;
• Acting more as a coach than a captain.

They're three really valuable pointers, which need to become second nature if you're going to do the job well - and if you plan to stay true to them when times get tough in the boardroom.

As you can see, they're not the type of thing you'll read in a CEO's job description - although they are also not totally removed from some modern management thinking. The more I thought about it, the more I realised the article could have been written for my friend - yes, he now has a copy... and having chaired his first Board meeting, he also understands how true (and timely) it is.

Where did that come from? How well do we understand our risks?

I expect we’ve all heard enough of the corporate horror stories. One big failure has barely dropped off the front page when another hits. Some, like General Motors and Chrysler, resembled train wrecks in slow motion that we couldn’t stop watching, over months or years, even though we sensed how they were going to end. Others, like Bernie Madoff’s vanished billions and Bank of America’s boss Ken Lewis after the Merrill Lynch acquisition (hero to zero in six months), seem to have hit from nowhere.

So what have all these cases in common? One question being asked with increasing frequency is ‘Where was the Board of Directors?’ This leads to another thought, which is that in each of these cases the Board, generally a group of very smart and experienced individuals, must have made some (conscious or subconscious) assumptions that turned out to be flawed.

At GM maybe the underlying assumption was ‘we’ve been in this situation before and the great American public will see us right,’ or perhaps ‘we’re a national icon and a huge employer... we’re too big to fail’ (and how often have we heard that epithet in the last 12 months?). Around Bernie’s Board table, perhaps the mistake was something more fundamental, maybe ‘what a great investor he is’ - overlooking the now-obvious question of where (and whether indeed) he was investing, or just moving the money around.

In today’s climate especially, one of the biggest challenges for a Board of Directors is identifying the real risks that can derail the company. But how many Boards ask the simple question, ‘what are the things that could put us out of business... however unlikely they may seem today?’ And why don't they ask? Because the CEO might be offended?

I’m not talking about Boards becoming entirely risk averse: that’s not how you make your shareholders rich. However, I am talking about a Board’s real understanding of the risk profile, and making some conscious decisions about the corporate appetite for various risks. I’d expect that in at least the majority of these cases the camel's-back-breaking-straw risk that finally brought the company down was one that the Board hadn’t fully seen coming. I’d also guess, without knowing the answer, that most if not all these companies had formal committees set up to identify and monitor risk.

Knowing that the quality of your Board’s decisions depends on understanding your opportunities and your risks, how do you know that the risks you’re hearing about are those that require the greatest focus? How do you ensure that the decisions you’re making will address these risks? How can your Board ensure that they have asked the right questions of the management team?

Well (for once here’s a direct pitch), we’ve brought to New Zealand what is possibly the first - and almost certainly the most thorough - method for assessing the effectiveness of your risk committee(s). We look at ten different aspects, from your risk culture to your management processes, and we ask you to assess two factors: how important each is to you, and how well you think you deal with it.

Sounds simple, even simplistic? Well, one large international client, which has put all its risk committees through this (board, management, operating units, subsidiary companies), and then saw the 'gap analysis' that emerged, has told us that if they’d done it four years ago they would have identified holes in their systems and culture, which would almost certainly have prevented some huge, very public, problems they faced.

If you’d like to know more, please contact me. Meantime, if you’d like me to send you a copy of some analysis we’ve done (as part of a larger survey among over a hundred Boards), on how effectively Boards generally oversee their risk, let me know and I’ll forward that to you too.

No obligation, no pressure, but can you afford not to be interested?

Wisdom to know the difference

Most of us know the ‘Serenity Prayer,’ which asks for

• “Serenity to accept the things I cannot change; courage to change the things I can; and wisdom to know the difference.”

Sometime we find a limit to what we can achieve as an independent director.

A few years ago, I joined the Board of a company in which the Chairman and the Chief Executive had worked together since the company’s establishment. By the time I joined, they were the only two at the Board table who had been with the company from the start.

To some of us, the CEO appeared to have lost the energy for taking the business forward, despite having had some significant successes until then. The Board’s meeting agenda was usually composed mainly of rearward-looking or operational detail and we didn’t see much creative or strategic thinking - at a time when our industry was going through big changes and some of us could see exciting opportunities for the company to take a leadership position.

On the surface all our boardroom discussions were very polite and we seemed to reach a consensus on most matters - including an agreement to take a new look at the company’s direction. However, although we had some useful strategic planning discussions and regularly discussed future options, nothing seemed to change in practice.

Perhaps most telling was that any strategic ideas that came up at Board meetings were generally repeated back to us by the CEO, with no further thought or analysis - or even pushback; but month by month, nothing actually happened.

“Courage to change the things I can...” As most of us would, I suspect, we - two of us especially - kept trying to make progress. We had regular Board-alone sessions, where we discussed our concerns with the Chairman, who usually agreed with our analysis. But, when the CEO joined the meeting, the Chairman would negate any of our questions or comments, with a remark such as, “Now this isn’t meant in any way as a criticism of management.” This became so frustrating that we came to see the Chairman as ‘Counsel for the Defence’ for the CEO. Putting myself into the CEO’s position, I’m not surprised that he saw the Chairman’s comments as endoresement for taking no further action on our concerns.

“Serenity to accept the things I cannot change...” By now you’re probably asking why we didn’t raise this directly with the Chairman. We did - several times. What we gathered was that he had invested so heavily in bringing the CEO up to speed in the early days that he now didn’t have the energy - or the heart - to act. Also, in case you’re wondering about another option, there were good reasons why he was the right person to lead the Board, and changing this was not a practicable option.

“And the wisdom to know the difference...” I worked out that I had three options: to keep banging my head against the frustratingly hard wall; secondly, to wait until the Chairman retired and hope we could do something then; or to spend more of my time in places where I might be able to make a difference.

I don’t know what you’d have done in this situation. I was fortunate enough to have been offered another Board position, working with a group of people where doing nothing was never going to be an option.

I still have a sense of missed opportunity and unfinished business, and I’m not sure that I showed much ‘serenity’ in my frustration. But at least I feel I was given ‘the wisdom to know the difference’. In my new role, I know I won’t die wondering what we might have done.

"Failing our Students" - what the business schools haven't been teaching

“By failing to teach the principles of corporate governance, our business schools have failed our students... By not internalizing sound principles of governance and accountability, graduates have matured into executives and investment bankers who have failed workers and retirees, who have witnessed their jobs and savings vanish.”

Not my words, but an extract from an article in the Wall Street Journal on 24th April (that a friend sent to me), by a business school professor from North Carolina, Michael Jacobs, who was previously director of corporate finance at the US Treasury.

Besides agreeing strongly with Professor Jacobs, what else should we learn from this? First, that we’ve sometimes been talking to the wrong people; and second that we’ve usually left it too late.

I spend quite a lot of my time presenting at directors’ workshops and courses. The typical participant has already built a successful career - chief executive, second-tier management, new director, or sometimes quite experienced as a director but with no formal training in the role. To reach this current stage, such people have learned what works for them and have usually developed some well-entrenched approaches to doing things.

If they haven't previously factored-in good governance practices, it’s unlikely that a few days on even one of my programmes will change the habits of a lifetime!

All our experience teaches us that habits learned early are habits learned well. So what if we listened to Professor Jacobs’ advice and started teaching principles of good governance at a much earlier stage in these leaders’ careers? What if we included corporate governance as a core element of MBAs - and not just in the sense of the controls, checks and balances, but showing examples of the real value that a dynamic and engaged Board can add to an organization, and its chief executive?

The lesson I’ve taken from Professor Jacobs is that we should be exposing people to the principles of good corporate governance while they are still putting together the building blocks for a career in leadership. By the time they get there, it may be too late to change.

I hope we’ll see many more younger participants on our director-training programmes, and that I (and others) can spend more time in front of MBA classes, where tomorrow’s leaders often build the framework for their high-flying careers. If they come, and if Professor Jacobs is right, then maybe we won’t see a repeat of the excesses and behaviours that have so dented credibility and faith in the free enterprise system in the last 18 months.

And that would have to be good for everyone, not least those who choose to learn what good governance is, far earlier in their careers.

Running the company or asleep at the wheel? The director's duty of care

A couple of weeks ago, I discussed whether it was possible to run a company by consensus. The emphasis was on ‘consensus’. In the last few months, however, we’ve seen more people asking the question we’d like to be able to take as read: whether the directors were actually running the company at all.

The last six months have seen more spectacular company failures than most of us have ever seen before. And let’s be honest: a government bailout is actually a failure - just ask the traditional shareholders in British or American financial institutions or US car makers. Closer to home, we’ve seen a string of failures in New Zealand finance companies. Now the shareholders and investors with some of these companies are looking for their day in court, and perhaps for some vindication, even if they may not get their money back.

First, though, another moment of honesty: it’s not a crime for a company to go broke. It’s just a part of the free enterprise system that companies come and go. Sometimes a company fails because a major supplier or customer goes out of business; sometimes the bad news just becomes overwhelming. The law acknowledges this and directors won’t be legally on the hook.

But where the law does become interested is usually in one of two areas: were the directors asleep at the wheel, or did they continue trading when they should have known the cause was hopeless?

I’d like to think about the former, what we call the director’s ‘duty of care’ (the general legal requirement is to act ‘in good faith’ and ‘with reasonable care, diligence and skill’ in what the director believes to be the best interests of the company). Most directors I work with are very aware of this duty and I suspect that the general level has increased recently.

But there’s still the notable exception - for example most of us can name at least one director who regularly fails to read their board papers before arriving at the meeting (although it’s a while since I’ve seen a director blatantly rip open their courier pack as they sat down). In this case, how can they possibly understand the issues or know what’s going on?

Worse still, and one that gets my blood boiling, is the director who consistently fails to turn up for board meetings: I’m not talking about a director who misses one or two meetings a year - we can all get sick or have to travel overseas - and I’m happy to say that I’ve seen less of it in recent years.

But one notable exception jumps to mind. The pattern is familiar - a last minute phone call just before the meeting starts, to tell us about an unexpected visitor he has to see; or a family member who urgently needs to be taken to hospital. Given the pattern of the last few years, he must have a huge family, or they all have a genetic predisposition to sudden serious illnesses - and, thinking about it, he must be the only family member who can drive too. In a case like his, I’d describe it not so much as reasonable care that's lacking, but a total abrogation of his duty as a director.

While a company is doing well, the absent or ill-prepared director may not seem too much of a problem. But a company is entitled to the benefit of its directors’ collective wisdom. My guess is that, if it goes to court (which will occur only if things have gone horribly sour), the judge is likely to decide that that entitlement was retrospective: in other words the board meetings a director failed to attend in earlier years will count against him or her.

And I haven’t even discussed those directors who turn up for the board meeting, enjoy lunch (in fact are often good company), nod sagely at everything that’s said and never contribute an original thought or worthwhile question of their own...

Ah well, back to that latest courier pack for another evening’s reading. Did I hear someone say, ‘Get a life, Richard’?

Consensus governance: how Google does it - and what we can learn

I think we would agree that Google Inc has done more in the last decade to change the way we live and work than any other company. It has become the dominant leader of the digital revolution (and in doing so has probably gathered more information about you and your habits than you know yourself), much as Microsoft dominated the software industry of the previous decade.

So, if we want to understand how best to govern our own businesses nearly ten years into the twenty-first century, we should be able to learn some lessons from how Google does it. The McKinsey Quarterly recently published an interview with Google CEO, Eric Schmidt. One of the most interesting parts of this was Schmidt's explanation of how they run Google by consensus, in preference to a more traditional, hierarchical structure.

Schmidt advocates - and practises - the 'wisdom of crowds' hypothesis - which, in his words, argues that 'groups make better decisions than individuals' ... especially when they are selected from among 'the smartest and most interesting people.' That description sounds to me very much like an affirmation of sound governance by a board of directors.  

But this description raises the question - what then is the role of the leader in today's company? Or is there indeed a role for the leader?  First, says Schmidt, the leader must enforce deadlines - not the outcome.  In other words, he or she must insist on execution, but is not the person to decide the strategy alone.  I take this definition to point the finger at all those boards that make good collective decisions, but then don't ensure their decisions are acted on.

Schmidt then argues - perhaps rather threateningly to a leader uncertain of his or her position - that the second requirement is to get dissent: 'If you don't have dissent then you have a king.' This surely is one of the fundamental features of an effective board - to encourage, or even insist on, differing opinions being aired, as a way of generating discussion and reaching a genuine consensus view.  

When we look at some of the corporate disasters of the last few years, we can ask how differently things might have turned out if the leader had not driven the agenda - and the outcome he (usually it has been 'he') wanted - but instead had allowed the leadership group/team/board to reach a real consensus position; and secondly, what if they had insisted on some dissenting views - people who would play 'devil's advocate', who could ask what the real risks of the preferred strategy might be... and whose careers would not suffer as a result of doing so.

You may remember that saying of Sam Goldwyn: 'I don't want any yes-men around me. I want everybody to tell me the truth even if it costs them their jobs.' Perhaps that's the attitude that has developed in boardrooms over the last decade, which now needs to change.

Not taking part in this Recession, thanks.

If you are registered on Facebook - how else do you keep in touch with the activities and travels of three children living overseas? - and if you belong to the 'New Zealand Network', then you're welcome to sign up to (and participate in) my Group, "We've looked at the Recession and decided not to participate."

This is not a struthious ("related to, or resembling, an ostrich") attempt to ignore what is happening globally or to belittle the very real difficulties that thousands of organisations and millions of people are facing as a result of the meltdown. (Only today I heard that at least 20 million Chinese have lost work in the cities and have had to return to the relative poverty of the countryside.)

The purpose of this Group is, however, largely to remind people that recessions are also times of opportunity: unless we get into another Great Depression, most people will still have work, business will continue, and some enormous opportunities will be available to those who take a longer view, who refuse to batten down altogether and are willing to take a chance... There's the added advantage that, if you see an opportunity to invest or grow, chances are there will be fewer people competing with you - they've listened to the doomsayers telling them they should be miserable, so they've stayed home.

It's just a decision.

"Fortes fortuna juvat." (Google it, if you must.)  

A propitious number? How big shouldn't your Board be?

"Kong Hee Fat Choy" and welcome to the Year of the Ox! As you will have known, last week marked the Lunar New Year, and I expect that the virtues we associate with the ox - such as strength, persistence and determination - will be very apt for the year ahead.

Among other cultural preferences that westerners have become familiar with in the last few years, we all know the value that the Chinese place on the number eight (how many millions of dollars changed hands for that single-digit number plate in Hong Kong?).

Well, sorry to rain on that parade, but last year some interesting research, entitled 'Parkinson's Law Quantified', established that eight is the worst possible number of members for an effective decision-making governance body: most of the research centred on the number of cabinet members in nearly 200 governments, but the researchers apply the findings equally to Boards of directors.

The first finding, which will surprise nobody, is that "cabinets or Boards become highly inefficient once

their size exceeds a critical 'Coefficient of Inefficiency', typically around 20." (Do you realise they actually fund people to research the blindingly obvious??)

The second observation is a re-statement of the widely-acknowledged 'Parkinson's Law', namely that "the growth of a bureaucratic or administrative body usually goes hand in hand with a drastic decrease of its overall efficiency." Well, yes, I do live in Wellington so this isn't actually news either.

As one outcome of their research, though, they found that a Board (or cabinet) of eight members was the most likely to lead to deadlock and internal conflict.  I'll let you work your own way through the complex maths that the authors use to explain their findings, but I think that here they may have missed one crucial point - particularly as it relates to an effective Board of directors. This is that an effective Board will operate largely by consensus decison-making, rather than on a simple majority. In other words, most effective Boards will be unanimous in most of their decisions. I don't see any loss of effectiveness in having one or two dissenters, as long as it's not the same one or two people with every decision; but if you get to the point where a Board is split down the middle, then usually some more fundamental questions - like agreement on direction and strategy - need to be sorted out first.  

It's for this reason that I have never been concerned about a Board having an odd or even number of members. In fact, in over 16 years and a large number of Boards, I can't think of one decision where having an even number of Board members became an issue for us. An effective Chair will usually pre-empt any difficulties, understanding in advance what most people's views are likely to be (without pre-judging the outcome), and will generally not allow an issue to go to a vote if it is likely to become divisive.

On balance, despite the mathematical 'proof', I have been happy serving on Boards of eight members. My preference usually is for fewer rather than more (I like Boards of 5-7). However, sometimes you need a reasonable size - very seldom more than 10-12 - to cover the full range of perspectives, experience and competencies that a Board might need.

As a footnote to the paper, the researchers uncovered only one cabinet of eight members, King Charles I's "Committee of State". And, as they note, "Look what happened to him!" Based on that sample size of one, therefore, who are we to argue?

Not another Economic Forecast

As we begin another year, you might like to throw yourself back twelve months and think about what we were expecting for 2008.  

With oil in January 2008 selling at about $US 85 per barrel, you might have been very smart and predicted that it would go to a record high of $US 140 or more - as it did in June. I remember some people telling us then to prepare for life at $US 200 (was that really only seven months ago?). But how many people told you last January that the price would drop below $US 50 again before the end of the year? Well, we know what has happened since: as I write, the price is almost exactly $US 100 below its peak - here's a chart showing the average monthly oil price since 1946, both nominal and in 2008 dollars.

In the last four months, we've also seen one of the largest financial markets meltdowns in history - certainly the most traumatic since 1931-32 - and the largest ever co-ordinated loosening of monetary policy.  This chart on Wikipedia shows movements in the US Federal Funds Rate over the last half century, which reveals an uncanny symmetry between 1954 and today with a 'pivot' in about 1982. But, what hit me the hardest and highlighted the significance of what has happened is this table from the Bank of England, which records the Bank Rate from October 1694 (sic, I have not transposed the digits), when the Rate was set at 6.00%.  It reached its historical low of 2.00% in April 1852, and on a few subsequent occasions, including 1932, 1939 and December 2008.  But, unless I have missed something, the Rate has never been lower than that... until last week, 8 January 2009, when it dropped to 1.50% - for the first time in more than three hundred years.

I'm no Economic Historian nor an expert in Central Banking. But I am old enough to know that central banks have spent most of the last thirty years using the few tools they have - mainly the setting of interest rates - to keep inflation low but positive, in order to provide a sound platform for the sustained economic growth that the planet has experienced over the last twenty years.

Who knows where this dramatically-loosened monetary policy will take us? Will we see a resurgence in global inflation in the next twelve months, leading to a fresh cycle of unprecedented tightening in order to stop prices running out of control; or will even these drastic cuts in interest rates (effectively to zero) fail to prevent a spiral into deflation, which none of us has experienced before? Or neither of these extremes?

I have no idea where this recession will lead, or how bad or long it will be.  I'm certainly not going to try to forecast.  

As a board member, my big lesson from the last twelve months is that we need to prepare ourselves NOT for a $US 200 oil price, nor a New Zealand dollar exchange rate of $US 0.40, nor for a specific price for any commodity (money, gold, milk powder...).  No, what I think we need to be ready for is continued volatility, where we learn to live with - and take advantage of - the unpredictability and lack of clear price trends. This calls for greater risk awareness from all board members - not necessarily risk aversion - and a real understanding of our strategic risks and opportunities. (When did your board last ask - and try to answer - questions like 'What could actually put us out of business?' and 'Where does our money really come from?')  

We all need to think carefully about what our real business is, and our own unique value proposition, since we can no longer lean on sustained economic growth or continued price inflation to cushion our poor strategic decisions.

So there we are - back on deck for another year of challenge and excitement... as the late Sir Peter Blake used to ask, 'If it was easy, why would you bother doing it?'

And, if I'm completely wrong and 2009 is a year of unprecedented calm and stability in prices, then this time next year I'll probably write about the volatility of everything, including volatility.