Wednesday, 29 April 2009

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’?

Thursday, 9 April 2009

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.