What's really in a name? A. Rose ...

I've taken a digression from our normal topics this week to look at a different type of governance: have you noticed how often our elected leaders have surnames beginning with letters in the first half of the alphabet - Bush, Blair, Clinton, Clark?

I thought I would take a deeper look at whether there was anything to this.

I looked at who has been elected to lead four different, but related, countries, the US, Britain, Australia and New Zealand. I've excluded those who reached the top through succession or internal 'coup' (Gerald Ford, Jenny Shipley, Gordon Brown - so far), unless they went on to win an election in their own right (Harry Truman, Lyndon Johnson, Paul Keating).

To give myself a reasonable sample size, I have looked at leaders who first came to power since 1939, which seems as much a watershed date as any, arguably representing the start of the era we're now in. My final 'control' check was to see where the middle of the alphabet really falls: the halfway-point in my telephone book is towards the end of 'L', so I have taken all those whose name begins with 'M' or later as being in the second half.

What I found quite surprised me. You have almost exactly twice the chance of being elected leader of your country if your name falls in the first half of the alphabet.

There are of course some notable exceptions to this - Thatcher, Reagan, Muldoon and Rudd - but perhaps another theme from Shakespeare takes over here:

"There is a tide in the affairs of men, Which, taken at the flood, leads on to fortune."

In other words, perhaps the forces leading to some of these results were so powerful (stale government, desire for change) that, to quote the Australian cliche, a "drover's dog" (or Moggie?) could have done it.

Another point to ponder is that those with the most ignominious endings carried 'second-half' names (thinking, briefly, of Nixon and Whitlam). New Zealand has had more than its share of leaders who got to the top via a leadership change between elections (Marshall, Rowling, Palmer, Moore and Shipley). All have 'second-half' surnames and all reinforce my findings by either failing to win, or (Palmer) not lasting until, the next election.

Is this all just a statistical blip? Or does it have something to do with our childhood conditioning, during those years of waiting our turn in the school playground ("Get to the back of the line, Zebedee")?

Either way, it puts an interesting slant on the current US presidential campaign - since we're likely to see both candidates sporting 'second-half' surnames. Perhaps we shouldn't write Hillary off just yet ... or watch her again in 2012!

(Yes, I've looked at my own chances - 'W' - and I have decided not to throw in the day job!)

So although he/she might smell as sweet, "A. Rose" might have a better chance of leading their country by taking a different type of flora for a surname ... um, er, Bush?

FICKS your Board

An excellent article in last month's Harvard Business Review, 'Leading from the Boardroom,' highlights a paradox that many Boards face.

Directors know - or ought to know - that the real task of a Board is 'to build tomorrow's company out of today's'. The authors of the article, Jay Lorsch and Robert Clark, note that as the pressure on compliance grows, a Board's natural response is to spend more time on avoiding mistakes and minimising risks, rather than focusing on long-range planning. As a result, they expose their companies to potentially even bigger risks.

Think of the Board of a manufacturer of music CDs: what's the value of making sure we comply with every regulation and check every figure against last month's results, if we miss the fact that Steve Jobs of Apple has reinvented our industry - and that nobody wants to buy CDs when they can download their Amy Winehouse favourites onto their iPod? Oops, suddenly we don't have a business. That's the type of issue that Boards ought to be thinking about!

In my advisory work, I've developed a way for Boards to segment their work: I call it 'FICKS', obviously a catchy name (well, I think so) but also a helpful acronym for the five key functions of a Board:

• F - Future Focus - making sure we have the right Chief Executive (for the next few years as opposed to the last few), and working with management on strategy development and execution (let's spend about 30% of our time here - even though it's scary because it involves making decisions about an uncertain future);

• I - Issues Identification - understanding our environment, spotting the trends, communicating with our stakeholders so they understand what we're doing (another 30%);

• C - Compliance - it's still important to make sure we keep to the law, regulations and best practices, and monitor the risks the business faces, but not at the expense of looking ahead (perhaps 15% of our time);

• K - KPI ('Key Performance Indicator') Monitoring - sorry to tell you this, but you don't usually need to spend half of every Board meeting asking the same questions about the numbers and budgets that you asked last month (15% again);

• S - Succession and Skills - making sure we've got the right people at the Board table and in top management to deal with what we'll be facing over the next few years (the remaining 10%).

We can break this into three broader categories - the first two (F & I) are about creating value (cumulatively 60%), the next two (C & K) involve preserving value (30%), and the last (S) deals with the ability to keep adding value in the future.

In summary, the latter categories (C, K & S) are a means to the end - the end being to look ahead and build the organisation of tomorrow. That's where, as directors, we build the legacy that makes our job worthwhile.

Of course it's never this simple or so clearly segmented in real life - any decent strategy proposal will have elements of all five! And the proportions will vary from meeting to meeting. But I've found that 'FICKS' is a useful reality check on how a Board really spends its time, and whether it is dealing with the right things - as opposed to dealing well (perhaps) but with the wrong things.

You may get a surprise when you think about how your Board spends its time. But I'm sure the exercise will be worth it.

(Oh, and if you do find this is of any use to you, some attribution of my trademark, 'FICKS', would be appreciated, thank you!)

Is it all worth it? ... Well, yes.

It's not quite like life on Mars; but the search for hard evidence that good governance does lead to improved organisation performance and better shareholder returns has been almost as elusive.

Now at last a study of over 600 public companies in Britain, "Governance and Performance in Corporate Britain", by the Association of British Insurers, has come up with some strong indicators:

□ Over a five-year period, the shares of companies deemed to be well-governed delivered a return about 4.5% per annum higher than their industry peer group;

□ Well-governed companies showed a lower volatility of returns over time;

□ Poor governance was associated with 3-5% per annum under-performance and a smaller (but measurable) decline in the market value of assets;

□ And the evidence indicated that good governance led to higher performance, rather than vice versa (and it was a causative relationship, not just a correlation).

The survey also came to the unsurprising conclusion that having more Non-Executive Directors on the Board (NEDs, directors who don't draw a salary for their day-job) led to improved performance. But the key here was balance: having too many NEDs was associated with lower profitability. This suggests that having a mix (the British practice) might be preferable to current New Zealand and Australian - and increasingly American - practice, where most or all the directors are drawn from outside.

So we finally have some evidence to support what many of us have long believed (for goodness’ sake, it’d be a boring role if all we did was monitor compliance and identify risk!). Perhaps this will start to counter those popular anecdotes about directors - like defining the difference between a director and a supermarket trolley (answer: a director may hold more food, but at least the trolley has a mind of its own).

Maybe this survey is the terrestrial equivalent of finding water and organic chemicals on the Red Planet. I hope it will give directors even more reason to leap out of bed in the morning, looking forward to the Board meeting - and confident, in the words of the late Sir Peter Blake, that it will “make the boat go faster.”

"Best before ..." How long should a Board Member stay?

One of the commonest questions people discuss with me is the length of a board member's shelf-life. As a general guide, there's a good rule for management and boards that it's better to leave a year too early than stay a year too long (I suppose a recent Australian Prime Minister might be pondering the same ...).

However, I think there's a fundamental difference between how long a Chief Executive is likely to be in the role and how long a non-executive board member (who doesn't work there in a 'day job') should serve. When a CEO arrives in a new job, he or she will then eat, live and breathe it every day of the week, while a board member probably has contact with the business only a few times a month.

I may be a slow learner, but I find it usually takes a couple of years at least as a new board member to feel that I really understand the business and its issues, its strengths and its risks. It seems to me that so many organisations with term-limits of 2-4 years (whether formal or just habitual) are wasting enormous potential value: just as the board member is really starting to contribute, we get rid of them. I worked recently with one organisation that has a limit of two 1-year terms for their board members ... and they wonder why their board doesn't provide any real leadership!

The other consequence of these short-term appointments, if your board members never get the chance to become fully effective, is that the organisation will almost inevitably be dominated by the CEO, with few checks or restraints. Either that, or the CEO will get frustrated that the board members never really understand what's going on and therefore won't make decisions. I've seen both and they're both likely to end in tears, and at least one departure.

In New Zealand, we see this in companies owned by the Government, SOEs, Crown Research Institutes, etc - some of them very large and complex: the convention is that you serve up to two 3-year terms, so, just as you get up to speed, they blow the whistle and call 'full-time'. We are finally seeing a bit of flexibility around third terms, but I shudder at the number of good directors who've been lost to their companies just as they were starting to make a real contribution to the strategy, and to provide some real support (and challenge) for the CEO.

If a board member is really performing and adding value around the board table, then why wouldn't you want to keep them for 8, 10 or even 12 years? Ask any CEO who their most valuable board member is and they'll almost always name one of the longest-serving.

On the other hand, long service isn't a right. A board member has a responsibility to keep up to date with the issues of the organisation and the industry: today's challenges are very different from those of 2003, and I'm sure they'll be different again in 2013!

My biggest challenge a few years ago as chair of a non-profit organisation was to help a couple of very long-serving board members - passionate volunteers, who'd put their hearts into the place over nearly twenty years - to realise that they were operating mentally in the 1980s, and that we really needed some fresh skills for a new environment. Even in a non-profit (sometimes, especially in a non-profit), enthusiasm on its own isn't enough: you need to make sure you've got the skills, experience and networks that are relevant today, and will be tomorrow.

And let's not even talk about the worst case I saw - a board member, totally unsuited to the role, who fell asleep (at my count) in 18 of his 22 board meetings, before, thankfully, his appointment was not renewed.

Auckland Airport - rating the players

Well, it's now in the hands of the Overseas Investment Office and the politicians.

After painful months of bid, rejection, counter-bid and apparent knee-jerk response from local councils and national politicians, the private and institutional shareholders have voted heavily in favour of selling their Auckland Airport shares. But we now have to wait, possibly until mid-April, to see if normal property rights - such as the right to sell a share in a public company to a willing buyer - will prevail over a vague (and lately introduced) concept known as 'the national interest'.

Report Card:

The institutions and small shareholders: Pass: they have behaved rationally, opting to sell their shares for a price far above the current market. Yes, the bloodbath in capital and equity markets over the last few months (hey, cash looks good right now) has encouraged them; but they've probably been prompted even more by the government's recent intervention in the process, in announcing, at very much the last moment, that the bid will be subject to Ministerial decree about selling 'sensitive assets on sensitive land'. No forewarning of this goalpost-shift, by the way! Ironically, without this last minute move, it seems quite possible that many shareholders would have opted not to sell. But when you're told that you don't know what's best for you, you tend to react.

The board of AIA: A pass, but must do better next time: I think people have been confused by the board's position. It has sent messages that the company needs a cornerstone shareholder, but then advised against the bid to begin with. With the recent change in sharemarket conditions, the board changed its advice - recommending against approving the bid, but advising holders to sell if it proceeded. If you realise the directors' first duty (under the Companies Act) is to the Company - not the shareholders - I think you can make more sense of this: perhaps directors feel the Canadians aren't the best option for the company, but wanted to help the smaller shareholders to make a sensible decision if the bid does go ahead. But they could have been clearer and explained their thinking a little better

Auckland and Manukau City Councils: They've sat this test twice (Dubai Airports last year) and failed both times. Well, they're politicians, so it's hard to expect fully rational, strategic thinking. Never mind their decision over this bid: mightn't things be quite different if they had embraced the original bid from Dubai Airports? Auckland could have looked forward to becoming a major hub for one of the world's biggest airlines; someone, other than the ratepayers of Auckland and Manukau, would have invested a lot of money in improving the airport, creating countless jobs and further wealth for the region (... and obviously increasing New Zealand's relevance as a global transit stop - a new Singapore, or of course Dubai, model). Perhaps most important, and something that seems to have been forgotten, the two City Councils would have had the sale proceeds available to invest elsewhere ... possibly some of it back into the airport if it had remained a listed company, almost certainly at a lower price once the premium for control had gone! (Poor ratepayers, yet again.)

The bidder, CPPIB: Well done, a good pass. I think it's hard to find fault with their behaviour throughout. I hope to see them back here next term. They've made a good, clean offer and have said they don't want control of the board. If you look at their history, they're not asset-strippers, but tend to be long-term holders, looking for long-term returns (and isn't that what we all really want from Auckland Airport?). Now they've even said they're willing to reduce their voting rights to 25%, even though they may own 40% of the company. And they've done this in spite of all our attempts to kick sand in their faces. A pity that some other people in the playground haven't behaved as rationally and honourably.

Finally, will someone please explain to me this xenophobia about selling 'infrastructure' assets to overseas owners? Of all the things you can sell, infrastructure seem the lowest risk of all under overseas ownership: after all, if things go really sour, they can't actually take Auckland airport away, or close it down and shift it to China. Compare that with many other types of business that we seem less reluctant to sell! Oh, and did I mention that those who sell would actually have cash to re-invest in something else: it's not as if the airport's being stolen.

Overseas, this isn't such a big deal - after all the Spanish own Heathrow Airport (did you even know that ... or care?).

Please don't let this become yet another case of New Zealand snatching a last minute defeat - and of helping overseas investors understand that we're really not the good and stable investment destination you thought we were.

(Disclosure: A family member of mine has a small, non-lifestyle-changing, shareholding in AIA, and has voted both to approve the Canadian bid proceeding and to accept the offer for the shares ... we'll wait and see.)

Update on Carl Icahn's blogging

You may remember in my post 'An idea whose time has come?' I noted that iconoclast Carl Icahn was launching his own blog on corporate governance.

If you're wondering why it hasn't yet hit the headlines, here's the latest from Reuters:

"... So far, however, readers wanting a fix of the latest Icahn blast on The Icahn Report have been disappointed, with the site simply sporting a dour picture of Icahn with the notation, 'blog coming soon'. At a meeting last night, Icahn explained that he’s not suffering from writers’ block, but said his lawyers are stopping him. 'Every night, I write for an hour and they tear it up,' said Icahn with a sardonic laugh."

Isn't it good to live in a less litigious environment, where we don't typically ask our lawyers to clear every step ... unless you're a lawyer I suppose.

"Interesting times" in health

Working with a couple of New Zealand District Health Boards this week, I was reminded of the (perhaps allegorical) Chinese curse, "May you live in interesting times." Although perhaps cliched, it seemed a reasonable opening for my presentation to board members in one of the largest, most complex and highest profile sectors in the economy. (I also questioned what some of them must have done to have deserved the curse in the first place.)

I looked into the origins of the saying: it has been quoted in English since about the 1940s, but what I found most interesting was the story that this is only the lowest of three curses of increasing severity, with the others being:

• "May you come to the attention of those in authority" - a curse that was obviously laid on the entire Board of the Hawkes Bay DHB, who were very publicy sacked last week; and, worst of all,
• "May you find what you are looking for" - perhaps you can think of your own candidate/victim, but I wonder if the new Minister of Health might have have hesitated before his notorious "I'm running the show" comment, if he'd been aware of this 'ultimate' curse.