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. 

Evolution - the survival of those most responsive to change

As you will of course have remembered, it was 'Evolution Week' recently, the anniversary of the launch of Charles Darwin's 'The Origin of Species' (24 November 1859).  So often we misquote him by referring broadly to 'the survival of the fittest', but Darwin's thesis is far more encouraging than that cliche indicates:

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

Any of us can take heart from that: how strong we are and how intelligent were both decided to a large degree very early in our development as a human being (personal trainers and pop psychologists notwithstanding). But how responsive we are to change is a conscious decision, which we can take at any time.

If you want a dramatic example, finish reading here, then watch this short video on Youtube. I honestly don't know whether it's genuine - there seems to be some debate - but I've looked at it several times and it still looks good to me. Regardless, take it at face value and think about the instant decisions this pilot had to take when faced with a catastrophic change that, according to all precedents and accepted wisdom, would have given him about five seconds to live... and how responsive he was to this change.  

Now think about the changes you (and your business) face in this global downturn. And whether you'd prefer his challenges or yours.  

Have a good, adaptable, week.

(Here's the link again. To keep this window open while you open the link, click on the link with the right-hand button on your mouse and select the options of New Window or New Tab.)

What? Were they thinking?

You've probably read about this summer's tour to New Zealand by the West Indian cricketers. If so, I wonder whether you've also shaken your head in disbelief at Dunedin's planned welcoming call: "It's all white here." Let's leave aside for a moment the rush of blood that generated such a catch-cry, with excuses that it's a contrast to Dunedin's traditional "Black-out" campaign for the All Blacks (the West Indians can be expected to be up with the play on local rugby traditions - yeah, right)... or that it refers to the players' test match uniforms - yeah, right again.

This little example seems to confirm the view that common sense really is an oxymoron (a bit like fun run or civil war). Where was the plain good sense when the City Council was discussing it? Did nobody stop to consider how it could - almost certainly would - be interpreted? Would they have used the slogan if, say, it had been the English cricket team instead of the Windies?

What were they thinking? Or, rather - What? Were they thinking?

Why I mention this today is that it reminded me of a question someone on a directors' course asked a few weeks ago: What is the most important skill for a director to learn? I don't claim to have a simple answer for this, but I thought of a couple of possibilities that I've gleaned from other, more experienced directors, including "To object without being objectionable," or that "Dissent is not disloyalty."

What I replied was, "To ask the second question". The reason I think this is such a valuable skill is that it's easy to ask the first question about something, for example "Have we chosen a slogan for welcoming the West Indian cricket tourists?" More likely, in the boardroom, it'll be a question of clarification on a topic the Board is dealing with, or a challenge to a proposal from the Chief Executive. In the latter case, especially, it is quite common for the CEO to push back quite hard: he or she has probably thought through their case in some detail, and has anticipated the first round of questions. I've seen instances where the CEO's immediate response was sharp enough to deter further questions from any but the bravest Board member. This is when it helps to have thought through the issue before you ask the question: if I get this response, that will prompt a further question, and so on...

I don't have a transcript of the Dunedin City Council's meeting, but I can imagine the discussion may have gone something like this, after the "All white here" slogan had been announced:

1st question: "Don't you think that might be a little inappropriate?"

Pushback response: "Don't be so sensitive and b..... PC [politically correct]!"

... Silence, end of discussion.

On the other hand, what if somebody had had the common sense, wisdom, or guts to ask:

2nd question: "Never mind what we think of it, how are we and Dunedin going to look when this is spread across the front page of the world's newspapers?" (in case you can't guess, read the answer here).

Then again, this seems so numbingly obvious that perhaps there was a bigger, more devious game being played, in line with the old cliche that any publicity is good publicity. Was it all just a set-up to gain attention? If so, they should all stand in the corner for twenty minutes, just like any other four year old trying the same trick.

"It's a no-brainer"... but when should the Board get involved?

I'd like to share a small quandary with you. The last month has involved a lot of activity around some of my Boards - the main reason for the relative silence on this page.

A couple of weeks ago, on a Saturday morning, our company's legal adviser rang to ask if I would sign an urgent document that needed the signature of two directors. I don't need to go into the details, but it related to a fairly large transaction, which I knew was coming up. But it had emerged since our previous Board meeting and we'd never discussed it together as a Board.  

I talked it over with our lawyer and asked whether he thought this was a matter that ought to go to the Board first. 'Well, it's really a no-brainer, isn't it?' was his reply. I agreed, and signed. I did ask him to confirm that in his opinion it was in the best interests of the company for us to sign this document, which he did. 

Looking back though, should I have pushed back a little harder? Certainly, there was some urgency about the transaction. And yes, I did (and still do) believe that going ahead was in the company's best interest (one of the legal tests for a director's actions). But I have this feeling that we might have been a little lax in our process. All Board members had seen the emails on the subject, so I suppose they could have raised any concerns. But my main question is where the boundary is: when does a 'no-brainer' become a 'half-brainer', or a matter that might actually benefit from some considered Board discussion, or finally a decision that really needed some thorough testing? And who decides where these borders are? After all, part of our reason for being there is to test and challenge management thinking.  

As directors, we don't usually do much in our individual capacity, and the whole Board is likely to be responsible for the actions of any of us. So the other directors were - possibly without knowing it - putting their faith in the two of us who agreed to sign.

I think I have learned from the experience. If I'm in the same position again - whatever the need for haste - I think I'll at least ask for a Board conference call to discuss it first - as much for the benefit of the other directors as for my own peace of mind. 

We've just had another Board meeting, at which the Board ratified our actions. What if they hadn't? I'd be interested in any similar experiences you may have had - and what you did.

Never a good time - increasing directors' fees

There are some things for which it's never the right time: closing a major highway intersection for repairs, refurbishing the company's head office, and testing the office fire evacuation procedures, for example. And raising directors' fees.

Last week we saw another classic case of an unpopular motion to raise directors' fees in a large public company, Contact Energy Limited. I'm the first to argue that directors need to be adequately rewarded: Contact is one of the two largest listed companies in New Zealand and its independent directors currently receive about $100,000 per annum in fees (read details in the annual report). While this may sound a lot, I believe it's actually quite reasonable, even modest, given the calibre of people Contact would hope to attract, and the demands and responsibilities placed on directors in large public companies. For the record, I have great respect for the technical abilities and professional achievements of Contact's Board members, which is not to say that some of them haven't made some big mistakes in the past.

Besides this, the fees have not been adjusted since 2004 - and I don't know many senior executives who would have accepted zero adjustment to their salaries for the last four years.

And that's where it seems to have gone all wrong. The rational case for an increase seems strong. But I believe the way the Board has gone about seeking this increase has smacked of either insensitivity to the company's small shareholders and customers (many of whom, including your blogger, are both), or an arrogance that tends not to go down well in this country.

As I say, it's never a good time to raise directors' fees - someone will always get upset, if only through pure envy. Now put yourself into the Board's shoes and consider the following - none of which is a secret:

• The world's economy seems in danger of stalling, if not of going into a flat spin;
• We're two weeks away from a general election, so everything is political fair game; and
• On the actual day of the Annual General Meeting, many of Contact's customers (yes, me too) received a letter from the company telling us that our power bills were going up by about ten percent.

When I was learning to fly, many years ago, my instructor gave me his definition of a superior pilot - "a pilot who uses their superior judgment to avoid situations that would require their superior skill." If the directors of Contact had applied superior judgment, I suspect they could have seen the fight they were buying for themselves. Instead of ignominiously retreating at the AGM, and handing a moral victory to a shareholders' representative in a Viking helmet, the directors might have modified their proposal: rather than asking for a doubling of the approved fees (which they hadn't intended to use in full), perhaps they could have argued and gained greater support for a smaller increase, based on the long period since the last pay rise.

It's not the increase itself which is so significant, but broader questions that this issue (not the first) raises about the Company's attitude to its large base of small (and definitely minority) shareholders - and whether the Board is too far removed from the real world to appreciate that the Company doesn't operate in a vacuum. Telecom has paid the price for such arrogance (or corporate myopia); it would be pity if our next largest listed company also fell victim to its own hubris.

Social responsibility, however you define it, is not an optional add-on to a director's role. It is an integral part of governing a company that operates in a real world of people who pay their power bills, read the papers, vote at elections and try to make the best living they can. No company can afford to ignore this for long.