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.

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?