Better Boards

Charles Darwin and the Insurance Company Board

2011-04-19T18:36:00.006+12:00

As a New Zealand taxpayer – and therefore collectively on the hook for a possible $0.5 – $1.0 billion support package (read ‘bailout’) – I was delighted to see that the Government has appointed an experienced insurance professional, John Pritchard, to the board of AMI Insurance.

It may come as a surprise – as it did to me when I read AMI’s latest annual report – to find that not one of the existing board members appears to have a background in either insurance or risk … unless you count the ownership of racehorses in the latter category. I know, and have considerable respect for, some of the directors: an outstanding retired banker, a leading former retailer, a successful market gardener, and so on. But nobody about whom I could find any experience in the industry in which AMI operates.

Going one step deeper, the Chief Executive’s own earlier career was mainly in banking, not insurance. When you look at the executive management team, you see Heads of Customer Division, Customer Experience, Marketing and Products, all of which helps us to understand how the company has been so successful in growing market share over the last decade, from a relatively small Christchurch-based insurer to one of the leaders nationwide.

However, nobody in the top team has a title that suggests deep involvement in risk management. You have to delve to what appears to be at least third tier to find someone described as Actuarial Team Leader.

I doubt whether anybody could have foreseen the destruction caused by the seismic bombs that hit Christchurch last September and more tragically on 22 February. But a part of risk management is about assessing events of low probability but high impact.

Much of AMI’s business was, not surprisingly, centred on Christchurch, where it had acquired a large share of the House and Contents insurance market, and a disproportionate concentration of its portfolio. And I have read that its reinsurance rates were among the industry’s lowest. Not being from the industry, I wouldn’t have a clue about appropriate reinsurance levels, but I do understand a little about concentration of risk.

What bothers me is that I’m not convinced that anybody else on the board would have had much more knowledge, so would not have been in a strong position to ask whether the reinsurance rates were too low for the high concentration of the company’s exposure.

My daytime business is ‘Building boards into leading teams’, and I’m the last person to suggest that everyone at the board table should come from the same industry background. To the contrary, I believe that having a range of backgrounds and perspectives is vital in achieving effective board oversight. However, having nobody at the board table with a background in the industry seems to defy common sense – because directors must be sure they are receiving the information they need in order to make good decisions. If you don’t have somebody with experience, you won’t know what you don’t know.

Without knowing the background, I can only make some assumptions about AMI’s board practices and (lack of) evolution. The Chairman has been on the board for about twenty years and several of the other directors have been there for a long time, while the CEO was appointed more than 15 years ago.

I’d imagine that some of those relationships had grown quite comfortable during the good times of rapid growth. One of the dangers when this happens is that a director who wants to ask hard questions, challenging the strategy and management’s assumptions, can feel increasingly uncomfortable and isolated if he (at AMI they’re all ‘he’) starts to ‘rock the boat.’ This is why it’s so important that a healthy board culture doesn’t just accept, but insists on dissenting views being aired.

I’d also guess that, as the business grew rapidly, the board’s priorities reflected its experience in growing businesses and satisfying customers, and didn’t focus adequately on changes to its risk exposures or concentration of its portfolio.

The lack of board turnover, combined with the directors' industry backgrounds, seems to have resulted in a failure to grasp the increasing significance of such agenda items, in line with AMI's changing position in a rapidly changing world. As Charles Darwin observed (see my earlier post on his anniversary a couple of years ago):

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

A failure to recognize this at AMI’s board table over many years may well cost you and me up to a billion dollars. Let’s hope Mr Pritchard can make enough of a difference to prevent this from happening.

Is banking any different from other industries?

2011-01-20T15:20:00.005+12:00

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

2010-06-05T11:09:00.007+12:00

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.

2010-05-29T02:56:00.002+12:00

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?

2010-03-22T10:56:00.004+12:00

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

2009-09-19T16:44:00.001+12:00

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?

2009-07-31T18:41:00.010+12:00

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?

2009-07-18T19:01:00.006+12:00

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

2009-06-01T12:58:00.006+12:00

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

2009-05-17T15:05:00.004+12:00

“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

2009-04-29T16:07:00.003+12:00

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

2009-04-09T05:37:00.008+12:00

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.

2009-02-03T12:17:00.003+12:00

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?

2009-02-03T10:11:00.006+12:00

"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

2009-01-12T12:00:00.008+12:00

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

2008-12-03T12:25:00.011+12:00

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?

2008-11-24T21:36:00.008+12:00

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?

2008-11-18T03:10:00.008+12:00

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

2008-10-27T00:33:00.007+12:00

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.

Springboard or Tramlines? How do you manage the Meeting Agenda?

2008-10-12T00:45:00.002+12:00

I suppose we're all creatures of habit - even those of us who talk about and sometimes initiate change. But I've had a good experience recently that has made me really think about the order in which we deal with things at our Board meetings.

I've always advocated getting to the key decision items and strategic issues as early in the meeting as we can, so we can spend as much time as we need on these. (These big items are what we sometimes refer to as the 'gorillas in the room': however docile they may seem, you can't ignore them.)

But until now I've been a fan of working through the CEO's report ahead of these items. I've felt that the Board needs to be updated on what has happened since the report was written - probably up to a fortnight before the meeting, if the papers are well planned and reach the Board members a week or so before the meeting.

Well, I've changed my mind. I've chaired three Board meetings in the last couple of months (in two separate organisations), where for various reasons we hit the strategic items almost immediately - right after the formalities and action points from last time. What a difference it made to the meeting: the whole Board was engaged and involved in the discussion from the start. We enjoyed some great thinking, including some big ideas from 'outside the square'. This week we even generated a spontaneous whiteboard session for half an hour, to capture some ideas that we haven't adequately explored before. Not quite the typical image of a traditional board discussion - I'm pleased to admit!

I've thought about why these meetings went so much better. It wasn't just that we gave ourselves enough time for the big items - we usually do that reasonably well - but I think the real difference is that we hadn't been drawn down into the operational issues, which is what probably happens once you get into the CEO's report. The Board members had arrived - well charged with caffeine in most cases (this may also be relevant) - to talk about big issues, and nothing got in their way before we did just that.

And what did we lose by this? Well, if anything, we became even more efficient in our use of time. By the time we got to the CEO's report, we'd discussed most of the main items she'd written, so we spent only about ten minutes on some of the smaller, but important, matters in the report.

There is one assumption in all this: our Board members have to read their papers, and think about the issues, before our meeting. I'm lucky with the Boards I chair, but I know this failure to prepare is a 'sea anchor' that holds some boards back. We take our papers as read (... and understood and thought about) - we couldn't have an effective meeting otherwise: then we use the information from them as background - a springboard - for the type of discussion that effective Boards need to have around the table.

The alternative - sadly quite common - type of meeting is where the Board works its way from page 1 to the end of the papers, without deviating, looking up or adding a creative (or strategic?) thought for the full three or four hours that they're together. Just like a tram-driver really, with the difference that the latter doesn't need to worry about steering the vehicle.

Next, I'm thinking of keeping the minutes from the last meeting until near the end of the agenda too. Why not?

A recipe for New Zealand

2008-09-21T14:15:00.002+12:00

Last year, John Williams, one of New Zealand's relatively unsung entrepreneurial heroes wrote a piece for the website nzedge.com setting out ten strategies that would restore New Zealand to the league of wealthy nations, where most of us - I suspect - believe we should be. John used to own Marton-based company PEC (New Zealand) Limited, which developed some revolutionary petrol-pump technology that is now in common use around the world.

From this smart, technology-based platform, which has successfully been taken to global markets, John has produced a list of his 'must-dos' that would see New Zealand transform itself into a genuine knowledge-based, smart economy that we need to become if we are to remain globally competitive.

The list begins, not surprisingly, with a suggestion that New Zealand industry should emulate his success, by 'maximising growth in the sectors where we currently produce world-class products and/or services.'

He includes several strategies for business and commerce, but he also recognises the need for a sound basis in a strong and fair society, recommending (No.4) that the values-based "Kiwi-Can" programme should be extended to all primary and secondary schools.

Whether you agree with the details of this 10-step recipe is, I think, less important than that here at last is someone taking a long-term, strategic look at what New Zealand needs to do. One of the features that I feel has been sadly absent from our national debates over the last decade has been that we have not really talked about what sort of a country we want New Zealand to be. We have argued at length about policies, fairness and tactics; and we've even talked loftily about 'knowledge economies', 'growth waves', 'innovation frameworks' and so on; but without some hard decisions about what we're actually going to do, these will remain simply as cliches.

This debate isn't optional: if we don't at least have the discussion, we'll continue on the current path, where, while enjoying its best trading conditions for decades, New Zealand has barely held its place in the OECD's income rankings. If we have the debate, it's quite valid that we might reach a consensus that we don't want to get back among the rich nations. But I doubt that will be the answer.

What I think we might discover is that dragging ourselves back up the growth curve is in reality the best path to those global standards of health, education and social outcomes that most New Zealanders instinctively want. Unless we're generating the wealth, we can't spread it around. New Zealand's general election is only seven weeks away. Let's challenge ourselves, and the people who aspire to represent us, to take this national debate seriously... to show us their strategies for growing the pie, rather than changing the way we divide the existing one... and to make sure that all sectors of society take part and help to develop a sense of vision and purpose for the next decade.

And, while we're at it, let's not leave it just to the politicians. As leaders in our own sectors, we need to have these discussions around our board tables: how do we build our company to take advantage of the global opportunities (and counter the threats) of the increasingly complex global environment we're in? If we all address these questions, the sum of our answers will go a long way towards providing the answer for New Zealand.

Measuring real success

2008-08-25T06:37:00.007+12:00

I realised I'd had enough of the Olympics for another four years when I found myself staring at a semi-final of the women's Handball tournament between, I think, Norway and Georgia. Now come the analysis and post mortems, including the recent discovery that Bronze medallists ('Wow, I got an Olympic medal') are generally happier than those who win Silver ('If only I'd gone just a little harder ...').

New Zealand has had a successful fortnight, with a haul of three Gold, one Silver and five Bronze (that's why we needed that earlier analysis), placing it twenty-fifth in the overall Medal rankings.

We're sure to see commentary around New Zealand's traditional area of strength - medals per head of population. Here we are near the top again this year, with just over 2 medals per million of population, pretty much in line with Australia. On this measure, we're six times as successful as the USA (three million people per medal) or Britain (1.2 million per medal), but we all trail Jamaica, who dazzled on the track with eleven medals in total (six of them Gold), from a population of fewer than three million (remember 'Cool Runnings' - the movie about the Jamaican bob-sleigh team?). If you want more, see this forecasting model produced by Professor Andrew Bernard in the United States and this clever graphical analysis by the New York Times, showing relative performance at each Olympic Games since 1896.

Enough jingoism for one blog post! What I really want to write about is a more meaningful, and sobering, measure of a country's success - New Zealand's ranking in GDP per head of population. Here we have little to be proud of over the last forty years. From being one of the wealthiest countries in the 1960s, we slipped to 22nd out of 30 OECD countries by 2005, sitting between South Korea and Spain, with about 85% of the OECD average Real GDP per head. In 1970, we were up at about 115% of the OECD average.

The good news is that we stopped sliding in the early 1990s. The bad news is that, despite stated political ambitions to return to the top half of the OECD ladder, and enjoying New Zealand's best terms of trade for some decades, we've made no real progress in the last few years.

Looking ahead, I think we face two dark clouds, both related to our remoteness: the growing issue of 'food miles' presents yet another non-tariff barrier to our food exports. Regardless of the science, and the proven fact that total carbon emitted in sending our produce to Europe is less than that of European produce (where stock are generally housed under cover during winter), what really matters is what the supermarket shopper believes. We need to get our message across.

The second point is similar: whether we can remain a destination of choice for the world's tourists, if they get more concerned about the carbon footprint of long distance travel.

As a resource-rich country, we're blessed with some of the world's best conditions for producing protein, we have plenty of fresh water (usually) and a broad range of options for our energy needs. Until recently, we've been sheltered from the adverse trends by high prices for our commodities and a strong and growing global economy. The latter is fading fast, while the former may continue for a few years. But we need to face the reality that one day we won't be the world's cheapest food producer: South America and Eastern Europe are not standing still.

This is a challenge for governance at all levels: for Boards, it's important that we all play our part in thinking how we can genuinely transform our businesses, to get ouselves back onto a faster-growth path. We have the raw materials, we have the brains and the education; we need to commit to investing in a country that wants to grow the pie faster, rather than simply distributing what we have differently.

Next time, I'll look at one person's recipe (non-party political) for restoring New Zealand to the levels of wealth we could enjoy - with all the other benefits that flow in health, welfare and life expectancy.

Welcome a-board - more news on better balanced boards

2008-08-08T06:41:00.009+12:00

If you read The Economist, you'll know that it never lacks confidence in its own rightness.

It promotes a liberal, free-market view of the world and, healthily, has little time for the fuzziness of much modern economic policy making. So I think that an article this week, Getting more women on board, is quite significant. As you'd expect, this article is about the improving gender balance on Boards and in top-level management (known these days as 'The C-Suite' - as in 'C' for 'Chief [insert function - Financial, Information, Executive ...] Officer').

The article discusses the slightly disappointing findings of a survey by Catalyst, an NGO that promotes equal opportunity in workplaces, indicating that the rate at which women have reached the top floor offices has 'stalled' in the last few years. Even now, Catalyst estimates that women occupy only one in seven board positions in Fortune 500 companies.

One interesting, and not surprising, finding is that the strongest predictor of how women will progress into the top executive positions in the future is the current proportion of women on their board:

'Companies with 30 percent women board directors in 2001 had, on average, 45 percent more women corporate officers by 2006.'

You'd expect this if a company has a culture that creates a work environment providing opportunity for all its people - as seems probable if there is real diversity around its Board table. There is also some evidence that female directors are seen as role models who both inspire and support aspiring female executives.

The Economist takes this a step further, getting close to what I see as the real point - the incentive for shareholders to select leaders from the broadest possible pool of talent, regardless of gender or other demographics (apart, one would hope, from ability).

Several years ago, I was a member of a Board of five directors. Normal succession processes had resulted in my being the only male on the Board. The best part of that experience was that it was three or four months before anybody even noticed this rather unusual circumstance. And that, surely, is the end-game - when surveys such as Catalyst's, and blog posts like this, are redundant, because all of us around the table are seen simply as directors, each appointed because the shareholders considered us to be the best person for the role.

Realistically, I think it'll be a while yet.

Paying dividends - a director's duties

2008-07-25T11:11:00.004+12:00

If you've taken any interest in financial markets over the last year (and if you either borrow money or have some to invest, it would be a good idea - especially now - to take an interest), you'll know that a number of finance companies in New Zealand have found themselves in difficulties.

You're also likely to have heard various commentators allocating blame. Some commentators have known what they're talking about, but others we might describe, charitably, as having less than a full understanding.

I thought it might help to explain some of the basic duties of directors in these situations (remembering that I'm a company director, not a lawyer, so I'm drawing any inference as an informed layman, rather than a legal expert), so you'll be in a better position to judge the facts:

1. Dividends

In general terms, dividends are income that shareholders receive as a return on their investment, usually paid from the company's tax-paid profit. Section 52 of the Companies Act says that the Board of directors may authorise the payment of a dividend if it is 'satisfied on reasonable grounds that the company will, immediately after the distribution, satisfy the solvency test' - together with a few other conditions.

So what's the 'solvency test'? For this we look at Section 6: '... A company satisfies the solvency test if -
(a) The company is able to pay its debts as they become due in the normal course of business [my italics]; and
(b) The value of the company's assets is greater than the value of its liabilities.'

My guess would be that finance company deposits which fall due on a particular date would be classed as 'in the normal course of business'. In determining the value of the company's assets, 'the directors must have regard to the most recent financial statements of the company ... and all other circumstances that the directors know or ought to know ...' [again, my italics].

Even allowing for the tidal wave of changes in financial market conditions, and the precipitous decline in reinvestment rates (the amount of deposits that are renewed when they fall due, rather than being repaid to the investor), which has led to the liquidity difficulties of some finance companies, these provisions in the Act should prompt some searching questions of a few people who are known to have been paid large dividends in the not too distant past.

2. Reckless trading

There's another Section (135) in the Act, entitled 'Reckless trading' which may also turn out to be relevant. Under this, a director 'must not agree to the business of the company being carried on in a manner likely to create a substantial risk of serious loss ...' to the people the company owes money to.

The Act provides various defences for people charged under these Sections, so you can expect any legal actions to be lengthy, strongly contested, affairs and, naturally, to be far more complicated than this simple explanation.

But I hope that, after reading this, you will be better able to form your own view of the actions and responsibilities of various parties likely to feature in the news in coming months.

Does absolute power corrupt absolutely?

2008-07-14T06:45:00.006+12:00

Last week British retailer Marks & Spencer faced attacks from shareholders and members of the financial press, when Chief Executive Sir Stuart Rose was promoted to Executive Chairman.

23% of shareholders abstained or voted against Sir Stuart's re-appointment to the Board because they considered it went against good governance principles to have one person holding both positions, Chief Executive and Chairman.

This is an old debate and I think it's very easy to over-simplify it - right or wrong. The real answer, as always, is much more complex and depends on the substance rather than the form of the appointment.

If we start with what we're trying to achieve - a successful company - we can find case studies that both support and oppose the appointment.

In many large American companies (which Marks & Spencer is not, of course), the roles are combined. This has often been quoted as one of the weaknesses that led to the fall of companies like Enron and Worldcom. I think it's always a risk if one person holds too much power in an organisation, but the American system provides balance by having, usually, one or two other positions in addition to the Chairman and CEO: we usually find a President and Chief Operating Officer and, since Sarbanes-Oxley, the position of Lead Independent Director. So, in practice, this 'standard' American model builds in some real checks and balances on each individual.

What really matters is not so much the Board's structure, but how (and if) Board members fulfil their roles adequately. There's plenty of evidence to show that the difference between effective and ineffective Boards comes down to how Board members act, whether they deal with the tough issues and have the necessary debates, and that this matters far more than details about the Board's structure. If you've got the right behaviours in the boardroom, you can deal with deficiencies in the Board's structure or composition. But not vice versa.

As has been in the case in several of my previous 'posts', it comes down to the substance of the matter, not just the form.

Marks & Spencer will be an interesting case to watch. As an English company, it would not be typical to have the President/COO and the Lead Independent providing balance. However, my guess is that the Deputy Chairman and other Board members will be very conscious of their obligations to perform: perhaps we'll have material for another comment in a couple of years.

I learned about succession from that

2008-07-09T14:32:00.008+12:00

They say we learn best from our mistakes ... some people would say that explains why I never stop learning.

I was reminded the other day of one of the biggest boardroom mistakes of my career. If it's any comfort - which it wasn't to me - it was in an area that many boards fail to deal with well, board succession; or in this case choosing a successor for the Board Chair.

I had been Chair of a medium-sized non-profit organisation for about six years and we had agreed it was time for a change, for both the Board and me. First, breaking all my own rules (see my recent post 'How do we fill his boots now he's gone?'), I agreed to lead the succession process. Without realising it at the time, that alone probably restricted our search criteria to people I thought would be good for the role.

After defining the attributes we were after, we developed a list of possible targets. Our preferred choice, from what we knew of the people, was a just-retired highly-successful Chief Executive who we knew had a passion for our sector. Although several of us had met him a few times, none of us could say we really knew him. (Does anybody hear warning bells yet?) I was given the job of phoning him to ask if he'd be interested.

To my mild surprise, he told me this was his first approach to join a Board since his retirement and yes, he was flattered and delighted to be asked. Abbreviating a long story, we felt that we'd 'got our man', so we didn't approach any of the other candidates (I think that's still quite normal, especially with non-profit Boards, because I think there is an understandable reluctance to approach people for voluntary roles, only to say 'sorry' to them later).

Well, he joined, was elected Chair and I left the board. I've never believed in hanging around once you stop being the Chair: it's the governance equivalent of 'Dead Man Walking', when you don't want to be there and you know nobody else wants you around either.

From almost his first meeting, the appointment was a disaster. He started behaving as the 'super-CEO', over-ruling the employed CEO, getting involved in management details and barely including the rest of the Board in most decisions. Get the picture? Much to the Board's credit, they realised very quickly the damage this was causing and he was a very short-term Chair of that Board.

So what did we (or I) learn from all that?

First, there are very good reasons for checking references. We've seen several public examples of what happens when nobody did. Only a few months after these events, someone I knew quite well asked me quietly, but obviously in frustration, why I hadn't checked with him (yes, I know, there's a small thing about Privacy Law as well). He told me - too late of course - that the person in question was a superb CEO, but terrible to work with as a director, because he could never remove his CEO 'hat'. However big the reputation, we need to check whether it is relevant to the role we're considering: it's a big change in approach from being a CEO to joining a Board as a non-executive member (even as Chair), where effective decision-making comes from building consensus, and where we don't manage the business hands-on.

This example showed me that checking those references is vital, even for a voluntary, non-profit position, because the consequence of not doing so can be disastrous.

Secondly, should I have been involved in the process at all, considering it was my successor we were looking for? In an ideal world, I don't think so. Perhaps I was so keen to move on that I allowed (possibly even encouraged) some short cuts in the process. In retrospect, if I hadn't been involved, the rest of the Board might have been more rigorous in interviewing and checking references, rather than letting me influence the appointment too much. In my defence, none of the other Board members showed a lot of enthusiasm for putting in the time that was needed to find someone and make the appointment.

On the scale of how wrong things can go, this was possibly not too bad. But the lessons were clear, and more importantly they taught me that we've developed some good basic principles of how Boards should do things.

These principles have evolved through other people's mistakes: disregard them and people will be learning from yours!

Good governance? Lessons that come close to home

2008-06-16T21:48:00.005+12:00

I thought you might enjoy this from that renowned bastion of good governance, the Russian government. First Deputy Prime Minister Shuvalov was quoted in a recent edition of The Moscow Times.com, extolling the virtues of high corporate governance standards:

"If Russia is to become a major financial center, we need to embrace evolving corporate governance standards," Shuvalov said.

Deputy Prime Minister Zhukov backed this up:

"We want to be seen as a country with a good deal of responsibility in business..."

So I suppose that means it's all OK then. Remember though that this comes at a time when the State seems determined to take control of BP's Russian subsidiary through political, rather than market, channels (throwing in challenges such as heavy back taxes and visa problems for company employees). Perhaps this real-life tussle gives a truer picture of the current state of commercial affairs there.

As a result, I found another comment in the same article, on the role of government-appointed directors to state-owned company boards, rather more plausible:

"Very often, the time they devote to reading documents on the situation in the company amounts to the time they spend in a traffic jam on their way to a board meeting."

Yes, I know, it could never happen here. I hope not. But I'm still dismayed at the number of Board courier packs I see ripped open for the first time on the early-morning flight to the meeting - never mind that the papers are on view up the aisle for anyone to read. The director has at best 30-45 minutes to skim their papers; they can't hope to have a full grasp of the issues they'll be dealing with a few hours later.

If you're going to do this job properly, minimising the risk to yourself and the rest of your board, as well as the company, you need to know what's in those papers: not just the content, but you need enough time to think about the issues they raise.

If you don't, you just might end up in the position of the board of the New York Stock Exchange (other side of the Atlantic this time) a few years ago: thanks to their Board members not reading their papers in advance, they ended up having to pay their departing CEO about $US140 million (oh, and it was a not-for-profit).

Happy reading!

How do we fill his boots now he's gone?

2008-06-08T18:55:00.007+12:00

If you live in New Zealand or Australia, and have even a passing interest in rugby, you'll know that Robbie Deans, one of New Zealand's finest coaches (if not the finest - but that debate has filled plenty of other blogs) has said his farewells to the Crusaders, the most successful team in Super Rugby history.

Just in case you've been on a clandestine trip to Mars, suffered radio failure and missed the news while you were away, the ultra-successful coach of the Canterbury-based Crusaders, after missing out on his dream job of coaching the All Blacks up to the 2011 Rugby World Cup (even more blogs), has been lured - 'snapped up' might describe it better - across The Ditch to coach the Wallabies for the next four seasons.

Actually, this week's post has nothing to do with rugby. What caught my eye was a comment last week from Hamish Riach, the Crusaders' CEO, that Deans would have no say in choosing his successor. And the controversy that this has caused.

Surely, goes the argument, Robbie's been so successful that he should have a hand in picking his successor? Well, I agree with Hamish. However great a coach, or a CEO, or a Board Chair has been, you never, ever, want a clone to replace them. The people who will be held accountable for the success of the new appointment need the freedom to make their own choice. Certainly, let them consult the person who's leaving (more often I've seen the departing leader offer their opinion anyway), and let's have, preferably, a couple of people being groomed to take over when the time comes. That's just prudent succession planning.

But, come selection time, all bets and promises are off the table, and the Board's Appointments Committee must have a free hand. Usually the biggest mistake it can make is to try to find someone in the same mould as their predecessor ('...to carry on the legacy...'). This fails for two reasons: the new person will almost inevitably fall short of expectations (and unfair comparisons), and, secondly, the departure of a key person gives the Board an opportunity to look at what type of person we need for the next few years - rather than slavishly continuing what has worked over the last five or eight.

So, Robbie, I don't know what you think of this - if you've had time to think about it at all in your new job. But my instinct is that the Crusaders have already shown what makes them successful, in making yet another good call: brave management decisions are all part of the mix. I won't be in the least surprised to see the Crusaders continue their winning way, whomever they appoint to fill Robbie's boots.

And, living in Wellington as I do, it hurts me to admit it.

Why me? What do I need to know?

2008-06-01T12:15:00.016+12:00

A friend of mine phoned a couple of weeks ago to tell me he'd been invited to join the Board of quite a large company. He was keen on the opportunity - and the company - and told me he was meeting the Chairman the next day. What were some of the questions he should ask to help him decide whether to accept?

Some of you will already have noticed one positive feature in this: it's natural that we should be delighted by an invitation like this. As an experienced company director once said to me: 'It's never a bad day when you're invited to join a Board.' After all, it's a compliment to one's (perceived) skills and experience. But, as he went on, 'I thank them for the invitation, I enjoy the moment and I'll start my due diligence tomorrow.'

In this case, I think my friend's best move was to resist the temptation to accept the offer immediately, or, as I see so often, to put up no more than a token display of modesty or questioning.

It's easy to fall into this trap in the glow of the moment, but you need to stop and consider what you'll be getting into. Companies legislation is usually quite 'binary' about responsibilities of directors - you either are or aren't a director - so you need to understand that, legally, you carry the full weight of directors' responsibilities from the day you sign on (there's no allowance for 'training wheels').

What, then, are some of the things you need to find out before you accept?

Let me add that this is not a comprehensive list - nor 'expert advice' - and that you need to apply your own 'care, diligence and skill' (the typical legal description of the duty of directors) in assessing what information you need - and how much is enough for you to make your decision. I'm also not talking here about the basic information you should obtain, such as what you can find from trawling the website or strategic/business plans, or your assessment of the organisation's financial position (please remember that cash is what pays the bills, so pay particular attention to where the cash is coming from and how reliable those sources are).

One thing you might do is to ask to read the Board's Minute book. A review over the last couple of years should give you a good sense of how the organisation works, its strategy (whether it has one and how well it's working), financial performance, major challenges, quality, clarity and consistency of decision-making, and many other things that will help your understanding of the organisation. And if the Chairman is reluctant to let you see the Minute book, ask yourself why - and whether this is an organisation and team you really want to be a part of.

As with everything here, what matters to you in all this is how the future looks, not just past performance.

1. Why me?

I think this is one of the most useful questions of all and the answer can tell you a lot. If it's along the lines of, 'Well, we've asked seventeen other people; they've all said no, and we can't think of anyone else ...' (it won't be quite this obvious, but make sure you read between the lines), you might want to look elsewhere. But if the answer is, 'We've got these issues ahead of us and we think that your background in [insert details here] will give us that perspective we need at the Board table,' then you may just have stumbled right onto the main things you'll be expecting to deal with, if you accept.

2. How well can I work with these people?

How many people join a Board without even meeting the people they'll be spending their time with? You don't need to be best friends with them, or even agree with them all the time (if fact if you do, then perhaps you're not the best person to bring a fresh perspective), but, to be effective, you must be able to work constructively with them. You must share a common vision for where the organisation is heading and be comfortable with how it does things (its values and culture). So, at the very least, meet the other Board members, the Chief Executive and top management team: you need to know them and they you.

3. What are the big trends, opportunities and threats facing this business, and what are the Board's big priorities for the next year or so?

You don't just want the answers: you need to know how well the current Board has thought about these things. If you're not happy with the answers, this may not deter you from joining, but at least you know what one of your early priorities will be.

4. How good are relationships with key stakeholders?

It may be pointless to join a Board which has fallen out with its major shareholder or key customers, because chances are that you'll be dealing with some pressing issues, not of your making, in the near future - unless, of course, it's the key shareholder who wants to appoint you to help address the problems.

5. Is the organisation aware of any significant legal action (actual or pending)?

Similar in a way to the previous point: this is not so much about any personal liability - since you may (note - may) be protected against actions that preceded your arrival (please make sure you understand what your actual position is). But, if the issues are significant, they will almost certainly be a serious distraction for the Board, and get in the way of progress in your core business.

6. What's the time commitment?

Don't underestimate this. My rule of thumb is 'three for one': in other works, if we have a four-hour board meeting each month, I'll mentally 'budget' twelve hours a month (say about a day and a half) for the role - four for the meeting itself, four for preparation (reading the papers and doing what else you need to keep up with the issues - wider reading, networking and so on), and the other four for all the other things that you get involved in, such as informal discussions with the Chairman, representing the Board at customer functions, visiting company facilities ...

To do this job properly requires you to put in time and effort. And if you don't, then not only will you be letting down the organisation and your fellow Board members, but you're potentially exposing yourself to greater risk because you won't have as good an understanding of what's going on as you should have.

7. Do I really want to do this?

This is a vitally important question - which you need to ask yourself rather than anyone else. I've found that you need more than director's fees (don't even think about 'status' - that's largely a myth!) to keep you motivated as a Board member: you need a 'burn' that you really want to play a part. Unlike an executive role, where you're in the business every day, as a Board member you may only be involved a few days a month.

I believe you need a sense of excitement and a desire to make a difference in order to keep you engaged. I've found from experience that, if that's missing (perhaps it's a sector that doesn't really excite you), then you may go through the motions, and you may even play a full part at Board meetings. But you probably won't do much more than the minimum and, quite soon, you'll start to regard that courier delivery of next month's Board papers as another chore, rather than opening a window on the next exciting episode.

As you may guess, I've written this from experience of mistakes I've both seen and made. I hope it helps with your 'due diligence'.

If, after all this, you go ahead and join that Board, as I hope my friend will, then good luck with the job ahead ... I trust you will enjoy making a difference as part of your organisation's top decision-making body.

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

2008-05-19T08:24:00.004+12:00

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

2008-05-07T06:30:00.020+12:00

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.

2008-04-18T11:14:00.012+12:00

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?

2008-04-09T06:20:00.009+12:00

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

2008-03-21T07:50:00.008+12:00

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

2008-03-07T18:13:00.004+12:00

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

2008-03-07T05:43:00.004+12:00

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.

An idea whose time has come?

2008-02-06T14:47:00.000+12:00

They say timing's everything. No sooner do I launch this Better Boards blog than billionaire investor Carl Icahn (estimated by Wikipedia to be the 18th richest man in the America) decides to do the same thing!

Reuters reports that Icahn, who first came to public attention with his 1985 takeover of TWA (remember them?), and who has been described as the shrewdest investor on the planet is establishing a blog to discuss ideas on corporate governance, an area in which he has strong opinions [surprise!].

"[The US] is losing its economic hegemony," Icahn said at a corporate governance conference in New York. "I want to see who is interested in this. I really think there's a lot to do."

I shall be interested to see how opinions in America compare with ours. Whatever the views, this only demonstrates that more and more focus is coming onto how boards work, and whether they help or detract from the creation of shareholder wealth.

And that's something we should all, as directors, be interested in.

The long-term vision - soft thinking or an essential building block?

2008-01-25T07:12:00.000+12:00

I was thinking the other day about one of my last Board meetings of 2007. A year or so earlier, we'd agreed a broad-brush picture (aka vision) of what we thought the company should look like in 2020 - which will be long after the current leaders have all departed. This 'vision thing' is not uncommon in companies.
Then, at the end of last year, we found ourselves faced with a choice: either a strategy that would probably give an attractive return over the next four or five years, but which compromised the 2020 vision; or a direction that probably wouldn't pay for five or six years, but which potentially would contribute significantly towards that long-term vision.
It was a robust discussion; at the start I felt the majority mood was for the shorter-term option. In the end, though, and thanks to some outstanding chairmanship (that might be another story), the Board reached a unanimous position, sacrificing the short-term so that the 2020 vision remained intact.
To me, though, the real lesson from this was not whether we made the right decision - which I hope we did! - but how essential it was for us to have done that long-term thinking earlier.
If we hadn't done that, then I am almost certain we would have taken the superficially-
attractive shorter option. It's not that the long-term vision is necessarily right, but that, without it, we would have had no reference point to compare the short-term against longer-term decision. We could as easily have reached a conclusion for all the right reasons that the 2020 vision was flawed and have taken the shorter option.
As I said earlier, lots of boards develop long-term visions: I believe that one way to test whether it actually means something is how often you make hard choices, tested against that vision.
What do you think?

CSR - Necessary but not sufficient?

2008-01-23T05:36:00.000+12:00

Like me, you've probably read a lot about how companies that actively practise Corporate Social Responsibility (CSR) generate greater returns for their shareholders than those that don't. It's very fashionable, but a recent article in Harvard Business Review challenges this comfortable PC view.

According to HBR, there's only a weak link between CSR and increased shareholder value. However, there does seem to be real evidence that the absence of CSR practices can increase risk - a string of corporate misdeeds has shown us all how damaging that can be to the share price, which may recover, and to directors' reputations, which sometimes can't. One of HBR's conclusions is that it may pay "to do good, but not too good": in only 2% of the companies actively dedicating resources to CSR did it actually cost shareholders value. So, for the cynic, perhaps you can think of CSR as another - inexpensive - insurance policy: if we do good things, and consciously don't do bad things, then we're less exposed to the downside. Think of it as a corporate variation on that old definition of conscience, "a mother-in-law who never goes home."

One interesting conclusion I think we can draw from the study is that increased profitability is a poor rationale for CSR. But, as HBR puts it, perhaps doing good is its own reward. And even in the corporate world, is that so wrong?

Welcome to my Better Boards blog!

2008-01-07T15:42:00.000+12:00

I'm glad you've visited. I hope to make it worth your while to return from time to time. (You might want to make it easy by adding this page to your Favourites folder.)

This blog is about helping boards work more effectively: I plan

to include some of my own thinking,
to pose a few questions to make you think, and
to provide links to other articles that might help.

I expect the subject matter will be wide-ranging, but everything will be aimed at helping boards, and those of us who sit at the table, to add more value to our organisations. I think there's an opening for a forum like this - although I suspect many more boards than we might assume already work quite effectively: we just never hear about them because boards that do their job seldom attract the limelight. If I'm successful, we'll read about even fewer in the future.

As the old governance paradox has it: When an organisation is working, the CEO's the star; when it all turns pear-shaped, "Welcome a-board!"

I'm also keen to know your thoughts - whether or not you agree with what I say - so please don't be shy about adding your comments.

I look forward to your joining me on this exploration.