Opinion

Recording board meetings

2012-01-31T06:25:00.000+11:00

Maybe the question here is not so much "should board meetings be recorded" but rather what effect does recording have on board effectiveness?

Leaving aside the legal considerations, which are important, one might argue that if full and frank discussions cannot take place, then decisions might be different to those had that information been presented. I suspect that a board member might be reluctant to discuss in a full and frank manner if he/she believes that those words may lead to either legal, personal of industrial implications. This may impact outcomes. As official minutes are generally santised, such problems occur much less frequently in a purely written form. Therefore I have no doubt that in many instances, recordings may hinder board effectiveness.

The other context is when a board takes poor minutes and has experienced many disputations about what was actually said and agreed at a meeting. Recordings may certainly help corporate memory but may hinder personal contribution for reasons mentioned.

I feel however, that verbal presentations made to the board by non-board executives might be recorded because the entirety of the presentation is the "evidence" upon which the board relies, deliberates on and uses to resolves matters. Opinions, comments and other statements made by executives in support of a view are important to the resolution of the issue in hand. The problem with this however, is that honestly in such statements may also be stifled as with board members. The fear of "retribution" within the organisation for honest (but not necessarily accurate) statements is a real influence on subjective decision-making.

Answering some questions on the board and CEO relationship

2012-01-30T20:29:00.000+11:00

1. How far or deep can a board of directors get involved in judging or influencing the leadership style and the leadership activities of its CEO?

The answer of course is that "it depends." Let us accept firstly the premise that a board appoints its CEO to fulfil certain tasks and to achieve certain outcomes. If the board is rational and competent, it determines the leadership and management skills and attributes needed to satisfy the board's objectives and appoints the best person it can afford who possesses those attributes to the rol. The reason is because such an appointment lowers appointment-risk and increases the likelihood of successfully achieving that which was intended.

Of course, if the board doesn't behave rationaly or competently, then the appointment may be sub-optimal or fail.

When we talk about "leadership and management skills" we inevitably include leadership style and "activities" or management practices. These too vary with the context.

The leadership style required for a predominantly "left-brain" organisation is different to one which is predominantly right-brain. Similarly, what you do and how you do it, from a leadership perspective, will vary, for example depending on whether you are changing an organisational culture, process or other corporate attribute very quickly or slowly (i.e. "big bang" change versus "continuous improvement".) Management style for revolutionary change is quite different to a "steady as she goes" type of change agenda.

To each of these myriad of contexts is applied a "management style" that will work best in that context.

If the CEO doesn't posses in his/her skill-set an ability to apply the optimal "style" then a sub-optimal outcome will occur. Sometimes this sub-optimal/dysfunctional approach can be very painful for an organisation.

The board's role, among other things, is to monitor CEO behaviour and performance. If sub-optimal leadership strategies are being applied within the orgaisation, the board, through the Chairman, should discuss the matter with the CEO in order to understand the issues: why did the CEO use that technique; is the CEO aware of the ramifications of that chosen technique; is the CEO capable of utilising the optimal strategy, etc

If the CEO doesn't satisfy the Chairman/board that they will/can remediate the situation in an acceptable time-frame, then the board may consider this one of the triggers that starts a search for a new CEO.

Remember that a CEO is meant to be "an expert" in dealing with and satisfying the challenges facing the organisation and for which that CEO was appointed. Board "involvement" and "influence" should only be applied when warranted, and that is a very subjective decision.

Unless the board is mature and knowledgable, then they too may misjudge the situation and impose themselves unjustifiably on the CEO when he/she is quite capable of handling the issues.

2. To what extent HR matters ( usually the domain of the CEO) can be treated on board level?

The importance of HR will vary depending on the corporation, what it does and how it does it. I don't know of any company however that doesn't require people - so the importance of HR, culture, industrial relations, and so on will vary depending on context.

When the management of HR or HR-related issues threatens to destabilise the company, force the company to take on unjustified risk or expense, or when the issue threatens to tarnish the company's reputation and ability to sustainably transact its business; then the board must interfere to ensure suitable remedies, strategies or solutions are in place. That doesn't mean that the board has to do it, but rather that it is done. If internal staff can't do it, then it's the board's responsibility to ensure that competent outsiders are brought in to "fix it".

3. What are tasks of board committees?

Each board committee (e.g. Audit, Finance, etc) has its own "agenda", own timelines, and its own objectives. The tasks therefore vary depending on those variables.

4. In what way is CEO to be involved in choosing his own successor etc?

It will vary from context to context. If the CEO has been successful, respected and is, say retiring on good terms or has been head-hunted into a new prestigeous role, then I suspect he/she will be actively involved in their own replacement.

If on the other-hand the incumbent has failed in his/her role, why would a board seek his/her involvement in the replacement?

Succession planning

2012-01-29T11:27:00.002+11:00

One needs to differentiate between succession planning and the triggers that activate the plan.Normally, the concept of succession planning applies to senior management and not just the CEO.

Therefore, it is often a plan drawn up by or under the auspices of the Head of HR or equivalent or an external specialist. The plan is ultimately presented under recommendation to the board for review, amendment and ratification.

All corporations of any significance (i.e. employee numbers) should have a robust succession plan that is reviewed regularly.

The issue is then "what are the triggers that activate the plan" relating to, in particular, the CEO, the CFO and perhaps the Company Secretary.

Some of the triggers might include:

- unexpected resignation of the incumbent
- failure to achieve individual KPO for which the incumbent is responsible
- failure to deal adequately with a situation that the incumbent should have dealt with more effectively
- an incumbent's indiscretion, dishonesty, unethical behaviour, or similar
- foreseen milestone, such as age retirement
- premature or unexpected incident such as illness or accident

The succession plan should not only elaborate and identify individuals, but also processes that need to be implemented in the event that the plan is activated for any reason. In all probability, the plan will vary depending on the role. For example, the search for a CEO may be "in private" (i.e. a head hunted role) versus open advertising for other roles. Also the preparation for replacement may occur while the incumbent is still in the role.

A retraction request from "The Age"

2012-01-20T17:19:00.007+11:00

In today’s paper (http://www.theage.com.au/victoria/saddams-music-teacher-jailed-over-robberies-20120120-1q9gc.html) The Age reported that a man was jailed for robbing two elderly women aged 87 and 60.

No argument with the 87 year old, but I am 61 and feel that I am in the prime of my life – and certainly not “elderly”. We “mature” adults are to life what a good aged red is to wine; what ripe fruit is to delicious eating; and what experience and a meaningful life’s journey is to wisdom, mentorship and good counsel.

A polite and gentle retraction would be appreciated from the Editor.

It’s hard enough to get through to those “youngsters” in their 20’s and 30’s who think that one’s 50^th birthday automatically triggers a “factory reset” of their intelligence and experience. We really don’t need The Age newspaper reinforcing those discriminatory attitudes.

Corporate performance reporting

2012-01-19T08:20:00.002+11:00

The "only performance report" that matters is the one that reports to shareholders the extent that the corporation has lawfully and ethically delivered shareholder objectives against the criteria of "value", "benefit", "growth" and "risk".

And the only way a board can know what those objectives are is to ask ALL shareholders.

Not only don't corporations ask ALL shareholders but they use institutional (big investor) objectives as a proxy for all shareholders. Research has demonstrated that this assumption is false.

If you ask directors/managers to developed an internally generated performance report, then you will get a subjective presentation of what suits directors and managers and justifies their positions - and not what shareholders consider important or want.

A cynical view - perhaps - but many directors have demonstrated over an over again that they make decisions in their own interest rather than that of shareholders.

Changing society's priorities

2011-11-09T10:28:00.001+11:00

Considering the industrial action by society's most necessary workers (health, education, police), maybe it's time to change the priorities we have in society. I suggest the following:

A society must treat all people equally and without bias;

Education at all levels must be accessible to all and the only way to do that is to make it free and make all tertiary education merit-based;

Private education is open to all who choose it but the State won’t fund it to any greater extent than if the student was in the public sector;

The law must be blind to colour, religion, gender, sexual preference and socio-economic status;

Equality of health access and health quality to all;

The state and its instrumentalities must be secular – because people in society believe different things. The State must be neutral while allowing anyone to believe “anything” they choose – provided it doesn’t harm or denigrate anyone else;

Free speech comes with responsibility and obligation (i.e. no harm to others);

If you are unemployed and you want unemployment benefits, you must work for the state on community projects, to the best of your ability;

Migrants to Australia must accept Australian law and Australian values – otherwise they can go elsewhere;

Hate speech (or actions) is illegal;

The Education system must teach students, civics, ethics and basic commercial principles to enable them to interact effectively in society when they graduate from school;

Politics must lift its game – it needs to be principled and competent;

Donations to political parties must be illegal;

Politicians who make promises before an election must deliver them or suffer a penalty (lose a percentage of their pro-vote) at the next election;

The helping professions (health, education, etc.) would receive significant tax cuts to enhance their standing and their value – to both society and the individual;

… and I could go on…..

Two Views on Intelligent Design

2011-11-04T13:06:00.000+11:00

As I understand the argument, it really boils down to two almost irreconcilable positions.

On the Scientific View: Science as it stands today, is incapable of proving or disproving the faith-based propositions due to the unavailability of suitable and adequate tools, techniques and measurement methodologies. Although science is a reflection of Man’s great intellect, intelligence, advancement and at times, wisdom, it has developed a profound arrogance.

Although scientists acknowledge (begrudgingly) that there are areas of Man’s beginning and existence for which they have no explanation, they refuse to acknowledge that answers exist and that the offered answers may be correct. They argue that since they cannot prove those answers in a laboratory situation, those answers are "incorrect". Their argument is logically incorrect as it commits the fallacy of Argumentum ad Ignorantiam: that the scientist’s proposition (that faith-based propositions are false) is true simply on the basis that the scientist’s proposition has not been proven false.

There must be and is an answer to Man’s beginning’s and his continuing existence. Answers do exist as proven by Man's very existence. The problem is that science has not evolved sufficiently to be able to demonstrate or prove those answers.

The limitation is of science and scientific method and not of the answers provided. Science, in due course, will either confirm or disconfirm the hypotheses upon which various answers have been provided to these nagging questions. It may be that all hypotheses provided to date will be disconfirmed. That will not mean that there is no answer – it will merely mean that the answer has not yet been found.

Furthermore, it is not a matter of categorising the ‘dispute’ as being between ‘science and faith’, as such a categorisation implies that faith is ‘unprovable’ scientifically. A more appropriate categorisation is between the ‘scientifically provable’ and ‘the as-yet scientifically unproven’.

On the Religious view: Religions emerged from their various contexts to suit Man’s needs at those times. They were formed in response to not only socio/environmental stimuli, but also Man’s need for an understanding of his environment. His ability to explain profound, largely natural, phenomena eluded him: his only recourse was to a supernatural being: a God that had all the answers, but was out of the reach of being known by Man and therefore could not be refuted.

Understandably, each religion claimed its “rightness” over all other beliefs and religions. Some interpretations within some religions even went so far as call for the death of all people who did not adopt their view of the world and of their God. This continues to this day.

Soon Man learned that the people who controlled access to their God gained enormous power over the people who followed that God. Some religions manipulated the supposed message and intent of their God in order to retain their power. They could do this because followers of that religion were too trusting, intimidated, had no better explanation, unable to question or were afraid to question or challenge.

Others felt that the greater the number of adherents to that brand of religion, the greater the power of the religion and therefore the greater the power of the people who controlled the gateways to it.

In each case, the religion was a product of Man, his limited understanding, and the context within which that religion was born.

If one reflects on the essence of religions, one finds kernels of truth which if adhered to, would enhance Man’s growth, harmony and wellness. Most religions prescribe sane and appropriate ways for Man to interact with his fellow Man. In the contexts in which those religions formed, those prescriptions may have served its adherents well. The intercession of Man to manipulate these prescriptions for his own ends, has not served Man well and in many cases has distorted the essence of goodness to be found in each religion.

In each religion there are Men of goodwill to their fellow Man, Nature and the environment, and there are people of ill-will or of self interest who do not serve Man’s best interest. It is not the religion that fails; it is the people within it who fail to heed the goodness of the religious context in whose name they speak.

In each religion there are aspects, interpretations and guidelines that serve its adherents well and those that do not. Each religion offers its own definition of ‘right’ and ‘wrong’. Some of these definitions of rightness and wrongness are shared across many or most religions and others are peculiar to a specific religion. Each in their context is given meaning by that context.

We are all of our own context – a context that may be defined by a religion or one defined outside of religion. If we all took our bearings only from our context’s definition of ‘right’ or ‘wrong’, we might become confused by the conflicting interpretations of rightness and wrongness offered by different contexts.

In the Universe of Man there is no absolute ‘right’ and ‘wrong’: only that which serves him and that which does not - only that which enhances the growth of his essence and destiny and that which impedes it.

Despite all of this, religion is merely a context. The context is not ‘good’ or ‘bad, or ‘right’ or ‘wrong’ – it just is. Our challenge is to make decisions from within our own contexts that will enhance our essence, our destiny and the world around us. The context gives our choice a character that enables it to dimension our essence. No more, no less.

Is science right? Not until it can convincingly confirm or disconfirm the claims of religion. As long as scientific method remains imperfect, its inability to confirm or disconfirm

Is religion right? Depends on which religion you are talking about and whether you believe in religion at all. Believing in a religious view does not make the view right. Not believing in religion or a particular view does not make that view wrong.

Selling value in law firms

2011-11-02T08:26:00.004+11:00

The way to establish value as perceived by the client requires 1) an understanding of what the client is trying to achieve (both generally as a business and specifically in the context of a particular brief) and 2) the way that the law firm can help the client achieve those outcomes (rather than "just" provide a service). In this way, the legal firm is perceived as contributing to corporate KPOs rather than "just" being a cost (and therefore detracting from those KPOs.)

In order for the firm to do these two things, a person within the firm needs to understand the client's context and needs, and be integral to, engineering a service or group of services provided by the firm that will help deliver those outcomes for the client. This person must be able to pull resources from anywhere in the firm (or outside of it) to deliver what the clients need.

Intellectually, most people in the legal community will acknowledge this as a truism and obvious. The challenge comes from aligning the firm structure, processes, accountabilities and reporting with the needs of its clients and the market.

As I understand the structure of legal firms, service lines have their own utilisation, sales and contribution accountabilities. This is OK if you are based on a "sales" culture where every service line is trying to (and measured by) selling and utilising its time and resources. However it's not the optimal structure if you have to engineer different service line inputs as and when a client may need them so that the firm can "deliver value".

Therefore, if a firm is serious about delivering value, then it needs to seriously consider the suitability of its structure to deliver such value.

There is another problem that will occur in moving to a "marketing" culture (i.e. giving the client what he wants rather than selling them only what you're offering). Without getting too philosophical about the issue, a sales culture tends to be "Left-Brain" meaning that it is predictable, sequential and ordered. People know where they belong and to whom they are accountable. A marketing culture is more "Right-Brain". People are more flexible, able to handle ambiguities and don't stress with more than one person to be accountable to.

Therefore, a culture that is value-driven and market-oriented, will necessarily be more right brain than left brain. If your firm is currently composed of a lot of technical experts with a fine eye for detail, then I suspect they are predominantly left-brain. If you impose a right-brain culture on them (e.g. a matrix form of management) they will stress because they seek orderliness and predictability. If the firm restructures to provide a fluid environment to best deliver value to clients, then expect stress to increase. This needs to be managed or else the firm will implode (i.e. staff will leave to find less stressful environments.)

Ombudsman Report - Police & the Minister

2011-10-28T11:58:00.000+11:00

How is it that the current government, when in opposition, constantly made the Minister (of whichever fiasco was playing out at the time) responsible for what happened in the Minister's department. Yet the same rules don't apply to the current government.

How does a society build robustness?

2011-10-28T09:23:00.004+11:00

In response to a colleague's question “How does a society build robustness?” I suggest the following:

A society must treat all people equally and without bias;

Education at all levels must be accessible to all and the only way to do that is to make it free and make all tertiary education merit-based;

Private education is open to all who choose it but the State won’t fund it to any greater extent than if the student was in the public sector;

The law must be blind to colour, religion, gender, sexual preference and socio-economic status;

Equality of health access and quality to all;

The state and its instrumentalities must be secular – because people in society believe different things. The State must be neutral while allowing anyone to believe “anything” they choose – provided it doesn’t harm or denigrate anyone else;

Free speech comes with responsibility and obligation (i.e. no harm to others);

If you are unemployed, to get unemployment benefits, you must work for the state on community projects, to the best of your ability, until you find alternate employment;

Migrants to Australia must accept Australian law and Australian values – otherwise they can go elsewhere;

Hate speech (or deed) is illegal;

The Education system must teach students, civics, ethics and basic commercial principles to enable them interact effectively in society when they graduate from school;

Politics must lift its game – it needs to be principled and competent;

Donations to political parties must be illegal;

Politicians who make promises before an election must deliver them or suffer a penalty (lose a percentage of their pro-vote) at the next election;

The helping professions (health, education, etc.) would receive significant tax cuts to enhance their standing and their value – to both society and the individual;

… and I could go on…..

Political instability and business management

2011-10-13T14:11:00.000+11:00

At the moment, we are experiencing, among other influences, political instability. Yesterday it was economic instability, industrial instability, etc... There is always something - never in recent times have we had total calm and predictability.

Business must navigate through and past these obstacles and still achieve their objectives - that is what directors and managers are employed to do. Those skilled at navigation will reap the benefits and those who are indecisive and/or don't know how to deal with the issues that confront them, will similarly get the outcomes they deserve.

Today we blame a fairly sub-optimal community of mediocre politicians - but it is the constituency that voted them in and which led to the current state of affairs. It may get worse before it gets better. Therefore, learn to deal with it rather than complain about it.

Senator Nick Xenophon parliamentary disclosure

2011-09-16T11:58:00.000+10:00

There are a number of issues that arise under the umbrella of Senator Xenophon's disclosure this week of alleged rape within the Catholic Church.

First: The allegations were of a rape. That is a crime. The organisation within which this alleged crime was committed should have/must report it immediately to the police - its a crime and not a discretionary or disciplinary issue for the Church to manage.

How would it be if any organisation within which a crime was committeed had as much time as it liked to manage the individuals, evidence, context and witnesses before it reported the matter to the police? It would quite legitimately be totally unacceptable. Yet the Catholic Church, which is theoretically meant to hold the moral high-ground, has not been moral or ethical by refusing to report the mattter to the police immediately the allegation came to their attention. There was NOTHING for them to do BUT report the matter to the police and allow the authorities to do what they needed to do.

In fact, one may even go so far as to accuse the Church of aiding and abbetting an alleged crime.

Secondly: The time taken by the Church to "investigate" the matter could reasonably be interpreted as a cover up as there was nothing for them to investigate. It is even conceivable that the Church may have been found to have allegedly covered up, abetted or facilitated the alleged accused from ever having to front the law. This, in any other circumstance, would be interpreted as a criminal act in itself.

Therefore, the Church was entirely incorrect to delay, for even a day, any such alleged criminal activity. The Church has lost any moral high-ground it might have had claim to by virtue of its demonstrable inaction.

In their defense, the Church argues that there are complex and sensitive issues to consider. Sorry - that's irrelevant. There are no complex or sensitive situations that absolve alleged criminals from facing the legal process. If complexities and sensitivities do exist, as they do, then the police and judiciary are quite capable of managing them. It is not the place of the Church to decide what is complex, sensitive and therefore beyond their obligation to report to the police. How much crime would be covered up if we all had that privelege?

That brings us to the actions of the Senator. Generally speaking, the actions of the Senator in this case are unusual but not without precendent. I suspect that the Senator acted because of the clear breach of duty of the Church and the appearance of obfuscation and delay by them. He probably figured that the law and the authorities can't do their job if the powerful owner of the context in which the incident allegedly occurred appears to be preventing access or due process.

By making the statement under Parliamentary Privelege the Senator was able to surface a clear breach of process without the defamatory threats that would certainly be applied if the matter was surfaced outside the Parliament.

I conclude that the Senator's action, in this circumstance is both reasonable and appropriate. He has used his judgement wisely to bring to the authority's attention something allegedly criminal that strong forces were trying to keep hidden.

In that action alone, the Senator has done more good for the average citizen than much that has been undertaken in Parliament over the last couple of years.

Risk Management throughout an organisation

2011-09-16T09:33:00.000+10:00

I would have thought that if the entire organisation has a "risk-management" mentality, then it will be very hard for new and break-through initiatives to occur from within.

I don't mean to imply that risk-management is unimportant - just the opposite - it is critical. However, it depends on where the risk management should occur. If you are an engineering company making or designing highly volatile and dangerous products, then product and process risk-management disciplines need to be embedded within the company, while the business risk-management needs to be(inevitably will be) "higher-up".

On the other hand, if you are in a highly volatile consumer market that requires adaptive products and innovative channels, you need to be creative and encourage creativity within the departments of the corporation. The commercial (and legal) risk management activities need to occur at executive management and at board level.

Horses for course, as they say. What is certain however, is that one size does not fit all. Be careful what you aspire to achieve - a risk management culture throughout will stifle entrepreneurship and creativity - just look at the Australian banks!

How many directorship can a person take on?

2011-09-11T12:39:00.002+10:00

The number of directorships is certainly a product of individual competence but other issues come into play:

1. The complexity of the context and the corporation: the more complex the organisation, the more time and commitment is required. Therefore, fewer additional commitments are reasonable.

2. The role of the director in the corporation and the number of sub-committee commitments required will also affect the ability to take on additional roles. Where the corporation requires limited involvement, then more directorships are possible. The more a corporation requires a director to take on pseudo-executive commitment, then the fewer other commitments are possible.

3. The individual's commitments outside the corporate area also have a major influence on the time available. Where individuals also take on NFP, voluntary, charitable and other commercial activities also limits their productive availability to any particular corporation.

4. The propensity for spontaneous calls on a director's time: if the corporation is in a highly volatile space (calamities, cultural dynamics, union volatility, political volatility, sensitivity to economic dynamics, environmental sensitivity, etc) the more there is likely to be unplanned calls on director time. In that sort of context, it's hard to commit to too many directorship (or other commitments) because of the unpredictability of the context and the inability to "give time and attention" when called upon.

5. Finally, the individual's propensity to accept personal risk: in the current climte of increasing director accountability and shareholder activism, fewer directors are prepared to take on too many commitments (board or otherwise) which enables them to stand accused of negligence through lack of focus.

The dilemma of the Gillard Government

2011-09-01T14:48:00.000+10:00

It is true that the Gillard Government has found most things very difficult so far during its term in office. Part of this has to do with the way it came into power, part the "breaking of promises", part the poor implementation of policy and part as a result of the structure of the minority government.

They are the realities.

In all probability it will be thrown out of office at the first opportunity that the Coalition Opposition can engineer.

What also appears to be a reality is that the Coalition Opposition is so focused in de-legitimising the government that it has failed to develop any policies of its own and appears to be rehashing old policies that saw the Coalition lose government.

A reactionary Right-Wing government may ultimately be the biggest and most impactful legacy of the Gillard Government.

Myth 23: Business is about 'Maximisation'

2011-09-01T14:33:00.001+10:00

There is a fundamental difference between maximisation and optimisation – and business is not about maximisation, but about optimisation. Dividend and Asset Growth, for example, are competing objectives. If we wish to maximise dividend, then we have less to apply to asset growth and vice versa. Maximisation is about “the most” while optimisation is about trade-off, or “the best in the circumstance”.

No organisation that I have ever encountered has been focussed on only one objective. Most corporate objectives have the following dimension:

1.        A benefit dimension: dividend, capital gain, shareholder discount, etc.

2.       A value dimension: share price, market capitalisation, net assets, etc.

3.       A growth dimension: sales growth, profit growth, market penetration, market share, all within certain timeframes.

4.      A risk dimension: how much risk the organisation is prepared to endure to satisfy its objectives, with risk often considered to be debt, gearing, diversification, etc.

Management frequently speaks in terms of maximisation: sales, profit, dividend, ROI, etc. yet all these have implications and contexts.

If I wish to maximise profit, I will restrain expenditure thus possibly constraining growth. If I maximise sales, I may compromise profit. If I maximise dividend, then I may compromise future growth.

This is not rocket science, yet management frequently thinks in simplistic maximisation-terms and fails to recognise the real trade-offs involved in management. That’s why good management is difficult because its about getting the best outcome in a dynamic and multivariable environment.

The common faults of management fall into these categories:

1.          Chasing maximisation at the expense of optimisation.

2.         Not understanding the trade-offs involved in every decision.

3.         Ignoring the dynamic and imprecise: just because and influence is difficult to measure doesn’t mean it doesn’t exist .

4.        Failure to analyse the trade-offs.

5.        Focusing on management-determined objectives instead of shareholder-based objectives. It is easier to manage if you have clear metrics against which to assess options. Since management-made objectives are coloured by subjectivity, shareholder objectives are more robust.

Myth 22: Management always acts in the best interest of owners

2011-09-01T14:28:00.001+10:00

One does not need to refer to WorldCom, Enron, HIH, Qintex and scores of other profound examples of malfeasance, greed, theft, egotism, connivance, deceit, nepotism, scandal and ineptitude to accept that not all management acts in the interests of the corporation, let alone the interests of the shareholder.

There are many inescapable facts that managers, directors, shareholders, brokers and analysts must acknowledge:

1.          Managers are human beings.

2.         As human beings, they have perspectives, attitudes and perceptions that are unique to their personality, experience and context.

3.         As human beings, most frequently they are attracted by security and shy away from fear, insecurity and confrontation.

4.        Within the corporation, the implications of decisions and actions are not all uniform and predictable.

5.         Decisions that are unpredictable lead to enhancing insecurity and are therefore less preferable.

6.        Managers, like other mortals, pursue self-preservation.

7.         Managers, to “protect themselves”, are less likely to make decisions that are higher-risk and that threaten their security within the organisation.

8.        Some organisations occasionally need to take higher risk decisions.

9.        Managers, because of their own human nature, may fail to make the decisions that are in the best interest of the organisation and therefore the shareholders.

10.      Management through its own subjective filter interprets and decides what is in the best interest of shareholders.

We also know that frequently CEOs choose directors who will serve the CEO’s purposes rather than provide the organisation with the dispassionate and independent adjudication and direction expected of the Board. Self-seeking behaviour therefore stretches from the bottom to the very top of most organisations.

Beware of the manager or director who passionately believes that his/her organisation is an entity apart from its owners. These people argue that “shareholders are merely investors and if they don’t like what they get from their association with the company they can leave and go to another company.” You show me a company with this view and I’ll show you a company that is not only not satisfying is shareholders, but is heading toward oblivion.

Myth 21: Organisations must, as part of the fundamental reason they exist, 'fulfil' their employees

2011-09-01T14:23:00.001+10:00

Contemporary management has embraced the attitude that it is the employers' responsibility to enable staff to fulfil themselves in the workplace.

This is quite legitimate when the fulfilment of staff is a necessary condition for the satisfaction of corporate and shareholder objectives. However, many organisations pursue the fulfilment of staff as a primary objective of the organisation, ranking equally with other stakeholders and with shareholders - and sometimes above them.

Although sounding somewhat apocryphal and politically insensitive in this 'new age' environment, staff are “merely” enablers to help the organisation fulfil its objectives much like other organisational elements.

The organisation does not exist for the benefit of staff but for the organisational outcomes that are intended to be delivered by them. In order to deliver these outcomes, the organisation needs to employ and maintain staff. In order to maintain staff, it needs to satisfy them sufficiently for them to do their jobs.

This logical argument is intuitively recognised by most organisations. Yet some of them choose to elevate the importance of staff to a point where staff satisfaction is divorced from the roles they are there to fulfil, and rank such satisfaction ahead of shareholder (and sometimes even corporate) satisfaction.

The reason for this is that it is easier to provide employee fulfilment than deliver corporate objective. After all, who among the staff will argue against their own happiness and contentment?

That virtually all employees employed by corporations work for someone and are therefore “enablers” is painful to acknowledge – particularly by those in the organisation.

Even when employees own shares in a corporation, the shareholding is a mechanism to secure commitment and therefore a higher probability of achieving objectives – for all shareholders.

The cost for satisfying staff is borne by shareholders. A position where a corporation incurs costs borne by shareholders for the satisfaction or gratification of staff that do not deliver benefits to shareholders in excess of their own costs is not sustainable in the long term.

Managers need to ask themselves “what is the nature, structure and character of the employees we need to deliver our objectives.” Everything outside that definition is an unnecessary expense and at shareholder cost.

Myth 20: Organisational culture is a 'given'

2011-09-01T14:18:00.001+10:00

Organisations are often heard to say 'we can't do that because it runs counter to our culture', or similar comments that reinforce the organisation's existing culture. Because culture is legitimately so hard to change, management tends to regard it as a given and something that shouldn't be tampered with.

And yet, culture is as much of a construct (enabler) as any other part of the organisation and it is required of it to contribute to the delivery of corporate and shareholder objectives in the same way as is expected of other parts of the organisation.

Shareholders are not too interested in the preservation or enhancement of the organisational culture of their investment if that culture impedes or hinders the satisfaction of their objectives. That doesn't have to mean 'open slather' or immoral and unethical practices, but it may have implications on style and method related to decision-making, communication, competition, reward, advancement, involvement and empowerment issues, among others.

Culture is an enabler and can be (should be) moulded to provide the optimal outcome for both the organisation and the shareholder. Corporations that are internally focused and consider that they have an existence independent of their owners, find it easier to justify the stability of the organisational culture, since for employees culture helps to define who they are and where they belong. Changing culture creates instability, insecurity and enhances stress.

But when one is focused on shareholders, then culture becomes an enabler and can be prudently changed or refined when necessary.

Many corporations are in the process of spending literally millions of dollars (some hundreds of millions) on creating “knowledge-based organisations”. Yet for some of these corporations, the investment has been akin to sitting in the car park tearing up $100 bills non-stop – an absolute waste of money.

For a “knowledge-culture” to be effective, it requires a culture to share and leverage experience and skill, and to see corporate value from the “sharing” rather than the “having” of knowledge. Many of these organisations desire the benefits of a knowledge-based environment, but aren’t prepared to remove the competitive, blame mentality, inability to learn from mistakes and other dysfunctional elements from their existing organisation’s culture.

The knowledge-based enabler for these organisations is frequently appropriate to their achieving their desired outcomes, but because they regard the organisational culture as sacrosanct, they waste their investment in knowledge, and thwart the organisation’s ability to deliver the necessary benefits to shareholders.

Myth 19: The 'SWOT' analysis is an excellent tool to build effective strategies

2011-09-01T14:13:00.001+10:00

Most managers have experienced the SWOT analysis – strengths, weaknesses, opportunities and threats. The theory is if you understand these things about the corporation, then you can optimise the business to leverage the strengths, minimise the weaknesses, capitalise upon the opportunities and avoid the threats. Anyway, that’s the theory. In practice, two profound dangers occur in using the SWOT.

Firstly, many companies assume that a strength is an attribute that needs to be built upon. True on many occasions, but not a universal principle. IBM correctly believed in the days before the PC, that their core strength was its unsurpassed competence in main-frame computers. Their decision was to leverage that strength.

The problem occurred when the PC came to the market. The strength that IMB had and leveraged, was not the strength that they needed in the “new world”. Many organisations are lulled into a false sense of security by deluding themselves that what they regard as their strengths (and they often rely on their own opinion of themselves) will be the attributes that will see them through to the future of the company. Such assumptions often deaden the organisation to the realities and dynamics of their chosen market. Such delusions are deadly and have seen many corporations realise only too late the price of leveraging only existing strengths.

Therefore rather than asking “what are we good at”, the core question needs to be “what to we need to be good at to get the desired outcomes?”

Secondly, it is very rare (based on nearly 35 years of consulting experience) to see a company undertake a SWOT analysis at every level of the organisation and review that SWOT when basics within the organisation change.

If a company chooses to embark on a web-based sales channel, for example, then its SWOT will have a certain construction. But if the organisation decides to embark on a manufacturing or retail strategy then that SWOT would (should) look quite different. A decision to leverage certain strengths might be a valid decision in a certain context but entirely inappropriate in another context. As an organisation lurches from business plan to business plan (sometime annually and sometime three-yearly), the SWOT undertaken in year one will, in all probability, be quite different in year “X”.

Inconveniently, most pressure to change occurs between planning sessions, not when an organisation chooses to develop its plan. It is a rare company indeed that constantly reviews its SWOT analysis and the impact at each level of the organisation – yet it is exactly that sort of review that is needed when the corporate focus and activities are significantly based on the outcomes of the SWOT analysis.

Myth 18: The planning process should revolve around maximising the sale of products and services

2011-09-01T14:02:00.001+10:00

There are few people who would contest the statement that most for-profit organisations are driven by efforts to maximise the sale of their products or services. In principle, there is nothing wrong with this provided that such sales contribute to the core outcomes required of the organisation.

Market share does not always equate to profit as there is almost always a cost of securing market share. Often the cost of growth is discounted by corporations in the pursuit of additional sales.

One (of many) large multinational Australian company was frustrated when as a result of a sales growth initiative, it secured its growth objective but found its profit had suffered badly. Staff when encourage to chase sales found it quite easy: they discounted stock. The error of management in that situation was they asked staff to chase sales, rather than margin - “One engenders the behaviour one measures.”

Most companies chase sales because of the benefit (profit) that such sales deliver. Sales for their own sake often leads to loss since the purpose of the sale has been “missed” i.e to generate net contribution.

The planning model proposed below argues that corporate (shareholder) objectives should drive the markets in which a company decides to be active. Each market has different characteristics and a different propensity to satisfy core objectives.

Within that market/s, the company must decide which products or services are best to “entice” the market to buy them. The total of sales and related activity in those markets must secure the objective required. If not, choose additional or different markets.

Once the product and service mix is chosen, then the method of enticing the consumer and getting and supporting the products in the market need to be resolved. Sometimes these decisions impact enormously on the real “cost” of product. The decision by Amazon.com to be web-based rather than retail-based had enormous impact on profitability in the short-term.

The lesson from all of this is quite pragmatic: unless the growth in sales delivers the outcomes desired by the corporation on behalf of shareholders, then don’t pursue it.

Choose the sales level and mix that gives you what you really are there to deliver – not what boosts your ego.

If shareholders have a profile of long-term growth, then strategic positioning in the market by securing market share may be an appropriate strategy. If shareholders have a profile of short-term dividend, then strategic product positioning over the long-term may not be appropriate.

Product and service sales are enablers to achieve outcomes – not the outcomes themselves.

Myth 17: Tools and techniques chosen by management enhance owner objectives

2011-08-31T17:15:00.001+10:00

My research on shareholder, corporations and managers illustrates that managers are “merely” people with their own attitudes, perceptions, biases and fears. These human traits, when allowed to dictate corporate policy, will inevitably impact the quality and robustness of decisions made – and ultimately will impact on shareholder outcomes.

Take a manager faced with a decision that involves a significant risk to the corporation. If the culture is one that is quick to blame, then the personal risk that the executive faces if the risk turns sour, may result in the executive losing career opportunities – let alone his job.

If the executive has a young family, mortgage and private school fees, then that executive, only because he is human, is likely to shy away from taking the risk – even if it is the appropriate thing to do from a corporate perspective.

Therefore on one level, managers by their humanness, make decisions that may not be in the best interest of the organisation and its shareholders. On another level, managers will be attracted to things they know, and away from things they don’t know – again only because they are normal. A manager familiar with the 360 degree review technique, for example, will be attracted to it because, in his knowledge, he feels safe. Whether the 360 degree review technique is the optimal technique needed for the manager’s context may be a question that the manager won’t ask and the corporation may be oblivious to.

The choices that managers make everyday are always made with someone’s subjectivity playing an role – sometimes a minor role and sometimes a major one.

The old adage that one can’t teach an old dog new tricks is a wonderful metaphor for this situation.

What earlier discussion clearly conclude is that no tool or technique is always the right technique for every situation. Managers are affected by their subjectivity; organisational tensions, competition and conflict; and the normal dynamic of aspiration and success, that comes to play in deciding corporate strategies.

Sustained Competitive Advantage, World’s Best Practice, TQM, 360 degree reviews, Innovation, Re-engineering, Teaming, Knowledge Organisations, Learning Organisations, Quality Circles and so on are all techniques that suit a certain context. Used inappropriately, they can cost millions, defer desired outcomes or even compromise permanently the organisation – all at the expense of the poor shareholder who has entrusted the management to perform as required.

Myth 16: Corporate and CEO performace are best measured by comparison to industry ratios and competitor performance

2011-08-28T13:03:00.001+10:00

Since, as my previously discussed research demonstrates, shareholder objectives vary within the same company, and between companies within the same industry, an industry-based generic ratio will disadvantage those corporations who, based on their own shareholder objectives, do not pursue that ratio as their principal outcome, or who rank that ratio in importance below other outcomes.

The preferred and more effective method for assessing CEO and corporate performance is by assessing their ability to deliver those outcomes that are specific to it, its shareholders and its context. It is considerably easier to assess a company against its own specific performance objectives, even though it might then be more difficult to establish cross-corporation relativities and comparisons.

In a competitive environment, it is easy to state that company 'A' is superior to company 'B' based on sales, market share, number of customers, etc. Biggest, highest or most, normally wins. However, when one factors in shareholder objectives, or what the company is trying to achieve within known constraints, then comparisons become more tenuous. Is a company that deliberately pursues and excels in dividend generation superior to a company that deliberately seeks long-term positioning? Is a company which pursues dividend maximisation with a gearing constraint of 25% superior to a company that pursues dividend maximisation with a gearing constraint of 75%?

Based on the model proposed, cross-corporation comparisons are only valid when the corporations involved in the comparison are trying to achieve the same outcomes based on the same constraints.

Pressure by institutions, analysts or an unsophisticated Board for a CEO to lead his organisation to a “best in sector” based on industry ratios risks focusing the organisation on outcomes that are not related to its shareholder requirements.

Myth 15: Churn is a company's share registry is an indicator of poor performance

2011-08-26T11:44:00.000+10:00

Much movement on the share registry of a corporation is commonly interpreted as representing instability and is therefore seen as negative. Boards and CEOs therefore attempt to “quieten” their registries, using a range of techniques including, promotion, advertising, communication to shareholders, communication to analysts, promise of bigger benefits, etc..

Although volatile movement on a registry may be unfavourable, it should by no means automatically suggest that all movement on a registry is negative and that stability of the registry, per se, should be aspired to. Except in a market in free-fall, every transaction has a buyer and a seller. Where an existing shareholder is selling because of the corporation’s inability to provide a high probability of satisfaction, then it is likely that the shareholder may discount the sale price asked in order to cut “losses” and reposition in another registry that offers greater probability of satisfaction. If many of the company’s shareholders feel the same way, then prices will fall.

Conversely, an investor wishing to gain entry into a registry or wishing to buy a greater holding will see additional value in that stock over the purchase price. If there is no such perception of “extra” value, then there is not much point in the purchase. When there is “extra” value perceived by the intending investor, and when many investors perceive such “extra” value, then there is a likelihood that prices will be pushed up to a level that equates to the perception of value.

This is no more than normal supply and demand mechanics at work. Therefore, when existing shareholders wish to sell their holdings due to a negative perception of the future, then prices will tend to be depressed. When external shareholders want to enter the registry, then they tend to push prices up. Depressed share price causes market capitalisation of that company to be depressed while rising prices enhances market capitalisation.

Companies therefore should attempt to minimise all churn on their registry caused by disenfranchised shareholders because this will constrain share price and market capitalisation. The methods used by companies to achieve this might vary, but can be summarised as methods that enhance shareholder satisfaction and positive perceptions of future performance.

On the other hand, all companies should “chase” positive churn, i.e. registry churn caused by investors wishing to enter the registry. Particularly when fewer existing shareholders are prepared to exit the registry. This forces share price up which is to the advantage of all existing shareholders. One is not able therefore, to deduce merely from the existence of churn, whether the instability is “positive” or “negative”. One conclusion is clear however, positive churn is very much to the advantage of existing shareholders.

Myth 14: Corporate efficiency is achievable from a detailed knowledge of current performance

2011-08-24T16:29:00.001+10:00

Many CEOs and senior managers make fundamental changes to their organisations based solely on existing performance. They may divest or cease operations of a product or division that has not achieved, for example, the corporate ROI expected. Other measures may be chosen as the criteria that dictates whether an activity is continued or ceased.

The issue is not that such deliberations are made, because that is exactly what management is paid to do - to ensure the viability of operations. However, the reality is that management often makes these decisions in an inappropriate context. The following quote by Hamel and Prahalad illustrates this point:

“ROI (or return on net assets or return on capital employed) has two components: a numerator - net income - and a denominator - investment, net assets or capital employed. Managers know that raising net income is likely to be harder than cutting assets and head count. To increase the numerator, top management must have a sense of where new opportunities lie, must be able to anticipate changing customer needs, must have invested in building new competencies, and so on. So under intense pressure for a quick ROI improvement, executives reach for the lever that will bring the fastest, surest result: the denominator.” [Gary Hamel and C.K. Prahalad, Competing for the Future, Harvard Business Review, July-August 1994]

One of the key issues about such decisions are managers who chase the wrong performance measures. More often than not, these performance measures have been internally determined (i.e. by management) and do not necessarily directly address shareholder objectives. This is because most organisations have no verifiable and quantified view of their own shareholder objectives and therefore need to make a subjective assessment of what will please shareholders. Such subjectivity inevitably leads to management comparing themselves to peers and setting generic ratios and performance measures as their own performance criteria. The chase for performance based on inappropriate performance measures will negatively impact upon real shareholder satisfaction.

The second issue is that in chasing the wrong measure, often core assets are cut or jeopardised. If ROI is determined by management as the key measure, then they may cut products and/or activities that the company has been seeding for some time and at considerable cost that haven’t as yet achieved the desired ROI. Management action may certainly enhance ROI, but it may also destroy shareholder funds invested in new product development over many years.

Thirdly, undertaking efficiency reviews and actions solely on the basis of current operational performance is not sufficient or adequate. One must also know where the organisation is “travelling” (or more specifically, where it would like to “travel”) in order to determine whether the intended cuts will aid or hinder the company’s future aspirations. All too often, corporations with no vision to the future, or a vision that is largely undefined, undertake significant organisational change only to find that that which has been eradicated or changed is that which is needed for future operations and success.

Corporate improvement must be determined by the context within which the corporation operates: i.e., what outcomes are needed to satisfy shareholders and what attributes of the current operations are required to satisfy the vision for the future.

Myth 13: World's best practice is a legitimate aspiration for all organisations

2011-08-22T09:34:00.000+10:00

As with many enabling strategies adopted by organisations, World’s Best Practice (WBP) is often elevated to the corporation’s mission and vision statements. The corporation then inevitably chases this objective because the mission statement implies that being “best” is why (or one of the reasons that) the organisation exists.

The reality is that few if any shareholders make their investment on the basis of the best practice position of their intended investment. They may however, make their investment on the basis that best practice brings an outcome that the investor seeks. But it is not the best practice per se, that is the attraction but rather the outcomes from best practice to which the shareholder is attracted.

As with most corporate strategies, there is a cost associated with their choice and their implementation. When the choice of a strategy such as WBP is made because it is only through being at WBP that shareholder objectives can be satisfied, then the decision is rational.

It is when management likes the concept of being at WBP and chases such a standard for reasons other than enhancement of shareholder objectives, that dysfunction and tension (and conflict) occurs between organisation and owners.

Many organisations chase WBP because they see that WBP is a status position they would like to aspire to and have for their own organisation. Yet the WBP standard is often far in excess of the standard required in the corporation’s own market place to satisfy its current or potential customers.

Where a company operates or intends to operate in a global market then WBP may be a relevant differentiator in the company’s market place. But then again it may not.

If WBP in say, the order-to-deliver process in a certain industry, is half a day, and the industry’s best practice in a company’s market place is 5 days, then there is no justification in chasing WBP unless at half a day, the company will be able to secure additional advantages (such as increased sales or economies of scale) that will lead to enhanced shareholder objectives.

If such “elasticity” does not exist in this particular market, then the investment (and other costs such as organisational change) required to achieve a half-day standard will detract from that which shareholders desire.

As with all such generic corporate aspirations, they, and WBP is no exception, are not a standard panacea for corporate visioning or mission definition. Such enablers must be determined by their suitability, their context and their ability to deliver or enhance defined shareholder objectives.

Myth 12: All organisations should strive to become "Quality" organisations

2011-08-21T11:00:00.000+10:00

Three important issues surface when considering the use of “quality” strategies for organisations.

Firstly, much has already be discussed in this book about the folly of chasing an enabler as an end in itself, rather than using the enabler to achieve a specific desired outcome. Many, if not most, corporations have the concept of a “quality organisation” identified somewhere in either their mission, vision or operating statements and strategies. This implies that they will “chase” quality as a desirable outcome. Quality is expensive of time and resources, generally has a longer-term payback and it carries a risk element. It also compromises in the short-term, other outcomes such as profit, investment, etc.

Secondly, organisations should never chase quality because “it makes management and staff feel good about themselves”. This is never a sufficient justification to adopt any strategy.

The only legitimate reasons for a corporation to embark on a quality path is that quality is (proven to be) the differentiator in the mind of the customer between choosing or not choosing to buy; and quality assists the organisation to satisfy specific shareholder objectives, such as the minimisation of risk (caused by poor product or processes).

Because of the financial and other implications of “quality programs” or “quality accreditation”, such decisions should never be taken lightly nor should it ever be assumed that the pursuit of quality is a “given” in any situation.

It is not suggested however, that companies should be content with shoddy products or processes, but that quality programs have implications and those implications may impact significantly on the organisation’s ability to deliver what it is really there to do - i.e. satisfy shareholder objectives.

Thirdly, having or adhering to a quality program is not a guarantee of success. TQM and other quality programs generally concentrate on the processes within a corporation, on the premise that if all the processes are effective, efficient and of quality; then the outcomes that those processes produce will be of quality.

The unfortunate reality is that an organisation may have superlative quality processes, but still produce a poor product that no-one wants. “Quality” is not a substitute for thinking. Many corporations who have been quality accredited are still not performing against other criteria. Often the cause of this incongruence is that too much faith is placed in the “quality process” as a cure-all, while the basics of running a business are down-played or over-looked.

Although it is never the intention to promote mediocrity over excellence, it must be said that many corporations satisfy their shareholders by providing the market with what it wants; and what it wants may be “less” than what can be achieved.

From a product perspective, enough “quality” should be build into a product or service to create the necessary sales that will create the necessary and desired benefits to satisfy its owners. Note that the concept of maximisation of quality is not present here.

From an organisational perspective, only sufficient investment in “quality” is needed that will create the necessary processes, environment and outcomes to enable the organisation to satisfy its owners in the timeframes that they consider important. Over this level, any investment in the pursuit of quality is at the expense of shareholders.

Trusting management

2011-08-21T10:50:00.001+10:00

Much has been written about the loss of trust in management. These discussion almost always deal with the loss of "trust from below" - i.e. trust by employees or subordinates of senior management.

What they don't deal with is the loss of "trust from above" - i.e. the loss of trust by the board and shareholders in management. Causes for this include management:

1. Setting expectations and failing to deliver.
2. Saying things that are later demonstrated to be false.
3. Withholding part of the "truth".
4. Only putting one side of the argument for an initiative proposed by management.
5. Pursing initiatives that only management will personally benefit from (i.e. KPI facilitation when the KPI is the basis of management's remuneration).
6. Pursing personal gain ahead of corporate gain.
7. Saboutaging initiatives that benefit shareholders ahead of management (eg. golden parachutes, etc).
8. Promoting colleagues beyond their competency.
9. Allowing risks and problems to remain unresolved beyond necessity.
10. Hiding issues that later embarass or compromise the board.
11. Hiding issues that later negatively impact company reputation or worth.
12. Hiding issues that later increase risk or cost.

It is often the case that on some issues the "trust from below" is incompatible with "trust from above" and they conflict. Corporate and cultural tension is often caused when these two truths are made public and both board and management are perceived as breaching faith (internal and external).

A difficult position to recover from.

Myth 11: All companies should strive for Sustained Competitive Advantage

2011-08-20T08:55:00.000+10:00

This, like a score of other “motherhood and apple pie” strategies is dangerous if adopted unquestioningly. Strategies such as the following appear in the mission statements of many of the world's major corporations: "We will become the biggest", or the "best", or have the "largest market share", or "we adopt TQM principles", or “we are here to maximise customer satisfaction”, or “we are here to create sustained competitive advantage”, and so on.

These are all admirable pursuits, but only when they are in context, and then only when they are seen as enablers to achievement rather than the purpose for striving. In other words, they are the tools used to get to where you want to go. No owner who invests in a corporation does so because it has established, for example, sustained competitive advantage per se. Rather, the owner invests because of the benefit that sustained competitive advantage delivers.

It is a truism that not all organisations are alike; they have different needs and aspirations and similarly, the expectations of their owners are different. Therefore the adoption of a particular management theme or tool-set, may not be equally appropriate for all organisations.

Sustained competitive advantage in most contexts implies on-going investment in product design and modification, quality orientation, new channel development, research and development, innovation and other strategies and techniques which continuously review and revitalise products and services in order to maintain a competitive advantage.

Most of these techniques have a “longer-term” benefit rather than “shorter-term”. Sustained competitive advantage is often appropriate therefore, when shareholders are content with longer term pay-back of expected benefit. It is often in conflict with shareholders however, when they have a short-term expectation of benefit.

As an example, a manufacturing company may have a flexible ability to tool-up quickly to manufacture a certain type of product. A new product hits the market that is well within the capability of the company to produce. In the short-term, and in the early stages of the product’s life-cycle, demand is well in excess of supply so quality and efficient channels are not critical. The company is not very liquid and therefore has little capital resource to draw on. Historically, the company has provided good short-term dividend return to a loyal group of shareholders.

As the product becomes accepted in the marketplace and becomes more mature, new suppliers enter the market. In order to stay in the market, all suppliers must start differentiating their product, concentrate on quality and invest in efficient distribution channels. Due to the cost of such investment, one would only contemplate such a strategy if one was prepared to remain in the market long enough to enjoy the benefits from this strategy and its necessary investment.

It is clearly inappropriate for the company in question to even contemplate “sustaining advantage” as it doesn’t have the capital, it isn’t what their shareholders want, and they would lose the flexible opportunistic character of their business that has served them well.

Sustained competitive advantage, like most strategies, needs to be moulded to suit the context and objectives. It should never be regarded as a “given”. Embedding sustained competitive advantage within a corporation’s mission statement is therefore a commitment to certain long term strategies, investments and shareholder outcomes. It is never a panacea for shareholder satisfaction.

Myth 10: Structural change is the key to improvement

2011-08-16T15:53:00.000+10:00

It is quite alarmingly to observe the frequency with which organisations reach for the “structure button” whenever they need to wring some improvement from their organisations.

It is reasonably understandable why this occurs. This is because structure is arguably the most pervasive, visible and responsive element of the organisation. When required to “do something”, a CEO will often change the structure so that he/she is seen as having done something quickly - irrespective of whether the change brought about will create the impact desired.

Certainly structure can aid (or hinder) certain outcomes. In fact, the wrong structure can have disastrous ramifications on people, process and outcomes. However, structure is “no more” than an enabler and should be treated as such. It should never be the first point of call when seeking improvement, as structure is a necessary outcome of “higher level” decisions made for the organisation.

The relationship between these elements of the organisation are as follows:

The organisation exists to fulfil owner objectives. The fundamental characteristic here is the recognition that the initial stimulus of all organisations is the satisfaction of owner needs. This is equally true of public and private, large and small organisations. Corporate objectives therefore must reflect owner objectives.
The organisation chooses to operate within specific economic, social, cultural, regulatory and economic parameters within which it must be active in order to fulfil its owners' objectives and extract the benefits sought by them.
Within this market, the organisation must choose what it will offer (i.e. its products and services) so that a benefit can be extracted from the chosen market in order to satisfy owner objectives.
Once an organisation's products and services have been identified, it must choose the methods by which the market will become aware of its offerings and how these offerings will reach their market. This is the classical four “Ps” of marketing. The market and product/service decisions will open up a number of distribution, support and delivery options. How does the organisation get the products and services into the market while still satisfying core objectives? What channels of distribution, service delivery systems and marketing communication strategies are available and which ones deliver the desired benefit? Answers to these questions are impossible without knowing what outcome is desired.
Once the market and product mix strategies have been determined, it is then necessary to assess their impact on the organisation's product and service delivery capability, particularly human resources, structure, information technology and financial resources. The higher-level decisions will significantly determine decisions on human resources, structure, information technology and processes required to make it happen. A decision to manufacture versus a decision to retail, for example, will cause significant changes to H.R., I.T., organisational structure and process strategies. The higher-level decisions determine the mechanistic needs of the organisation.
Only when these tasks have been effectively completed, can an organisation pull together these divergent (and often conflicting) elements and call it a business, operating, corporate or strategic plan. After the higher level decisions have been made, an organisation can develop a holistic financial picture. Only then can an organisation determine whether it will satisfy owner objectives.

Myth 9: Maximising customer service is the path to success

2011-08-15T08:00:00.000+10:00

Many organisations claim that they exist “to satisfy their customers”, or to “maximise customer satisfaction”, or some other variation on this theme. When one examines their operations, one often finds both an ethos and an operational environment that is trying to do just that - maximise customer satisfaction or value.

If we take this concept to its logical conclusion - what would an organisation that is providing “maximum customer satisfaction” actually be doing? Even if it is providing good service at a good price and thereby satisfying customers, it is inevitable that competitor reaction will find a way to provide slightly better service or product at a slightly better price. When we extend this logic to its extreme, then “maximum” customer service must, by definition, be the provision of exceptional service at zero price to the customer - an obvious inanity.

The provision of customer service (together with a host of other motherhood and apple pie concepts) must be applied in the context of owner satisfaction. It is only against such a yard-stick that management can determine how much investment into customer satisfaction “is enough” to generate the outcomes desired.

Customer service, as noble and important as it may be, is “no more” than an enabler through which the organisation achieves its ends. No owner has invested in or created a corporation in order to provide customer service, per se.

Customer service is however, seen as the enabler or channel that will deliver the benefit or outcome sought by owners. Doing it well may be important and doing it better than the competitor may also be important, but only when it serves owner objectives and is used as an enabler and not as the reason for existence.

Does satisfying customers more than one’s competitors motivate the customer to buy, buy more, cross-buy, up-buy, provide the company with a strategic advantage? If it doesn’t do any of these things then why is the company spending money making customers happier?

Owners are therefore largely concerned with outcomes, while boards and management are understandably pre-occupied with means. It is not surprising then that management “elevates” the enabler to primary importance because that is the way management sees the world and it is the element that is largely controllable by them.

In the majority of corporations, management defines the outcomes that will be delivered by the corporation, and management’s definition of these outcomes is, more often than not, a product of what is achievable in the marketplace rather than of what owners want. Since a key determinant of what is achievable in the marketplace is dependent on customer service (among other criteria) it is not at all surprising to observe corporations who pursue it with almost religious zeal and often at the expense of higher-level objectives.

Elevating enablers to primacy is dangerous because most organisations attempt to maximise core objectives. For example, companies try to maximise profit rather than ever say “this is enough profit in the context of all the other things we are trying to achieve”. But since customer service has a cost and is to some extent “limitless” all efforts to enhance customer service will carry significant financial implications for most corporations. Often corporations strive for continual enhancement of it, even when the marginal benefit has long turned negative - a point of which most companies are oblivious.

It is important for corporations to recognise that customer service is “only” an enabler, and to limit endless enhancements to the point of Just Noticeable Difference (JND). That is, the point where additional customer service is exceeded by benefits created by the provision of that additional customer service. “Obsessive or chronic enhancement” of customer service, is a common ailment of corporations who see their reason for existence as the provision of service, rather than the benefit that service provides.

Myth 8: There are “Strategic Principles” that apply to all corporations

2011-08-14T10:40:00.000+10:00

We frequently see companies adopt one or more of a range of strategic “principles” that guide much of what they do. “Principles” such as Focus, Differentiation, Time is of the Essence, Concentration of Forces, Building on Strengths, Matching Aims with Resources, Limiting Risk, Shareholders wanting Earnings, Customer Service, Best Practice, Sustained Competitive Advantage, Total Quality Management, and the list goes on and on. The use of these “principles” are not however, applicable in every instance or in every context despite what many popular authors who promote their own “hobby horse” would like us to believe.

Each of these “principles” are only enablers that assist a corporation to achieve a specific outcome defined by its owners’ objectives. The choice of an enabler should only be assessed against its ability to enhance those objectives, and not because it is used by other companies (competitors or not) or because it is the “flavour of the moment”.

Each of these “principles” have serious implications and impacts on core objectives, and wrongly chosen, will impede an organisation’s ability to satisfy them. The following are examples of legitimate alternatives to some commonly used strategic “principles”. Each is appropriate in its own context and inappropriate out of that context.

Focus versus diversification

Differentiation versus a “me-too” strategy

Time is of the essence versus at the right time

Concentrate your forces versus spread your risk

Build on your strengths versus build the strengths needed to fulfil your aims

Match aims with resources versus create the resources to satisfy aims

Limit risk versus accept higher risk for higher reward

Create “unite’ de doctrine’ versus internal competition and intrapreneurship

Shareholders want earnings versus asset growth and security

Quality organisation versus give the market what it wants

Best Practice versus be as good as you need to be, to satisfy aims

Sustained competitive advantage versus commercial opportunism

Choosing the appropriate strategy is always dependent on the context and what it is that the strategy is required to accomplish. The accomplishment in turn is always dependent on the corporate objectives that are themselves dependent on owner objectives. In assessing strategies therefore, one must necessarily assess the contribution that the strategy makes toward the organisation’s fundamental objectives.

Myth 7: Owners and managers share common objectives and perspectives

2011-08-09T08:03:00.000+10:00

It has been a generality in business that owners and managers look at the corporation “through the same eyes” and that the same “appropriate action” would be chosen by either group.

Unfortunately this is not supported by practice.

Management may elect, say, a Total Quality Management (TQM) strategy because based on their knowledge of their market, quality is the differentiator between the customer opting or not opting to purchase the company’s product.

From a corporate perspective this seems like a reasonable decision path. However, TQM is expensive to implement, takes time for its benefits to come to fruition and often carries with it considerable risk. An investment in TQM is necessarily borne by shareholders, at least until its benefits “kick-in”.

If all shareholders of that company have longer-term objectives, then a TQM strategy may enhance those objectives. But what if those shareholders have a short term cash dividend objective? Clearly, a TQM strategy would be directly to the disadvantage of their objectives, irrespective of what management determines is “good for the company”.

If management is faced with a desire to embark on a TQM strategy when shareholder objectives are long term, then an investment in such a program seems relatively straight forward – go and spend the money needed.

But when management faces a desire to embark on TQM but shareholder objectives are short term (eg dividend growth), then the challenge facing management is different. The challenge is for management to enhance quality AND continue to pay dividend. This paradox therefore requires innovative solutions in the same way that Honda resolved the paradox between quality and cost.

Just spending the money as a strategy in the long-term scenario detracts from shareholder satisfaction in the short-term scenario. Similarly, short-term dividend-focussed strategies may be redundant, expensive or higher risk in the long-term context.

Different perspectives of owners and management as to what is an appropriate strategy or policy (let alone outcome) causes tension between the two groups. This tension is also fuelled by differing motivations of the two which when applied to the formulation of corporate destiny, has the potential to create great disharmony or dissatisfaction.

The principal reason that owners invest in a corporation is to fulfil their own specific objectives that most generally relate to wealth creation and its maintenance. The principal reason that managers are involved in a corporation (where they have little or no equity) is because management is the manager’s profession. The issues and outcomes that enhance or detract to or from a manager’s professional standing are not the same issues or outcomes that create or maintain wealth.

As an example, the way that managers are perceived as effective or “good” is generally in comparison with their peers. Therefore, managers will understandably strive to perform well on measures that help that assessment, such as industry or sector ratios. A manager may be considered as the most effective in the industry or sector if, say, his ROI is the highest in the sector. But what if in the search for “excellence”, the high ROI is achieved through high gearing and high risk? And what if shareholders are risk averse and demand low gearing?

There is considerable evidence to support the contention that managers and owners do not share common objectives and perspectives. That their objectives and perspectives differ, is normal and to be expected. However, not understanding that they differ is both naive and potentially dangerous for shareholders and their expectation for certain outcomes.

A recipe for potential disaster is created when management is biased toward or from certain tools, techniques and strategies needed to operate the corporation optimally.

The solution to this dilemma is to define shareholder objectives in quantifiable terms; use these metrics as the core element of the corporation’s mission statement; and then ensure that all tools and techniques chosen by management are assessed against the mission-metrics to ensure that they contribute to or enhance shareholder objectives.

Myth 6: Organisations know what their shareholders want

2011-08-06T11:22:00.000+10:00

Intuitively one would expect that small organisations with few shareholders are more “in-touch” with their owners’ objectives than larger organisations. One would further expect that the larger the organisation and the greater the number of shareholders, then the less able the organisation is to keep “in-touch” with all shareholder objectives.

Unfortunately, experience and reality show that companies, irrespective of size, are not immune from the lack of congruence between owner objectives and corporate actions.

The majority of companies are small businesses who have one or a small number of people carrying out the roles of managers, directors and owners simultaneously. One would expect that since one person carries out all three roles then “knowledge” would be “perfect” and congruence would be maximised.

Most small businesses actually have difficulty in ensuring congruence because they are too involved in operational management. It is easier to change the objective than to change the operational, marketing or business realities that threaten incongruence.

Generally boards and management of large corporations maintain that since they have many shareholders with varying objectives and they can’t effectively ask shareholders what they want; the board has the responsibility to define the core deliverables of the organisation. These deliverables are intended to keep shareholders satisfied. For reasons identified earlier, such presumptions by boards are often misplaced because they are subjectively derived. The demonstrable fact is that many (most?) corporations do not know what their owners want in any realistic, practical and measurable way.

In the case of medium size companies where management may be divorced from directorship and/or ownership, it is common to find organisations intent on striving to maximise generic outcomes rather than satisfy specific owner objectives. Certainly, a large part of this lack of congruence is caused by management failing to ask owners what they want; but equally at fault, are owners who have not made the effort of telling management in realistic and measurable terms what it is that they desire from their involvement in the company.

Very few companies, irrespective of size, really know what their owners want. In the case of small business, the owner/manager has rarely defined what it is that is wanted so that it becomes the principal driver of business performance.

The solutions are clear and easy: if you are an owner, even of the largest corporation, make sure that the board and/or management knows what you want in terms of value, benefit, growth and risk. Also identify your objectives in terms of environment, ethical activities and governance issues such as related-parties transactions.

If you are a director or senior manager, ask your owners what they want as an outcome.

If you are an owner/director/manager, then be honest with yourself and what you are doing operationally. Is the company that you run giving or likely to give you the outcome you seek? If not, then its time to assess the options.

Carbox tax and climate change

2011-08-06T11:19:00.002+10:00

If we accept that a carbon tax will be introduced regardless of whether we agree with it or not (and regardless of whether we agree with the science that justifies it); isn't the issue (and greater value for directors) for/from this forum:

Firstly, how corporations (and therefore directors and managers) can protect their corporation from any negative impacts of the tax and climate change? At this stage and based on the consensus on the issue demonstrated in this discussion and in the broader community, directors MUST accept the issue as one requiring a risk management strategy.

Secondly, how corporations (and therefore directors and managers) can take advantage of the opportunities that such a tax and envirnmental change will create?

Huffing and puffing about whether the policy and/or science is right or wrong is irrelevant unless you are able to affect public policy and change it - and I don't know whether that has been explicitly proposed in this discussion. If you can't change it, apply a probability to the liklihood of it happening and prepare your company for its realisation.

If as a director, you ignore the possibility of this issue affecting your corporation, its value and its impact on shareholders; then be prepared for the inevitable shareholder legal action against you for neligence. Do you really want to have that fight?

Myth 5: Each investor has fixed objectives for all his/her investments

2011-08-03T11:52:00.000+10:00

My research has confirmed that not only do different shareholders have different objectives, but the same shareholder’s objectives vary among different investment targets.

It is possible, but not particularly useful, to talk of a set of generic objectives shared by the community of shareholders. Such objectives will necessarily be in general and generic terms such as maximisation of 'wealth' or 'benefit'.

The difficulty comes from an attempt to define such concepts as 'wealth' and 'benefit'. It means different things to different investors. Some may interpret wealth enhancement as asset growth, while others may interpret it as dividend maximisation. 'Benefit' may mean dividend to one investor while it may mean share price growth to another.

The error of many boards and management is that they argue from the general to the particular. If they believe that all shareholders want, say, dividend maximisation, then they argue that their shareholders want dividend maximisation. The issue is that corporate strategies to minimise risk or grow assets are different and have fundamental impacts on what a corporation does and how it does it.

Compounded upon this error is the assumption that each shareholder will have consistent objectives across all investments. Institutional investors weight certain attributes such as growth, industry sector, risk, etc. and choose their investment targets on the basis of those weightings (among other criteria).

They may invest in a certain industry sector in order to minimise risk or to secure the benefits from fast growth. Their expectations (and therefore objectives) from such investment decisions will vary according to the character and attributes of each target and what that target represents for the investor in the investor’s context. A typical large investor will (and mom-and-dad investors may) therefore have a range of objectives within his (their) investment portfolio/s.

How then, can a corporation claim to be pursuing shareholder wealth or benefit if it does not know in real and quantifiable terms what it is that its shareholders regard as 'wealth' and 'benefit' as it relates to the shareholder’s objectives in that particular corporation?

This is a fundamental issue with modern corporate management and the cause of much owner pain and management dysfunction. Boards and management make fundamental strategic, operational and investment decisions based on incorrect assumptions about shareholder 'well-being' or on ill-founded subjective assessments.

Without clear and quantified owner objectives, management will continue to fire its strategies at shadows rather than at substance and continue to wonder why owners are unhappy. Corporate investments and resources will continue to be applied in directions that are presumed to be appropriate without ratification in measured terms of the correctness of those actions. And those actions will continue to detract from the maximisation of owner satisfaction as long as 'owner satisfaction' remains undefined and unquantified.

Myth 4: The corporation should be in charge of its own destiny

2011-07-31T12:56:00.000+10:00

Modern business is at the crossroads.

On one hand, boards and management argue that shareholders have generic objectives, are not fully informed, have conflicting interests and suffer from a range of other attributes all of which contribute to their “inappropriateness” in determining the destiny of the organisation in which they hold ownership.

This philosophy holds that the board and management are better placed to determine the destiny of the organisation and determine the outcomes that the corporation will deliver. Shareholders who don’t like the way the company is run (so this philosophy goes) can quit the registry and take up ownership elsewhere.

The contrary view held by shareholders, regulators, and certain key associations, maintains that the organisation exists solely to deliver shareholder satisfaction. As such, the organisation is the servant of the owners and all that the organisation does, must in one way or another, enable those shareholder objectives to be fulfilled or enhanced.

Examples abound of management that has taken an organisation down a particular path for a range of seemingly admirable reasons only to find that its owners either flee the registry or whose best interests are seriously damaged.

The problem with boards and management who are beholden to no one except themselves is that they have no reference point against which decisions and strategies can be assessed and determined. An organisation whose principal accountability is to itself is not compelled to maximise owner benefit or even to avoid owner harm if it believes that such a course “is not in the best interests of the corporation.”

The reality of course is, that in some instances, the best interests of the owners are served by the organisation ceasing to exist (sell, merge, divest, etc). Some of the defensive corporate plays recently seen in the US and Australia and largely engineered by boards and management, were no more than attempts to keep the organisation intact demonstrably for board and management purposes rather than in the best interest of the owners.

Corporations that act in other than the best interests of owners represent diminished probability of satisfaction and imply higher risk to their owners. Investors denied access and input will feel vulnerable to the character and machinations of management. They will tend toward other forms of investment where probability of outcome is stronger and where the investor is offered greater accountability from the chosen investment vehicle and less susceptibility to the foibles of individuals.

The implications of this on the entire equity structure of the economy promises to be profound if this crucial issue leads to organisational empowerment from owners.

All corporations must ultimately be accountable entirely to their owners and the outcomes delivered by those organisations must be unashamedly aimed toward satisfying and/or enhancing owner objectives. It is only through the establishment and enforcement of an external accountability on a corporation that owners can start to feel some comfort (but no guarantee) that their organisation is striving to achieve that which its owners intended.

Myth 3: A corporation's mission statement statement is the principal reason for its existence

2011-07-29T08:57:00.000+10:00

We have all heard of the “Big Bang” theory of the universe and the general diversity of opinion as to its accuracy as an explanation of how the universe started. When we seek the “Big Bang” theory of the corporation in order to identify where the corporation “starts” we tend to observe much more agreement.

In the corporate context, most observers of and participants in business would agree that the raison d’etre of corporations (i.e. where a corporation’s efforts “start” and from where it gets its legitimacy) is identified within its mission statement. And it is from this mission statement that organisations develop an enabling vision and extract from it a set of enabling objectives and strategies that will deliver this vision and fulfil its mission.

Unfortunately this process is flawed since in most organisations the process of developing its mission is undertaken entirely by management. And it is management who, without the necessary metrics to define their owners’ objectives, make subjective assessments as to those objectives (albeit well-meaning), and incorporate them into the organisation’s strategies and plans. In other words, managers decide what it is that their organisation will do and what their organisation will deliver.

Since shareholder objectives vary significantly, management’s subjective assessments are therefore often wrong, inexact or inappropriate. The corporation’s mission then, is a statement of organisational deliverables that, because it has been subjectively derived, often diminishes the probability for owner satisfaction from the company that the owners collectively posses.

A key element of most organisations where management defines the mission statement, is that management sets the performance criteria against which it will itself be measured. These criteria may not be the criteria needed to drive toward owner objectives and owner satisfaction.

Since management is “merely” human and thus exhibits natural human traits and tendencies, the measures used to assess itself are frequently those that are less challenging, less confronting, are less risk-taking or threatening than they might be if they were set in a manner focussed exclusively on shareholder best-interest.

The question therefore is whether an organisation’s mission statement is the fundamental reason why an organisation exists. Strictly speaking, the mission statement does provide the rationale for an organisation’s existence and context to its operational and investment strategies.

However, the issue for those organisations where management subjectively develops the mission statement, is that as long as a mission statement fails to address the satisfaction of owner objectives in tangible, quantifiable and measurable ways, then the mission statement is not the definer of a corporation’s purpose. The mission statement will provide the necessary direction for the corporation as long as it is not a statement of subjective or uninformed management, but is an accurate representation of the outcomes desired by owners.

Mission Statements that speak of “quality”, “best practice”, sustained competitive advantage” and similar motherhood statements without convincingly demonstrating that such philosophies contribute to the enhancement of shareholder satisfaction threaten the use of shareholder funds toward projects that add little to the owners of those funds.

The only way to bridge this chasm between management perception and owner objectives is to quantify owner objectives in a way that enables the organisation to determine what it needs to deliver over time. Once quantified, a mission statement for an organisation needs to be “no more” than a statement of quantified owner objectives since the organisation “merely” exists to satisfy those objectives.

Independent directors

2011-07-22T10:20:00.003+10:00

The intent of the independent director is to counter-balance the presumed (and actual) potential self-interest of executive Directors and ensure that all shareholder interests are dominant.

In the Murdoch case, because of the power of the Chairman/CEO/dominant shareholder, this appears not to be the case. Therefore, with News Corp, whether the directors are independent or executive is somewhat moot.

The ONLY way to ensure that a corporation is focussed on shareholder objectives is to firstly, establish the corporation's shareholders' metrics on value, benefit, growth and risk; and secondly, to have those metrics and the corporation's alignment with them independently certified.

The role then of the independent director is not so much to protect shareholder interests, because that will be done by establishing, publishing and certifying the corporation's objectives. Rather, the independent director's role will be to provide independent oversight on the processes of the corporation.

Myth 2: All corporations exist to produce the same outcome

2011-07-22T09:45:00.000+10:00

It is truly amazing how many boards and their management believe that owners are a homogeneous group who all share common objectives. And it is the belief in such common objectives that causes organisations to chase the mythical “maximisation of shareholder value or wealth” often at the expense of what shareholders actually want.

The fallacy of this belief in a unitary and generic objective can be illustrated on two levels.

Firstly, if “shareholder value” or “wealth” is represented by, say, a corporation’s net assets or dividend, and if all shareholders only sought to maximise either or both of these criteria, then even in an imperfect market, all shareholders would eventually accumulate and gravitate in those few corporations that had the highest dividend and/or net assets. Even a cursory examination of listed stock performance will confirm that this does not occur. Clearly other factors and issues impact upon shareholders that affect their investment/ownership decisions.

Secondly, research (detailed in my book) into the hypothesised homogeneous banking sector, has found that the top 20 shareholders in five banks behaved significantly differently to changes in, among other criteria, net assets and dividend. One bank’s top twenty shareholders might sell their holdings with a change in net assets while another bank’s top twenty shareholders might buy.

Interestingly also, was the fact that there was a very significant degree of overlap in ownership in the top twenty shareholders in each of the sample banks. Forty percent of the top 20 shareholders had top twenty equity in all five sample banks. Equity in some but not all of the other banks in the sample took the degree of overlap much higher as would an assessment of top fifty behaviour instead of only the top twenty.

The point here is that not only did the top twenty shareholders in Bank A behave differently to the top twenty shareholders in Bank B, but by and large, these were the same shareholders. Therefore, it is clearly erroneous to believe that all shareholders have the same generic objectives, and it is furthermore erroneous to believe that any one shareholder will have the same set of objectives across all of his/her investments.

The implications for corporations are clear. All corporations must identify what their own shareholders want from their involvement in the organisation. Such identification must be in tangible, quantifiable and measurable terms so that boards and management can establish clear and unequivocal outcomes that the organisation undertakes to deliver.

Without a clear statement of end-of-period deliverables, effective organisational, strategic and investment decision cannot be made.

It is no longer acceptable for boards and management to use subjective judgement to determine what is a good outcome or not for shareholders.

The corporation is a “servant” of its owners. As such, and except in a purely legal sense, it does not have a life of its own outside its owner context.

Knowing exactly what its owners want, and not guessing or assuming what they want, should be a primary accountability of all boards and management.

Myth 1: The corporation exists for its stakeholders

2011-07-17T15:58:00.000+10:00

When one examines the mission statement of many of the world’s leading corporations, one will inevitably find references to the satisfaction of stakeholder objectives. These references not only acknowledge the owners of the corporation, but more often than not, also identify other stakeholders such as employees, the community, the government, suppliers, and of course, the ubiquitous customer, among a range of stakeholder communities.

When one then examines the operating strategies employed by these corporations, one regularly finds that investment and operational decisions are made that attempt to maximise stakeholder satisfaction: i.e. they attempt to maximise the “benefits” provided to each of the corporation’s stakeholder constituents.

Philosophically, it is hard to argue against maximising value to stakeholders. The reality however, is that decisions to maximise stakeholder value never occur in an implications-vacuum. There are always implications and most often costs, associated with keeping stakeholders happy. And most frequently, one finds that to keep one set of stakeholders happy is inevitably at the expense of other stakeholders. Who then gets primacy over the organisation’s efforts in satisfying its stakeholders?

If one is both honest and rigorous, one must recognise that no organisation exists to satisfy its non-owner stakeholders, per se. Rather, organisations must satisfy their non-owner stakeholders in order that the owners’ objectives can be satisfied.

Business is all about delivering the best possible outcome to the owners of the organisation, whatever those desired owner outcomes may be. An owner never invests in a corporation because of the stakeholders or in order to satisfy them. However, owners know that in order for their objectives to be fulfilled, stakeholders must be “appeased”.

Generally speaking, and from an owner’s perspective, non-owner stakeholder satisfaction is about delivering the “lowest level of satisfaction” that the organisation, management and owners can “get away with” while still delivering the over-riding owner objectives. That does not imply that owners “abuse” non-owner stakeholders, but rather that any effort and resource applied to non-owner stakeholder satisfaction over the “minimum” needed to deliver owner objectives will detract from those objectives.

Although this may appear apocryphal and certainly politically incorrect in today’s environment, business is not about delighting stakeholders (customers or others) per se, but about satisfying owners in order to secure their desired benefits.

It is necessary sometimes to “delight” stakeholders (when “delight” is the difference between participation or purchase an non-participation or non-purchase) in order to satisfy those owners. Owners generally recognise however, that “unbridled” owner satisfaction is not possible in developed Western societies, and as such, it is widely accepted that owners must “invest” in non-owner stakeholder satisfaction in order for their own objectives to be satisfied.

Organisations that “elevate” non-owner stakeholders to primacy in their raison d’etre, risk making operational, management, strategic and investment decisions which maximise stakeholder objectives at the expense of owner objectives. Non-owner stakeholders are, from an organisational perspective, enablers. Maximising (rather than optimising) enablers risks significant organisational misalignment.

One major global chartered accounting and consultancy had as part of its Mission Statement the “maximisation of customer satisfaction”, and coincidentally no mention what-so-ever of partner profits. Logically, the quintessence of “maximising customer satisfaction” must inevitably be the provision of service at no cost to the customer – clearly an inanity. When asked how much investment in customer satisfaction was needed to deliver partner objectives, no partner could provide an answer, yet hundreds of millions of dollars were spent on enhancing customer satisfaction.

Responsible management is all about “optimising” non-owner stakeholder objectives in the context of, and in order to fulfil (and maximise where possible), owner objectives. It is not about treating owners and other stakeholders as equal (as is being mooted by certain vocal community interest groups). No owner will remain an owner if non-owner stakeholders secure their own objectives at the expense of owners.

Strategy and the board

2011-07-17T10:47:00.001+10:00

Strategy review has always been a role of the board as have their other compliance, oversight, director and CEO selection responsibilties. Whether they do it well or not is another matter entirely.

The need to review/develop strategy varies within companies, industries and economies. One school of thought argues that the strategy process is linea and programmable (i.e first you analyse, then you develop the strategy and then you implement it - in that order).

The other school of thought argues that strategy is "emergent", that is, it needs to change with context and circumstance. Therefore the frequency that you review/develop strategy will constantly change with changing circumstance. Also you may review one part of your strategy while you are implementaing another part.

To add another complexity, the term "strategy" is a generic term. A successful strategy is never merely a high level statement of direction. It necessarily must be accompanied by a clarifying statement explaining how the elements of the organisation are going to be afected by the higher-level strategy.

As an example, to move into a new sector, a company must explain how that will impact its market definition, products and services, channel to market, support mechanism, communication to market, HR, IT and systems, management structure, and its KPOs.

Without such a statement, management will guess (inevitably incorrectly) the way the new strategy is to be applied. What happens therefore, is that each of these "sub-elements" of the corporation represent a level of strategy too.

Many boards are focussed on the initial strategy without a lot of thought about the critical supporting strategies or their implications.

There is no right or wrong - it's a matter which best works for your company in its context. In reality, most organisations fall between the two extremes.

Centro and its aftermath

2011-07-03T22:29:00.001+10:00

I think that the need for directors to be more "financially literate" and "financially inquisitive" is self-evident. Undoubtedly, this will happen because directors and boards will "over-weight" financial literacy in order to manage their own perceptions of risk.

The issue is this, and it's serious: an eye for detail and a 'beyond-average' ('pathalogical'?) pursuit of financial robustness is a left-brain attribute. In time, boards will be dominated by a left-brain board member profile.

It's not that a left-brainer can't do the creative, innovative, out-of-the box type thinking that most organisations need, but the likelihoood is that the "average" left-brainer has considerable discomfort in focussing on long-term right-brain activities.

This spells long-term trouble for companies. What dies, is entrepreneurship (and the business intuition that underpins it) and the ability to handle comfortably, highly complex, ambiguous and unclear situations - characteristic of right-brainers who are much more comfortable in that space. Many HR issues, for example, are typically right-brain activities. Relationship management, crisis management and inter-personal facilitations are all right-brain skills (predominantly but not exclusively).

With the greatest of respect to the honourable judge, a board needs to have a range of skills - and they NEVER EVER all reside in the one person. If you have a number of similar people all sitting on the board - you are going to experience significant skill gaps.

I think the board needs a variety of skills and it also need a very robust Audit/Finance Committee. Maybe when the board doesn't have those skills in requisite numbers or in sufficient depth of skills, the board should be able to retain independent financial experts to ask the hard questions on their behalf.

The judgement does three profound things: It yells to all existing directors, "Beware, you are in extreme risk."

It also says to prospective directors, "Unless you are an 'expert' in financial analysis, don't even think of taking a board position in any type of company."

Finally it says, "Any director willing to take on the personal risk (i.e. those who have transferred all their assets to their spouse, children, trust or elsewhere) can ask any price and they will get it."

Furthermore, it says something fairly pointed about financial advisers and consultants: It has been overheard that, "You can't trust them anymore, you can't rely on them anymore, and hiring a top-line Chartered Firm won't anymore protect the directors or the company."

What's that going to do to the financial advisory business?

This ruling will have major impacts - some of which we won't see clearly for a couple of business seasons - but they are on the way. Stay tuned for the episode entitled, "Who the heck is prepared to be a director and where do I find one? Name your price!"

Executive Compensation Database

2011-06-30T08:58:00.000+10:00

As informative as the Executive Compensation Database may be, the key metric is the correlation between total remuneration and corporate performance (i.e. metrics of shareholder objectives.)

The executive can justify a higher remuneration if the executive can deliver above the minimum shareholder metrics, and vice a versa.

Looking at remuneration as an absolute number (e.g. the executive with the highest or lowest rem) is frought with danger if not assessed in a corporate performance context.

As an example:

Company X has earned for its shareholders a 10% ROI. On that basis, this ranks relatively low compared to other companies. The executive's rem is based on industry standards and is, in this example, $1m.

What bearing on the executive's rem are the following two scenarios:

A. When the executive took over, ROI was 15% and the executive has been responsible for an erosion of shareholder benefit. Is the executive still worth $1m?

B. When the executive took over, ROI was negative and the business was on the verge of insolvency. The executive saved the company and returned it to profit. Is the executive's rem worth more than industry standard?

Therefore executive 'worth' can only be assessed in context.

Challenging HR strategies

2011-06-19T11:05:00.000+10:00

The challenging of HR colleagues should be on the same basis as the challenge of all aspects of corporate operations.

I have frequently seen CEOs and Chairman impose on an organisation a strategy, initiative or focus that could not be justified by pragmatic analysis of claimed benefits promised. What happens is that the individual in question, through his or her power, imposes a direction (without objective evidence of benefit) and everyone has to toe the line - and inevitably they don't have the "clout" to challenge the proposal - an inevitable career limiting action.

It's not that talent management strategies should not be used (or any other strategies for that matter) but that they should be assessed for the benefits they can provide the organisation. Unfortunately, too many guru theories are adopted without question and without an understanding of their appropriateness or their impact on organisational objectives and shareholder benefits. I have (literally) seen billions of dollars of shareholder funds in my client organisations being fritted away through unquestioning (but well-intentioned) actions and initiatives.

In one particular listed client, the CEO was "hot" for talent strategies and methodologies and had invested tens of millions of dollars in legitimately developing them. He retired and the new CEO, who was financially oriented, cut all those programs thus "wasting" the investment already made. Had the strategy been assessed for "evidence of benefit" then either the program would not have been commenced due to lack of evidence of benefit, or once started, would not have been terminated because of the demonstrated evidence of benefit.

Demise of the AGM

2011-06-18T11:26:00.001+10:00

The AGM and its "demise" has less to do with the AGM, per se, than it has to do with the growing powerlessness of shareholders.

For shareholders, the tragedy and frustration is that directors and managers (with the best intent) have taken upon themselves the role of proxy-owners, rather than as agents of those owners. They make decisions about and for the corporation that takes on risk and debt that owners must carry, while simultaneously the agents are being rewarded against KPIs that they themselves engineer.

This is not the fault of the AGM, but rather the fault of all parties in not getting the relationship between owners and their agents correct. Self-interest, arrogance, gutlessness and stupidity are often to blame.

As long as agents are allowed to choose the outcomes that the corporation strives to deliver to shareholders, then shareholder frustration and activism will continue.

The only way to "fix" the relationship between owners and agents is to ask owners what they want from their investment along the dimensions of value (what they value in their investment in the company), benefit (how they want their benefit and its quantum), growth (what do they want to see grow), and risk (what do they consider as risk).

If you ask owners of a listed company these questions, then you will get four bell-shaped curves which represent the entire "shareholder metrics" for that registry. It is then up to directors to interpret and filter those metrics for the company's context, industry, capabilities, etc and to then determine the corporation's Mission statement or statement of purpose.

These corporate metrics should be incorporated into the company's Annual Report. Investors (new owners) will be attracted to those corporations whose metrics reflect their own investment objectives.

It is then the role of the corporation and its agents to deliver those metrics. Management can be as entrepreneurial and strategically adventurous as it needs to be to achieve those metrics provided is remains within the content of those metrics (i.e. does not exceed its "risk" parameter, achieves its "growth" requirement and delivers its "benefit" requirement while protecting and enhancing its "value" definition.)

Of course, the KPIs against which agents are rewarded MUST reflect the core corporate metrics determined by the board - and not those engineered by the agents.

For those who would like the research evidence supporting this approach, I refer you to my book "Corporate Crap: Stupid management myths that destroy shareholder value" (Fairfax Publishing).

I am happy to discuss with anyone how they can establish metrics for their corporation and/or investments.

Governance and start-ups

2011-06-17T20:30:00.000+10:00

The argument that "startup board governance has not kept up with the pace of innovation," is problematic for the following reasons:

1. There is a difference between the nature and context of the corporation, and the role of the board that governs it. In relation to start-ups, the corporation goes through enormous change and capability as it ramps up to sustainability and maintainable profits. However, the Act, and particularly the Act in relation to it's corporate obligations and those of directors, essentially and generally do not change, regardless of the corporation's context, maturity or size. Therefore to suggest that "governance" needs to evolve at the same pace with the organisation's context is somewhat misleading since the Act doesn't evolve therefore "governance reuirements are relatively fixed" particularly compared to the hyper-growth of some corporations.

2. The issue isn't so much (as I see it) that start-up governance per se isn't evolving; but rather that directors and managers are failing to understand the evolving nature of the relationship between shareholders, managers and directors. This is not an easy path and many stumble along it: some directors are too remote and aloof (acting like top100 directors) when what is needed is much closer involvement to guide more practically the activities and directions of staff and the corporation. Simlarly, but to the opposite extreme, some directors get too "close" when in fact they should act more "remotely" and start nuturing management to use more appropriate processes and procedures (and have the guts to make certain decisions) and the corporation through to adoption of "traditional" board/CEO/management relationships, procedures and processes.

3. The causes of this dilemma varies. Sometimes it is the well-meaning "fault" of directors. Sometimes it's the chairman, sometimes its the shareholders and sometimes it's management. More often than not, particularly in start ups, it a combination of all of these - particularly when shareholding, executive directorship and management overlap and are rolled into one or a few people and when they can't separate one role from the other.

4. My experience with about 50 start-ups, is that the cause of the problems generally rest with the founder/CEO who fails to understand the board requirements and who has controlling equity and can thus sack Chairman and / or directors. There is a big difference between a start-up enterprise and an established small company - generally the latter has an evolved and bedded-down governance structure (more than merely a nascent one).

5. Sometimes a start-up appoints a known chairman who brings the company credibility but the chairman's skill rests within substantial enterprises, and not with start-up ventures. Failure to tell the difference between the needs of both are common.

6. On nearly all the start-ups that I have been involved in, the call on directors is often more intensive than in larger corporations. This is for three reasons: the corporation at start-up doesn't have the internal skills to resolve some issues; the corporation doesn't have the financial resources to hire external consultants to solve some issues; the CEO (most often) is the "inventor" of the business and is good at whatever he/she "invented" as the rationale for the business, but lacks the broad corporate skills inevitably needed to grow a business on all operational and strategic dimensions. Thus with a dearth of internal skills, directors are called upon to engineer a response. In the larger corporation blessed with more resources and skills, directors are more often required to adjudicate the recommendations of others, rather than engineer solutions themselves.

Directors (and managers) who fail to understand the evolving relationship of each party in the corporation's evolution will inevitably step on someone's toes and / or cross the line of appropriateness.

Future of corporate governance

2011-06-10T06:57:00.002+10:00

I think the future of corporate governance lies in the following areas:

1. Acceptance of directors and managers as agents of the owners of corporations - and not as proxy-owners.

2. Acceptance that the purpose of the corporation is to serve its owners.

3. Establishment of two-way communication with shareholders, not merely one-way as at present.

4. Directors becoming more accountible to shareholders for the corporation's ability to satisfy the owners' objectives. Cessation of "blaming the managers" culture of the board.

5. Greater transparency of the corporation's objectives and of operational decisions to achieve those objectives.

6. Due to the increasing crescendo of shareholder activism, a greater focus on shareholders: particularly on establishing shareholder metrics and therefore, on fulfilling them.

Does corporate governance matter?

2011-06-08T09:18:00.000+10:00

Governance matters a lot because it deals with the WAY corporate business is done and the WAY it is reported and over-sighted. Shareholders who are distant from the information and processes of the business must "feel comfortable" about the processes of the business otherwise they perceive risk, which is in turn a risk for the business - thus good governance gives those shareholders "comfort".

As important as governance is, it is NOT about essence or content of organisational outputs, but 'merely' about process. A corporation that adheres to the governance principles is still able to "deliver' poor outcomes - and from that shareholders are more at risk and more upset - and the fodder for the shareholder activist movement.

How to confront a "wayward" CEO

2011-05-22T14:30:00.001+10:00

1. Confront the reality of the situation.

2. If it is currently "secret", assume it won't be for much longer.

3. Establish the facts of the situation.

4. If the CEO's behaviour can be remedied, then begin remedial action immediately you have established a remedial strategy. Develop a public statement for circulation if and when required.

5. If the CEO's behaviour cannot be remedied (and the ramifications will negatively affect the corporation while the CEO remains), then dismiss the CEO and appoint a temporary CEO. Catch your breath and find the best person for the job.

6. Ask yourself (i.e. the board) why the behaviour was able to occur; and what needs to be done now to avoid a repeat.)

7. Start intensive cultural change initiatives if they are indicated.

8. At all times be honest; confirm your belief in your employee's honesty, integrity, intent and morality; ensure that your organisation's cultural management disciplines are as good as you can make them.

Governance stifling entrepreneurialism

2011-05-19T08:38:00.000+10:00

The thing that stifles entrepreneurialism is when executives take the organisation on a personal or subjective journey for which shareholders carry the cost and the risk.

Corporate governance is essential to ensure compliant processes and procedures, while shareholder metrics are essential for determining the substance of corporate outcomes (i.e. that the entrepreneurial venture is intended to deliver.)

Of course some CFOs are split - the stronger and more robust the governance procedures, the more accountable the executives. Just because some executives are against it, doesn't invalidate its need.

Owner and manager objectives

2011-05-16T09:51:00.002+10:00

It is a generality in business that owners and managers look at the company “through the same eyes” and that the same “appropriate action” would be chosen by either group. This is not supported by practice, experience, research or logic.

Management may elect, say, a Total Quality Management (TQM) strategy because based on their knowledge of their market, quality is the differentiator between the customer opting or not opting to purchase the company’s product.

From a corporate perspective this seems reasonable. However, TQM is expensive to implement, takes time to come to fruition and often carries considerable risk. An investment in TQM is necessarily borne by shareholders, at least until its benefits “kick-in”.

If shareholders of that company have longer-term objectives, then a TQM strategy may enhance those objectives. But what if those shareholders have a short term cash dividend objective? Clearly, a TQM strategy would be to their disadvantage, irrespective of what management determines is “good for the company”.

If management is faced with a desire to embark on a TQM strategy when shareholder objectives are long term, then an investment in such a program seems relatively straight forward – go and spend the money needed.

But when management wants TQM but shareholder objectives are short term (eg dividend growth), then the challenge is different - to enhance quality AND continue to pay dividend. This paradox therefore requires innovative solutions in the same way that Honda resolved the paradox between quality and cost.

Spending the funds in the long-term scenario detracts from shareholder satisfaction in the short-term scenario. Similarly, short-term dividend-focussed strategies may be redundant, expensive or higher risk in the long-term context.

Different perspectives of owners and management as to strategy or policy (let alone outcome) causes tension between the two groups. This tension is fuelled by differing motivations of the two which when applied to the formulation of corporate destiny, has the potential to create great disharmony or dissatisfaction.

The principal reason that owners invest in a corporation is to fulfil their own specific objectives, that generally relate to wealth creation and its maintenance. The principal reason that managers are involved in a corporation (where they have little or no equity) is because management is a manager’s profession. The issues and outcomes that enhance or detract from a manager’s professional standing are not the same issues or outcomes that create or maintain wealth.

For example, the way that managers are perceived as effective or “good” is generally in comparison with peers. Therefore, managers will understandably strive to perform well on measures that help that assessment, such as industry or sector ratios. A manager may be considered as the most effective in the industry or sector if, say, his ROI is the highest in the sector. But what if the high ROI is achieved through high gearing and high risk? And what if shareholders are risk averse and require low gearing?

There is considerable evidence to support the contention that managers and owners do not share common objectives and perspectives. That their objectives and perspectives differ, is normal and to be expected. However, not understanding that they differ is both naive and dangerous for shareholders and their expectation for certain outcomes.

A recipe for potential disaster is created when management is biased toward certain tools, techniques and strategies needed to operate the corporation optimally.
The solution to this dilemma is to define shareholder objectives in quantifiable terms; use these metrics as the core element of the corporation’s mission statement; and then ensure that all tools and techniques chosen by management are assessed against the mission-metrics to ensure that they contribute to or enhance shareholder objectives.

Chairmen, CEOs and mentors

2011-04-30T09:30:00.002+10:00

I currently mentor a number business owners, directors and CEOs. There are a number of dimensions to all of this but the biggest hurdle that I encounter is the Chairman, CEO or director who by virtue of their position, believe they "know it all" - and it's much more common than one might think.

When I mentor CEOs, directors and chairmen, it is often important to do it in a way that is "invisible" to the organisation because it may compromise their standing and status. The only people who are aware of the relationship is the board (who approve the relationship) and accounts (who pay for it). Even then, the discussions between the two are totally private.

I call it Mentoring-in-Confidence (MIC) which is quite different to a coaching role which often relates to the development of specifc skills.

A MIC is a professional, very senior and generally mature person with a broad and deep
understanding of people, organisations, commercial processes, political processes and
organisational systems and structures.

The MIC has superior talents in identifying root causes of issues and quickly providing options for action.

The MIC acts as a strategic angel, confidante, network pivot, devil’s dvocate, “technical filter” and mentor who challenges, guides, suggests, helps, helps develop strategies, facilitates and coordinates for his/her client.

The relationship is guided by strict confidentiality, ethical, honest, open, sensitive, professional and forthright standards and discipline.

The relationship built between a client and a MIC often develops into life-long friendship.

A key element of the relationship is the chemistry between the two people - a person who is not prepared to consider the experience and advice of others is not generally fertile ground for growth and development.

Sustainability skills on the board

2011-04-25T09:04:00.002+10:00

Although sustainability is important, and very important at that, it is not as big an imperative for some companies as it is for others.

For a company where issues of sustainability and environmental responsibility are critical or important, one might consider having those skill sets represented on the board. But similarly, sustainability skills can be bought through the advisory market for those companies where those issues aren't critical all the time.

Similar arguments can be made for legal, financial, industry, international, people, technical, etc skills for different companies.

Ultimately, the skills represented on the board must be the skills that help the board steer the corporation - no more and no less. Too many companies have adopted guru theories and trends and have been burdened with non-value adding processes and disciplines.

Let's be careful but diligent about which skills are represented on the board and why.

Shareholder activism challenges executive and company strategy

2011-04-21T08:25:00.001+10:00

This article (http://www.linkedin.com/news?viewArticle=&articleID=483250554&gid=1331907&type=member&item=51149915&articleURL=http%3A%2F%2Fwww%2Eswissinfo%2Ech%2Feng%2Fbusiness%2FExecutive_bother_as_shareholders_rattle_cage%2Ehtml%3Fcid%3D30030374&urlhash=auoi&goback=%2Egde_1331907_member_51149915) correctly flags the growing crescendo of shareholder activism. As flagged in previous postings, this will not stop and directors and executives need to pay close attention.

Where directors get it wrong is to assume that 1) all shareholders have the same objectives (research and logic clearly demonstrate that they don't); 2) Act as if they do; 3) Treat shareholders as the enemy and a pain to be endured; 4) Fail to understand that directors are proxied by shareholders to deliver shareholder objectives; 5) Fail to understand (or even ask) what their shareholders want; and 6) that institutions are a proxy for all shareholders.

Shareholders get it wrong by 1) trying to run the companies they have appointed directors and managers to run. Shareholder will not ever have the same information and resources to manage the company effectively as management, regardless of how well informed one or a handful of shareholders may be, but they should be telling the company what outcomes they want; 2) assuming that the AGM and a loud voice are the only strategies available to the shareholder.

In order to lower the activism temperature companies should (must) start taking shareholder metrics on what their shareholders want as outcomes from their investment around value, benefit, growth and risk perceptions.

A few large listed companies are now preparing to do this - therefore this is an inevitability so directors need to start paying attention now.

Directors are increasingly being seen by shareholders as "the enemy" even though a core part of their responsibility is ensure that shareholders are satisfied. All the corporate rhetoric says that yet the performance is abysmal. Shareholders are rebuffed at every turn.

The situation is now changing. The days of the corporate executive sitting sanctimoniously on his board-throne is being challenged and will soon crumble. Directors will certainly continue but they will be, and be seen to be "merely" agents of the owners ensuring proper, ethical, legal and commercial performance of their investment in order to deliver to those owners the outcomes they "were promised".

"Times are a changin'."

Monitoring managers - does it matter?

2011-04-17T13:11:00.002+10:00

Of course it matters. Research conducted over many years clearly demonstrates that managers, like all people, are largely directed by their own subjectivities and contexts.

This means for corporations, that senior managers are attracted to strategies and initiatives that not only enhance the corporation, but also increase positioning of the manager and generally shy away from high personal risk. This is a problem for corporations because not all initiatives and programs are judged by objective criteria but are interfered with by people's subjectivities. When a corporation needs to embark on a higher risk strategy, the strategy might not be adopted because managers may be blamed if it doesn't succeed and they may have "a lot to lose."

There should be no surprise in this.

Therefore, a board that does not monitor managers, their actions, decisions and assumptions, is failing in its duty.

Furthermore, boards demonstrate their own subjectivity too. Then it's the shareholder's responsibility to ensure that the the board does not allow its own subjectivity to impede the aspirations of shareholders.

Role of the board

2011-04-14T08:40:00.000+10:00

It is the role of the board to deliver its charter. If it is a for-profit corporation, then its role is to deliver to its shareholders/investors their definition (as interpreted by the board) of value, benefit, growth and risk.

To do that, it must manage its stakeholders to deliver those outcomes. The corporation does not exist for the stakeholders, per se, even though those non-shareholder stakeholders may have a serious interest in the organisation.

If the organisation is a NFP, then the board must ensure that the organisation delivers its charter objectives - no more, no less.

An organisation's Vision should not be its driving force. It's Mission, in definable and quantifiable terms should be its "purpose for existance". The Vision is "merely" the view the organisation has of itself sometime in the future while delivering its mission - and it changes as its context matures.

If you are focussed on the vision, then you seriously risk being captured by the enabler instead of the outcome required.

Boards and their non-adoption of human rights principles

2011-04-14T08:23:00.000+10:00

Boards will not support human rights proposals for a few reasons:

1. Corporations are not agents for social change - they exist to deliver to their owners that which the owners want (leaving aside the distortions caused by board and management subjectivity, greed and stupidity).

2. What is ethical for one person is not ethical for another. What is oppression for one, is freedom to treat for another. This doesn't in any way justify or condone unethical practices, but it does emphasize the "greyness" of the discussion.

3. What is unethical in say, a Western society, may be totally acceptable in another country in which the corporation is active. Take treatment of women for example. Treating women equally is a given (at least in theory) in Western economies while women are treated as chattels in many second and third-world economies.

4. A large number of investors / shareholders earn their funds through questionable activities and from questionable sources.

5. If society wants corporations to support human rights principles, then, assuming one could define them in a way that would secure widespread agreement, you should legislate for such principles and practices so that all corporations are on a level playing field. In other words, government must define what companies can and can't do. This will be a challenge since first-world governments themselves deal with, support and fund second and third-world countries that commonly act in a manner that contravenes human rights.

6. Therefore, if you want human rights principles to prevail, then two initiatives are needed:

Have governments legislate for it (despite the caveats above) and demonstrate in their other dealings the human rights principles they expect of corporations;
Have shareholders withhold their investment in those companies who demonstrably do not exhibit positive human rights behaviours. If you hit the company in a manner it understands, i.e. financially, then it will alter its behaviour. Appealing to a board's altruistic motivations is like asking an alcoholic to refrain from drinking at a party at a brewery.

Expecting boards to behave above the lowest common standard is a futile expectation.

The Greens and anti-Semitism

2011-04-03T15:37:00.001+10:00

The reason some members of the Greens are seen as anti-Semitic is because of their silence and abject failure to criticize other nation states on equal terms. Israel is by no means perfect, nor is any other nation for that matter, yet members of the Greens single out Israel above (instead of) all others.

If some of the members of the Greens focused on other nations the same way they focused on Israel, then the criticism would be fair, subject of course to the accuracy of their accusations. But since they choose to ignore all other atrocities and only focus on Israel, then it is impossible to absolve them from the anti-Jewish intent of some of their initiatives.

Israel is the only country in the world in which Jews can be guaranteed freedom from persecution for being Jewish. We already know that there are attempts around the world to delegitimize Israel’s existence, through campaigns funded by Arab states (refer UK educational institutions, UK unions, President Jimmy Carter’s apology, etc).

Such delegitimisation implies that Jews should not have their own home-land. If that is the case then that is rampant anti-Semitism – no matter which way you look at it. If the Greens support anyone within their midst who propagates such views, then don’t be surprised when Jews and other reasonable people use all the energy they can muster to excise the cancer from any sphere of influence in this society – not for their own benefit – but because it’s the right thing to do.

Information security

2011-04-03T09:46:00.000+10:00

Information security is part of the multi-dimemsional responsibilities of management. It's the board's responsibility to make sure they do it effectively and economically.

There is no generic answer to "How much security do we need" - it is of course context based.
The more sensitive the information, the more security is needed. The more the information can be used to enrich someone (or destroy someone), then the more security is needed. The more the organisation is planning for major change, the more security is needed.

"Enough security" is when the information is suitably secure. What the definition of 'secure' is, is however open to definition. Some data systems are considered secure if they cannot be breached using tools valued at $200,000 for example. That implies that if someone has sufficient motivation, all systems can be breached, but such a system is "safe" from the "casual intruder".

Therefore each organisation needs to determine its own threshold of tolerance. Using external consultants to recommend what that is may be useful.

The board and organisational culture

2011-04-02T09:35:00.002+11:00

Culture is much more than 'values and what behaviour is acceptable.' Culture is an all-encompassing term that not only relates to the way staff interact and deal with each other, but also how the organisation deals with suppliers, customers, the community, mistakes made by staff, reward, remuneration, promotion and succession, etc.

As such, it is the role of management to ensure that culture is sculpted to serve the purposes of the organisation in order to deliver its objectives. Culture is not a given and is not fixed. As hard as it is to change, it is still changeable - and that's management's responsibility.

The board's role then, is to oversight that the nature, character and delivery of 'culture' , like all other operational elements, is effective, suitable, practical and appropriately implemented. The board is not equipped to 'manage culture' as it is not "close enough to the game" to really understand it.

Thus management has available to it a wide range of options to 'right-size' and 'right-shape' the culture it needs to perform as required. Survey's are but one tool. Other tools might include workshops, one-to-one interviews, external reviews, client feedback, supplier feedback, team feedback, 360 degree reviews, etc. What works and what doesn't work depends largely on the context and the objective - each is good when it is fit for purpose.

Furthermore, the culture needed by the organisation to achieve its objectives need not or may not be the same culture needed for the board to operate effectively.

There are two imperatives for the board in relation to culture: 1) ensure that management develops a strategy to establish and maintain the culture needed for the organisation to fulfil its charter, and 2) develop a culture within the board that will most effectively and efficiently enable the board to fulfil its responsibilities and obligations.

Measuring director's performance

2011-03-31T19:59:00.000+11:00

The question is "what are appropriate performance targets for an independent director / independent chairman?"

Cash flow, adequate funding, suitable processes, strategy are all legitimate tasks undertaken or contributed to by boards and their members. However, the question is around "appropriate performance targets" and the difficulty relates to how you measure the contribution of an individual when a small or large group (including scores of management) have contributed to the task or outcome. How do you separate the CONTRIBUTION of a single individual in a group milieu?

I've seen directors make magnificent contributions by "merely" asking the right question, at the right time in the right way. Similarly, I've seen magnificent management tactfully overcome the idiocy or self-interest of some directors to still enable the required outcomes to be achieved. What and who then do you measure?

The comments of other commentators on this topic clearly demonstrate the point of the contextual nature of tasks. If a particular director was recruited to, say, oversight the selection and implementation of a new accounting system, then surely he/she should be assessed by his/her performance against that objective, among others.

There are of course other criteria that directors must satisfy and they can be assessed through the chairman's evaluation, 360 degreee evaluations or group discussions/workshops. Each have their advantages and disadvantages. Yet the core issue here I think is the measurement of a director's "core responsibilities" and those responsibilities that justified that director's appointment.

All of this reinforces the original comment that it depends on the context and the specific "roles" assigned to each director.

Two-strike rule and proxy firms

2011-03-29T08:12:00.000+11:00

The Coalition's desire to make the two-strike threshold 25% of all shareholders effectively lifts the threshold to unachievable, and therefore meaningless levels - particularly since many/most voters don't bother to vote. Maybe that's the Coalition's intention?

Institutions use proxy recommendations because it's too hard for them to resolve voting strategy, and they don't have the resources to do the work required to determine the issues themselves for all the companies in which they invest.

If the desire is to have institutions determine all voting issues themselves (thereby making the proxy advisors redundant) then there are two options: increase the resources of the institutional investors or make the job of determining the issues easier.

The first option will increase costs and lower margins and is unlikely to happen.

The second option is the most realistic - but how?

If a corporation declares its objectives as being based on quantified shareholder objectives (metrics) then the corporation's performance or non-performance can be easily determined against those metrics.

The majority of issues that require a shareholder vote impact the orgsanisation's ability to deliver its objectives. When managers determine what a corporation will pursue (as they do now), shareholders have little means to determine the underlying issues and the appropriate voting response. This is compounded when those same managers are rewarded by KPIs that they themselves determine.

If the subject of a shareholder vote impacts shareholder-determined required outcomes, the shareholder can much more easily assess the arguments for and against the issue and determine their impacts on required outcomes.

Essentially, this is what proxy firms attempt to do but must struggle with management-derived KPOs, management-incentivised initiatives that may or may not benefit shareholders and they are in complete ignorance of what ALL shareholders really want because no one asks them. No wonder it's hard to determine the appropriate voting strategy on most issues.

Mark McInnes and his appointment by Solly Lew

2011-03-27T09:36:00.001+11:00

This is a very shrewd appointment by Solly Lew and his board. The "elephant in the room" is obvious to all therefore no "skeletons in the closet" anymore. McInnes has "paid for his misjudgements" and is now moving on. By admitting his error, and being very mindful that if he repeats it he will be well and truly finished, he can now get on with his core skill set.

However, I doubt that if McInnes again transgresses, he will find much forgiveness in Lew and his board.

For McInnes, its an incredible opportunity to "erase" the negatives by demonstrating his retailing prowess and delivering to his "saviour" the financial returns he desires.

Leadership

2011-03-24T08:45:00.003+11:00

Leadership is context based. Leadership in a growth market, for example, requires different attributes, strengths and personality compared to leadership in a mature market or one in decline. The point here: there is no generic/universal answer.

Furthermore, not all corporate outcomes are in financial terms. Most commonly, they are couched in the terms of value (what shareholders consider 'value'), benefit (how do shareholders want their benefit), growth (what do shareholders want to see grow), and risk (what do shareholders regard as risk).

If in any particular industry performance is determined by, let's simplistically say the ROI generated; and one particular company achieves the highest ROI, then is that company's leader the best? What if the ROI was secured through high gearing and high risk when shareholders were risk averse? Is the leader still the best?

The board's role is to appoint the most suitable leader in the corporation's context and needs. He/she must 'lead' the corporation to the delivery of its corporate objectives. Whether the leader exhibits 'classic leadership attributes' is virtually irrelevent.

There are many (notorious) leaders of corporations that have led the company down an erroneous path that was not congruent with the needs of its shareholders.

Give me a leader who can deliver shareholder objectives any day over a leader who subjectively pushes his/her own vision.

Handling Activist Shareholders

2011-03-21T09:19:00.001+11:00

In my experience, the best ways to "deal with" an activist shareholder is:

1. Find out what they want as outcomes from their investment against the criteria of value, benefit, growth and risk. In other words, establish their Metrics based on their perception of value, how they want their benefit, what they want to see grow, and what is their definition of risk.

2. Know what the rest of your shareholders want in quantifiable terms against value, benefit, growth and risk.

3. Construct a curve of these metrics.

4. If the activist is an outlier (extreme high or extreme low) on those metrics, then the organisation's argument is that it satisfies the majority of its shareholders and the activist agenda would harm the majority of shareholders.

5. If the activist metrics align with the majority of shareholders, then the majority of shareholders want what the activist wants but the activist is the most vocal or confrontationalist. Therefore, you better listen as the activist is only saying what the majority of shareholders are thinking.

Most corporate responses to activist shareholders assume a defensive stance rather than accept that the activist has a legitimate right to declare his "outcome expectations". Needless to say, shareholders get really irate when this happens.

The corporation's "defense" is merely to establish whether that activist requirement is with the majority or the minority and then act accordingly.

The distinction must be made between "outcome expectations" and desire to influence strategy. Although all intelligent board and senior management would listen to any strategic or operational suggestions provided by activist or anyone else for that matter, shareholders do not have the depth and breadth of information available to the organisation; so making strategic or operational suggestions is inevitably sub-optimal. In any case, shareholders proxy the board and management of the corporation to manage - that's what they get paid for.

However, it is absolutely the right of shareholders, activist or not, to voice their "outcome expectations"; afterall, that's why they invest in the corporation. And it is the responsibility of the board and management to know what their shareholders want and not to guess what they want or to "give them" whatever management feels is appropriate.

"Activist" is not a dirty word - it is merely legitimate owners pressing for their rightful outcomes (subject to the comments above.)

Remember too, that research has validated that corporate performance is generally better within an activist environment than a non-activist environment.

Libya and terminology

2011-03-17T18:39:00.000+11:00

How is it that when the Libyan uprising started, those opposed to the establishment were termed "democracy fighters"; and now they are being called "rebels"?

Whose perceptions are being worked on, by whom and for what purposes?

Family business - internal conflicts

2011-03-13T08:50:00.001+11:00

IMHO opinion, the independence or otherwise of the chair, or for that matter the board members, is not the issue.

In clients for whom I have resolved such issues, the problems appear always to be differing personal objectives of the players.

The technique I use to resolve the issues are as follows:

1. Meet with each individual on a one-on-one basis and in strict confidence ask them what are their personal objectives in staying with the company, what do they want out of it and what are the issues that they feel need resolution. What do they propose is the resolution to those issues?

2. I then conduct a workshop tabling the varying issues, problems and resolutions proposed in the confidential interviews. No issue or solution is attributed to any particular individual so we always deal with the issues rather than the personalities.

3. The outcome of the workshop is a plan of action dealing specifically with the issues agreed by all as requiring remediation.

Leaving aside legality and corporate compliance, the corporation can effectively do whatever is wants to satisfy its family owners. No one has ever said that private companies need to "maximise" - they need to do whatever they wish - it's their money, their time and their risk - provided that whatever they do is ethical, fair and legal.

Other issues I would raise at the workshop would include:

management expectations - decision-making and relationships with employees
succession plans
role of board and its members
adherence to board directive

Once upon a time...

2011-03-09T10:04:00.002+11:00

Once upon a time, there was a guy named Peter. He was the sole survivor of a huge accident where 250 people died.

People of Faith approached Peter and said, "God has looked favourably upon you and saved your life. Let's pray to God."

Peter responded, "If God favoured me to save my life, then why did 250 people need to die for me to live?"

The People of Faith answered by saying, "God saw that you had great things to do and give, so your life was worthy."

Peter responded, "There is nothing I can do in my life that justifies the death of those 250 people."

The People of Faith said, "God has his ways and reasons and we are not to question why."

Peter said, "If God could only 'show me the way' and save my life by sacrificing 250 other lives, then God is either unmerciful or God is not omnipotent. Furthermore, if I am to learn a lesson in my life, there is no more worthy lesson than that of mercy, compassion and tolerance. If you claim that God has caused this calamity, then this is a God I can't accept as my own."

[Instead of Peter, read Ahmed, Zvi, Ravi, etc]

Where to start in straightening out an organisation

2011-03-06T11:09:00.001+11:00

Where do we start indeed!

What I do with my corporate clients and NFP and government organisations that I work with is the following:

1. I secure clarity and agreement on the purpose of the corporation or organisation. If it's a for-profit organisation, then this comes from shareholders (refer: my book on the subject http://www.jacobyconsulting.com.au/books/business.htm). If it's an NFP, then it comes from its Constitution, Articles or other chartering document. If it's a government department or organisation, it will usually come from an Act of Parliament.

2. I then workshop the board and/or owners/shareholders to identify the outcome metrics associated with each of the organisation's objectives. This is stated in terms of $, %, # or some other quantifiable form.

3. The board or managing authority of the organisation then interprets those metrics in terms of the organisation's context, it's capabilities, opportunities, competitors, industry structure, status of the economy etc. The nuancing of the metrics then represent's the corporation or organisation's Statement of Purpose. In order words, it exist to deliver those outcomes.

We then start to drill these metrics down the organisation. The method is outlined at (http://www.jacobyconsulting.com.au/knowledge/planning_schematic.htm)

4. Once the metrics are understood, we then determine the market that will deliver those metrics. For example, some markets can only deliver an ROI of 10% while others can deliver 25%.

5. Once we have resolved the nature of our market, we then determine the products and services that need to be placed into that market in order to extract those outcomes (metrics).

6. Once we know what products and services we will use, we then need to determine the optimal manner in which those products and service will be delivered to market (channels); what level of product and service support is required; and how we will communicate and promote the products and services to the consumers / market.

7. Once these issues are resolved, and only then, can the organisation determine what sort of people it needs and what sort of systems (eg I.T., processes, procedures) it needs to enable all of the above to operate efficiently and effectively.

8. Only then can the organisation determine what management is required and what board skills are required. This is the organisation structure stage. Unfortunately, most companies mistakenly start here.

9. All of the above decisions, when accurately modelled, will deliver a set of outcomes. When these outcomes equal or exceed the Statement of Purpose, they can be finalised and formalised into a Business Plan.

This hierarchy of decision-making is really important. Making decisions out of their logical sequence commits the organisation to strategies and structures that are sometimes illogical and harmful to owner and corporate interests.

This process works for private, listed, NFP, government, large and small organisations.

Doing more to assure investors

2011-03-05T15:50:00.000+11:00

On one hand, strong corporate governance, avoidance of related party transactions and similar, are all important but "only" reassure the investor that there has been no malfeasance. This focus is about avoiding "detracting" investors.

An investor will be "attract" to an investment when the investor has a high level of confidence that the investment will deliver that which the investor wants.

Much movement on the share registry of a corporation is commonly interpreted as representing instability and is therefore seen as negative. Boards and CEOs therefore attempt to “quieten” their registries, using a range of techniques including, promotion, advertising, communication to shareholders, communication to analysts, promise of bigger benefits, strengthening corporate governance, etc..

Although volatile movement on a registry may be unfavourable, it should by no means automatically suggest that all movement on a registry is negative and that stability of the registry, per se, should be aspired to. Except in a market in free-fall, every transaction has a buyer and a seller. Where an existing shareholder is selling because of the corporation’s inability to provide a high probability of satisfaction, then it is likely that the shareholder may discount the sale price asked in order to cut “losses” and reposition in another registry that offers greater probability of satisfaction. If many of the company’s shareholders feel the same way, then prices will fall.

Conversely, an investor wishing to gain entry into a registry or wishing to buy a greater holding will see additional value in that stock over the purchase price. If there is no such perception of “extra” value, then there is not much point in the purchase. When there is “extra” value perceived by the intending investor, and when many investors perceive such “extra” value, then there is a likelihood that prices will be pushed up to a level that equates to the perception of value.

This is no more than normal supply and demand mechanics at work. Therefore, when existing shareholders wish to sell their holdings due to a negative perception of the future, then prices will tend to be depressed. When external shareholders want to enter the registry, then they tend to push prices up. Depressed share price causes market capitalisation of that company to be depressed while rising prices enhances market capitalisation.

Companies therefore should attempt to minimise all churn on their registry caused by disenfranchised shareholders because this will constrain share price and market capitalisation. The methods used by companies to achieve this might vary, but can be summarised as methods that enhance shareholder satisfaction and positive perceptions of future performance.

On the other hand, all companies should “chase” positive churn, i.e. registry churn caused by investors wishing to enter the registry. Particularly when fewer existing shareholders are prepared to exit the registry. This forces share price up which is to the advantage of all existing shareholders. One is not able therefore, to deduce merely from the existence of churn, whether the instability is “positive” or “negative”. One conclusion is clear however, positive churn is very much to the advantage of existing shareholders and corporate governance is only part of that process.

The 'real issues' confronting the corporation

2011-03-05T15:38:00.000+11:00

Context defines their challenge and often, their ability to meet those challenges.

In consulting to literally hundreds of companies over 30 years, I have come to the following conclusions - not necessarily what you would expect.

Most corporations try to do the right thing by their shareholders and stakeholders.
The level of incompetence at executive and board levels in many corporations is simply astounding.
I have witnessed BILLIONS of dollars of shareholders funds being wasted over the years as a result of well intentioned but intellectually bankrupt thinking.
Ego and reputational and career risk is the most destructive and destabilising influence within most organisations.
Individual subjectivity is the principal determinant of corporate strategy and activity - with corporate outcomes being determined by subjective judgement rather than by a factual understanding of shareholder requirements.
Corporate performance is often determined by power and charisma rather than logic and evidence (acknowledging however the important role that business intuition plays.)

How sad!

Board Succession

2011-03-05T15:06:00.001+11:00

Few companies have the luxury or patience of "honing" skills in existing or prospective incumbents of the board - as logical as it is. If decisions are made in the new appointee's first meeting, that person is expected to make a robust decision or contribution from the getgo.

I am of the view that a corporate context determines needs required on the board where context has both current and future dimensions.

Some of the considerations may include:

1. The corporation's context (present and future) determines the skillsets required of the board.

C=P+F - Context equals present context plus future context
C=>SKn - Context determines skills needed

2. Total skillsets required of the board less those that exist (and will continue) will identify skills needed in an incumbent.

SKi=SKn-SKp - Incumbent skills equals needed skills less present and continuing skills

2. An incumbent must:

demonstrate the needed skills (SKi)
demonstrate an ability to work at board level (i.e. have a "Director" perspective rather than an "Executive" perspective) (SKb)
have a very high level of emotional intelligence (Ei)
have a mature ego (Em)
have personal objectives that are fulfilled with success in his/her board KPOs (rather than in conflict with them) (Op=Oc)
be able to identify what level of "training" and "guideship" he/she wants to better deliver their role (i.e. growth path) (GP)

Therefore the suitable incument = SKi+SKb+Ei+Em+[Op=Oc]+GP

Getting a mentor

2011-03-03T08:50:00.001+11:00

Generally a mentor can provide experience, poise, judgement and expertise, networks - particularly if you are in unfamiliar territory. There are a number of mentor types that you might consider and they are not all the same. An individual mentor should be:

1. Someone you respect
2. Someone without another agenda
3. Is readily available
4. Ideally doesn’t charge a fee
5. Has different skills to you
6. Has broad experience
7. Will be honest with you and you with him/her
8. Will be ecstatic in your happiness

There is also a Business Coach. I differentiate between a “business coach” and an “executive coach”, A business coach is defined as a person skilled in a variety of corporate competencies who works with a CEO, senior manager, or nominee, to make better and more effective organisational and business decisions thus delivering improved organisational and business outcomes. Although aligned to a specific client, the business coach may be seconded (or “lent”) to another executive or manager to help them with their own area of responsibility for a project or limited time.

An Executive Coach is focused on the senior executive to largely, but not necessarily exclusively; help him/her deal with the issues that confront senior executives in large corporations. These issues are more intense, complex and involve greater career implications than the business coach environment. Unlike the business coach who may be “lent” around the organisation, the executive coach is client dedicated. Also unlike the business coach who is often seen as an informal member of the management team, the executive coach “belongs” to the client exclusively.

A Life Coach is a person who provides encouragement, direction, motivation and support to an individual seeking improvement in life as a whole. Career or profession form only part of the focus of a life coach, who sees career as a means to an end, rather than the end in itself. In the words of one coach, “A Life Coach is your own personal cheer squad, guide, mentor and motivator engaged with you to plan, create, solve and focus your energy on your goals.”

A Skills Coach is a person who provides specific “teaching” of defined required capabilities. Once the required skills are taught and demonstrably applied by the client, the coaching program is complete. Some skills coaching relationships extend informally after the formal relationship has concluded. The coach continues to act as sounding board or “mentor” for the student on matters relating to the taught skills.

An "Oracle Mentor" is much like a business and executive coach with the following differences:

1. The oracle mentor acts either for a relatively small fee or gratis, depending on the circumstance;
2. In some cases, oracle mentors acting in a private capacity exchange their managerial skill for equity in the helped entity;
3. The oracle mentor is often a retired or semi-retired individual who is driven not by a financial benefit, but by a desire to “give back” by helping others succeed;
4. Because of the benevolent nature of the mentor’s motivation, the mentor and client meet infrequently even though the mentor is happy to help by phone or email if the client requires urgent advice – although this is not common;
5. The oracle mentor represents wisdom and experience and is often a last resort for the client, rather than one who gets involved early in the client’s issues.

A Mentor-In-Confidence (MIC) is the highest level professional mentor available in the counselling market and is an amalgam of business coach, life coach, executive coach and oracle mentor. The MIC provides senior managers and directors in large corporations with confidential advice (hence the name) and technical support in a manner that is invisible to the client’s organisation and staff but with the approval of the Board of that organisation. This is normally a fairly expensive service.

When is a deal done a "done deal"?

2011-03-02T13:48:00.000+11:00

There are two perspectives here: that of the purchaser in the deal and that of the vendor.

From the vendor's perspective, a "deal is done" when:

the terms of the contract are fulfilled and consideration satisfied;
there are no blow-back issues such as misrepresentation, fit for purpose, etc claimed by the buyer against the vendor;
all latent warranties, potential liabilities and other obligations from the vended asset expire, are expunged or transferred out;
the impacts on the vendor's company from the sale of the asset have been neutralised.

From the purchaser's perspective, a "deal is done" when:

the terms of the contract are fulfilled and consideration satisfied;
no hidden issues are discovered that escaped due diligence such as misrepresentation, fit for purpose, etc claimed by the vendor;
the impacts on the purchaser's company from the purchase of the asset have been incorporated.

Corporations and the social media

2011-02-26T10:35:00.000+11:00

Social media, much like most new technologies, will inevitably be incorporated into corporate operations and processes in a range of ways - some successfully and some with less successfully. It's an evolutionary thing.

However, the issue for directors, management and shareholders, is the opportunity and threat that it can create for each. I suspect that a strong social media community of, say, shareholders in a particular company, can bring a lot of pressure to bear on the board and management - particularly when "a company insider" joins the social media community and is able to provide contrary information to that provided by the Chairman, management and the company's Press Office.

How much more incendiary will this become if a member of the press, brokerage or analyst communities is also a member of that company's social media community?

The management of stakeholder (and especially shareholder) expectations and the establishment of "one corporate truth" will become extremely challenging. Inevitably this will affect confidence in the company, its board and its managers.

Changes in the Middle East and Radicalism

2011-02-19T13:03:00.000+11:00

I think the argument proposed by most Western societies is that in general, a move to democratic principles as an aftermath of the current Middle Eastern turmoil is a good thing.

This argument is based, I believe, on the assumption that the majority of Middle Eastern citizenry are moderate and therefore no institutionalised or formalised "Radical States" will emerge, or at least be less likely to emerge.

Leaving aside the glaring examples of the Gaza Strip or Iran (both illustrate the use of a sham democratic process that result in radicalism), I believe that this argument fails.

If one examines the rise of Islamic fundamentalism, it is only within the lax and legally protected environments of democratic states that enables extremism to be "operationalised".

In dictatorial states, where the will exists, extremism is quashed ruthlessly, or conversely, nurtured.

Regardless of where the funding of extremism comes from, the implementation of extremist strategies is best nurtured, for a range of reasons, in democtratic states.

The funding of extremism probably comes largely from the wealthy dictatorial states or wealthy individuals within those states who have gained their wealth from the dictatorial structure of the state which has "bestowed" on them enormous economic and financial favours.

I suspect that the possible outcome of the current Middle Eastern turmoil will be the overthrow of most non-democratic states and their replacement with largely and initially, "non-extreme" democratic governments. Over time however, extremism will nurture independently of governments and be exported globally.

Western governments will struggle to deal with this trend as, on the face of it, they will be forced to deal with democratically elected governments. In the past, one could develop a relationship with the "ruler" or dictator and that relationship could be engineered to deliver the particular needs of a foreign power - even if unpopular with the "public". An example of this was Egypt's antipathy to Hamas in relation to the Gaza Strip or even Egypt's and Jordan's peace treaties with Israel.

In the future, a government that appeases the West where the appeasement is in conflict with the will of "the public", will have to face that public at the next election. This is a much more difficult achievement.

Add to this the growing influence of Muslims in Western and democratic societies and the increasing dis-inclination of Western governments to disenfranchise a growing proportion of their constituencies. The birth rate of Muslims in Western societies is often many times that of non-Muslims - thus this influence will grow and become more acute. In France it is reported that Muslims exceed 13%-14% of the population at the moment and growing rapidly.

The upside however, is the potential that a democratic society composed of a majority of moderate and reasonable people, will deliver a fairer and more equitable society for itself. A moderate society will, in theory, shun extremism of any nature or origin.

Although that is the hope, one needs to remember that the US, the "flag-bearer" of democratic states, is the home of a growing number of its own extremists - both politically and religiously.

Therefore, democracy in and of itself is unlikely to be the panacea of all current and potential threats that the world currently faces from extremism.

My hope is optimistic while my expectation is pessimistic.

Open rebellion in the corporate sector

2011-02-19T12:08:00.002+11:00

Much like what is happening in the Middle East at the moment; you can oppress the people for just so long before they engineer a way to communicate, unify and impose their will.

Instead of "people" one could read "shareholder" as a direct analogy with the corporate world.

Organisations that are, and remain obstinate in the face of overwhelming shareholder dissatisfaction will, in the inevitable passing of time, succumb to the power of its owners. Corporations, their boards and executives who conveniently hide behind corporate walls, internal processes and legal ploys will, in time, face their destiny.

Key Board Challenges

2011-02-19T11:57:00.000+11:00

One of the challenges discussed as an imminent board challenge is communication with shareholders. Unfortunately, most corporations (and their I.R. departments) see communications as one-way - from the corporation to the shareholder.

What is needed is a "listening to shareholders" capability whereby corporations learn what their shareholders want in terms of specific (and not assumed) outcomes - and aligns the corporation to the delivery of those outcomes. And we're not talking about listening to a few shareholders, as they do now (i.e. the institutional investors as proxy for all shareholders.) Instead, we're talking about surveying all shareholders and establishing the company's Shareholder Metrics.

Corporations' failure to deliver shareholder outcomes is generating a growing and powerful activist investor community. There are activist fund managers and investment portfolios currently and quietly building their war chests in order to pounce on weak and indolent registries. Be warned.

Couple this with the inevitable morphing of the power of social media into the investor market and you have a new and powerful threat that will give boards, their members and executives severe headaches in the coming years - but will deliver greater accountability to the corporations' owners.

"Shit happens"

2011-02-09T12:10:00.000+11:00

The media, particular Network 7, is getting a whole lot of its own "shit" thrown for its airing of Tony Abbott's "shit happens" comment.

We all know the heights and depths that the media is capable of, so there should be no surprise that Network 7 aired the comment.

The issue is not the comment, per se, but that Abbott clearly froze when asked a legitimate question requesting clarity regarding the context of his statement. The question now being raised is whether Abbott has got what it takes under pressure. Apparently "his people" were pre-warned of the question so surprise is not an excuse.

The incident reminds me of George W Bush being told of the 9/11 incident. He sat there staring at a kid's book which was upside down - stunned, alone and vulnerable and not knowing what to do or what to say. Certainly this can happen to anyone, but you expect your leaders, or potential leaders, to be a bit more robust and resilient to such situations.

A Corporation's Community Obligation

2011-02-05T11:29:00.000+11:00

The mistakes that management and directors make in supporting the community is to confuse enabler with outcome. Corporations must be responsive to community (and other stakeholders) in order to deliver their corporate outcomes (whatever they may be) - no more and no less.

Pusuing "community" on par with shareholder objectives is to confuse enabler with outcome.

A corporation should satisfy community and other stakeholder needs only to the extent that they have to, and to enable the corporation's objectives to be satisfied. Same applies to employees, etc. That doesn't mean that you don't provide an "exceptional" response - but only if it is required. To exceed the minimum (as politically uncomfortable as that may sound) is inapproproiate - particularly when the funds used for those purposes should be applied to unfulfilled corporate objectives.

For all of those well-meaning and well-intentioned people who advocate for the primacy of community, staff or other stakeholder outcomes, I have worked in and with hundreds of corporations and have seen literally billions of dollars of shareholder funds fritted away on well-meaning and well-intentioned initiatives that were irrelevant to corporate requirements but driven by subjective management interpretation, ego, networks or other non-core influencers. Sponsorships of "pet" projects without a corporate pay-off is a perfect example.

The corporation is an entity engineered to deliver shareholders their definition of "benefit". It is not an agent for change nor a tool for community, staff or others to achieve their personal objectives. To confuse this issue is to play craps with shareholder funds.

Solitude and loneliness of leadership #2

2011-01-18T08:54:00.000+11:00

Like with most things, there is no generic model for CEOship's relationship with solitude and loneliness.

There are two key dimensions of CEOship: the person and the context....and both evolve over time.

We are all familiar with CEOs who are great for growth and change but are lousy with stability and consistency - and vice a versa. People bring not only their skills to a role, but also their personalities, biases, experiences and fears. Some handle solitude and loneliness well while other become depressed when alone.

Also within the one organisation, dynamics will change as will the pressures; and so will the CEO's ability to handle them. A profound left-brainer will feel comfortable managing detailed corporate issues - such as finance, logistics, manufacturing or process development. That person may, however, stress over building long term complex, creative and ambiguous futures.

A profound right-brainer will feel comfortable in abstract and creative environments but will get bored with intensive detailed work over long periods.

So it is with solitude and loneliness. Some will struggle to deal with it, while others will crave its presence which gives them "time to think".

Therefore the value of advice on how to handle a CEO's solitude and loneliness will depend on the recipient's personality and psychology and context in which the CEO finds him/her self.

Failure to deal with the issue on a personal level and dealing with it only on the role-level, will fail to provide meaningful insight.

The Floods and leadership!

2011-01-16T15:25:00.002+11:00

The performance of the Queensland Premier in the face of the floods there has been outstanding.

Seems to beg the question then: where is the Victorian Premier?

Solitude and loneliness of leadership

2011-01-16T15:10:00.000+11:00

The solitude and loneliness of leaders has been recognised for some time.

I have been providing what I have termed "Mentoring-in-Confidence" (MIC) services to senior executives for a number of years now. The MIC-type mentoring is the highest level professional mentor available in the counselling market and is an amalgam of business coach, life coach, executive coach and oracle mentor.

Access to a MIC provides senior exectives, Chairmen and directors with a practical way to overcome their solitude and obtain high-level assistance - without undermining their status in the eyes of their peers, seniors or subordinates.

The service provides senior managers and directors in large corporations with confidential advice (hence the name) and technical support in a manner that is invisible to the client’s organisation and staff but with the approval of the Board of that organisation.

This type of service provides:

One-on-one confidential mentoring of senior managers and directors for an annual retainer-based fee;
Relationships between the MIC and executive are strictly confidential;
MIC and executive sessions are organised at a time, frequency and place to suit both parties;
The MIC is always contactable by the executive for advice or discussion;
The MIC helps the executive work through specific corporate or personal issues and challenges in a “back-room”, strategic and confidential manner;
Any suggestions, strategies or actions that emanate from a MIC/Executive relationship are seen as the executives's "own work”;
The MIC can introduce Subject Matter Experts (SME) as required by the executive.
MICs can organise and facilitate intensive confidential workshops to target, solve and brainstorm specific client issues. SMEs may be invited to participate in or lead intensives.

The MIC service should be used in the following contexts:

When a CEO or very senior manager needs a “strategic angel”;
When a CEO or very senior manager needs a confidante;
When an intimation of change may create distress in an organisation;
When the CEO or senior management have certain technical skills and capabilities but not others;
When the CEO or senior management believe that internal recommendations for initiatives and projects may be biased by self-interest;
When it is hard to determine a “good for business” view;
When a CEO needs independent validation or a “technical filter” from experts;
When a CEO or senior management struggle with balancing career and family;
“Stapled” to a new senior appointment to help in a speedy ramp-up.

Can or should boards damped speculation?

2011-01-16T15:02:00.002+11:00

Speculation is often represented in a company's registry through its churn. The mistake is made when one assumes that all churn is bad or undesirable.

There are two types of churn: Negative churn in the registry is caused by existing shareholders vacating the registry. This is caused when they believe that their individual objectives are not going to be satisfied by the company they have invested in; or that another company has a greater liklihood of satisfying those objectives. Their flight from the registry softens share price.

Positive churn on the other hand, occurs when external investors see value in the company's stock and pursue it (as well as existing shareholders adding to their holdings). This action tends to strengthen share price.

If the question is "Can boards develop strategies to squeeze speculation out of the financial markets" then I would suggest that you wouldn't want to do that if you are targeting "all speculation" because it will hurt shareholders. On the other hand, diminishing negative churn and encouraging positive churn is a shareholder-enhancing activity.

And the best way to damped negative churn is to know what your shareholders want (i.e. establish their shareholder metrics) and align the corporation to their delivery.

Investor Relationship Officer - and board positions

2011-01-08T08:38:00.002+11:00

Should an IRO be on the board?

The traditional IRO's role is to communicate the company's activities to its shareholders. In other words, a one way communication.

If the IRO's role was to establish what the shareholders want against the criteria of value, benefit, growth and risk, and help the company optimise its corporate KPOs to achieve those shareholder metrics, then the IRO's position on the board would be of benefit to both shareholder and corporation - and would represent a valuable two-way communication.

My experience with IROs is that many believe that "they know all that needs to be known about their shareholders" therefore establishing shareholder metrics is a waste of time. IROs with such a view would only confirm the current criticisms against existing boards - that they ignore real shareholder objectives and substitute them for their subjective assessment of what they want to deliver to their shareholders.

The other dimension of all of this is that the board should already be aware of its shareholder metrics - which as a rule, they are not

Cricket

2011-01-07T18:10:00.000+11:00

Let’s all get a grip. Cricket is only a game and its favour ebbs and flows between the nations – otherwise it would be incredibly boring. It’s England’s turn at the moment, and they richly deserve it, so let’s not get too bitter, stressed or panicked. Our turn will come again – be patient and enjoy the resurrection.

The USA

2010-12-25T11:47:00.006+11:00

For years I wanted to live in the US. Not that there was anything wrong with Australia but the US seemed lively, exciting and certainly where all the action was.

On reflection I can now see why I was so stupid and naive.

Despite all the great things the US has done, and there's a lot of them, and what it has to offer (even despite the years of George W. Bush), there are some very profound issues I have with the US.

1. Capitalism: now don't get me wrong here - I'm a capitalist through and through but the American system is so warped that it is to Capitalism what Mao's China was to Communism: heartless, extreme, lacking compassion and very doctrinaire. It's all about sink or swim.

You can't tell me the the alleged richest country in the world can't support its poor, uneducated, jobless and disadvantaged? It's not that they can't, but their form of Capitalism is about excess, hedonism and the accumulation of excessive wealth - regardless of its impact on society. Surely it's only a matter of time before their society will be in upheaval - or collapse. It seems like the Roman Empire all over again.

2. Health System. Obama is certainly on the right track here but the Neanderthal Right just won't give in.

3. Gun Laws: the world watches in open-mouthed disbelief at the sheer idiocy of Americans who extol their right to own arms and then cry in anguish as some pimple-faced teen guns down a classroom of helpless students with a semi-automatic rifle. This is not freedom - but rather enslavement to a doctrine without understanding, or being prepared to understand its implications - a vicious and stupid treadmill that Americans are too stupid to get off.

4. The legal system and its litigious nature: Sheer idiocy - but because it's spreading from the US to the rest of the world, we are all suffering from the inaccessibility to the law and fair legal process.

5. The Evangelical Right: I do not see the difference between the radical Evangelical Right and the Muslim radicals, except that the Evangelicals appear to have enormous influence in Washington. Scary stuff.

6. Debt. As long as Americans continue to live beyond their means, the more likely that the day of 'come-uppance' will arrive. My advice to the US: don't piss off the Chinese because they'll pull the plug on the US debt - even if they hurt a bit in the process. It's only a matter of time.

Of course, if Americans woke up to their reality, they'd increase their taxes for a few years and eliminate their indebtedness - but they won't do that since increased taxes contravenes their Capitalist, right-wing ethos of wealth maximisation, living to excess and small government.

They seem incapable of understanding the difference between "common good" and "individual rights"; between "the activities of government" and "responsible government"; between "government helping to facilitate the economy" and "the government interferring in individual economic rights."

They're free of course to do what they want - but don't expect the rest of the world to feel sorry for them when the shit hits the fan - as it will.

It's my view that history will show that the American empire started it's decent when George W. Bush came to the throne. Since then, the capitalists have been, like Nero, fiddling and gorging themselves on the excesses of a distressed society. We can only imagine what the epilogue will say!

Postscript 18 January 2011: I received this anonymous comment: "THEN KEEP YOUR SORRY ASS IN AUS?" .... and that ladies and gentlemen, is why the US is in the state it's in. A group of redneck fascists who don't understand that other people have legitimate opinions about things they don't agree with. Not only are they quite infantile on matters to do with taxation, economic revival, gun laws, medical services, education, business, politics, culture, etc; they are also profoundly arrogant (a generalisation of course).

There are many US citizens who say that we are not Americans therefore we are not entitled to comment on the US. Fair enough except that US capitalism, entertainment, and culture is imposing itself on the rest of the world and profiting by it. While that happens, we in the rest of the world have a right to express our opinion about those influences being "imposed" on us that are harming our culture, environment and context.

Company Directors - Saviours or Devils?

2010-12-25T11:32:00.003+11:00

Those of you who are familiar with my work and writing, will know that I am an advocate for the shareholder. Not a fanatical and myopic advocate that promotes shareholders over every stakeholder regardless of the circumstance; but rather one that recognises that a corporation exists for the benefit of those who invest in it - i.e. its owners.

Shareholder "satisfaction" is about optimising circumstance and opportunity to deliver reasonable shareholder expectations in that context.

My published research on shareholder primacy focused on management subjectivity and the way their decisions, ill founded but well intentioned, dictate organisational behaviour and the ability, or not, for shareholders to be satisfied.

My writings to date have only superficially dealt with directors and their role in the shareholder versus corporation debate. Two recent incidents have forced me to broaden my focus to include the powerful influence that directors have in aiding or thwarting the proper destiny of the corporation. Up till now, it has been managers who have got most of the blame for shareholder dissatisfaction.

Incident One

I was recently nominated to a listed board by over twenty of its shareholders. Although the board had vacancies and had performed poorly, and my credentials to serve were sufficiently strong as to have secured the nomination of nearly 10% of the shareholding, the board refused to support my nomination. Their argument was essentially, that the appointment was unnecessary. The ultimate vote in support of my nomination exceeded 20% of shares held.

The company had clear, visible, public and negative relationships with many of its shareholders and shareholders who supported my nomination were keen to see my shareholder-centric methodologies and philosophies incorporated into board deliberations and practices.

What we saw here was a small group of directors subvert the desire of a significant (albeit minority) group of shareholder desires.

Incident Two

I contacted a leading director organisation offering to have a chat with them about one of their governance principles relating to the responsibility of directors to align the corporation to shareholder "value" expectations. I mentioned that the rhetoric was nice, but there was no independent and quantifiable measure that was used to ensure that this principle was complied with. The operationalisation of this principle is entirely a subjective decision of the board and its directors.

I proposed an independent Shareholder Certification / Accreditation body and invited the organisation to participate in its establishment in order to demonstrate thought leadership and practical application of their own principle.

The response from them was that "there is no appetite for further accreditations, or certification of companies."

This is a self-serving attitude that avoids accountability of the board and its directors to its shareholders.

Implications

I am of the view that the majority of directors have gained their corporate experience and credentials through their management roles over the years. They have achieved their elevated positions of director by "playing the corporate game", i.e. by thinking as management do - complete with its subjectivity, biases and arrogance.

To expect directors to suddenly change their views and beliefs the moment they enter the board room is unrealistic and unlikely.

In order for directors to take their own rhetoric seriously, rather than merely a sop to placate shareholders; directors, boards and corporations should be forced to align to their shareholders.

There are two ways to do this: either through legislation or through market forces.

The former is unlikely because of the short-sightedness and 'weakness' (read "gutlessness") of the government.

Therefore the only practical way for corporations' directors and managers to be brought into line is to have the corporation punished for non-compliance through an independent Shareholder Certification/Accreditation scheme.

Shareholder Certification

A Shareholder Certification body would deliver the following benefits:

For Shareholders/Investors/Owners

a. Decreased risk in making investment decisions by matching an organisation’s overall shareholder objectives with their own objectives.
b. Informed investment decisions through the provision of independent and quantified representation of shareholder objectives for each participating company.
c. Enable more effective investment choice by allowing investors to select from a range of shareholder objectives of different companies. The investor would select the investment that provided the greatest probability of fulfilment.
d. Provide a reliable and objective method for measuring the performance and competence of a corporation and its C.E.O.
e. More easily identify areas of poor performance or under-performance and a greater ability to scope the impact of such under-performance.
f. More easily able to “gather the evidence” to justify a change to the Board as a result of poor performance.

For Boards and Management

a. More effective and easier corporate governance through the identification of legitimate, recognised, owner-approved and quantified objectives which form the raison d’etre for a corporation’s existence and which define its objectives and form the context for its mission, vision, strategies and actions.
b. More easily able to determine and resolve efficacy and appropriateness of management and board decisions and actions.
c. More easily able to monitor and assess the outcomes of management and board decisions and actions.
d. Better able to assess corporate, C.E.O. and management performance.
e. Clearer and less ambiguous expectations against which directors and management are held accountable.
f. Better able to match shareholder objectives with management objectives and strategies therefore better able to meet shareholder expectations.
g. Ability to communicate and individually report to each shareholder based on that shareholder’s personal objectives.

For Brokers, Analysts and the Public
a. Better able to gauge investment options for clients using the Investor Profile tool.
b. Better able to provide effective investment-specific performance measures which will assist in identifying performing and underperforming investments.
c. Better able to decrease broker/client risk by increasing the frequency that broker advice will satisfy client expectations.
d. Better able to decrease the perception of risk in the investor community and thereby bring otherwise risk-averse investors into the market.
e. Decrease the “speculative” character of investments.
f. Increase the opportunity of enhancing the relationship between investor and broker through a better understanding of the character of client objectives.
g. Enhance the opportunity for brokers to develop their own owner profile methodologies which mirror Owner Accreditation, and which enable account relationships to be personalised and enhanced.

For Regulators, Legislators and Government
a. Sees that the onus for corporate governance is accepted and exercised by shareholders.
b. Sees the initiation of an effective non-government regulatory process that is equally applicable for all organisations.
c. Avoids accusations of “big-brother” regulation.
d. Sees leading edge and world first corporate practices introduced into Australia.
e. Relieves some pressure from the Australian Securities Commission, Australian Stock Exchange and others to enhance regulation.
f. Enables Australian commerce to be seen as less risky for investors.
g. Will attract capital into Australia.
h. Supports new corporate structures and philosophies which will avoid a repetition of the heady days of the 1980s and the recent GFC.

Competition is Failing

2010-12-25T10:04:00.000+11:00

My associate, Dr Kenneth J Preiss, Chairman of PreissLevyJacoby & Associates has written a wonderful article on competition.

"Current debate about competition policy and practice fails to address the interests of a central player in the market dynamic – the end consumer" he states. Read the entire article on the PLJ website at http://www.pljanda.com/news/competition-is-failing-us/

Governance - take 2

2010-11-07T09:43:00.000+11:00

Corporate governance is really important, and good governance is even more important. But let's not put too much faith in "governance".

Governance can be likened to quality accreditation: even with the most robust internal quality processes, one can still build a concrete life vest.

So it is with governance. Despite strong governance practices and clear and transparent accountabilities, a corporation can still deliver outcomes that do not align with shareholders objectives.

Directors and managers must understand that governance is a MINIMUM requirement (i.e. an enabler), and not the end-game.

Bank Bashing

2010-11-04T13:37:00.001+11:00

Those who insist on bashing the banks are ignorant of the real purpose of the economic enterprise. The for-profit corporation has a single objective: satisfy its shareholders within legal and regulatory constraints. The definition of “satisfaction” is always across four dimensions: what does the shareholder consider to be “value”; how is the “benefit” to be delivered; what within the corporation is intended to “grow”; and what does the shareholder consider to be “risk” and how much of it is acceptable?

Therefore, the role of boards and executives is the optimisation of these four variables, and not the maximisation of any single one of them.

In order to do this, corporations must manage their various stakeholders in a manner that will enable optimisation. Although it is socially insensitive to say it, no listed corporation exists for its customers, staff, suppliers, the community or any other of a myriad of entities and interests. That’s the reality – they are all “enablers”. However, corporations must manage those stakeholders in a way that they will deliver the required benefit to the organisation and generally that means “keeping them happy”. Therefore long-term dissatisfaction by, for example, customers, is inevitably unsustainable and bad business.

Therefore, the accusation against banks that they have “screwed” customers fails to acknowledge that banks will extract benefits from customers (and others) for as long as they can, or until customers stop supporting them, or until a regulatory/legislative environment constrains them.

Stop blaming the banks – they are only doing what we all should understand they are motivated and designed to do – create benefit for their shareholders – and this year they have done that exceptionally well.

The reason that customers are not easily able to change their “supplier” is because of the costs and difficulty of changing. Moves are afoot to lubricate and cheapen the process of change which will immediately change the “value proposition” offered to bank customers. If society wants banks to act in a certain way, then that’s OK, but government must legislate for it so that all banks are treated equally and so that shareholders of any particular bank are not disadvantaged by the subjective judgements of directors and managers.

When should a board seek outside advice?

2010-11-02T10:43:00.003+11:00

A board should, in principle, have sufficient diversity of skills and experience to be able to assess the robustness of operational decisions and recommendations made by the CEO and the executive management team. When such experience and skills are lacking (e.g. one-off or unusual situations and challenges), then it is reasonable to draw on the skills and experience of external parties and advisors.

The challenge of course is for a board to self-assess and judge whether "they are skilled and experienced enough and when their own judgement is inadequate." The best way to judge the capability of the board, apart from a range of diagnostic tools related to board effectiveness, is to have a fairly robust review process that assesses the impacts and outcomes of previously undertaken decisions, coupled with a process that "implements the learnings from such assessments" ...and each board is different.

In my humble opinion, the only way for a board to assess the effectiveness of CEO (and executive managment team) performance is against their ability to deliver shareholder objectives (as interpreted by the board). If a corporation is unaware of those shareholder objectives, then it is impossible to make that assessment in any meaningful manner. One therefore resorts to assessment against peers and that is fraught with danger as different organisations chase different outcomes - thus making comparison difficult (invalid?)

To add another nuance to this challenge, I have recently come across a corporation where, regardless of the CEO's skills and capabilities, he has a very powerful Chairman who, for all intents and purposes, "runs" the business. How does one in that context meaningfully assess that CEO's performance?

Governance - the elephant in the room

2010-10-30T18:01:00.002+11:00

In my humble opinion, the biggest elephant in the room is the refusal of corporations, and in particular high-flying boards, to actually LISTEN to their shareholders about the outcomes the shareholders seek from their investment in the company.

Despite the fact that corporations are owned by their shareholders, and ASIC, ASX, AICD guidelines all reinforce the obligation of directors to focus on all shareholders; shareholders are still being ignored, patronised, marginalised, threatened and economically alienated from the organisations they own.

To a large extent, directors who having come up from the ranks, have little motivation to change the way they think which got them to where they are today - unless they see the writing on the wall.

Shareholders are getting more vocal, more organised and more ruthless. It's time for the corporate mavens to wake up, listen and focus. Repairing the relationships between boards/directors and shareholders is not hard nor is it painful with clarity of vision and pure intent. It will however, get much more painful shortly when shareholders run out of patience.

Corporate Governance

2010-09-26T14:05:00.000+10:00

The issue of corporate governance is a symptom of a much bigger problem: the way executive managers/directors relate to their shareholder/owners.

Many/most listed companies claim they conform with ASX's Governance Principles - yet how often is their rhetoric actually checked for accuracy and effectiveness.

Just as it is possible to build a concrete life vest while being quality-accredited, so it is possible to have the corporation harm shareholders - even when complying with all Governance Principles. Therefore, Corporate Governance in and of itself is not "enough".

In the context of corporate activity, governance as an issue, pales into insignificance compared to the billions of dollars of shareholder funds wasted through managerial subjectivity, incompetence, poor judgement, ill conceived pursuit of guru theories, pursuit of executive managers’ (and directors and chairpeople) personal agenda, misguided assumptions and inadequate corporate oversight and accountability. All of that despite management’s generally "honest" endeavours “to do the right thing” and generallly all within the context of "reasonable" governance practices.

As long as directors and managers are free to define the outcomes of the organisation they manage, then shareholders will nearly always come off second or even third or fourth best.

Managers decide the projects that the corporation invests in, the initiatives they will undertake, the markets they will play in, the tools they will use, the philosophies they will adopt, and the corporation’s remuneration policy. Management also determines how resources will be applied, what the organisation will generate, what benefit the owners of the business will secure, if any, and how they themselves will get paid. They determine the performance criteria against which they will be assessed and by which they will be rewarded.

And these business costs are costs carried by owners and the business risk is also largely carried by owners. They are not costs or risks carried by management who initiate those costs and risks.

This stems from a belief that the corporation, because of its legal status, is a separate entity from its owners i.e. the Social Entity view of the corporation.

This view argues that only managers and directors can determine corporate objectives.

Instead, directors and managers must understand that, despite the legal status of the corporation, they are nevertheless agents of the owners – and not the owners themselves.

Managers must apply their efforts toward the optimisation of shareholder objectives – that is their job and that is what they are paid to do – and that is the fundamental purpose of the corporation.

Critically, ONLY by knowing its shareholder objectives (i.e. its metrics – value, benefit, growth and risk), can an organisation align its activities toward their fulfilment.

Corporations currently make assumptions about their shareholder objectives that are demonstrably, logically and intuitively wrong.

As examples of such erroneous assumptions, my research has found that:

• All shareholders do not have the same objectives

• A shareholder may have different objectives for different investments

• Institutions are not a proxy for small investors

• Management assumes it knows what it is that shareholders want and they act on that assumption – but they don’t know without asking – and no one asks.

• Shareholders cannot run the company but they can and should define its outcomes: i.e. board interpreted shareholder metrics based on value, benefit, growth and risk – and what they want becomes the corporation’s Mission.

If you don’t fix and realign the relationship between the corporation and its shareholders, then tweaking governance will make little difference to the business owners and may lull them into a false sense of security. Ultimately,

Governance is all about process and nothing about outcomes.

"Bright young things"

2010-09-12T10:41:00.000+10:00

"Bright young things" certainly bring to the market exciting opportunities, largely because of their tech-savy, their understanding of the needs and behaviours of "their generational peers", and their enthusiasm.

They also bring inexperience, arrogance, unwillingness to learn the lessons of more experienced people and an impatience - particularly with the cultural and human side of organisations and the complexities of building a sustainable business.

These comments are certainly generalisations with many notable exceptions. However, the warning is that it is wonderful to grab hold of the coat tails of a young entrepreneur (of which there are many), but be prepared for the free-fall moments when market or technical intuition is insufficient to inform them of the organisational, people or process needs of the organisation.

On balance, I have a lot of time for the "bright young things" and mentor many of them - a process that is enlightening for both of us.

Board evolution

2010-09-12T10:39:00.000+10:00

A board's role and function is not static over time. As its members develop experience and insight in their various board and non-board roles and activities, they bring enhanced insight and understanding to the board. Directors "mature" in the role as do executive managers mature in their roles.

Similarly, as executive positions change within the company, keener focus is required is some areas impacted by those changes. As new incumbents gain experience and understanding in their role, so the need of the board to be vigilant "softens" as trust, honesty and understanding grows.

As challenges emerge in a corporation's operating environment, so directors need to develop understanding of the issues and develop competencies enabling them to adjudicate on strategies or remedies affected by those challenges.

Thus an important aspect of directorship is the ability to be flexible and understand new contexts, new people and be able to absorb new skills.

In this day and age, there are not many boards that can justify inflexibility in its members.

Family business and boards

2010-09-12T10:36:00.001+10:00

Having worked with many family-based businesses, it is my view that most family businesses choose not to have a formal board because they focus on their perception of the "negatives" of a board and discount the "positives".

From their perspective, a board may make them more accountable (even if only to a board-outsider) and less flexible in "doing business". They may also see the expense of the board as an "unnecessary" cost.

The positives that they discount include compliance, governance, networking, experience, etc.

Where family businesses do adopt a board structure, it is often (but not exclusively) to aid business - to bring in experience, establish business relationships, enhance status (i.e. appointing a "big name") or satisfying stakeholders (investors, banks, etc).

I suspect that family-based businesses will not adopt formal board structures and processes unless they see a significant benefit in it for them - particularly benefits that out-weigh the perceived negatives.

How to keep good people on a start-up board

2010-09-12T10:34:00.000+10:00

I have found that there is no "silver bullet" solution to this question, primarily because people are different and have different objectives, needs and contexts. Some need cash, some need asset growth, some need prestige and status, some need a retirement nest egg while others just want to be wanted and others just want to be "loved". Therefore, assuming you could find a tactic that would satisfy your three criteria, there is no guarantee that it would satisfy the needs of your key people.

Assuming therefore that the objective here is to retain your people, my suggested process for finding a way forward is:

1. Meet with each executive or valued staff member in a one-on-one session. Ask them why they are working for you and what benefit, over three to five years, would they regard as sufficiently meaningful and enticing to pursuade them to stay and help build the business.

2. Develop a time-boxed benefits plan (whatever benefits they might be - for each year of the planning period.) Have that plan signed by you and the staff member as a plan in principle.

3. Have your accountant, CFO or financial advisor sit with your employee and/or their accountant to develop a strategy within the context of your business to achieve all the financial benefits needed to hit the agreed milestones with the least negative (most positive) impact on the employee.

4. For all non-financial outcomes (e.g. responsibility, career progression, work variety, status, travel, etc) develop a similar plan but use your HR manager (if you have one) or an external HR specialist to develop career plans for all employees to deliver the agreed milestones.

5. At least twice per annum, meet with all key employees to monitor performance and progress toward their milestones - financial and other. Be prepared to change milestones and outcomes if needed and warranted.

The benefit of this process is that is customises the benefits and outcomes to the employee's context - thus has more meaning. It also has the employee's buy-in to the process rather than having it imposed on him/her.

Furthermore, it sends the employee a signal that they are important and warrant such personal treatment - rather than being "merely a dispensable cog in the machine".

The election of Wyatt Roy

2010-09-12T10:32:00.000+10:00

As a generalisation, every person should be considered on their merits. Youth certainly brings great benefits, as do the insights and perspectives that come from experience and maturity - one does not compensate for or exclude the other. Yet youth or maturity, in and of themselves, are insufficient to provide what is needed in every context and situation.

If I were to nominate a single attribute that helps flag a high potential contribution at board (or any senior managerial) position, then I would have to opt for Emotional Intelligence (EI). Corporate management is about understanding context, understanding people, and being able to read all of them through a prism of objectivity, fairness, commerciality and compassion. In my humble opinion, EI is more more important than "just" knowing facts and figures.

The mark of competency is not merely knowing facts and figures, but being able to mould them to achieve desired outcomes.

Therefore, it is arguable whether "youth" has the required EI to do this. That some younger people have this skill is indesputable - and that many mature individuals lack such EI is also indisuptable.

Why don't we leave the age-based view of board members behind, and rather focus on the the match between what a board requires, and the best candidate available to fit that role - regardless of age (or gender, nationality, religion, etc).

As historic as Wyatt Roy's election has been, it is easier to secure a ticket to the Grand Final than it is to effectively play in it. Let us give him the room and time to gain the insight to make a valuable contribution - and then judge him by his results. Prematurely using him as a "role model" may pressure him sufficiently so as to impede his ability to perform.