I've been reading some back issues of The American Scholar recently, as part of my personal commitment to read widely and explore topics that I'd not normally think about. Reading widely is the side story of my quest to explain how Boards influence company performance. It provides a bit of balance to the humdrum of reading academic papers.
Some of the articles and books that I have read have really captured my attention and thought. One such article, originally published in the Spring 2010 issue of Scholar, summarised British philosopher A.C. Grayling's book Ideas that matter: The concepts that shape the 21st century. Grayling introduced 12 ideas that would, in his opinion, dominate public consciousness and debate during the century ahead.
This sounded remarkable, for the making of reliable predictions—especially longer-term predictions—is notoriously difficult. A reliance on empirical evidence can easily lead to erroneous conclusions—the White Swans Thesis is a famous case in point. Notwithstanding this, most, if not all, of Grayling's predictions are coming to pass, just three years after his thesis was published. What does this say about Grayling's ability to predict the future? Did he see something that most of us missed, or is Grayling's "long term view" actually much shorter than what readers might have assumed in reading the title? I suspect the answer lies somewhere in the middle. Call me a sceptic if you will, but I'm yet to see a robust case to suggest that the making of future predictions based on empirical historical evidence is anything more than intelligent guesswork.
On coping with growth...what is the Board's role?
What role is the Board actually fulfilling as the company copes with growth?
Does the Board really understand how the executive is progressing in terms of strategy implementation and the management of risk?
Why did the Board's Audit Committee not detect the revenue recognition error, particularly as the scale of the error was not insignificant?
How clearly defined are the company's strategy and governance practices?
High rates of growth naturally present challenges for most companies, and this latest series of announcements suggest Diligent is by no means exempt. All power to the Board though, because it has recognised that it is experiencing stresses and strains, and it seems to be committed to resolving them. It will be very interesting to see how the Board responds, particularly in terms of the strategic decisions it makes to redeploy resources and adjust processes, in order to secure the next stage of business growth.
A recent study, conducted by UK firm Reputability LLP, has found that failures of governance are at the seat of most company failures. A lack of [governance] skill and an inability to influence management were cited as the root cause of 88% of the failure cases studied. Gosh, that's nearly nine out of every ten failures attributable to poor governance! Information asymmetry, a tendency to rely on quantitative data (numbers) and poor 'soft' skills were identified contributing factors. The full report is available, for a fee, here.
This report is an indictment on governance. It clearly exposes an underlying problem with governance. Boards, in general, are not operating effectively. I'm not particularly surprised by the findings of this study. Most corporate Boards operate within a framework called 'agency theory', whereby an adversarial relationship between the owner's representatives (the Board) and management exists. The Board sees its role as that of a policeman, to monitor and control management, in order to protect the interests of the owner(s). In such situations, trust is typically low, reputations are carefully protected, and information is shared carefully and sometimes under duress.
The tragedy is that agency theory remains the dominant governance framework—in the western world at least—despite a seemingly endless body of evidence that shows companies are not well served by it. Perhaps this report might prompt Boards and shareholders to take stock, and consider other governance frameworks whereby Boards and management actually work together to maximise performance. After all, the evidence is compelling. Is that asking too much?
Periodically, the topic of success appears in my musings. As recently as yesterday for example, I wrote about core purpose and values—in tandem—as being crucial to achieving high performance and, by implication, success. But what is success? How do you define it?
For eons, most Western cultures have defined success extrinsically—by what others have, what others think about us, or what we think others might think. Money and power are the benchmarks of success in any society founded on accumulation. You know the story: the more people have the more they want—all in the name of so-called success—and so the bandwagon rolls on.
I have long thought that extrinsic ambition is hollow and fraught with danger, because the price one has to pay to be successful in monetary or power terms only spirals one way—upward and, inevitably, out of control. Thankfully, calls to redefine success are starting to emerge. I hope such calls are heeded, lest our society simply collapses around us. And we wouldn't want that, would we?
The core purpose of most organisations is to maximise its performance—whether it be a not-for-profit agency, a government department, a faith-based group, a health provider, a commercial enterprise, or any other organisation. The definition of performance differs from organisation to organisation differs, of course. NFPs measure performance in terms of services provided, whereas commercial enterprises generally measure performance in terms of wealth creation, for example.
Notwithstanding this honourable goal of maximising performance, many organisations struggle to perform as they'd like. Often, regulatory frameworks and internal confusion (over purpose, strategy and operational priorities) divert attention and resources away from the "business" of the organisation. Why is this? I'd like to suggest that many organisations are not entirely clear about why they exist—even though they think they are.
When I'm asked to help an organisation with its performance, one of the first things I ask about is core purpose. Sometimes a clear statement is provided, but only sometimes. More tellingly though, the underlying values and belief system—upon which behaviour is based—is generally not nailed down. Organisations are complex, socially dynamic entities, and even the best laid plans can be readily undermined by dissenting (and sometimes well meaning) individuals or groups. And therein lies a root cause. High performance is generally contingent on having a clear purpose and an agreed set of values to guide behaviour and decision-making. Just ask the CEO of any successful enterprise.
The topic of gender diversity has been a popular theme in the popular press and academic literature in the last couple of years. Awareness groups have been formed to speak into the diversity debate, and to promote the interests of women in business. Research reports have identified a correlation between women and performance, in that the presence of women in Boardrooms and executive suites seems to enhance company performance. However, the research is not conclusive, and a sound causal explanation is yet to emerge.
With all this interest and activity, you would think women would be actively pursuing executive positions, particularly the C-suite. I thought this as well—until I read McKinsey's report entitled Unlocking the full potential of women at work. The most intriguing insight was that, despite their career success, 59% of women said they did not aspire to the C-suite. The main reasons for the reluctance? Structural obstacles, lifestyle choices, and corporate politics in the C-suite. While the market seems to be keen to provide opportunities for women to participate in all levels of the business community (which I applaud), it seems that for some roles at least, women just aren't interested.
This week marks a red letter point in my doctoral journey because, on Thu 13th, I will visit the Boardroom of Company Beta (*), observing and recording the meeting. Finally, after twelve months of reviewing the literature, proposal writing and careful planning, I've reached the milestone point where data collection can commence. It feels good! Over the next year, I will be gathering data from several sources within three companies (Board reports, minutes and meeting observations; Chair and CEO interviews; annual accounts; historical performance data), and trying to make sense of it.
To those readers not familiar with my doctoral research: I am investigating the relationship between governance and performance, with the overall goal of providing an explanation of how Boards actually contribute to business performance (because we don't know). The research design is a longitudinal multiple-case study, underpinned by a philosophy called critical realism, and the direct observation of Boards in situ. This combination has never been tackled before—hopefully I haven't bitten off too much! If you'd like to learn more, have a look at the papers on my Research page, or contact me directly.
(*) Company Beta is so-named because it was the second company to provide approval to participate in my doctoral research. Anonymity is an important condition of this research, to protect the companies and give them confidence that what is reported in the final thesis is not identifiable back to source. I'm due in the Boardroom of Company Alpha in late June, and am still negotiating with a couple of companies to become Company Gamma.
Christchurch, the garden city devastated by a series of major earthquake events: The City Council and the Regional Council have become engaged in an accusatory finger pointing battle which is paralysing progress towards the rebuilding of the city. Having two agencies overseeing the same geographical area—albeit with different remits—is hardly conducive to an effective, coordinated rebuild of the city.
Wellington, the capital city: The "city" is actually four cities (Wellington, Porirua, Hutt, Upper Hutt), all of which are separately governed with local council structures and costs. This piecemeal approach to local government has provided jobs for four Mayors, four sets of Councillors, four CEOs and four duplicated sets of staff and services. Oh, the wastage.
These models—the two-tier agency model (City and Regional Councils) and the multiple-small-agency model (Wellington)—are hardly conducive to the cost-effective provision of infrastructure services. How can any city hope to be a strong and vital contributor an economy when there is bickering and fighting within? A body cannot hope to survive with two heads. A family (city) divided cannot prevail. The role of local government is local infrastructure. Far too much money is wasted on duplicated effort; and on middle management, communications and so-called consultants. Lots of activity (seemingly) but little in the way of tangible progress.
Thankfully, moves are afoot to reform local government. Wellington looks like following Auckland's lead (of one civic agency), although agreement on the best model is yet to be achieved. A smaller, coordinated civic agency can only be good for economic growth and societal well-being. If less money is spent on excess and duplication, more money should remain in the pockets of local businesses (to drive growth) and citizens (improve their well-being). The face of local government needs to change—the finger pointing and power games have gone on long enough.
My work—if you could call it that, because I don't get paid—entails much reading. Every day of every week, I delve into books, magazines, journal articles and new feeds—all in the name of reading widely and becoming informed. Doctoral research requires it and, as I've come to discover, the quality of my thinking has probably improved as a result.
Today, my readings included an interesting short piece entitled Darwin's Finches. While I'm no evolutionist, this article did set me thinking about the validity of natural selection and adaptation to one's environment. Peter and Rosemary Grant's work was fairly compelling. It showed that natural events can precipitate small but significant changes within a population. That set off another train of thought—where does natural selection stop? Does it continue through to evolution (apes to humans, as has been speculated by evolutionists), or is natural selection real and evolution simply a theoretical position promoted by those whose worldview excludes the supernatural? Now I'm nudging against a big philosophical question. Better that I get back to my core reading I suspect!