Category: Business Laws & Ethics

This is a guest post from Steven R Roberts

Non-Profit Boards, charities, foundations must fight to establish a brand and a following. Therefore they must be led boldly or their missions will have little chance of being fulfilled. After chairing several non-profit boards, and being on a couple of for-profit boards, in the past twenty-five years, I believe the keys to leading effective non-profit boards are:

First, Board leadership must determine why members have joined the board. I’ve found that BOD members have two reasons for agreeing to be on a board; the first group has some degree of passion for the organization’s Mission and the second group, while willing to participate in board work, is satisfied that membership looks good on their resume and facilitates networking.

In appointing officers and developing committee assignments the chairman is well served to appoint those with a passion to the strategic planning, brand management, finance and goal setting tasks. The second group can be better employed in implementing the fund raising goals, managing event tasks and working on committees.

Secondly, members must be trained to rely on the committee system. By that, I mean the committees are the place for research, benchmarking other’s approaches and idea/program development. Committees must bring the answers and proposed actions to the board, not the questions. The questions existed before and that’s why the committees were created. It is very easy for the board (especially ones with eclectic business backgrounds) to dive into the details of the issue and discuss options other than the ones proposed[J1] . This usually results from a lack of thorough committee work or lack of training of the committee/board roles and leads to the board itself becoming a committee. This is counterproductive and doesn’t give the committee members a chance to grow in work ethic and leadership. Long, circular discussions at the board level by members who haven’t studied the issue are frustrating and the reason some good board members quit. “We talk forever and don’t get anything done” is the common refrain in board member exit interviews.[J2]

Thirdly, leadership must be bold and brave. The group’s brand must be aggressively established (Hey, we exist and here’s the reason.), as a means of increasing the understanding of the importance of the mission to board members as well as outside volunteers and donors. Time should be spent developing a clear Mission statement. The organization, profit or non-profit, needs a clear vision, one understood by board members and other supporters, donors and future board members. Leadership must also establish aggressive fund raising goals. Modest fund raising goals and the resultant modest projects don’t get much notice inside or outside the organization. It may be easier for the board members to each write a check and devote their energies to other pursuits.

Fourthly, once aggressive goals have been set, board leadership must train members to work harder (albeit in between regular work and other activities) than they do for their money earning regular jobs. They need to bring the power of their business training and potential networking opportunities to the effort. Many members will grow if they are given total responsibility for projects. Growing an individual’s skills and leadership capabilities is a gift that can be facilitated by giving them responsibility broader than that they have at work and in some cases letting them fail. This simple concept, which applies to for-profit work as well, is covered well in the book Flight of the Buffalo (1993) by James Belasco and Ralph Stayer, including many examples and ideas on how to successfully empower employees[J3] .

Finally, the fifth key to effective non-profit boards is that funds, especially early funds, must be spent on visible projects, those which will in turn be helpful in establishing the group’s brand and establishing the cycle of raising future funds.
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Steve Roberts is a business consultant, board chair for the Dearborn (MI) Public Library Foundation – www.dearbornlibraryfoundation.com, and an author – www.steverroberts.com.

[J1]That is how they add value!

[J2]This is a chairman problem – it has nothing to do with the role of cttees which should be set in the Terms Of Reference or Charter) and everything to do with not making decisions.

[J3]Board members aren’t employees!

Recent calls by the governance advisory community for the individual voting record of each director to be disclosed to shareholders are missing an important aspect of boardroom dynamics – joint and several liability.

Within a board, each director should feel that they can, and will, be held to account for any, and all, of the decisions of the board. The prospect of a director saying, in effect, “Don’t blame me; I didn’t vote for it” is utterly dismal. Such a director would possibly also feel able to shirk responsibility for devising solutions to problems that ensued from a course of action he or she had voted against. That would be divisive and could dangerously weaken the board by removing insights, knowledge and moral support from the team making the rectifying decisions.

There is a big difference between informed consensus on a strong board and weak directors who pander to and support the decision of the majority.

When a director, as all directors must at some time in their careers, finds him or herself disagreeing with a course of action that the majority of the board wish to implement it is imperative that he or she continue to disagree until satisfied that:

• The decision will not materially harm the company in the short term
• Implementation will provide information that can then be used to decide if, and how, to continue
• The proposed actions are broadly in line with the expectations of all shareholders
• There is a review point at which the whole board can reassess the decision
• The opportunity cost is affordable, and
• The decision is legally and morally defensible.

If a director finds that the rest of the board wish to implement a decision that violates one or more of these statements then the safest thing to do is resign. This board is not serving the shareholders’ interests and it will be dangerous to remain associated with it.

If a decision meets these tests but is not to the directors liking it is for that director to propose an alternative that will better serve the needs of the shareholders. If there is no better alternative to a course of action that is affordable, in line with shareholders expectations, in the interests of the company, legal, and capable of being halted at a later stage if adverse effects become apparent then there is no reason to oppose the decision.

Much depends on the trust that the individual director is able to place in his or her fellow directors. If it is believed that these are honourable people, who will stop and reassess when if say they will, and who are working in the company’s (or shareholders’) interests than a director may allow the board to proceed even if, personally, he or she would prefer not to. If the decision, once taken, will then be allowed to run an unexamined course or if a review is not also a point for reassessing the direction (often serving, instead, to determine bonuses for completion of certain stages) then a director may be loath to proceed even with assurances.

Chairmen, in particular, should ensure that their boards are scrupulous in living up to any commitments that have been made to gain approval for a decision. They must also be patient and allow dissenting directors to find a point to which they are comfortable to proceed. In the long run, a board that is confident and able to form true agreement on each and every decision is far stronger than a board where factions and spurious majorities can force the board’s hand on important decisions. If the voting record shows 100% agreement on all substantive issues that should be a good thing. The true measure of the calibre of individual directors should be the time and diligence with which the whole board seeks consensus and the unanimity with which they endorse and support decisions once they have been made.

What do you think?

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Julie Garland-McLellan has been internationally acclaimed as a leading expert on board governance. See her website and LinkedIn profiles, and get her book Dilemmas, Dilemmas: Practical Case Studies for Company Directors.

Today’s New York Times published another in a string of articles highlighting safety issues on the Deepwater Horizon rig at the heart of the Gulf of Mexico oil spill crisis.

A confidential survey of workers on the Deepwater Horizon in the weeks before the oil rig exploded showed that many of them were concerned about safety practices and feared reprisals if they reported mistakes or other problems.

In the survey, commissioned by the rig’s owner, Transocean, workers said that company plans were not carried out properly and that they “often saw unsafe behaviors on the rig.”

Some workers also voiced concerns about poor equipment reliability, “which they believed was as a result of drilling priorities taking precedence over planned maintenance,” according to the survey, one of two Transocean reports obtained by The New York Times.

“At nine years old, Deepwater Horizon has never been in dry dock,” one worker told investigators. “We can only work around so much.”

“Run it, break it, fix it,” another worker said. “That’s how they work.”

In reacting to the allegations, note how the company responded:

The spokesman, Lou Colasuonno, commenting on the 33-page report about workers’ safety concerns, noted that the Deepwater Horizon had seven consecutive years without a single lost-time incident or major environmental event.

This statement highlights the challenge organizations have in creating a true safety culture. What went on at Deepwater Horizon happens across thousands of job sites across the country on a daily basis. The difference here is that the consequences for failure were so great.

Making it through another day without incident is a misleading indicator of safety. Seven consecutive years without incident says little about the risk of what may happen tomorrow. More telling is the fear factor among the workers as to what are the real safety risks.

Ethics Risks

On the Deepwater Horizon the two primary ethics risk factors for safety seemed to be far outside normal limits: fear of reprisal and focus on the numbers vs. actual safety.

Fear of Reprisal –

As one worker wrote in the report;

“I’m petrified of dropping anything from heights not because I’m afraid of hurting anyone (the area is barriered off), but because I’m afraid of getting fired.”

Workers who feel intimidated not to report safety risks for fear of losing their jobs will think twice before saying anything that isn’t an immediate danger. However, on a ship as complex as the Deepwater Horizon, there are hundreds of systems and areas in which early signs of trouble are noticeable, but can be ignored on a daily basis without risk of immediate personal injury.

Bureaucracy –

The other issue that impacts safety is when the process of reporting incidents or near-misses becomes its own bureaucratic mess. Employees and managers become focused on the metrics, i.e. number of incidents, with the risk of losing sight of the underlying danger.

Investigators also said “nearly everyone” among the workers they interviewed believed that Transocean’s system for tracking health and safety issues on the rig was “counter productive.”

Many workers entered fake data to try to circumvent the system, known as See, Think, Act, Reinforce, Track — or Start. As a result, the company’s perception of safety on the rig was distorted, the report concluded.

Many managers are penalized for too many incident reports being filed, creating pressure on them and their workers to not report.

Real safety occurs when workers feel safe enough to report their concerns, and field managers do not feel disinclined to report because of negative consequences to their own career.

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David Gebler is the President of Skout Group, an advisory firm helping global companies manage ethics risks. Send your thoughts and feedback to dgebler@skoutgroup.com.

The popular press, and sometimes even the business press, will refer to founding CEOs as if they remained the sole equity holders when, as the business grew, outside equity has been used to fund the growth and the founding CEO has retained only a small minority stake. This illusion of ownership persists after listing, the creation of an ‘independent’ board of directors, and recruitment of a professional management team.

Dangerously, the illusion may persist also in the mind of the founding CEO. This can cause many conflicts between the desires of the founding CEO and the expectations of the equity providers. In worst cases founding CEOs are ousted from ‘their own’ companies leaving behind an organisation divided into factions and reeling from the aftermath of the trauma such internal conflict always generates, or are found to regard the company’s property as their own, awarding themselves generous benefits or ‘investing’ in unnecessary such as penthouses for the CEO to reside in when visiting town, or corporate jets, boats and helicopters.

In the best cases the founding CEO provides guidance, keeping the company on track as it grows to fulfil the promises made when inviting investment. This delights investors and CEO alike.

What are the critical differences between the two cases?

Perhaps the greatest difference is the respect that the CEO has for the providers of the outside equity. This is most easily gauged when the first equity injection from beyond the founding CEO and his or her direct family occurs. At this point the company is generally not listed and a shareholders’ agreement is drafted to protect the interests of the outside equity providers. If this first agreement is balanced and respects the need of the external shareholders to have some control of their shareholding then the likelihood is that the CEO will perform well as subsequent shareholders join the organisation and introduce greater complexity into the investor relationship management.

A well written shareholders’ agreement will provide for the CEO to undertake management of the company, for some group to take the big strategic decisions using consensual decision-making, and for shareholders to vote their stock at AGMs and EGMs, or at certain crucial points such as a sale of equity above 15%, disposal of assets, mergers, acquisitions, sales and purchase of shareholdings, etc. Devices such as preferential shares or casting votes for the founding CEO are a bad sign. They work in practice but they subvert the fundamental rule that all shareholders are equal.

An independent board of directors, properly structured and constituted, is can assist in making the transition from entrepreneurial stages to corporate reality. It is important that the founding CEO selects directors who will not be “yes men”; in particular a skilled chairman with experience in taking a company from the current phase of activity to an investment-worthy stage. In selecting the board it is important that the founder recognize that this activity is be done under the guise of his or her shareholding rather than under the guise of their CEO role. Shareholders select the directors; CEOs manage the daily activity of the organisation.

Having a properly constituted board of directors will give confidence to investors and may prevent them from requesting a seat on the board of their own. A board charter, that defines the role of the board as representing the interests of all of the shareholders, will assist in this. The charter should make clear that even if a new investor is given the opportunity to appoint a director to the board that director will be bound by the terms of the charter and must represent the interests of all the shareholders, not just their nominator.

As the company grows the skills required of the CEO will change. At some stage the founder must consider relinquishing the CEO role whilst retaining the ability to influence progress through their board position. If this succession is not well planned there is a real risk that the board will remove the CEO. It is important that the founding CEO be aware of the needs of the company as it develops and recruit viable alternatives to him or herself. At this point, if the CEO has assumed well the role of a board member, it is not uncommon to the CEO to assume the chairman role.

This is an orderly and equitable way for a CEO to remain influential in the destiny of the company that they have founded without subverting the rights of the investors who had made that destiny possible. The other ethical alternative is to grow more slowly, using only the CEO’s own equity and the cashflow generated from operations and perhaps a combination of joint ventures, alliances and outsourcing arrangements that allow the founding CEO to retain absolute control over a part of the operations.

What do you think?

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Julie Garland-McLellan has been internationally acclaimed as a leading expert on board governance. See her website and LinkedIn profiles, and get her book Dilemmas, Dilemmas: Practical Case Studies for Company Directors.

Jeff Jarvis’ latest book ‘What Would Google Do’ envisions the ways in which running businesses the way Google is run would change industries. It is impossible to read this book without having a few innovative ideas of your own. It got me thinking ‘What would Google do if they regulated boards or designed corporate governance systems?’

Here are some ideas:

Give people control and they will use it – in theory this is what happens at AGMs. In practice the process stultifies the content and the voting rules and systems mean that the exercise is often an empty formality because the deals have been done long before the meeting took place. The Google algorithm would ruthlessly accept voting decisions, in real time over the internet. The AGM could be webcast and votes cast remotely after hearing the arguments for and against each issue. Chat rooms could allow shareholders to communicate with each other and the board on the issues as they were being discussed. A bulletin board could gather topics for discussion and the Chairman could allocate time to each topic depending on the number of shareholders who wanted to have it discussed. No more hijacking of meetings by vocal minorities; much more communication that shareholders want.

Life is a beta test – instinctively, when we make mistakes, we feel embarrassed. We shouldn’t. A board that truly values innovation or creativity should be out pushing the boundaries of what is possible and failing a little from time to time. (and how many companies have those two buzz words in their values statements?) Failing well means acting quickly to rectify mistakes and that means having the systems in place to know about the failures, fast, and to admit to them, openly. When Coca Cola Amatil implemented a system of ‘pre-nuptial’ agreements designed to help the whole board to eject any one member whom the rest felt was no longer part of the team there was a major outcry; shareholders want dissident voices to be heard in the boardroom not ousted from it. The Chairman apologised and the contracts were ripped up and never mentioned again. I don’t respect him less because of that issue; I respect him more!

Don’t be evil – Google’s founders wrote, before their IPO, “We believe strongly that in the long term, we will be better served – as shareholders and in all other ways – by a company that does good things for the world even if we forego some short term gains.” Wow! How many pages of social and environmental reporting does it take most boards to say the same thing? And why do we still see boards that countenance obviously bad behaviour for short term gain, whether we look at the sporting club that covers up a star player’s drug and violence problems, an asbestos producer that severs all ties to the people who may need compensation for the harm its products have caused, or the banks that allowed trading in instruments that were clearly not the creditworthy investment grade product they were held out to be?

Elegant organisation of data – When you type a search into Google you get back a simple list of relevant sources of the information sought. There is no clutter, no distracting graphic, and the sources are ranked in order of likely importance. Why aren’t board papers presented like that? Why don’t boards report to their shareholders like that? Imagine what an annual report would look like if the most frequently read information was on the front page. How good would accounts be if useful information, instead of being stuck in pages of small print notes to the accounts, was up front in the P&L and less useful information was hidden behind the summarised data and only sprang to view when you clicked upon it to expand it? Shareholders have voted against receiving paper annual reports. We don’t need a thick catalogue full of glossy photos to tell us about our company. We don’t want that replaced by a pdf file of the same thing. We want data that we can sort, cut and paste into our spreadsheets, condense and expand to suit our needs. So do boards. So why are we still in the trap of ‘doing what we did last year’ and creating thicker, more unwieldy, documents instead of taking a Google approach and providing interactive reports, with important information (that is what the recipients are most likely to want to see) first, and less important information later?

Meritocracy wins – in boardrooms it is often the sad case that directors are selected because of what they have done in the past and with insufficient real analysis of what they will provide to the board in the future. On Google data is realtime; imagine if we could constitute boards that had access to the best expertise on any topic, instantly, as required. How would that affect quality of data, independence of thought and speed of reaction? Of course there would be a cost in consensus building, responsibility for implementation and group decision making. I know some boards are using open source technology to run their agendas but what if they adopted the open source model for their committee structures and even the board itself, allowing executives and visiting experts to enrich the debate?

Well, those are the first five ideas that struck me on reading the book. What do you think?

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Julie Garland-McLellan has been internationally acclaimed as a leading expert on board governance. See her website and LinkedIn profiles, and get her book Dilemmas, Dilemmas: Practical Case Studies for Company Directors.

There are many attempts to define ethical standards for company directors.

It would be foolish to argue that there should not be an ethical standard or even that an ethical standard is as important as a competency standard. The problem is with identifying a suitable standard before making a board appointment. Whilst many boards have codes of conduct few request incoming directors to formally sign that they have read, understood, and agree to be bound by, these codes. Even fewer have an explicit statement of consequences for any breach of the codes.

This leaves boards in a difficult position when conduct is ‘unbecoming’. The offending director may state that they were unaware of the breach and of any possible consequences. When board members’ reputations are at stake this can turn into a highly inefficient ‘Mexican standoff’ where the board is reluctant to go to the shareholders and request a removal because the offending director may claim a lack of natural justice. If the offense is one that shareholders would obviously view as undesirable, such as theft, the case is usually resolved with a settlement and deed of separation where the director is rewarded for going quietly. When the offense is subtle, such as favouring the interests of a majority shareholder above those of other shareholders, the outcome of an EGM vote is less predictable and the offending director may defend his or her position sufficiently vigorously to deter the board from an attempt to oust them.

This, already unclear, environment is made more uncertain by the changes in social acceptability of actions and utterances. Different boards will react differently to similar actions.

In recent times we have seen:

• The audit committee chairman of a major retail bank refuse to resign after significant fraud and controls weaknesses were identified. This case was resolved by paying the director a settlement including retirement benefits.
• A CEO sanctioned for posting holiday snaps of himself on the beach (without a shirt) on the popular Facebook website.
• Directors of a multinational company caught having a shared business interest that they had not disclosed to the board and that created a conflict of interest which, being unknown, could not thus be managed.
• The CEO of a major listed retail company fired (with termination benefits but without performance bonuses) after admitting harassment of a female employee.
• A CEO fired for having a consensual, although extramarital, affair with a subordinate.
• A director of a major investment bank revealed in the international press and in a ‘true story’ book as not knowing the difference between equity and revenue (no wonder it failed).
• Directors and senior executives caught using derivative instruments to protect their shares and options from losses when investors had been lead to believe that these equity holdings were created to align interests.

But how can a board specify an appropriate ethical standard without venturing into the realm of people’s private lives?

Historical performances, personal wealth, having achieved a position of eminence in society, and many other indicators that we use have all been proven to fail.

We need something that, without enforcing any single religious or philosophical code upon all directors, will allow shareholders to understand the settings and sensitivity of a proposed director’s moral compass so they can make an informed vote when asked to elect that individual to their boards. It should encompass the ideals of ‘innocent until proven guilty’ and of ‘wiping the slate clean’ after repentance and rehabilitation.

Until we find such an indicator we are destined to continue to suffer improper behaviour from our board members. These are the people responsible for setting the tone at the top and developing the culture of the enterprise. Shouldn’t we have some measure of their values before we appoint them to our boards?

What do you think?

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Julie Garland-McLellan has been internationally acclaimed as a leading expert on board governance. See her website and LinkedIn profiles, and get her book Dilemmas, Dilemmas: Practical Case Studies for Company Directors.

As BP continues to be in the spotlight, with every business practice being scrutinized, we can learn some lessons on how ethical companies balance safety and costs.

Ethical Culture

There is nothing inherently “ethical” about balancing safety and costs. Few programs, even government projects, can reduce safety risks down to zero. The key factor is how does the company balance the risks and how are those decisions made known to key stakeholders, both inside and outside the company.

As reported in today’s Wall Street Journal:

Until the April 20 explosion of the Deepwater Horizon oil rig in the Gulf, Mr. Hayward (BP’s CEO) repeatedly said he was slaying two dragons at once: safety lapses that led to major accidents, including a deadly 2005 Texas refinery explosion; and bloated costs that left BP lagging rivals Royal Dutch Shell PLC and Exxon Mobil Corp.

In a review of internal documents, BP seems to have taken a reactive approach to managing safety issues. Only when confronted by government agencies did BP make commitments to take action:

The agency had inspected a refinery in Toledo, Ohio, which BP now jointly owns with Husky Energy, in 2006, uncovering problems with pressure-relief valves. It ordered BP to fix the valves. Two years later, inspectors found BP had carried out requested repairs, but only on the specific valves OSHA had cited. The agency found exactly the same deficiency elsewhere in the refinery. OSHA ordered more fixes and imposed a $3 million fine.

However, as we have seen from the fallout from the Gulf Oil Spill, the recent mine accidents in West Virginia, as well as FAA intervention on airline safety issues, relying on government identification of safety issues may no longer be a viable fall back position for companies that have greater knowledge of the issue than the government.

In February 2009, Allison Iversen, a coordinator at Alaska’s Petroleum Systems Integrity Office, sent BP a letter saying it had failed to inspect the stretch of pipeline for more than a decade before it broke. A scheduled 2003 inspection was never performed because the pipe was covered in snow and the company never returned to do it. The state also said it was “deeply concerned with the timeliness and depth of the incident investigation” conducted by BP. It took four months to provide a report that other oil companies typically submit in two weeks.

The result has been a spotty record of being proactive on safety issues:

“They claim to be very much focused on safety, I think sincerely,” says Jordan Barab, deputy assistant secretary at the Occupational Safety and Health Administration. “But somehow their sincerity and their programs don’t always get translated well into the refinery floor.”

At the same time, BP has been focused on cost reductions:

Meanwhile, company officials continued hammering home the message on costs. Mr. Shaw, the Gulf of Mexico head, made the point at a meeting for top managers in Phoenix in April 2008. His aim, according to an internal BP communication, was to instill a “much stronger performance culture” in the organization, based on strictly managing costs and “this notion that every dollar does matter.” BP declined to make Mr. Shaw available for comment.

But there have been challenges in balancing a “performance culture” with maintaining adequate safety standards:

Obstacles soon emerged. A 2007 internal document setting out the safety policy spoke of an industry shortage of engineers and inspectors that could endanger plans to implement new standards for inspecting and maintaining critical equipment. An internal presentation in May 2009 cited a shortage of experienced offshore workers and said more training was required to “maintain safe, reliable and efficient operations.”

Some think the cost drive affected safety. Workers had “high incentive to find shortcuts and take risks,” says Ross Macfarlane, a former BP health and safety manager on rigs in Australia who was laid off in 2008. “You only ever got questioned about why you couldn’t spend less—never more.” BP vigorously denies putting savings ahead of safety.

Ethics and Safety

So how do companies effectively balance safety and costs?

The first step is to differentiate two critical types of safety expenses: the cost of identifying safety risks and the cost of mitigating them. Organizations cannot make an intelligent decision to bear the risk of a particular action if they are not getting adequate data on which to make such a decision.

In today’s world, with a global corporation’s daily actions affecting so many external stakeholders (e.g. the public), it is ethically unacceptable for a company to not have full knowledge of the risks it generates. Cutbacks in safety personnel, as well as creation of performance incentives that quash disclosure of safety issues, is questionable at best.

It is a separate matter to act on mitigation once a safety issues is fully acknowledged, even just internally within the company’s decision-making hierarchy.

From BP to Toyota, companies have to make decisions daily as to what level of safety they can economically bear. If a decision to take a certain level of risk is legal, within industry guidelines and best practices, and fully vetted internally among subject-matter experts, such a conclusion, even if it leads to a problem, will result in far less damage than if the company either never evaluates the risk, or intentionally quashes discussion on how to manage that risk.

The public accepts the inherent risk in deep water drilling as well as manufacturing safe automobiles. What is not acceptable is an organization that abrogates its responsibility to fully weigh those risks by short-cutting the internal intelligence gathering mechanisms that keep critical data from being openly discussed.

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David Gebler is the President of Skout Group, an advisory firm helping global companies manage ethics risks. Send your thoughts and feedback to dgebler@skoutgroup.com.

The British Financial Reporting Council has just released an updated version of the corporate governance code. The new Code recommends “in the interests of greater accountability”, that all directors of FTSE 350 companies shoulder-elected by the shareholders each year at the AGM.

As with all other provisions of the Code, companies are free to explain rather than comply if they believe that their existing arrangements ensure board effectiveness, or that they need a transitional period before they introduce annual re-election.

This provision sits uneasily alongside the provision that requires directors to be appointed for a specified term and for there to be an especially rigorous explanation of any term beyond six years. It is obviously not intended that, as in some not-for-profit boards, the board is to be substantially changed each year. It is also at odds with the provision that states (and we should all agree) that the nomination committee nomination committee should evaluate the balance of skills, experience, independence and knowledge on the board and, in the light of this evaluation, prepare a description of the role and capabilities required for a particular appointment.

It is very difficult in a fast moving commercial environment to find people with the specified skills and experience that also have a vacant slot in their portfolio of board seats at the time when you need to fill your board vacancy. Having found such a person it is a relief when the shareholders ratify the appointment at the next AGM. Although it is rare for shareholders to overturn the recommendation of the board there is always the chance that this may be one of those rare occasions. Boards work (or should work) at the strategic level and they need time to impact the company culture and implement strategic changes. To attempt to provide this high level input in a short time-frame (and one year is perilously short) and have noticeable results to ensure being voted in again at the next AGM is an impossible task. At worst it will lead to a rash of short term initiatives that could weaken the company in the long term (such as cutting back on training and R&D) and at best it will lead to more time at AGMs being wasted with matters of form rather than issues of substance.

The boards of smaller companies are also encouraged to consider their policy on director re-election. Presumably with the idea that they too might benefit from a complete loss of corporate knowledge or an unbalancing of the carefully built skills set available on their boards.

This recommendation is a disaster. It shows that the code-writers have no respect for the value of a skilled board team that acts on strategic long-term issues. Let’s all hope that the FTSE 350 companies opt to explain rather than comply.

What do you think?

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Julie Garland-McLellan has been internationally acclaimed as a leading expert on board governance. See her website and LinkedIn profiles, and get her book Dilemmas, Dilemmas: Practical Case Studies for Company Directors.

One of the most vexed issues when talking to people who aspire to company directorship is the simple question, ‘What does it take to be a director?’

There are few satisfactory responses. There are courses (some of which are very good and comprehensive) but none of these are accepted as proof that an aspiring director has any real potential. There are proponents of appointing ‘eminent persons’ such as successful politicians, business-people or academics in the hope that the good judgement they developed in reaching their positions of eminence will be the sort of judgement that will also serve a board. In the not-for-profit boardroom the ability to make substantial donations is often considered to be sufficient qualification for the role. But none of these criteria really touch the core of the problem; how to identify good director talent before the aspiring director has already built a board career.

This confusion over the suitable ‘entry level qualification’ for boards is exacerbated by the team-based nature of the role. In consulting to boards it becomes quickly apparent that many board problems are actually simple interpersonal or team dynamic issues that are played out at the highest (and most dangerous) level in the organisation. How can board recruiters measure the ability of an aspiring director to make a valuable contribution to the team, without losing their independence of thought?

Every board is unique and individuals who perform well on one board may fail spectacularly on another. Taking on a new board role is a nerve wracking experience for both the recruit and the recruiters. There are never any guarantees of success. At the present time we are witnessing a world in which previously well respected, widely experienced, board directors have been found lacking in judgement and have presided over corporate failures that, with the benefit of hindsight, make it obvious they never should have been given that responsibility.

Regulatory standards are of little help. All around the world there are ‘lowest common denominator’ standards that helpfully inform us that directors should be over the legal age of adulthood, out of jail, not currently banned from directing and, in some (but not all) jurisdictions, not certified as insane. These are easily measured criteria but they are also clearly not sufficient qualification for a role in which lives, as well as life’s savings may be at stake.

The work of academics studying the board provides some useful indications. There is no overwhelming statistical proof that structural board arrangements such as audit committees, balance of executive and non-executive, or of independent and non independent directors, etc. have any impact on the likely performance of the company. There have been suggestions that the slight correlations are proof that companies that are performing well can afford to fill their board with enough independent NEDs to staff the relevant committees and provide the desired ‘balance’. Companies that have performed badly often go through a process of having very engaged ‘executive-style’ boards as they right the problems and get corporate performance back on track.

The academics are generally agreed that a board that operates as a team, with effective conflict resolution and rigorous debate in an atmosphere of trust and mutual respect, has a better chance of driving better performance than a board that is dysfunctional and unable to reach agreement on the key issues. But the thorny problem remains; there is little way to tell which individuals will enhance the board’s dynamics before the appointment.

The use of skills matrices to ensure that the board has members who can adequately understand the issues expected to be raised as the company progresses in implementing its strategy does assist in some respects. However, the fact remains that there are still some glaring inconsistencies. Most companies need people to implement their strategies and yet very few boards have anyone with a human resources background among their members. The number of IT and marketing specialists on boards is also generally very low. Legal and financial skills are generally better represented than the softer skills. There is no doubt that understanding the law and finances is a necessary skill for every director; but is it really necessary for companies to have such a preponderance of highly qualified professionals from these two disciplines at the cost of a more balanced array of skills?

The current debate on diversity would appear to suggest that the more diverse the board the better the expected corporate performance. There is not yet any great evidence for this, especially when gender is the basis for the conversation. Perhaps looking at other types of diversity, such as skills based diversity, would give a more informed understanding of what a board really needs. Then, working back from the needs of a board, we might be able to establish a baseline for the minimum criteria a director must satisfy to be considered fit to take on the role.

For directorship to become professional, we need professional standards for directors. If only we could agree on what those standards were ….

What do you think?

Recent Breakthrough in Development: Systems Thinking

One of the recent breakthroughs in organizational and management development is the ability to understand organizations and each of the various functions in them as a system. Each of the functions, such as Boards, planning, leadership, management, marketing, sales and finances is a system. Each of these functions is also a subsystem in the overall system of the organization.

Our understanding of systems helps us to be much more effective in “diagnosing,” including to identify causes versus symptoms in order to improve the organization or any of its functions.

What is a System (Inputs, Processes, Outputs)?

A system is an ongoing series of activities focused on achieving an overall purpose. It has various subsystems, each of which is connected and aligned to achieve that overall purpose. For example a car is a system, but a pile of sand is not.

Systems have various inputs which are processed to produce various outputs. The inputs usually come from other systems and the outputs usually are input to other systems, as well. Strong alignment of these systems usually optimizes the performance of the system, as well.

What is the System of a Board of Directors?

Let’s look at the system of a Board of Directors.

Inputs

Typical inputs to Board operations include:

• Past evaluation results of Board
• Annual calendar of Board activities
• Strategic plan
• Business plans
• Stockholders’ expectations
• Laws and regulations on governance
• Employees
• Best practices on Boards

Processes

The typical recurring processes of a Board can be organized into four stages, including planning the Board, developing the Board, operating the Board and evaluating the Board.

Process: Planning the Board

• Develop Board policies and procedures
• Update Board member job descriptions
• Update the Board organization chart
• Develop Board Committee work plans

Process: Developing the Board

• Form Board Governance Committee
• Recruit new Board members
• Provide Board Manual to each
• Train members about Boards
• Orient members about the organization
• Organize members into committees

Process: Operating the Board

• Attend meetings
• Research, discuss and debate issues/topics
• Make motions and decisions
• Drive strategic planning
• Supervise the CEO
• Conduct public relations
• Review financials
• Declare stock equity and dividends (in for-profits)
• Drive fundraising (in nonprofits)

Process: Evaluating the Board

• Evaluate each meeting
• Evaluate quality of attendance, participation, teamwork, strategic decisions
• Evaluate Board operations annually
• Develop and implement Board Development Plan

Outputs

Examples of typical outputs or results from Boards include:

• Board minutes with decisions
• Directives to the CEO
• Public speeches
• Financial reviews
• Board Development Plan
• Updated Board policies and procedures

Here are several graphical depictions of a system of a Board. These depictions also are called logic models.

So What About “Diagnosing” the System of a Board?

It’s helpful to “diagnose” the performance of a system by working backwards from the quality of the system’s outputs, then examining each of its recurring processes, and then the quality of the inputs to the system (remember that these inputs often are outputs from another system.) A good Board evaluation would examine at least the occurrence and ideally the quality of the outputs, processes and inputs. Here are several Board evaluations.

Too often, we look primarily at the results, or outputs, of Board operations and then we exhort Board members to improve those results. If we also look at the processes then we can also mention those to members as ideas about how they can improve their results.

It’s beyond the scope of this blog post to go into much more detail about this diagnosis and steps for recovery. See the subtopic Free Complete Toolkit for Boards in the Free Management Library.

What do you think?

(This post was adapted from the book Field Guide to Consulting and Organizational Development by Carter McNamara, Authenticity Consulting, LLC.)

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Carter McNamara, MBA, PhD – Authenticity Consulting, LLC – 800-971-2250
Read my weekly blogs: Boards, Consulting and OD, Nonprofits and Strategic Planning.