Category: Business Laws & Ethics

Today’s Wall Street Journal published an excerpt from the forthcoming book by former Chrysler and GM exec Bob Lutz. Lutz says that in the auto industry a knowledgeable autocrat is the successful model for a leader. In critiquing the bureaucracy for which GM has been famous for, Lutz says that the autocrat is the model for leadership that is decisive and can make the tough decisions needed to bring new models to the market.

Yet, Lutz does not offer reasons as to why the only cure for bureaucracy is autocracy. See the rest of the story at skoutgroup.com

Here are some ideas I drafted for a debate on gender quotas. I would love to have your feedback:
I consider myself to be a professional company director. I am chairman of an ASX listed company, sit on another listed board, am on the board of a company that is planning an IPO, and also on two government sector boards.

A few years ago (more than I care to mention in public) I was an aspiring director; doing well at my job but not considered to be ‘board material’ by the few head hunters who condescended to talk to me about my career aspirations. Nobody at the time suggested that I needed a quota to help me get ahead; the prescription was education and experience.

Being keen I took my ‘medicine’, doing the company directors course in 1996 and passing the exam and assessment task upon completion. I also completed a graduate diploma in Applied Finance as that was another area of weakness – I’m numerate but not an accountant; boards need directors who can read a set of accounts and draw their own independent conclusions from them.

Then I got stuck in a bind – I needed experience to get a job as a director but nobody would give me a job as a director so I didn’t get the experience I needed to get the job. There are two ways out of this bind. You can find a group of people who have so much confidence in you that they will invite you onto a board even though you have no experience or you can find a group of people who need your skills so much that they will invite you onto a board even though you have no experience.

Some people choose the first option and become so good at their jobs that they gain confidence and eventually board seats. Others, like me, find not for profit boards to whom they can make a contribution and get their experience that way before working up to paid commercial boards. Either route will work and is likely to give a better class of director than a quota system.

According to statistics compiled by the Australian Institute of Company Directors, 11.7 per cent of ASX 200 directorships are now held by women, up from 8.3 per cent when we first introduced our programs and initiatives at the beginning of 2010. Fifty-nine women were appointed to ASX 200 boards in 2010, a substantial increase on the previous year (with only 10 women being appointed in 2009). Already this year, 21 women have been appointed to ASX 200 boards. This growth has been achieved without quotas by the use of education programs, heightened awareness and networking.

Contrast this to the Royal Australiasian College of Surgeons: their most recent statistics show that of the 5,421 surgeons active in Australia today (or, at least, at the end of 2010) only 458 were female. That equates to only 8.4%. I haven’t heard any clamour for quotas of female surgeons to counteract this low percentage of female representation at, arguably, the pinnacle of the medical profession. Have you?

Perhaps this is because, when you are lying on the operating theatre table, puffing desperately on proffered anaesthetic, the last thing you are thinking is “golly, I hope I get one of the female surgeons. Even if she isn’t qualified or experienced, I want to give a girl a go at gouging out my inner bits!”

So why, when we talk about boards, do we assume that it is okay to allow unqualified women to practise directorship. Isn’t directorship a profession? Do we really expect investors to want to risk their savings on unqualified and inexperienced directors’ judgements?

This, for me, is the crucial issue. Directorship is a professional enterprise. It is important that Directors are skilled and experienced. This is an issue for women; it is a fact that, in the commercial sector, most people are invited onto boards of companies of a similar size to the one where they work. For the large listed company sector, from which most commentators draw their statistics, the percentage of female CEOs and of female senior executives is very low.

This is a problem because former CEOs and senior executives are prized potential board members and our pipeline just isn’t flowing. It is no wonder that female directors aren’t gushing out of such a turgid and constricted.
In small business the trend is much better with a female representation that almost matches the gender split in our society.

Until we fix whatever is wrong with our large organisations that prevents women from rising through the ranks in the proportions in which they enter those ranks, we will never see an equitable balance of women on the boards because we won’t have an equitable supply of women in the places where boards look for new directors. At the moment we don’t quite know what is wrong.

Attention is being focused on hiring and promotion biases, on maternity leave, career disruption and ongoing education, and on flexible employment practices. That is a good place to start. Clearer, and more objective, qualifications for directors (and senior executive advancement) would also assist.
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 books Dilemmas, Dilemmas: Practical Case Studies for Company Directors and Presenting to Boards.

(See Part 1 of 2)

Relationship Model

Steven Block proposes a model that, instead of having a rigid, top-down structure of roles and hierarchy of the traditional policy model, provides for Board and staff members to work together with great priority on generating relationships and value from those relationships.

The Executive Director and staff play an important role in bringing matters to the group (a group of Board members and staff) and their opinions are greatly valued. Board and staff share experiences together, for example, rituals and meals, to develop relationships. Board members are not expected to take part in activities outside Board meetings. They can be there to assist staff. Committees are not used .

Nested Boards

While it is not necessarily a new perspective on Boards, nonprofit leaders should understand this Board model because they might encounter it when collaborating with other nonprofits. Nested Boards exist in associations or “umbrella” organizations that have members, or subgroups, that also are organizations.

An example is a national organization that has chapters in various regions or states. Advantages to this arrangement are that the members benefit from the guidance and resources of the umbrella organization. The umbrella organization benefits from the structured involvement and representation of the various subgroups. Members of the organization’s Board of often are members of the Boards of the various subgroups.

There can be a continual tension in the arrangement. Subgroups want the autonomy to serve their local constituents, yet want the benefits of their affiliation with the umbrella organization. Likewise, the umbrella organization wants the dedicated participation and contributions of the subgroups, yet wants the subgroups to effectively manage their own operations in their own locales. See The Dynamics of Nested Governance in Nonprofit Organizations: Preliminary Thoughts .

Policy Governance^â Model

Although it is not new, Carver’s Policy Governance^â Board is another prominent Board model. (“Policy Governance” is a commercial product and registered trademark of Carver Governance Design, Inc.) The model is designed to ensure that Board members always operate in a fashion that maintains strong, strategic focus for the organization.

Board members enforce clear policies that determine the “ends” for the organization to achieve and they set very strict limits within which the Chief Executive operates. This structure is characterized by few, if any, distinct officer roles or Board committees.

Nonprofits are encouraged to use trained consultants to implement this model. Similar to other models, there are very strong critics and proponents. This model is not referenced throughout the guide because of its commercial and highly technical nature. See Carver Policy Governance Model.

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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.

Lead Independent Directors are becoming fashionable. They are now an accepted and appreciated element of board work. Boards that appointed them (sometimes on a rotating basis at each meeting to avoid conferring any power on the incumbent) with reluctance are now singing their praises. So what has lead to this Road to Damascus conversion?

Is a combination of roles inappropriate?

The issue is one of fitness for the tasks at hand. If the combined role of chairman and CEO (often called president) is satisfying the needs of the stakeholders (mostly the board and the senior executives but also the shareholders and the regulators) then by all means combine the roles.

In Australia this combination of two roles in one person is more often found in companies that are ‘in transition’; usually recovering from a disaster, newly formed or recently changed, growing very fast, having lost a trusted incumbent of one role unexpectedly and without a clear succession, or heading for disaster and/or unable to find a person to fill one of the roles.

In some companies the concentration of power in one set of hands allows for swift decision-making, clear communications and great performance. In other companies the combination leads to a quashing of diverse views and influences in decision-making which leads to eventually disaster. The difficult issue is to know which sort of company you are in.

What are the roles?

The general convention is that the chairman is ‘the boss of the board’ and the CEO is ‘the boss of the day to day operations of the company’.

There are areas of contention about whether the board (lead by the chairman) or the executive team (lead by the CEO) is responsible for strategy, design of risk management, appointment of internal auditors, etc. To resolve these areas most good boards will decide where to handle each issue based on a rational analysis of the skills available, the time for doing the work, and the level of confidence they have in the management team. If there is any doubt most regulatory regimes stipulate that the board has the power and is in a position to choose what is delegated and to whom. Sometimes a combined board and executive committee will be the best solution, sometimes management propose and boards ‘add value’, sometimes boards suggest and management ‘refine and develop’.

To further cloud the waters, there is a convention that, although we refer to the Chairman as ‘the boss of the board’, the chairman leads the board only with the consent of the other directors. This consent can be withdrawn at any time (unless you are in one of those rare organisations where the board is appointed; usually in the government or quasi-government sector, in which case the shareholder will have to be asked to decide).

When a board is wavering in its support of the chairman there is a power vacuum which will become dangerous if not addressed. At this point another director needs to step up to the task of discussing the issue with the remaining directors and then, when a clear consensus is formed, with the chairman. Ideally this other director would be the person in the role of ‘lead independent director’ or ‘deputy chairman’ as those roles already have some level of conferred trust from the remaining directors.

Agency theory at work

Agency theory has it that management teams, in the absence of firm controls, will naturally tend to reward themselves at the expense of the shareholders. The board is intended to be the principle control and should supervise and direct management so that the needs of shareholders are given priority. In a not-for-profit those needs would include doing more work, at less cost, to further the aims of the organisation. In a for profit enterprise those aims would include optimising current profit and future wealth creation.

When the leader of the board is also the principal manager of the management team agency theory would suggest that the management team will reward themselves excessively at the shareholders’ expense. In that situation an independent leader is required to assist the board to reach a rational and unbiased view of appropriate remuneration and other ‘perks’ such as large offices, executive jets, interest free loans to buy stock, etc. Ideally the lead independent director will perform that role.

Disentangling roles when disaster looms

All companies need to change the incumbents of their most senior roles at some time. Changing the CEO or Chairman is one of those occasions. When the chairman is also the CEO this is a very complex decision to make. Which role is being fulfilled inadequately? Or is it both roles?

When a chairman is also the CEO he or she, as a member of the board, should have a role in firing the CEO, and should have a role, as the chairman, in developing the consensus that firing the CEO is the action that will create the best outcome for the shareholders. This is an impossible conflict of interest and, to resolve it, companies that have decided to combine the roles, have created the role of lead independent director to step in and usurp the role of the chairman in that decision.

Likewise, when it is the chairman role that is being performed inadequately the CEO is usually the first person to reach that opinion and the one with most knowledge of the issues that need to be better handled. When the roles are combined the incumbent is unlikely to recognise that he or she is providing inadequate self leadership. The long suffering lead independent director is expected to recognise these signs and alert the rest of the board to them.

Added value

Having established the role of lead independent director to handle these pernicious problems, boards then discovered that this role could offer many additional advantages. Lead executive directors are now often involved in leading the performance assessment of the chairman. This requires a director to have a good knowledge of governance and a high level of interpersonal skill to delve into the information and then convey it to the Chairman.

Another area where Lead Independent Directors add value is in the assessment and appointment of auditors, both statutory and internal, because the Chairman has a conflict of interest in this matter.

When the role was first introduced it was viewed with suspicion. Now, in companies where the incumbent has performed well, it is viewed as an essential component of board success. It is not, and never will be, a role for the faint hearted, inexperienced or Pollyanna-ish. It goes a long way towards resolving the conflicts inherent in combined Chairman and CEO roles. Company where the role has been performed ‘sub-optimally’ are now looking at boards where the role is adding value to governance and upgrading their own performance. There is even evidence that the role (if not yet the title) is spreading to boards where the CEO and Chairman roles are separate.

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 books Dilemmas, Dilemmas: Practical Case Studies for Company Directorsand Presenting to Boards.

Have you recently read any articles about what your board should be focused on? Was it social media, bird-flu, Internet portals, Terrorism or some other fad?

I wish I had a dollar for every article on the latest buzz-word that every board should worry about. Or fifty cents for every list of twenty questions board members should ask about the craze. I would hate to be on a board that was so easily sidetracked from their real concern; running the company so that it achieves what it was set up to achieve.

In some great research from Australia, Neil Buck surveyed real company directors on what risks they thought most likely to impact their companies. His initiative revealed 16 categories of risk which, when read by company directors, were recognised as things they worry about.

I have followed up on that research and interviewed 241 company directors on the big risks facing their company. Unsurprisingly the number one risk was financial but (sad news for the audit community) it was not financial statement misstatement or fraud, but simple cash flow risk that kept directors awake at night. Fixing this is a question of strengthening the business. Improving reporting or ticking boxes in the board room won’t help.

Directors the world over are focused (as they should be) on running businesses to generate wealth (or benefits in a NFP context) in an environmentally and socially acceptable manner. If bird flu is important for the business they will focus on that. If not, they should focus on what is important for their business.

Directors can rely on their own judgement to help them to evaluate such things.

They may get it wrong occasionally (all boards, when they are being honest, have a decision they regret in their history) but it rarely is so wrong that they can’t fix it. Unless, of course, they are rushing from one fad to the next without pause for thought.

Anyone who suggests that every possible risk should be a board focus is either totally inexperienced in the board room or hoping to sell your board something. For optimum results focus your board on what is important for your organisation by holding an annual discussion of strategic aims and current targets. Forget the current fashion and just talk about what the organisation needs to achieve and what are the risks that threaten that achievement.

Unleash your board on the issues that affect your organisation’s ability to deliver its strategy. You will be amazed by the power that the board can generate and the value that they can add.

Too many boards waste their time addressing the issues of the day rather than the issues that they really know are important.

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 books Dilemmas, Dilemmas: Practical Case Studies for Company Directorsand Presenting to Boards.

As demands for Board effectiveness and accountability continue to grow, research and discussions about how Boards might operate differently, continue to grow, as well. There are a variety of new ideas for Board models.

Networked Governance

David Renz suggests that the effectiveness of governance could be enhanced when we realize that governance can include organizations and activities that go beyond the role of the Board in an organization. Nowadays, many nonprofit services to a community are often delivered across a network of organizations and, thus, the distributed governance of that network is a key point in the effectiveness of those services. Renz mentions the advantages of the perspective on networked governance and also mentions the difficult challenges inherent in that perspective, for example, how can individual nonprofits and Boards influence the overall network and how can we ensure that individual Boards are doing their fiduciary responsibilities. See Exploring the Puzzle of Board Design: What’s Your Type? by David Renz.

System-Wide Governance

Judy Freiwirth asserts that the traditional “top down,” “command and control” paradigm of Boards actually gets in the way of the nonprofit’s successfully working toward its mission. She suggests that the governance responsibility to be shared among constituents, including members, staff and Board. In System-Wide Governance, Board members are from the community and constituency. Although, governance is very democratic in nature, Board members do perform some legal and fiduciary responsibilities. She mentions the Whole Scale Change methodology as an example of how constituency-based planning and operations can be successful. See System-Wide Governance for Community Empowerment by Judy Freiwirth and Maria Elena Letona.

Community-Driven Governance: Governing for What Matters

Community-Driven Governance is a framework that defines a Board’s primary purpose as leadership towards making a significant, visionary difference in the community the organization serves. The Board’s work centers around an annual plan that aims first and foremost at the difference the organization will make in the community. The plan then addresses the organizational infrastructure needed to implement that plans. The approach is intended to be simple enough for any Board to put into practice, while comprehensively addressing first the ends, and then the means for which a Board will hold itself accountable. The approach also aims to avoid a typical problem in Boards when they attend primarily to internal operations, rather than truly representing the needs of stakeholders. See Governing for What Matters by Hildy Gottlieb .

Our next post will explain the Relationship Model, Nested Boards and the Policy Governance Model.

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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.

A new study published in the Annals of Internal Medicine offers insights into what distinguishes high-performing and low performing with regard to deaths of heart attack patients under their care. It’s not the training of the doctors or the investment in high-tech equipment. It’s the organizational culture that makes the greatest difference.

As Dr. Pauline Chen reports in her blog posting in the NY Times this week:

While business executives have long understood the impact of an organization’s culture on the bottom line, it has not been clear if those same qualities could affect how well patients do.

“It’s how people communicate, the level of support and the organizational culture that trump any single intervention or any single strategy that hospitals frequently adopt,” said Elizabeth H. Bradley, senior author and faculty director of the Yale Global Health Leadership Institute at Yale University.

Rather, it was the approach to challenging patient care issues that seemed to set institutions apart. A hospital might discover, for example, that a heart attack patient who returned to the hospital with severe edema, or swelling, might have been discharged without her prescribed diuretic.

At a low-performing hospital, such an error might result in doctors, nurses and pharmacists on the front lines blaming one another and hospital leaders taking care to remain uninvolved. But clinicians and leaders at a high-performing hospital would be eager to address the error, acknowledging it without disparaging one another and working together to re-examine and, if necessary, reconfigure the hospital’s discharge process.

Culture Saves Lives!

It’s ironic that a word like “transparency” can have several confusing meanings, even in a business context. While transparency as a concept is often most visible in the realm of social responsibility and compliance, its real benefit is when it’s seen as a business priority.

Transparency is about information. It is about the ability of the receiver to have full access to the information he wants, not just the information the sender is willing to provide. Transparency embodies honesty and open communication because to be transparent someone must be willing to share information when it is uncomfortable to do so. Transparency is an individual being honest with himself about the actions he is taking. Transparency is also the organization being upfront and visible about the actions it takes, and whether those actions are consistent with its values. What would cause someone act contrary to his or her values? What are the influences and factors inside an organization that cause individuals to veer from actions or decisions that they do not believe are right?

In an organization where there is alignment between their Standards and their Values, there is no fear in raising or disclosing difficult issues. A value of honesty is consistent with the ability to act on one’s concerns, or ask questions. Employees and managers can safely admit mistakes and can openly deal with problems and challenges. There is true open communication. If an engineer raises a concern about product quality, for example, that person is given a chance to be heard and have the issue either resolved. The engineer may not be correct, but there is enough respect that if he or she is wrong, they are given an opportunity to learn why, and the encounter has a positive outcome.

For employees to trust in transparency, they must first feel safe: physically, financially, and emotionally. Undue pressure and fear of losing one’s job make it difficult to take the risk of admitting mistakes or weakness. Employees must feel they have a personal relationship with their leaders to the point where they would feel comfortable having a conversation that involves some risk.

As an example of the strategic importance of transparency, look at the challenges that have plagued Johnson & Johnson in recent years. The manner in which J&J handled the 1982 Tylenol crisis has always been the model of transparency; an organization acting in a manner consistent with its values. J&J immediately pulled the product from the shelves without regard to the cost or public embarrassment, and certainly with no regrets over lost profits. In repeated interviews Jim Burke said that J&J’s Credo made it easy for him and his team to know exactly what to do: J&J’s “first responsibility is to the doctors, nurses, and patients, to the mothers and all the others who use our products and services.”

In stark contrast to how Jim Burke handled the 1982 crisis, McNeil leadership under Colleen Goggins has been described as evasive and not forthcoming. Consultant to over-the-counter drug companies, Donald Riker, was quoted as saying, “At every step in this process J&J has not been transparent. Every bit of information is cagey, secretive, and micromanaged.”

Companies with cultures that are working for them and not against them are ones where transparency is seen as an internal imperative, and not a external disclosure requirement.
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David Gebler is the President of Skout Group, an advisory firm helping global companies use their values to clear the roadblocks to performance. Send your thoughts and feedback to dgebler@skoutgroup.com.

It’s ironic that Charlie Sheen played the character with the ethical conscience in the 1987 film “Wall Street.” Now he’s at the center of a titillating Hollywood scandal that has lessons to teach us about business ethics and the business of Hollywood.

As has been widely reported in the Los Angeles Times and elsewhere, CBS Warner Bros studio announced that TV’s most popular sitcom, “Two and a Half Men” will be suspended, and perhaps canceled, due to the public dispute between the lead star of the show, Charlie Sheen, and the show’s writer-producer, Chuck Lorre.

Television critic Mary McNamera summarized the issue this way in a column this weekend in the LA Times:

If you are the star of a hit comedy on CBS, you can keep your job in spite of accusations of: threatening your pregnant second wife; holding a knife to your third wife’s throat on Christmas Day; and indulging in cocaine-fueled weekends during which your bizarre behavior causes your female companion to fear for her life.

But say mean things about Chuck Lorre and You Are Toast.

It is difficult to feel anything but relief regarding CBS’ recent decision to officially halt production of its hit comedy “Two and a Half Men.” A crazed Charlie Sheen once again took to the radio airwaves this week, this time to denounce the show’s creator, whom the troubled actor accused of stealing from him. Within hours, CBS and Warner Bros. finally put their foot down; for once, the writer trumped the performer, perhaps because Lorre also produces two other very successful comedies on the network, “The Big Bang Theory” and “Mike and Molly.”

The impact of both Sheen’s off-screen behavior as well as his dispute with the producer has significant financial ramifications. Some estimate that the cost of canceling the show could exceed $200 million in lost licensing revenue to Warner Bros.

In most other companies that generate this much revenue, there is clarity as to standards of behavior and accountability to meet those standards, or face the consequences. The stories of numerous CEOs who have been forced to resign for engaging in far less egregious activity are proof. But Hollywood, like many professional sports franchises, have trouble deciding how to treat their stars. Does the business demand that everyone adhere to certain standards, including the stars, or does the franchise revolve around the idiosyncrasies of its stars, apologizing and rationalizing unacceptable behavior? Would the show go on with a new star? There are many examples, in Hollywood and in sports, where the business transcends the personalities, and the franchise has the ability to withstand the personality foibles of any one individual.

Two and a Half Men is a major business. Clarity as to its values and standards would help guide its stakeholders to know how to best protect the value of the franchise for the long-run.