Category: Starting a Business

Nobody’s perfect!

Here are three common issues that can hamper even skilled, ethical and intelligent directors:

Committee thinking

It is important to remember that a board is not expected to perform as a committee. Committees are groups of representatives brought together to resolve an issue in a manner that is acceptable to each of the groups represented on the committee. This is quite different to a board which must develop the most advantageous solution for the organisation regardless of the potential impact of that solution on other organisations or individuals.

The public sector uses a lot of committees, often under other names, to broker compromises to otherwise intractable conundrums. This is a highly important function and one which the sector does well. However, this is not the function of a board. New board members with extensive committee experience or public sector backgrounds can have trouble adapting to their new role. This is especially so when the issue is not explicitly addressed or considered. Many people who are excellent committee members wonder why the behaviours that made them successful in a committee environment fail in the boardroom.

Conflicted Relationships

The most common conflicted relationship on boards is that of the CEO, a member of management and (usually) also a director. When the CEO is also Chairman (or President) this is exacerbated. It takes a very special set of skills to enable a director to move easily from the role of a manager presenting to the board and accepting direction from the board to the role of a director, independently assessing the proposals of management and overseeing their actions to ensure they suit the strategic aims of the company. Setting remuneration becomes very difficult when there are a large number of executives on the board.

Another relationship that is common in federal organisations (those with state, branch or chapter structures where each state branch or structure is represented on the board) or joint ventures is the ‘two-tier director’. These roles require the wisdom of Solomon as decisions about funding and capital structure will inevitably involve one party ceding for the other to gain.

Family companies have very complex relationships and it can be difficult for directors to actively discuss contentious issues with people with whom they live in close family relationships. Generationally diverse family boards can have the widest range of viewpoints to assimilate into a single agreed strategy.

Shareholders

I have heard it said that a shareholder in the boardroom is much like a mother-in-law in the bedroom; intensely interested in the outcome but a great hindrance to the procedures!

A good director acts only in the interests of the company and never from his or her own personal interest. Many shareholders like to see directors have ‘skin in the game’ and ask that the director (especially in a start up or small listed company) acquire a significant parcel of equity in order to align his or her interests with those of the shareholders. This creates problems:

1. Nobody really knows what is significant to another; apparently wealthy people may be geared to excess or apparently impoverished people may be truly wealthy.
2. If the shareholding is so large as to be significant to the director it is large enough to tempt the director to act to protect the value of that holding at certain times, which may suit the director more than the company. Timing becomes an issue.
3. Insider trading immediately becomes a possible issue; directors know when dividends are to be declared, how projects are faring, if potential acquisitions exist and other price sensitive information before those items are progressed to the stage where an announcement may be made.
4. If the director leaves they will probably sell their stock and that will affect the shareprice.
5. If the director is able to gain voting control with the support of a few others the company has effectively been taken over but no control premium has been paid to the ordinary stockholders.

Of course there are always examples of boards where these conflicts are well managed. Consider Harvey Norman, a listed Australian company where the major shareholders, CEO, founder, Chairman’s wife, CEO’s husband and some longstanding employees are all members of the board which appears to function well and deliver acceptable corporate outcomes.

There are many other sources of impediment to director and board success which I could not cover in this brief post and which may, on occasion, be more serious than the three I opted to discuss here.

Which have you encountered in your dealings with boards, and, more important, how do you overcome the drawbacks to achieve success?

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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 business press reports that a lawsuit filed last week on behalf of Johnson & Johnson shareholders accused the company’s directors of ignoring “red flags” foreshadowing product recalls and government probes of manufacturing defects and marketing practices.

The lawsuit alleges that while J&J once set “the gold standard for integrity and excellence,” the directors’ “utter disregard for their fiduciary duties, including permitting and fostering a culture of systemic, calculated and widespread legal violations has destroyed J&J’s hard-earned reputation.”

Bloomberg Business reports that the board received “years of red flag warnings of systemic misconduct,” according to the complaint. “These red flags came in the form of federal and state regulatory investigations, subpoenas and requests for documents, FDA Warning Letters, news articles and the recall of products accounting for hundreds of millions of dollars in corporate losses.”

It will be very important to watch the progress of this lawsuit on several levels:

1. Will Directors be held liable for failing to adequately monitor the culture of the company?
2. How important is the fall of the company’s reputation (in terms of news articles being a “red flag”) in determining directors’ liability.

Stay tuned…

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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.

I have to admit that I have a conflict of interest here. All four of my kids have attended Maimonides School in Brookline, Massachusetts. But the story below from boston.com is a good example of how we can instill values in our kids in ways that matter…to them and to us.

In the last girls’ soccer game of the season at Maimonides School, an underclassman pulled off her uniform and handed her jersey over to an injured teammate.

Senior player Tifara Ramelson had torn ligaments in her knee during her final season, but Shoshana Ehrenkranz, a seventh-grader, wanted Ramelson to have one last chance to play.

Moments like these permeate the athletic program at Maimonides School, a Jewish day school in Brookline.

For its athletes and leaders, it was no surprise they were recognized for good sportsmanship this year.

“For me it’s not about winning the game; it’s about playing well,’’ said Sophie Edelman, the varsity volleyball captain. “I want to have a good relationship with my teammates rather than show them I’m the best server in volleyball.’’

Today, Maimonides will honor its athletic teams at the opening game of the girls’ basketball season by presenting the District Sportsmanship Award.

The school received the award last month at the Massachusetts Interscholastic Athletic Association’s 17th annual Sportsmanship Summit at Gillette Stadium.

The summit recognizes one school in each district for sportsmanship, and Maimonides won the award among private schools, said Peter Smith, the association’s assistant director. The summit has grown in the past several years as more schools are interested in attending, with 1,100 people participating this year, he said.

“This is the type of stuff you take for granted,’’ said Smith. “There are a lot of people out there doing good things, and they’re not things you see in the news.’’

Maimonides won the award after being nominated by Marie Laundry, athletic director at Mount St. Joseph’s Academy, an all-girls Catholic school in Brighton.

“They come prepared all the time. They’re good sports and play hard right up to the last minute,’’ said Laundry, who coaches basketball and soccer against the Maimonides teams. “They never give up, and they encourage each other.’’

Maimonides students, administrators, and coaches all agreed their sportsmanship stems from values the school teaches starting in kindergarten. Half the school day is spent in academic classes, while the other half is spent studying the Torah, administrators said.

Lashon harah, for example, is in Jewish law the prohibition of gossip. It teaches students to be mindful of what they say about others, said Rabbi Dov Huff, assistant principal of general studies.

“In the newspaper, you read about how some schools do terrible things and haze. That just doesn’t happen at Maimonides,’’ said Elan Baskir, a senior who plays soccer, basketball, and baseball.

Baskir said the men’s soccer team made the quarterfinals for the first time in school history this year. It wasn’t easy. One victory, Baskir recalled, came on a freezing, rainy day.

But when the team stood on the brink of losing in those quarterfinals, said Huff, he overheard the players chatting in their huddle, with their captain praising his teammates not only for a great season, but also for respecting others.“To me, it was shocking. . . . What was on their minds is they did it the right way,’’ said Huff.

Rabbi David Ehrenkranz, who teaches the Bible and the Talmud and coaches varsity softball, said he teaches the same concepts in class and during practice.

“Dignity and self-restraint are second nature,’’ said Ehrenkranz. “I see no difference from students in my class, the way they behave in the classroom, compared to my athletes.’’

Athletic Director Hal Borkow said other schools and referees often compliment him on Maimonides students’ behavior, such as when a tough call is made, and the athletes take it in stride.

“The ref made a point to let me know that the kids behaved like mature young adults,’’ said Borkow.

But not everyone has to study the Torah to promote sportsmanship. Students said one of the most important ways to develop good attitudes is to maintain good relationships with teachers.

Huff, who graduated from Maimonides before becoming an administrator, said every grade has a tradition called shabaton, when students will spend the weekend at a teacher’s house, eating meals together and talking about important issues.

“Teachers in the school as a whole play a big role in how to behave,’’ said Tamar Kosowsky, a senior varsity volleyball captain. “Every school should focus on what it means to be athlete on the field.’’

Administrators said receiving the award meant they were doing the right thing, in and out of the classroom.

Judy Boroschek, general studies principal for the school, said, “It felt very affirming of what we’re trying to accomplish — to think school can have that much of an impact.’’

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David Gebler is the President of Skout Group, an advisory firm helping global companies use their values to remove the roadblocks to performance. Send your thoughts and feedback to dgebler@skoutgroup.com.

A powerful tool was made available to the public yesterday. In research reported Thursday in the journal Science, scientists at Harvard University, Massachusetts Institute of Technology, Google and the Encyclopedia Britannica unveiled a database of two billion words and phrases drawn from 5.2 million books in Google’s digital library published during the past 200 years.

Just insert the phrase “business ethics” and see what emerges:

While the increase in the phrase in recent years makes sense, given the increase in the number of business books published. But look at the blip in 1930, just after the Crash of 1929. It didn’t take long for authors to be raising issues about practices on Wall Street.

Hmmm.

Many directors of Government owned enterprises take up the role because they want to have an effect on the organisation and, through the organisation, on the society they live in and will bequeath to their children. Indeed, they are frequently appointed because the shareholder sees their passion for effecting change in that way and feels that it would add value to the board.

Even directors who do not profess a burning sense of mission will admit to a deep sense of responsibility for organisational and societal outcomes. In all my conversations with directors of government owned enterprises I have never found one who was there purely for the money. This is hardly surprising as the organisations themselves, whilst expected to operate efficiently and, in many cases, to generate profits that provide taxation and dividend income to the shareholder, are not constituted for financial reasons alone.

Regardless of what the passion is, whether it is conservation of the environment, empowerment of employees, preservation of heritage, education of youth or care for the needy, it must be controlled and focused by the boardroom processes to achieve its true expression in organisational results and societal or environmental impact.

Traction or Friction?

Unfortunately for many directors, this is where the rubber hits the road and it all comes to a screeching halt. So many things conspire to turn the desired traction into frustrating friction. In addition, although there is sometimes education available for new directors on legal, financial and procedural matters there is very little guidance on how to constructively live their passion and positively effect change through the organisation. Think about it: when was the last time that you received practical instructions on how to broach difficult topics with unsympathetic people and then continue to have a high performing relationship with them after you have done so?

In addition to uncertainty about how to bring their passion to bear on the processes and outcomes, there are many other things that act as distractions: finances to analyse, planning and budgeting cycles, technology roll outs, training programs, recruitment or retrenchment activity, regular reports to the shareholder, requests from the shareholder for information or policy advice, and pressure to stick to the accepted agenda and processes that, ostensibly, satisfy the other board members.

Many directors are overwhelmed by this activity and, when it is exacerbated by the self protection of the status quo, they simply give up, or wait for an opportune moment to unleash their passion. It is a moment which never seems to arrive. They are frequently good directors, diligent and dedicated, but they somehow feel that they are not really achieving all that they could or should. Sometimes the shareholder feels the same way and, after a term or two as a director, they are not reappointed, but are quietly replaced and, as nobody ever knew for sure what the director’s passion was, nobody is ever sure just how valuable an opportunity might have been missed.

Other directors strive to have the effect they want but find all their efforts are ineffective and, worse, some are counterproductive and cost them the relationships that they need as political capital to pursue their aims. They become branded as troublesome, impractical, or even unethical. They are seldom reappointed and, again, valuable opportunities to incorporate their thoughts into the board’s machinations are lost.

Only directors who can apply their passion in a board-appropriate manner will successfully manage to influence events and corporations.Few directors receive any training in how to do this.

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 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.

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.

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

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.

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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.

This blog post has been moved to the Business Ethics topic in the Library.

The following guidelines ensure the ethics management program is operated in a meaningful fashion:

1. Recognize that managing ethics is a process.

Ethics is a matter of values and associated behaviors. Values are discerned through the process of ongoing reflection. Therefore, ethics programs may seem more process-oriented than most management practices. Managers tend to be skeptical of process-oriented activities, and instead prefer processes focused on deliverables with measurements. However, experienced managers realize that the deliverables of standard management practices (planning, organizing, motivating, controlling) are only tangible representations of very process-oriented practices. For example, the process of strategic planning is much more important than the plan produced by the process. The same is true for ethics management. Ethics programs do produce deliverables, e.g., codes, policies and procedures, budget items, meeting minutes, authorization forms, newsletters, etc. However, the most important aspect from an ethics management program is the process of reflection and dialogue that produces these deliverables.

2. The bottom line of an ethics program is accomplishing preferred behaviors in the workplace.

As with any management practice, the most important outcome is behaviors preferred by the organization. The best of ethical values and intentions are relatively meaningless unless they generate fair and just behaviors in the workplace. That’s why practices that generate lists of ethical values, or codes of ethics, must also generate policies, procedures and training that translate those values to appropriate behaviors.

3. The best way to handle ethical dilemmas is to avoid their occurrence in the first place.

That’s why practices such as developing codes of ethics and codes of conduct are so important. Their development sensitizes employees to ethical considerations and minimize the chances of unethical behavior occurring in the first place.

4. Make ethics decisions in groups, and make decisions public, as appropriate.

This usually produces better quality decisions by including diverse interests and perspectives, and increases the credibility of the decision process and outcome by reducing suspicion of unfair bias.

5. Integrate ethics management with other management practices.

When developing the values statement during strategic planning, include ethical values preferred in the workplace. When developing personnel policies, reflect on what ethical values you’d like to be most prominent in the organization’s culture and then design policies to produce these behaviors.

6. Use cross-functional teams when developing and implementing the ethics management program.

It’s vital that the organization’s employees feel a sense of participation and ownership in the program if they are to adhere to its ethical values. Therefore, include employees in developing and operating the program.

7. Value forgiveness.

This may sound rather religious or preachy to some, but it’s probably the most important component of any management practice. An ethics management program may at first actually increase the number of ethical issues to be dealt with because people are more sensitive to their occurrence. Consequently, there may be more occasions to address people’s unethical behavior. The most important ingredient for remaining ethical is trying to be ethical. Therefore, help people recognize and address their mistakes and then support them to continue to try operate ethically.

8. Note that trying to operate ethically and making a few mistakes is better than not trying at all.

Some organizations have become widely known as operating in a highly ethical manner, e.g., Ben and Jerrys, Johnson and Johnson, Aveda, Hewlett Packard, etc. Unfortunately, it seems that when an organization achieves this strong public image, it’s placed on a pedestal by some business ethics writers. All organizations are comprised of people and people are not perfect. However, when a mistake is made by any of these organizations, the organization has a long way to fall. In our increasingly critical society, these organizations are accused of being hypocritical and they are soon pilloried by social critics. Consequently, some leaders may fear sticking their necks out publicly to announce an ethics management program. This is extremely unfortunate. It’s the trying that counts and brings peace of mind — not achieving an heroic status in society.

What do you think?

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Carter McNamara, MBA, PhD – Authenticity Consulting, LLC – 763-971-8890
Read my weekly blogs: Boards, Consulting and OD, Nonprofits and Strategic Planning.