Category: Starting a Business

The role of the board changes as the company grows and the management team becomes more diverse, with a wide range of experts who can contribute to strategy in different ways.

A company passes through several stages in its life cycle. In the first stage ‘Start-up’ strategy is developed and implemented by the founder and a close team. At this stage it is not often clear who is doing what. The team will switch from their shareholder role, to their executive role and then their board role quickly whenever the need arises. Usually, whichever role the founder plays most can be said to be the place in the organisation where the strategy is developed.

As the company enters the second stage ‘Growth’ more people join and the roles start to be defined with greater clarity. Skilled or qualified staff start to offer their inputs to strategy and the board needs to be explicit about the sharing of the roles to ensure that efforts are coordinated so that people feel engaged. Failure to separate and define roles will lead to dissent and disorder. Failure to share opportunities to contribute will disenfranchise management. The board need to be especially vigilant that the founder does not continue to dominate the process although they may still design the process so that the founder has the final say.

Eventually growth will start to slow down. This is a stage at which a company needs to focus efforts on internal effectiveness, systems and processes. It is also a stage during which the strategy development, in good companies, is formally delegated to the now strong and experienced management team and the board moves into the more traditional role of understanding, testing and endorsing strategy. Much will depend on the decision of the founder to remain as an executive (usually CEO) or to move to a non executive role (often Chairman but not necessarily always so).

If the transition is an abrupt or unexpected slowing of growth and represents a deviation from agreed plans it is not uncommon for a board, at this stage, to step in and remove the CEO or undertake other actions to restructure management so as to gain better visibility of the path ahead. If the transition is smooth, expected and well prepared for then the role of the board is not as overt.

At this point the company needs to decide if there are additional activities they wish to undertake that would effectively renew the organisation and continue the growth or if they are happy to transition to a less volatile mature operating state as the company becomes ‘Sustainable’ or ‘Mature’. This is the stage of life of most large blue chip organisations. They undertake enough new developments to maintain their sustainability but never so many that they revert to the risky volatile growth phase. Outcomes are expected to conform to plans and the board spends as much or more time monitoring strategy implementation as they do developing strategy.

Finally the organisation will enter the stages of decline and, if this is not arrested by reinvention, decay. A good board will be alert for indications that decline is imminent and will ensure that management are challenged with the task of developing new strategies for growth to counteract the tendency of the organisation to drift into these stages. Companies in decline are often paradoxically very profitable as investment in new lines of business and growth projects slows whilst tried and tested products are efficiently produced and sold.

Many family businesses enjoy this phase as a means of creating funding for the retirement of the founder. Other businesses work hard to transcend the tendency towards decline and decay. The board may, again, need to become more active (and possibly even forceful) to ensure that management focus their efforts appropriately depending on the owners’ desires for the organisation.

Some not-for-profit businesses look forward to these stages as they will indicate that the mission has been achieved; when a cure is found for cancer most cancer-related charities will focus on transitional arrangements to assist current sufferers, on providing information about the cure and on closing down in an honourable manner. A few will move into other disease related work whilst most will seek to exit the marketplace. For commercial companies the imperative will be to either create new business streams or to return capital to the shareholders whilst meeting obligations to stakeholders. The board must step into their role as the ultimate endorsers of strategy during these phases.

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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.

If you only looked at the headlines of today’s feature in the Wall Street Journal: The Case Against Social Responsibility, you might think that the ire of business ethics professionals would be raised to the level of hysterics. But Professor Aneel Karnani raises a critical point that is at the heart of not only corporate social responsibility, but of business ethics as well.

“In cases where private profits and public interests are aligned, the idea of corporate social responsibility is irrelevant: Companies that simply do everything they can to boost profits will end up increasing social welfare.”

While at first Karnani’s seems provocative. However, the logic is that companies won’t engage in practices that aren’t profitable. Therefore, only when socially responsible practices make business sense and are what the public wants, will companies be acting in a socially responsible manner. But to them, it’s just good business, therefore the “green” labels are mere PR window dressing.

But the heart of Karnani’s argument is exactly at the heart of today’s business ethics issues as well:

When talking about why a company would not do the socially responsible thing, even if it is a profitable avenue, Karnani states:

Unfortunately, not all companies take advantage of such opportunities [of benefiting society while acting in their own interests], and in those cases both social welfare and profits suffer. These companies have one of two problems: Their executives are either incompetent or are putting their own interests ahead of the company’s long-term financial interests. For instance, an executive might be averse to any risk, including the development of new products, that might jeopardize the short-term financial performance of the company and thereby affect his compensation, even if taking that risk would improve the company’s longer-term prospects.

The heart of the argument is that long-term financial interests are in the best interests of both the shareholders and the public. Companies that plan for the future are the ones that see the business benefit of ensuring that their markets and customers will be around the the long-term as well. The problem is not profit per se, the problem is short-term self-interest over long-term corporate interest.

So how do companies position balance profit and socially responsible activities?

The challenge is to design self-regulation in a manner that emphasizes transparency and accountability, consistent with what the public expects from government regulation. It is up to the government to ensure that any self-regulation meets that standard. And the government must be prepared to step in and impose its own regulations if the industry fails to police itself effectively.

It always comes down to values: companies that actively foster transparency and accountability internally will have the easier time creating the alignment between profit and social responsibility, because leaders will have the sense and the capabilities to look out for the long-term interests of shareholders, which will benefit all of the organization’s stakeholders.

Thank you Professor Karnani for highlighting that the source of true social responsibility comes from the core values of leaders and not from a superficial “greenwash” that masks a short-term outlook.

It has often been said that there is no place in the boardroom for a director who does not understand the business. Now we need to consider if there is room for one who does not understand internet enabled connectivity.
Directors need to understand both the risks and the opportunities presented by the internet in general and social media in particular.

The Impact on Business

The days when a corporation’s website was simply an online brochure are long past. Most companies now offer some degree of interaction. World class companies have specific communication strategies and communities that ‘meet’ using the company as a focus for their interests.

At its most basic level the internet is a source of threat or opportunity for the business. Transactional friction is reduced, customers can communicate across time zones and geographical boundaries, supply chains become ‘transparent pipelines’, employees can collaborate on projects and spread best practice, the possibilities are huge. These opportunities are asymmetrically spread and new competitors can use technology to gain an apparent overnight advantage on established companies. The need for capital is dramatically reduced as new players cooperate to mimic the reach of large multinational companies without incurring the bureaucracy or cost structure. Many an industry leader is watching new competitors scoop the choicest morsels from the market by targeting prospective niches, or simply hijack the revenue stream by delivering an alternate method of satisfying demand.

The Impact on Boards

Technology is also changing the face of the boardroom. Many directors now access secure ‘virtual board papers’ rather than receiving voluminous printed material. For some this is simply an emailed file that mimics the old paper-based pack; for others it is web-enabled environments where directors can self serve their requests for more information by drilling down or through layers of data behind the official board packs.

Meetings themselves are changing with boards opting for web-conferences, virtual presentations, and internet enabled ‘visits’ from external experts. Gone are the days when a director hanging onto a crackling phone line and listening in missed out on vital clues as to his or her colleagues feelings about the issues under discussion!

The Impact on Directors

Directors are also embracing new technology to avail themselves of opportunities to network with their peers, learn when and where it suits them, and research potential new board seats. The number of director-related groups on LinkedIn is growing almost daily and these groups range from select ‘close networks’ of directors who all know each other or serve on the same board to large international communities of interest where a director in Saudi Arabia can comment on proposed regulations for corporate governance in Latvia that are put out for comment by a Danish national and read from Australia to Zimbabwe.

There are a number of places where anonymous requests for advice can be posted and, whilst some of the responses are less than well researched, many of the respondents are well recognised governance experts in whose advice the poster may feel reasonably confident. There are also places for whistle-blowing on unacceptable practices and for keeping up to date with the latest regulatory changes.

Astute directors are reading what their investors (and some traders) are saying about the company and its board in chat-rooms. Others are using these as another vehicle for communicating with shareholders.

The internet ‘Genie’ is definitely well out of the bottle, what will happen next is almost anybody’s guess. The only thing I know for sure is that change is coming and my businesses, boards and director friends must all be ready to meet it.

What do you think?

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.

The speed of the announced departure of Hewlett Packard CEO Mark Hurd was in and of itself newsworthy. At first blush it would seem that an action by a leader to warrant such fast response from a board must be quite nefarious; if not fraud, then at least a juicy sex scandal. Instead, as was reported in the Wall Street Journal:

H-P said Friday that Mr. Hurd, 53 years old, didn’t violate the company’s policy regarding sexual-harassment but submitted inaccurate expense reports that were intended to conceal what the company said was a “close personal relationship” with the contractor.

Expense Reports? One CEO friend of mine mused that it would be one thing if Hurd had claimed personal expenses as business expenses in order to hide a liaison from his wife. That would be fraud, even if it was a small amount. But mere false categorization? “That’s absurd,” he said, “to fire a successful leader for not mentioning this contractor on his expense reports.” However, nothing can be farther from the truth.

I give tremendous kudos to the HP Board for taking such swift action on something that might seem so small.

Unlike opportunities for major fraud, which really can only be carried out by a small number of people, expense report violations is something that is within the domain of thousands and thousands of HP employees. False expense reports may seem minor, but it is often the place where larger crimes start, and can serve as a convenient hiding place for many varied violations.

Several pharmaceutical companies have recently paid hundreds of millions of dollars to settle claims by the FDA of kickbacks to doctors. The place where these violations appear: expense reports.

Moreover, there is no more powerful negative influence on a workforce than perceptions of unequal treatment of senior leaders. If a junior manager could be disciplined or fired for the kind of violation that mark Hurd engaged in, and if he was only given a slap on the wrist, the reverberations of inconsistent treatment spread like wildfire. Employees are willing to make sacrifices for the company and to even look out for the company’s interests over their own, but only when they feel they are being treated “fairly.” Once an event occurs that gives them grounds to perceive they are being “suckered,” then all that commitment vanishes in a flash. It’s back to looking out for #1.

The Board did the right thing, signaling to all HP employees that no one, even the CEO is exempt for holding to the stated standards of business conduct.

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.

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[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.