International Process and Performance Institute

We live in what could be termed the age of corporate governance. Corporate governance codes of practice and consultants abound. There must be at least one expert on corporate governance for every Fortune 500 company.

Yet before any of us had heard of the term “corporate governance” directors who were modestly paid by today’s standards managed to build profitable companies with a global reach. As a researcher at the Institute of Directors I interviewed thoughtful and competent directors. When I undertook my early surveys I encountered effective boards.

Over the last couple of years in this age of corporate governance we have experienced a catastrophic failure of governance in the banking sector. The World Council for Corporate Governance is needed today as never before. There is much for this International Corporate Governance Conference to do.

The theme of this panel discussion is STARR – the selection, training, appraisal, remuneration and retirement of directors. I would like to focus on selection. Recent events have called into question the value added by many boards, particularly those of financial institutions that have been bailed out or whose assets have been written down.

The banks rescued by Governments are not obscure companies run by inexperienced directors. They include household names, whose board members have included the ‘great and the good’ of the City establishment.

Despite their directorial pedigrees, clear duties and responsibilities and regular attendances at meetings, many directors seem to have neither noticed nor questioned dangerous practices. Executive directors have not been held to account. Boards have presided over bank cultures and practices that suggest a short-term focus, self-interest and greed among those for whom they have been responsible.

Is there an alternative to ‘safe directors’ who ‘look the part’ with their smart suits and ‘track records’ of service on plc boards, and who can be relied upon not to question, challenge or probe? We need to look beyond the ‘normal suspects’ for people of integrity who would be willing to ask difficult questions and who would welcome an opportunity to ‘make a contribution.’

Given the evident deficiencies of the current narrow gene pool from which directors are selected and the lack of value some of them appear to add it ought to be possible to do better. A new generation of directors are required, selected from people of integrity who have their feet on the ground, are alert to risks and the reality of what is happening around them, and who think for themselves. Where should we look?

Charities have a big impact on the lives of many people. The work of some medical charities affects the quality of life of millions of people with specific conditions. Yet those who serve as charity trustees are often unpaid. They have significant legal duties. They attend and contribute to board meetings, and discharge their responsibilities without any hope of personal financial gain. Their motivation derives from the vision, purpose and work of the organisation and their reward comes from the satisfaction of contributing to its success.

The major professions, many of which are self regulating, can also have a significant impact upon the lives of most citizens. Despite their responsibilities and what is at stake, committee and council members generally give their time for free. Like charity trustees, all they normally draw is out of pocket expenses, such as the cost of travel to committee meetings. Why do they do this? They are there because they want to make a difference.

Many directors of large corporations like to stress the complexities of the issues they face. Yet, understanding that economic bubbles bust, or that people may default on their mortgage statements in a recession, seems to have been too complex for some boards.

Some areas of the public sector such as the NHS are inherently complex.  A large Primary Care Trust (PCT) can spend over £1 billion locally on health care. The one that I sit on as Chair of the Audit and Governance Committee is also responsible for social care. There are various committee and sub-committee meetings to attend. There is the added challenge of holding executives to account when main meetings are held in public. Many members devote much time to preparing for meetings and often engage in rigorous questioning that would be unusual in some private company boardrooms.

In any sector some directors and boards will be more effective than others. However, there is much that private sector boards can learn from the voluntary, public and professional sectors. Directors do not need to be mercenaries whose first thought may be to arrange alibis and disclaimers and maximise their remuneration. It is possible to find people of integrity with directorial qualities and experience outside of the relatively narrow ranks of the City establishment and those who already have plc director experience.

Outside of the rarefied atmosphere of plc boardrooms, and in other walks of life, motivated citizens are giving considerable time, much of it unremunerated, to service upon boards that have a significant impact upon their fellow citizens. Many of them are displaying directorial qualities that would put some high profile directors of large corporations to shame. Few of them fit the caricature of the ‘nodding donkey’ or the ‘cardboard cut out’.

Directors in these other arenas are very committed and highly motivated to provide effective governance. Within the parallel dimensions in which they operate – whether charities, the professions or the public sector – significant effort may be devoted to ensuring directorial knowledge and skills are kept up to date. Nomination committees should broaden their investigations to embrace candidates from the voluntary, public and professional sectors.

I do not expect sudden or large scale change. Directors have onerous duties and responsibilities. Because of what is at stake selectors need to exercise a degree of caution. A core boardroom team of competent and experienced directors with more conventional backgrounds may first need to be put in place before existing directors feel confident enough to consider additional appointments from beyond the traditional gene pool that might bring greater diversity and fresh thinking into the boardroom.

Widening the gene pool will not be easy. There are people with directorial qualities and potential out there. To use a quotation: - “Seek and ye shall find”.

Some companies seem to be taken by surprise by external events. They find themselves ill prepared to cope with challenges or unable to seize opportunities. Other businesses are much more alive to what is happening in the business and market environment in which they operate. They track issues, anticipate events and monitor competitive activities. In a recession they create new possibilities and forge closer relationships with customer.

Why are some businesses better equipped than others to seize the moment and/or turn adversity to advantage? What do these “winners” do differently from other companies, particularly “losers” that appear ambushed by developments and struggle to react? To answer these questions and other questions my Winning Companies; Winning People* research programme has examined the experience and achievements of over 2,000 companies and over 500 professional firms.

High performing “winners” and low achieving “losers” vary greatly in how they relate to the world around them. “Losers” tend to be “in their own space” and concerned with their own agendas and requirements. In comparison “winners” are more aware of the needs of others and more sensitive to developments in the external business and market environment.

Let’s look at the findings in more detail, starting with the less successful entrepreneurs and boards or “losers”. Because they are largely preoccupied with themselves they are often unaware of impending external challenges and pressing requirements to change. They simply do not see them. Many of them appear oblivious to significant developments in the market places in which they operate.

Our “losers” also fail to “read the road ahead”. They do not anticipate. They are not alert to threats and opportunities. Hence, when they do wake up to what is at stake they may have little time in which to adapt even if they had the will and means of doing so. Their reactions are often under pressure and ill considered. For example, they may weaken their longer term competitiveness by quickly and indiscriminately cutting costs in an economic downturn or recession.

“Losers” just hunker down. They make cosmetic references to environmental and social concerns in annual reports and accounts. They stick to what they know and feel comfortable with and plough ahead regardless, hoping any problems they encounter will blow over. If they do stop and take stock of where they are it is generally infrequently. Whatever changes are made tend to quickly become permanent features.  They are not flexible, in command and steering their enterprises.

Often “losers” will resist opportunities when responding to them would require changed practices and behaviours. New requirements may be perceived as distractions until such times as they become so pressing and potentially lucrative that they can no longer be ignored or avoided. Some only act when legislators or competitive activity requires them to do so.

In contrast, the boards of successful companies or “winners” have more acute and sensitive antennae. They look out for the weeds that can foul propellers. They also actively scan for ideas that might benefit their customers. In short they are aware of what is happening around them and in the business and market environment. They are also entrepreneurial. They view problems as arenas of potential opportunity and take the initiative in shaping the future, challenging assumptions to create new options and choices.

“Winners” identify and monitor economic, political and technological trends, and assess their likely impacts upon both themselves and their customers. They then consider what if anything they should do in response. In addition to always being vigilant, systematic exercises are undertaken on a regular basis, and at least once a year. Resulting actions are subsequently reviewed and if need be challenged and amended as events unfold.

Because they look ahead and anticipate, “winners” generally give themselves sufficient time to register, react and adapt. In an economic downturn or recession they don’t just seek economies. They also seek opportunities to build market share, for example by taking over a failing rival, or gain competitive advantage by recruiting key staff who become available or investing while interest rates are low. Changes are made in a considered way as and when they are needed. They are often implemented before they are imposed by others, or otherwise formally required.

People in winning companies address problems rather than conceal, ignore or avoid them. Hence, they do not build up to a point at which they are either insurmountable or appear to be. Steps are taken one at a time. A series of adjustments over time – some small others more fundamental - may allow “winners” to cope with radically altered circumstances.

Perhaps the key difference is that “winners” do not just think about themselves. They also consider their customers and how a development such as the discovery of oil, economic hardship or new environmental legislation might impact upon them. They look for ways of helping their customers to respond, and in so doing build closer and mutually beneficial relationships with them.

In addition to being alert and thinking about your customers, are there processes or approaches you could adopt to stay on top of developments and benefit from them? Yes there is. Smart companies have an issue monitoring process (IMP) and carry out formal issue monitoring and management. This supplements but does not replace “eternal vigilance”.

If not undertaken more frequently IMP could be an annual exercise to which all board members, key personnel and even customers, suppliers and business partners might be asked to contribute. It should also precede any annual budgeting or planning exercise as these activities should take account of external realities and developments.

IMP participants are asked to identify major issues, trends and developments in the external business environment, and consider: (i) how will they impact upon firstly the company and secondly its customers and suppliers; (ii) what the company needs to do in response at local, operating unit and group levels; and (iii) how it might be able to help customers and suppliers to respond (i.e. possible business opportunities).

Experienced users of IMP find that it is difficult to track more than ten issues, and better to concentrate effort on a smaller number of the more significant ones. To aid comprehension the summary of each issue, its impacts and what needs to be done in response should, ideally, be no more than a page. Those reporting issues should be asked to think through their implications and make practical recommendations for action to confront challenges and seize opportunities.

Significant positive developments and negative issues need to be continuously managed. If left unchecked even minority interests can grow like waterway weeds and block navigation. Proactive approaches can generate goodwill. For example, BP-Amoco acknowledged the risks of global warming ahead of other oil companies and announced its intention to seek specific reductions in carbon dioxide emissions.

In summary “winners” live rather than simply exist. They are an integral part of the world in which they live, anticipating, influencing and interacting with external developments. Their success reflects what they do to help others to survive and thrive.

© Colin Coulson-Thomas, 2009