One Minute Governance

Boards are an important part of corporate governance in most organizations, but an effective board is not the same as good governance.

Background music is Of the Stars by KC Roberts & the Live Revolution

SCRIPT:

I said earlier this season that board effectiveness and good governance aren’t the same. When I say “board effectiveness” what does it mean to you? I even struggle with this one, which is troubling given that my company is called “Fullbrook Board Effectiveness.” My URL is even boardeffectiveness.ca. If anyone would have a pithy, inspiring definition of board effectiveness it would be me, right? Let’s put that aside for a second and ask another question: “If your board is effective, whatever that means, do you automatically have good governance?” Thinking through the previous episodes from this season, we already know that good governance isn’t box ticking compliance, it’s not good operational performance, it’s not succession planning, etc. I don’t even think it's all of those things mushed together. On top of that, I think we’ll all instinctively feel like having a great board is somehow also not enough to have good governance. Even amazing boards are still reliant on great managers to help them to access the right information at the right time, facilitate great meetings, generate exciting strategic options, and so on. So already we know that great boards are only POTENTIALLY great unless they have great management. But a great board would always hire great managers, right? That one gets a “lol” from me. Anyone who’s ever had responsibility for hiring and promoting people knows that no matter how perfect your processes, you can never guarantee you’ll get it right. There are other ways we could explore this question, but I think I’m already convinced that board effectiveness and good governance aren’t the same thing. But what is board effectiveness? I’m open to suggestions, but for now let’s steal from our definition of good governance a few episodes back. Board effectiveness is when a board is working to create conditions  in the organization that maximize the likelihood that effective decisions will get made.

Organizations that survive for a long time - generations, even - are really impressive, but it doesn't mean they have good governance.

Background music is Of the Stars by KC Roberts & the Live Revolution

SCRIPT:

I contributed to a paper a few years back that found over a 50 year period that family-controlled listed companies were significantly more likely to survive for the entire stretch than non-family firms. Cool finding, right! The problem is that it’s not all that clear to me that survival is always a good thing. I can imagine myself being a founder or business owner who, for example, resists an offer to buy my company – one that might be in the best interests of my organization and its stakeholders – just because I want to stay in control or keep my name on the door. There’s nothing wrong with that – as the owner, it’s my prerogative. I can kinda do what I want. But in this case surviving – aka not getting absorbed by another company – is clearly not the same as good governance. Of course there may be cases where survival *is* indicative of good governance. A company that survives and thrives over a long time probably didn’t succeed in spite of bad decisions. I think the point here is similar to a couple of episodes back where I argued that good financial performance isn’t the same as good governance. It can be pretty tempting to look at a company that has survived for a long time – generations, even – and think that just because it continues to exist it must have great leaders and effective governance. But if we take a moment, we can all imagine how an organization might survive despite awful governance, maybe on the fumes of what was once a great idea. Sure, it’s surviving, but is it “living”? Is it “thriving”?

I don't care how good your return to shareholders is...it doesn't mean you have good governance.

Background music is Of the Stars by KC Roberts & the Live Revolution

SCRIPT:

I’ve already talked about stakeholder capitalism vs shareholder capitalism a bunch of times on OMG – have a listen to episodes 5, 31, 48, 52, 56, etc. So I’ve already established pretty clearly that I believe organizations can and should make decisions that take into consideration the interests of a broad range of stakeholders – not just shareholders. So in the assessment of whether shareholder value and good governance are the same thing, that’s my stance. If you make decisions that generate value for shareholders without taking the interests of other stakeholders into account, I believe that’s BAD governance. What makes this a bit tricky is that there are jurisdictions – the United States, for example, where boards are *required* to prioritize the interests of shareholders. In other words, if the board makes a decision that benefits some other stakeholder at the deliberate expense of shareholder value, then they have failed to discharge their legal duty. I encourage organizations in the U.S. to remember two things. Even when the interests of shareholders seem at odds with those of other stakeholders, they probably aren’t. If you take time to generate multiple options and examine them through different lenses and different time horizons, there is almost always a path that benefits shareholders and, say, the environment. The other thing to consider is this: what if the rules are bad – and I’m not saying they are…? What if a change in the rules would be good for your organization, for your customers, for your employees, for your country, your society? There are lots of loud voices in the U.S. speaking up in favour of stakeholder capitalism. Maybe you could add your voice to the chorus.

I don't care how good your financial performance is...it doesn't mean you have good governance.

Background music is Of the Stars by KC Roberts & the Live Revolution

SCRIPT:

Corporate governance evolves *slowly*. Even in a single boardroom, real governance change tends to happen at a glacial pace, but on a system level…man. Seriously, every single little change to regulation – however, toothless or insignificant – gets treated like some kind of revolution, and then the real-world impact is basically nothing more than symbolic, or maybe a tiny addition to public disclosure. Perhaps the most frustrating example of things that take forever to change is the insistence among many corporate leaders that as long as an organization is performing well, it must have “good governance.” I agree to a tiiiny extent, in the sense that if you observe performance over a long enough period, say 20 years, then a corporation with great performance is unlikely to have awful governance. Right? A failure to make effective decisions for 20 years would only lead to amazing long-term performance with extraordinary luck? As for short- and medium-term performance, anyone who insists that they are useful indicators of good governance can go fly a kite, if you know what I mean. Let’s think of some governance disasters – oh right, we listed some a few episodes ago: Enron, Theranos, etc. and others we didn’t mention like Wells Fargo or Boeing – you know what most governance catastrophes have in common? The catastrophe is revealed in the wake of AMAZING financial performance. Think of the Financial Crisis – basically the culmination of a thousand awful decisions by a thousand corporations, all performing EXTREMELY well! Nah, financial performance is not the same as good governance.

I often hear people say that hiring the CEO is the most important thing that a board can do. Still, even doing a great job at hiring a CEO isn't the same thing as good governance.

Background music is Of the Stars by KC Roberts & the Live Revolution

SCRIPT:

I had originally planned to do an episode later this season called “Is hiring and/or firing the CEO really the most important thing a board does?” and maybe I still will, but I feel like this topic fits nicely in the sequence we’ve got going on right now. The idea that a board’s most important job is always to choose the right CEO kinda bothers me. I think the problem is that it seems like such a lazy, unambitious concept of what makes boards valuable. And also puts too much emphasis on one element of good governance – an important one, at that – but still just one piece. If I were trying to describe my ideal board of directors, it wouldn’t sound anything like “you better hire the perfect CEO, and if you don’t…you better fire them quickly and make sure the next one is perfect.” As far as I know, most CEOs are just people. Some people are exceptional leaders of people OR projects. Very few people are exceptional at both. Regardless of what your CEO is great or awful at, don’t you think that what differentiates an average board from a great board might be its ability to help to activate the CEO’s superpowers, and provide a bit of air cover around the CEO’s weak spots – however tiny they might be? Sure, every board needs to take the selection of the CEO REEEAAALLLY seriously, and to be courageous enough to fire the CEO when it’s time to go in a different direction. But the *most important part of a board’s job*? I’m not so sure about that.

Increasing emphasis on corporate purpose is a *really* good thing, but it's not the same as good governance.

Background music is Of the Stars by KC Roberts & the Live Revolution

SCRIPT:

This is probably the most obvious of all the titles in this sequence. Of course purpose is not the same as good governance. Take any incorporated entity, from a one-man-shop like my company, Fullbrook Board Effectiveness, to let’s say Amazon, it’s really helpful to be able to answer the question “why does this organization exist?” if you want good governance to  happen. Does Fullbrook Board Effectiveness Inc exist just as a tax shelter for my work, leaving me free to just kinda do whatever I want for a living? Does it exist to make the world a better place by helping organizations to make better decisions? Is it something else? Without some clarity, it’s hard to figure out if you’re making good decisions. Imagine being a director on the Amazon board and starting to come to terms with the organization’s countless operational activities and hundreds of thousands of employees. Without a clear understanding of Amazon’s purpose, it would be impossible to sit at the table and assess the potential value of a new opportunity, or even to know what kind of questions to ask or what conversations to have. Purpose, mission, vision…they’re all so important to sorting through the paths in front of you that it’s hard to imagine good governance without them. But even when you get them right, there are still a lot of factors that affect decisions, like culture, people, processes, physical space, legal constraints, and, well…you get the picture.

LOTS of experts will tell you that corporate governance is all about strategic oversight. I'm here to argue that there's a lot more to good governance than that.

Background music is Of the Stars by KC Roberts & the Live Revolution

SCRIPT:

Let’s get something important out of the way right off the bat: good corporate governance and board effectiveness aren’t the same thing. In fact, there are plenty of incorporated entities out there that don’t even have functional boards of directors, but that doesn’t mean they don’t have good governance if we stick with the definition of good governance from a few episodes back. Either way, if there is one challenge that’s generic to just about every BOARDroom I’ve been in, it’s the struggle to find the right balance between the board’s focus on operational matters vs it’s focus on strategy – or, how much do we reflect on the past vs. how much do we dream about the future? It’s *very* common for people who talk about corporate governance to emphasize that the board has little to no role in operations, and should spend as much time and energy as possible on future-oriented strategic matters. We’ve talked about this a bunch of times before on OMG so I won’t belabor it. Suffice it to say that I believe boards can and should focus on whatever they think is going to result in the best decisions for the organization and its stakeholders. But even in a case where a board chooses to focus on day to day minutiae, or even to run the organization entirely, that doesn’t relieve them of their obligation to make sure that the organization has a well-articulated purpose, strategy, strategic plan, and objectives. Either way, it’s pretty clear that strategic oversight is not the same as good governance.

Sure, the "G" in ESG stands for "governance," but ESG and good governance aren't the same.

Background music is Of the Stars by KC Roberts & the Live Revolution

SCRIPT:

ESG is an initialism referring to Environmental, Social & Governance. I remember when I first heard the term ten, eleven, twelve years ago, I assumed that what it was trying to get at was an organization’s governance when it comes to environmental or social factors, and it’s secretly how I continue to think of the term. But that’s not what ESG means out in the real world. ESG is really just a catch-all for non-financial factors that people might want to take into consideration when running an organization or measuring an organization’s performance. Whether you like my definition of ESG or the real-world definition, or some other interpretation, I bet it has started to impact your idea of what good corporate governance looks like. Here’s a generic example: if an organization fails to take environmental or social factors into consideration when making an important decision – say, opening a new mine, or cutting down old-growth forest – I ma, they completely fail to take any interest at all in the potential environmental or social impact of their decision…is that good governance? OF COURSE NOT! Not just because it seems somehow immoral or evil, but because it’s important to consider as many factors as possible or else we’ve failed to create the conditions for an effective decision. But let’s say we DO take E and S into account when doing G. Is that sufficient on its own to say we have good governance. Um…no.

Thinking of compliance as good governance is probably the most common, and distracting, false equivalency in corporate governance.

Background music is Of the Stars by KC Roberts & the Live Revolution

SCRIPT

I spent nearly 20 years running a project at the University of Toronto’s Rotman School of Management that resulted in a couple of different sets of what we called “board ratings.” Fundamentally, these board ratings were just sets of rules against which we would score the governance disclosure of big listed companies. If a company’s disclosure was in line with the rules, they would get a favourable board rating. Even just describing it out loud makes it seem kinda silly, doesn’t it? Applying generic rules to 250 different companies in different industries with different models, structures, sizes, and people. The implication being that somehow I – as the manager of the project – had come up with the single answer to what an effective board is, and thought I could measure it through public disclosure. Well, as absurd as that sounds, it’s basically the same as most of the rules, regulations, and laws that apply to corporate governance. And lots of corporations OBSESS over complying with all of them – even the optional ones like the board ratings I managed. It helps them to signal to the world that they have good governance. But when it comes to our definition of good governance, compliance is virtually meaningless. There isn’t a single regulation or law that sets corporations or boards up to make good decisions. That doesn’t mean compliance is bad or useless – in fact it’s probably pretty valuable for a lot of reasons. But good governance isn’t one of them.

If I'm going to give you a definition of GOOD governance, I guess we'll need one for BAD governance, too.

Background music is Of the Stars by KC Roberts & the Live Revolution

SCRIPT

In the previous episode, I suggested that we define good corporate governance as creating conditions that maximize the likelihood that effective decisions will get made. I’ve had months to sit with it, and you’ve only had a few days but it still gives us a useful starting point for a bunch of conversations. Including thinking about what BAD corporate governance might mean. The most high-profile conversations about bad governance – or good governance, for that matter – are usually triggered by big, sexy crises or blowups. Especially if there’s a criminal or systemic element to the story. Theranos, Volkswagen, Enron, the Financial Crisis…they all prompted interesting conversations about corporate governance and in some cases played a role in kicking off major policy changes affecting disclosure requirements, board composition, and more. But does bad disclosure mean you have bad governance? Does less-than-perfect board composition mean you have bad governance? What, really, do the Volkswagen, Theranos, and Enron cases have in common that they don’t ALSO have in common with lots of other organizations that have never had a crisis, and never will? Maybe I’m overstepping here, but could the definition of BAD governance just be the absence of good governance? In other words, the definition of bad corporate governance is NOT creating conditions that maximize the likelihood that effective decisions will get made. It’s a bit of a scary thought, isn’t it? What even ARE the conditions that make effective decisions happen? Before we get into it any further, let’s take a break for a few days and sleep on it.