Archive for the ‘Post of Note’ Category
Posted on August 13th, 2008 by Julie Garland McLellan »Permalink
In a recent article on Train Wreck, Steve Tobak put forward the idea that corporate governance is a myth. He based that hypothesis on the assertion that there are no consistent and effective laws, methods and metrics governing public companies.
From my years of experience with public company boards and directors, I would agree about the lack of consistently effective laws or methods for governance. But I would also give a bit more credit to those who serve on corporate boards. I have worked with quite a few in my day, and most have been peopled with ethical and hard-working directors and have managed good standards of governance, often under trying circumstances.
Through my work in corporate governance, I have come to view governance as a social system that is very dependent on the qualities and characters of the people involved. I have also come to recognize the key elements of a successful board – and a successful corporate governance program. While I have been fortunate to witness some real success stories, I do agree with Mr. Tobak that such stories are not nearly as common as they should be. For that reason, I’ve outlined below what I believe are crucial factors for a successful board that truly serves its shareholders.
Straight Talking. The first requirement for a successful corporate board is a willingness to tell – and hear – hard truths. Good governance requires guts, and good boards are made up of brave and courageous people. I know about the sorts of boards that led Steve Tobak to write his article – the very sorts who would never dare to hire a consultant (such as myself) who might tell them the truth.
Knowing the Goals. To discharge their responsibility to the shareholder requires a board to understand what type of shareholders they have and what type of performance the shareholders are looking for. For a large listed company, this is no mean feat. Responsible, successful boards invest time and effort on communicating with their shareholders to ensure that investors understand the company’s direction, goals, and likely outcomes – with a keen awareness of their responsibility to represent the interests of minority shareholders along with those of larger investors.
Planning Strategy and Execution. Once the board has worked out what is acceptable performance for their shareholders, they reach the real challenge: ensuring that the company has a strategy that will deliver that performance. It is imperative that the board should contain individuals with a deep understanding of both the company’s business and the industries in which it operates, as well as any geographic regions and key customer needs. It is also imperative that the board should be independent of management and capable of thinking through an independent line of analysis.
Defining Success. Boards must take responsibility for developing key performance indicators (KPIs) and ensuring that management report these diligently and accurately. Reporting must be comprehensive and timely enough to ensure that the board is aware of performance without being so cumbersome that it hampers management’s ability to deliver. Developing good KPIs is more of an art than a skill — something that boards get better at with practice.
Building a Team. When the board has endorsed the corporate strategy, they then have a responsibility to ensure that there are sufficient skills within the boardroom for appropriate oversight of the strategy as management set about implementation. Sometimes the best person to add to a board is one who makes the other board members slightly nervous. It requires courage to recommend such appointments to shareholders, but a good chairman will seek out such directors, confident that they add value to the board, even if they do make his job more difficult.
Leadership on Compensation — both for the board and for executives. Many people consider “independence” in this sense to mean sufficient personal wealth that board directors need not rely on fees paid for board appointments. That is a sadly deficient definition. It is not uncommon for board members to become almost addicted to the status of his or her membership. There is a difference between loyalty to the board and a slavish desire to remain on the board.
My personal preference is for a board fee that adequately compensates board members are the risks and liabilities of the position as well as the considerable time and expertise that it requires. Like Mr. Tabek, I have found that stock and options provide incentives for board members to further their own interests over and above those of shareholders, although I know many ethical directors are paid in that manner and would never do any such thing.
The board must also give thoughtful guidance as to executive compensation. Again the issue of options, whilst intended to align interests with those of the shareholders, can provide perverse incentives. Boards need to ensure that executives are paid sufficiently well to stay on board, without risking an unacceptable transfer of wealth from the shareholders to the CEO.
Effective Oversight. Having decided on the remuneration mechanism, the board must develop a close relationship with the CEO so that they can oversee performance and ensure that ethical behaviour in the best interests of the company and the shareholder, rather than incentive-driven behaviour in the best interests of the CEO’s pay packet. As Steve Tobak points out, it is easy for a board to condone behaviour that raises the share price in the short-term whilst undermining the long-term sustainability of the organisation. Good boards do not take the easy route, instead understanding the key attributes of the strategy and linking compensation to achieving strategic milestones.
These things can be consistently measured and compared across different companies – but of course they don’t tell you whether or not the board members are ethical, independent and fiercely committed to the success of the company. You cannot legislate for ethics or commitment. All you can do is hire the best available board members, support them in their endeavours, and hold them to account through appropriate disclosure. However, if you do that, my experience suggests that you will get good governance.
Tags: Tags: corporate boards, shareholder value, corporate governance
Julie Garland McLellan has over 20 years experience in strategic business development in resources, utilities and energy industries. She is currently a corporate governance consultant with Blackrock ITS, a leading Australian IT services and solutions firm. Previously, she served as associate director with McLennan Magasanik Associates, and a board member of the Victorian Minerals and Energy Council, the Victorian Energy Networks Corporation (VENCorp), the Melbourne University Engineering Foundation and City West Water. Julie has an honours degree in civil engineering from City University in London, an MBA from the leading Spanish Business School (Instituto de Empresa in Madrid) and is qualified in finance and corporate governance.
Posted on July 16th, 2008 by Julie Garland McLellan »Permalink
I was at a company directors’ conference recently where my colleagues and I began discussing how we anticipate that company directors’ roles will change in the future.
We all agreed that company directors are under increasing pressure to add value to businesses, and that there will be growing scrutiny about their impacts on the bottom line. Some of this discussion is already happening.
So where do board directors really demonstrate their value? My friends are all sure that their ability to develop and institute sound governance policies adds value by reducing risk. McKinsey & Co in their 2005 Global Investor Survey revealed a willingness by investors in Asia to pay up to a 25% premium for companies exhibiting good governance policies. You can bet that in the future, boards will be mindful of this in developing governance processes and procedures that instill confidence in the minds of investors and the public.
It is likely that the biggest value added by good governance practices is the time that is saved through automation and stream-lined processes; this can be put to use in the strategic performance related areas where competitive advantage is created.
Savvy board members will likely work to engage their communities in efforts to gauge how governance is measured – and track the value that the board has added in the process, so that it can be captured and reported to shareholders. This is no small task. In my experience, when boards do a 360 degree performance review they often find that the further from the boardroom, the lower the perceived value added by the board. The best boards are now focusing their performance review on specific activities and SMART metrics that ensure performance is recognized.
As companies begin to focus more closely on just what it is that board members do in their roles, these kind of value-add calculations will be important metrics that will impact the share-price in the same way as production data. Is your board ready that brave new world?
Tags: corporate boards, Controls Intelligence, IT, ROI, shareholder value
Julie Garland McLellan has over 20 years experience in strategic business development in resources, utilities and energy industries. She is currently a corporate governance consultant with Blackrock ITS, a leading Australian IT services and solutions firm. Previously, she served as associate director with McLennan Magasanik Associates, and a board member of the Victorian Minerals and Energy Council, the Victorian Energy Networks Corporation (VENCorp), the Melbourne University Engineering Foundation and City West Water. Julie has an honours degree in civil engineering from City University in London, an MBA from the leading Spanish Business School (Instituto de Empresa in Madrid) and is qualified in finance and corporate governance.
Posted on June 27th, 2008 by Julie Garland McLellan »Permalink
During a recent talk recently with some colleagues, we ended up in a lively discussion on how information technology is considered by – and presented to – corporate boards.
One of the key issues we discussed is the gap between the real-time, active reports on internal operations enabled by continuous controls monitoring and the static reports that are inevitably shown to corporate boards. Even at some of the most forward-thinking companies, where these solutions provide varied functions and departments with real visibility into internal operations, the board almost always sees a PowerPoint or Word summary of those operations, which they are expected to use to make strategic decisions.
These kind of static summaries are about as useful or representative as a single frame from a movie – yet the board is expected to make decisions on this information, which may already be outdated by the time it is formally presented.
The consequences can be serious. Given how long it can take to plan and execute a board’s strategic initiative, acting on information that is out of date can be disastrous. Consider, for example, a retailer whose most recent sales summary shows an increase in sales in an Indian market, prompting board decisions to invest additional resources in building a factory there. Implementing such a plan can take a year’s worth of work, from construction to hiring. Now consider that, two months into planning, sales in that market stagnate. In order to plan effectively and avoid wasting resources – perhaps put the project on hold for a bit – the board must have regular access to the real-time operational visibility available to company employees.
This is where boards could really benefit from continuous controls monitoring – and its capabilities for generating rules and exceptions to rules using real-time data. If boards were able to tap into this intelligence, they could make decisions incorporating these rules to allow for changes in circumstances. So, for example, they could plan to build a factory in India provided that sales stay within certain defined parameters – with sales below those figures to be flagged as exceptions and reviewed by the board.
By taking assumptions out of planning and instead hardwiring set parameters into a project plan, the board can be sure that key assumptions are always factored in, and that they are working with the most up to date, accurate intelligence possible.
We often hear talk of how investments in governance, risk and compliance can bring broader ROI to the enterprise, and this is a key example of how visibility into controls can have far-reaching positive impacts on a company.
Tags: corporate boards, Controls Intelligence, IT, ROI,
Posted on June 17th, 2008 by Julie Garland McLellan »Permalink
Corporate boards can (and should!) operate with a primary focus on revenue-generating activities. This is the bread and butter of any corporate operation, and the board’s duty to shareholders means that profit must be top-of-mind.
Unfortunately, at times boards and those with other fields of expertise – say IT or finance or HR – can seem to be speaking in different languages about the initiatives they are pursuing, and failure to map plans and ideas to the board’s priorities can cost an operation valuable time and resources.
Consider IT, for example. How a board considers IT expenditures can vary widely and ultimately impact how widely IT initiatives are deployed, how deeply they are supported, and whether they’re allowed to continue after initial roll-outs.
Oftentimes, boards will approach IT expenditures globally, establishing budgets for the entire enterprise without establishing criteria on how that budget can be spent. Many boards evaluate proposed projects based on the total project cost. Some boards will also consider the credibility of the IT department and past successes at coming in on budget, being installed on deadline, and that the implementation “worked” (defined as, “it did what it was supposed to do”). What these approaches fail to consider is the impact of IT expenditures on profit – and thus, the enterprise as a whole. When boards focus solely on IT implementation checklists, they fail to consider the truly important metrics – whether Product X or Software Y allow users to increase efficiency, improve speed, or compete in new sectors – and the ultimate impact of those IT expenditures on the company’s bottom line.
What boards should really be considering when evaluating IT expenditures is whether the proposed new technologies will allow the business to accomplish goals that it couldn’t before, along with the strategic impact on the company of accomplishing those goals. Factors like keeping up with the competition or avoiding being stuck with a legacy system are non-issues unless they somehow affect P&L statements.
The real concern for boards should be in accurately evaluating how IT will improve the business, how the success of IT initiatives will be evaluated, and what the return on investment will be. Boards should be calculating ROI for all of their decisions. Simply put, if something’s big enough to bring to the board, it’s big enough to justify an ROI calculation.
Information Technology has brought tremendous changes and benefits to corporations throughout the world, and we know that’s a trend that will continue. But to ensure that companies invest smartly in IT, it’s crucial to factor in ROI from the outset.
Tags: corporate boards, IT, ROI
