Happily ever after. Part III / by Alexander Lyadov

My notes from the 3rd module of Board Direction program

The Board Direction program was created by Ukrainian Corporate Governance Academy for current or future board members of private, public or state-owned companies. The modules are taught by the invited professors from top business schools such as INSEAD and London Business School. In order to better internalize all the ideas I learnt from the lectures, cases and internet articles I am publishing these notes made during my study. I thought they might be of interest to those, who like myself are eager to learn how to build truly effective and value creating Boards. I worked as a Board Director in various companies and witnessed firsthand how that governing body alike scalpel surgeon could be an instrument of healing as well as of destruction.

Attention! These notes are NOT what the professor said or what was written in the study materials - there are just my thoughts extracted from all the content I heard and read during last week in various sources, which was filtered through my perception and personal experience. It should also be noted that for the reader some of the ideas may sound unclear or even contradictory, as they require knowledge of particular context or my additional explanation. Thus if you have any questions, comments or complaints, please address them only to me personally. 

Governance and Strategy
Corporate governance is the balance between Power to Direct (Who?) and Accountability (To Whom?).

The challenge with inviting Independent Directors is that they often don't know your business.

You may need different people on the board once things got better (to address new challenges).

When board successfully resolved current company's crises, before stepping out it should ensure that proper processes and controls are in place in order to avoid failure again.

As a Chairman you should be ready to step in as a CEO.

Strategy is a Process, not an Event.

Should we consider Competitive Advantage as Durable or Transient? Check the book: "The End of Competitive Advantage"

Group-level strategy: Why we are in these businesses - may be someone else would better running it?

The existence of the parent creates direct and indirect costs… to justify these costs, the parent must add more than equivalent value… ideally, the parent should add more value to its businesses than any other rival would.

The reason why family business have various businesses is to diversify it's wealth.

Governance and Strategy are interrelated.
- Governance: Who directs the firm? (base: Law)
- Strategy: What is the firm's direction? (base: Economics)

Business strategy - how to create value and how to capture it.

Board: do we really want to be in that business? Pay attention to industry profitability, e.g. pharmaceutical vs airplanes.

Business Model:
- WHO are you customer?
- WHAT are you offering?
- HOW are you doing that?

Strategy is what NOT to do.

Blue Ocean concepts help us examine opportunities for new market space creation and attracting non-customers.

Blue Ocean: Source of profitability comes not from industry attractiveness or narrow market segment positioning, but from the firm’s strategic moves that ‘reconstruct’ industry boundaries.

"I want to think out of the box, but where is the box?" -Unknown

Corporate Governance doesn't not make money, it's a cost (pain) to protect you by avoiding problems.

Most frequent board mistakes according to observation of Louise Hedberg from East Capital:

- Lack of board diversity
- Chairman is the same person as CEO (no accountability)
- Former CEO as a Chairman (influence of past on present, not admitting mistakes)
- Fake boards (all key decisions are taken outside the board).

Shareholders: Different Values, Different Methods
Different shareholders (of your company) differ by values (external vs internal) and methods (vocal vs silent). Thus there is a matrix of 4 types: Activist, Trader, Entrepreneur and Sleeper.

Shareholders may change their type, e.g. Sleeper might wake up and become Trader.

Therefore ask yourself how well do you know your shareholders:
- Who are they exactly?
- Does an owner strategy exist?
- How are shareholders changing (identity/type)?

Activist Investors are activists who target poorly performing quoted stocks in order to take a minority stake, obtain a change in strategy and/or structure and sell the shares at a significant profit.

Important trend: especially in the USA but also in Europe and Asia, activist investors have grown significantly ($30 Bio in 2010; $130 Bio in 2015).

Traders mover firms by expectations (punish for not following the trend).
Activists drive firms by interventions (punish for doing it wrong).

What is the BEST strategy... for WHOM? (CEO, state, particular investor etc.)

Owner Strategy
In many contexts, there is a Principal Shareholder group:
- Family business (even if listed: i.e. FCA, Merck, Tata)
- Founder-led firm (even if listed: i.e. Google, Facebook)
- State-held firm (even if listed: i.e. Swisscom, Renault, RBS)

For good governance, make sure that owner strategy is a) Defined in advance, and b) Revised as necessary.

In the state-held firm, owner strategy should address:
- Public welfare
- National employment
- National technology development
- National security and independence concerns

Board of Directors: The Interest of the Corporation
Board of Directors have different roles in different countries:
US: "...on behalf of stockholders"
UK: "...in the interests of the company"
Germany: "...in the best interests of the enterprise"

Board upholds the organization’s viability, survival.

Independent directors often are good at evaluating external factors, but not so good at evaluating internal company's capabilities.

Board Director. Criteria for Independence:
1) Non executive (and not former exec)
2) Not associated w/Stakeholders or Mgmt
3) Not entrenched: limited length of tenure

 Targeted board composition in terms of:
- Board know-how (finance, internet etc.)
- Board roles (controller, creative etc.)
- Board demography (female, male, mature, younger etc.)

Minimum 20 days and maximum 40 days of work annually are expected from Board Director.

When being offered board position the first question should be "In whose interest is the firm being run?".

The Evolution of Corporate Governance: With Scope, with Risk
Start-Ups. Key Governance Issues:
- Board: experience and decisiveness
- Founders: imagination and sense of realism
- Ownership: interests at entry and conditions of exit

Triggers for Rethinking SME Governance:
- Scope: new markets; new risks
- Finance: new Investors; new creditors
- Performance: underperformance; negative surprises

When company is in crisis, as a board director you are already in, it's too late to resign (you are in troubled plane without a parachute). So it's better to engage in.

"Mr. Corleone is a man who insists on hearing bad news immediately", the Godfather movie.

Form vs Substance: be careful when introducing the notion of the board to an "innocent" owner.

The Independent’s Personal Challenge: Transforming the Board:
1) Before accepting the position do your research and be clear about expectations?
2) Do your work to improve governance, but don't do it alone (form a coalition)
3) Be prepared to resign if governance remains unacceptable

Board Director, never accept the job that you can't afford to loose.

The Governance of Succession in Family and Founder-led Businesses
With succession, the power to direct changes hands.

Succession - amazing how rarely boards discuss that - should be on agenda every year.

Succession for continuity is more often than succession for change.

Question - are you the right stuart of those assets?

Succession Model 1: Preserving Empire
My tenure will end < --- > the organization must continue

Model 2: Change to stay alive
My tenure will end < --- > the organization must change
Why don’t more leaders think this way?

Model 3: Holding on until the end
My tenure can’t end < --- > the organization must continue

Model 4: Serial entrepreneur
My tenure may end < --- > the organization must change
Why don’t more leaders choose this route?

Surviving Autocrats and Stalemates
Success as a red flag for governance (I): when it's based on a person - dependance on an autocratic leader.

Typical Autocratic Leaders: Examples:
- The autocrat controls all the key internal relationships (i.e. Jobs)
- The autocrat holds all the key external relationships (i.e. Dassault)
- The autocrat is a uniquely gifted businessperson (i.e. Li Ka Shing)
or… the autocrat is a combination of all of the above

Typical Autocrat Leaders: Solutions:
- Internal relationships: reorganization
- External relationships: board counterparts
- Uniquely gifted businessperson: systemization

Advice: Don't be the first external CEO of the family business (most likely to fail).

Typical Stalemates: Examples:
1) Joint ventures with opposing partners (e.g. Wahaha vs. Danone)
2) Family firms with feuding factions (e.g. son vs. daughter)
3) Listed companies with large, opposing shareholders

Typical Stalemates: Solutions:
1) Joint venture: Buyout, dissolution
2) Family firm: Diplomacy, psychology
3) Listed company: Shareholder lobbying

Success or Failure: Frames of Reference
Success as a red flag for governance (II): Cognitive Processes
- Success based on a formula: "This is the way we have always done it" (Microsoft, SAP etc.)

Failure as a red flag for governance (II): Cognitive Processes
- Cognitive dissonance: Inability to reframe - "I see the data, I don’t see the problem" (Apple (90s), Kodak etc.)

Our own frames:
- What are your governance frames? i.e. Roles of shareholders, directors, executives
- What are your strategy frames? i.e. Focus vs. Diversification; Cost vs. Quality; Old vs. New
- What are your information frames? i.e. Best-source vs. Multi-source; Quantitative vs. Qualitative

The origins of active Inertia lie in the commitments that once helped us to succeed.

Corporate Governance: Power to Direct (who?) <---> Accountability (to whom?)
- Ends: Legitimacy, Confidence, Guarantee
- Means: Actions, Procedures, and Controls

 

To read the Part I of notes, please read here

To read the Part II of notes, please read here


Credit photo studio-kerozen.com