ON DIRECTORSHIP is by PETER TUNJIC.

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 a leading voice in the re-discovery of what corporations are and why they exist.

The Mechanics of Boardroom Performance

 

 

“For every winner, there’s a loser.  And that person didn’t really need to lose. They just didn’t understand the game plan.”

Buzz Aldrin

Only seconds on the clock.  Brett Favre, in only his third game for the Minnesota Vikings, receives the snap, pumps, dodges then releases a 32-yard touchdown pass to wide receiver Greg Lewis to defeat the San Francisco 49ers .

Now imagine the same game but with no huddle before any play.  No signal call. No idea if the Vikings are in offence or defence.  And all players thinking they’re the quarterback.  In short, no idea but to improvise, throw a bomb in the direction of the end zone and try not to break any of the rules.  This is not the National Football League.  It’s the playground.

In the playground there’s no game plan.  In fact, no matter what code of football, without a plan everyone tends to scramble, chase and go long.

The game plan connects the team to the objective.  It provides the invisible mechanics that makes success possible.  Who’s on the field, their role and approach to the game deliberately revolve around whether the team is in offence or defence and the state of the game.  Indeed, wherever there is shared endeavour to a common objective you tend to find natural and logical mechanics that describes who does what, when and how.

Whether on the playing field or within the boardroom, a talented team will only be as good as their game plan.

The Mechanics of Governance

Today, the closest thing to a game plan in the boardroom is what I call the “Jensen Defence”.  Named after Michael Jensen and William Meckling, who started a revolution in the boardroom with their 1976 academic paper, the Jensen Defence is structured around the “democratic” objective of the corporation – the preservation and creation of shareholder value.

It’s defensive because it’s based on the assumption that top managers are motivated to maximise their personal return and that directors, as the so called   agent  of the shareholders,  must ensure that top manager don’t exploit their position to the detriment of the true “owner”.

The Jensen Defence, more commonly known as “agency theory”, argues the need to line up board structure, composition and process in the direction of the democratic objective:

  • Most directors should be independent
  • The CEO should not be the chair
  • Directors should be financially aligned with the shareholders through ownership and incentive compensation
  • Directors should be generalists
  • Directors should vigorously monitor management

    Though not the only boardroom plan, it’s the most popular having been adopted by boards, regulators and educators as best practice.  Indeed, it’s arguable that no management idea has as many devoted and one eyed fans.

    But as a plan, three flaws stand out.

    First, it’s simplistic.  The Jensen Defence relies on the assumption that if you get the right inputs of structure, composition and process you’ll get the right output of shareholder value.  But, these are only rudimentary mechanics.  Roles, actions and behaviours of directors are more or less fixed no matter what the situation and fixated on the one objective.  The only real variable is each director’s talent.  The rest is a black box that can only be held together by a heroic chair.

    Second, the goal posts keep moving and are becoming harder to see.  Value creation depends on which shareholder the board listens to.  A share trader’s idea of value is different and even opposed to that of a shareholder who plans to hold their shares indefinitely.  In addition, the practice of share lending is making it hard to know who the real shareholder is.

    Third, the Jensen Defence levels the playing field.  In football, the coach keeps their game plan a secret.  In the boardroom, publicly traded corporations are increasingly expected to comply with the Jensen Defence or explain why not.  Can you imagine a football coach explaining to the opposition how they plan to win?  The lesson here is that best practice has become most practice and is no longer a source of competitive advantage.

    The Break Down and Change Up

    Despite its flaws, the Jensen Defence has gone largely unquestioned in the boardroom.  It’s considered at best successful and at worst benign in delivering shareholder value.  Few think corporations fail because of best practice.  Experts are more likely to conclude there just wasn’t enough of it.   

    Then in 2008 holes started to appear.  Even best practice boards watched as their corporations faltered, failed or were bailed out.  In the minds of many, directors quickly fell to the bottom of the corporate ladder.  What few had realised was that corporations were changing and the Jensen Defence could no longer be seen as the best boardroom plan.

    The Jensen Defence can work when top management know what they’re doing.  How they’ll make the best possible promises, how they’ll keep them and get what was bargained for in return.  In other words, the corporation is profitable and sustainable and all that is needed are the checks and balances to prevent abuse by executives.

    The corporation is a product of the precursor to democratic capitalism; mercantile capitalism.  Related to the word merchant, mercantile capitalism invented the corporation to be the vehicle for collective human ambition and its internal combustion engine was trade.  Corporations are propelled by what they trade and the value of what they receive in return.  To this day, it is only through the wisdom and good fortune of this dynamic that a corporation can become strong, resilient and enduring.  After all, what is a corporation but the sum of its promises and the people who keep them.

    When our largest corporations were doing well, it might have made sense to leave the business of trade up to the “experts” and relegate the boardroom to defence and to emphasise defensive tactics like monitoring and questioning top management.

    But, fuelled by cheap money, a fetish for change and a 21st century work ethic – make the most money, in the shortest time with the least effort and with the greatest indifference to consequences – CEOs and top managers began to trade their corporation’s into weakness, vulnerability and ultimately insolvency.  In most cases the failure can be put down to a bad trade - either exchanging too much for worthless things like  securities, executives, ratings advice etc. or making gratuitous promises to analysts and the market.  Put simply, too many corporations made or relied on empty and unnecessary promises to try and keep the real ones – to pay bills, wages, loan repayments, taxes and dividends.

    No boardroom could defend the corporation once good judgement and commercial acumen had been systemically abandoned. 

    If top management have dropped the ball on trade, directors need to step up and change the way they direct.  It’s time to go from defence to a better plan and reconnect what happens in the boardroom with the mercantile objectives of the corporation.  What’s the point of continuing to defend a losing game?

    A better plan in the boardroom starts with a commitment to no more empty or gratuitous promises.  It means a focus on the real business of the corporation and the quality of the big promises exchanged between the board and those who participate in the corporation - shareholders, internal stakeholders like the CEO, external stakeholders like financiers, the state and directors.  But it doesn’t stop there, a better plan in the boardroom means guiding and positively encouraging those to whom the responsibility for trade is given to perform at their best, helping out by bringing opportunities to the table and finally training hard to do all these things.   

    To be clear, concentrating on the big promises doesn’t mean crossing the line that divides directing from managing.  It’s about rediscovering how to deliberately and pro-actively lead and direct the business of the corporation.

    The challenge is that no more can a board go from the Jensen Defence to a new game plan, focused on the mercantile objectives, without a change of strategy and tactics than a football team can go from defence to offence without a fundamental change of strategy and tactics.

    Make no mistake, the Jensen Defence was never designed to support trade.  When it comes to making the big promises, it’s arguable that there are no mechanics that connect the boardroom to the corporation’s mercantile objectives.  As a result, boardrooms can look more like the playground than the professional leagues.  You see, without the right mechanics when the whistle blows on the football field or the boardroom door closes, rudimentary structure and composition quickly disintegrates and the directors starts to scramble after the CEO like kids chasing a ball on a Saturday morning.

    That might have been tolerable when things were going well, but it’s no longer good enough.  It’s time for a new plan.  It’s time for “directorship, “mechanics” and what, for the purpose of this paper, I’ll call the “Tunjic Offence”.     

    The New Mechanics of Directorship

    When directors work toward the mercantile objectives of the corporation they’re practicing directorship and the Tunjic Offence describes the better strategy and tactics.

    The Tunjic Offence concentrates on the missing mechanics in the boardroom and connecting these to the goal of better promises and a stronger, more resilient and enduring corporation.   

    Who’s in the boardroom, their role, types of behaviour and tasks should all change depending on the mode of directing and the corporation’s circumstances.  The Tunjic Offence superimposes the kind of mechanics you see on the football field onto the boardroom to describe:

    •  Strategic direction based on matching the team to four ways or modes of directing based on the internal and external situation of the corporation;
    • Tactical direction based by matching team member roles, board and management actions and types of behaviour (or what I call “method”) to the right task according to the strategic choice of mode.

    These are the mechanics of directorship.  Though the language and model might be unfamiliar, anyone who has spent time in the boardroom has experienced good and bad directorship.  Mechanics exist whether a director is aware of them or not.  The point of the Tunjic Offence is to give them a name and to describe how they can be exploited to the advantage of the corporation. 

    But be aware, there are no silver bullets or checklists.  The Tunjic Offence is a comprehensive and practical system of directing and is designed with serious directors and top managers in mind.  Learning the mechanics of directorship takes more than a read through.

    Of course, if a board already follows so called “best practice”, why start again with a new plan? It’s a tough question but an easy answer if a corporation is struggling to stay in the game.  And, as every footballer knows, the pain associated with learning and practicing a new game plan is quickly forgotten but failure is not.

    The Game Changers

    Before going any further with the Tunjic Offence there are two “we’re not in Kansas anymore” ideas to grasp. 

    Boards Direct in Four Modes

    In football, who’s on the field, their position and role all depend on whether the team is in offensive or defensive mode, the score and the time on the clock.

    Modes and sophisticated team mechanics are not part of the Jensen Defence.  Directors are pretty much expected to defend all the time and their proper role, behaviours and tasks are fixed.

    The Tunjic Offence is dynamic and based on the idea of four strategic modes of directing:

    Mode

    Description

    Example Task

    Trade

    Making decision reserved to the board  

    Recruiting and selecting the CEO

    Guide

    Guiding, motivating and encouraging those directed to make sure they trade well

    Nurturing and Encouraging the CEO to ensure they perform at their best

    Help

    Helping the corporation by providing access to resources and opportunity

    Providing the CEO access to personal contacts

    Build

    Building and managing the team that can perform effectively in each of the Trade, Guide and Help Modes

    Director recruitment

     

    An effective boardroom transitions between these four modes based on both the situation of the corporation and the circumstances within the boardroom.  Each mode signals a different “state of play” and calls on team members to change their role, their actions, types of behaviour and the tasks they perform to match the selected mode.

    There is a Board and the Directorship Team

    The second game changer is who’s counted on the team.  The Tunjic Offence is focused on everyone physically in the boardroom and not just the directors.  Think of the boardroom as a kind of playing field occupied by people in various positions.

    The Jensen Defence focuses almost exclusively on the position of director and what is happening within the board. That’s like developing a game plan for football but only focusing in on one group of players.  A game plan naturally includes everyone on the field.

    For example, the roles of top managers in the boardroom have gone largely un-noticed by scholars, educators and regulators who re-enforce that “Manager’s must [only] Manage”.  Despite the amount of time and effort that top managers put into the boardroom, few have been formally trained to work with boards. I don’t mean as executive directors, I mean as top managers working collaboratively with the directors. 

     The Tunjic Offence recognises that the board, top management, the company secretary and committee members must all work together as a single team in each of the modes to effectively perform various tasks.   

    To be clear, the board is not part of the management team.  But those in top management, and in particular the CEO, will hold positions on multiple teams.  For most of the time, the CEO leads the management team, the CEO may also be an executive and part of the board, but for some of the time the CEO and others join with the directors on what I call the “directorship team”.

    The Elements of Directorship

    Now you know who’s on the team, the way the game is played and the general direction of the goal it’s possible to drill down on the elements that make up the strategic and tactical mechanics.

    The strategic mechanics are made up of the four modes, the directorship team and the corporation’s internal and external situation.  At every point in the life cycle of a corporation there is a complimentary combination of modes.  At start up the emphasis is on the Help Mode, growth sees the emphasis shift to the Guide Mode and in crisis the emphasis moves to Trade Mode.  In addition, a board can choose how much time they need to spend in each mode during each board meeting.  I believe that corporations are more prosperous, more able to cope with the unexpected and last longer when the board gets the balance of modes right over the course of a board meeting and the year.   

    Next are the tactical mechanics.  Once the strategic selection of mode is made, each member of the directorship team should adapt their role, actions and types of behaviour when performing the tasks associated with that mode.  This means there is a different tactical plan for each mode that is designed to align what is happening in the boardroom with the characteristics of the mode.

    For example, in Trade Mode the board’s role is primarily to make those decisions which are reserved to the board by law or as a matter of discretion.  The actions associated with that mode are designing, deciding, delivering and delegating.  The types of behaviour that best compliment the Trade Mode are critical thinking, willingness to accept dissent and to take personal responsibility for the promises that make on behalf of the corporation.  The tasks in the Trade Mode revolve around the big promises ie. to appoint the CEO, major acquisitions and the like.

    Additionally, because the Tunjic Offence covers the broader directorship team, the tactics include not only how directors relate to each other in each mode as a board (intra board tactics) but how the board and the other team members relate in each mode (Inter Directorship Team tactics). 

    For example, in Trade Mode the CEO should have little discretion when requested to provide information required by the board to perform their tasks in that mode.  However, in Help Mode the CEO has absolute discretion whether they will act upon the help offered by a director and the director should have no expectation that the help will be acted upon.   

     

    The Board Plan

    The strategic and tactical mechanics form the building blocks of a new plan for the boardroom.

    The plan starts with a focus on the directorship team, made up of the board, top managers and other boardroom players.  At the other end is the overarching purpose to ensure the corporation trades its way to strength, resilience and endurance.

    Based on the corporation’s unique situation, the board must choose the best mix of the four different modes of directing; trading, guiding, helping and building. 

    Each mode signals a different set of tasks required and how each member of the directorship team approaches those tasks; their unique roles and their unique actions and types of behaviours. 

    By matching and aligning the directorship team, their types of behaviours and actions around the right mode based on the ever changing situation the boardroom can approach what in sports is called the “zone”.     

    Be aware, each board plan is unique.  There’s no one size fits all and there’s no one size fits all the time.  As individual circumstances change so does the time and energy needed to be put into each mode.  The change of mode is then the cue to the rest of the directorship team that they need to also change their approach or risk being out of alignment with the rest of the team.

    Learning to Win

    The whistle blows, the playground empties and the team has lost again.  The parents gather to explain the loss:

    The first says they’re not motivated to win.  “We need to incentivise them more”.

    The next blames the kids.  “Let’s face we need more talented players”.

    The third thinks some kids up to no good.  “We need to catch them out”.

    Without a plan it’s easy to think the most obvious explanations for failure are also true.  But not in the National Football league.  When a team fails consistently the knives are out for the coach and their game plan.

    Boards have a choice if they want to end their losing streak.  Work harder at the same “me too” plan as everyone else or find a different way to win.  To be clear, Directorship and the Tunjic Offence is not a repackaged version of Corporate Governance and the Jensen Defence.  It is a head to head contest between an unheralded contender and the undisputed world champion;

     

     

    Directorship

    Governance

    Objective

    Maximise the corporation’s strength, resilience and endurance

    Maximise shareholder wealth

    Focus

    Promises and Trade

    Accountability and Control

    Variables

    Mechanics (Modes and Method)

    Inputs(Structure, Composition and Process)

    People

    Directorship Team

    Board

    Plan

    The Tunjic Offence

    The Jensen Defence

     

    The Tunjic Offence provides a practical solution to the challenges that confront today’s boardroom.   It’s a better plan because:

    •  It includes everyone who contributes to the successful performance of tasks in the oardroom and not just the board.

    •  It revolves around the four ways in which the board can direct according to the mode that is best suited to the corporation’s situation.

    •  It calls on everyone on the directorship team to match their role, behaviour and actions to the right mode.

    •  It completes the trinity of an effective boardroom.  Without the right plan, individual talent and teamwork is just another “Hail Mary” strategy.

    •  It introduces competition back into the boardroom by providing a plausible alternative to the Jensen Defence and gives directors and top managers a shared model to differentiate how their corporation is directed.

    But perhaps the best thing about the Tunjic Offence is that if you grasp the basics you can start to recognise the broken mechanics in the boardroom.  Once you understand mechanics it’s possible to measure, diagnose and even prevent the less obvious but more profound problems that undermine performance in the boardroom.  Fix the mechanics and there may be no need to rush out and recruit “better” directors, form new committees or find that elusive super hero chair. The turnaround is closer than you think.

    For decades, the world has believed that the board’s role is to defend shareholders.  In better times that might have been enough.  But, if corporations and capitalism are to be renewed, boards must rediscover their mercantile roots and once again lead and direct.  Today, the best defence is the Tunjic Offence and a focus on strength, endurance and resilience through better promises and trade.

     

     

    Who's Afraid of Competition