Strategy, risk oversight and board composition are the leading areas of board focus for 2015. That's according to a survey of more than 250 public companies by Deloitte LLP Center for Corporate Governance.
Can you tell which one doesn't belong? Is it strategy, risk oversight or board composition?
One of these things is not like the others,
One of these things just doesn't belong,
Can you tell which thing is not like the others
By the time I finish my song?
did you guess which thing was not like the others? Did you guess which thing just doesn't belong? If you guessed strategy is not like the others, then you're absolutely...right!
Governing and Directing: What's the Difference
Did you pass the Sesame Street Test?
Did you think that you were absolutely right because strategy has no real place in the boardroom? Did you think, it was a trick question because they're all board governance? Or, Like me, did you think strategy didn't belong because strategy is different to board governance?
Think of board governance and what comes to mind are board structure, process and composition. The focus is on independent directors, protecting and preserving financial value through maintaining control and managing risk. Risk oversight and board composition share a focus on value protection.
Forming strategy, communicating vision and culture, making decisions of consequence, like appointing the CEO and then inspiring management to be their best set a different tone. These things share a focus on value creation.
Board oversight and strategy have only one thing in common - the people in the chairs.
For me, governing and directing are two distinct systems of thought and action in the boardroom. It takes a leader, not a governor to create value. In the boardroom, leadership is what I call "directorship". It's a skill and it's different to governance.
Governors protect value, directors create it. Governors exercise risk oversight, directors take risk. Governors focus on getting the process right, directors focus on motivating people. Governors try and control their firm, director try to liberate the enthusiasm and innovation within the firm. Governors financialize, directors commercialize. Governors work for suppliers of finance, directors work the firm. Governors are looking behind trees, directors are looking beyond the forest.
What separates governors and directors is their attitude to value.
Governing for Shareholder Value Vs Directing for Firm Value
Sovereign wealth fund, Oslo-based Norges Bank Investment Management , leaves no one doubting why firms are governed:
NBIM's goal is aligned with a commonly accepted definition of corporate governance, namely the way that suppliers of finance assure themselves a return on their investment.
Compare this position with Apple Inc’s attitude to suppliers of finance (shareholders) under the chairmanship of Steve Jobs.
Apple was directed and controlled for Apple.
Despite regularly being marked down on corporate governance, Apple was directed into market leadership, with no debt and a bank balance that made activists green with envy.
Put simply, Apple prioritized stakeholders based on their contribution to Apple's success.
This applied to everyone including shareholders. Apple ceased declaring dividends when Jobs returned to the Board. He also rejected calls to buy back Apple's shares. According to Warren Buffet "He didn't want to repurchase stock", he continued "although he absolutely felt his stock was significantly under priced at two-hundred and whatever it was then." What Buffet knew is that neither he nor Jobs would "buy dollar bills for 80 cents" for as long as Apple and Berkshire Hathaway owned the mint.
It wasn’t that Apple’s board under Jobs was anti-shareholder – there were several lucrative share splits. Apple's directors put Apple first.
Jobs directed more than he governed. We even know what Jobs thought of governance types. When Jobs discovered that former SEC Chairman, Arthur Levitt, was a governance true believer, Apple’s board promptly retracted their invitation to join them.
Governors are focused on shifting value from the firm to their shareholders. Directors are focused on creating value in and for their firm.
Measuring Value Vs Creating Value
Governors measures value in dollars - creating it, measuring it, reporting it and redistributing cash in the form of dividends and increasingly buy backs. The audit committee and strong financial literacy are the backbone of good governance and the growing financialization of the firm.
Directors understand value is measured differently:
First, cash is not a synonym for value. Tom Graves reminds us value doesn’t mean cash. He goes on:
It’s utterly crucial, in all business contexts, to understand that money is only one subset of value – and that whilst all forms of value may interact, and may often be convertible from one form to another, not all forms of business-critical value can be converted to monetary form.
Second, financial statements are not a business model. A business model describes the rationale of how an organization creates, delivers and captures value. It takes six capitals to build a viable firm - financial, intellectual, produced, human, social and environmental. Directors direct through the business model. Governors govern through the financial model.
There’s a good reason why Apple only raised capital from shareholders once.
Governing for Transparency Vs Directing with Discretion
Governance demands an open book when it comes to communicating the company’s ideas and strategies to shareholders. Information is the lifeblood of the investors business model.
Directing for value demands discretion. Again under the chairmanship of Jobs, Apple was notorious for its tight control of information and Apple prospered. This was no quirk of genius. The harder it is to see within a firm the harder it is to imitate its success.
Managing Risk Vs Creating Risk
From a governance perspective, risks are best managed. Deloitte's go as far as to put risk at the core of their proprietary governance framework:
Risk intelligence is at the center of an effective framework for corporate governance - and it lays the foundations for everything the board and management do to properly govern the corporation
Governing for risk involves formulas and processes; setting risk appetite, formulating risk tolerances, adopting standards, delegating responsibilities, establishing risk committees, implementing risk programs and embracing the boards role of chief monitor of the corporation's strategic, operational, financial, technological and compliance risks etc.
Risk is like Count Von Count. Like a vampire, risk must be invited in.
Directors invite the right risk into the firm.
Every bold choice creates risk. Appointing a new CEO, acquiring a new business or pivoting the strategy all requires conscious and deliberate risk awareness and mitigation.
Governors exercise oversight, directors price risk, negotiate it, mitigate it, transfer it and then accept or reject the opportunity.
Getting the Balance Right: Right Things Vs Things Right.
Have we got the balance right between governors who focus on doing things right and directors doing the right things.
Not according to a recent survey of CEO by respected commentator Jeffrey Sonnenfeld:
CEOs complain that boards often lack the intestinal fortitude for the level of risk taking that healthy growth requires. “Board members are supposed to bring long-term prudence to a company,” as one CEO says, but this often translates to protecting the status quo and suppressing the bold thinking about reinvention that enterprises need when strategic contexts shift.
Heidrick & Struggles report that 84% of directors of the top 2,000 largest publicly traded companies in the United States thought “they are now spending more time on monitoring and less on strategy”. Resulting in only one-third of respondents to a 2013 McKinsey & Company report saying they have a complete understanding of current strategy. This, despite 67% of respondents to the 2012 Spencer Stuart US Board Index considering the board’s role in strategy is the biggest issue and PwC reporting that three quarters of directors want to spend more time on strategy.
Why have public companies become over governed and under directed?
Is it because corporate governance regulation and education is designed to ensure the "correct" board structure, process and composition rather than ensure "imagination, creativity, or ethical behaviour in guiding the destinies of corporate enterprises"? Has board governance monopolized the board room and strategy and the value creating tasks of directing become a well intentioned after thought?
One of these things is not like the other
Who knows, perhaps back in 1977 when Abraham Zaleznik was writing Managers and Leaders: are they different, one of his grand children was singing the Sesame Street classic that helps children identify the differences between things. Zaleznik knew there was a difference between managing and leading.
According to HBR, at the time of his breakthrough article management education centered on organizational structure and processes. For Zaleznik, the leadership elements of inspiration, vision, and human passion which drive corporate success were missing.
My generation of directors grew up on Big Bird and the rest of the neighbourhood who, in some way, helped raise us to see the differences in objects. And, later we would learn from Zaleznik and others, the difference in concepts like leading and managing.
Does cramming strategy, risk oversight and board composition into the one overflowing bag of governance pass the Sesame Street test? After all, what do these things have in common? More importantly, is this year's record breaking value of buybacks and dividends declared a measure of the damage done when we ignore the difference between value creation and value protection?
It's almost forty years since Zaleznik split the c-suite into leaders and managers, perhaps it's time for the boardroom to follow and split governing and directing. The same people performing different roles but with a different mind and skill set. Both equally important but different. Sure, like leading and managing, there's overlap and we'll be debating the difference for decades.
But that's the lesson I take from One of these Things is Not Like the Other.
When I was 5, I'm guessing I knew the difference between a cow and a group of people, cutlery and a clock and three starfish and a crab. But I still had to learn how to describe and communicate their subtle differences. Decades on, and nothing has really changed except I've graduated from objects to concepts like governing and directing. But understanding and communicating the differences between concepts at my age is no less difficult than objects in preschool. Especially when the word used to describe a brussel sprout and a rubber ball are considered the same.