Gilly Green , Managing Partner of global consulting firm Sionic, features DLMA analysis in her article appearing in the Spring/Summer 2020 edition of the PIMFA Journal published by the Personal Investment Management & Financial Advice Association. She writes:
In effective boards, the roles of Executive Directors and Non-Executive Directors (NEDs) work in harmony, providing checks and balances (value protection) at the same time as promoting the long-term health of the company (value creation).
DLMA analysis (pronounced dilemma) was developed in 2012 as a structured way to analyse the relationship between the four management disciplines involved in running a company - Directorship, Leadership, Management and Assurance.
The premise was simple - design a tool that gave company directors and executives a straight forward way to categorize their roles and create a shared insight into where they're putting their time and energy. A fresh way of visualising whether they've got the balance of management disciplines right for their company.
I used a 2x2 matrix. The board on the right . The executive on the left. Value creation at the top. Value protection at the bottom.
DLMA analysis offered a solid framework to analyze how board and executive roles produce positive and negative effects on business performance and could reveal the competitive tensions between all disciplines.
After a decade of research, the breakthrough was recogninging that, like leading and managing are different, governing (assurance) and directing were also different. For over 50 years, economists had boxed directors into the assurance corner. Focusing on the “what if” questions at the expence of the question of “what could be “. For reasons that have more to do with an outdated economic theory of value than reality, the assurance function came to dominate best practice. Creating not only a blind spot in corporate governance research but a fundamental capability gap in many corporations.
But spend any time in a high functioning boardroom and you recognise two distinct systems of thought and action in the boardroom. Their difference lies in their attitude to value.
Governance protects value. Directorship creates it.
Think of governance and what comes to mind are things like structure and process. The focus is on protecting and preserving financial value through maintaining control and managing risk. In contrast, directorship involves bold choices that create risk. Directing involves designing the ways in which all forms of value are created, making decisions of consequence and inspiring CEO's to lead their organizations into strength, resilience and endurance. Directorship enlivens. Governance is what keeps a corporation alive.
With three disciplines you get an oganisational pyramid. By recognising directorship as the fourth management discipline the power of the 2x2 Matrix could be unlocked.
You Can’t See Beyond the Forest from Behind the Trees
Executives had long been warned that they risk not seeing the forest for the trees. But what of directors who risked not being able to see what lies beyond the forest from when looking for threats hiding behind trees ?
DLMA Analysis is coupled with a familiar metaphor.
The metaphor captures both the dilemmas at the heart of the DLMA analysis and the goal of balance. To create value and maintain its value transforming engine a company needs both leadeship and management from its executives and directorship and assurance from its board. But the forces of value protection pull in a different direction to value creation and all four are competing with each other for energy and attention. The objective is bring them into harmony.
I proposed that the battle between protection and creation was being played out in the c-suite and the boardroom. Directorship and assurance were in tension on the left of the matrix and leadership and management were in tension on the right. And, to some extent, all four were on a collision course. Directors are faced with a dilemma of monitoring the executive in their assurance role and inspiring the executive in their directorship role. Academics and experience tells us that one role can create a downward spiral of distrust and the other role relies on shared trust.
The key to addressing the dilemma was the idea that boards and executives were “secretly” working together above and below the line.
Working Below the Line
Below the line represents the quadrants that focus on value protection.
Boards and Executives Share Managerial Functions
Assurance in the form of "best practice" corporate governance involves formulas and processes; monitoring and oversight, setting risk appetite, formulating risk tolerances, adopting standards, delegating responsibilities, establishing risk committees, implementing risk programs etc.
What those who put risk in the center of the boardroom don't seem to realize is that assurance shares managerial characteristics captured in the phrase “things right”. The irony of the governance set is that they say boards must not manage but promote a managerial ethos in the boardroom.
Whilst most directors don't think they're managing there's a distinct managerial feel to traditional corporate governance and best practice. Not that there's anything wrong with managing. There's a vital role for boards to ask "what if" and for executives to ask "what to do now". But not all the time. Value must be created before it is protected.
Though to I never proposed thant directors working below the line in their assurance role should micro manage. Instead assurance is a kind of "macro managing". Doing very different managerial type activities but with a similar state of mind.
Working Above the Line
Above the line represents those quadrants that focus on value creation.
The Board and Executive Share Leadership Functions
Both directorship and leadership share the characteristics of leading captured in the phrase “right things”. The Board and executive have complimentary and collaborative "leadership" roles. They make different decisions, pull different levers, but boards that lead and executives that lead share the same objective of creating the greatest possible value for directly for their corporation and obliquely for society.
The challenge remains that what passes for "best practice" in the boardroom continues to fall almost entirely below the line. All to often, the directorship quadrant remains conceptually and physically empty. Studies using DLMA Analysis in the UK, show companies are over capitalised in assurance and under capitalised in directorship.
What happens when a board never get above the line? Constantly challenging and questioning the executive creating an unhealthy adversarial relationship. Undermining the conditions required for board to get above the line to embrace its shared leadership role. It’s a downward spiral that does not appear on anyone’s risk register.
DLMA analysis offered a way to visualise the path from dysfunction to alignment.
The Time for Debating the Difference Between Governing and Directing Is Over
Gilly Green’s article reminds me that the time for debating the difference betwen governing and directing is over:
Wealth managers can learn from this crisis. Even before the regulator declares its hand, we have a golden moment to get ahead and make corporate governance fit-for-purpose and Boards truly effective.
Responding to the collapse of an asset management company in the UK, the advice is relevant to all directors who must continue to act despite the uncertainty and risk of covid, climate change and political uncertainty. Past practice never imagined the challenges posed by rolling crisis of unknowable duration or deapth.
We have run out of time to debate the difference between governing and directing. We need to get on with it and bring all four management disciplines to the challenge.
In Europe, consulting firms like Sionic and Grant Thornton, who have also featured DLMA analysis in The Board – Creating and Protecting Value, don’t need to be convinced by the need to recognise directorship. They are baking the concept into their solutions. Likewise, in Singapore, Sriven Naidu has introduced DLMA model into the the Singapore Institute of Directors curriculum. Releasing the value in the idea to bring about positive change for their clients and students. To me, this is the true measure of creating value. If an idea can’t move people to act positively, it doesn’t matter how much you pay for it. It destroys value in your hands and no one can afford that in the current climate.
It took me me a decade to understand the differences between governing and directing, It’s taken me the best part of the next decade to understand the meaning of this last statement. Value, in the context of creation and protection, is not what it seems. The time has come to debate the true meaning of value and align directorship, leadership, management and assurance with a good theory of value.
My latest breakthrough is that the value idea must yield to nature.
If there can be no change without work and there can be no work without energy, perhaps value is better understood as energy it its socal form and could be understood in the same way. The physical concept of energy, forgotten by management theorists for a century, must be brought into the boardroom and the c-suite. Aligning the decisions and actions of directors and executives with social energy production offers new hope for corporations and capitalism.
Value is energy in it’s social form, stored in many forms called capitals, measurable by the amount of work each different capital can perform and created when one value is transformed into another that can perfom more socially useful work. Nature loves a transformation and it has become increasingly clear to me that a healthier version of capitalism does too.
But not any transformation. Turning something that can do more work than money into money destroys value. Value is only created when a decision means that more work can be done after the decision than before. Shared value is when total value increases and both corporations and stakeholders are literally energised. That’s the lasting mark of leadership and directorship and the hidden potential of a energetic theory of value. Again, that doesn’t always mean more money. The capitals that work the hardest and for the longest time don’t necessarily appear on the balance sheet. Indeed, the mystery of social capital is that it “powers” corporations but can’t be bought or sold. Likewise, the paradox of intellectual capital is that not only can it simultaneosly be kept and given away but the more it is used the more of it you have.
Discovering and sharing the mysteries of value will be the objective of my last project. Unfortunately, this work is too late for this crisis ( and maybe the next). But not to late to one day stop the madness from which these crisis spring. If history and the state of the planet is any measure, nothing is more dangerous than the wrong theory of value. If value is socially useful energy, best practice ideas about value creation and protection are turned on their head. A single minded goal of maximising profits can be seen as destroying value and costs can be seen as transforming money into things that hold greater value than money. The implications for economics, accounting, law and corporate governace are profound.
The goal of DLMA analysis was to first to recognise the four functions of management. A goal which comes closer with the work of Gilly, Sriven and others. The next was to align these functions with a theory of value grounded in nature and energy. The final goal will be to demonstrate how creating value, properly understood, fulfills the ultimate social purpose of the corporation - to enliven all by dissipating socially useful energy throughout society. For all our sakes, I hope it doesn’t take another 10 years.