Executive Leadership and Corporate Governance (Part Two)

Poor performing Boards of Directors deliver a staggering number of adverse consequences to the shareholders of the companies they are legally charged with representing and protecting (do you see additional and legitimate Director liability in the previous statement?).

Before I enumerate a sampling of those consequences, let’s look at some of the key traits of poor performing and dysfunctional Boards. First and foremost, except in rare cases (possibly such as either a crisis turnaround situation where having a short term monarch (one person speaking for the company) at the helm, or in the case of an early stage start up where separation of the CEO and Chair is not either operationally of fiscally practical, might be beneficial), any company whose CEO is also Board Chair is likely to have a Board that underperforms. The reason is the Board has a legally binding responsibility and authority to hire and fire the CEO in the best interests of the company’s shareholders. That objective position is, if nothing else, psychologically compromised when the Board, which is the governing body to whom the CEO reports, effectively reports to the CEO when the CEO is also the Board Chair. Contrary to the (thankfully) ever shrinking group who would rationalize otherwise, the result of such a structure is an inherent and lasting conflict of interest which cannot be satisfactorily resolved. This structure represents a lack of effective leadership that puts the Board in a position where the best that can be hoped for is average performance.

Some additional traits or characteristics that by themselves identify a Board that is likely underperforming are Board members that are “friendly” to management (objectivity is compromised), Board members that are blood line related to the CEO (objectivity and requisite skill sets are compromised), Board members that do not have extensive experience in an expertise that is vital to the Board’s performance, and, last a Board that has little or no diversity, under any criterion of measurement you would like to use. We are no longer a homogeneous country, society or economy. That being the case, having a look alike, think alike, talk alike Board of Directors prevents management from obtaining the diverse amount of input required to be a leading company in a diverse economic environment.

Whether or not you can accept my thinking that the above are observable in and causative of poor performing Boards, no one will deny that there are poor performing Boards (refer to my recent Blog on the Bell Shaped Curve). So, given they do exist, what are some of the consequences of Boards that underperform?

First and foremost, the shareholders are the recipients of the ultimate fallout from poor Board performance because they are investors in a company that is poorly governed. Studies have shown that poorly governed companies do not fare as well in terms of creating shareholder value as do the shareholders of companies whose governance is graded to be above average.

Additional fallout from poor performing Boards results in management not receiving needed input (stifled by the Imperial CEO/Chair), receiving erroneous input (from Directors lacking sufficient expertise), insurance and bonding costs are increased (because actuaries perceive increased risk), financing either cannot be obtained or carries terms that are perceived by management to be onerous (because financiers perceive increased risk) and a key opportunity to differentiate in a positive manner from competitors is missed.

Finally, and most damaging, is the unavoidable fact that, particularly for privately held companies, when it’s time to sell the company, sophisticated potential buyers who perform true due diligence (i. e., more than just examining financial metrics and legal issues) on the company to be purchased will devalue a company that has been poorly governed. This occurs because the cost to increase the company’s value to a level it should have been at the time of purchase will be borne by the buyer. The buyer will therefore discount the value at the time of sale to accommodate for the additional investment required to bring the company to a desirable level of performance.

Friday’s Blog will outline the process to follow to achieve top notch governance.

Executive Leadership and Corporate Governance (Part One)

There are four things that can happen in a corporation’s response to its corporate governance requirements – and, unfortunately, three of them are bad. They are – minimal to no governance, poor governance, average governance and good governance. Why are the first three bad? And why do so few corporations have good governance?

This Blog will give an overview answer (writing a book in a Blog is never well received, thus the summary) of the last question first. Having served on numerous private company and NFP Boards and chaired several of them from 1991 to 2008, and having served on two public company Boards during the years 1994 to 2010, I believe there are two major reasons why relatively few corporations {Note – there are over 4,000,000 ‘S’ and ‘C’ corporations in the US} have good corporate governance – (1) a misguided need for “control” {e. g., “no one understands this business better than I do” and “I’ve invested the most capital in the company”} on the part of the CEO and (2) personal insecurity at the executive leadership level {e. g., “what if the Board becomes adversarial?” and “what if I can’t manage (or maybe manipulate?) the Board?”}.

Although most CEOs who are control types, and who are easily spotted as such, won’t readily admit it, the stark reality is their continued grasp at control is a cover for their leadership inadequacies. If a company doesn’t have a well crafted, ever evolving formal business plan that the entire organization is in tune with, and if the CEO and the company are not meeting the metrics that were set in the business plan, the CEO is not really in control of the company. To compensate for the company’s lack of satisfactory performance, there is a tendency for the CEO to grab for more “power”, in an attempt to become an absolute monarch that can never be questioned. This is never synonymous with organizational enriching control and leadership.

As part of the control process, the CEO asserts that no one knows the company’s business better than the CEO, and, therefore outside directors and an outside Chair are not necessary. While it may be true that no outside directors know the company’s business better than the CEO, that fact is irrelevant when it comes to governance. The job of the Board is not to run the company’s business. That truly is the CEO’s job. The job of the Board is to govern the company through the CEO, and it has legal authority to hire and fire the CEO. You can see how well this is received by a control personality! Having said what the CEO’s and the Board’s jobs are, it’s valid to note that the Board and the CEO should look like two Venn diagram circles that overlap and have a significant amount of commonality. In other words, the Board has to be reasonably informed about the company’s business (no small task in my experience) and the CEO should be reasonably informed about the issues of governance.

The CEO’s adversarial concern is borne out of a professional and personal insecurity that says, “I don’t know if I have the right Board”. Therefore the Board could “become adversarial” and, as a result, the CEO may not be able to “manage” the Board. CEOs of this type likely also do not hire good executives, or get the company in relationships with good outside partners or have good relationships with the company’s financiers. And the more they try to substitute power for real control (meeting key objectives in an accountable fashion), the more ineffective the Board becomes, thus creating a self fulfilling prophecy. And, ultimately, the more precarious the company becomes in terms of performance with all measurable metrics spinning out of control.

So “good” CEO control and leadership is managing the company to achieve its agreed upon strategic and operating metrics, while the Board governs the company according to accepted governance metrics.

My next Blog will address the issue of the consequences of poor performing Boards, followed by a Blog that, based on my governance experiences, will suggest ways to achieve optimal governance.

 

What the Bell Shaped (Normal) Curve Can Teach Executive Leadership

Let me preface this Blog by saying that this is not a treatise on statistics, but rather some insight by a non statistician on how and why to apply a well known statistical tool to help you run your company. So a brief writing on application and execution as opposed to theory.

Back in the ‘94/’95 era, I obtained an independent manufacturers rep engagement with a technology company. I was asked to find out why the company’s products were not gaining traction in the market and to see if I could find out the reasons why as I called on prospective customers. Since I wasn’t a previous sales participant in this market segment, I started by looking for information (remember, this was light years before Google and the Internet as we know it today) I could use that would help me increase market penetration.

A good friend and business associate of mine gave me a book (Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers, by Geoffrey A. Moore – today every legitimate technology salesperson is well versed in the tools in this book and its sequels) to read he thought might be of some help, as it dealt with the dynamics of the market I was selling to. In his book, Moore portrays the technology adoption cycle (which also determines length of the sales cycle) as a bell shaped curve, with roughly 67% of prospects falling within one standard deviation of the mean (average) and 95% of prospects falling within two standard deviations of the mean. As I began to dig into the book, I realized two things, one of which is still contrary to the way too many companies sell to this day (“Here’s your prospect list, call 50 companies on it each day. Remember, sales is just a numbers game”.) First was that some companies & people are likely never to buy (laggards), and some will buy later than others (late majority vs. early majority vs. early adopters). Second was that there are ways to determine which technology adoption categories prospects fall into, if one is willing to do the necessary research.

So I decided to do the research from which I could build prospect profiles. As soon as I could determine that a prospect fell into either the late majority or laggard category, I would put those in my “much later” file and continue my research until I could identify prospects that would fall into the early majority (at worst) or early adopter (best case) categories and pursue those prospects. Application of Moore’s work gave me a wonderful opportunity to help grow a virgin technology market for a company that 16 years later is now the dominant player in that market.

Several years after that assignment, I began to apply the normal curve to other areas of business, concluding that if the numbers in the universe being observed are numerous enough, the universe in question will present itself as a normal distribution or a bell shaped curve. So what does that mean to those of us who run businesses? If you are evaluating performance or behavior (as opposed to measuring height, for which there is no “good’ or “bad” – except maybe in basketball), the closer to the far left of the mean that performance or behavior is, the worse it is. If we, as leaders, recognize that we then have an opportunity to manage against those negative performances or behaviors by either eliminating them or fixing them. Think what will happen to morale and profits if occurrences at the left side of the curve are lessened or eliminated!!

I hear company owners and CEOs say they wouldn’t trade their employees for any other company’s employee group. Good thinking, but for the wrong reason, because if they would, they would still have roughly 5% of a new group of employees that would be creating a drag on the other 95%, just as is the case with the company’s existing group of employees!

Irrespective of the size of the company after you get to about 10 or more of the following categories, good leadership will require the study of processes, employees, vendors and customers and anything else that can be measured in order to determine who or what falls more than two standard deviations to the left of the mean and will work to improve that variable’s performance, or, failing improvement, eliminate it.

 

The Role of the Updated Job Description as Part of CEO Leadership

CEOs and job description updates??? Absolutely!!

Once a year is fine, and you should make these adjustments only for your direct reports. Those direct reports then need to do the same for their direct reports, and this process should continue throughout the organization until the level of no direct reports is reached.

Here’s why and how.

BDA’s experience with middle market privately held companies is that far too often the CEOs of these companies conduct employee performance reviews (if they conduct them at all) annually at best, and when they do so, they spend too much time looking in the rear view mirror. How did the employee do against the review period’s goals? Assuming those goals were achieved, there follows some discussion about what the measurement criteria will be for the next evaluation period. But unfortunately the emphasis is typically more on prior performance than talking together about what lies ahead. That creates a major opportunity lost in employee reviews when much of what is being discussed can be the result of activities that are eight, nine or ten months old.

What’s most important during the employee review discussion, assuming the employee in question had satisfactory prior performance, is what lies ahead, and how what lies ahead is communicated to the employee. What is communicated should be what challenges he/she must meet going forward. And those challenges should be the result of a well crafted strategic plan that is followed by a written business (operating) plan, a document that can be given to the employee as a follow up to the “what lies ahead” discussion. It also helps tremendously if the discussion can be in the context of the employee’s updated job description, and that document should flow from the company’s strategic plan and written business (operating) plan.

There are two major reasons for formally updating job descriptions. The first reason is that with the technological change our businesses now experience on what seem to be an almost a daily basis, the realties of our global economy and the dynamics of the markets we serve, any job description that is more than 12 to 15 months old is simply out of date. With an outdated job description, your employee is working to achieve a passé set of metrics, and metrics that may not be in sync with your company’s strategy and its forward looking operating plan.

The second reason for updating each job description is that the updated job descriptions should be written from the perspective of what is needed in the employee’s background and skill sets if his/her position were being filled today by a new employee – in other words, if the current employee were to leave and a replacement needed to be hired. This offers an unparalleled opportunity for the CEO to measure the current employee’s capabilities against what skills/background are needed to perform for the future, not how he/she measured up against prior requirements that may no longer be relevant. And it presents an opportunity to have the majority of the discussion in the performance evaluation center on how the employee and the CEO are going to work together with the company’s support to give the employee the opportunity to perform effectively within the content of the updated job description.

So what are the key points a CEO can take from this Blog? The process annually is to complete a strategic planning session which allows you to generate a business (operating) plan from which you can generate updated job descriptions. These actions result in an opportunity to cultivate employees who are prepared to operate effectively on your company’s behalf in today’s complex business world. Isn’t going through that process a result of great leadership? And think how well the effort you make will serve you in the months ahead, as now you know your key reports are working on what’s important for today and the future, and performing in a capable manner!