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Kindle Notes & Highlights
by
Bob Garratt
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February 12 - February 23, 2020
the eternal values of effective corporate governance – accountability, probity and transparency – keep on shining as brightly in this naughty world.
the short-term, mission-orientated mindsets and behaviours of executives are often in direct opposition to the long-term legal duties of the directors.
However, as few directors are aware or willing to fulfil their critical oversight role, they convince themselves frequently that their short-term gains are always for the benefit of the owners.
hearts-and-minds approach to corporate governance and director development.
regular and rigorous learning is the key to corporate success.
learning board model. At the centre of the model is the director’s irresolvable dilemma: how to drive the organization forward whilst keeping it under prudent control.
It is why boards were invented, to add sufficiently diverse wisdom to counter a single leader.
That is why effective organizations have monthly board meetings.
Sadly, greed and fear are characteristic human drivers.
Managers, or executives, are there to design, install and maintain the prudent control systems of the organization and to capture and use the learning flowing from them.
They are not there to develop policy and strategy on behalf of the directors, but they should provide much of the hard data and alternatives on which the directors must decide.
The board must lead in the formulation of policy as it, not the managers, is legally responsible for this – pointing the ship in the direction required given the many uncertainties that are beyond the horizon.
Directors have a fiduciary duty to ensure the long-term health of their organization and must, if necessary, counter any unreasonable short-term demands of both their shareholders and their executives.
Policies are the core of the business. They both set the purpose – why the organization exists – and allow the development of rational strategies and appropriate cultures.
Policies are not, as taught in some business schools, the rules of the organization.
Rules are an essential but operational aspect of prudent control systems.
the key concept that strategy is the broad deployment of scarce resources to achieve a purpose.
This is the role of the board of directors.
Strategies are flexible. They are not set in concrete. The uncertainties shown through continuous horizon scanning must allow for fast learning and the consequent adapting, or rejection, of the current strategy.
confusing two distinct and separately important processes: the prime board roles of policy formulation and its associated strategic thinking; and the executive roles of planning and delivery.
The acid test of whether an executive director will ever become a true director is if the individual can take an independent stance on a board item and be seen to disagree with the chief executive.
Executives who become statutory directors must have two employment contracts: one for, say, 80–90 per cent of their time as an executive under a normal contract of employment; and one, a contract for services as a director, for the other 10–20 per cent of their time,
Executives are there in part to add diversity to board debate through their detailed operational experience. They are not there to act as ciphers of the chief executive.
choosing individuals who will demonstrate independent thought, critical ability and judgement based on the best interests of the company as a whole.
directors need to be reflective, patient, able to horizon-scan, able to think strategically, open to new ideas and information, and capable of rational debate and decision-taking in areas of great uncertainty, these executive traits do not seem ideal in a board director.
so absolute power resides in the CEO/chairman and we know what absolute power does without sufficient critical directoral comment: it corrupts.
The chairman is also responsible for the board dynamics so will ensure open debate around the boardroom table,
One is not to talk too much from the chair. As time goes by it becomes more difficult to resist the temptation to reminisce, or to bring the discussion at the board onto more familiar ground in order to be able to take full part in it. The Chairman’s job is to listen and not to chatter. Chairmen are there to orchestrate the discussion, so that it comes to a fruitful conclusion. The test is straightforward; how much of the board’s discussion time is taken up by the Chairman? …
The board should include a balance … such that no individual or small group of individuals can dominate the board’s decision-making.
be absolutely tough-minded on the precise meaning of the oft-maligned term ‘added shareholder value’.
The economic value added after the board considers three interrelated issues – the reasonable short-term demands of the owners, the cost of capital, and ensuring the long-term health of the business.
these were decisions that could only be made by the board through regular and rigorous debate and decision-taking.
The prime role of the board of directors of this company is to help create long-term value for its shareholders.
2 Ensuring that all directors understand and subscribe to their legal duty of giving their first loyalty to the company as a separate legal personality.
Ensuring the selection, development and evaluation of all boards and directors as true professionals, whose primary concern is to balance the delivery of both board performance and board compliance through regular and rigorous board appraisal and continuing directoral development processes.
4 Ensuring that the chairman is accepted as first amongst equals aroun...
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Ensuring that the managing director, or chief executive, is treated as an equal colleague around the boardroom table, with special responsibility for helping ensure the effective implementation of board strategy and for ensuring the prudent control systems of executive performance.
reinforcing fiduciary duty assessing professionalism moves towards the triple bottom line and sustainability.
To act within their powers – i.e. the company’s constitution
To promote the success of the company 3 To exercise independent judgement 4 To exercise reasonable care, skill and diligence 5 To avoid conflicts of interest 6 Not to accept benefits from third parties 7 To declare interests in proposed transactions.
Being seen to have been careful, skilful and diligent is a legal requirement. So in areas and on proposals where boards have little knowledge, the expectation is that they will declare their areas of ignorance and seek, internally and externally, advice on the options, risks and consequences of proposed courses of action.
The requirement that the board debates policy and strategy issues in such a way that the detailed grunt work can be delegated to the executives before bringing carefully worked through alternatives for further board debate, risk assessment and decision-making and recording is now in the legislation.
This idea of a licence to operate, renewed annually or every five years subject to satisfactory performance,
the triple bottom line.
Companies would be audited annually on their: financial performance impact on the physical environment impact on the communities in which they operate.
Sustainability
The basic principles are: to do no harm through our activities to replace what we have taken where it is not possible to replace, then to substitute something of equal value to our community and the physical environment.
UN Global Compact. Its ten principles are as follows: Human rights Principle 1 Businesses should support and respect the protection of internationally proclaimed human rights; and Principle 2 make sure that they are complicit in human rights abuses. Labour Principle 3 Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining; Principle 4 the elimination of all forms of forced and compulsory labour; Principle 5 the effective abolition of child labour; and Principle 6 the elimination of discrimination in respect of employment and
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make boards preeminent in their position in the organizational hierarchy, as they will be the only people with an ethical and governance overview of the total business, internally and externally. Which is just as it should be.
ONE WAY OF VISUALIZING the role of the board of directors is to see it as the point of convergence of two pyramids (see Figure 1). One pyramid, the executive system of the day-to-day operations of the organization, faces upwards towards the board. From its broad base the experiences, information and ultimately the integrity of all the organization’s learning are focused on the board. The other, an inverted pyramid representing the outside world and all the uncertainties, trends and disruptions coming from it, is also focused on the board.
