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Kindle Notes & Highlights
by
Bob Garratt
They must design systems that allow them to track the patterns of the data before them to ensure that they are heading in the right direction at the right rate, or to know the reason why not. This data will include at the minimum financial, customer satisfaction, knowledge development, staff satisfaction, competitor intelligence and project performance – all of which combine to create the added value promised by the board to the owners. And it needs be presented to the board in an active visual form so that the trends are highlighted and tracked for all the directors to see.
To be able to supervise management effectively, a director needs both a mindset that allows him or her to take hard and soft data and find patterns within them, and decent systems to provide reliable data in the first place.
The most common comment from the directors with whom I work is that they are nervous because they have no real way of knowing whether the facts and figures on which they are basing their decisions are correct.
To achieve any sort of confidence you need a minimum of three types of measure: organizational capability indicators key performance indicators oversight of managerial performance.
A board may order what it wants, but there is no organizational rule that says its orders are connected directly to action. However, their direction and instruction can ensure a climate of cooperation and learning which will give high levels of commitment in individuals and small groups to deliver the strategy.
‘cash is king’ will always be true. It is easy to go bust on a theoretically profitable project or business just by running out of cash. It happens every day.
Directors need to understand not only cash flow and the profit and loss accounts but also, most importantly of all, the balance sheet.
A director needs to be able to see the changing pattern of the figures and their relationship to each other. Simply reading one set of figures is not sufficient, even if you understand them. You need to see the history, and the present position, to be able to think effectively about the future.
can the key trends be shown to the board on no more than two sides of A4 paper?
As businesses decentralize and strive to create smaller, more manageable business units it is necessary for the supervision of management approach to become more focused on project management skills to keep the whole together.
FIGURE 21• Kao Corporation’s discovery-driven planning process Source: Harvard Business Review, July–August 1995
From this data the staff can easily identify and codify, for the board’s information, the top ten customer issues each week. This information is then fed to the design function so that they can improve new releases and project future customer needs, although with new information security and personal data laws appearing in many countries, such approaches need thoughtful design and constant monitoring.
We know a lot now about the psychology of groupthink52 and the propensity of most humans to yield when under pressure,53 despite their espoused values of taking a high moral stance. So the board’s supervision of the executives’ management of risk becomes crucial. They are there to give direction, to give leadership on both task and values. Financial services companies have flunked this role.
risk is always with us and needs managing rather than eliminating
pursuing elimination of risk leads to narrow perspectives, unimaginative futures and a rotting head.
The Cadbury Report, The Financial Aspects of Corporate Governance,54 recommends that the directors make statements in the company’s annual report and accounts on the effectiveness of their internal systems of control as a way of assessing risk for shareholders.
team are faced with four options or combinations of them: eliminate the risk reduce the risk share the risk take the risk. In our current risk-averse climate, the tendencies are too often in the top two categories. As entrepreneurs we need to be thoughtfully in the last.
In the end boards still tend to return to the safety of assessing only financial risk as the highest priority for the enterprise’s and board’s survival.
One increasingly used technique by financial analysts is the Z-score concept. Here ratios appropriate to the enterprise are selected, weighted and then added together to produce a single index. Whilst there is no single model, a typical Z-score would comprise at least: profitability working capital financial risk liquidity.
technique known as risk rating uses a company’s Z-score history to predict the probability of financial distress for such negatively scored companies. Taffler reinforces the supervising management message ‘that plotting corporate performance over time [means that] problems can be picked up before the Z-score goes negative, giving more time for appropriate action to be taken’. The work on Z-scores has progressed to the point where a workable formula is used in a number of companies. This looks at five ratios: 1 Working capital to total assets 2 Accumulated retained earnings/total assets 3
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and then uses the formula: Z = 1.2 × 1 + 1.4 × 2 = 3.3 × 3 + 0.6 × 4 + 1.0 × 5 which is the best way known so far of predicting whether a company is likely to fail in the short or medium term.
most boards are not that concerned about future income streams and will over-manage the use of existing resources rather than think strategically.
a one-page summary of ten directoral duties. This was commissioned by the Commonwealth Association for Corporate Governance.59 The ten directoral duties outlined are as follows: 1 Legitimacy (working within the letter and spirit of the law). 2 Upholding the three major values of effective governance: accountability, probity and transparency. 3 Ensuring that the company is held in trust (fiduciary duty). 4 Upholding the primary loyalty of each director to the company. 5 Ensuring the duty of care, skill and diligence in decision-making. 6 Ensuring critical review and independence of thought
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reputation risk is now the major concern for most companies. And reputation risk is allied to pressures way beyond the ‘only the bottom line has importance’ mindset.
Limited liability in most countries is granted to the owners, the shareholders, up to the limit of their paid-up shareholding. The directors are not covered by limited liability. All directors have unlimited liability for their actions, or lack of them.
A growing number of US directors are running without such insurance. There is only one logical response – to ensure directoral competence and then ensure regular appraisal. Indeed, some UK insurers are now saying, ‘If you can show me that you have undergone some form of formal directoral induction, training and regular assessment, we can give you a significant discount on your D&O insurance.’
As a result of directors having no self-regulating professional body, they are not covered by the precedents of civil and criminal law.
A civil society cannot exist without effective corporate governance to best deploy its economic and social capital. Effective corporate governance balances over time all stakeholder interests, rather than just shareholder interests.
There are now league tables of corruption in countries, the best of which appear on the Transparency International website.62
This puts independent directors in an interesting and potentially powerful position. It is obviously meant to deal with Lord Halifax’s famous dictum – ‘the problem with British companies is that they mark their own exam papers’.
Standards for NHS Boards and the Audit Commission’s Take On Board are a good start.
The biggest breakthrough in the UK is the least publicly recognized. It is the creation in 2001 of the public examination and award of the status Chartered Director.
The written examination reviews a candidate’s knowledge of: the roles and duties of a company director finance (not just accounting) business strategy marketing organizational change board decision-making.
There are nearly 1,000 Chartered Directors in the UK and applications are increasing.
This extreme mix of personal greed and the simultaneous craving for acceptance by your work group, even if you do not like their ethics, seems to be endemic in financial services. It corrupts the rational distribution of scarce national resources to achieve social good and the aspiration of a civil society.
there is now a consolidated list of directors’ duties: The Seven Non-Exhaustive Duties of the 2006 Companies Act. There are many others but these are highlighted as the foundation for developing effective boards of directors in the UK: 1 To act within the powers of the company and to exercise powers only for the purpose for which they were conferred 2 To promote the success of the company and, in so doing, have regard to the likely consequences of any decision in the long term and in the interests of the company’s employees 3 To exercise independent judgement 4 To exercise the care, skill and
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Amongst its worst excesses is the notion that the CEO and CFO must sign off their quarterly accounts as true and accurate – do you know of an accounting system that can deliver true and accurate quarterly accounts? If so, you will make a fortune. And, if these benighted folk unwittingly mis-sign their quarterly statement, they face the strong possibility of a $1 million personal fine and one year in prison.
Rushed legislation usually follows the Law of Unintended Consequences.
It still seems odd that financial services are considered outside the remit of consumer legislation. Thus a totally untested or certified product can be launched onto the market with no onus on the company if it does not work.
Directors’ duties are both to work within the meaning and spirit of the laws and to behave in an ethical manner to their clients. This means always putting the interests of their clients above immediate personal gain, swearing to do no harm, swearing a primary loyalty to their organization, ensuring that conflicts of interest are always declared and that there is true independence of thought around the boardroom table.
There are six pre-conditions for a board development process to be successful: The board members must recognize and accept the difference between managing and directing. They must appreciate the need from the start to benchmark the position of the board as a working group, themselves as individual board members and the total effectiveness of the organization itself, in terms of both where they are now and where they wish to be. These differential or gap analysis measures are the foundation of any type of development process. No scientific process can start without them. The chairman must take
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A surprising number of directors with whom I have worked have said how lonely and unconnected the post is. This is particularly true of chief executives. They report frequently that they do not have reliable sources of information to let them know what is happening inside their enterprise because everyone has a vested interest in slanting information for maximum personal advantage.
Furthermore, it seems as though the non-executive directors are constantly policing them and trying to catch them out in those professional areas in which they are not as expert as the non-executives.
The rule of thumb at present seems to be that directors must not serve more than a total of nine years, three times a three-year service contract.
There will always be a mix of powerful players, which is why it can never be a true ‘team together’. It is to the diversity of these powers that the wise chairman will play, thus ensuring sufficient variety in the board’s thinking before decision-making.
The word ‘development’ comes from the Latin root volupe and is about two related aspects: first, identifying the richness contained within a person or thing; second, making this potential manifest and putting it to good use.
A board needs to commit itself to the idea of having three parallel streams of training and development under way simultaneously: the training and development of individual directors the training and development of the board as an effective working group the continuing development of the enterprise as a whole.
a simple 360-degree appraisal of each individual is usually sufficient. This is done at all levels of organizations apart from the board, so individuals are used to such a process. It is odd that it has not been considered essential at the highest level of the organization.
