A fish rots from the head

Prieur Du Plessis, Chair of the Institute of Directors, and Parmi Natesan,  contributed to Business Report on the essential qualities that Directors must have.  

The Chinese phrase "a fish rots from the head" is aptly quoted in relation to the Enron and other scandals in the 2000s, leading to more robust corporate governance frameworks. 

https://www.linkedin.com/pulse/portrait-director-prieur-du-plessis

Ethical directors - the key to good governance!

Peter Crow is a great commentator on board affairs and we appreciated his comments in this article on corporate governance. 

He makes a great point that enforced structural provisions may not be required if directors truly understand the role of the board and the business of the business.  He says though that this would rely "on directors behaving well and doing 'the right thing', a reliance that has a chequered history". We think that is quite the understatement! 

 

Why good governance matters

A couple of things that have happened recently which reminded us of how important good governance is – in both the business and organisational sectors. Getting it wrong can have serious consequences, especially in countries where regulatory standards are high.

The cost of getting it wrong

Some months ago we mentioned a corruption case in New Zealand which involved a Director of a contracting company paying bribes (in cash and in kind) to a senior Auckland City Council Manager. Well, in late February 2017 the case was heard in the Auckland High Court. The presiding judge said that the consequences of their corrupt practices had a far greater impact than on just the two individuals involved. She said it ‘negatively impacted the image of local government’, damaged the country’s international reputation, and damaged employee morale at the Auckland City Council. Because of the seriousness of the case (which the Crown Lawyer said was offending that ‘sits at the top of the range’), the judge sentenced both men to 5 years in prison. A tough penalty.

Riding for a fall?

This relates to a Board of eleven Directors that oversees a number of commercial assets, funds and social projects on behalf of a large community of owner/stakeholders. They contracted a consultancy group to advise them on how they could improve their governance structure and practices. During sessions with the Directors it became clear that there were two who appeared to play a more dominant role than the others. When the consultants suggested that the Board needed to use more formal processes to ensure that there was a greater degree of transparency in their governance approach, the two Directors mentioned explained that there was really no need to become more formal because they had their own way of looking at propositions and doing due diligence. But what of the other Directors?

The dangers

Essentially these two Directors were doing a lot of work outside the Board environment and basically telling the other Directors that they had done the necessary homework and all they essentially needed to do was to rubber stamp what they recommended. From a governance perspective this approach fell well short of what a Board should be doing (a) to meet regulatory compliance and (b) to ensure that the owner/stakeholders’ interests that the Board was overseeing were backed up by robust processes that included input and scrutiny by all Directors and that also ensured formal record keeping was of a high standard for transparency purposes. Several Board members had concerns about the way the Board’s business was being conducted and had asked for the consultancy group to undertake the independent review. This review is continuing.

Why worry?

Because of what happened in the first case. If one (or more) Directors becomes the driving force in any company or organisation and becomes involved in activities/practices which are potentially harmful then, at the full Board level, transparency is lost and good governance goes out the window. As the court case reported above illustrates, those who fail to meet good governance standards are going to pay a substantial price, if they are caught and prosecuted. And the consequences of their actions are felt by many more than those who are directly involved with corrupt and poor governance practices. That’s why good governance really matters – for the greater good.

Good governance - for one or for all?

Is business simply about making as much money as quickly as possible with a short- term view or is it about creating sustainable value that spans generations? An interesting question.

What’s one issue?

Danielle Martino Booth’s recent blog post on LinkedIn Pulse titled ‘Quantitative Easing and the Corruption of Corporate America’ questions the practices that some large corporations are pursuing to make money – with the Fed’s blessing. With money being cheap to borrow, leveraged share buybacks have been all the rage. She points out that Fed-blessed debt-financed share buybacks distort the market in favour of the privileged few. The Chief Investment Strategist at Bank of America/Merrill Lynch (borrowing off Winston Churchill) said, ‘Never in the field of monetary policy was so much gained by so few at the expense of so many’. He added that for every job created in the US in the last decade, $296,000 has been spent on share buy-backs. Corporations are also using super low interest US-raised funds to invest abroad ‘where taxes are lower and governments more eager to please’.

Martino Booth says these practices are endangering the US economy (again) and are ignoring the responsibility corporations have to leave a positive legacy for future generations. Such behaviour is not in the interest of the broader range of stakeholders many companies need to represent and is clearly not sustainable longer term. Is this good governance?

What’s another?

It comes down to the basic value propositions companies adopt as the vehicle to build a business. For example, a few years back we had the ‘pink slime’ debacle which led to a business in the USA extracting meat residues from fat trimmed off animals at abattoirs and used as a filler in burger patties going bankrupt. Once the public found out that the ammonia extraction process used left residues in the filler, the uproar was deafening – and it killed the company. Too narrow a stakeholder view?

And another?

The Internet of Things is generating a whole plethora of new and ‘innovative’ businesses. But some of them are quite bizarre – like a company called ‘My Flow’ developing a smart tampon which alerts women on their smart phones that it is time for a change. Then there is the ‘SKE Smart Jar’ that ‘analyses what is inside the jar and sends calorie, carb and other info to your phone’.  It reminds us that not every innovation or technological development actually has a real purpose, as this fascinating blog reminds us – ‘How many robotic intelligent assistants does it take to replace an alarm clock?’ Are these business ideas sustainable? Surely that’s what governance should really be about.

So, what is true good governance?

It is about not being reckless and, to use a term that was fashionable some years back, about delivering on the triple bottom line. Governance means catering to all those stakeholders impacted upon or influenced by any businesses actions or activities – not just a select few. It is about pursuing value propositions that have a purpose and which deliver long-term sustainable benefits TO ALL STAKEHOLDERS within an appropriate combination of economic, social and environmental goals. It’s about leaving a positive inter-generational legacy – not just about making fast bucks for a privileged few. Good governance is all about building long-term sustainable businesses.

This post originally appeared on our partner website www.marcollieblue.com

The growing risk of 'human stupidity'

As long as the human race has been on the planet people have always done stupid things. But there is a suggestion (originally made in 1936) that we may becoming even more stupid with each new generation. Here are a few examples that may support this contention!

Pokemon – Go

This app has taken the world by storm. Over 20 million downloads since launch. Nintendo’s stock has soared by US$ 7 billion.  People are running around searching out ‘Pokemons’ everywhere, including the US Holocaust Museum! One writer described it as a piece of trivia, just like the ‘Real Housewives’ television series – which is far from real. One man missed his baby’s birth because he was so absorbed in chasing Pokemons. Criminals have used it to lure victims into a trap. New Zealand players tracking Pokemons have suffered sprains through inattention and costing the country’s taxpayers and Accident Compensation Commission. Overseas, people have even broken bones. When people become so obsessed that company stocks soar by encouraging ‘human stupidity’, is that good?

Guns everywhere

The US love affair with weapons has, as Barack Obama recently said, led to US communities being flooded with arms. When such a flood occurs it is only logical that people in a confrontational situation, no matter how minor, tend to follow a ‘shoot first and ask questions afterwards’ approach. There are large corporate groups in the arms manufacturing / retailing sectors in the USA that benefit from the growth of such a societal fear. And they have invested heavily in ‘buying off’ the political establishment to preserve the status quo and encourage greater ‘human stupidity’?

Exxon wants to deny climate change

Recently Exxon has been in the news because of its reluctance to inform shareholders about the risks climate change and regulatory moves might have on the Group’s future. For 30 years the Group invested heavily in high profile ‘climate change denial’ initiatives. This is in spite of large investment groups controlling over US$ 3.4 trillion in funds saying that they are going to pull out of fossil fuel investments because of the risks. Exxon is suffering from a ‘stakeholder disconnect’. Another example of ‘human stupidity’?

Protecting people from themselves

The small community of Mangonui in the Far North of New Zealand has a beautiful harbourside board walk. It is constructed to resemble a wharf. In spite of almost total opposition from the local community, the Far North District Council has decreed that it is going to build a wall along the edge of the boardwalk ‘to stop someone accidentally falling off’ because it is concerned with the consequences of not minimising a risk under new health and safety regulations. In other words, they are determined to try and protect people from their own ‘human stupidity’ – something which is impossible. Someone will climb on or over the fence for sure and get hurt - probably while searching for Pokemon!

The bottom line

‘Human stupidity’ is a big risk for business. On one side it leads to ‘killing off customers’. On the other side it increases the risk of legal proceedings for not protecting people against risks which businesses either create, enhance, or fail to ‘fence off’ (even though taking risks is part of the human psyche). How many Boards of Directors really understand the ‘human stupidity’ risk?

This post originally appeared on our partner website www.marcollieblue.com

Director's risks - some real life questions (and answers)

A director of several companies recently asked us about risk.

His questions

  • ‘Risk management.......define, in your mind, what that is? I am a little confused on how to assess risk.
  • I sit on the Board of Company A - there is a risk that our internal controls are weak (and stealing continues unfettered!).  There is a risk that our competitors do a better job than us.  There is a risk that we expand too fast (thus, run into liquidity problems) or expand too slowly (and lose market share).
  • I sit on the Board of Company B - there is a definitely a risk of foreign competitors decimating our market share.
  • I sit on the Board of Company C - there is a risk that I die and no one capable or interested to take over and continue the party.
  • Give me a little direction.  You know I am a little thick on these touchy feely things.’

Our answers

The world we live in is shaped by positive and negative forces. In simple terms positive forces are opportunities and negative forces are risks – similar to those in our ‘Force Field’ diagram. The positive forces take you forward and strengthen your position but that can only happen if the negative forces (risks) are managed and either eliminated (often almost impossible) or minimised (always possible).

We have had a long association with a very successful New Zealand businessman. He succeeds because when he pursues an opportunity he always develops a thorough understanding of the associated risks and how to mitigate them. It is not rocket science. It is a matter of becoming very well informed and developing a good relationship with all key value chain stakeholders to understand everything from both his and their perspectives. That’s why he succeeds.

Of course it is impossible to eliminate risks 100%. After all we have to deal with other human beings, nature, and forces we can’t always control. But if we develop a well-informed understanding of what the risks are then we can minimise the impacts. For example, if you were a chocolate maker and only sourced your cocoa beans from Tobago in the Caribbean and a hurricane hit the island wiping out the crop, then you would be very vulnerable. If your customer service is poor and alienates your customers, that’s a huge risk – one that can easily be prevented. Another example is to develop a product or service before checking whether anyone will buy it at a viable price. This happens regularly because entrepreneurs are so passionate about what they pursue that they sometimes fail to check to see if others are just as passionate!

The potential issue

It sounds to us that the Director posing these questions may not have the level of understanding and governance control to be acting in the range of Board positions that he currently does as he faces issues that appear to be difficult to deal with and doesn’t know quite how to deal with them. As a result he could face risks (even future liabilities) as a director for failing to protect the interests of ALL STAKEHOLDERS – which is what a Board Director is responsible for at the end of the day. Unless the entire business value chain operates smoothly and for mutual benefit, then the risks take over and the opportunities are lost.

This post originally appeared on our partner website, www.marcollieblue.com

Excessive risk prevention weakens resiliency

As long as there are humans on this planet, people will take risks. Efforts to try and eliminate risk are doomed to fail – unless every human being is wrapped in cotton wool and locked in a cell. Even then someone will try to do something radical. There is too much focus today on trying to eliminate risk – and that’s not only bad for business but also for human resiliency.

Occupational Health and Safety

Of course people should be protected from truly dangerous situations. However, in a number of countries, such as New Zealand, recent legislative developments are causing concern. They appear to be moving a great deal of responsibility away from individuals to ‘someone else’. And yet it is the individual who is at the centre of any risk environment and is largely responsible for making a go/no-go decision. School principals are paranoid that they will be prosecuted if a pupil climbs a tree at school and falls to the ground and becomes injured – perhaps even dies. We have a council wanting to fence off a harbour-side boardwalk in case someone falls into the sea a couple of metres below – even though it has been there for years and no one has ever fallen in the water. It’s an obsession with eliminating a potential risk associated with a council managed asset, even if miniscule, that is creating a nonsense situation.

Why a nonsense situation?

Because a short distance away there are public beaches where the waves can be quite boisterous at times and dangerous rips can form. People have been injured and drowned there. But imagine the uproar if the beaches were fenced off so that no one could enter the water to eliminate a hazard. If they do install a fence on the boardwalk, what’s the bet that someone will climb up on it at some time and maybe fall off – from an even greater height!

Losing resilience

When we went to school we had to walk some kilometres from an age of 5 years. The first couple of times a parent walked with us to teach us the way and also to look left and right before crossing the road to make sure we were aware of the risk of being run over by a car or truck. Today, many kids are driven to school, often in large SUVs - sometimes complete with bull-bars. Parents want to make sure they arrive safely – but at the same time are also robbing them of the opportunity to recognise and manage risk. They don’t have to watch out for traffic. They don’t have to avoid hazards. They don’t have to be wary of strangers who may cause them harm. They are oblivious to many risks and unprepared to deal with them. In addition, interacting with others through interfaces (smart phones, social networks etc.) allows them to do things that they might think twice about if interacting with people face to face. There is a perceived level of protection and immunity from risk by hiding behind interfaces – although some are finding out that they are not as hidden as they may have first believed! Today’s young people are reported as having the lowest level of resilience ever.

Risk taking is essential

A quote from Elizabeth Peterson in a recent article sums it up succinctly. ‘If it’s not safe to make mistakes, then it’s not safe to grow’. And that’s the big issue. We appear to be focused so much on eliminating risks and hazards that we are evolving into a society that has decreasing resilience. If we continue to fail to recognise that we need to be resilient then we’re simply not prepared to survive and thrive in this world as individuals - or in business. Think of Kodak, Lehman Brothers, Borders and Amy Winehouse - amongst others.

This post originally appeared on our partner website www.marcollieblue.com