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Corporate governance

Governance Visualization — An OCEG Masterpiece

In one of my posts I wrote about a standout Corporate Governance organization Open Compliance and Ethics Group (OCEG). Another post covered Corporate Governance Visualization, the use of graphics to convey and explain Governance matters. I’d like to combine the two themes.

Corporate Eye has received permission to link to OCEG’s seminal visual on Corporate Governance. Think of it as “everything you wanted to see about Governance.” This is a landmark effort and visually shows all Corporate Governance practices and stakeholders, and all relationships and linkages.

You may access the visual here.

You will need to register for free subscription: well worth it you will get access to the visual and more. Also don’t worry about e-mails, OCEG respects your privacy.

For those who have an interest in Corporate Governance, OCEG and the visual is a must.

Innovation and Corporate Governance: Risks and Opportunities


At first glance corporate governance and innovation seem to have no relationship.

Corporate governance is, or perhaps should be, a rigidly defined set of principles and practices that are well codified. Innovation, on the other hand is not well defined, being somewhat free wheeling and creative.

Organizations are facing unprecedented rapid change and an ever increasing demand for faster decision-making. They must adapt to changes both inside—such as multi-generational employees and changing organizational arrangements—and outside the company such as regulations, competitors, and technology. 

While this is happening, the current menu of business tools and techniques is becoming less effective. The tools that worked in a Newtonian, mechanistic business world are too rigid and less effective. We are now in a Quantum world where chaos and complexity are the norms. 

The evolving business landscape demands that companies deal with “wicked problems”.  Wicked problems are messy, they are complex, don’t have direct solutions, cause experience and tools to be irrelevant, are based on conflicting, contradictory information and are connected with other problems. A wicked problem is so puzzling and confusing that it seems insoluble. This is where innovation comes in.

Perhaps this BusinessWeek article quote says it best:

“What was once central to corporations — price, quality, and much of the left-brain, digitized analytical work associated with knowledge — is fast being shipped off to lower-paid, highly trained Chinese and Indians, as well as Hungarians, Czechs, and Russians. Increasingly, the new core competence is creativity — the right-brain stuff that smart companies are now harnessing to generate top-line growth. The game is changing. It isn’t just about math and science anymore. It’s about creativity, imagination, and, above all, innovation.”

Companies  need innovation to launch new products, services and to reduce costs. Innovation is also risky since the outcomes are somewhat uncertain and could take more time and costs than anticipated. This is the nexus with Corporate governance. The Board needs to balance the need for innovation with the associated risks.

A simple definition of innovation governance is provided by Professor Jean-Philippe Deschamps  (Switzerland based IMD business school) :

Current innovation management techniques and organizational solutions tend to focus on many – not all – of the hard aspects of innovation, but much less on its softer elements. The scope of innovation is so broad that few companies appear to have thought deeply about what it takes now and will take in the future to steer and manage innovation in an integrated way, across all its aspects, hard and soft.

Innovation governance should be a key issue for Boards. As Steve Lennon puts it:

So directors need to establish a framework of corporate governance that can deliver two things that normally go together like oil and water: more innovation and less risk.

As tough as it may seem, this dilemma is at the heart of every director’s duty.

Yet, according to a report from Capgemini Consulting:

  • only 42 percent of respondents have an explicit innovation strategy;
  • only 43 percent of respondents say they have a formally accountable innovation executive.
This indicates that many companies need to look more carefully at how they govern innovation. Future posts will profile companies with best practices and other issues related to innovation governance.

 

Corporate Governance, Ostriches and Black Swans

Simply put, a Black Swan event is one that has a low chance of happening but if it does the impact could be catastrophic. The most current example is the BP oil spill in the USA.

Underpinning Black Swans are some interesting philosophical and psychological factors of human frailties.

A black swan is a highly improbable event with three principal characteristics: It is unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random, and more predictable, than it was. The astonishing success of Google was a black swan; so was 9/11. For Nassim Nicholas Taleb (author The Black Swan: The Impact of the Highly Improbable), black swans underlie almost everything about our world, from the rise of religions to events in our own personal lives.

Why do we not acknowledge the phenomenon of black swans until after they occur? Part of the answer, according to Taleb, is that humans are hardwired to learn specifics when they should be focused on generalities. We concentrate on things we already know and time and time again fail to take into consideration what we don’t know. We are, therefore, unable to truly estimate opportunities, too vulnerable to the impulse to simplify, narrate, and categorize, and not open enough to rewarding those who can imagine the “impossible.”

Black Swan: Strategy Execution for the “Outlier”

When Black Swan events occur, shareholders can suffer significant losses. Forbes magazine in their article, Of Brown Pelicans And Black Swans chronicled the financial impact of various corporate Black Swans–

Company

Start Date

End date

Market cap
(start date, in millions)

Market cap
(end date, in millions)

Money Lost

XOM

Exxon Mobil

3/24/89

4/10/89

55,275

52,170

3,105

MS

Morgan Stanley

9/10/01

9/17/01

45,171

39,259

5,912

BAC

Bank of America

9/10/01

9/17/01

92,439

87,147

5,291

MAR

Marriott International, Inc

9/10/01

9/17/01

9,996

7,892

2,104

BID

Sotheby’s

9/10/01

9/17/01

636

550

85

AXP

American Express Company

9/10/01

9/17/01

40,563

35,048

5,515

BK

The Bank of New York Mellon Corporation

9/10/01

9/21/01

27,269

22,555

4,714

XOM

Exxon Mobil

8/29/05

10/21/05

368,346

349,115

19,231

COP

Conoco Phillips

8/29/05

10/21/05

87,791

80,943

6,848

SCGLY

Societe Generale SA (ADR)

1/18/08

1/28/08

58,192

49,014

9,178

TM

Toyota

1/21/10

2/4/10

155,884

123,749

32,135

DLAKY

Deutsche Lufthansa AG

4/15/10

4/28/10

8,207

7,395

812

BAIRY

British Airways

4/15/10

4/28/10

4,338

3,952

386

BP

BP

4/22/10

6/17/10

186,431

99,273

87,158

The costs of Black Swans can be daunting.

ostrich heads

For Corporate Governance, dealing with Black Swans is risk management. The Board is responsible for oversight and the strategic direction of the company— not execution. This means Board members should take on a devil’s advocate role by asking C-Level managers questions such as–

  • How will you make the strategic direction come alive?
  • Have you considered all financial, strategic, ethical and risk issues?
  • What is the worst that could go wrong and how will you manage the outcomes?

More insights for dealing with Black Swans are covered in the report Black Swans Do Exist published by International Federation of Accountants–

  • Directors should increase their focus on risk, and engage more in detailed appreciation and understanding of the risks in their company’s products and service areas. For the financial services industry, a solution could be for boards to establish a specialized risk committee, and consider the employment of an external risk specialist.
  • Black swans do, and will always, exist. Therefore, be much more alert to the fact that, even at the extreme end of risk possibility, things do actually happen.
  • Executive remuneration should be better aligned with the longer-term real performance (in terms of profitability, not sales volume) of the organization—for example, via deferred remuneration in the form of shares.
  • Governance issues are probably best tackled with a mixture of regulatory, investor, and board responsibility. To only look to investors being more active is unlikely to be effective.

What do you think? Would this help companies deal with the arrival of a Black Swan event – and avoid the ostrich ‘head in the sand’ syndrome?

Coming soon: How Shell Uses Scenarios To Manage Risks.

Expose Your Board, Improve Your Corporate Governance

I remember one of my jobs when I had to organize and send the “Board Package” to members of the Board of Directors. Of course we knew their names, saw some of their pictures, heard about some senior management presentations and even knew of some of their characteristics. But, they always seemed elusive and removed. I’m glad to see that in some companies things have changed.

In the interests of improving Corporate Governance transparency, a few enlightened companies are exposing their Boards and their activities. For example Opnext, a high technology company that makes products for Telecom & Datacom. Defense & Security, Medical, Automotive Commercial & Industrial clients. On the Corporate Governance section, there is a comprehensive display of each Board Committee —

Look at the Audit Committee — not only are members identified, but the menu gives you access to descriptions of the Purpose, Meetings and Procedures and Powers and Responsibilities. Another good feature is that if you click on a members name, say Mr. Kendall Cowan, you are taken to an informative display of the composition of all Committees and Mr. Kendall’s background.

Finally, Sun International, gaming, hotel and entertainment company in the Republic of South Africa, on their online Corporate Governance displays a report card of the attendance history of Board members —

Now that is transparency.

Leadership Development–Context is the Key

Despite much advice from the $15 Billion Leadership Industry (business schools, seminars, books, tapes, journals), it seems that many so called leadership experts; business books and publications failed us.

…corporate America is in crisis, confidence in leaders is plummeting, and a recent DDI survey finds that more than one-third of all new leaders fail. What’s wrong with leadership development?
Leadership Development: Does Not Fit All

And it gets worse — in their recent report on leadership development, Global Leadership Forecast 2008|2009 Development Dimensions International (DDI), has a sobering chart on the declining confidence that HR professionals have in the ability of leaders to insure financial success.

Reasons for this include such items as:

  • Lack of CEO involvement
  • Leadership development not linked to strategic objectives
  • As Jay Conger, one of the best thought leaders (see The Productization of Leadership Development) suggested: companies look for quick fixes
  • Or perhaps the problem is what the doyen of business thought leaders, Warren Bennis,  once said, “I don’t think [leadership] is yet a ‘field’ in the pure sense. There are something like 276 definitions of leadership.”

To some extent, all of these are valid reasons why Leadership Development programs don’t deliver. However, I think the real culprit is that these programs do not adequately capture the context in which a leader works. That context is the complex soup —

  • of external factors such as the industry environment, political and social trends, regulation;
  • of internal factors such as the corporate culture, administrative systems, “tone at the top”

These factors combine into a context that is indigenous to each company.

“Yes, business leaders need to have certain personal characteristics to be successful, but it is often the application of those characteristics within a specific context that define great success. It’s not only who you are, but when and where you are.”

Tony Mayo, co-author of “In Their Time: The Greatest Business Leaders of the Twentieth Century” (see The importance of context for successful leadership)

Mayo gives a real example of the importance of the context of leadership —

The list of once-successful CEOs who have failed in new business settings is long. Bob Nardelli is a prime example. His stellar career and track record at General Electric seemed to be just what The Home Depot needed. Nardelli’s success at GE was predicated on a command-and-control leadership style that fit that company. That same style was less suited to the participatory culture of Home Depot. Nardelli failed to recognize the importance of Home Depot’s culture and was unable to survive despite certainly having the raw talent to manage the company.

The context of a company is found primarily in the hearts and minds of managers in the C-Suite. One of the best ways to tap this valuable source of intelligence for developing new leaders is mentoring.  The next post will profile companies who use leaders as teachers in Leadership Development.

Sites For CEOs

Things have changed in the last 15 years. In the mid-1990s, I remember hearing about a CEO from a major company when he was getting briefed about the Internet, brought his secretary since he did not know how to use a keyboard. Now CEOs are necessarily technology savvy and are increasingly using the internet. A number of surveys confirm this.

Forbes magazine’s survey “Day In The Life of C-Level Executives” (2004) found –

Web Usage

  • The internet continues to be the most influential and important source of information on business for C-Level executives around the world.
  • The Web is a pervasive presence in the lives of C-level executives: 38 percent of C-level respondents said the Web is their single most important source for information on business. The next most prevalent source of information was daily newspapers by 26 percent of respondents.
  • Among large company executives, the reliance on the Web is even greater with 51 percent naming the Web is their most important business information resource, followed by newspapers at 22 percent.
  • C-level executive respondents also stated they are spending less time with other media, including newspapers, magazines, TV, radio and industry trade publications as a result of the time they spend online (not including email): 59 percent are spending less time with magazines, 50 percent say they are spending less time with newspapers, 48 percent less time with TV, 46 percent less time with radio and industry trade publications respectively.
  • 26 percent of large firm respondents said they are knowledgeable about Wi-Fi technology and they are reporting some current usage of the technology.

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