Is it time for Director Effectiveness Reviews?

The picture above is a scan of some of my brainstorming doodles in the light of recent corporate traumas.

I’m starting work with current clients on director effectiveness reviews alongside their board effectiveness reviews, which are used by some merely as a “tick box” exercise.

The behaviour issues arising in board effectiveness reviews are never published or rarely addressed fully. This is not the fault of the reviewers.

I don’t carry out formal reviews myself. I focus on addressing the behaviour issues which are surfaced by them.

It seems to me that effective boards are those where there is a shared purpose, an agreed strategy to achieve that purpose and negotiated behaviour change to implement the strategy. I call this PSB.

When I say negotiated behaviour change I mean each director’s commitment to colleagues to change, even a little, their worst behaviour that is likely to increase risks and smother opportunities.

It would be easy to kick this issue into the long grass, as done in the Financial Services sector, by falling back on yet another noun: conduct, which is observed behaviour over time.

Boards have an uncanny knack of appearing to confront tricky issues by turning them into grandiose nouns. All that happens is that there’s lots of faff and paperwork and conferences and no change. Witness The Banking Standards Board’s recent scathing reports into the lack of improvements in “conduct” since the Global Financial Crash.

I prefer adjectives: an effective board rather than board effectiveness. So what about ensuring we have effective directors to enable that outcome?

The main test for an effective director, in my view, is a willingness to change, even a little, their worst behaviour.

Are you?

Ciarán Fenton

The Carillion Report: three behaviour lessons for boards

It would be unwise for anyone to indulge in schadenfreude on reading the Joint BEIS & Work and Pensions Committees Report into the collapse of Carillion published today because the behaviour that led to it is widespread and everyone knows it.

A more useful response would be to hold a workshop at your next board meeting with the title:

” What can we, as directors, learn from the mistakes highlighted in The Carillion Report?”.

I propose three lessons for your consideration:

First, voluntarily agree to use an ESG50 or similar approach to decision-making. I set out such a plan in a paper I presented at The University of Bolognia earlier this year, See #ESG50.

By ESG50 I mean that your board should give a 50% weighting to Environment, Society & Governance issues within your critical decisions and a 50% weighting to financial return issues.

“It will never happen on our board”, I hear you say.  Don’t be so sure. The zeitgeist is not with you. For example, Harvard Business Review has, since 2015, given a 20% weighting to ESG issues in its Global Top 100 CEO rankings. It’s only a matter of time before this arbitrary percentage will be increased with a dramatic impact on the rankings.

And if the gladiators of capitalism such as HBR, Larry Fink and Merryn Somerville Webb are calling for behaviour change – which they are – then your board should wake up and smell the incense because there has been a shift in public opinion and tolerance for corporate misdemeanour.

The mandate society gives your board to trade is, merely that, a mandate. Don’t’ think it can’t be withdrawn.

But how does ESG50 work in practice? It means that every decision is subjected to an ESG test. If you read the Carillion Report you will I’m sure to agree that had its board applied such a test to its key decisions, which are listed in detail, Carillion would still be a going concern today.

Second, I propose that your board reviews the interdependence between the personal purpose of each director on your board and the purpose of the organisation.

In this regard one of the most chilling if unsurprising sections of the Report is on Page 47:

  • “107. Carillion’s directors, both executive and non-executive, were optimistic until the very end of the company. They had built a culture of ever-growing reward behind the façade of an ever-growing company, focused on their personal profit and success. Even after the company became insolvent, directors seemed surprised the business had not survived. 108. Once the business had completely collapsed, Carillion’s directors sought to blame everyone but themselves for the destruction they caused. Their expressions of regret offer no comfort for employees, former employees and suppliers who have suffered because of their failure of leadership.”

If through some magic time tunnel, the directors of Carillion could wind back the clock and put in place a process that would have prevented this hubristic outcome, what would they have done? What can your board do to avoid such consequences even if not perhaps as catastrophic, but hugely damaging to your business?

The answer must lie in the transparent articulation of personal objectives and how these are interdependent with the goals of the business. I acknowledge that these conversations would be painful and demand a level of emotional intelligence that you may feel some directors may lack. But what’s a bit of discomfort around the board table compared to these risk events?

Third, I propose that you appoint by rotation at each board meeting a Devil’s Advocate who has permission to call out anything which should be called out. I wrote about this at the time of the collapse: Could a Devil’s Advocate process prevent a Carillion situation on your board?

Even if you ignore these suggestions, you should at least bring your risk register up to date and place at the top of that list “Conduct Risk”. Had Carillion done so, and flagged as “Red” the possibility that their “cosy relationships” with advisers and NEDs would lead to disaster one hopes they might have mitigated those risks.

As a board exercise, why not print out the Report and work through the list of risk events that your board believes Carillion could have avoided and how your board could be exposed to similar risk? What have you got to lose?

Ciarán Fenton

If GCs waived their long-term incentive plans, would boards make better decisions?

logo lawsoc

This article was first published by The Law Society In-House InsideOut Magazine on April 30th. 2018.

If GCs waived their long-term incentive plans, would boards make better decisions?

Board effectiveness consultant Ciarán Fenton argues for a more independent in-house function to enable better board decision-making. 

 

‘The whole world is in a terrible state of chassis,’ says Captain Boyle in the last line of Juno and The Paycock (1924), the play by Sean O’Casey.

He used the word chassis to give the word chaos a more profound and broader meaning, and to capture the madness of the times.

And a state of chassis is an appropriate word to use to describe current times in the world of politics and business. Trust in business is low; corporate conduct is still routinely poor, and political uncertainty, and therefore business uncertainty, is the new normal.

This macro-context presents GCs with a rare opportunity to step into the vacuum created by extremes. They should do so now, before the world returns to the old normal, as it inevitably will.

The current vacuum at the centre of the political spectrum allows the extremes of left and right to set the agenda. But the vacuum also allows hitherto unheard voices to be heard: #metoo, gender pay gap, gun control and other conduct and environmental, social and governance (ESG) issues are being addressed in a manner unthinkable in ‘normal’ times.

Ultimately, these conduct and ESG issues will come to haunt the boardroom, in one form or another.

And now the boardroom turns to lawyers for help, only to find that in-house and external law firms – themselves merely an extension of in-house, hence the name ‘in-house’ – are not in good shape to deal with these problems.

Why? Because ‘the Business’ has neglected Legal for years, and taken all the advantages of having ‘friendly cops’ on the inside without confronting its responsibility to create an environment in which Legal can do its best work.

If anyone doubts the abusive nature that is the Business-Legal relationship, they should read UCL’s Mapping the Moral Compass Report (June 2016) into the ethical pressure that businesses exert on in-house lawyers.

I need no persuading, as I’ve observed it for myself at close quarters over ten years as a leadership and board effectiveness consultant.

But Legal has to face the fact that it has allowed this culture to develop by allowing itself to be bullied and bossed around by the Business, and that perhaps it is compromised in its collusion with performance management systems – the bell curve, in particular – and some bonus schemes and long-term incentive plans (LTIPs).

How can a lawyer be confident that they are not conflicted in giving advice, even unconsciously, if they are to benefit from the outcomes through bonuses and LTIPs?

When I raise this point with lawyers, the reactions are mixed: some counter it, and argue that being treated like everyone else strengthens their position when giving cautious advice, as if to say: ‘I could benefit if we did X, but I’m advising Y because it’s the right thing to do.’

Others feel strongly that they should be allowed to benefit from their contribution to their organisation’s growth like everyone else. But everyone I speak to displays a momentary flicker of panic at the inescapable logic that they may be compromised and at the unthinkable prospect of earning less money for the same work.

But Legal could now name its price, with higher salaries and without any LTIPs, if only it would tell the Business what legal counsel and process it needs, and at what cost to achieve its business goals, but within a defensible ESG framework and that it is non-negotiable.

Legal should present to the business its reframed purpose as follows: ‘To enable better boardroom and executive decision-making.’ Full stop.

Legal should build the function from a clean sheet and not be forced to play catch-up with the business. It should deliver specific interventions related directly to business strategy decision-making. In this way, its role and purpose would no longer be a matter of endless debate at conferences.

The debate could move on to how best to outsource legal process, and how to up-skill in-house lawyers as first-class advisers, some as great leaders of legal teams, even, where the numbers allow it.

The in-house community needs its own statutory body, (say) the Institute of In-House Counsel (IIHC) or something of a similar title, with its own rules, qualifications and procedures. Currently, there are no additional qualifications required to be an in-house counsel.

The IIHC would create an environment in which in-house lawyers could present a united front to businesses and a uniform model for the function, thereby creating an opportunity for lawyers to lead much more fulfilling, less stressful lives.

But this would require, however, a significant mindset change in three ways:

  • In-house counsel must acknowledge that they are different to everyone else in the Business: officers of the court first, business partners second, whose purpose is to enable better decision-making; who get paid top salaries, but no LTIPs. If you want to make money, stay in private practice.
  • Legal must tell, not ask, the Business what it needs regarding legal counsel and process to meet business objectives, and how much it costs. If the Business can’t afford it, then it can’t have it. No more ‘diving catches’ by lawyers.
  • In-house counsel must support each other in enforcing the highest standards of conduct in business, with zero tolerance for elevated ethical pressure. Lawyers and the IIHC would actively support colleagues who are being bullied. Businesses just wouldn’t dare try it on. The shocking ethical pressure percentages in the UCL report would be reversed.

Philip Wood QC, soon-to-retire head of Allen & Overy’s Global Law Intelligence Unit and author of The Fall of the Priests and the Rise of the Lawyers, once said: ‘… legal systems are in all their respects the most fundamental source of morality.’

This is not a rallying cry one often hears from GCs – not because they don’t believe in morality, but because they don’t believe they have the power to impact conduct, which is behaviour over time.

They do have the power. All they need to do is to use it. And if they don’t, society will start to call out much more often and much more forcibly than they do now: ‘Where were the lawyers?’.

As in, how could the lawyers let #metoo happen? Well, how? They must have known.

Ciarán Fenton

Why directors should reveal their purpose to colleagues, if they know it

laughing board

Some view the boardroom as a cross between a bear pit and The Coliseum. A place where ritual humiliation can be observed if not savoured. An arena of intricate game playing where the winner gets their way.

Why would any director take the risk of being vulnerable in these circumstances, even if the caricature above is only sometimes true?

The answer to that question is that if you feel that your board is irredeemably dysfunctional, then you should leave it.

But most boards are remedial, because most directors, bar psychopaths and extreme narcissists, are in search of meaning to their lives, even if they might not admit it or indeed be aware of it.

The downside of the current obsession with “board effectiveness” is that it almost anthropomorphises boards. Boards, per se, can be neither effective nor ineffective

Only directors can be effective, and so, ideally, director effectiveness reviews should replace board effectiveness reviews.

But don’t expect directors to be all clamouring to be personally reviewed, even anonymously, anytime soon because they would feel exposed.

Their weaknesses would be laid bare. Their insecurities revealed. Their lack of clear purpose and direction a potential embarrassment.

Many readers will scoff at this scenario as a wild generalisation. They will protest that they have a singular focus, probably based on some external measure of success.

But many too would if given a chance to explore it, acknowledge a gnawing sense of internal purposeless wholly at odds with their frenetic and often stressful external personae as directors.

How can boards possibly achieve their potential if a context isn’t created to enable its directors to achieve theirs?

The best-kept secret in business life is that organisations are merely a loose collection of individuals for a brief period and not a unitary body which acts like some corporate robot programmed by a unanimous board.

It’s a nonsensical construct. But we all collude with it because we see no alternative.

But what if it were possible for directors to be themselves at their board meetings? What if they could share with colleagues their journeys towards meaning and fulfilment?

How much more powerful therefore would their collective decision-making processes acting as a group of searching people sharing in a joint endeavour?

It will never happen on your board, you may say. But are you sure? What do you know, if anything, about the interior lives of your colleagues?

What do you know about your own interior life? What if you mustered the courage to make just a small change in how much you reveal about yourself to your board colleagues?

If you do, then watch and notice how, if you change, they’ll change. I’ve seen it done and it works.

Ciarán Fenton

I help directors relate better: with themselves, their colleagues and their organisations by exploring personal and organisational purpose, strategy and behaviour – Personal/Organisational PSB