Why business plans should include director behaviour forecasts

It’s the holiday season, and operating board directors like everyone else are setting their Out of Office email modes to On. But while they may be demob happy, many are not happy at work at all. Not one bit.

Typically the cause of their ennui is the dominant poor behaviour of other directors, as they see it, towards them on their operating boards. It often keeps them awake at night. It makes some even weep. Over the years I’ve identified three broad categories.

First, there is bullying behaviour. It can be conscious or unconscious, but the effect is the same: other people suffer. And usually, that means the business suffers because the business is a collection of people.

Second, is passive aggression. This too can be conscious or unconscious but has the same impact as bullying does on people and the business.

The third is hubris. You can be neither a bully nor passive aggressive to exhibit hubristic behaviour. Exponents chief behavioural trait is that they appear to listen to you but not a word you are saying is getting through. They are often very nice people, and for whom the glass is always not just half full, but overflowing.

Very little upsets them. But, as one client put it, “they are capable of extreme levels of unconscious cruelty” towards others. The impact on the business can be disastrous.

While we are all capable of each and all of the behaviour listed, my focus is on the impact of those whose dominant response is just one of the above and is extreme.

So, even if only half of what I say is true regarding the impact on the business, why don’t operating boards try to predict director behaviour in their business plans? Surely it would make commercial sense to do so?

The answer is partly that the bullies, passive aggressors and hubristics (sic) sign off the business plans and partly because there is no business planning language to cover off this nebulous issue.

I propose that the solution to the second part of this problem is to have a section under the SWOT heading in the business plan that addresses poor conduct i.e. poor director behaviour over time is a top risk.

This solution may help to solve the first part of the problem because any Threat in the SWOT section of a business plan is a risk and there is precedent for including mitigation of risks in business plans as a matter of good practice.

So is this not an opportunity for business planners to put in place, at the outset, processes and governance structures that at least reduce the impact of the risky behaviour?

And of course, business planners can avoid the thorny issue of naming the behaviour in the business plan. All they have to do is to name the potential risk attached to it.

For example, one risk is the failure by any director to call out their concerns on any issue at operating board meetings which could lead to significant risks to the business.

Therefore the business plan should include processes to mitigate that conduct risk. I propose the appointment by rotation at each operating board meeting of a Devil’s Advocate whose sole purpose at that meeting, and with the full permission of the other directors, is to spot and call out conduct risk by drawing attention to behaviour at that meeting which could give rise to such a risk.

Now that step would require courage – a behaviour which is the greatest mitigator of all risk events in business. And courage thrives where directors “have each other’s backs”.

So, as you set your email to OOO for your summer break can you honestly say that your colleagues have your back or, indeed, you have theirs? What can you do to improve that mutual support when you return? What might stop you?

Perhaps you might feel better if you gave these questions some thought on the beach. At worst you might be able to make small changes that could make a big difference.

Happy holidays. Happy returns.

Some in-house counsel teams are missing an opportunity around ethics

“Most lawyers take ethics, speaking up and doing the right thing very seriously…and you won’t make many friends if you suggest otherwise” was the response I received from one GC when I mentioned I was writing a piece suggesting that they should do more.

So, let me be clear from the start: I’m not saying they don’t; I am saying that many lawyers appear, for good reasons, to care much more about, and have more energy for, risk management than ethics management. The key word here is “more”.

At least that’s my impression after working with in-house teams over many years. I’m also aware that most organisations have Compliance functions and some even have Integrity or Ethics functions and work on ethics tends to sit there. I know also that the subject of ethics is entwined with company values and culture.

But my point is that there is a very good reason why in-house counsel spend more time on risk management and that is because it’s measured, to some extent at least.  And people tend to deliver only what’s measured.

One definition of ethics is “…a set of moral principles that govern a person’s behaviour or the conducting of an activity.” One can see why, therefore, that broad work on ethics isn’t easily measured, so broad work on ethics is, understandably, not a priority.

Moreover, in-house teams are under enough pressure doing “more for less” without inviting yet more work. The over-worked GC can also rightly point out that ethics are the responsibility of everyone in “the business”, not just lawyers. I wholly agree with this point and therefore feel that no function should have ethics with a capital E in its title.

Yet we know that poor conduct creates legal risk. Conduct is defined as observed behaviour over time. Poor conduct is poor or unethical behaviour observed over time. So why are ethics management not, typically, front and centre as a part of Legal’s strategy, to the extent that risk management is?

The answer is that there is neither a financial nor an emotional incentive for doing so. But why isn’t there? The recent high profile corporate “risk events” which involved seriously unethical behaviour by senior executives in organisations were, surely, in part  a failure to anticipate and avoid the conduct which led to that wrongdoing.

With hindsight, would not the CEOs of those companies have approved a much greater Legal spend on reducing conduct risk if they had been forced to confront the high probability of those events occurring in advance?

One CEO said to me many years ago – “All I want from Legal is that they anticipate risk”. “Is that all?”, I thought. And what crystal ball were they going to provide in-house to do this? And is not risk anticipation a joint endeavour? Is that not the reason that in-house exits?

The average Top and Emerging Risk Report produced by GCs doesn’t place “the conduct of our directors” as its No 1 risk. If it did there’s a strong chance the risk would be mitigated by remedial action in respect of that behaviour.

It’s not that conduct risk isn’t by now a familiar term, particularly in the financial services sector. But this is not by choice. The Regulator has regulated conduct heavily since the Global Financial Crash.

But it’s not working. Earlier this year The Banking Standards Board published its second annual review and in respect of which The Financial Times ran the headline: “Bankers battle with ethics versus career quandary”.

Based on a survey of 28,000 employees at banks and building societies “more than a third fear negative consequences of voicing concerns…one in eight had seen instances where unethical behaviour had been rewarded…[a large number saw] a conflict between their organisation’s values and how it did business”.

“Conduct” has been commoditised as a term, reduced to a box which needs to be ticked, just like board “effectiveness”. Unless and until “the business” honours the spirit as much as the letter of the law then nothing will change and it’s only a matter of time before we open our newspapers to the next avoidable corporate scandal.

If a company’s Risk Register is a list of top and emerging business, legal and reputation risks, which could affect outcomes, it follows that conduct by directors should go right to the top of that list because most risks are forged in the crucible of boardroom relationships.

The topmost risk is the risk of systemic weaknesses in board decision-making and governance due to the failure of each director to change their worst behaviour and exploit their best.

What if the Legal function, in addition to the regular “calling out” it currently does as part of “BAU”, addressed this matter head on and became an agent of conduct change and demonstrated a link between improved conduct and reduced legal risk? Would that not make the annual battle that is the GC’s lot, of making the business case for legal spend easier?

My proposal is that you, in your role as in-house counsel, can choose to change the status quo. The incentive to do so is threefold: your function will receive more money if you sell in the idea properly; the business will be better protected and, crucially, your job will be more fulfilling.

But I don’t believe that the nettle has yet been fully grasped regarding the relationship between the GC and the CEO. I have spoken and written about this many times, particularly in a pamphlet entitled The GC-CEO Relationship post Global Financial Crash: Flourish or Flounder?. I help GCs and CEOs to grapple with these issues in the first hundred days of a new role. So I am close to the arguments on both sides.

The core of my argument is that GCs often fail to confront CEOs with the truth that they cannot do ten things for seven dollars, if ten things actually cost ten dollars. Often they retreat to the “diving catch” mode drummed into them at law school which is that you get it done, no matter what. This behaviour must have a knock-on impact on the time available for ethics management.

I acknowledge that many lawyers disagree with me on this point and feel that the 10 for 7 argument is a red herring.  Indeed some feel it’s an affront to their professional code of doing what needs to be done. I respect this view but disagree with it.

I propose three actions:

First, the CEO should accept that they are, de facto and whether they like it or not, the chief ethics officer, all lower case.

Second the GC should help the CEO to publish a company wide ethics policy, heavy on the spirit of good behaviour and conduct, light on regulation and they should place director conduct at the top of the risk register.

Third, the GC and CEO should sign a Memorandum Of Understanding reflecting the reality of their relationship – and the reality that the GC role is a unique and tough one  to execute – and which promises “only to deliver seven things for seven dollars”.

The CEO must then take responsibility for the missing three things, especially if one of them is withholding budget for Legal to spend time on the important, but not urgent, matter of helping to create an ethical culture.

In practical terms, the GC and team – down to the most junior lawyer – is in a position to contribute ideas to creating an ethical framework on a daily basis because they see things others don’t.

Whilst contributing to the creation of an ethical culture is the responsibility of every function, in-house teams have a particular budgetary incentive to champion it because, by helping the company to avoid conduct risk in practical ways, they would have to work less hard to justify their budgets. For many, that would come as a blessed relief.

A version of this article will be published in the August 2017 edition of InsideOut, the online magazine of the Law Society’s In-house Division, their community for in-house lawyers.

What operating boards can learn from Game of Thrones

Last week, whilst home alone and idly channel hopping, I stumbled across the Top 20 Game of Thrones Moments as voted by “you the viewers”.

“I’m-not-a-Game-of-Thrones-viewer” I shouted slowly at the telly. This behaviour is an indication, I’m told, of early onset Victor Meldrew.

In truth, I have in fact watched bits of the series when battling to switch channels with my daughter, and losing those battles.

“Gratuitous sex and violence. Gratuitous-sex-and-violence”, I said – twice – when asked what I thought of it.

But somehow, that evening on my own, there seemed to be a difference between being forced to watch an episode and analysing a Top 20 countdown. Countdowns are different.

And Top 20s are special, no matter what the subject. I caught that bug from Radio Luxembourg at boarding school, ’72-’78. Never recovered. I’ll watch a Top 20 anything.

So, I decided that I would endure watching The Game of Thrones Top 20 Moments for the benefit of my customers, readers and, I suppose, as a kind of study in anthropology.

I stuck it out. Clip after clip of the most unimaginable violence and every manner of sexual intercourse known to man, woman or beast. These were inter cut with “comment and analysis” from a wide spectrum of GOT (is that the right acronym?) fans. Some of these were even adults.

The series apparently has made television history for one reason or another and that in itself must mean that it might contain “learnings” for CEOs and boards about “behaviours”. I’ll do my best:

First, bad people do bad things to good people and get their comeuppance, sooner or later. True, even in banking scandals.

Second, some people like watching other people suffer. It’s called “schadenfreude” whose emotional sibling in the boardroom is shaming.

Third, if you press your thumbs into someone’s eyes as hard as you possibly can you will make a mighty mess. Although there are directors on boards who dream of doing that to other directors there is no known record of it happening at a board meeting. That said, the emotional equivalent is a regular occurrence.

So, should boards use Game of Thrones at their next training day? No. The truth is there’s nothing in the series about behaviour that most board members don’t know already.

There’s lots of familiar M&A with the emphasis on the A. The series contains shed loads of hostile takeovers but without any bids. And there’s no shortage of SM scenes – what board of directors can honestly claim zero tolerance for emotional sado-masochism?

And my favourite moment? None. T’was all gratuitous-sex-and-violence. But perhaps, on reflection, there was one moment that could be termed redemptive. And that was when Hodor holds the door (hence his name, geddit?) to prevent a hoard of zombies killing his mate.

Reminds me of a story I heard years ago about a senior executive who deliberately took a “hit for the team” in his annual performance review so that the scores in the forced distribution bell curve system worked out ok overall.

Whilst I wouldn’t condone such behaviour, no matter how well intentioned, it nevertheless demonstrates that sheer madness isn’t restricted to television drama.

To be fair to Game of Thrones – it doesn’t pretend to be what it’s not; unlike some organisations which still use performance management systems that masquerade as mutton dressed as lamb.



How to turnaround an unhappy board of directors in three steps

With apologies to Tolstoy, all happy boards are alike; each unhappy board is unhappy in its own way.

Unhappy boards consist of unhappy directors. This is obvious. But since people speak of boards as if they are people – anthropomorphism, to give this behaviour its technical term – they need reminding that they’re not. It’s the directors who are unhappy, not the board.

Happy boards outperform unhappy boards because unhappy, stressed and frustrated directors don’t perform as well as those who are content, energised and empowered.

The reasons for unhappiness will vary from director to director. But directors share one systemic grievance, also shared by their workforce, which is that work in the 21st Century is often not very fulfilling, at all. The happiness at work surveys, which make for grim reading, bear out this assertion.

If directors can address the systemic issues between themselves on the board, can you imagine what they can do for the rest of their workforce?

I believe the world of work can be fulfilling. Not 100% of the time of course, but I believe in the 75% rule that three-quarters of the time you should be able to say: I’m happy at work. But the world of work is still not what it could be especially for those who sit on boards.

We have only ourselves to blame. In the 20th century we permitted a framework for work to develop which created three components that ensured people became and continue to be trapped on a treadmill:

  • The maximisation of shareholder return as a primary purpose
  • Human capital management designed to serve that purpose
  • Exploitation of human and other resources as the main focus of boards

But the movement towards a new model has been building for some time. Everyone knows that the shareholder framework is no longer fit for purpose but have struggled to break its grip.

As far back as 1994 Charles Handy published The Empty Raincoat to set out a “…philosophy beyond the impersonal mechanics of business organisations…if economic progress means that we become anonymous cogs in some great machine, then progress is an empty promise”.

Even mainstream human capital writers like Jon Ingham were trying to humanise thinking in the early part of this Century in his book Strategic Human Capital Management – Creating Value through People, recognising that value can’t be created through any other means.

In what has been considered a “ground-breaking book”, Frederic Laloux’s Reinventing Organisations (2014) set out a thesis that “a new shift in consciousness” is underway which could help us invent “a more soulful and purposeful” way to run our businesses.

He sets out what he calls a “Teal” approach to this new way. This includes self-management rather than cumbersome management structures, bringing the whole person to work and what he calls ‘evolutionary purpose” focusing on what society wants from the business and not on the bottom line.

These are just three of many writers addressing these issues. Their work has been augmented by the growth of “not just profit” movements, which sprung up after the Global Financial Crash in 2008. These include Blueprint for Better Business (of which I am one of several advisers); B Corporations and Tomorrow’s Company.

Many of these use “top down” approaches that have strengths and weaknesses. My contribution to this canon is to take an individual rather than a corporate approach. I believe in individual change as an agent of, so called, organisational change, using the following steps:

First, while I agree with others that the purpose of organisations should be to make all stakeholders equally happy – shareholders/other risk takers, workers, suppliers, their families, their communities and future generations through the proper use of the physical environment involved in the business – I nevertheless believe that they will do so only if directors unilaterally grant themselves permission to do so.

The block so far is that directors are afraid of the investor. But if investors are educated to understand that they are not getting as good a return on investment without conceding to equal stakeholder happiness, then they are likely to give it. The first step, therefore, is to take responsibility for enlightening them.

Second, It has always struck me as odd that companies motivated – red in tooth and claw as it were – by profit, continue to allow their workers, especially their highly paid directors, to leave large chunks of their value at reception because boards have failed to create an environment which encourages them to bring their whole selves to work not just the part circumscribed by their job description or, more often, by the culture of the organisation.

The reason of course for this is linked with the first step, but also because they may not know how, precisely, to deal with the whole person. As one delegate quipped rhetorically at a people conference: “Do we really want people to bring their “whole selves” to work? Really?”

Third, is what I call the “paradox of small change” which is that small changes lead to big outcomes. Changing just ten interactions out of every hundred is just 10% change.

That’s small change. But it’s hard to do. You must start with yourself if you want others and your world of work to change; then you must accept that organisations don’t exist, except in law and in the minds of people who work in them, save that they are groups of individuals who are struggling to be who they should be.

If your board is unhappy and you’re serious about doing something about it, start by demanding equality of return for every stakeholder in the business; then find out what each director needs to be happy, 75% of the time and, finally, negotiate the behavioural small changes required to create an environment in which these are met. That’s it. Simple.