Why boards should use HBR’s list of Best-Performing CEOs in the World 2017 with caution

Sports podium

Harvard Business Review has recently published its annual Best-Performing CEOs in the World rankings.

Pablo Isla, Martin Sorrell and Jensen Huang are in first, second and third place respectively. Sean Boyd, Jean-Laurent Bonnafé and Ian Cook are placed 98th, 99th, and 100th.

Does this mean that your board should favour the first three over the last three as benchmarks for your CEO? The rankings suggest that you should. I disagree.

HBR has ranked CEOs using a weighting system, which favours financial performance over the other factors using an 80/20 ratio. “To calculate the final ranking, we combined the overall financial ranking (weighted at 80%) and the two ESG rankings (weighted at 10% each), omitting CEOs who left office before June 30, 2017”.

By two ESG rankings, they mean environmental, social and governance analytics as reflected in two scores: Sustainanalytics and CSRHUB. Directors who are shareholder-value merchants, red in tooth and claw, might wince at the inclusion of such wet factors. I argue the opposite: the weighting for the ESG factors is not high enough.

For example, Pablo Isla, CEO of Inditex, headquartered in Spain, is in first place while Ian Cook, CEO of USA based consumer goods company Colgate-Palmolive is in 100th place.

Let’s look at their comparative rankings: Isla scored 18, 76 and 142 for FINANCIAL, Sustainanalytics and CSRHUB respectively, whereas Cook scored 186, 167 and 89.

These suggest that while Pablo Isla outperformed Ian Cook in FINANCIAL and Sustainanalytics scores, Cook outperformed Isla in CSRHUB scores significantly. So what?

Let’s look closer at the providers of the ESG scores: “Sustainanalytics is a leading provider of environmental, social and governance (ESG) research and analytics that works primarily with financial institutions and asset managers and with CSRHUB which collects, aggregates and normalizes ESG data from nine research firms and works mainly with companies that want to improve their own ESG performance”.

CSRHUB is obviously the “softer” of the two ESG scores. Why has it the same weighting as the other ESG score? Why is governance, a crucial internal board matter conflated with environmental and social matters, both external issues?

Who decided on the 70/10/10 ratio? Why not 60/10/20? Or why not split out governance and give it a score of its own? Surely any board would link good corporate governance with risk reduction and maximizing opportunities?

Would you not be a tad miffed if you were Paul Polman, CEO of Unilever, ranked 82nd with a 177/168/17 score? His CSRHUB ranking of 17 comes as no surprise. He is famous if not infamous for his focus on non-financial performance factors. It was he who refused to report to the market on a quarterly basis.

Should he not be further up the “performance” rankings? He is, by all accounts in the financial press, trying to balance performance with developing capability and with ensuring sustainability in all its forms. But did his financial score suffer because of his CSRHUB score?

And what are we to make of his Sustainanalytics ranking of 168 against Pablo Isla’s score of 76? On which environment, social or governance (ESG) factors did he underperform his betters in the rankings?

Isn’t it the case that these rankings should be taken with a large pinch of sodium chloride? Should HBR not use just one crude financial performance score and not attempt to take account of the ESG factors at all or look again at how it addresses non-financial performance?

I have sympathy with HBR’s dilemma. Society is increasingly vocal on behavioural matters. It’s right that HBR should reflect this. But their rankings will continue to be flawed unless and until boards catch up with society and incentivise their people on behaviour as much as performance. This shift would be reflected in the rankings since these merely mirror back what boards value. What’s measured gets delivered.

In work I do with boards, I find that those whose financial performance is strong, often suffer from hubris. Perhaps HBR should include a hubris score in their next rankings. It would be useful, if not amusing, to see what that would do to the current list.

 

 

Business or personal strategy: which dominates your board?

What is it with our obsession with strategy? We are respectful of words like profit and loss but somehow treat strategy differently.

After 15 years consulting and nearly 20 years in corporate life, it is the word which stands out for me as the most abused because it appears to mean wholly different things to different people.

Conversations, which tend to be liberally peppered with it, bear this out: “I’m hiring someone to do the day to day stuff, so that I can concentrate on strategic stuff” or “We have just hired an awesome Head of Strategy” or “Frankly, and strictly between you and me, the problem with Joe Bloggs is that he’s not very strategic”.

Worse is when strategy is confused with purpose and execution as in “we intend to be the best in the world by hiring good people”.

Being the best in the world, if you mean it, is a business objective and is not a strategy. Hiring good people is as basic a leadership behaviour as breathing. Strategy, it ain’t.

But why the confusion? Strategy means how your board achieves its purpose. That’s it.

It should be decided once and, while it may change, it should stay fixed for a reasonable period to allow for its implementation.

Therefore there should be no need to use the word strategy in any context other than “since our agreed strategy is X then we are doing y or we should do z”. Or not, if those actions are not congruent with your strategy.

For example, Ryanair’s objective was, it appears, to be the best and most profitable no frills airline in the world – or words to that effect.

Its strategy appears to have been to train the market  to expect nothing but a safe and cheap flight. Its execution behaviour – love it or loath it – was to do everything to lower market expectations of airline service which had been raised over a generation which believed  flying was for a certain “class” of person. Ryanair broke that myth.

Proof that its poor treatment of customers was “strategic” is the manner in which it reacted almost overnight to the introduction of a business class product by rival Easyjet. Suddenly, Ryanair became user friendly, introduced its own business class product and sales went up by c 20%.

That’s a story of a simple purpose, sophisticated strategy and clean execution behaviour in action. There was no confusion whatsoever about the meaning of those words. The results bear this out.

The problem on many boards however is that there isn’t a shared business purpose nor, in addition, are the directors upfront about their personal purpose.

If your business purpose is not shared by your colleagues on your board and if your and their personal purpose is also not clear then it’s not surprising that your business strategy will be weak, at best.

Some clients “push back” on this by saying that “our purpose is to make money, everything else is strategy”. To which I reply “it’s no wonder you all have a different spin on strategy since making money is, again, as essential as breathing. It is a collateral benefit, not a purpose.”

The reason purpose and strategy are problematic is because they are difficult to get right. It is a truly challenging task in complex markets to get your purpose statement right and then to follow through with choosing the right strategy to implement it.

But, and perhaps surprisingly, this can be made much easier if your directors are upfront about their personal purposes.

After all, the purpose of any organisation is inter dependent with the purposes of each of the people working in it and, particularly, with the members of its board.

Initially I find this a hard sell. Directors  find it  difficult to accept that they constitute the business. They speak of the business in the abstract, as if it were a third party. But it isn’t.

It is the sum of their individual purposes brought to bear on a market need. But often the personal purpose of one or two individuals can dominate or skew business objectives and therefore strategy.

Once I get a board to address the matter of their shared business purpose in the light of their personal objectives, I find that business purpose and strategy can be reframed much more cogently.

Your CEO is key to the success of this reframing process. If he or she is willing to share their personal purpose and strategy honestly and openly they will be a catalyst for the others to do the same. This is called leadership.

There are three steps to harmonising business and personal strategy on your board:

First ask each director to articulate their personal financial and fulfilment needs and objectives and how these fit with their understanding of business purpose and strategy.

Second, in the light of these shared insights your board should work on the precise wording of business objectives and which all directors are happy to sign.

In my experiences this process can be difficult and can surface deep and painful disagreements. But it’s worth the pain because future disagreements will be more easily resolved by reference back to agreed objectives.

Finally when, and only when, there is absolute shared clarity on business purpose and one that fits with the articulated personal objectives of each director, can you move on to addressing strategy.

Then, often to everyone’s pleasant surprise, agreeing a good and robust strategy becomes relatively straight forward. Are you surprised?

www.ciaranfenton.com

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.

CEOs: learn from Mrs May, disband your inner circle today

Many CEOs have, like Mrs May, an inner circle. It’s lonely at the top. You need people around you that you can trust, to tell you the things you need to hear or, if you’re weak, what you want to hear.

There’s nothing wrong with these inner circles provided they are informal and counterbalanced by a board with a formal governance process and in which power truly resides. The issue here is the location of power, not just leadership style.

Mrs May, allegedly, relied on her inner circle to the exclusion of everyone else. The cost of this error will be high. But it’s not as if she didn’t know that her leadership style was a matter of concern for many. Indeed she revelled in her reputation as “a bloody difficult woman.”

And she was not alone in her approach. The ink is barely dry on The Chilcot Report which highlighted Mr Blair’s “sofa style” decision-making as a contribution to the errors in the Iraq war.

So why do many leaders persist in making this unforced error? The answer is that they have no incentive to change. They believe that their behaviour got them to the top, so why change it?

Mrs May didn’t become a micro-manager overnight. It’s part of who she is and how she got to be Prime Minister.  Her identity must be bound up with distrust of others. In that respect, she is typical of many leaders I encounter in the course of my work.

If the cause of the behaviour is easy to diagnose, the cure is less so. It demands behavioural change, and that’s hard unless it’s taken in small steps.

So, if you’re a CEO with high emotional intelligence (EI) and therefore the self-awareness to know that you are behaving like Mrs May or Mr Blair, and know you should stop it but don’t know how then here’s how:

Step 1: Assemble your full operating board and ask each member to acknowledge their outstanding behavioural weakness. Start with yourself. If some less emotionally intelligent members are struggling, play “the least likely to say” game. That will soon flush it out.

Step 2: Start trading behavioural change deals as in “I’ll micro-manage 10% less if you acknowledge your mistakes 10% more”. Then legislate for the breach of these deals.

Step 3: Announce that, in future, no major decision will be taken without full discussion by the entire board and at which meetings and by rotation one member will act as Devil’s Advocate with full permission to question the rationale for each decision.

“Pigs will fly”, I hear you mutter in response to these steps. Not true. This process works. I have facilitated it many times. It works because there is an incentive to make yourself vulnerable, to change and to move to a higher level of leadership behaviour. The latter is the real prize because it feels good and it makes you a better leader.

And let’s be clear, micro-managers don’t enjoy micro-managing. They find it exhausting, energy sapping and time-consuming. Most of all it hides latent greatness. One micro-managing CEO I worked with and who did reduce his meddling behaviour using my small change approach, reported that he had more time, a happier team and, I believe, developed higher levels of trust.

I’m sure that there’s a different, more trusting, softer side to Mrs May. One that we have not seen, although one hears that the 1922 Committee had a glimpse of it during her belated mea culpa. See what I mean about incentives?

If I had my way, every leader would have to spend a minimum of one year at Emotional Intelligence School (EIS). There they would undergo mandatory weekly psychotherapy to process formative years’ experiences; they would study psychology and behavioural science, and above all, they would have to pass a boot camp type test on the benefits of good corporate governance. That would teach them never to rely on an inner circle, ever.

Three steps to unblocking road blocking behaviour on your board of directors

Last week The Times reported that the term “roadblock” was used to describe a surgeon at the centre of a shocking medical malpractice case in the north of England.

Colleagues, apparently, had to “work around” him and concerns about his behaviour were either ignored by him or buried by others. The case reminded me of how prevalent this story is in business.

Although the roadblock cases we all witness on boards may not be as devastating as that one, they can nevertheless cause grievous harm to people and businesses.

But what can you do? These are often bright, effective and key people in the business. They may be robust in their dealings with colleagues but charming with clients and, crucially, they deliver results.

Challenging them is difficult. They are powerful and don’t use, shall we say, Queensbury Rules during difficult exchanges. In short, they bully.

It’s not easy to tackle this problem but it’s not impossible. In fact the issue itself is simple: how to deal with bullying behaviour. The problem is in mustering the courage and enlisting support to deal with it. I use a three step approach in my programmes which I hope you find helpful.

Step 1: Ensure that each director, including the “roadblock”, has a shared, and agreed, understanding of the objectives and strategy of the business.

More often than not, I find there isn’t such a shared understanding save that everyone wants to make as much money as possible. That doesn’t count in my book. That’s like breathing. It goes without saying.

Ask each director to come up with a more sophisticated objective than making money and a strategy to achieve it. The outcome can be surprisingly positive, productive and unifying. At the very least it will clarify any misunderstandings.

It’s crucial to ensure that the “roadblock” signs up to the strategy too. Don’t move to the next step until they do. You may find that this process leads to some softening by the offending director. Or not.

Step 2: Check that there is unanimity amongst all the directors on the roadblock issue. Unless everyone is saying the same things, the problem could be something, or someone, else.

If there is unanimity then agree that everyone on the board not only has the right but also the duty to call out the behaviour on the next occasion it arises. Then, crucially, the person who does call out the bad behaviour must be backed by the others.

This is not about “ganging up” but an important step in reinforcing the agreed approach in dealing with the roadblock which is about always coming back to business strategy and objectives, not personality differences. This is good corporate governance, not corporate politics.

Step 3: Is to make a small change in how everyone deals with the roadblock at board meetings. The principle here is that the other person won’t change unless you change first. A commitment to small change in behaviour, over time, is easier to secure than so called “transformational” change which is a lesser spotted occurrence than some commentators would have us believe.

On the next occasion and at a fully attended board meeting – ideally an operating board meeting, not a main board meeting because procedures tend to be more formal there – when roadblocking behaviour occurs, then one director must muster the courage to enquire how that behaviour helps implement the strategy to achieve the agreed objective. I say “must”, intentionally.

The response is likely to be a strong, if not brutal, push back or to obfuscate or both. Each director should in turn ask the same question or otherwise indicate that they back the questioner. It’s as simple as that, even though it may not feel that simple.

Unless you have chosen the wrong battle to fight or someone lets you down in the room, this approach should work, over time. You will find that on each occasion the other party is challenged to explain the link between their behaviour and business strategy to which, after all they have signed up, they will struggle to maintain the roadblock behaviour in the face of such ongoing unity of purpose.

If their behaviour is unconscious they may even see the light. On the other hand, if they are successful narcissistic bullies they will try everything to bully their way out of the challenge.

If every director sticks to their guns and quietly and calmly return, each time they are rebuffed or traduced, to the agreed business purpose and strategy the other party will have to relent, ultimately.

And if they don’t then the directors have a choice: either to remove the roadblock or become part of it themselves. Sadly, too often the latter is the case but it doesn’t have to be so, if everyone has each other’s backs.

Why CEOs and directors, unlike Mrs May, should actively encourage dissent on their operating boards

Mrs May continues to present students of leadership with excellent material on the dos and don’ts of modern leadership.  Her speech this week announcing the General Election was another great contribution to that canon.

The strongest part of her speech, and one that CEOs would do well to emulate, was her absolute clarity of purpose. This is no “Theresa Maybe” as The Economist described her at the start of her premiership. Love her or loathe her, you can be in no doubt that she wants as hard a Brexit as she can negotiate. That’s her purpose. No maybe about it.

CEOs who don’t convey this level of clarity on their own purpose go on to struggle to articulate a credible strategy and as a result their implementation plans are weak and risk-rich from the outset.

But then Mrs May needlessly threw away this early advantage.  Had she been a client of mine, I would have insisted she maintain that level of clarity in all aspects of her speech because it pains me to see leaders score avoidable own goals and she scored a veritable hat-trick, all of which CEOs can learn from.

Her first own goal was when she said that the reason for calling an election was because “…there should be unity in Westminster, but instead there is division.” It is bad enough that this was a huge lie  – everyone knows she called it for party political reasons – but it was the underlying disregard for opposing views, so well known to directors who have to work for bullying CEOs, that will have done her damage.

Rafael Behr put it well in The Guardian: “The democratic process is being requisitioned not to air competing opinions but to dispense with them.”

She could easily have just stuck to the line that she wanted a stronger negotiating hand via a stronger majority. No one would have blamed her for that. But like many CEOs with low EQ she confuses dissent with an attack on her identity and so she attacked her dissenters, who are elected and one could argue, paid to dissent, just as NEDs are on  main boards or divisional directors and function heads are on operating boards.

Her identity, like many CEOs, is tied up with being right. Any questioning of that is forbidden because to question is to undermine and that casts you, in that most damning of all verdicts, as “not a team player”.

In my corporate career I experienced and witnessed brutal treatment of dissent on many boards and executive committees. On one ExCom I was warned on arrival that new people were easy to spot because they were the ones smiling. No one, I was told, smiled again after receiving their first humiliating and public slap down. So I didn’t smile. I still got slapped.

The reason this behaviour doesn’t benefit Mrs May or CEOs is that they, ultimately, are the losers. Mrs May lost many floating voters who share Rafael Behr’s views. In addition she lost her moral authority with Tory MPs who agree with Rafael Behr but are afraid to speak out. Later when she needs their support when things get rocky for her, as they surely will, she won’t have it.

CEOs lose badly with this behaviour because it negatively impacts the ROI on their wage bill, especially to directors who are usually highly paid.  This ROI is already affected by the standard behaviour of any employee – director or not – to leave, daily, a significant part of themselves and therefore their value at Reception because they feel it’s unsafe to bring it in.

No amount of HR sponsored “bring your whole self to work” campaigns will change this unless the “invitation” from the CEO is there to do so. But in situations where slaps are administered for daring to be yourself, CEOs and HR Directors should be under no illusion that their ROI plummets drastically and they won’t even know what they’re missing. This is one of those own goals that’s barely visible, because it happens so fast.

The well documented behaviour of advisers in The Oval Office during the Bay of Pigs fiasco is a good example of the dangers of not encouraging dissent. The problem was that no one spoke up because the agenda was controlled. Therefore there was no room for dissent. This contributed to what was an historic disaster for American foreign policy in the 20th century.

I believe CEOs should open every operating board meeting with the same announcement each time: “I need to hear people disagree with me and with each other, constructively. If you don’t you’re not doing your job and if you’re not doing your job you’re of no use to the business.”

If Mrs May had announced an election saying she wanted a stronger mandate and that she welcomed a stronger challenge within and without her party at this difficult time, then that would be a sign of courageous leadership and she, and we, might get not just what we want but need.  But to complete her hat trick Mrs May missed that too and she and we will suffer, needlessly as a result.

 

 

 

3 Steps To Better Negotiating

First published by The Law Society April 2017: http://www.lawsociety.org.uk/news/blog/3-steps-to-better-negotiating/

All solicitors are negotiators. But not all solicitors are good negotiators in all situations. One general counsel told me that many solicitors in his team struggle to see the bigger picture in negotiations, are too narrowly focused, and consequently lose the plot.

Good negotiation is about securing a win-win outcome, not win-lose. This necessarily involves compromise and, above all, an ability to sell. Many solicitors achieve much less than they could because they hate the process of selling. They fear rejection, are uncomfortable asking for anything, and don’t know how to sell well.Good selling technique is essentially about needs analysis. This can be broken down into 3 steps.

Find out how the other side feels

The other side’s needs may not be logical or rational, but they are always driven by feelings.

Ask lots of open, ‘biased’ questions – Who? What? When? Where? How? Listen to the nuances of the feelings expressed in the answers. You must listen carefully, not just to catch someone out, but to understand them.

You can check that you have ‘bottomed out’ their needs by using two simple techniques. First, briefly summarise back to them your understanding of their needs. If you get it right, watch for a physical response – often a nod. This, as the psychologists tell us, is the involuntary sign people give when they feel heard.

The second technique, which I have used in negotiations and found works every time, is when you feel you’ve asked the last question, ask one more. This stretch will usually bring to the surface a deeper truth.

Demonstrate how your proposal will meet their needs

This step is short, because it’s straightforward, albeit difficult: demonstrate, rather than assert, how your proposal will meet their specific needs, as well as your own.

Close the gap between their needs and your proposal

Start by asking: ‘If 10 is having a deal, and 0 is not having one, where are we now?’. Unless things have gone horribly wrong, the typical answer is ‘7’. Next, ask: ‘What has to happen for us all to turn the 7 into a 10?’. And then, say nothing. This silence is crucial. No matter how uncomfortable the silence becomes, don’t break it except to repeat the question. They will fill the silence.

When you are clear on the points which make up the gap, address each point carefully in turn. There are various techniques you can use to close the gap, but the most important is to remind the other side about the shared purpose of the negotiation. This purpose can get lost in the heat of the negotiation. Unless there is a shared purpose, there isn’t a negotiation. It’s an imposition.

(Small) change your behaviour

Confront which part of the selling process you hate most, and why. Once you have isolated your fear and its origin, the final step is to become comfortable observing your process or, to use the current jargon, to be mindful. Mindfulness is about separating yourself from your thinking, as in: ‘There I go again not asking for what I want, just demanding it’, but in a manner which is not self-destructive.

Then you can to start making small changes in your behaviour – say, changing 1 interaction in every 10. That’s a small change, but it’s worthwhile, because it creates a virtuous cycle: the more you change yourself, the more success you will have in your negotiations.