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.

 

 

7 Small Changes to Achieve Better Board Effectiveness, Conduct & Leadership

ChangeThese are the seven steps I use to facilitate better board effectiveness, conduct and leadership on main and operating boards, executive committees and senior function teams:

Step 1: Acknowledge uniqueness

You and your colleagues are unique individuals. No two board members are the same. If you behave as if they are you cannot expect to get the outcomes you want. If each board member is unique it follows that your board is unique. Why would you use generic processes for a unique situation?

Step 2: Understand uniqueness

At work, the components of your, and each of your colleagues’ uniqueness are their skills and experience, reputation and emotional intelligence. Whilst many share aspects of these, no two board members share the precise mix. Why, therefore, would you treat yourself and your colleagues as human capital assets?

Step 3: Understand emotional intelligence (EI)

The most important components of emotional intelligence are empathy, self-awareness and the ability to negotiate needs productively. All three are important. While organisations may perform well for a while without these in harmony in each director, research suggests that organisations that fail to foster these, often struggle to develop long-term capability. In which case, why would your board ignore individual EI problems, even if those colleagues with issues are delivering good results in the short-term?

Step 4: Understand the negotiation of needs

Experts tell us that if your ability to negotiate your needs productively and safely was frustrated in your formative years then you will have taken a decision to deal with that frustration in a manner that was appropriate at that time. However they also tell us that humans have a tendency to extend formative years decisions into adult life. Even those people who experienced little or no frustration in having their needs reasonably met in their formative years suffer when they encounter those that did or when they experience significant stress in later life. The productive negotiation of needs as between members of boards and teams is key to success. Why would your board not pay attention to creating an environment in which members’ needs can be negotiated productively, even if this involves painful confrontation of personal issues?

Step 5: Reveal hidden potential through small changes

Experts also tell us that no one escapes emotional pain. Everyone carries one outstanding emotional painful experience. By outstanding I mean more than all other painful experiences. We compensate for these in different ways but these strategies invariably hide our potential. If this is true, it means that your board’s hidden potential is more than the sum of the hidden potential of you and each of your colleagues. The route to revealing the hidden potential of each director is for each to negotiate small changes in behaviour with each other. In aggregate the sum of the small changes is greater that each in terms of their impact on board effectiveness and conduct. Conduct is observed behaviour over time. Why would your board not seek to reveal the hidden potential of each member over time?

Step 6: Share your personal purpose, strategy and behaviour plan

You and your board colleagues each have, or should have, a personal purpose or objective at work, a strategy to achieve it and a personal behaviour plan to implement that strategy. Some do this process intuitively; others plan it whilst others drift. The more these issues are shared openly between board members, the more likely it is that business purpose, and strategy and behaviour will be successful.

 Step 7: Make personal and business purpose interdependent

The tension between the personal purpose of each of your board members and the purpose of the business negatively impacts performance and the development of long-term capability. It follows that these are interdependent and if so it further follows that it is worthwhile paying attention to the interdependence of personal and organisational purpose. It also follows that not doing so increases organisational risk and reduces opportunities.

I use three well-known emotional intelligence tools to help directors implement these steps:

Tool 1: Feel/Need/Do?

Regarding specific issues or behaviour or exchanges at board meetings what do you feel?; what do you need in relation to that feeling?; what are you going to do to meet that need?

Tool 2: Are you selling or buying?

In almost every board interaction you are either selling or buying. Know which and know how.

Tool 3: Are you in Parent, Adult or Child mode?

In almost every boardroom interaction you and your colleagues will, at various times, be in Parent, Adult or Child mode. Do you know which you frequently occupy and when? Do you know how to get yourself and your colleagues into Adult-Adult mode?

The steps and tools above together constitute The Fenton Model® which is a registered trademark of Ciarán Fenton Limited.

Ciarán Fenton

October 2017

Could you rate your relationships?

I’ve been writing a number of digests for in-house counsel.  In my first, I asked, “are you a lawyer or a business person first?”. 

 Today, I ask you to consider this:

If, today, you were to analyse your top 10 to 20 core business relationships, how many are in trouble and how many are heading that way?

Using a RAG method, how many would be amber or red? In my experience, in-house counsel have at least one red relationship and several ambers at any time.

As in-house counsel your primary objective is to provide pro-active input into the management of legal risks, in a context of consistently poor economic conditions, a more complex business and regulatory environment and the need to ensure the smooth management and operation of the legal team.

In this context, fraught relationships are a drain on your time but they are never easy to turn around. When the money and the strategy are in place what goes wrong are the relationships.

My experience working with in-house counsel is that once they understand that they can reframe their relationships to create win-win outcomes rather than the win-lose outcomes they were trained in a Law school, then these relationships can be converted to green. 

So how would you rate your current relationships?

 

In your role as in-house counsel, are you primarily a lawyer or primarily a business person?

I asked this question at a workshop I led for The Association of Corporate Counsel (ACC) last month.

Some bristled initially at the question. It seemed they felt that the answer was obvious: lawyers first, no question. But as the debate developed it became clear that old certainties are changing.

My challenge was: If you take the “corporate shilling”, do you not have a duty to help grow the business first, within the law, like every other employee? There was again some initial pushback on this and, it seemed to me, genuine discomfort at the dichotomy of gamekeeper versus poacher, as they might see it.

My view is that in-house counsel and the business are better served if they join the management team fully, just as the CFO does. He or she has to be as much of “a cop” as in-house counsel.

What do you think?  Please join the debate by posting your comments below.

You might also like to watch my video interview with Paul Gilbert, CEO LBC Wise Counsel where I discuss these issues in more detail.