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The essence of good governance | Dr Peter Crow · The Better Boards Podcast Series

• 0:02
  SPEAKER_00: The Essence of Good Governance Corporate misshapes and failures of various kinds have resulted in an increased interest in governance.
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  SPEAKER_00: Despite considerable attention, confusion over what governance is, the role of the board and how governance might be practiced has resulted in more questions than answers.
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  SPEAKER_00: In today's podcast, I'll explore the challenging craft of board work with Dr.
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  SPEAKER_00: Peter Crow, a board director and advisor from New Zealand with global experience.
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  SPEAKER_00: We'll explore contemporary challenges, where boards go wrong, universal principles of governance, and what boards need to do if they are to be more effective in their work and achieve and sustain high organizational performance.
• 0:46
  SPEAKER_00: Welcome to the Better Boards podcast series.
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  SPEAKER_00: I'm Dr.
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  SPEAKER_00: Sabine Demkowski, founder and managing partner of Better Boards.
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  SPEAKER_00: We make the boards of the most ambitious organizations more effective.
• 0:58
  SPEAKER_00: Our mission at Better Boards is to contribute to creating better boards.
• 1:02
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• 1:09
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• 1:18
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• 1:23
  SPEAKER_00: To fulfill our mission, we give a voice to all who care about creating better boards.
• 1:29
  SPEAKER_00: Peter, thank you so much for contributing to the Better Boards podcast series.
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  SPEAKER_01: Sabine, it's a pleasure to be with you.
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  SPEAKER_01: Looking forward to the conversation.
• 1:38
  SPEAKER_01: Fantastic.
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  SPEAKER_00: And you are our first guest from New Zealand.
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  SPEAKER_00: So a particularly warm welcome.
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  SPEAKER_00: Thank
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  SPEAKER_01: you very much.
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  SPEAKER_00: Can we start by exploring the wider context and why board work is so challenging to really get it right?
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  SPEAKER_01: Gosh, what an amazing question to start with.
• 1:56
  SPEAKER_01: We're living in a very dynamic world.
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  SPEAKER_01: The only constant, it seems, is change.
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  SPEAKER_01: And, you know, recently with the COVID, we've all come to understand that it's very difficult to predict the future or to understand how we should be operating.
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  SPEAKER_01: And of course, boards are no exception.
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  SPEAKER_01: So we've got issues pressing in.
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  SPEAKER_01: on boards, for example, sustainability agendas, ESG, what I call participations.
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  SPEAKER_01: This is the diversity, equity and inclusion, geopolitics and nationalism.
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  SPEAKER_01: Who was able to predict the onset of the Russian invasion to Ukraine or the continuing difficulties in Syria for example and more importantly the impacts of those in terms of energy security so you've got all of those geopolitics and their stakeholder expectations as well whether it's um some several years ago now the extinction rebellion the efforts of activist stakeholders around scope one two and three disclosure reporting for the onset of climate change some say emergency And of course, as each year goes by, it seems that there's more and more compliance demands.
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  SPEAKER_01: So the environment outside the boardroom, outside the company is very, very dynamic.
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  SPEAKER_01: And so that means that we're operating as a board in a marketplace in an environment that's far from static.
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  SPEAKER_01: And as board directors and as a board, we're only meeting periodically and we're doing other things.
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  SPEAKER_01: So we need to work hard and reconfigure ourselves, reset ourselves so that we're equipped before each meeting.
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  SPEAKER_01: It's almost as if we're working in an environment where what we're trying to achieve is a little bit camouflaged And we've only got partial information.
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  SPEAKER_01: So that's why board work gets a little bit challenging.
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  SPEAKER_01: And of course, when there's new directors in the room, there's new ideas about how we do things.
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  SPEAKER_01: So good chairmanship, good process, good practice is really important if boards are going to contribute well.
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  SPEAKER_00: So what have you seen?
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  SPEAKER_00: What are some of the hurdles on all of this mix?
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  SPEAKER_00: And much has been reported about the mix you outlined there.
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  SPEAKER_00: What are the hurdles that effective boards that you have seen have overcome in order to operate in a manner that really represents good governance and is effective?
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  SPEAKER_01: There's a couple of things.
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  SPEAKER_01: I'm going to share with you the three questions that I get asked regularly.
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  SPEAKER_01: And interestingly, these three questions have not changed significantly in over 15 years now.
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  SPEAKER_01: It's a bit worrisome.
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  SPEAKER_01: And they're these, you know, what is corporate governance first?
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  SPEAKER_01: Two, How should it be practiced?
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  SPEAKER_01: And three, what is the role of the board?
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  SPEAKER_01: So together, what those questions and the ongoing asking of those questions tell us, privately, we're confused about our job as directors.
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  SPEAKER_01: And that's a problem.
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  SPEAKER_01: So the first hurdle that we need to overcome as directors is understanding our job.
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  SPEAKER_01: Now, that might sound pretty basic.
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  SPEAKER_01: But I see it all the time.
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  SPEAKER_01: You know, I do a lot of work in family businesses and private businesses.
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  SPEAKER_01: Just today, for example, I was working with a board in the health sector that's experiencing some super growth with telehealth and online services and meeting with five directors.
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  SPEAKER_01: And I've got five different understandings of the role of the board.
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  SPEAKER_01: So there's that big hurdle of bringing the ideas together.
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  SPEAKER_01: The next hurdle, is in relation to the purpose of the company, whether we express it as vision or mission, that sort of thing.
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  SPEAKER_01: So it's a scary statistic that one in six directors understand the business of the business.
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  SPEAKER_01: In other words, the competitors, the landscape, the innovations, the disruptions, one in six.
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  SPEAKER_01: So if you've got a six-person board, One of them understands that and makes it very difficult for the rest to contribute well.
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  SPEAKER_01: And what's worse is that about one in 20 boards, approximately, one in 20, have a single and united view as to the overall purpose of the company.
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  SPEAKER_01: So the hurdles are many.
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  SPEAKER_01: I've just highlighted two or three there that are understanding the role of the board, agreed purpose of the business.
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  SPEAKER_01: Because in law, One of our duties is to assure the ongoing performance of the business.
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  SPEAKER_01: And if we're going to do that well, we need to provide steerage, guidance, because that's where the word governance means.
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  SPEAKER_01: That's where it comes from.
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  SPEAKER_01: It's very difficult to do that if we don't know where we're going.
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  SPEAKER_01: How do we overcome that to be effective?
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  SPEAKER_01: We need to sit down and have good agreements, good discussions about what those things mean.
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  SPEAKER_01: We also need to commit as directors to spending enough time to read widely, to fill in the blanks, to bring our maturity and wisdom, and to be engaged.
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  SPEAKER_01: Good chairmanship is important to that.
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  SPEAKER_01: There's many specific factors, of course, but those are some of the big items.
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  SPEAKER_00: Each time something goes wrong in terms of governance, regulators...
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  SPEAKER_00: Investors are quick to come up with suggestions or even more regulations or guidance.
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  SPEAKER_00: Much has been made about this best practice in governance.
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  SPEAKER_00: And many people have argued that, well, structure and processes are directly linked and material to performance in a causal sense.
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  SPEAKER_00: What are your thoughts on that?
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  SPEAKER_01: They would be fine.
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  SPEAKER_01: If we didn't have people, if a board was made up of something other than people, there's two difficulties.
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  SPEAKER_01: One, the first difficulty is that the board does not run the company.
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  SPEAKER_01: That's the chief executive's job.
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  SPEAKER_01: That's the executive's team's job.
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  SPEAKER_01: The board's job is to make decisions and then to ask the chief executive and his or her team to implement those decisions.
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  SPEAKER_01: And the board's Decision-making is usually reserved for the very big decisions, the strategic decisions, the decisions with long-term impact, for example, merger, acquisition, marketplace, approving strategy, these sort of things.
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  SPEAKER_01: And those big decisions take time to prepare and things change and they take time to implement and things change.
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  SPEAKER_01: And then the material effects or benefits or outcomes of those decisions could take months or even years.
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  SPEAKER_01: So this dynamic marketplace and the difficulty with best practice is it assumes that there's one best way of doing it.
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  SPEAKER_01: And I don't know about you, but the way a family business needs to operate is quite different from the way a listed bank needs to operate is quite different from a, I don't know, a mining company or a forestry company or a social enterprise, you know.
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  SPEAKER_01: So I think there's some principles that are reasonably universal, but this notion of saying one size fits all or, quote, best practice is deeply flawed.
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  SPEAKER_01: Better that we think about best fit or how should we practice governance differently given what's in front of us, rather than having a singular process which dehumanizes it.
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  SPEAKER_01: The boardroom is not a factory.
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  SPEAKER_01: The company is not a factory.
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  SPEAKER_01: It's full of people and things change.
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  SPEAKER_01: We need to account for that.
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  SPEAKER_00: Yeah, I mean, like you, Peter, when we do these board evaluations, we have seen organizations that have the perfect structures and processes.
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  SPEAKER_00: They tick all the boxes, but yet the board, of course, is still not effective.
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  SPEAKER_00: which is interesting.
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  SPEAKER_00: So this overall reliance on structures and processes, I'm really delighted that you highlighted and describe it so clearly.
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  SPEAKER_00: Thank you.
• 10:21
  SPEAKER_01: Sorry, just adding to that, if I may, one of the elements here, Sabina, is, and you talked about, you know, when there's a problem, the lawyers or the regulators or whoever gets involved, they design more regulation or add to the code.
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  SPEAKER_01: And the UK governance code, the Australian one, the Indian one, you know, whatever, there's a lot of similarities between them.
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  SPEAKER_01: But of course, as time goes by, they get more complex and more prescriptive.
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  SPEAKER_01: The goal is that it helps boards do their job properly.
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  SPEAKER_01: But what it does counterproductively is it focuses the board more on complying with the regulations and the codes, which means that it's got less time to do the rest of its job, which is the value creation piece.
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  SPEAKER_01: It's focusing on value protection, but it loses sight of value creation.
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  SPEAKER_01: And that's the difficulty.
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  SPEAKER_01: And sometimes I get looked at really oddly when I say this, but sometimes I wish that some of these corporate governance codes would be shortened greatly.
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  SPEAKER_01: And we went back to some of the earlier principles, which continue to hold, but we were less prescriptive because directors were more educated and they gave more of themselves to these roles.
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  SPEAKER_00: Yeah, and that is, I mean, that's almost a standard sentence in a board evaluation.
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  SPEAKER_00: Most boards will highlight that they are overburdened by governance issues and don't have enough time to focus exactly what you say, the value creation process.
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  SPEAKER_00: I think you will get a lot of applause from our listeners on that one.
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  SPEAKER_00: Now let's come to something exciting here.
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  SPEAKER_00: You created the strategic governance framework.
• 12:02
  SPEAKER_00: Yeah, it's a piece of work you researched, you published, it's peer reviewed.
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  SPEAKER_00: It isn't just something that you dreamt of for this podcast.
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  SPEAKER_00: What is it?
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  SPEAKER_00: Can you describe to our listeners what the strategic governance framework is and how it might help boards to become more effective in what they do?
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  SPEAKER_01: Look, Sabine, I'd be delighted to.
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  SPEAKER_01: And what it does is it represents the flip side of the coin that we've been talking about.
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  SPEAKER_01: We're trying to work out How we balance between value protection, which is important for compliance, and value creation, which is the performance.
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  SPEAKER_01: The board is to have any impact on the future performance of the business in any sustainable way, then three things are necessary.
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  SPEAKER_01: They are these.
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  SPEAKER_01: One, what the directors bring.
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  SPEAKER_01: In other words, their capability.
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  SPEAKER_01: Sometimes you might use the word capability competency so this is the mix of skills and expertise that the directors individually and collectively bring into the room that's the first leg the second leg is what the board does when it's in the room so when it's meeting as a board you know and notice that i emphasize board there because rightly understood All decisions are made by the single board.
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  SPEAKER_01: In other words, all the directors collectively.
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  SPEAKER_01: They might arrive individually.
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  SPEAKER_01: They might have individual thoughts.
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  SPEAKER_01: They'll do their discussions and debates.
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  SPEAKER_01: But ultimately, the decision, when the chair calls for that decision, the decision's recorded as the decision, not of Peter, not of Sabina, not of the individuals, but of the board.
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  SPEAKER_01: So first one, capability.
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  SPEAKER_01: Second one, activity.
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  SPEAKER_01: And the third one, is behaviour, because as we discussed before, it's about how we act as directors and how we interact.
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  SPEAKER_01: So the board is a collection of directors, whether there's five or seven or 13 or in America, God forbid, sometimes even 20.
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  SPEAKER_01: It's crazy, but just go with that for now.
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  SPEAKER_01: And the job of the chair is to convene and coordinate those people.
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  SPEAKER_01: And importantly, what the board needs to do, what the directors need to do in terms of the way they act and interact.
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  SPEAKER_01: There's five things that are important within that.
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  SPEAKER_01: And so there's that strategic competence around ensuring that we've got the intelligence and the cognition of the directors where it needs to be, and they express their ability to apply relevant skills and expertise to perform their tasks well.
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  SPEAKER_01: So that's that strategic competence.
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  SPEAKER_01: The second one is the active engagement.
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  SPEAKER_01: The directors have actually prepared beforehand, that they've got high enrolled performance, that they actively participate, they debate and they make informed decisions.
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  SPEAKER_01: So that's the second one.
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  SPEAKER_01: The third one is sense of purpose.
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  SPEAKER_01: So the directors, you know, the motivation and the resolve of directors, they know why they're there and they understand the firm's or the company's purpose as well.
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  SPEAKER_01: So their decisions are in the context of advancing the company towards what it's trying to achieve.
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  SPEAKER_01: The fourth one, collective efficacy.
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  SPEAKER_01: So this is the notion of the directors interacting with each other, working together to make these strategic decisions.
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  SPEAKER_01: And the evidence for that is those characteristics of cooperation, empathetic listening, situational awareness, social, even vigorous debate, all of them.
• 15:39
  SPEAKER_01: So can they make a decision by working together Or like many boards, do they just set it to one side or do they fail to make a decision?
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  SPEAKER_01: And then the last one is constructive control.
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  SPEAKER_01: So do they operate as a coach holding the executive team accountable and guiding?
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  SPEAKER_01: Or do they operate as a policeman where when there's a problem, they basically get out the stick, if you will.
• 16:04
  SPEAKER_01: And also, it's not very nice to say, but they beat up, right?
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  SPEAKER_01: That's all about compliance, right?
• 16:10
  SPEAKER_01: And that's just not helpful.
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  SPEAKER_01: So there's three things.
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  SPEAKER_01: Strategic governance framework.
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  SPEAKER_01: If the board is to have any influence or any impact on the sustained performance of the company, three things are needed.
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  SPEAKER_01: What the directors bring, capability.
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  SPEAKER_01: What the board itself does, activity.
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  SPEAKER_01: And I've not gone into that.
• 16:29
  SPEAKER_01: There's a very good framework within, developed by Bob Garrett from the UK.
• 16:35
  SPEAKER_01: You can read about that in the book, The Fish Rots from the Head.
• 16:39
  SPEAKER_01: So I'll not go into that in detail because that's fit for purpose.
• 16:43
  SPEAKER_01: And then the third thing is the way that the directors act and interact.
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  SPEAKER_01: The important thing here is this is like a multiplication equation that if any of these elements are missing, then the likelihood of the board adding any value at all drops to zero.
• 16:59
  SPEAKER_01: The company still might be okay, but it'll be for reasons.
• 17:04
  SPEAKER_01: The thing that's been fascinating about this, as I've worked with boards around the world, on this in an advisory or whatever basis.
• 17:12
  SPEAKER_01: They say, but what about structure?
• 17:14
  SPEAKER_01: What about process?
• 17:16
  SPEAKER_01: The board is a dynamic workplace.
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  SPEAKER_01: The decisions are made by men and women sitting together, working together, and it's a social exchange.
• 17:25
  SPEAKER_01: So the likelihood of the board effectiveness being a function of what it looks like is low, but what it does is high.
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  SPEAKER_01: And so that work was completed nearly a decade ago now, and it's been well received.
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  SPEAKER_00: Fantastic.
• 17:40
  SPEAKER_00: Now, sadly, we have to come to an end.
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  SPEAKER_00: What are, from all of what we discussed, what are the three things our listeners should take away from this podcast?
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  SPEAKER_01: So can I start saying if the board is to be effective, its function as a governance body is really determined by what those directors bring, what the board itself does, and how the directors act and interact.
• 18:03
  SPEAKER_01: So that was just a summary of the strategic governance framework.
• 18:07
  SPEAKER_01: The boards can make a difference.
• 18:10
  SPEAKER_01: Many people would say that the directors come and they eat the sandwiches and they talk about golf things.
• 18:15
  SPEAKER_01: Sometimes even their golf handicap, it's a bit cynical.
• 18:19
  SPEAKER_01: But if boards are focused on what matters, they can make a huge difference.
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  SPEAKER_01: And the evidence is a lot of the private equity and other well-run boards around the world.
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  SPEAKER_01: And the third thing, is that governance itself is an activity.
• 18:33
  SPEAKER_01: It's about steering and guiding the organisation.
• 18:36
  SPEAKER_01: It's not a legal framework, although the laws and regulations are important because they define the boundaries, but they are not governance themselves, and nor is it a structure.
• 18:48
  SPEAKER_01: Just because you've got independent directors or men and women or whatever it is, the demographic diversity is not linked directly to performance.
• 18:58
  SPEAKER_01: What matters is what the board does, what those directors do together.
• 19:03
  SPEAKER_00: Fantastic, Peter.
• 19:04
  SPEAKER_00: Thank you so, so much for contributing to the Better Boards podcast series.
• 19:09
  SPEAKER_01: Thank you very much, Sabina.
• 19:10
  SPEAKER_01: It's been a
• 19:10
  SPEAKER_00: delight speaking.
• 19:11
  SPEAKER_00: Thank you.
• 19:13
  SPEAKER_00: How can we help you and your boards?
• 19:15
  SPEAKER_00: We at Better Boards are always delighted to hear from you.
• 19:18
  SPEAKER_00: So if you have a question about a podcast or if you would like to contribute to a podcast or if you would love to have a demo of our board evaluation platform, please reach out and get in touch.
• 19:30
  SPEAKER_00: You can best reach us at info at better-boards.com.
• 19:35
  SPEAKER_00: Thank you for listening.