Monday, 29 August 2011

Boards and fraud – who gets the sack and who gets to stay?

We have seen lots of corporate scandals over the past decade, and in many of these cases the boards of directors were up for some heavy criticism. Whether it was Enron, Tyco, WorldCom, or one of the toppled investment banks, their boards took some flack, since of course they are ultimately responsible for the corporation’s actions.

But what happens to such directors? What happens to these people in the business elite when their company, for example, is caught being involved in financial fraud? Well, perhaps not surprisingly – and this may come as a relief – they often get the sack (as research by Professor Arthaud-Day from from Kansas State University and colleagues convincingly showed). Directors associated with financial misrepresentations are often dismissed from the board of their fraudulent company but, interestingly, subsequently they also regularly get the boot at another board. As you may know, outside directors often serve on the boards of multiple companies and a study by Professor Srinivasan from the Harvard Business School showed that they lose about 25 percent of these (rather lucrative) jobs if one of the companies in their portfolio is caught up in fraud.

Yet, this also implies that 75 percent of companies retain a particular board member, even though he or she is compromised having served on the board of another company while it was committing fraud. And that begs the question, what firms decide to retain such a tainted board member, and which ones decide give them the sack?

Professors Amanda Cowen and Jeremy Marcel from the University of Virginia decided to examine this. They managed to collect data on 277 directors who served on multiple boards concurrently, one of which was associated with financial fraud. Their statistical analysis showed that companies that were covered by more equity analysts and governance-rating agencies were more likely to dismiss compromised board members; up to twice as likely. These external observers apparently serve as a bit of watchdog. However, surprisingly, when a company had a relatively large number of public pension fund investors amongst its shareholders, they were less likely to dismiss a compromised board member. Cowen and Marcel speculated that this was because these pension fund shareholders do the monitoring themselves, so that they don’t care much about the company’s directors; tainted or not.

You also have to realize who does the firing; and that is the rest of the board. Cowen and Marcel’s research also showed that very prestigious, well-networked boards were less likely to fire their tainted fellow director. It is well known that boards of directors form a rather cliquish corporate elite. It is not easy to find your way into this world, but once your solidly in, not even a little financial fraud is going to convince your corporate buddies to throw you out.

Tuesday, 16 August 2011

So, you think you have a strategy? Five poor excuses for a strategy

Most companies do not have a strategy. Ok, I admit it, I do not have any solid statistics (if such a thing were possible) as evidence to back up this statement, but I do see a heck of a lot of companies, strategy directors, and CEOs present their “strategies” and I tell you, I think 9 out of 10 (at least) don’t actually have one.

Sure, it depends on the all-evasive question “what is strategy?” but even if you would take the most lenient of definitions, few companies actually have one. Let me not tire you with some real strategy textbook definitions but if I would just put it as “you know what you are doing, and why”, most firms would already fall short on this one.

Most companies and CEOs do not have a good rationale of why they are doing the things they are doing, and how this should lead to superior performance.

I’d say there are 3 types of CEOs here: 1) CEOs who think they have a strategy; they are the most abundant; 2) CEOs who pretend to think that they have a strategy, but deep down they are really very hesitant because they fear they don’t actually have one (and they’re probably right); these are generally quite a bit more clever than the first category, but alas fewer in numbers; 3) CEOs who do have a strategy; there are preciously few of them, but invariably they head very successful companies.

So what do all these CEOs do, when confronted with the question “what is your strategy?” Well, of course they will retaliate with a powerpoint presentation, headed by the title “our strategy”, and there is stuff on it. It just ain’t strategy.

Let me present you with five such common excuses for a strategy or, put differently, five examples of why the things on the powerpoint are not strategy:

Are you really making choices?
Strategy, above all, is about making choices; choices in terms of what you do and what you do not do. Future Plc for example has chosen to focus on specialty magazines for young males (decent magazines, by the way…) in English. This contains some very clear choices. The point is that what they are throwing away, i.e. choosing not to focus on is meaningful. They concerns things that could have made them money as well. For example, magazines for middle aged women might potentially be very profitable, but that is just not what they want to do, because they think concentrating on a clear set of consumers and products will help them do better. Most companies don’t do this; they cannot resist the temptation of also doing other things which, on an individual basis, look attractive. As a consequence, they end up with a bunch of stuff that appears attractive, but strangely enough they don’t manage to turn them into a profitable proposition.

Or do you just stick to what you were doing anyway…?
Another variant of this is the straightjacket of path dependency, meaning that companies write up their strategy in such a way that everything fits into it that they were doing anyway. And there might be nothing wrong with that, if it so happens that what you were doing anyway represents a nice coherent set of activities. Yet, more often than not, strategies adapted to what you were doing anyway results in some vague, amorphous statement that would have been better off in a beginners’ class on esoteric poetry, because it is meaningless and does not imply any real choice. The worst of the lot I have seen (although low on poetic value) was Ahold’s poor excuse for a strategy, which ended up doing so many different things in so many different corners of the world that they resided to calling their strategy “multi-format, multi-local, multi-channel”. This – not coincidentally – was shortly before the company collapsed.

Your choices have no relationship with value creation (you’re in “The Matrix”)
Sometimes companies make some choices, but it is wholly unclear why these choices would do you any good? It is not just about making choices, you need a good explanation why these choices are going to create you a heck of a lot of value. Without such logic, I cannot call it a strategy. Let me give you an example, which happens to be the most common strategy I have seen among multinational corporations: The Matrix. On the horizontal axis, one puts countries; on the vertical axis, one puts business lines. And the strategy is to tick boxes, as many as possible, as quickly as possible (preferably through acquisitions). But why would performing all your activities in all your countries be a good strategy? If you can give me an explanation of why this would lead to superior value creation, I might label it a strategy, but such an explanation is usually conspicuously absent. Without a proper rationalisation of why your choices are going to help you create value, I cannot call it a strategy.

You’re mistaking objectives for strategy
“We want to be number 1 or 2 in all the markets we operate in”. Ever heard that one? I think it is bollocks. A CEO who wrote to me the other day, after having read my book (“Business Exposed”), said of most of these things proclaimed to be strategies that they were like saying “I am going to win the 400 meters during the 2012 Olympics by running faster than anyone else”. Yes, that is very nice, but the real question is “how?” We want to be number 1 or 2 in the market; we want to grow 50 percent next year; we want to be the world’s pre-eminent business school, and so on. These are goals; these are objectives, and possibly very good and lofty ones, but strategy they are not. You need an idea and a rationale – a strategy – of how you are going to achieve all this. Without it, they are an aspiration, but certainly not a strategy.

Nobody knows about it
The final mistake I have seen, but scarily common, of why CEOs who think they have a strategy don’t actually have one (despite circumventing all of the above pitfalls), is because none of their lower ranked employees actually knows about it. A strategy is only really a strategy if people in the organisation alter their behaviour as a result of it. And in order to achieve that, they should know about it… Strategy by itself does nothing; the powerpoint presentation – regardless of how colourful and fine-tuned – is not going to resort to improved performance unless the choices and priorities it contains result into actions by middle managers and people on the work floor. A good litmus test is to simply ask around; if people within the organisation do not give you the same coherent story, chances are you do not have a strategy, no matter how colourful your powerpoints.