Chairing the board

The shift we’ve been expecting in Air New Zealand’s strategy?

Has Air New Zealand’s market strategy changed – or is it simply now more obvious?

I’ll start by saying that I have been a relatively frequent, usually satisfied, flyer with Air New Zealand for a long time (my Frequent Flyer number has five digits and I’ve accumulated 14 ‘banked years’ of membership).

In the last three years, every airline in the world has faced challenging headwinds and has had to make tough choices. A couple of stories about our national airline in the last fortnight suggest that they’ve now made a clear decision about their broad market positioning.

When I was younger, business schools taught that to be successful and profitable you had to choose one of three over-arching strategies (you could potentially have a secondary strategy, but nobody could afford all three):

Product leadership – think Mercedes Benz;
Customer intimacy – The Ritz Hotel in London, or Huka Lodge near Taupo;
Operational efficiency – Toyota, or WalMart (hold that thought).

The theory was that the first two allow you to make your margin through premium pricing: customers are likely to pay more if they believe they’re buying the best product or premium service. The third strategy generates your margin at the other end, minimising your cost of production.

In recent months, Air New Zealand has talked about ‘best in class’ cabins that they’re developing for their very long haul routes. This, with relentless advertising promoting smiling cabin crew, implies at least one of the former strategies.

While the airline’s welcoming Lounge hosts and most cabin staff play a large part in keeping us loyal, two recent incidents make me sceptical about the real strategy:

Since we started flying again last year, we’ve read stories of countless passengers frustrated by their inability to contact the airline when they needed to change their flight – often after a cancellation or delay. A further story this week tells of a customer who took two full days to get through. Perhaps other airlines are even worse, but I’ve seen little to indicate that Air New Zealand has ever made this a priority: when did you last try to call the airline – even on their priority line – without hearing the message that ‘we’re currently experiencing greater than usual demand’. This does beg another question: what constitutes ‘usual demand’ … pre-1990 levels?

Secondly, two weeks ago Air New Zealand may have set an unenviable record for the world’s ‘longest flight to nowhere’. Its flagship service from Auckland to New York, one of the longest non-stop flights in the world, was eight hours in, two thirds of the way across the Pacific, when Terminal 1 at JFK International Airport was shut down because of an electrical fire, and all inbound flights were told to go elsewhere.

Many flights already en route diverted to other US airports, Newark, Washington DC, etc. From there, their passengers would have had a relatively short onward connection. Air New Zealand returned to its starting point – about as far geographically as you can be from New York. I even understand, from those who have listened to the in-flight radio exchanges, that the Air New Zealand flight crew pleaded with management to be allowed to divert to an alternative US airport, for the sake of their passengers. (You can hear more detail about this incident on my favourite weekly aviation podcast, AvTalk.)

By my estimate, two-thirds of the way across the Pacific puts the flight quite close to Hawaii when it turned back. If I couldn’t go all the way to New York, a day or two in Honolulu before completing my trip on, say, United Airlines, a Star Alliance partner of Air New Zealand, would seem a reasonable option.

In contrast, returning to my start point, after 17 hours or more on board, with the prospect of repeating the whole thing tomorrow, for a total of nearly 35 hours in the air, must feel close to physical and mental torture. Perhaps some people have a higher pain threshold than mine.

The explanation I’ve heard is that any other diversion would have put the aircraft and crew in the wrong place, creating further delays. Really? Was that aircraft, and its crew, so vital to the next day’s flights? How long would it have taken Air New Zealand to fly a fresh crew up to Honolulu and bring the empty aircraft back to Auckland … or on to New York to pick-up the customers who’d already booked for its return the next day?

Even if the explanation is valid, Air New Zealand clearly ranked its own operational requirements above the convenience, comfort – and wellbeing – of its customers.

Some years ago, the then-CEO of Air New Zealand, renowned for his unwavering focus on customer service, observed: ‘At Air New Zealand, we don’t fly aeroplanes … we fly people.’ After last week’s flight to nowhere, the aeroplane may have been in the right place. The people clearly weren’t.

Which brings me back to my start: Air New Zealand’s CEO was, as we know, formerly Chief Executive Officer of WalMart US. Perhaps the only surprise is that the airline’s strategy has taken so long to become clear.

(If you’re reading this post on LinkedIn or Facebook, you can follow my blog at chairingtheboard.com)

No such thing as ‘Invisible Leadership’

I usually hesitate to comment on current events, because experience shows that matters are seldom as they appear in the fog of a fast-moving situation.

This weekend’s catastrophic storm event in Auckland, however, speaks for itself and calls for an immediate reaction.

First, I find it ironic that a Mayor, who was elected on a platform of getting rid of bureaucracy and red tape, should blame exactly the same bureaucracy and process for his delay in declaring a state of emergency on Friday night. Even from a distance of 600km, any responsible decision maker could have seen much earlier in the evening that this storm was overwhelming and beyond the resources of any business-as-usual response.

Today, Monday, we hear (RNZ Morning Report) that the Mayor is too busy with ‘back-to-back briefings’ to speak with the media. This looks like a leader hiding from his responsibility to his community of 1.8 million Aucklanders.

Many thousands of people have suffered enormous loss and trauma – broken families, lost houses, destroyed businesses – and have no idea what the next few days or months will bring, or how they might hope to recover. They are looking to their leaders for any reassurance, encouragement, comfort or empathy they can glean.

It’s telling that the new Deputy Prime Minister is scheduled to provide an update later today, rather than the elected leader of the community.

Compare and contrast: most readers of this post will be old enough to remember the immediate aftermath of the 2011 Christchurch earthquake. Bob Parker, then Mayor, didn’t lock himself in briefings all day. He was visible constantly, offering support, comfort and confidence that he, the City Council and emergency services were doing all they could in the face of overwhelming damage and loss. His presence was so constant that it was rumoured that he slept in his hi-vis jacket.

A leader can choose what briefings to receive and how long they need to be. A leader then needs to lead. Where I was trained, we were taught that there’s no such thing as invisible leadership.

To Mayor Brown, my message today is, ‘Get out there and be the leader Auckland needs.’

Four times twice as much: how the Chair’s job has grown.

The latest edition of the Australian Company Director magazine quotes a senior board chair describing how the role has evolved in recent years:

‘Where once the rule of thumb was that the chair did three times the work of a non-executive director (NED), they now do four times the work of NEDs, who in turn are working twice as hard as they used to.’

For the mathematically challenged, I think she’s saying that a board chair today has about eight times the typical workload an NED had, only a few years ago.

People unfamiliar with the role (to some extent, anyone who hasn’t been a chair) might ask what requires such a commitment. After all, they attend the same number of board meetings as all other directors, don’t they?

Over the last few years, I’ve developed a framework that I hope de-mystifies the role, outlines its breadth and demonstrates how critical it is to the success of both board and organisation.

My Five Roles of the Board Chair have resulted in a vaguely Scottish-sounding acronym – with a guttural absence of vowels – MCBSD (work in progress … it doesn’t quite roll off the tongue yet):

M – The first function, the one that everyone knows about, is Meetings: the Chair’s most obvious job is to plan and lead powerful Board meetings – meetings at which the Board makes the decisions that only the Board can make, where we tackle the difficult issues, where differing views are sought and tested, and when the Board and CEO agree at the end that the organisation is better off than when we sat down, when we know we’ve made the boat go faster.

Achieving this in our limited time together takes careful agenda planning and ensuring that we receive high quality briefing material in plenty of time. During the meeting, the Chair must remain alert to who’s speaking; who still needs to (and sometimes who needs not to); fresh ideas that might be emerging; what we still need to address; what we might be missing; and, finally, when we’re ready to make a decision.

C – The second job, that can take a lot of time, is managing the Board’s relationship with your only direct report, the Chief Executive. At its best, this can be one of the most satisfying parts of the role – developing and nurturing a strong working relationship based on trust, openness and respect (in both directions). The paradox is that it must not evolve into personal friendship: as Chair, you act on behalf of the full Board, not on your own account, and you need to keep that professional distance.

In contrast, if the relationship breaks down, or the Board begins to lose confidence in their CEO, managing this relationship may become challenging, time-consuming and immensely frustrating. If the relationship breaks down completely, one of you probably has to go: I can’t remember a broken relationship ever being fully rebuilt, and if the Chair and CEO can’t work together the organisation will suffer.

B – One of your biggest responsibilities as leader is to build and develop your Board. Some Chairs have the luxury of being able to select, or at least nominate, who joins you. In these cases you must resist the temptation to people who look and think like you, which may make for a more superficially collegial board. Instead, you need to think hard about the attributes that will add the greatest value, offer the best oversight and deepest insights, and find people who think differently (see my earlier post on Cognitive Diversity), so that the whole Board is greater than the sum of a few cosily-connected parts.

Where directors are appointed or elected by others (usually shareholders or members), I believe that the Board and Chair have a right – even a duty – to let them know what skills, experience and linkages might add the greatest value to the Board. They can choose to accept that advice, or not.

By whichever route your fellow directors arrive, as Chair you need to make the most of your team. You need to support their professional development as individuals and as a team; to ensure regular evaluation of board and individual performance; and to establish an appropriate committee structure with the best members on each; as well as planning for and managing the next round of succession.

S – Gone are the days of the invisible Board, or the Chair who appeared only for the AGM and set-piece media announcements. Today, our shareholders and stakeholders, external and internal, expect to know us, to hear from us and to be able to contact us if needed.

As Chair, I find huge value in getting to know the organisation on the ground, and in hearing from the people working in it. This is not about getting in the way of management – it’s vital that we don’t – but more about understanding what makes the organisation tick, and at the same time repeating the Board’s key messages, showing that we’re all heading in the same direction, and helping people to understand the valuable part each of them can play.

If you ‘dig the well before you need the water’, to build the trust and confidence of your shareholders and stakeholders, you’ll find it easier to have the tougher conversations when things aren’t going to plan or you see clouds on the horizon.

D – Finally, one important aspect of the job that I’ve seen several Chairs forget, especially when they’re new in the role: besides balancing your time with the tasks I’ve mentioned above, remember that you’re also one of the directors – not simply a facilitator or coach. You need to make sure you don’t dominate or cut discussions off too early, but you’re probably better informed than your colleagues, you still have a valid perspective, the right to ask questions, and even to admit you don’t understand.

Yes, ‘four times twice as much’ feels about right. It’s a big job. But if you want to make a real difference in your governance role, there’s no greater satisfaction than leading your Board through challenging times and seeing the value that you and your colleagues have added.

As someone said to me recently, ‘Your goal isn’t to live forever … it’s to build something that will.’

Good luck! And, if you need to talk about this, you know where to find me.

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If you’re reading this post on LinkedIn and want to follow my blog, you can do so at my site chairingtheboard.com

Ten minutes that will transform your (Zoom) board meetings

I’d guess that most of us have held more board meetings virtually than in person over the last 18 months. Remote meetings, still a rarity two years ago, are business as usual and here to stay.

We’re learning how to make the most of them:

To interpret non-verbal signals (aka body language) from only our colleagues’ faces;
To stop people talking over each other, most of the time;
And to manage the unusual constraint that everything we say and every facial gesture is seen by everyone else in the meeting. There’s no ‘one-to-one’ (outside the ‘Chat’ box).

But there’s one aspect of living on Zoom^[1] where many of us seem to have learned nothing in the last 18 months – our own welfare. Who hasn’t been stuck for hours, barely moving, staring at their board colleagues through lengthy meetings, where the breaks are dictated by the strength of the chair’s bladder?

We all know about people’s limited attention spans and the benefits of regular physical movement. Yet, here we are, ignoring both, in the supposed interests of getting through our meeting.

In a physical boardroom, we have the luxury of being able to move in our chairs, or even to move our chairs; we can look from side to side directly at our colleagues around the table. Some boards even provide a side table with refreshments through the meeting, so that board members can stand up and move around, without missing any of the discussion.

None of those luxuries is available on Zoom. Like a well-trained gun-dog, a hungry leopard, or a cat that’s spotted a mouse, we sit motionless – except that we’re staring at a screen 60 centimetres in front of us and often well below eye level. I don’t know the potential long-term harm or risks of this behaviour for humans, but I do know at the very least that it’s hard to stay fully focused on the discussion for hours on end.

Here’s my simple but powerful solution: every hour, call a ten-minute break – not five, but ten. Ten minutes gives people enough time to stand up, attend to their physical needs and make a cup of coffee or respond to that urgent email request. In comparison, a five-minute break barely allows time to do one or the other.

Since I began this approach, taking regular and longer breaks, my meetings have become livelier and more engaged, and it’s a tempo you can sustain for pretty much as long as you need. And, once they’ve tried it, nobody has complained (to me anyway) that we’re wasting time.

A few little tips to help even further:

Let people know at the start of the meeting that this is what they can expect.
When you break, tell people exactly what time you’ll be starting again.
And please, when you take that break, remember to turn off your camera and microphone … need I say more?

Just try it. Then let me know your experience.

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If you’re reading this post on LinkedIn and want to follow my blog, you can do so at my site chairingtheboard.com

^[1] Zoom, or any other video-conferencing app

The three levels of medalling, in board diversity

Over that inspiring fortnight of distraction, the Tokyo Olympics, two new verbs have joined the mainstream, as in ‘I can’t believe we’ve medalled … we were only aiming to podium at the next Games.’

As those verbs have entrenched themselves in the sports lexicon, so ‘diversity’ has become possibly the most discussed, most abused and most poorly understood term in board vocabulary.

Let’s look at diversity in the language of the last few weeks:

Bronze – demographic diversity

Much of what we read about diversity addresses only one dimension, gender: ‘How many women on your board?’ To be fair, the discussion can extend to other demographic measures, as in ethnicity, age or geography.

Even here, I see this often as a lazy substitute for real diversity. Looking different or coming from another part of the country is no guarantee that you’ll add a different perspective to our board discussions. Indeed, researchers who published a Harvard study in 2017 ran an experiment more than 100 times, and concluded that there was no correlation between demographic diversity and problem solving performance. The ability to solve complex problems, surely, is what we’re aiming for.

Then again, when filling a board position, we want to select from as broad a field as possible. So this type of diversity is still an essential component – for the purpose of inclusiveness and equality of opportunity. We also need to ensure we’re not excluding, or unconsciously discriminating against, particular sectors of our population, as can often result from ‘hiring in the mirror,’ unwittingly preferring people who look or sound like us.

Perhaps, then, demographic diversity is more like the qualifying rounds than gaining a medal: without it you’re not even in the game. But it’s far from enough.

2. Silver – skills, experience and linkages

This next category takes us in the right direction. Having a range of skills and experience at least helps us to ask questions from different angles. Many companies elect their entire board from a similar catchment. For example, an engineering firm may have a range of demographics among its partners – young, old, men and women, but often they’ve all been trained to think the same way: as engineers. Similarly, with the boards of many organisations, such as co-ops, the board may be drawn exclusively from members – farmers, retailers, cab drivers – so again they may not have much breadth of experience or skills.

Another valuable attribute of a well-structured board is directors who bring a wide range of networks, or linkages. Often, in my experience, knowing which influential stakeholder to talk to, or how to tap into a key stakeholder’s thinking, is hugely valuable.

These are areas where independent board members can help to fill the gaps. It’s not about the demographics, but the skills, experience and linkages we need at the board table. It’s an area where I’ve had some wonderful, and challenging, career experiences: the only non-engineer on a board of structural engineers, and the first independent director and only non-farmer on an infant formula co-op’s board^[1], to mention two. As a result, I’ve had the luxury over those years of asking the ‘dumb’ question, such as ‘Why do we do it this way?’ – sometimes the question other directors really wanted to ask, but were too embarrassed, because they thought they should know the answer.

3. Gold – ‘cognitive diversity’

To get what we’re really after, the best group to solve complex problems together, we need what the authors of the Harvard article call ‘cognitive diversity’. I think of this as different ways of thinking about problems. The researchers divide this into two areas:

Knowledge processing: do our directors apply their existing knowledge to a problem, or prefer to gain new knowledge?
Perspective: do they apply their own expertise, or build on the expertise and thoughts of others?

Not surprisingly, boards with the highest levels of ‘cognitive diversity’ scored best at solving complex problems – regardless of whether they were socially, ethnically and gender diverse, or all young Hispanic women … or even pale, middle-aged and male.

The answer seems obvious: appoint cognitively diverse members to your board. The reality is more difficult: how can you tell? You can’t see cognitive diversity; also, because people generally like to fit in, they tend to be cautious about standing out as different, especially when we first meet them, as in an interview.

Here’s the challenge for our board chairs: we often talk about authenticity in our own leadership. Perhaps even more important is to celebrate the differences, to encourage everyone at the board table to be themselves and, like the late Mr Sinatra, to do it their way.

When we genuinely bring together a range of problem-solving styles, where people are comfortable expressing different views resulting from different thinking styles, challenging long-held assumptions, and asking questions that make us all think … then perhaps we can stand at the top of that diversity podium.

And, as chairs, we’ll be able to claim our own ‘PB’!

^[1] I won’t forget my introduction to the Dairy Goat Co-op. At the AGM where I’d been nominated, one of our farmers asked me, ‘So, Mr Westlake, what do you know about goat farming?’ We both knew the answer.

Perhaps, I said, my total lack of knowledge was the most valuable thing I brought: the other six directors knew everything they needed to. I hoped, though, that I’d bring some other skills and experience from my non-farming, background.

The other shareholders seemed to agree and elected me as the company’s first independent director.

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If you’re reading this post on LinkedIn and want to follow my blog, you can do so at my site chairingtheboard.com

When your board member is the subject expert: three hidden traps

How often do we hear boards discussing the type of skills they’d like to attract … ‘Wouldn’t it be great if we had an engineer/micro-biologist/blockchain expert on the board?’

I’m fully in favour of making sure our boards have people with the right skills and experience for the business. We’ve all heard of corporate train-wrecks where their absence has been a factor: insurance companies with no insurance or risk experience; building companies with no construction experience; even banks with no bankers (as we found after the 2008-2009 GFC). You need at least some of your board members to have experience in the industry, so the board knows what it needs to ask – in the cliché of some years ago, to move from the unknown unknowns to the known unknowns – and, crucially, to sense whether the answers from management pass the ‘sniff test.’

If I were on the board of an insurance company, for example, I could ask how much reinsurance cover we should hold; but, without experience in the insurance industry, I wouldn’t know whether the answer I received was reasonable. So I’d want to be sure someone else at the table had that experience.

All very reasonable. But, as always, we get unintended consequences. If we have a board with several experts in specific disciplines, we need to watch out for how much we’re really behaving as a committee of individual experts, compared with how much we’re genuinely working collectively as a board of directors.

Secondly, if we have the recognised subject authority around our table, and they offer their opinion (especially when it comes as a statement, rather than a question), who dares to disagree or challenge? And, if we do, does the expert then become frustrated? We need to remember that, as directors, we all have a duty to review and test the information we receive.

This is all manageable, as long as we stay aware of our role.

But what about those organisations, often NGOs, smaller and resource-constrained, which attract heavy-hitters to the board who are better qualified and connected than the managers employed in the organisation? To take advantage of this – the experienced finance, marketing or fundraising board member – we may engage them as cheap (often free) consultants, or set up a committee, in order to strengthen the operational function.

Here’s the trap: your expert or specialist is a board member, so the committee we establish reports to the board … right? Wrong – for two reasons:

If the committee reports direct to the board, who’s really running the business? How can your CEO influence the committee’s activity if it reports direct to the board, and what happens if s/he doesn’t agree with the committee’s recommendation?
If the committee’s recommendations turn out to be flawed, and it all goes wrong, who do you hold accountable? You can’t penalise your CEO, who wasn’t responsible for it … and who governs the governors?

I like to draw the distinction between

Genuine board committees (such as risk, audit, people & culture): these consist entirely of board members and provide recommendations for the board’s decision; and
Those committees we set up mainly to strengthen management capability: they contain one or more board members but probably also members of the management team.

These ‘management-support’ committees need to be accountable to the chief executive, not the board, so that s/he can decide whether to support or implement its recommendations – as with any other management proposal – and in turn can take responsibility for its success or failure.

This of course requires board members to accept that, when they’re acting in this way, they’re not doing so as board members, but as subject matter specialist advising management. Your board member needs the flexibility (and humility) to accept that it’s up to the CEO whether or not to accept their advice.

However, a cautionary tale: I once chaired a board in the performing arts sector (an industry, our CEO once described to me, of ‘nuts, sluts and perverts’). Our board included several passionate, larger-than-life personalities, some of whom were also expert in fund-raising and marketing (and, as far as I know, none of the above ‘attributes’). We established a couple of committees to support our over-worked and under-resourced management team. One of those committees worked as planned.

On the other, however, one board member simply couldn’t accept that she wasn’t the boss: “But I’m a board member …”

I thought we’d be able to manage this at the board meeting. Instead, we found that the board member, with whom the CEO had disagreed, had become our “hammer” (“When you’re a hammer, everything looks like a nail.”). Despite our/my best efforts, we couldn’t get her to modify her behaviour. In the end, we didn’t simply take her off the committee – she had to leave the board. So, even if you get it right in theory, it doesn’t always work as planned.

As I say, having the subject matter expert on your board can be a mixed blessing.

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If you’re reading this post on LinkedIn and want to follow my blog, you can do so at my site chairingtheboard.com

When the Chair wants to become the Boss

Last week the New Zealand Herald revealed that, among candidates for the chief executive’s role at Greater Wellington Regional Council, the current Council Chair Daran Ponter had thrown his hat into the ring.

It’s far from the first time that this has happened, not only in local government, and it can work perfectly well – as long as the process is handled fairly and impartially. The first problem the Council faces, of course, is that the Chair is the person most likely to have been leading the appointment process up to the time the application was submitted. The important thing here is for the Council/board to act fast and decisively.

If any board member/councillor wants to apply for an executive role in their organisation, they must immediately step right away from the governing body. They can no longer remain (or be seen as) a member of the governing ‘club.’

I’ve been on several boards where a board member has applied for the CEO’s role – and has been appointed. In my experience they may indeed be the perfect candidate:

They’ll know the issues the new CEO will need to deal with,
They’ll know what’s expected of the appointee (they may well have been involved in writing the position specification), and
They’ll know the board and the board will know them – which can be a huge advantage for someone coming into the top job.

But you need to avoid the appearance of favouring that candidate or of giving any sense that the appointment is a ‘done deal.’ I can recall one occasion as a board chair, when my deputy phoned to ask whether I’d consider his application for the vacant CEO’s role. We had gone through a search and appointment process and had been ‘underwhelmed’ by the first round of candidates, so we’d re-advertised the role. I replied that I was delighted he’d applied, but we still needed to follow our proper process, for two main reasons:

We needed to be fair to any new candidates – not simply favouring the one we knew;
If we appointed him and it didn’t work out, we’d be open to the accusation of not having run a more robust process, rather than assuming this was the right person simply because we knew him.

All well and good, when the person is appointed, and they make a success of the role – as I’m pleased to say this person was and did.

What if … ?

However, the important question for Greater Wellington is – what if Mr Ponter isn’t successful, and the Council appoints someone else as CEO? What happens then?

Can he come back into his role as Council Chair?
- After all, having been a candidate, he’d be in the awkward position (almost certainly) of disagreeing with the Council’s biggest decision this year. To put it more bluntly, would he have a vested interest, even sub-consciously, in seeing the new appointee fail?
Can he credibly even return to the Council?
- This question doesn’t seem to occur to many people, but again he’d be in the position of disagreeing with Council’s biggest decision; everyone around the table would know that … and he’d know that they knew it. In a legal or constitutional sense, I imagine there’s no way of preventing him from returning – after all he was elected for three years – but can it work in practice? How uncomfortable would that be for everyone at the table?

Several years ago, I was on a board that was in this exact position, when our Chair told the board he’d like to apply for the CEO’s role – with the added complication that this was the board of an industry representative body and our Chair was also chief executive of one of our member organisations.

A couple of board members went through the usual motions of saying he’d need to step aside from the board during the process. I then asked the ‘what if?’ question, and they realised that it was slightly more complicated. After a short discussion, the rest of the board agreed that, if he was unsuccessful, he couldn’t return as Chair. We also agreed that even returning as a board member could be a problem. If that had been the result, it would have put him in the awkward position of having to explain to his own board, as their CEO, why he’d stopped chairing our board and possibly why he’d had to leave our board completely – when none of his board had any idea that he was applying for a new role.

I was relieved, for him as much as for us, when we sat him down and explained this dilemma. The consequence of not being successful had never occurred to him and it didn’t take long for him to withdraw his application.

An important part of any board member’s role is to think ahead and to ask ‘What if …?’ and ‘What next …?’

Many years ago, when I was learning to fly, we had a poster displaying the definition of the superior pilot:

‘The superior pilot is the one who applies their superior judgment to avoid situations that would require their superior skill.’

Being a director (or a Council member) is no different.

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If you’re reading this post on LinkedIn and want to follow my blog, you can do so at my site chairingtheboard.com

The (other) Rule of Six – and the mistake we make in using it

Last week, British Prime Minister Boris Johnson introduced the ‘Rule of Six,’ limiting gatherings to six people, in order to slow the spread of Covid-19.

This brought to mind the older ‘Six Block Rule’ that directors have used to guide them on their capacity to accept new roles. The ‘Rule’ proposes that, in general, a competent director can manage up to six full board positions (blocks) at any time, with a chair role counting as two blocks, and a committee chair as one-and-a-half.

It suggests, for example, that we can handle two chairing roles and a couple of other positions. I know many people with several more than this. I can also remember one occasion when I was chairing three boards, as well as a bank’s Finance and Audit Committee, and I was newly on the board of two other companies: total 9.5 blocks.

A challenging and busy period – mercifully quite short.

I also know some directors with several more than this, who seem able to juggle their commitments successfully. On the other hand, you’ll find some – perhaps political ‘favourites of the month’ – who have more appointments than fingers and thumbs, and a few toes, and I seriously wonder whether they do justice to all of their roles.

Some countries have a cap on the number of public company board positions a director may hold, usually five or six. I think this is totally reasonable, but it’s also worth acknowledging that a listed public company is likely to be far more demanding on your time than a medium sized private company or NGO.

I’d argue that the Six Block Rule is actually the wrong way to look at capacity: anyone with some experience knows that different boards require differing amounts of time and effort. I rather prefer the ‘Three to One’ approach: that the time you need to budget is roughly three times the length of your average board meeting … and ‘Three-Squared for the Board Chair’.

It works like this. Suppose you hold a board meeting each month that lasts four hours: budget twelve hours a month:

Four hours in the meeting;
At least four hours to prepare fully – not just reading the board pack, but staying informed about your broader environment and the issues you’ll be dealing with; and
The remaining four hours for those other things you do as a director – committee meetings, strategy sessions, shareholder meetings, discussions with the CEO, and so on.

If you’re the board chair, multiply this time by three again (you might want to read my earlier post, ‘The Five Roles of the Chair’):

First, you have to do everything your other directors do – but probably more so;
You need to build, lead and develop your board;
You’ll be dealing with your external stakeholders; and
You’re likely to be managing the board’s relationship with your chief executive.

… You also hope you won’t have to do all these at the same time.

Rules of thumb are quite helpful most of the time, but averages are dangerous things. Think back a few months to the early days of pandemic Lockdown. Most directors I know were attending remote board meetings every week, sometimes almost daily; and many chairs were practically full time in supporting their CEOs, and liaising with their colleagues and other stakeholders.

Here’s the lesson from that time, and the flaw in any rule like this – ‘Rule of Six’ or ‘Three to One’. When you’re deciding whether you can accept a new position, ask yourself not only whether you can cope if one of your boards has a crisis … what if they all have a crisis at the same time? Or, more accurately this year, what if the same crisis hits them all, at the same time?

Precisely when your board needs you most, will you be missing in action because you’re overloaded?

That’s what you need to think about, when you’re offered yet another role to add to your portfolio. Good luck!

If you’re reading this post on LinkedIn and want to follow my blog, you can do so at my site chairingtheboard.com

The Four Levels of Board Maturity … and what you need to do about yours

Some people tower over their profession: Albert Einstein – physical sciences, Chuck Yeager – test flying, Florence Nightingale – nursing (and statistics – check her out). In corporate governance, few are as respected as Professor Bob Garratt, author of ‘The Fish Rots from the Head’. It’s an excellent metaphor to illustrate his discussion of board leadership, albeit, as a marine biologist once advised me, biologically incorrect.

Professor Garratt is one of the western world’s leading thinkers in directing and controlling companies. In a recent article from his 2017 book, ‘Stop the Rot: Reframing Governance for Directors and Politicians,’ he describes the four levels of board maturity that help identify how your board is adding value. I’ve looked at each of these below and have suggested how, as chair, you might respond depending on your own board’s maturity level.

First is what Professor Garratt describes as the Accidental Board. In these businesses, often family companies or employee-owned businesses, the directors have been registered, but the board is a formality and largely ignored, except for signing a couple of forms to accompany the annual financial return. This is a dangerous playground: they’re not even aware that directors assume serious responsibilities and obligations when they consent to act … as one senior director put it to me, ‘When you join a board, you hand over a blank cheque which is your reputation and you should aim for it never to be cashed.’

These boards don’t know what they don’t know. At the very least, get them some basic training in governance, and how it differs from what they’ve been doing. You wouldn’t let someone drive a car, boat or aeroplane without some instruction. Why let them out as your company’s governors (derived from the Latin for helmsman) without equivalent training?

At the second level is the Grudgingly Compliant Board. These directors understand that they have responsibilities, and personal exposure if they don’t comply. But they see governance as a handbrake on the business and won’t invest any more than the bare minimum of time or resource into it.

This sounds like several companies I know: they have a board, because they think they should; they hold as few board meetings as practicable, with an agenda that’s largely about ensuring they’ve ticked the legal boxes, reviewed last month’s financials, discussed a few operational matters and aimed at making today’s meeting shorter than the last. These boards don’t understand the value that directors can bring when they stand back from the business, test management’s thinking, and offer guidance and insight from a range of perspectives.

For these directors, the appointment of the board’s first independent director can provide the wake-up call. Alternatively, they may decide to seek outside advice or training when they, or a newcomer, sense that the board could deliver much more. For you as chair, this is your opportunity to stop the board from staring in the rear-view mirror and force it to look ahead to shape the company’s course.

When this leads to the Learning Board, the company’s top management and owners, as well as the directors, recognise that an effective board is a vital component of the leadership. The board grows from its limited role of overseeing and holding the CEO to account, and becomes an enabler and accelerator for the business – setting policies, looking ahead and working with management to formulate strategy and set challenging but achievable goals and objectives.

Here is your chance as chair to take your board ‘from good to great’ – to widen your board’s perspective from a narrow focus on maximising shareholder value. What must the business do, to ensure survival and success over the years ahead: how do you remain a good investment for your shareholders, an attractive employer of your people, a company your customers are proud to associate with, and a valuable member of society, making your small part of the world a better place?

At the highest level, we have what Professor Garratt describes as the Professional Board. I prefer the Leading Board –

Providing effective direction, oversight and control;
Holding board meetings whose main purpose is to help our chief executive succeed;
Constantly reviewing the changing environment around us; and
Identifying the opportunities ahead, while spotting the roadblocks in our way.

This Leading Board is willing to raise difficult issues, to hold challenging conversations, and to listen to views that may make us uncomfortable. This board evaluates its performance and the contribution of each director, on a regular annual or biennial cycle.

When the world changes, why assume (if only implicitly) that the board we had last year is necessarily the one we need for next year?
Does our current way of governing, with its associated ‘infrastructure’ of meeting preparation and support, add to or detract from the value we bring?
How might we do it all better?

These are tough questions, but ones we must ask if our board is to continue adding value and providing the guidance and support our chief executive needs.

As chair, you have the opportunity (and responsibility) to ensure that your board’s composition, skills mix and practice are relevant to the challenges of the next few years, not simply a legacy of habit or history. As the late Jack Welch memorably summed it up: ‘If the rate of change on the outside exceeds the rate of change on the inside, the end is near.’

As chair, you can make sure that doesn’t happen.

But you need to act: first, acknowledge your board’s real maturity level (perhaps not what you’d like it to be).

Is it

An Accidental Board?
A Grudgingly Compliant Board?
A Learning Board? Or
A Leading Board?

Then decide what you need to do about it – today.

And if you’re not sure, call me.

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If you’re reading this post on LinkedIn and want to follow my blog, you can do so at my site chairingtheboard.com

Who saw that coming? The A.R.T. of Risk Governance

I don’t suppose any of us fully anticipated what we, and the rest of the world, have experienced in these last few months.

Most of our boards have well considered and often colourful risk registers, which they review regularly. So why was this coronavirus such an ambush? How many registers contained something like: ‘Global pandemic, forcing us to close our business, and generate zero revenue for several weeks’? Perhaps many Chief Risk Officers were too nervous to present anything quite so apocalyptic to their board (note to self: reality check on our board’s culture, and how we respond to bad news from management).

I wrote a few weeks ago (The Wisdom of Wimbledon, Covered Are We) about one organisation that did understand the consequences and acted on it. But, if we’re honest, this virus took most of us by surprise – not least with how fast it turned our lives upside down: airlines and tourist operators, struggling to manage excess demand only a few months ago, were suddenly starved of cash, almost overnight.

In the spirit of ‘Never waste a good crisis,’ this may be time to take a fresh look at how we identify risk. Most of us have extensive risk registers and associated ‘heat maps’, where we plot the likelihood of a risk materialising and the impact or severity if it does.

A 2012 article in the Harvard Business Review was one of the first to explain why we can’t treat or manage all risks the same. Since then, my colleague Vaughan Renner and I have developed the authors’ approach into what we call The ART of Risk Governance™:

‘A’ is for Appetite. Many boards have a carefully crafted ‘Risk Appetite Statement.’ Mostly, they lie.

‘Risk Appetite’ is curried prawns from a side-street vendor in Mexico City. The common definition of ‘appetite’ is ‘a desire or liking for something.’ Unless you’re quite perverse, you don’t have a desire or liking for most of the risks in your register. However, you do need to identify them and decide how to treat them.

For some risks, though, ‘appetite’ is the correct term. These are the risks we choose to accept, or even seek, because we hope the benefit or return will be greater than the likely cost.

Banks, for example, set a ‘credit risk appetite,’ which they hope will generate a level of lending where the overall returns to the bank are maximised, allowing for a certain number of bad debts. Other businesses may set a risk appetite for acquisitions or other strategic moves – big enough to make a significant difference, but small enough that they won’t kill the company if they fail.

We need to agree the board’s risk appetite and set limits around these strategic choices.

‘R’ is for Resilience. Even if we’d had the foresight to include ‘Pandemic’ in our Risk Register, most of us couldn’t have prevented it or stopped its rapid spread across the world.

Risks like this are normally related to external events. We have no ‘appetite’ for them and we usually can’t stop them, but we do need to be resilient, so we can survive when they occur.

These events may be:

Short term – natural disasters like flood, drought or cyclone, or geological, or biological, like the pandemic.
Medium term – often the result of economic or political changes. Our boards need to consider a range of scenarios and ask, ‘What if?’ – ‘What if we do have a change of government?’ … ‘What if we don’t?’
Long term – can be some of the hardest to address – such as long-term demographic or economic changes: what might our world, our market, our customers, and our competitors look like in 20 or 30 years, and how can we evolve to take advantage?

‘T’ is for Tolerance. Most of the risks on our register (health & safety, data loss, internal fraud, and so on) have an operational focus, and they offer no strategic benefit. Yet they usually fill much of our risk register, because they lend themselves to quantification, and to controls that we can implement, to reduce the probability of it happening (say, defensive driving courses for our employees on the road), or the impact if it does (regular file back-ups and duplicate sites for our data).

We could, if we chose, mitigate or eliminate most of these risks. But we’d have no money or resources left for anything else … you could probably build a crash-proof aeroplane – but it would be too heavy to leave the ground.

Some risks we may simply accept, as part of what we do. For the rest, will we reduce or eliminate them, transfer them to someone else, or, finally, avoid them altogether? And let us do so to the extent that it is practicable and cost-effective, while still allowing us to achieve the organisation’s goals.

From my experience with many boards, it is this third category – internal, operational and at least partly controllable – that frequently dominates when we review our risk registers.

Some internal fraud or the loss of a key person, or a data hack, are annoying, and can be expensive and distressing, but they don’t usually kill the company. But many boards don’t spend enough time considering the longer term, or the external, strategic environment, where the risks fall largely into the first two categories. Yet these usually contain the risks that can put us out of business.

When your board takes its next ‘deep dive’ into Risk, try identifying your main exposures in three separate sessions: one for each of these three categories. You may discover a ‘richer’ trove than you’ve probably considered before. Then consider how you will approach each:

For which do you have a genuine appetite, and need to apply some limits?
Against which do you need to build your resilience? And …
What level of tolerance have you for those risks that you can actually manage?

Welcome to Level One in The ART of Risk Governance!

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If you’re reading this post on LinkedIn and want to follow my blog, you can do so at my site chairingtheboard.com