Fit for purpose
Robin Murray Brown of Tyzack Partners looks at the various strategies boards need to employ in order to avoid becoming victims of an increasingly competitive business environment.
Albert Einstein once observed that “any intelligent fool can make things bigger and more complex. It takes a touch of genius and a lot of courage to move in the opposite direction”. What, I wonder, might he have made of the corporate leadership challenges of the early 21st century?
In the mid 1970s, Eastman Kodak was untouchable in the US photographic business and held a dominant position in worldwide photographic film sales for most of the 20th century. The company enjoyed high market share, strong margins, positive cash flow and a treasure chest of patents potentially worth billions.
However, this commanding and seemingly unassailable competitive position also led to Kodak’s downfall. Firstly, it spawned a culture of complacency which blinded managers at all levels to the reality of—and the need to adapt to—the changing global business environment. And, secondly, it allowed the development of a culture of caution at any price, in which executives were reluctant to champion new ideas or to think differently.
The combination proved fatal. Without innovative and responsive leadership, the failure of the company’s historic business model was inevitable. Kodak’s shares were recently delisted and are now valued in cents following its Chapter 11 bankruptcy protection filing in the US. It has been a spectacular fall from grace for a name most of us grew up with.
What lessons can be learned from a corporate failure in which a market leader with an unquestioned track record of innovation failed to react to the opportunities thrown up by a growing market? Surely, the argument runs, the company which invented one of the first digital cameras stood to gain the most from the technological explosion of the last decade.
The first place to look is at the leadership of the company, and specifically the board of directors. Far from providing strategic, entrepreneurial leadership to the company and ensuring the right management team was in place to deliver it, the board allowed a risk-averse culture to develop. In an all too familiar vicious circle, both the organisation as a whole and the board stopped making the bold but commercially justified decisions of the kind that had characterised the company’s earlier success. As competition grew, and margins came under pressure, this was a critical shortcoming by any measure. Compounded by the challenges of a major global downturn, it proved lethal.
In particular, it highlights the point that the best people to lead companies in times of growth are frequently not the right leaders in economic competitive headwinds. This applies both to executives and non-executives and, as some tentative green shoots appear in the economic outlook, will put pressure on boards looking to return to sustainable growth.
A board’s accountability to its shareholders during a downturn can lead to an understandable mood of caution. However, for businesses to identify and exploit the new opportunities which will deliver recovery and growth, they must be prepared to accept again a degree of risk. It is no surprise that management of risk is increasingly being seen as a collective board responsibility. This should not be interpreted as a sign of executive weakness, but a reflection of a greater willingness by management teams to draw on the experience of their non-executive directors, much as they would for issues of corporate strategy.
The current global economic situation has not changed the role of board directors; what has changed is the execution of that role and how the board addresses stakeholder expectations. They now have to be more effective in balancing the exploitation of commercial opportunities with sensible risk management and the maintenance of shareholder value. It is a much finer balance than simply deciding to batten down the hatches and cut costs.
For the chairman or CEO in this situation, a key priority is making sure that their board is fit for this purpose. It requires a candid analysis of the skills, experience and knowledge needed amongst the non-executives, and an honest assessment of any gaps. These need to be addressed through a professional process which draws on independent advice, casts the net widely and brings lateral thought and imagination to the exercise.
The overall composition of the board is as relevant as individual competencies. At a time when robust discussion and streamlined decision-making are at a premium, there is a case for less traditional structures and authorities across organisations, including in the boardroom. There is no simple answer to this: the growing opinion that smaller boards are better suited to steering companies through the uncertainties of economic upturn can be countered by evidence that larger, more diverse boards tend to make less extreme (and thus probably less risky) decisions, leading to less variable corporate performance. But if a board becomes too large, it may quickly become unwieldy and less effective.
In other words, a balance needs to be struck between the sometimes competing demands of sound corporate governance, legal or regulatory obligations and practical effectiveness. Successful companies will be those whose leadership teams understand and reflect the markets they serve, and accept that homogeneity in the boardroom will inadequately equip them for today’s markets. With a limited pool in which to fish, board nomination committees may think they have an unenviable task in the years ahead, but they also have perhaps the best opportunity in a generation to put the building blocks in place to bring onto the board the talented and experienced independent directors of the future.
It may, to borrow Einstein’s words again, require both genius and courage but, as he also said, perhaps in a more reflective moment: “We can’t solve problems by using the same kind of thinking we used when we created them”.