The importance of maturity
Most governance literature is written for large, mature, listed for-profit companies. Most companies do not fit into that category.
Following the natural lifecycle development curve and adapting governance to suit is a more appropriate course. However, companies are exhorted to aspire to, and then attain, a theoretical ‘best practice’ governance that often does not meet their needs at different stages of growth. Well intentioned directors often exacerbate this pressure by demanding that every board on which they serve adopt the practices that work well for every other board. Instead, they should adopt practices that suit the needs of the company at the time. Different governance will be required for companies depending on whether, classified by their place on the maturity continuum, they are start-ups, scale-ups, stabilising, declining, turnarounds, or re-emergents.
On the maturity continuum this focus on ‘one size’ or ‘cookie cutter’ governance gives rise to the following problems:
Start-ups
Start-ups are tiny. The board is often comprised of a sole director who is also the founder. That director (if they have any hope of succeeding in creating a significant enterprise) will gather a small group of trusted advisors to help him or her build the company from concept to reality. At some point one of these advisors will point out that they are a ‘de-facto’ board. A de-facto board is an uninsured board, and directorship carries some hefty personal legal liabilities. At this point the group will likely decide that they need to form a real board, complete with expensive D&O insurance[1]. The time and effort that goes into forming a board agenda, writing board papers or reports, and drawing up board minutes usually falls upon the CEO. This detracts from the time and energy that is available for establishing the company, developing products, making sales, raising capital, etc. The board that should support is instead stifling the fledgling enterprise.
Scale-ups
At this stage the company begins to gain commercial scale, reaching minimum viable product, raising capital through various rounds of financing, building systems, recruiting staff, and gaining customers. This is when the company starts to experience its first need for a board to guide activities and establish standards. The incoming directors are usually either individual investors or nominees of smaller private equity funds. However, these directors often lack the skills to make a contribution to the strategy or operations of the company; their main interest is to oversee their investment and to ensure that the company is following the plan that formed the basis for that investment.
Three problems arise:
1. The board does not provide the advice and guidance required to advance the strategy
2. The board focus on their returns and place a reporting burden on the company — and its founder — that detracts from the ability to focus on growing the business
3. The board insist on following the established plan when opportunities arise to make a better plan.
Each of these individually can significantly damage the business. All three are a death sentence.
Stabilising
This is not a glamorous stage of company growth after a period of strong growth the board needs to put in place systems and processes that stabilise and control the business. Those skills are not likely to be found among the strategic business visionaries that underpinned the start-up success or the relationship and product builders that powered the board’s thinking in the scale-up stage. Nor are they likely to be found among the risk-tolerant entrepreneurs and vigilant investors that also frequent these boards.
This is the time to bring in the reporting and accounting specialists, the business process optimisers, and the quality assurance gurus. And to bring those in, without creating a top-heavy board that topples the company, you need to move directors out. Most boards are reluctant to push fellow board members from their posts just as the fruits of their labour come into season. They then fail to understand the scale of investment and degree of rigour that is required to support systematisation at the executive levels leading to companies that have weaknesses and vulnerabilities in their systems, just as those systems have been extended to their full reach.
Mature
Most governance literature is written for these boards. The recommendation is for a majority of experienced, independent directors, a board that stays out of management and operations, and the building of strong relationships with the shareholding institutions that hold most of the stock.
The problems that can arise are manifold:
· The board becomes distant from the operations and can’t exercise effective control as complexity and scale increase. Eventually this results in a major failure.
· The directors are drawn from ‘the who’s who of business’ at the ‘top end of town’ and aren’t alert to, or even aware of, merging trends in society. Sooner or later either the business model or the products and services will be found to have become out of step with modern requirements.
· Investing institutions are judged and rewarded on their return on investment leading to a short term focus on returns rather than a balanced focus on strategic investment and renewal.
· Reporting becomes complex and prescriptive rules prevent directors from having constructive dialog or making meaningful disclosure because of fears of differential briefing and being seen to be puppets of shadow directors.
Eventually one or a combination of these will cause a company to slow or cease its growth. In a comparative sense it starts to decline.
Declining
At this point the board is likely to become concerned about their own reputations and the flat top line. They can either focus on ‘denominator management’ by reducing costs until they significantly weaken the ability to deliver consistent quality. Or they can aim for the illusion of growth by pursuing mergers and acquisitions without any real synergy. The temptation to excuse failure to grow by citing external pressures or adverse environments in reporting is rarely resisted; nor is the creation of overly stretch targets that can, when combined with a distance between the board and operations, lead management into distorting the business to reach the targets (and trigger their bonuses) whilst damaging the brand and resilience of the company.
These are dangerous steps into what can become an unavoidable death spiral.
Turnaround
Reversing the decline is harder than starting up in the first place. The board needs to be united behind a strategy that is likely to be very different from the strategies adopted in recent years. It may involve new senior management and a complete shift in thinking. Often a turnaround is only partially possible, and companies must shed non-strategic operations to focus on others. Clear and consistent messages must be given to stakeholders so that they can understand and support the turnaround efforts. A board of independent directors operating without direct reach into the business is rarely well suited for this work. Apart from stellar examples such as the board of Nokia which transitioned from forestry and rubber goods into mobile telephony, most boards fail to adapt. Directors leave and are replaced or, more common, a new board is brought in after a change in ownership control. The new board, to be effective, will often reach deep into the organisation and take control of vital functions, establishing limits to decision-making and focusing everyone on the survival plan. Disaster awaits any company where the existing directors or continuing management team resist this change.
Renewal
With renewal the cycle starts again. A small purpose-driven board that supports a strong and decisive strategy is required. Often the board that has driven the turnaround is full of pragmatic directors who are interested in the short term gains that can be made if the turnaround succeeds. They are not likely to wish to remain for the long term or for the slow and risky process of rebuilding. If they do stay it is likely that their ‘take control’ style of governance will be ill suited to the more experimental and growth-oriented style that is required to move forwards.
As with all the stages before, the wrong board, at a time when a different set of board skills is required, can stifle success and snatch defeat from the jaws of victory.
Julie Garland McLellan is a consultant who works with boards and directors to give them the practical skills they need to build better businesses. She is famous for her practical and pragmatic approach to the real problems that face boards and directors and for her ability to bring sanity and solutions to even the most vexed boardroom.
She has first-hand experience on 18 boards across three continents — including listed, private, government, and not-for-profit boards — and has helped boards to lead successful organisations for over 22 years. Julie has written and facilitated director education for leading governance institutions, including the Australian Institute of Company Directors, The Governance Institute of Australia, The National Association of Corporate Directors (USA), The Taiwan Corporate Governance Association, etc.
Julie is the author of six books for directors and is publisher of The Director’s Dilemma newsletter.
[1] D&O insurance is the common term for directors’ and officers’ insurance which provides partial protection for boards and senior executives against the potential liabilities they may otherwise incur.