In my last blog I outlined some desired changes to the corporate structure, and to our current governance models. I see these as helping to foster a more “directorprenuerial” mindset, but more importantly, they can help generate more value creation. In this final blog of the series, I’d like to demonstrate ways in which boards can add value through defining the board itself as a competitive advantage, rather than a cost centre.
I think we can all agree that the very static form of a board is not a particularly agile model. Sure it provides stability. Sure it provides insight. But can it actually deliver value in such a period of change and such a period of complexity? Consequently, and even before this period of time dawned upon us, boards are no longer competitive – that is, they are not delivering competitive advantage. If you ask most managers what they think of boards, they see them as a cost centre.
Indeed, it would be rare for a CEO to see their board as a profit centre. All the studies that show improvements in value creation by boards normally point to their characteristics along two key dimensions: their adherence to good corporate governance, and their willingness to take leading advocacy positions (such as gender diversity). According to the research, the general improvements are in the range of 1% to 2%. Interestingly, in gender diversity there are some outlier studies, which I certainly would support from my own experience, of around 6% increased in enterprise value compared to the average.
But, in general, better boards (as defined by our standards of best practice in corporate governance) deliver somewhere between 1% and 2% greater results than those that do not exhibit those traits. As a return on investment (and good practice corporate governance is costly), we would say that equates to an average additional increase in return, but it’s far from a standout performance.
As a non-executive director of several private companies, I’m actually quite happy that my colleagues on listed boards have to disclose all their corporate governance practices, and they have to revert to the norm by paying attention to standard corporate governance approaches and best practice guidelines because what that means is that corporate governance in their context is highly unlikely to ever lead to competitive advantage.
Whereas, within private (and for-purpose) entity, we do not have to disclose to the market how we function as a board, what skills we are prioritising, what we pay attention to. We don’t have to reveal our use of external advisors, the way we meet, what we talk about, the review processes we undertake, the relationships we have with management, or how we delegate. Behind this wall of commercial-in-confidence, we can create unique approaches to delivering competitive advantage, things that are not operating at or around the norm.
As we saw during the GFC, governance frameworks (legal, compliance, risk) often lag behind markets and technology. Why would we want to limit ourselves to increasingly out-dated, outmoded and obsolete operating models? Instead, by taking a lead from start-ups and the current generation of disruptive entrepreneurs, private company boards can take advantage of the disruption by developing a more responsive and even pro-active governance model for themselves. For example, adopting/adapting methodologies such as the lean business model, agile software development, rapid-prototyping and collaborative design techniques.
We hear a lot about “disruption” in terms of innovation, market dynamics, business models and technology – not least in connection with the shared economy, and companies like Airbnb and Uber. However, a recent HBR article (December 2015) revisited “disruptive innovation”, and concluded that Uber is actually engaged in sustaining innovation, not disruption.
True disruptive innovation targets lower-end and often less-profitable parts of the market, which have traditionally been neglected by existing providers. It then gains traction by offering “fit for purpose” services that can be scaled upwards to disrupt incumbents through a combination of more competitive pricing and superior products, services and customer experience.
Which is why pop-up boards (or the “Boards-R-Us” model as described by Chicago University) are ideally suited to helping private companies derive competitor advantage through targeted value creation. By offering them access to things like a pool of talent, relevant skills and networks for specific purposes, private companies and SMEs are both more able and more likely to adapt to the pop-up board model. Over time, we will even see public and listed boards adopt pop-up boards, to give them access to similar resources and similar thinking.
While we are on the topic of innovation and entrepreneurship, the conversation is starting to move from “start-ups” to “scale-ups”, to help drive more sustainable business growth opportunities In which case, the pop-up board could be a perfect fit to bring the relevant skills and experience into a company to support the scale-up transition.
Finally, we should not overlook the role of technology in supporting a less traditional board model, and helping to generate further competitive advantage. By using available cloud, social and mobile solutions, boards can host virtual meetings, facilitate collaboration through new project management and communication tools, and streamline their governance process and administration through automated workflow, monitoring and reporting.
It complex and disruptive times the traditional board model will at best protect the status quo temporarily and at worst destroy value. Best practice governance is a reversion to the norm with limited opportunity for completive advantage.
As Australian Prime Minister Malcolm Turnbull has noted it’s an exciting time to be alive. Complexity and disruption bring great opportunity. The opportunity for boards is to reconceptualise their organisations to embrace change. But first, they must change themselves.