New Paradigm in Corporate Governance: Fink’s Big Ask, and Distributed Decision Making using Machine
23 May 2018
I’m on the Camino for a week with two old army buddies and set aside some reading for my flight and subsequent 5 hour train journey through Northern Spain (beautiful!)?
My selection was (1) The Purpose of the Corporation: (https://corpgov.law.harvard.edu/2018/04/11/the-purpose-of-the-corporation/#more-106200) which included, (2) World Economic Forum: The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth (3) European Commission’s: Action Plan: Financing Sustainable Growth . (4) Martin Reeves never fails to excite and challenge so I included BCG's: Always on Strategy (https://www.bcg.com/publications/2017/growth-always-on-strategy.aspx) again, and finally (5) for cross reference the January 2018 annual letter from Larry Fink, Chairman of BlackRock, to CEOs.
Change has arrived. There is now overwhelming acceptance, based on empirical evidence:
- That we need ‘A New Model for Corporate Governance’, and
- What Good Corporate Governance Looks Like,
Clearly, we are witnessing a fundamental shift in the generally accepted definition of the firm, and a gravitational pull away from short-termism to long-term value creation, ESG/CSR etc. Post the global financial crisis we are also seeing the emergence of new corporate contracts with society at large. This is evidenced by demands for clear organizational definition of ‘societal purpose’ and good corporate citizenry/statesmanship.
Most importantly, what we are also seeing here is a change being driven not so much by regulators and policy setters as by an ‘enlightened self-interest’ on the part of investors and strategic leaderships generally.
The International Business Council of the World Economic Forum believes that there is now a broad based consensus … ‘’that recognition and acceptance of the New (Corporate Governance) Paradigm by corporations, their CEOs and boards of directors, and by leading institutional investors and asset managers, will create a corporate governance framework that will facilitate sustainable long-term value’’.
Resonating very positively with leading codes and guidelines, it is easy to see how the detailed principles/requirements suggested for investors and corporations can be readily applied to many Global 2000 firms.
But what are we really talking about here? On the one hand, we are clearly talking about a new board and investor approach to how they communicate with each other on balancing short-termism with long term gains, strategic decision making, ESG/CSR and current governance hot spots such as culture, risk management, succession, compensation, diversity and crisis management, to name but a few.
Talking the talk however is not the same as walking the talk. You need to be able to perform, and to master the myriad of shocks and surprises you are certain to encounter in our hyper-connected, multipolar, uncertain world.
Governance at its core is about decision-making, and corporate governance is about decision-making systems designed to ensure adherence to sound behaviour on the road to success.
Board committee structures and checkpoints (audit, compensation, nominations etc.) are just part of the corporate regimen required to arrive at a given destination with more resources than you started out with.
So, given that we know what a good (new paradigm) corporate governance framework looks like we really need to understand what is required to make it work: effectively, effortlessly and seamlessly, across organizations of all types and sizes. We need, in effect, to understand what a good decision making system looks like?
The good news is that there are some proven and accepted examples out there, none better in my view than those described below:
- General Stanley McChrystal describes wonderfully in his book Team of Teams: New Rules of Engagement for a Complex World (https://www.amazon.com/Team-Teams-Rules-Engagement-Complex/dp/1591847486) how the US military discovered that its 20th century military doctrine was no longer fit-for-purpose. The doctrine that worked for symmetrical warfare, did not work for the asymmetrical one which they faced against AQ/ISIS. Through much trial and error they discovered that strict hierarchical command and control structures no longer worked. They needed to pivot. They learned that once:
- everyone was absolutely clear as to core purpose and mission,
- decision-makers, from the supreme commander down to the smallest units on the ground, had a ‘shared consciousness’ of what was going on across their area of operations (i.e. there were no organizational silos); were adequately resourced and trained, and
- decision-making responsibilities were sensibly devolved to those closest to the achievement of objectives on the ground, that
Strict adherence to a hierarchal command and control model was flipped to strict adherence to an approach to distributed decision-making.
Today Team of Teams is a book frequently referenced by experts in Enterprize (Organizational) Agility. Top performing organizations have adopted enterprize agility wholeheartedly as an operational imperative which is mission critical to performance.
2. Mc Kinsey’s paper on INGs AgileTransformation
(https://www.mckinsey.com/industries/financial-services/our-insights/ings-agile-transformation) resonates strongly with Team of Teams. For me the most interesting Q&A was the very last one, which is as follows:
The Quarterly: What advice would you give leaders of other companies contemplating a similar approach?
Bart Schlatmann: Any organization can become agile, but agility is not a purpose in itself; it’s the means to a broader purpose. The first question you have to ask yourself is, “Why agile? What’s the broader purpose?” Make sure there is a clear and compelling reason that everyone recognizes, because you have to go all in—backed up by the entire leadership team—to make such a transformation a success. The second question is, “What are you willing to give up?” It requires sacrifices and a willingness to give up fundamental parts of your current way of working—starting with the leaders. We gave up traditional hierarchy, formal meetings, overengineering, detailed planning, and excessive “input steering” in exchange for empowered teams, informal networks, and “output steering.” You need to look beyond your own industry and allow yourself to make mistakes and learn. The prize will be an organization ready to face any challenge.
3. Last year BCG published a truly brilliant paper ‘’Always on Strategy’’ (https://www.bcg.com/en-es/publications/2017/growth-always-on-strategy.aspx). In this paper BCG ask...''Why do companies fail or fall behind their rivals? Among the many reasons, three stand out. Some companies miss a major strategic shift or industry disruption. Others see a big change coming but fail to develop the right strategy in response. And some identify a winning strategy but fail to execute effectively. To increase their odds of success in today’s turbulent environment, leading companies are complementing their traditional annual strategy-setting process with something more dynamic. BCG calls it 'Always-on Strategy''
Of course BCG is absolutely right!
BCG is not the first to have recognised this need, or to have coined the phrase, however they are the first IMHO to articulate a world class methodology. Clearly, whereas Competitive Advantage traditionally emphasized unique defensible value propositions it must now also include an ability to achieve and maintain organizational agility such that an organization has an ability to effectively, and seamlessly, shift direction, grasp opportunities or avoid threats and risks to the business model from wherever they might emerge.
Clearly pressures on directors are increasing massively.
Larry Fink in his letter says that …"boards meet only periodically, but their responsibility is continuous. Directors whose knowledge is derived only from sporadic meetings are not fulfilling their duty to shareholders".
Fink calls for "A New Model for Corporate Governance… and a new model of shareholder engagement – one that strengthens and deepens communications between shareholders and the companies that they own" he says that …''companies must be able to describe their strategy for long-term growth … and … that you publicly articulate your company’s strategic framework for long-term value creation and explicitly affirm that it has been reviewed by your board of directors".
This is a big ask!
It requires a massive transformation from 20th century 'Command and Control', 'Compliance/Check-Box Governance Control Postures' … to … 'Purpose and Objective Centric Distributed Decision Making from the Board Room to Front-line and Operational Support Decision Makers Distributed across the Organization'.
There is a difference between ‘talking the talk’ and ‘walking the talk’!
Change/transformation is notoriously hard. In this case, it is harder again when the change is from ‘hard-wired control postures’ (audit committees, processes, checklists et al) to ‘the soft-underbelly of people and those decision making supports provided to them’ where everyone is singing off the same hymn sheet, in real time.
Decision-making systems today necessarily include the use of machine learning (ML) technologies (AI is a dangerous catch all label?) which can massively augment (and in some cases automate) an organization’s ‘ability to know for sure’ what side of the good-bad corporate decision-making line it is actually sitting on.
Machine Learning (ML) however requires a lot of big (and good) data.
A problem exists where organizations having mountains of customer data for example have only small amounts of strategic data.
Huge amounts of customer data aggregate over time. Time and history affords you the ability to predict customer preferences based on algorithmic analysis and testing of behaviours over time. Strategic bets based on this kind of data can, subject to good ‘agile execution’ can deliver super results and these can be relatively easily communicated to stakeholders.
However, very many strategic bets are high risk because there isn’t all that much data around. There is a direct correlation between low data and poor information; yet there are many instances where decision-makers decide that they ‘like the risk’ because they perceive significant returns.
Decisions based on small data are particularly vulnerable to bias, group think and big voices/influencers in the room. In such cases it is safer to take a ‘team of teams’ approach to distributed decision-making.
Think of the diverse array of sensors in the modern car, each one informing your decision-making as you drive from A to B, reverse and park the car etc.
Now think of your hundreds/thousands of front-line decision-makers as your organizational sensors. Using ML technology, and assuming you ask them the right questions, you can get the machine (adjusted for bias, sentiment etc.) to:
- Give you insights you didn’t have before;
- Help you develop scenarios and options; and
- Alert you as to when you should consider pressing the pause button, slow down, or accelerate.
ML has a long way to go, however we are certainly on the cusp of being able to run queries across strategic data sets derived from ‘human sensors’ (i.e. your front-line and operational support decision-makers) providing structured insights, into:
- STRATEGY: The non-financial operational activities today … which will underpin strategic/financial performance tomorrow;
- EXECUTION: The validity of principal business assumptions … from the Boardroom to front-line decision-makers;
- CAPITAL ALLOCATION: Proof that people have thought things through … as they draw down scarce capital;
- DISRUPTION: Competitor strengths and weaknesses/emergence of business model disruptors … before it’s too late;
- CULTURE: ‘How we do things around here’ (i.e. Culture) … as distinct from ‘how we hope/pretend we do things as defined in our corporate values statements’;
- ESG/CSR: Conduct of third party suppliers … whose behaviours affect our reputation;
- RISK/CRISIS MANAGEMENT: Seeing the issues before they hit you ... 'built-in' versus 'bolt-on' risk/crisis management;
- The list is endless …
The bottom line: Sound decision making systems lead to demonstrably safer high-impact decision making, and this ultimately is what all stakeholders want.
Peadar Duffy is Founder Director of SOLUXR (An Irish and Latin blended name meaning 'to illuminate') which provides expert automation and augmentation solutions for burning strategic issues facing complex networked/distributed organizations. www.soluxr.com