Author: Tom Koor

Tom Koor

What are the three greatest risks to your company?

What are the three greatest risks to your company?

 What is the purpose of this article?

This article enables a discussion regarding the three greatest risks to your company.  The audience for this article includes: boards of directors, CEO, C-Suite, individual investors, and institutional investors.

This article does not provide tax, legal or financial advice.

You must do your own research and fact-based analysis using current and relevant information.

You can download a PDF of this article from: What are the three greatest risks to your company

What are the critical learnings in this article?

The three greatest risks to your company are:

  • The talent on your board of directors
  • The talent on your C-suite
  • If you have controlling shareholders, the talent of the controlling shareholders.

Why are these three the greatest risks?

#1 They make the business decisions with the greatest impact on the company e.g.

  • Appointment and termination of the CEO
  • Assessment and approval of the talent selection, development, and exiting processes and policies – including your board of directors and C-Suite.
  • Assessment and approval of: the strategic plan, budget, and policies.

#2 They monitor the performance of the company, its talent, processes, and technology. They take corrective action.

#3 They have, or lack, a variety of external relationships which can enable your company’s success

#4 They have, or lack, the capability to assess the analysis and recommendations provided to them from internal and external sources.

#5 Their behaviours, actions, and decisions communicate the expected values, morals, and ethics to the entire company and members of your company’s ecosystem.

The talent as a whole must be competitively differentiated. 

  • If the talent as a whole significantly lags the competition, the company will under perform or fail.
  • This does not mean that every single person in the above talent pool must be better than all of the competition. Company success requires a team.

What are your next steps?

  • Define the words/concepts you’re using, in a glossary. I’ve seen major confusion when the same words mean different things to different people.
  • Define what you mean by risk vs uncertainty.
  • Define how your measure the impact of risk e.g. how does the measure of a high-risk item compare to the measure for a low-risk item.
  • Describe your future scenarios. There must be at least three failure scenarios. #1 You company goes out of business. #2 Your company creates negative economic profit.  #3 Your company produces below median benchmark results.
  • Define the evaluation criteria for talent. Start with the criteria outlined in the further reading section below: “What are the core components of talent? V4”
  • Do an anonymous self assessment of your talent. The directors assess the board as a whole and C-Suite as a whole. The directors also assess any controlling shareholders. The C-Suite assesses the board as a whole and C-Suite as a whole. The C-Suite also assesses any controlling shareholders. The assessment questions are: Will the talent at the board, C-Suite, and any controlling shareholders enable company success in every future scenario. If so, why? If not, why not.  For the scenario in which your company fails, what components of talent enable failure?
  • Discuss the results. Create an action plan to increase the chances of your company’s success and reduce the chances of failure.

What further reading should you do?

What are the core components of talent? V4 Koor and Associates

https://koorandassociates.org/creating-business-value/core-components-of-talent/

Your company will fail.

https://koorandassociates.org/avoiding-business-failure/your-company-will-fail-v1/

Jeff Bezos 2020 letter to shareholders – his final one.  He quantities value creation in financial terms for some members of Amazon’s ecosystem.

https://www.aboutamazon.com/news/company-news/2020-letter-to-shareholders

Tom Koor

What is your business strategy? V2

What is your business strategy? V2

 What is the purpose of this article?

This article enables a discussion about what is your company’s business strategy. The audience for this article includes: the board of directors, C-Suite, and investors.

This article is intended for business who have to compete for customers, or investors.  Therefore, this article is not intended for: pension funds, sovereign wealth funds, etc.

This article does not provide tax, legal or financial advice.

You must do your own research and fact-based analysis using current and relevant information.

You can download a PDF of this article from: What is your business strategy V2

What are the critical learnings in this article?

  • Your business strategy is about making an integrated set of choices that compels desired customer and ecosystem member actions.
  • Your business strategy, company purpose, and North Star metric are all inter-related.

Are there different types of strategies?

There are many different types of strategies. E.g.

  • Business strategy;
  • Strategy for winning a war; or
  • Strategy to win at the Olympics.

The common factor is: What does success look like?

What is a business strategy? 1

A business strategy is about making an integrated set of choices that compels desired:

  • Customer actions; and
  • Ecosystem member actions

 

Your company’s strategy includes both the choices you’ve made today and the choices you’ve made in the past.

Doing nothing is always a choice you can make.  Many leaders don’t understand that they have made the do-nothing choice.

Steve Jobs supposedly said “Deciding what not to do is as important as deciding what to do””

What are the four components of a business strategy?

  • Desired actions: e.g. what are your desired actions for your customers? Switch from a competitor to your company? Stay with your company?  Buy more from your company? Recommend your company to others, resulting in viral grow? Etc.
  • Compels: the desired action is irresistible for the customer. Emotion is more powerful than logic in compelling actions. Thus, you must be focusing on the heart, with additional support via logic
  • Choices: You have at least two alternatives, and decide which alternative(s) to execute.
  • Integrated set: e.g. your customers may perceive that your value proposition 2 has multiple components. Each component has choices. The combined set of choices results in compelling action.

Does your business strategy reflect the purpose of your company?

Why does your company exist?

Larry Fink, in his 2018 letter to CEOs, said “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate…..Without a sense of purpose, no company, either public or private, can achieve its full potential…..And ultimately, that company will provide subpar returns to the investors” 3

 Bain’s 2024 analysis showed that companies that delivered both stakeholder and financial value delivered better shareholder value. 4

Jeff Bezos quantified value creation for some members of Amazon’s ecosystem in financial terms, in his final letter to shareholders in 2020. This letter included his first shareholder letter from 1997.  Amazon’s current CEO continues to include in his shareholder letter, the original 1997 letter. 5

Is your North Star metric aligned with your company purpose and business strategy? 6

“…having an overarching metric that gives direction and aligns all the other metrics together can be infinitely useful.

The North Star metric gives you a direction that is in line with the value you offer to your customers. That direction is the single largest driver of sustainable long-term growth”

In order to determine the single most important metric for your growth model, you should look at how your product delivers value to your customers. You should be able to understand the value your customers get from your product looking at user engagement and activity level. For example, for Medium (the reader and writer network) the metric is “total time reading,” for Facebook it is “daily active users,” for Airbnb the metric is “nights booked,”

Why are choices about ecosystem members critical?

  • One example of an ecosystem member is your employees. Do current and future employees want to work for your company? Are they passionately committed to your company’s success? Is their purpose aligned with your company’s purpose and North Star? Do current and potential employees perceive a competitively differentiated value proposition for joining or staying with your company? What are the choices you’ve made to attract, retain, and develop the employees you need?
  • There are many more choices your company can make regarding ecosystem members.

What are the seven inter-related strategic choices you need to make?

  • What is the problem you are trying to solve?
  • Who has the problem?
    1. How do your potential customers describe and perceive their problem?
    2. Which customer segments will your target?
  • What is your competitively differentiated value proposition, in the hearts and mind of your target customers?
  • What is the competitively differentiated talent you need?
    1. What roles will have the greatest impact on planning and delivering the value proposition?
    2. What are the specific capabilities of this talent?
  • What are the competitively differentiated capabilities you need? E.g.
    1. Resources such as: intellectual property, technical expertise, technology, financial, partnerships, relationships, channels, talent
    2. There are two sets of processes: #1 processes to acquire and manage the resources #2 Marketing, sales, onboarding, off boarding, R&D, production.
    3. What are the specific points of competitive differentiation?
  • What will be the total cost of developing and delivering the value proposition? Thus includes the talent and capabilities.
  • What are the values you will use in making your choices?

You can document the key points of your strategic choices in a single slide.

 What are your greatest challenges to creating a strategy that enables value creating growth?

  • Listening to your customers as you talk with them to understand their perception of their problems. Steve Jobs supposedly said “If you define the problem correctly, you almost have the solution”. Albert Einstein supposedly said “ If I had only one hour to save the world, I would spend fifty-five minutes defining the problem, and only five minutes finding the solution”. Many leaders have strong opinions regarding what they think are customer problems.
  • Confusing a strategic plan with a tactical plan to achieve the strategy. A common definition of a strategic plan is  “A strategic plan describes the company’s current state, desired future state and how to go from one to the other…. business goals and projects to achieve them… 12-month action plan that lists specific initiatives”. 7 That definition reflects a tactical plan.  Including a tactical plan in your strategic plan produces a massive document which makes it very hard to focus on the actual strategy.
  • Not discussing and agreeing upon the values used to make your strategic choices. For example, will you include the impact on ecosystem members in your decision making – such as moving employment elsewhere if the result is devastation of local communities that depend on you. Is your “North Start” maximizing shareholder value?
  • McKinsey has said what strategy is not “it is not a wish list of possible outcomes”.

What are your next steps?

Define the words/concepts you’re using, in a glossary.  I’ve seen major confusion when the same words mean different things to different people.

Phase 1

  • Prepare a strategy assessment document by reviewing your existing strategic plan. Use the above definition of strategy.
  • Identify what’s missing.

Phase 2

  • Interview your board of directors and C-Suite to prepare a second strategy assessment document.
  • Ask what they personally think the strategy is and what they believed other director and C-Suite think the strategy is. Use the above definition of strategy.
  • Discuss the implications of the different points of view regarding strategy and the gaps in in your strategy.

Phase 3

  • Identify and assemble to right talent to make and revise the choices.
  • Define the process for making and revising the choices. Revisions may occur at any time.  Train the decision makers. The process will also identify the required capabilities of external advisors and support people. The process must document the alternatives considered and the rationale for the choice made.
  • The process must describe the links between strategy and tactics, the links between the strategic plan and the tactical plan.

Footnotes

1 Adapted from the strategy definition in the following article

“Strategy for startups-Redux” Roger Martin Medium Sep 16, 2024

https://rogermartin.medium.com/strategy-for-start-ups-redux-e8a04a1d8b72

2 “What is a value proposition? Koor and Associates website.

https://koorandassociates.org/understanding-customers/what-is-a-value-proposition/

3 Harvard Law School Forum on Corporate Governance, Larry Fink’s January 2018 letter to CEOs

https://corpgov.law.harvard.edu/2018/01/17/a-sense-of-purpose/

4  “Financial or Stakeholder Value? For Shareholders, Both Are Best” Bain, July 10, 2024

https://www.bain.com/insights/financial-or-stakeholder-value-for-shareholders-both-are-best-snap-chart/#:~:text=or%20Stakeholder%20Value%3F-,For%20Shareholders%2C%20Both%20Are%20Best,Leading%20companies%20deliver%20both.

5 Jeff Bezos final letter, as CEO, to shareholders in 2020

https://www.aboutamazon.com/news/company-news/2020-letter-to-shareholders

6 Forbes August 24, 2017 Andrew Miller

https://www.forbes.com/sites/forbesagencycouncil/2017/07/19/how-to-find-your-companys-north-star-metric/#:~:text=In%20order%20to%20determine%20the,user%20engagement%20and%20activity%20level

7  I copied this definition from the website of a major organization.

 

Tom Koor

Limited Partner assessment of a fund. V8

LP (Limited Partner) assessment of a fund. V8

 What is the purpose of this article?

  • Help individual LPs (Limited Partners) think about how to assess a GP (General Partner) managed fund making investments in private companies. Institutional investors, family offices, and ultra-high net worth individuals should do more than what is discussed here.
  • Help fund managers prepare to engage with knowledgeable LPs.

This article does not provide legal, tax, financial, or investment advice. You must do your own research and fact-based analysis using current and relevant information.

You can download a PDF of this article from: LP (Limited Partner) assessment of a fund V8

This article is focused on those people who consider their fund investment as part of an asset class in their overall investments.

Your overall investments have the core goal of growing and preserving your capital.  This capital may be needed for:

  • Retirement;
  • Heirs and estate (may include a foundation);
  • Major future spending; etc.

I’ve observed that some investors do not include these expenditures as part of their overall investment portfolio.  They view these expenditure as:

  • Giving back;
  • Supporting worthy causes and worthy individuals, etc.

 This article is focused on funds where the GP can enable value creation, using the combined resources available to it.

What are the three types of funds LPs might invest in?

  • The GP (General Partner) controls portfolio companies. The GP helps drive value creation using the resources (e.g. talent, relationships, knowledge, experience)of the GP and other LPs invested in the GPs fund. Capital is only one component of enabling value creation. Degree of control can be achieved by many means other than 50%+ equity.
  • The GP does not control the portfolio companies but still enables value creation drawing upon the resources of the GP and the LP investors in the GP’s fund.
  • The GP does not have control and has little impact on value creation. The GPs contribution to the portfolio company is capital.

 What are the critical learnings in this article?

  • Assess a fund (which is asking you for money) the same way they’d assess a company asking them for money.
  • Understand how the fund and its managers are competitively superior i.e. managers know things that others don’t and can do things others cannot.
  • Understand the potential for the fund managers to succeed in rapidly changing and different future.

Section A – What are some overall fund concepts?

What are the four stages of a fund?

  • Assembling a group of LPs.
  • Selecting investments.
  • Growing the value of the investments.
  • Achieving the value by exiting/selling the investments.

 Section B – What is the overall approach to assess a fund?

What are the four decision stages for assessing a fund?

You need a filtering process to end up with a few high potential fund candidates.  Why a filtering process? You might have contact with dozens or hundreds of funds.  You don’t have time to do in-depth analysis of each fund.

  • Should you open an email from a fund or reach out to a fund?
  • Should you have a brief chat with a fund?
  • Should you conduct due diligence with the fund?
  • Should you make an investment?

There are three sets of assessment criteria and analysis, distributed throughout the four decision making stages.

  • Alignment with and support of your investment thesis.
  • Past accomplishments and plans to grow your investment.
  • The capabilities of the fund managers to succeed in an uncertain future.

Some assessment criteria result in an immediate rejection of the fund (e.g. you don’t trust the fund managers) while other criteria result in a scoring.

Your assessments reflect:

  • The competitive differentiation of the fund and its managers.
  • Both the potential to increase the value of your assessment and to manage risk.

Remember that the economic interests of the fund general manager and fund investor are not the same.

  • The fund investors’ economic return is the rate of return on the capital put into the fund.
  • The fund managers’ economic return is a combination of management fees, other fees, and a share of the increase in the value of the capital in the fund.

Section C – How do you assess the talent of the GP?

Why focus on understanding how the fund managers are competitively differentiated?

Unlike 10+ years ago, these days there are countless funds and unlimited capital available.  Some of the implications include:

  • Many funds have been created by managers with limited capabilities to be successful.
  • The massive increase in the total number of funds means that there has been a massive increase in the number of below average funds.
  • Superb portfolio companies seek out funds that can provide more than just capital.

How is the talent and resources of the GP competitively differentiated, in the past and the future?

How is the GP’s performance competitively differentiated, in the past and the future?

Do the fund managers have the potential to succeed in a rapidly changing and different future? 1

The future will quickly be very different from the past.  Leading companies (of all kinds) are finding new and better ways to be successful. To what degree do the fund managers have the 8 core components of talent to succeed in a very different and uncertain future?

  • Self-awareness: e.g. Do the fund managers understand their strengths and weaknesses?
  • Character: e.g. Values, morals, and ethics. Warren Buffett supposedly said “…looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you.”
  • Relationship skills: e.g. Ability to create and sustain a network of personal relationships.
  • Crystallized intelligence: e.g. what skill, knowledge, ways of thinking, mental paradigms, and facts must the managers have.
  • Fluid intelligence: e.g. The ability to solve problems without past experience. This is critical for innovation, which is coming up with new and better solutions.
  • Cognitive skills: e.g. Able to collect and do fact-based analysis with sound logic and reasoning.
  • Ability to quickly learn and unlearn: paradigms, frameworks, methodologies, data, facts, knowledge.
  • Creativity

Some large LPs test the fund partners for the above talent components.

Your assessment of the above 8 talent components requires defining positive and negative indicators for:

  • observations regarding the analysis of the data room;
  • answers to questions for the fund managers references;
  • answers to questions for others who have interacted with the fund managers;
  • answers given by questions to the fund managers; and
  • outcomes of the behavioural interviews of the fund managers.

How has the GP learned and changed from their past experiences?

  • Is the manager doing the same things as 10 years ago or have they learned and evolved? How has their talent, processes, and technology changed? E.g. What role is data science and AI playing in both portfolio company screening and daily monitoring?

 What are some of the critical questions you must answer regarding the GPs:

  • How are the fund managers competitively differentiated in their capabilities? This includes talent, processes, and technology.
  • What do they know that other fund managers and you as an LP don’t know?
  • Are the fund managers above average? In the top quartile? Or higher? Or in the bottom quartile
  • What has been their historical performance. This may be: in a previous fund, previous personal investment results, or their career.

What is the current LP perception of the GP?

  • What is the NPS (Net Promoter Score) for the GP, based on LP input? NPS question – would you recommend this GP? If so, why? If not, why not?
  • Interview some existing LPs.

Section – D How is the fund governed?

How are LPs engaged with the General Partner?

  • What information is provided to the LPs and when?
  • How often is there a meeting of all LPs and what is the purpose of those meetings?
  • What authority do LPs have? What decisions must they approve? What veto power do they have?

What is the role of the LPAB (LP Advisory Board)?

  • What is the purpose of the LPAB?
  • What is the documented mandate?
  • What authority does the LPAB have? What decisions does it make? What veto power does it have?
  • How often does it meet?
  • What information is provided to the LPAB and when?
  • Who is on the board and how are they members selected?

Section – E How does the GP create value?

  • How did the GP create value in portfolio companies? Historically the bulk of private equity asset class created value three ways: multiple expansion supported by M&A, margin improvement, and leverage.
  • Many VCs focused on sales growth rather than profitable growth.
  • Some VCs take the approach of making investments in a large number of companies, and then making follow-on investment in those few companies that are successfully growing?
  • How did the fund managers increase the capabilities of the portfolio company leadership teams? E.g. improving the talent, improving recruiting, improving exiting, improving succession planning?
  • How did the fund managers assess and improve the leadership coaches and advisory boards for their portfolio companies?

 What is the GP’s process for exit planning?

How does the fund manager plan to return cash to LPs via successful exits? At this point in time many funds are having difficulty selling portfolio companies, resulting in cash returns to investors not meeting expectations.

  • What has been the GP’s historical results? What has been the return on LP investment?
  • What is the GP’s process for exit planning?
  • Does the GP start exit planning as part of the portfolio investment selection processes? Do they talk with potential buyers to determine the exit potential?  Do they maintain ongoing dialogue with potential buyers?  I’ve seen buyers disappear as the world changed, resulting in the inability to exit.
  • What is the GP’s target for future value creation after exit? i.e. why will the strategic buyer, other fund, or the public markets find the portfolio company to be attractive.

How does the GP manager the director talent it places on portfolio company boards?

  • What is the process for selecting, assessing, and exiting directors?
  • What only talent development is provided for directors?
  • Are there quarterly meetings for the GP’s selected directors. Meetings could include: discussion of portfolio company issues, continuing education, case study reviews, post- and pre- mortem discussions, lessons learned.

Section – F What has been the fund performance?2

  • 75% of LPs recalculate a fund’s performance using deal-level cash flow data. This enables LPs to make consistent comparisons of performance among funds.
  • Determine the impact of credit facilities and financial leverage on the fund’s performance.

Analyze the fund’s value creation drivers using techniques such as: PME (Public Market Equivalent analysis), Sensitivity analysis (e.g. did one deal drive all results, and every other deal failed),

Section – G What should be in the fund’s data room?

What is the purpose of the data room?

  • The data room provides a collection of documents which are intended to help answer some of your due diligence questions.
  • You’ll need to analyze the data room contents and benchmark the fund relative to other funds. The benchmark may range from an informal judgement to a factual analysis.

What are the fund’s 8 sets of data room contents, if this is the managers’ first fund?2

  • Fundraising pitch deck, including: team, including managers, advisors, etc. (with biographies), the opportunity (i.e. what is the market gap and why is the team best positioned to win), investment thesis, sourcing strategy decision making process, case studies, track record spreadsheet, portfolio construction, fund structure and terms.
  • Investment track record detail. If this is the managers’ first fund, the investment track record will include results from previous funds the managers were at and the managers personal investment results.
  • Investment memos and market map. The market map illustrates the segments and potential portfolio companies.3
  • Due diligence questionnaire. An industry standard questionnaire is provided by the ILPA (Institutional Limited Partners Association)
  • LPA (Limited Partnership Agreement).
  • Fund Model. A financial spreadsheet illustrating hypothetical future portfolio, with a number of key metrics
  • Reference list. You may also contact people not on the reference list. You may also require a formal background check of the fund managers.  Who are the other investors, their experience and value, and why did they invest?
  • Fund contact list. This includes lawyers, accountants, other professionals, etc.

 What are the fund’s 6 additional sets of data room contents, if this is NOT the managers’ first fund?6

  • Financial information i.e. free cash flow actuals and forecast scenarios; audited financial statements.
  • Examples of prior capital call and distribution notices.
  • Compliance manual.
  • ESG (environmental, social and governance) and DEI (diversity, equity and inclusion) policies.
  • Valuation policies.
  • Business continuity planning.

What technology does the fund use?

  • What software is used to manage the pool of potential portfolio companies? This pool could include: companies applying, companies discovered by the software, or companies contacted by the fund. Software could also manage the process and information of potential companies going through the selection and deal process.  What are the metrics?
  • What software is used to manage the data room made available for potential LP investors?
  • What data science tools are used in the selection and monitoring of portfolio companies? What are the metrics?
  • What AI tools are used in the selection and monitoring of portfolio companies? What are the metrics?
  • What tools are used to manage the relationship with LPs, including reporting to LPs?
  • What tools are used to support the LP Advisory board?

What valuation methodology does the fund manager use?

There are various methodologies, including:

  • International Private Equity and Venture Capital Guidelines 4
  • Valuation of Portfolio Company Investments of Venture Capital and Private Equity Funds and Other Investment Companies – Accounting and Valuation Guide 5
  • Fund performance (in terms of cash distributions) relative to an ETF, such as S&P 500 or asset allocation fund.
  • Realizable value if sold the fund investment on the secondaries market.

What value does the fund manager assign to a portfolio company if there are no current buyers.  I’ve seen some funds assign value of what they hope or wish to achieve in the future.

The further reading section of this article provides reports from INSEAD regarding private equity valuation.

 Section – H What are the fees the fund earns?

What fees might be charged to investors, directly or indirectly?

Fund manager fees are specific to each fund.  Compensation is not always fully disclosed to LPs, especially if fees are charged to portfolio companies. Fees may include:

#1 Annual management fee: This could be based on: invested capital; or committed capital; or net asset value of the fund. The fees often range from 1.25% to 2%.  Some charge less.

#2 Fund’s administrative fees: These could include: legal, audit accounting.  Sometimes these are capped at 0.10% to 0.15% of assets.

#3 Annual performance fees: These can range from 15% to 30% of annual net profit.  Performance fees are often subject to:

  • hurdle rates (e.g. profit must exceed 5%-8%, compounded annually. The manager’s performance fee is based on profit after the hurdle rate);
  • high water mark (fund value exceeds previous highest value of the fund. Thus, if a fund drops in value, and then goes backup, performance fees are only paid after exceeding the previous peak value)
  • The degree to which portfolio companies meet or exceed environmental, social, sustainability, climate, and governance factors. Some funds say that they are focused on these factors.

#4 The fund may receive fees from the portfolio companies. Sometimes these fees reduce the management fees charged to investors.

  • Breakup fees: a portfolio company buyer decided to not do the acquisition.
  • Directors’ fees: portfolio companies may compensate board directors who are representatives of the fund.
  • Advisors: advisors to the fund and/or portfolio companies may charge fees
  • Affiliate services fees: Affiliates of the general partner may be paid for thing such as: underwriting, consulting, placement agent services
  • Placement agent fees: agents who are paid to sell LP partnership interest

#5 How much of the fund’s management fee is going into partners pockets vs helping to grow the long-term value of the fund?

  • Some funds make provide support people such as HR, finance, IT, etc. These are funded from the management fee, not by investors. Thus, short-term partner income is reduced.

What are your next steps?

  • Define the words/concepts you’re using, in a glossary. I’ve seen major confusion when the same words mean different things to different people.
  • Review your overall investment thesis and thesis for the asset class your fund will reside in.
  • Create your template for your personal investment memo. This will capture your facts, analysis, and judgement as to why you want to make the investment in a fund. This will be helpful in the future, both as you look back and as you consider additional fund investments.
  • Prepare your overall plan. This will include specific decision-making processes and criteria, including those red flag items which result in immediate rejection of a fund candidate.
  • Assemble your team e.g. lawyer with experience in LP agreements (and governance and dispute resolution), tax advisor, other professionals to assist with the data collection and analysis. Your team might include psychologists.
  • Prepare your selection and evaluation plan and identify at what stage(s) the information will be collected and analyzed. Depending upon the number of investments you plan to make, you may decide to use LP management software.

Footnotes

1 What are the core components of talent, Koor and Associates

https://koorandassociates.org/creating-business-value/core-components-of-talent/

2 Enhancing private equity manager selection with deeper data

https://caia.org/sites/default/files/enhancing_private_equity_manager_selection_with_deeper_data.pdf

3 Illustration of a market map, Atlantic Canada Fintech, 2022

https://atlanticfintech.ca/wp-content/uploads/2022/11/fathom4sight_atlantic-fintech_ENG-report_2022.png.pdf

4 International Private Equity and Venture Capital Valuation Guidelines, 2022 Dec

https://www.privateequityvaluation.com/Portals/0/Documents/Guidelines/IPEV%20Valuation%20Guidelines%20-%20December%202022.pdf

5 The American Institute of CPAs

https://www.aicpa-cima.com/cpe-learning/publication/valuation-of-portfolio-company-investments-of-venture-capital-and-private-equity-funds-and-other-investment-companies-accounting-and-valuation-guide-OPL

6 “Data Room Best Practices”, Silicon Valley Bank

https://www.svb.com/emerging-manager-insights/starting-a-fund/data-room-best-practices

 

What further reading should you do?

Valuation and return measurement in private equity. Insead 2011 May

https://publishing.insead.edu/case/valuation-and-return-measurement-private-equity-overview

Measuring private equity fund performance Insead 2019 Feb

https://www.insead.edu/sites/default/files/assets/dept/centres/gpei/docs/Measuring_PE_Fund-Performance-2019.pdf

Value Creation 2.0 A framework for measuring value creation in private equity investment Insead 2016 Feb

https://www.insead.edu/sites/default/files/assets/dept/centres/emi/docs/value-creation-2-0.pdf

“Due Diligence Questionnaire”, Business Finland Venture Capital

https://www.businessfinland.vc/4af44d/siteassets/venture-capital/sijoitusdokumentit/bfvc-due-diligence-questionnare.docx

Why are values, morals, and ethics important?

https://koorandassociates.org/values-morals-and-ethics/why-are-values-morals-and-ethics-important/

How to assess director and CEO talent – regarding values, morals, and ethics.

https://koorandassociates.org/values-morals-and-ethics/how-to-assess-director-and-ceo-candidates-regarding-values-morals-and-ethics/

How do asset managers assess private equity fund managers?

https://koorandassociates.org/creating-business-value/survey-how-do-asset-managers-assess-private-equity-fund-managers/

Institutional Limited Partners Association

https://ilpa.org/

Tom Koor

Society does not trust its leaders and institutions. V6

Society does not trust its leaders and institutions. V6

 What is the purpose of this article?

  • To enable boards of directors, C-Suite, and shareholders to begin a discussion regarding: the value of society’s trust in them, and whether action must be taken to increase trust.

You can download a PDF of this article from: Society does not trust its leaders and institutions V6

What are the critical learnings in this article?

Globally,

  • The majority of people believe government and business leaders purposefully try to mislead people.
  • 40% of the American public believes problems with their social institutions cannot be fixed and to just “let them burn”.
  • Governments are seen as far less competent, and ethical, than business.
  • 74% believe that elected officials don’t care what people like them think.

In Canada,

  • Only 5% of Canadians believe the next generation will be better off.
  • 65% of Canadians believe economic growth means increased income for the rich.

I wonder how society can survive when the population doesn’t trust leaders and institutions and believes leaders are only looking after themselves.

Most Canadian believe that economic growth is harmful to them.1

Politicians talks about economic growth.  What do Canadians think that means to them as individuals?

  • Only 1/3 of Canadians believe economic growth is a good thing.
  • 72% of Canadians believe that economic growth means a higher cost of living to them.
  • Only 22% of Canadians believe that economic growth will lead to a more equal Canada.
  • 65% of Canadians believe that economic growth means increased income for the rich
  • Only 1/3 of Canadians believe that economic growth means higher wages for the low and middle class.
  • Only 5% of Canadians believe that the next generation will be better off.

 Employees do not trust their leadership and are not connected with their company. 2

  • Only 23% of U.S. employees strongly agree that they trust the leadership of their organization
  • 51% of currently employed workers around the world say they are watching for or actively seeking a new job,
  • Only two in 10 employees feel connected to their organization’s culture.
  • Only four in 10 employees report unethical behaviour at work if they have firsthand knowledge of it.

American’s trust in government and the traditional mass media continues to drop.

October 14, 2024 Gallup Survey findings:3

  • 36% have no trust in traditional mass media (Newspapers, TV, radio) 33% have not much trust Only 8% have a great deal of trust.
  • 19% have no trust in the Senate and House of Representatives. 46% have not much trust only 4% have a great deal of tryst.
  • 26% have no trust in the federal government to handle domestic problems 36% have not much trust. Only 8% have a great deal of trust.
  • 21% have no trust in the Supreme Court. 30% have not much trust.  Only 12% have a great deal of trust.

There is a massive difference in how Democrats and Republicans trust the government and mass media, as shown in the footnoted report.

My observation: this helps explain why so many Americans think the country is going in the wrong direction.

 How many people trust CEO, business leaders, and the government?

The 2024 Edelman Global Trust Barometer4 has disturbing global statistics:

  • 49% of people in developed countries trust NGOs, business, government, and media. (It’s 63% in developing countries)
  • 79% of the general population in China trust business, government, and media.
  • Governments are seen as far less competent, and ethical, than business.
  • 63% of people trust business. 51% trust government. 49% in Canada. 40% in the US.
  • 63% of people believe that government leaders are purposely trying to mislead people by saying things they know are false or gross exaggerations. 64% feel that way about journalists and reporters, 61% about business leaders.
  • 74% of people trust scientists to tell the truth about new inventions and technologies. 51% trust CEOs and 45% trust government leaders.
  • 88% of people worry about job loss, 76% worry about climate change, 73% worry about nuclear war.
  • 59% believe that government lack competence to regulate emerging innovations.
  • 62% expect CEOs to manage changes occurring in society, not just those occurring in their business.

The 2024 Edelman Canadian Trust Barometer5 show Canada is similar to the rest of the world.

  • 53% of people in Canada trust NGOs, business, government, and media.
  • 57% trust business, 51% trust the media, and 49% trust government.
  • 39% of Indigenous trust business, 41% trust media, and 28% trust government.
  • 82% are worried about job loss, 71% about climate change, and 70% about nuclear war.
  • 77% trust scientists to do what is right, 74% trust teachers, 43% trust government leaders, and 39% trust CEOs.
  • 60% of people believe that government leaders are purposely trying to mislead people by saying things they know are false or gross exaggerations. 59% about business leaders. 55% feel that way about journalists and reporters,
  • 59% believe that government regulators lack adequate understanding of emerging technologies to regulate them effective.
  • 41% believe scientists do no know how to communicate with people like me.
  • 74% tryst scientist to tell the truth about new innovations and technologies. 40% trust CEOs and government leaders.
  • 59% expect CEOs to manage changes occurring in society, not just those occurring in their business.

How many Americans believe that their political institutions should be burned to the ground?

6 surveys done in 2018 by Professors Michael Bang Petersen, Mathias Osmundsen, and Kevin Arceneaux6 revealed:

  • 24% of the American public agreed “society should be burned to the ground”
  • 40% of the American public agreed “we cannot fix the problems in our social institutions we need to tear them down and start over” and “when it comes to our political and social institutions, I cannot help thinking ‘just let them all burn’”.
  • Key findings include: people are so discontent that they do not care about truth; people deliberately share false and hostile rumours on social media with the goal ”to mobilize the audience in pursuit of chaos.”

What are some key findings from Harvard’s Fall 2023 survey of U.S. youth, 18-29 years of age7

  • What % trust neither Joe Biden nor Donald Trump to handle the following issues: Israel-Hamas War: 44%; Climate change: 39%; Gun violence: 39%; Crime and public safety: 37%; protecting democracy: 32%.
  • Youth believe that the American economy is in worse shape that the personal situation. Very Bad (American 22%, personal 9%), Fairly Bad (American 48%, personal 24%, Very Good (American 3%, personal 13%)

 What are some key findings from the Pew Research Center’s Global Public Opinion survey regarding democracy, published February 28, 20248

  • 59% are dissatisfied with how their democracy is working.47% of Canadians are dissatisfied. 66% in the US are dissatisfied.
  • 74% believe that elected officials don’t care what people like them think. 64% believe this in Canada. 83% in the US.
  • 42% say no political party in their country represents their views. 35% of Canadian’s believe none of the political parties represent them. In the US its 49%.
  • 77% believe a representative democracy (people elect those who will pass laws) is a good way to govern.
  • 70% believe direct democracy (people directly vote on laws) is a good way to govern. 70% in Canada believe it’s somewhat good or good. In the U.S. it’s 66%
  • 58% believe having experts govern is good. 49% in Canada believe it’s somewhat good or good. In the U.S. it’s 48%.
  • 31% of people in Canada believe representative democracy is a very good way to govern. This is a drop from 43% in 2017. 14% believe it’s bad or somewhat bad. In the US it’s 23% believing bad or somewhat bad
  • 52% have an unfavourable view of their national leader.58% have unfavourable view of opposition leader. 55% have unfavourable view of political parties.

My personal observation

  • If people believe their interests are not being looked after by institutions and society, then the sense of frustration can lead to tearing them down. I wonder if politicians, CEOs, and boards of directors understand the long-term implications of their deliberate or accidental actions to destroy the public’s trust in them.

What are your next steps?

  • Conduct an anonymous survey of your board of directors, CEO, and C-Suite to learn their perception of how important trust in them is, in order to achieve the company’s long-term value creation.
  • Survey your board of directors, CEO, C-Suite, employees and other members of your company’s ecosystem, top learn the degree of trust in the board of directors, CEO, and C-Suite.
  • Analyze the results to determine if: trust is needed, and if improvements in trust are needed.

What further reading should you do?

  • Read each of the articles in the footnotes below, to understand further details regarding the lack of trust and the perceived issues with capitalism and democracy.

Footnotes

1 “Canadians think ‘economic growth’ is a bad thing. What’s going on?” Globe and Mail, Sep 05, 2024, Tony Keller article, Tony quotes from the Boston Consulting Group’s Canadian Consumer Sentiment Survey, done in May and June 2024.

https://www.theglobeandmail.com/business/commentary/article-canadians-think-economic-growth-is-a-bad-thing-whats-going-on/#:~:text=Sixty%20per%20cent%20expect%20higher,just%2013%20per%20cent%20disagree.&text=Overall%2C%20the%20survey%20finds%20that,cost%20of%20living%20for%20them.

2 “6 worrying workplace numbers – and what you can do about it”, Gallup Survey November 01, 2023

https://www.gallup.com/workplace/513491/worrying-workplace-numbers.aspx

3 ”Findings from the 2024 American Values survey”, Survey done in August 2024

PRRI is a nonprofit, nonpartisan organization dedicated to conducting independent research and driving conversations at the intersection of religion, culture, and politics.

https://www.prri.org/research/challenges-to-democracy-the-2024-election-in-focus-findings-from-the-2024-american-values-survey/

4 2024 Edelman Trust Barometer – global report

https://www.edelman.com/trust/2024/trust-barometer

5 2024 Edelman Trust Barometer – Canada

https://www.edelman.ca/trust-barometer

6 Professors Michael Bang Petersen, Mathias Osmundsen, and Kevin Arceneaux “A ‘Need for Chaos’ and the Sharing of Hostile Political Rumors in Advanced Democracies”.  In 2019 won the award for best paper in the Political Psychology division of the American Political Science Association.  The %’s referred to area on page 32.

7  https://iop.harvard.edu/youth-poll/46th-edition-fall-2023

8 https://www.pewresearch.org/global/2024/02/28/representative-democracy-remains-a-popular-ideal-but-people-around-the-world-are-critical-of-how-its-working/

Tom Koor

Are company values valuable?

What is the purpose of this article?

The purpose of this article is to enable boards of directors, the C-Suite, and major shareholders to discuss the purpose of company values.

This article does not provide tax, legal or financial advice.

You must do your own research and fact-based analysis using current and relevant information.

You can download a PDF of this article from: Are company values valuable

What are the critical learnings in this article?

  • I’ve seen countless company value statements
  • I’ve never been clear on the value of the value statements.

What are some examples of company values?

The following examples came from a quick search of the web

Accountability: make it happen

Diversity: Learn from difference

Empathy: Put others first

Fun:1

Integrity: We hold ourselves to the highest standards to build trust

Integrity: act with honor

Integrity: Do what’s right

Passion: Be your best

Respect: value every voice

Responsibility: Make tomorrow better

What are some questions for discussion?

  • Does everyone from temporary/gig workers to the board directors understand the values?
  • What do these values actually mean in terms of what each person in the company does: their behaviours, actions, and decisions.
  • Are values used to hire, assess, and terminate employees at any level. g. do you not hire someone because they don’t 100% of the time put others first? Does the board of directors governance committee not put a director forward for election because the candidate is not funny enough?
  • Do employees join or leave the company because of the documented values?
  • How are the values use? E.g. at Are the value reviewed at the beginning of each board of directors meeting? Is every board decision and action reviewed for compliance with values?
  • What is the relationship between values and a code of conduct or a code of ethics?
  • What is the relationship between values and morals?
  • What problem and need do documented company values help solve?
  • What is the purpose of having documented company values?
  • How do you measure the use and benefit of documented company values?

What are your definitions of what values, morals, and ethics are?

The following are the definitions I use:

Values: Values are the rules by which people make decisions about what they should or should not do. Values have different importance’s, which is helpful when needed to trade off or balance one value versus other values. Values are what someone thinks and feels internally.

Morals: Morals are decisions, actions, and behaviours which other people feel are right or wrong, good or bad.  Morals are actions and behaviours arising from one or more values.  Not all values are related to morals.  You are judged by others as to whether or not your actions and behaviours are moral or immoral.

Ethics: Ethical decisions, actions, and behaviours are based on following a documented set of standards or principles.   Many companies and professions have a Code of Ethics.

Note that the values people use to make decisions and guide their actions may be very different from the documented company values.

 What are your next steps?

  • Define the words/concepts you’re using, in a glossary. I’ve seen major confusion when the same words mean different things to different people.
  • Individually survey and interview the board directors and C-Suite regarding the questions in the section above.
  • Analyze the feedback to determine issues or conclusions.
  • Review with the board of directors and agree upon an action plan. One possible action is “do nothing”.

Footnotes

1 At least 12 companies, such as Best Buy, have Fun as one of the company values.

 What further reading should you do?

What are the values of the U.S. Army?

https://koorandassociates.org/values-morals-and-ethics/values-u-s-army/

Tom Koor

What is the corporate governance ecosystem? V2

What is the corporate governance ecosystem? V2

 What is the purpose of this article?

The purpose of this article is to enable a discussion and action planning among owners/shareholders, boards of directors, CEOs, C-Suite, and advisory boards regarding the company’s governance ecosystem

This article does not provide tax, legal or financial advice.  You must do your own research and fact-based analysis using current and relevant information.

You can download a PDF of this article from: What is the corporate governance ecosystem V2

What are the critical learnings in this article?

  • The corporate governance ecosystem is the same as your company’s ecosystem.
  • Your company’s ecosystem can enable your company’s success or destroy your company.
  • Like natural ecosystems, the firms involved in business ecosystems compete for survival with adaption and often extinction.

What is corporate governance?

“Corporate governance involves a set of relationships between a company’s management, board, shareholders and other ecosystem members.  Corporate governance also provides the structure and systems through which the company is directed and its objectives are set, and the means of attaining those objectives and monitoring performance are determined”.1

What is the corporate governance ecosystem?

The corporate governance ecosystem is the same as your company’s ecosystem

What is your company’s ecosystem?2

A corporation’s ecosystem is the network of people and organizations, (including the board, management, shareholders, employees, regulators, suppliers, partners, competitors, the media, rating agencies, communities, NGOs (Non-Governmental Organizations), other third parties, organizations that create and commercialize new technology and society) directly and indirectly involved in the operation of the business through both competition and cooperation.

The idea is that each entity in the ecosystem will affect and is affected by the others, creating a constantly evolving set and nature of relationships in which each entity must be flexible and adaptable in order to survive, as in a biological ecosystem.

The actions and behaviours of the ecosystem vary, depending upon what attribute of the corporation is considered. For example, the ecosystem has different behaviours when regarding the second-to-second corporate delivery of products or services versus when the corporation is dealing the event of personal information of hundreds of millions of users being hacked.

Like natural ecosystems, the firms involved in business ecosystems compete for survival with adaptation and often extinction.

In today’s rapidly changing business world, a company creates its own ecosystem or comes up with a way to join an existing ecosystem by providing an advantage that is currently lacking in that ecosystem.

Why do you need to understand your company’s corporate governance ecosystem?

  • Your company’s ecosystem can enable your company’s success or destroy your company.
  • You cannot manage what you don’t understand.
  • McKinsey has written “..each company must earn the ‘social license’ to be in business..”3
  • Understanding of the governance ecosystem can be a competitive advantage, or disadvantage. A global McKinsey survey showed that less than 20% of executives had frequent success in influencing government policy and the outcome of regulatory decisions.4
  • Influencing your ecosystem starts with listening to the ecosystem members. Then you begin a variety of communications approaches with key members of your ecosystem.
  • Governance requires management of the conflicts of interest among your company’s ecosystem members.5
  • Your company’s scenario planning must include scenarios regarding what your future ecosystem will look like, who the key members will be, and how ecosystem members might interact with each other and your company

What are your next steps?

Define the words/concepts you’re using, in a glossary.  I’ve seen major confusion when the same words mean different things to different people.

Questions for your board and CEO/management to consider. Ask the following questions and document the agreed upon answers, as well as points of disagreement.  Remember, the Supreme Court does not always have a unanimous point of view.

  • Who are the key members of the governance ecosystem? Which members assess the performance of the company?  Which members believe they should have some sort of involvement in the objective settings and planning to meet the objectives?
  • Who is managing the relationship with each key ecosystem member? Board?  CEO, C-Suite?  Employees?  Contractors? What is the nature of the relationship? (observing, communicating, meetings, working together or working against)
  • Which members, if any, have you decided not to have relationships with?
  • What is your process for setting objectives for the board and management? How do the relationships impact setting the company’s objectives? What are the various interests of the ecosystem members?  How does the board and management deal with the many conflicts of interests and expectations?
  • What is your process for determining how the board and management meet their objectives?
  • How do you assess the performance of the board and management, in creating long term value and in meeting their respective objectives?
  • How are the members of the ecosystem involved in the setting of objectives, plan preparation, and performance assessment?
  • How do you communicate the objectives, plans, and performance to the members of the ecosystem?
  • What are the different perspectives among ecosystem members as to how to monitor and assess the company’s performance? How is the board’s, and CEO’s performance measured by different components of the ecosystem?
  • Based on the answers to the above questions, what is the action plan, if any, for the board and for management?

Footnotes

1 Based on “G20/OECD Principles of Corporate Governance”, 2023  Page 6. I changed “stakeholders” to “other ecosystem members”, https://www.oecd.org/en/publications/2023/09/g20-oecd-principles-of-corporate-governance-2023_60836fcb.html

2 Adapted from Investopedia 2023

3 Jim Brennan, Greg Kelly, and Anne Martinez “Tough choices for consumer goods companies” McKinsey Dec 2013, https://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/tough-choices-for-consumer-goods-companies

4 John Browne and Robin Nuttall, “Beyond corporate social responsibility: Integrated external management”, McKinsey Quarterly, March 2013, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/beyond-corporate-social-responsibility-integrated-external-engagement

5 Professor Didier Cossin and Abraham Hongze Lu, “The four tiers of conflict of interest”, IMD, Global Board Center, https://www.imd.org/research-knowledge/articles/the-four-tiers-of-conflict-of-interest-faced-by-board-directors/

What further reading should you do?

What is corporate governance?

https://koorandassociates.org/corporate-governance/what-is-corporate-governance/

Your company will fail.

https://koorandassociates.org/avoiding-business-failure/your-company-will-fail-v1/

 What does society thinks of institutions and corporations “56% companies that only think of themselves will fail”, “60% CEOs are driven more by greed than by a desire to make a positive difference in the world”,2018  Edelman Trust Barometer Global Report, https://cms.edelman.com/sites/default/files/2018-01/2018%20Edelman%20Trust%20Barometer%20Global%20Report.pdf

Jeffrey Sonnenfeld, Melanie Kusin, and Elise Walton “What CEOs really think of their boards”, Harvard Business Review 2013 April, https://hbr.org/2013/04/what-ceos-really-think-of-their-boards

Professor Didier Cossin and Estrelle Metayer “Does your board really add value to strategy?”, IMD Global Board Center, https://www.imd.org/research-knowledge/articles/board-strategy/

Tom Koor

What is corporate governance? V4

What is corporate governance? V4

 What is the purpose of this article?

The purpose of this document is to enable founders, CEOs, management, investors, shareholders, boards of directors, advisory boards to create a shared understand of their company’s corporate governance.

This article does not provide tax, legal or financial advice. You must do your own research and fact-based analysis using current and relevant information.

You can download a PDF of this article from: What is corporate governance V4

 What are the critical learnings in this article?

  • Corporate governance is broader and deeper than just the board of directors.
  • Discussion around governance is often very silo based and depends upon the specific background of the governance advisors. After company management, its board, and its shareholders have heard from several different advisors, there is often a confusing and disjoint picture of governance with limited shared understanding.
  • You need a shared understanding of the definition of corporate governance, the purpose of corporate governance, and the purpose of the corporation to avoid confusing and conflicting decisions and behaviours.

What is corporate governance?

“Corporate governance involves a set of relationships between a company’s management, board, shareholders and other ecosystem members.  Corporate governance also provides the structure and systems through which the company is directed and its objectives are set, and the means of attaining those objectives and monitoring performance are determined”.1  (See the Further Reading section for a link to the article “What is the Corporate Governance Ecosystem?)

Based on the above definition, there are five aspects to corporate governance:

  • The focus is on relationships among different types of people.
  • Directing the company. Appendix 1 provide a sample definition of directing.
  • Setting objectives. People set objectives.  The board directors, company management, shareholders, stakeholders and third parties all have different interests and personal objectives.  The conflicts of interest need to be understood and managed to agree upon objectives for the board and for management.
  • Determining how to meet objectives. People have to develop plans which reflect what they will do to achieve the objectives.  Both the board and management have objectives and plans.
  • Monitoring performance. The performance of people (the board and management) is monitored. Everyone needs to understand the personal consequences of not achieving objectives.

Also implied in the above definitions:

  • Who can make decisions and how are those decisions made?
  • What are the consequences for decision makers who make poor decisions?
  • Who has the authority to act on behalf of the corporation and in what specific situations?
  • Who is accountable for behaviour and outcomes?
  • How are those people who are accountable for execution involved in decision making?

 What are the challenges of understanding corporate governance?

Discussion around governance is often very silo based and depends upon the specific background of the governance advisors e.g.

  • Lawyers often start with the Business Corporations Act. Sometimes the legal framework is a social purpose corporation, such as a B Corp., a partnership or a joint venture.
  • Regulators often start with financial risk management guidelines.
  • Accountants often start with quality of financial statements.
  • Consultants have a variety of different points of view.
  • IT (Information Technology) governance advisors have an IT-centric perspective.
  • Private corporations may have unanimous shareholder agreements, which limit the decision making and accountability of the board of directors by reserving certain decisions for the shareholders.
  • Any corporation could have a voting trust comprised of some or all of the shareholders.
  • Financing agreements may have terms and conditions which constrain the company’s decision making and may even provide the financers with decision making authority in certain situations.
  • Values, morals, ethics, company purpose and culture are a critical, but often overlooked, part of corporate governance.

Often there is a legal perspective of acting in the best interests of the corporation or the shareholders or other members of the company’s ecosystem.  What does this actually mean? Two example questions, for which I don’t have the answers:

  • If climate change is real, should the company reduce or eliminate its impact on global warming, even if that reduces company profits, shareholder dividends, and compensation for the board of directors and C-Suite?
  • Should the company lobby governments to reduce or eliminate environmental laws and standards in order to increase company profits?

After company management, its board, and its shareholders have heard from several different advisors, there is often a confusing and disjoint picture of governance with limited shared understanding.

Sometime there is confusion between a fiduciary(i.e. decision-making board )vs an advisory board. 

  • The decision-making board has the authority to make decisions and is accountable for the results of those decisions.
  • The advisory board has no authority to make decision and is not accountable for the actions of the board of directors, C-Suite and others in the company.

 What is the purpose of the corporation?

What is the purpose of your corporation?  Is it solely to make money for shareholders and the C-Suite? Does the purpose of your corporation help attract and retain the right kinds of employees?

Why have societies and governments put in place the legal and regulatory framework for corporations?  Is it to enable the creation of financial wealth for shareholders and the C-Suite?  Is it so a “business can thrive and sustain growth while enhancing the wealth of its stakeholders and the well-being of societies in which it operates?”2

The U.S. perspective on the relationship between the corporation and society has changed radically since 1981

 In 1981: “Corporations have a responsibility, first of all, to make available to the public quality goods and services at fair prices, thereby earning a profit that attracts investment to continue and enhance the enterprise, provide jobs, and build the economy.” “Business and society have a symbiotic relationship: The long-term viability of the corporation depends upon its responsibility to the society of which it is a part.  The well-being of society also depends upon profitable and responsible business enterprises.”3

In 2016: “Core guiding principles: The board approves corporate strategies that are intended to build sustainable long-term value.”5 There is no mention of responsibility to society.

Larry Fink, in his 2018 letter to CEOs, said “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate…..Without a sense of purpose, no company, either public or private, can achieve its full potential…..And ultimately, that company will provide subpar returns to the investors”4

 The purpose remains fixed while operating practices, cultural norms, strategies, tactics, processes, structures, and methods continually change in response to changing realities. 5

 What is the purpose of corporate governance?

The purpose of corporate governance is to enable the achievement of the purpose of the corporation, consistent with the corporations’ values, morals, and ethics.

Corporate governance manages the broad set of conflicts of interests which arise. The OECD governance definition starts with relationships: within corporate leadership, as well as stakeholders and third parties.  Any relationship has the potential for conflict of interest, because company ecosystem members may have different or conflicting interests.  For example, how should both profits and costs be allocated among the ecosystem members, including: CEO, C-Suite, shareholders, employees, and society. This conflict become acute in cases of poor profits or losses.

Perhaps the greatest conflict of interest is deciding the degree to which the corporation extracts value from society versus creating value for society. An example is the decision on whether to whether to replace local community employees with lower-cost offshore staff which may benefit the off-shore communities or retain the employees in order to sustain local communities.

What are some of the different contexts for a board of directors?

  • A two-tier board (a management board and a supervisory board) in Germany, and some other European countries
  • A certified B Corporation in the United States
  • Crown corporations in Canada
  • Corporations with a Golden Share
  • Multi-class shares
  • Shareholders voting trust
  • Unanimous shareholders agreement in a private company. Etc.

What are your next steps?

Define the words/concepts you’re using, in a glossary.  I’ve seen major confusion when the same words mean different things to different people.

#1 Survey the board of directors, C-Suite, advisory board(s), and key other members of your company’s ecosystem to determine what they perceive to be:

  • The purpose of your corporation.
  • Your company’s corporate governance.
  • The purpose of your company’s corporate governance.
  • Your board of directors’ decision-making model.

#3 Analyze the surveys to identify the implication on value creation.

#4 Agree upon: the purpose of your corporation, your definition of corporate governance, the purpose of corporate governance, and the board’s decision-making model.

#5 Review and revise corporate governance documents, processes, and technology to align with #4

#6 Review other governance within your company, to align with #4 and #5 above,

 Footnotes:

1 Based on “G20/OECD Principles of Corporate Governance”, 2023  Page 6. I changed “stakeholders” to “other ecosystem members”, https://www.oecd.org/en/publications/2023/09/g20-oecd-principles-of-corporate-governance-2023_60836fcb.html

2 Dr. Didier Cossin, Boon Hwee Ong, Sophie Coughla, “Stewardship fostering responsible long-term wealth creation”, IMD, Global Board Center 2015, https://www.imd.org/globalassets/board-center/docs/stewardship_2015.pdf

3 Ralph Gomory and Richard Sylla, “The American Corporation”, April 2013, page 6, The Wall Street Journal http://online.wsj.com/public/resources/documents/50b74ca9c91e6TheAmericanCorporation11292012.doc.pdf

4  https://www.blackrock.com/corporate/investor-relations/2018-larry-fink-ceo-letter

5 Page 17 The five most important questions you will ever ask about your organization (2008)   by Peter F. Drucker,  Jim Collins et al, I adapted.

Further reading

What is the corporate governance ecosystem?

https://koorandassociates.org/corporate-governance/what-is-the-corporate-governance-ecosystem/What is the purpose of your company?

https://koorandassociates.org/corporate-governance/what-is-the-purpose-of-your-company/

How can the board of directors create value?

https://koorandassociates.org/corporate-governance/how-can-the-board-of-directors-create-value/

Is your company planning to fail?

https://koorandassociates.org/avoiding-business-failure/is-your-company-planning-to-fail/

 

APPENDIX 1 Sample definition of directing the company

In the context of corporate governance, “directed” refers to the guidance, oversight, and strategic leadership provided to a company by its board of directors and senior management. Specifically:

  1. Strategic direction: The board of directors sets the overall strategic direction and goals for the company, guiding its long-term vision and objectives.
  2. Decision-making: “Directed” implies that key decisions about the company’s operations, investments, and policies are made or approved by the board and executive leadership.
  3. Oversight: The board provides oversight of management’s actions and performance to ensure they align with the company’s goals and stakeholder interests.
  4. Policy setting: The board establishes and approves corporate policies, procedures, and guidelines that govern how the company operates.
  5. Resource allocation: Direction includes decisions on how to allocate the company’s resources to achieve its objectives effectively.
  6. Risk management: The board directs the company’s approach to identifying, assessing, and managing various risks.
  7. Ethical standards: Direction involves setting and maintaining ethical standards and corporate culture.
  8. Ecosystem relations: The board guides how the company interacts with and balances the interests of various ecosystem members, including shareholders, employees, customers, and the community.

In essence, “directed” in corporate governance means that the company is guided and managed in a structured, purposeful manner by its leadership, rather than operating without clear guidance or oversight. This direction aims to ensure the company operates efficiently, ethically, and in alignment with its stated objectives.

Tom Koor

Can leaders (U.S. Presidents, Board Directors, CEOs) have an “Off Day”?

Can leaders (U.S. Presidents, Board Directors, CEOs) have an “Off Day”?

#1 In the June 27, 2024 debate between President Biden and Donald Trump, President Biden showed signs of mental issues and cognitive decline.  What if during those 90 minutes, there’d been a crisis, and President Biden had to make the decision on whether or not to launch nuclear missiles? U.S. Presidents sometime need to make momentous decisions with limited preparation time. Given the impact of these decisions, should U.S. Presidents be allowed any “off days” when they have degraded mental capabilities?

#2 Are company board directors allowed to have “off days”?  Should a board director be allowed to make decisions (e.g. CEO appointment, CEO termination, accepting/rejecting M&A offer, etc.) when their mental capabilities are degraded? If not, what processes does your board have in place to prevent this?

#3 Are company CEOs allowed to have “off days”? Should your CEO be allowed to: make recommendations (e.g. presenting strategy to the board of directors), decisions, and communications (e.g. live global virtual town hall) when their mental capabilities are degraded?  If not, what processes does your board have in place to prevent this?

Tom Koor

Does your board compensation reflect board value? V2

Does your board compensation reflect board value? V2

 What is the purpose of this article?

Enable investors, the board directors, and management to discuss the board’s impact on value creation and related compensation.

This article is focused on for-profit company boards, not: charities, government entities, or not-for-profit organizations.

This article does not provide tax, legal or financial advice.

You must do your own research and fact-based analysis using current and relevant information.

You cand download a PDF of this article from: Does your board compensation reflect board value V2

What are the critical learnings in this article?

  • The board of directors’ impact on value creation is unclear.
  • The relationship between director compensation and value creation is unclear.

Let’s assume your company has the principle that value creation is reflected in compensation. 

  • CEO compensation can range up to $100 of millions per year.
  • At the June 13, 2024 Tesla Annual General Meeting, shareholders were voting on Elon Musk’s $56 billion compensation package (yes – $56 billion).
  • Many C-Suite and senior executives make millions of dollars a year.

What does board compensation look like in one of Canada’s largest public companies?

This is a typical situation. I won’t mention the company name, which could distract the conversation.

  • The CEO compensation is more than $10 million per year.
  • The CEO compensation is about three times the total compensation of the board.
  • The average director compensation in this company is what a successful MBA graduate would make in their third year in a tier 1 strategy firm.

What is the relationship between board compensation and value creation?

Do the differences between board compensation and management compensation reflect:

  • The board having little impact on value creation?
  • The board has decided to allocate the bulk of its value creation impact to others in the company’s ecosystem e.g. executives?
  • The boards of large companies view their contribution as charitable or giving back to society?
  • Or something else?

The ability of talent to create value in a specific company is impacted by several factors, including:

  • The company’s brand or reputation.
  • Intellectual property.
  • Technology
  • Processes
  • Business Partners
  • Capital

Let’s not forget luck.

Why should you focus on value creation?

  • I’ve seen countless companies that that talk about strategic objectives, strategic initiatives, strategic etc. I’ve seen these achieved, while value creation is poor, and in some cases the company fails and goes out of business.
  • This is one of the reasons I talk about value creation plans and not strategies. A discussion about “successfully achieving a strategy” is very different from a discussion about “successfully achieving value creation”

What are your next steps?

Define the words/concepts you’re using, in a glossary.  I’ve seen major confusion when the same words mean different things to different people.

Discuss and agree upon:

  • Does the board of directors have ultimate authority? If not, who does?
  • Does the board of directors have ultimate accountability for your company’s performance and value creation? If not, who does?
  • If your company has controlling shareholders (e.g. private equity, voting trust, unanimous shareholders agreement) do they have ultimate authority and accountability for company performance and value creation? If not, who does?
  • What does accountability mean? If the people with accountability have poor personal performance, what are the implications for those people?
  • What are the principles used to determine the value creation of each person in the company, including board directors?
  • What are the principles used to determine how much of each person’s value creation should be in their personal compensation vs allocated to others?
  • What is your company’s overall value creation plan, metrics/KPIs (Key Performance Indicators), process for setting value creation targets, and process for tracking results.
  • What % of your company’s pre-tax profits are allocated to: the board of directors, each director role, and each role in the C-Suite?
  • Based upon the above, discuss the compensation of the board relative to their value creation. And do a benchmark comparison with other companies.
  • Based on the above, discuss the potential for value creation in director roles, and the implications for the director capabilities.

 What further reading should you do?

Professor Dieder Cossin and Estrelle Metayer “Does your board really add value to strategy?”, IMD Global Board Center

First sentence in the article is “Boards are ultimately responsible for the long-term success of their organisations.”

https://www.imd.org/research-knowledge/articles/board-strategy/

Jeff Bezos 2020 letter to shareholders – his final one.  He quantities value creation in financial terms for some members of Amazon’s ecosystem.

https://www.aboutamazon.com/news/company-news/2020-letter-to-shareholders

“Traditional corporate governance dooms your company to failure”, Koor and Associates

https://koorandassociates.org/corporate-governance/5786-2/

“Is your company planning to fail?”, Koor and Associates

https://koorandassociates.org/avoiding-business-failure/is-your-company-planning-to-fail/

Tom Koor

Elite talent – What is it? V2

Elite Talent – what is it? V2

 What is the purpose of this article?

Enable the investor, founders, board of directors and C-Suite to discuss the role of elite talent in their company’s success.

You can download a PDF of this article from: Elite talent – what is it V2

What are the critical learnings in this article?

  • A small percentage of people can generate much of the value within any team or role. This is elite talent.
  • A small percentage of roles can generate much of the value within your company. This is high potential elite talent.
  • Elite talent is rare. High potential elite talent is even rarer.

What is the value and need for elite talent?

In today’s competitive business environment, there is unlimited capital for companies that have the potential to create major value,  The talent to create major value is rare.

One study of talent across many types of organizations showed that: 1

  • The top 1% of people account for 10% of the organizational output.
  • The top 5% account for 25% of organizational output.
  • The top 20% account for 80% of organizational output.

Adding one elite performer to a team, can increase overall team performance by 5-15%. 2

Google found that people performance follows a power law distribution, and not a bell curve. Top 1% of workers generate 10 times average output .3

 

McKinsey’s research on private equity portfolio company CEOs showed that: 4

  • Top quartile CEOs deliver shareholder returns that are 9% higher than industry peers, every year that they’re CEO.
  • In some industries, top quartile CEOs deliver 16% higher yearly shareholder returns.

One company with thousand of employees, found that 37 roles delivered 80% of the company’s EBITDA 5

How does “Moneyball: the art of winning an unfair game” by Michael Lewis, illustrate elite talent.

  • Billy Beane became the Oakland A’s baseball team general manager in 1997.
  • There was over 100 years of baseball wisdom on how to select talent, especially from school. The front offices, managers, coaches, scouts, and players all shared a common point of view regarding the best practices for selecting talent.
  • Billy Bean did not follow 100 years of wisdom. He took a fact-based, mathematically analytical approach.
  • The Oakland A’s then reached in playoffs in 2000 to 2003. In 2002, the A’s player budget was $44 million U.S., the New York Yankees’ player budget was $144 million U.S.

My observations:

  • You don’t need everyone to be elite. One person can change the organization.
  • The basis for change was selecting the right talent in the first place. (E.g. out of high school) rather than trying to change existing talent.
  • Money alone does not ensure elite results.
  • Fact-based analysis is critical. Cambridge physicist Ian Graham developed the mathematical model which was used to select the manager and players for the Liverpool FC rugby team, resulting in them winning the 2018-2019 UEFA Champions League.
  • You succeed if you do something both different and better than others.
  • But then the other teams copied Billy Beane’s approach. In today’s hypercompetitive world, competition improves, thus elite talent needs to also improve. If elite talent doesn’t Improve, it will no longer be elite.

Why do you need high potential elite talent ?

The definition of a high potential person is someone who can become key driver of organizational performance i.e. “generate exorbitant output that can influence the success or failure of their organization.  This is different from individual career success. Many leaders that advance in their personal career don’t turn their teams or companies into competitively differentiated success. XX

High potential people can impact your company’s success both today and in the future.  High potential people can change to continue to be elite in new roles or changing existing roles.  Yesterday’s requirement for elite capabilities may be different from today’s requirement or tomorrow’s requirements. Someone who was elite yesterday might not ne elite today or in the future.

What are the characteristics of high potential elite talent?

  • Cognitive skills
    1. Long-term memory
    2. Working memory: hang onto information while using it
    3. Logic and reasoning
    4. Visual processing
    5. Processing speed
    6. Attention
      1. Sustained – for long periods of time
      2. Selective – without distraction
  • Divided – doing two things at once
  • Ability to quickly learn and unlearn: paradigms, frameworks, methodologies, data, facts, knowledge.
  • Fluid intelligence he ability to solve problems without past experience. This is critical for innovation, which is coming up with new and better solutions.
    1. The future is impossible to predict but actions and decisions are focused on this unpredictable future.
    2. The future will also be different from the past. i.e. there won’t be historical experience to draw upon.
    3. Able to provide direction when there is no map.
  • Character
    1. VME (Values, Morals, and Ethics) Warren Buffett supposedly said “…looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you.”
    2. Courage: It takes courage to make the right decision. The right decision is often not: the cheapest, easiest, lowest risk to the company, lowest risk to you, and what everyone else is doing.
    3. Perseverance, especially against all odds.
    4. Knowing when to stop persevering. One leader told me “If you’re digging yourself into a hole, stop digging.”
  • Relationship skills:
    1. The ability to create and sustain a network of personal relationships.
    2. Persuasion and negotiation, which is key to managing different points of view and interests.
    3. Creating and maintaining followers. A leader without committed followers is not a leader.
  • Communications activities include:
    1. Write, speaking, singing, drawing, and body language
    2. Speaking and singing also include tones, pitch, etc.
    3. Communications is two way:
  • Broadcasting
  • Listening, which includes analysis of input
    1. Communications can have a variety of outcomes, including:
  • Understanding other people
  • Changing the belief, emotions, and behaviours of others.
  • Learning such as facts, knowledge, ways of thinking.
  • Building trust and relationships.
  • Persuading people to take certain actions.
  • Gaining the emotional and intellectual support of people.
  • Creativity

A Google search of creativity reveals many very different definitions of creativity. Two definitions are:

  • “The ability to think about a task or a problem in a new or different way”
  • “Creativity involves two processes: thinking, then producing. If you have ideas but don’t act on them, you are imaginative but not creative”

 How do you select elite talent?

  • The best predictor of how someone will perform in a job is a work sample test (29%) 6 For example, when recruiting board directors, they should serve for one year as a board observer, to enable assessing them.
  • The two second best predictors are: are tests of general cognitive ability (26%); 7 and structured interviews (behavioural (tell me about a time) and situational (what would you do if) (26%). 8
  • Four interviews predict whether to hire someone with 86% confidence and each additional interviewer adds 1% confidence. 9 This assumes that you are clear on what value the role provides, the specific characteristics of people who can deliver that value, and do a combination of work sample and structured interviews.
  • The definitions of elite talent change over time. At the 2023 Collision conference is Toronto, one presentation shared a survey of over 200 Chief Technology officers. The top three things they were looking for in employees: ability to collaborate, ability to learn, ability to problem solve. Coding skills and knowledge of coding languages was not in the top 3. Several years ago, coding skills would have been the competitive differentiator.

 How do you select high potential elite talent?

  • You first select for elite talent, using the criteria described above.
  • Then you do additional assessment using the seven high potential characteristics described above.
  • You’ll have use enhanced behavioural questions and background checking.
  • Psychological testing is also required. This can be done by software, psychologists, or some combination

What are your next steps?

  • Create the definitions which are commonly understood within your company, including: talent, value, elite talent, high potential elite talent, etc. Your words and definitions may differ from what is in this article.
  • Determine which company roles would benefit from elite talent. Consider the time, effort, and skills necessary to assess, select, and develop elite talent.  The initial scope of your analysis ranges from the board of directors through to the most junior entry level employee. Contractors may also be within scope.  If there are investors which control or greatly influence your company, they are also within scope.
  • You can also focus on the roles which have the greatest current, or potential, impact on company value. These roles will require high potential elite talent. The you’ll need additional time, effort, skills, and software to assess, select and develop high potential elite talent. These roles won’t necessarily be the highest roles in the organization chart, but will be at many levels. Include the board of directors, CEO, and C-Suite in your analysis
  • You will need a process to allocate the extremely scarce high potential elite talent. Years ago, the board of directors and CEO were focused on allocating the very scarce capital – potential capital is now unlimited.  Thus, the board and CEO need to focus on talent allocation. You’ll also need a process to allocate high potential elite talent at the board of directors.

 Footnotes:

1Tomas Charmorro-Preeuzic, Seymour Adler, and Robert B. Kaiser, “What science says about identifying high-potential employees.” Oct 3, 2017

https://hbr.org/2017/10/what-science-says-about-identifying-high-potential-employees

2 Ibid

3 Laszio Bock, Work Rules (New York: Hatchette Book Group, 2015), 182

4 Maria Capozzi, Sacha Ghai, John Kelleher, and Kurt Strovink, “CEO alpha:  a new approach to generating private equity outperformance”, McKinsey article March 2023

https://www.mckinsey.com/industries/private-capital/our-insights/ceo-alpha-a-new-approach-to-generating-private-equity-outperformance

5 Ibid

6 Laszio Bock, Work Rules (New York: Hatchette Book Group, 2015), 91

7 Ibid., 91

8 Ibid., 91

9 Ibid., 103