Author: Tom Koor

Tom Koor

What is the difference between strategy and tactics? V2

What is the purpose of this article?

  • Enable founders, C-Suite, Board of Directors, and investors to discuss and asses the company’s strategy and tactics.

You can download a PDF of this article from: What is the difference between strategy and tactics V2

 What are the critical learnings in this article?

  • Long-term success requires both the right strategy and successful execution of the right tactics.
  • Everyone in the company must understand the company’s strategy and focus their energy on achieving the strategy.

 What is strategy?

What will the company’s future success look like to the members of the company’s ecosystem?

  • How will customers perceive success? For example, “In five years time, we will be seen as the world’s best online search company.” is much different from “In five years time, we will be the world’s biggest search company.”
  • Your strategy will define assumptions as to who your target customers are, their ecosystem, and why the customers will be dealing with you rather than your competition. And of course, your competition will also change.  I’ve seen too many company failures resulting from strategies that basically say “This is what we are going to do.  This is the vision and mission of the company. We hope the customers will buy from us.  Hope is our strategy.”.
  • Strategy describes the company’s position in the customer’s ecosystem.
  • How will the other members of your company’s ecosystem perceive the future success of the company? Ecosystem members include: customers, employees, competitors, partners, and investors.

What are tactics?

  • What do you have to do to achieve future success? What are the types of people you need to build that future? (i.e. board directors, CEO, advisory board, C-Suite, management, and staff) If you are in a rapidly changing environment, you need people who can learn quickly and change quickly – knowing what worked 20 years ago may not be helpful in solving future challenges.
  • How will you enable every single person in the company from entry level staff through to the board of directors to understand how they are achieving the company’s strategy. There is a story that when President Kennedy visited a NASA facility in 1962, he asked a janitor with a broom what the janitor was doing. The janitor supposedly said “Mr. President, I’m helping put a man on the moon.”
  • The tactics will depend on the person’s role in the company e.g. The CEO may do acquisitions and divestitures, at all levels there may be processes, technology and talent changes, and the janitors have the tools to create and maintain cleaner work environment.

What are two illustrations of the difference between strategy and tactics?

#1 Hannibal 218-204 BC

  • Hannibal crossed the Alps (Romans thought this was not possible).
  • Hannibal won massive victories in Italy in 18 months – 70,000 Romans died in battle of Cannae; ¼ of Roman adult males killed.
  • Hannibal never lost a battle in Italy during the next 14 years
  • Roman Consul Fabius avoided battle with Hannibal but did not win the war.
  • Roman General Scipio did NOT fight Hannibal in Italy, because Scipio knew he’d lose. Scipio conquered Hannibal’s financial and logistical bases in Spain and then attacked Carthage, resulting in Hannibal being recalled from Italy.
  • Hannibal never attacked the city of Rome. Rome never surrendered or gave up. Hannibal lost the war.
  • Scipio never fought Hannibal it Italy, and won the war.

The key to strategy is being clear on what long-term success actually looks like. Then you need to successfully execute the right tactics. Hannibal and Scipio had different strategies i.e. different definitions of what long-term success looked like.

#2 Tiger Woods – 2006 British Open

  • Tiger Woods’ competitors teed off, using drivers to hit balls over the bunkers.
  • Tiger Woods typically used a four or five iron.
  • His long-term vision of success was getting the ball in the hole.
  • He then determined the best place to putt from to get the ball in the hole
  • Working backwards from the best place to put from; he then used four or five iron to position for eventual success. Tiger Woods, like Scipio, was focused on long-term success.

The key to strategy is being clear on what long-term success actually looks like. Then you need to successfully execute the right tactics.

Doesn’t good execution beat strategy?

  • I’ve often heard people say that good execution beats strategy. Being able to run faster, and last longer, than the competitors in your race, is of no value if you are running away from the finish line.
  • Your challenge is to have a better strategy than the competition and to successfully execute the right tactics.

Do you need an Office of Strategic Initiatives?

  • Do not create an Office of Strategic Initiatives, with EVPs, VP, Directors, etc. of Strategic Initiatives.
  • Why not?
  • Every single person in your company must be focused on executing the tactics to achieve the strategy of your company.
  • Every single person in your company needs to understand the relationship between what they do every day and your company’s strategy.
  • When ever I come across an organization with people whose titles include “Strategic Initiatives”, I make two observations: a) I wonder how those leaders and employees who are not working on strategic initiatives feel and are motivated b) I wonder why the company does not eliminate all the people, processes, and technology that are not focused on achieving the company’s strategy.

What are your next steps?

Phase One

  • Individually survey each board director and C-Suite member.
  • Ask them what the strategy of the company is and what are they doing to achieve the strategy of the company.
  • Identify the metrics regarding the strategy.
  • Document the metrics for each member of the board of directors and the C-Suite.
  • Analyze the results to determine: common understanding of the strategy and alignment of individual leader efforts with the overall strategy.
  • What are the learnings of the analysis?
  • What needs to change? Some of the changes may require replacing people.

Further phases

  • Extend the Phase One process throughout your company.

 What further reading should you do?

Is your company planning to fail?

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

Tom Koor

What is public company governance? V2

What is the purpose of this article?

Provide a framework which enables public company shareholders, boards of directors, C-Suite, and other to begin discussing what is governance.

This article is written from a Canadian perspective.  Governance varies significantly around the world.

This article does not provide legal advice.

You can download a PDF of this article from: What is public company governance V2

What are the critical learnings in this article?

You have to determine what exactly is meant by governance in your public company’s specific situation.  No outside expert can tell you because there is no one single answer

What is a public company?

The definition and characteristics of what is a public company depends upon the where the company is legally based.

  • In Canada a public company is “a company whose shares trade on a stock exchange”1
  • “German Public Limited Company (Aktiengesellschaft-AG) is a company having a legal personality of its own. It ownership is organized via shares of stock. As a general rule, the shares of stock can be transferred by the stockholders.  A public company can be listed on a stock exchange (listed company) or not (unlisted public company)”2

What is corporate governance?

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

This definition has 4 components:

  • Relationships among the company’s ecosystem members.
  • Decision making i.e. setting objectives and approving action plans.
  • Action plans i.e. means of attaining those objectives.
  • Performance monitoring of the objectives, action plans, relationships.

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

  • Lawyers often start with the Business Corporations Act. Sometimes the legal framework is a social purpose corporation, such as a B Corp., or 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.
  • Values, morals, and ethics may not be seen as a critical part of corporate governance.

Etc.

Often there this 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 answer:

  • If climate change is real, should the company reduce or eliminate it’s 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 a confusing and disjointed picture of governance with limited shared understanding.

In Canada, there is a broad range of decision making authority in a public company. Some of the possibilities are listed below.

  • Public company with no controlling shareholder. Shareholders elect directors and approve major change. Thus, the board directors have the bulk of decision making authority, but may delegate much of this authority to the CEO.
  • In certain cases, shareholders with a large equity or voting interest in the company have the legal right to appoint a director or directors.
  • A public company may have a voting trust. One person had the authority to vote all of the shares in the voting trust.  There are situations where the voting trust controls more than 50% of the votes. This often enables the person who votes the trust’s share to have major influence on company decision.
  • A public company may have dual class shares. Some shares may have no voting rights. Some shares may have multiple votes.  Thus, a person, or group, with a small amount of equity may have voting control of the company.  This may occur with company founders or the founding family.
  • 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.
  • OSFI (Office of the Superintendent of Financial Institutions) requires pre-notification of the appointment of officers or nomination of directors for the financial Institutions OSFI regulates. OSFI then has the opportunity to share any concerns or comments.

An interesting example of public company governance and the role of the board of directors occurred in Canada in fall 2021. The board of directors of Rogers Communications (a multi-billion dollar company) removed Edward Rogers, the board chair. Mr. Rogers, who controlled 97.5% the voting shares, then removed a number of directors and put in place directors who re-appointed him as board chair.  What I observed was, if directors did not do as they were told by a shareholder, the shareholder would then replace them with directors who would do as they were told.

What are your next steps?

  • Identify the decisions within your company’s ecosystem which have the greatest impact on value.
  • Define who has the authority to make those decisions. As noted above, many decisions impact your company are made by people outside of your company.
  • Remember that some people, who don’t have legal authority, may still have moral persuasion powers (e.g. If OSFI in Canada expresses major concerns about a potential board director, what will the financial institution do?).
  • Look at the regulatory regimes and governance practices of the different jurisdictions your company operates in, provides services or products, or has suppliers in.
  • Consider different scenarios. Who makes decisions can be very different in crisis than in the situation where everything is wonderful.

 Footnotes:

1 https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/templates-business-guides/glossary/public-company

2 https://www.german-probate-lawyer.com/en/glossary/def/public-limited-company-aktiengesellschaft-ag.html

What further reading should you do?

What is the purpose of your company?

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

What is corporate governance?

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

How does the board of directors create value?

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

“What CEOs really think of their boards”, Jeffrey Sonnenfeld, Melanie Kusin, and Elise Walton.  Harvard Business Review 2013 April

https://hbr.org/2013/04/what-ceos-really-think-of-their-boards

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

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

Tom Koor

What is different about private equity governance? V2

What is the purpose of this article?

  • Enable shareholders, board of directors, and C-suite to have a discussion regarding what is different about PE (private equity) governance.
  • This article provides general concepts. You need to understand your specific situation.  You should consult your lawyers for legal advice.  This article does not provide legal advice.

You can download a PDF of this article from: What is different about private equity governance V2

What are the critical learnings in this article?

  • PE shareholders and PE governance is focused on value creation.
  • In a private company with PE shareholders, the decision making authority of the board of directors and of shareholders can be very different from public company governance.

Where does PE fit into the overall governance framework?

There is a broad range of how decision making is structured in different types of companies.

  • Public company with no controlling shareholder. A founder might still have effective control, even though they have less than 50% of the voting shares.
  • A public company may have a voting trust. One person had the authority to vote all of the shares in the voting trust.
  • A public company may have dual class shares. Some shares may have no voting rights. Some shares may have multiple votes.  This enables founders and families to retain voting control of a company even when they have a minority of the shares.
  • A public or private company may have PE shareholders. They may have certain rights, such as being able to appoint a certain number of board directors.
  • In a private company, PE may have a wide range of governance options.

PE and management are aligned with a common focus on long-term value creation.

Shareholders, the Board and C-Suite all focused on value creation with a common set of metrics.

  • Decisions are based on maximising this long-term value, even if short term quarterly or yearly profits are impacted.
  • PE firms often have exit time horizons, often between 7 and 10 years.
  • The bulk of potential management compensation is aligned with the value shareholders achieve when they exit.
  • There some PE funds with long-term or perpetual time horizons, which require more complex compensation structures and metrics for management.

Public company shareholders and management are often not-aligned.

  • Many public companies do not have long-term value creation metrics, targets, or regular reporting of results against these targets.
  • Many shareholders, such as pension funds have a long-term time horizon. The board of directors and management are often focused on quarterly and yearly targets, and achieving the public guidance they have issued.
  • Management compensation is often not aligned with shareholder returns. For example, when share value drops: management is often issued new stock options at a lower price; management is still given major bonuses; etc.

The PE asset class has outperformed public company markets.

PE has outperformed public market benchmarks over the last five-, ten-, and 20-year periods.1

Public companies often have little significant long-term value creation.

Mark Leonard, CEO of Constellation Software, in his April 20, 2018l CEO letter. “Qualified and competent Directors are very rare, and not surprisingly, the track record of most boards is awful. According to the 2017 Hendrik Bessembinder study of approximately 26,000 stocks in the CRSP database, only 4% of the stocks generated all of the stock market’s return in excess of one – month T-Bills during the last 90 years. The other 96% of the stocks generated, in aggregate, the T-bill rate over that period. This means that 4% of boards oversaw all the long-term wealth creation by markets during that period. Even more disturbing, the boards for over 50% of public companies saw their businesses generate negative returns during their entire existence as public companies.” 2

PE company board directors and shareholders have a deep understanding on the company.

PE boards and shareholders may:

  • Have deep involvement with the company, unlike many public company boards.
  • Have two-way communications with the CEO and C-Suit weekly or more often.
  • Have support staff to analyze ongoing company reporting and do follow-up questions.
  • Regularly assess whether or not there is the right CEO.
  • Require the CEO to have a coach.
  • May have a board director or PE shareholder deeply involved in critical value creation initiatives such as M&A.

Public company boards often:

  • Take the approach of “noses in, fingers out”, unlike private equity which has fingers in.
  • Have limited two way communications engagement with the CEO and C-Suite.
  • Only have third-party analysis of the company when there is a crisis or major event.
  • Assess whether there is the right CEO only when there is a crisis.
  • Do not have directors deeply involved in critical value creation activities.

The majority of public company directors have limited understanding of their companies.

A McKinsey survey of board directors showed that most had little understanding of their companies. Only 16 percent said directors strongly understood the dynamics of their industries, just 22 percent said they were aware of how their firms created value, and a mere 34 percent said they fully comprehended their companies’ strategies.3

What are some of the decision making differences between a public company with no controlling shareholder vs a private company controlled by PE shareholders.

In public company some of the decisions with the greatest impact on long term value are made by the board e.g.

  • Approving the CEO’s strategic plan.
  • Approving major business changes or major changes to financial leverage.
  • Appointing or terminating the CEO.
  • Nominating directors, who require election by the shareholders.

The above decisions in a private company controlled by PE are often made by the shareholders. Sometimes the shareholders may set the strategy and appoint a new CEO to carry out the new strategy.

Fundamental corporate transactions (e.g. sale of company, merger, sale of substantially all assets of corporation) often require shareholder approval.  The decision making process can be much faster in a private company.

PE shareholders may the authority to restrict or even over-ride the decision making authority of the board of directors.

  • PE shareholders may have a unanimous shareholders agreement, which specifically limits the decision making authority of the board of directors and reserves certain decisions for shareholders. In this scenario, PE shareholders have the potential to veto any board decision or make any decision on behalf of the company.
  • PE shareholders may have certain veto powers over certain company decisions even without controlling votes.
  • PE shareholders may be in a voting trust enabling one individual to make decisions based on the voting rights of all the trust members.

What are your next steps?

If you are in a PE governance environment, either a stable situation or transitioning:

  • Step 1 is to document the expectations of the key members your governance environment, which may include: PE shareholders, the board directors, C-Suite, regulators, etc.
  • Step 2 identify the differences in expectations.
  • Step 3 outline the principles and process for moving towards a common set of expectations.
  • Step 4 assess your legal governance documents relative to expectations and make the required changes. Not all expectations can be included in legally binding documents.
  • Step 5 put in place an ongoing process to monitor and manage expectations.

What if you’re not in a PE governance situation? Your next steps are the same. You will still need to understand and manage the expectations of major shareholders.

 Footnotes:

1 A year of disruptions in the private markets McKinsey Global Private Markets Review. April 2021, Page 22

2 https://www.csisoftware.com/docs/default-source/investor-relations/presidents-letter/presidents-letter-april-2018-final.pdf

3 “Corporate Boards need a facelift”, Eric Kutcher, (McKinsey Partner) McKinsey website, May 4, 2018

https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-strategy-and-corporate-finance-blog/corporate-boards-need-a-facelift

What further reading should you do?

What is corporate governance?

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

What are your company’s decision making principles?

https://koorandassociates.org/corporate-governance/what-are-your-companys-decision-making-principles/

What is the purpose of your company?

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

Tom Koor

What do you do if you’re losing customers? V2

What is the purpose of this article?

Provide the board of directors, C-Suite, and investors with a framework to have the facts necessary to discuss the broad range of options to address customer loss.

You can download a PDF of this article from: What do you do if you’re losing customers V2

 What are the critical learnings in this article?

  • You need facts regarding why customers are deciding to leave your company and fewer customers deciding to join. You will fail if you base your decisions on opinions and hopes.
  • You need an understanding of how you ended up in this situation and then make the changes before you start the decision process on what to do. You will fail if the same people are using the same processes and approach to make decisions.

 What are your internal company facts regarding your cash paying customer loss?

  • How many customers are you losing, by month?
  • What is the churn rate?
  • What is the lifetime customer profit you’re losing and what were the customer acquisition costs?

All of the above should be categorized by: target segment, cohort, customer persona, channel, and partner.

What has happened to the overall cash paying customer demand over time?  I.e. the market size

  • What has been the trend in the overall number of cash paying customers?
  • What has been the trend in their overall spending for your solution and the solutions from your competitors?

What is the cash paying customer and user perception of the value they obtain from your solution?

  • Are your current customers recommending your company (if so why), or not recommend your company (if so, why not)? This is the NPS (Net Promoter) How does your NPS compare to your competitors and more broadly?
  • When the customer began paying, what urgent problem or need did they have and what value were they seeking from your solution? Value can be tangible: (e.g. cost reduction, time savings) or intangible (convenience, feeling good, perceived risk reduction).
  • When the customers left, what had changed in regarding the problems or needs they had and the value they were seeking from your solution?
  • What reasons did the customer give for leaving?
  • What are the benefits your customers obtain from your solution? These benefits can be tangible (e.g. cost reduction, time savings) or intangible (convenience, feeling good, perceived risk reduction)
  • Why did your competitors’ customers not select you?
  • How have the above changed over time.

 What have your learned from your competitors customers?

  • Why did they not select you and why did they select your competitor? This requires historical and ongoing data collection.

How do you collect this data from customers

  • You proactively engage with your customers, e.g. one-on-one interviews, focus groups, surveys, etc.
  • What do customers ask and tell you in person; via emails they send; via questions, reviews and comments on your website or other social media; what they talk about when contacting customer service, etc.
  • Analyze the value that customers achieve from your solution. How often do they use the functions which they have told you are of value? For example, if your company’s solution is helping customer teams to collaborate: how many teams are there, how many messages are they sending, etc. This assumes that you have built measuring tools into your products and service.
  • Analyze what you observe of customer actions: e.g. retention rate, churn, etc.
  • Analyse the financial aspects e.g. what is customer acquisition cost, customer life time profitability?

For all of the above data, analyse what have been the historical trends.  Whenever possible, benchmark your company against the competition.

How has your customer persona changed?

  • What is the target customer persona?
  • If you have a target customer persona, re-validate the facts in the persons.

Is the overall target customer market size shrinking?

  • What will be the future market size?
  • Will you still be able to grow the value of your company in this shrinking market? g. having 100% share of the target customers who want a physical keyboard on the phone results in a tiny company.
  • Should you redefine who your target customers are?

Is the overall market size the same or growing?

The above data and analysis will reveal what changes are required in how customers perceive the value they receive from your solution. The new value proposition will then drive the internal changes your company needs to make.

What are your next steps?

  • Collect and analyze the historical and current situation facts.
  • Define the required talent (board of directors, C-Suite, advisory board, and external advisers) and decision making process.
  • Assess your current decision talent and decision making process relative to the requirements.
  • Make any required changes before beginning the decision making process.

There are many potential actions to take, including:

  • Selling the company, doing acquisitions, doing divestitures, redefining who your target customers are, refocusing on what your target customers current urgent problems and needs are, changing channels, changing partners, making all of the internal changes necessary to achieve the desired actions and enable long-term success.
  • Internal changes can encompass: company purpose, company values, morals and ethics, company decision making principles, composition of the board of directors, composition of the C-Suite including the CEO, composition of the advisory board, changes to corporate governance, changes to talent, processes, and technology.

 What further reading should you do?

What is the purpose of your company?

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

How do you make strategic decisions?

https://koorandassociates.org/corporate-governance/how-do-you-make-strategic-decisions/

What are your company’s decision making principles?

https://koorandassociates.org/corporate-governance/what-are-your-companys-decision-making-principles/

Why are values and morals important?

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

Tom Koor

What are your company’s decision making principles?

What is the purpose of this article?

Enable shareholders, the board of directors, C-Suite, and advisory board to discuss your company’s decision making principles.

You can download a PDF of this article from: What are your company’s decision making principles

What are the critical learnings in this article?

  • Decision making principles enable better decision making, resulting in faster growth and more profits.
  • Decision making principles are inter-related with your company’s: purpose; values, morals, and ethics; value creation; and corporate governance.

What is the purpose of decision making principles?

  • Principles are the guidelines within which people make decisions. If rapidly growing or large companies have centralized decision making for every decision, the result is slow moving paralysis. If people in the company make any decision they feel like, the result chaos.
  • Successful employee empowerment depends upon principles.
  • Decision making principles enable better decision making.

What is the context for decision making principles?

There are five aligned and inter-related sets of concepts:

  • What is the purpose of your company?
  • What are your company’s values, morals, and ethics?
  • How does your company create value?
  • What is corporate governance?
  • What are your company’s decision making principles?

What are four examples of decision making principles?

The number and type of principles are unique to each company at a specific point in time.

#1The founder and CEO of a global transaction company had one simple principle. Keep customer application latency below xx milliseconds. If latency increased beyond this point, the company would quickly lose customers, regardless of any additional functionality.

#2 Staples was founded in 1986 with three core principles:1

  • Provide a one-stop shop for all of the products consumed in the office.
  • Offer everything at half price.
  • Provide a convenient place to shop.

#3 Tim Cook, early 2009 on a conference call with analysts, shortly after Steve Jobs went on a medical leave.

“We believe that we are on the face of the earth to make great products, and that’s not changing. We are constantly focused on innovating. We believe in the simple not the complex. We believe that we need to own and control the primary technologies behind the products that we make, and participate only in markets where we can make a significant contribution. We believe in saying no to thousands of projects, that that we can really focus on the few that are truly important and meaningful to us.  We believe in deep collaboration and cross-pollination of our groups which allow us to innovate in a way that others cannot. And frankly, we don’t settle for anything less than excellence in every group in the company, and we have the self-honesty to admit when we’re wrong and the courage to change.  And I think, regardless of who is in what job, those values are so embedded in this company that Apple will do extremely well.”2

#4 Ray Dalio (Founder of Bridgewater Associates, an investment firm with $150 billion (USD) in assets.  Ray’s personal wealth is estimated at $15.6 billion (USD)) wrote a 540 page book filled with his life and business principles.3

What are your next steps?

  • Review your existing documentation regarding: the purpose of your company; your company’s values, morals, and ethics; how your company creates value: your current corporate governance structure; and any existing decision making principles.
  • Interview and survey members of your company’s ecosystem to assess the degree to which your documentation reflects current reality.
  • Assess the degree of alignment among: purpose; values, morals, and ethics; value creation; corporate governance; and any existing decision making principles.
  • What are the differences between the perceptions of the ecosystem members and your company’s documentation?
  • What are the ecosystem member perceptions in the cases where your company has no documentation?
  • Analyze the above, including by ecosystem member.
  • What are the implications for your company?
  • Determine what improvements need to be made to the behaviour of your employees (this includes board of directors, CEO, C-Suite, every employee, and contractors)
  • Determine where a principle (or a few principles) could have the greatest impact on: achieving purpose; enabling moral, values, and ethics; and growing value.
  • Some possible areas which could have a major impact on value could include: selection and exiting of board directors; selection and exiting of CEO and C-Suite; the experience cash-paying customers and users have when interacting with your company; making strategic decisions; etc.

 Footnotes

1 David G. Thomson,  Master the 7 essentials of high growth companies, (Hoboken, New Jersey, 2010) John Wiley & Sons, Page 174

2 Walter Isaacson, Steve Jobs, (New York, 2011), Simon & Schuster, Page 488

3 Ray Dalio, Principles,  (New York, 2017), Simon & Schuster

What further reading should you do?

What is the purpose of your company?

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

Why are morals, values, and ethics important?

https://koorandassociates.org/values-morals-and-ethics/

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

How does your company create value?

https://koorandassociates.org/creating-business-value/what-is-value-growth/

What is corporate governance?

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

Tom Koor

What is different about family governance? V2

What is the purpose of this article?

  • Enable the family to discuss their overall governance structure, including the purpose of the family and family governance.
  • The article identifies potential components of family governance.
  • This article is focused on what to do, not how to do it. There is no advice on how to structure governance for your specific family situation.

You can download a PDF of this article from:  What is different about family governance V2

 What are the critical learnings in this article?

  • Wealth management is only a small part of family governance.
  • Purpose, legacy, values, morals, and ethics are the foundation of family governance.

What is family governance?

Family governance involves a set of relationships among: family members, family components such as family holding company, the family office, and other family ecosystem components.  Family governance also provides the structure through which: the shared values and objectives of the family are set, the objectives of the family components are set, and the means of attaining those objectives and monitoring performance are determined.

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

  • The focus is on relationships among different people and groups of people,
  • Setting values and objectives. People determine values and set objectives.  People have different interests and personal values and objectives.  The conflicts of interest need to be understood and managed to agree upon some shared values and objectives.
  • Determining how to achieve values and objectives. People have to develop plans which reflect what they will do to achieve the values and objectives.
  • Monitoring performance. The performance of people is monitored. Everyone needs to understand the personal consequences of not achieving values and objectives.

What is the purpose of governance?

Governance is the mechanism by which the purpose, values, and objectives of the family are achieved.

A critical challenge of family governance is understanding and managing the broad range of conflicts of interest.

What are the components comprising family governance?

#1 What is the purpose of the family?

Why does the family exist?  Is it to provide a certain lifestyle for certain family members?  Is to enable wealth transfer to future generations? What benefit to communities and society, if any, should the family provide?  What constraints or negative impact to communities and society should the family be committed to, if any?  The purpose of the family is intimately tied to the values, morals, and ethics of the family.

What is the definition of a family member? Who may, or may not, be a family member?  This can become complex, as people marry, divorce, have common-law relationship, have children outside of any formal relationship, as children are adopted, etc.

The greatest legacy for the founder(s) is to be able to see that memory, legacy and values will carry on through a family which remains joined. Family governance is critical to this.

#2 What is the purpose of the Family Constitution document?

The family constitution includes:

  • The values, morals, and ethics of the founder(s).
  • Other values.
  • What the family members can expect from the family businesses and investments.
  • Employment policy regarding family members in family businesses.
  • The overall family governance structure, e.g. family assembly, family council, etc.
  • Who is a family member and who attends the Family Assembly i.e. spouses and partner or only direct descendants. At what age do children start to attend and participate in the Family Assembly.

There can be additional policy documents, approved by the family council, but not part of the constitution e.g. investment policy, philanthropy guidelines.

The family constitution should be signed by each family member.

#3 What is the Family Council

  • It is the family council that helps bind the family across generations, by emotional bonding. Trusts and other legal documents alone will not be successful in keeping the family together.
  • The family council: engages the family; resolves issues (there can be angry and passionate disputes); celebrates the family; starts the education of future generations; and enables blunt discussion about the future and the policies embedded in the family constitution.
  • Articulating and gaining commitment to a common understanding of the legacy, shared vision, identity, values, and purpose.
  • Managing the transition from controlling founder(s) to subsequent generations. Ideally the new governance is in place in time for the founder(s) to see that it is working, and to be comfortable that the family will continue to be bound together in future.
  • Resolving family differences, which are often emotional and based on different perceptions.
  • The family council may enable a once-a-year family assembly where all members of the family come together. There, the family council provides an update as well as learns the views and preferences of the entire family. This can be an opportunity to build (or destroy) trust between the council and the family, as well as among the family.
  • The family council may represent different branches of the family.
  • The family council provides the legacy, emotional, and policy context for family philanthropic activities, including family foundation(s).
  • The family office provides the support required, and daily management of family council activities.

#4 What is the Family Investment Committee

  • The family investment committee recommends the investment policies which direct the investment activities of all the entities falling within the family governance structure. The investment policy is approved by the Family Council.
  • The investment policy is designed knowing that there can be swings in asset valuations and asset liquidity.
  • The investment policy also needs to consider the degree to which different family members depend upon income from the family assets.

#5 What is the purpose of a Family Holding Company (or companies)?

  • Having a wide range of family assets under a single governance structure, with a single board of directors.
  • Decisions regarding asset management reflect the overall direction of the family, rather than individual family members.
  • Enabling generational wealth transfer.

#6 What is the purpose of Family Trust?

  • Shielding assets from creditor claims.
  • Avoiding the probate process.
  • Avoiding legal challenges to asset dispersal.
  • Enabling generational wealth transfer.

#7 What is the purpose of the family foundation (or foundations)

  • It helps bind family members, providing continuity of family values, and illustrating there is more to the family than growing and sharing wealth.
  • Family members on the foundation board(s) can actively participate, and make a contribution to the family. The guidelines and policies guiding the foundation(s) are set by the family council.

#6 What is the purpose of a Family Bank (or other family controlled financial institutions?)

  • Provide finance and financial tools for family members and family controlled assets.

#8 What is the purpose of the family office

  • Supports the family members and family components with the day-to-day administration and management of the family’s affairs.
  • The services provided by a family office may include: asset management (this may include homes around the world, planes, yachts), cash management, risk management, financial planning, tax, accounting, travel arrangements, school arrangements, insurance, personal and property security, data security, vetting of employees and contractors, hostage & ransom negation, etc. The family office will depend upon third party service providers.

#9 What is the purpose of the Family Assembly?

  • Create emotional bonds between family members who may not otherwise meet frequently.
  • Provide non-binding feedback to the Family Council.
  • Provide training and education e.g. estate planning, taxes, etc.
  • Identify future leaders e.g. potential Family Council members.

What are the biggest challenges faced by family governance?

  • The family losing its understanding and commitment to long-term vision, identity, values, and purpose. This is a challenge as the family grows in size over the generations.  The family council and family office are key to helping new family members understand and commit to the non-financial legacy.
  • Gradually revising the shared vision, identity, values, and purpose over the generations. What was appropriate 50 years ago may not be appropriate 50 years from now.  Managing the desire for continuity with the need for change, which can result in passionate disagreements.  The legacy is not forgotten but actually evolves.
  • Family conflicts can easily arise, especially with multiple branches and multiple generations. A key issue can be the decisions around growing the family’s wealth vs distributing the family’s wealth.
  • The leaders find it hard to “let go”. The founder(s) may have built their wealth, based on being the decision-maker(s).  But to have a successful legacy, the founder(s) should transition to, and see, a new governance model in place.  The same challenges apply to the CEO of the family office (who should be a non-family member), as well as chair of the family council.  Thus, the succession planning for these two roles is critical and different from what one would see in traditional corporate governance.
  • The family wealth could suffer dilution or shrinkage due to high expenses, poor tax planning, or distributions to the current generation of family members. It can be difficult for individuals to defer immediate spending in order for wealth to be available for the next generation. It is key to build in the concept of “stewardship” – that the wealth is being passed onto the current generation, who must ensure that wealth is also passed onto the next generation.  The stewardship also applies to all the non-financial aspects which have been identified.
  • Entitlement is often an issue. Young family members may grow up with wealth and feel entitled as they become adults.  The family constitution should have principles around this.  As Warren Buffet said “Give each child enough money so that they can do anything, but not so much that they can do nothing”.  This approach to guidance as to how parents raise their children, can be a source of family conflict.
  • Intense and transparent communication with the family. If the family does not know what is happening, the family will not care. And without the emotional commitment arising from caring, the family will dissolve.
  • The subsequent generations attempt to run the family and business the same way the founder did (i.e. the family makes many investment and business decisions). The founder(s) have been successful this way.  The facts show that family businesses with majority of independent directors outperform the average public company (except in health care and financial services).  This can be a source of family conflict when subsequent generations believe they are just as competent, if not more competent, than the founder(s).

What are your next steps:

  • Determine which components of family governance apply to your situation, taking the amount of your wealth into consideration.
  • Perhaps all that is appropriate is have a will and powers of attorney and discussed those with your heirs and trustees. Even in this case, you’ll need to consider whether step-children and step-grandchildren should be heirs.
  • Perhaps there are more components of family governance you need to execute, but you’ll do it yourself.
  • Perhaps you need third parties to manage your wealth and the related financial management e.g. tax planning
  • Perhaps you need to execute all components of family governance, given the size of your wealth, as well as your legacy wishes. This will require third party help to create and manage your multi-generational governance structure.

What further reading should you do?

Why are values, morals, and ethics important?

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

Tom Koor

How will startups destroy you company?

What is the purpose of this article?

  • Help startup founders understand what’s necessary to destroy incumbents.
  • Help incumbent board of directors, CEO, C-Suite, and investors to understand what must change to both survive attacks by startups and to destroy established competitors.

You can download a PDF of this article from:  How will startups destroy your company

What are the critical learnings?

  • Founders have current and relevant knowledge and experience vs your company leaders having obsolete knowledge and experience.
  • Founders learn and unlearn faster than your company’s leaders.
  • Founders have a better ongoing understanding of customers (what their urgent problems and needs are, how they perceive value, how they make buying decisions, etc.) than your company’s leaders.
  • Founders make quicker decisions with better decision making processes than your company’s leaders.
  • Capital is unlimited these days. What is extremely scarce is leadership talent able to identify large numbers of customers with urgent problems they are willing and able to pay for.

Where is your company today?

  • Your company is a large, well established incumbent.
  • Your company is not in crisis.
  • Revenues and sales have been growing yearly and are forecast to continue to grow.
  • Your board of directors is well compensated.
  • Your C-Suite is well compensated.
  • Your board of directors and C-Suite agree that everything is going well and that there is no need to make any major changes to the board, the C-Suite, or the company’s business model.

How fast can your company end up in crisis?

  • Your company can go from double digit CAGR to negative CAGR within 3 years.1
  • Even country empires can fall within 5 years e.g. France in 1700, The Ottaman Empire in early 1900’s,. the Soviet Union in the late 1900s. 2
  • Blackberry was the cell phone leader in 2007. The iPhone was announced in 2007.  In 2008, the iPhone unit sales already exceeded Blackberry unit sales.

Will your company survive crisis?

At any given moment, 5-7% of incumbents are in free fall.  Free fall occurs when a mature incumbent comes under severe attack by new insurgents.  Only 10%-15% of companies ever pull out of free fall. 3

What’s the approach used by startups to attack your company?

Focus on creating value for C&U (Cash paying customers and users)

  • Develop deep and ongoing understanding of C&U problems and needs.
  • Develop deep and ongoing understanding of the value C&U obtain from addressing each component of their problem.
  • Focus on determining and identifying large numbers of customers with problems they are willing and able to address.
  • Constantly monitor whether or not customers and users perceive that they are obtaining value.
  • Understand why existing C&U are recommending or not recommending the startup.
  • Understand how C&U perceive the startup relative to your company.
  • Understand how C&U perceive the startup through the entire life item of the C&U relationship: marketing, sales, onboarding, product and service delivery, CU& support, and exiting.
  • Understand how and why customers decide to purchase or to exit. Understand how customers assess potential suppliers.

CEO and C-Suite Talent

  • Clear about the purpose of the startup – why does and must the startup exist. Understanding why now is the right time.
  • Each startup employee has a major impact on value creation.
  • Able to learn and unlearn quickly. E.g. The founders of the majority of unicorns (startups which achieved a $1billion valuation) had no previous domain experience.4 Roche paid $1.9 billion US for Flatiron Health, a cancer electronic records company. The Flatiron founders (Nad Turner and Zach Weinberg ) had no background in cancer. They came from advertising.5
  • Constantly experimenting with customers and creating new business models ahead of your company.
  • Able to fundamentally change direction based on solving urgent problems of customers willing and able to spend money. g. YouTube started as an online dating site, and Slack started out as an online gaming platform.6
  • Able to attract and create ongoing relationships with a broad range of talent: cash paying customers, employees, advisors, investors, etc.
  • Faster decision making than your company and better decision making processes.
  • Quickly re-allocating people and capital to what most impacts value creation.

The availability of unlimited capital and global talent.

  • Once a startup demonstrates that there are a large number of customers with urgent problems they are willing and able to pay for – there is unlimited global capital to fund rapid growth as long as the long term profitability of customers exceeds customer acquisition costs. Growth is not constrained by short-term profits.
  • The startup can from day one draw upon talent on a global basis. Even in the pre-COVID days, I was surprised that startups with a handful of staff were already operating globally with global staff.

The behaviour of everyone in the company

  • Everyone in your company can understand and relate to the purpose of the company. I love the story of when President Kennedy visited NASA and asked a janitor sweeping the floor why the janitor was working so late.  The janitor supposedly said: “I’m helping put a man on the moon.”
  • Leaders never criticize those who bring forth unpleasant realities.
  • People bring data, evidence, logic, and analysis to discussion.
  • Think and act with calm determination.
  • Leaders have a high question to answers ratio, challenging people and pushing for insight.
  • Team members unite behind a decision, even if they disagree with it.
  • Team members credit others for success yet also has the confidence and admiration of peers.
  • Team members argue and debate to find the best overall answers.

What are your next steps?

  • Assess and improve the ongoing process for your leaders to understand your customers and users.
  • Ensure your leaders are aware of global startups which could threaten your company.
  • Define the requirements for your leaders current, relevant knowledge, experience, skills, and networks. Assess your leaders relative to requirements and the competition. Begin this assess with the board of directors and C-Suite.

Footnotes

1 Chris Zook and Charles Allen, The founders mentality, 2016, Page 52

2 Chris Zook and Charles Allen, The founders mentality, 2016, Page 106

3 Chris Zook and Charles Allen, The founders mentality, 2016, Page 51

4 Ali Tamaseb, Super Founders, New York, New York , Hatchette Book Group, 2021, page 267

5 Ali Tamaseb, Super Founders, New York, New York , Hatchette Book Group, 2021, page 252

6 Ali Tamaseb, Super Founders, New York, New York , Hatchette Book Group, 2021, page 267

What further reading should you do?

Do you understand your customers?

https://koorandassociates.org/understanding-customers/do-you-understand-your-customers/

Why is learning critical for your company’s success?

https://koorandassociates.org/avoiding-business-failure/why-is-learning-critical-for-your-companys-success/

What are the three types of talent successful company’s require?

https://koorandassociates.org/creating-business-value/what-are-the-three-types-of-talent-successful-companies-require/

Is your company planning to fail?

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

How do you make strategic decisions?

https://koorandassociates.org/corporate-governance/how-do-you-make-strategic-decisions/

Tom Koor

Why is learning critical to your company’s success? V2

What it the purpose of this article?

Enable founders, CEOs, boards of directors, C-suite, and investors to discuss what people need to learn and how to learn. The focus is on your company’s value creation plan.  The concepts also apply to all other parts of your company.

You can download a PDF of this article from: Why is learning critical to your company’s success V2

 What are the critical learnings in this article?

  • Facts, assumptions, knowledge, experience, and skills are rapidly becoming out-of-date.
  • Making and executing decisions based on out-of-date facts, assumptions, knowledge, experience, and skills often leads to company failure – be it a startup or long-established global company.
  • The challenges are: leaders (e.g. board directors, C-Suite) not wanting to learn and/or unable to learn, determining what to unlearn and learn, as well as how to learn.

 Why focus on learning?

The inability to learn is the root cause of many companies failing. “The assumptions on which the organization has been built and is being run no longer fit reality.”1  This is true whether you are a pre-revenue startup or a long-established global company.

Why are assumptions critical?

All forecasts and plans are based on assumptions.  It is impossible to predict with 100% accuracy what will happen in the future and what the results will be from your decisions and actions.

It’s getting harder to make appropriate assumptions about the future because your company’s ecosystem will be getting more complex, the interactions between ecosystem members will be getting more complex, and changes will be occurring more rapidly to both your ecosystem members and the nature of their interactions.

Past results also often reflect assumptions rather than facts.  For example:

  • Did a good result occur due to good talent and good process OR was poor talent and poor process lucky?
  • Why didn’t customers buy your solution? Did you ask your customers?  Did they tell you the complete truthful explanation?
  • The interaction of your companies ecosystem members was complex. Hard to actually determine what the cause and effects were. Did your analysis reveal correlation rather than cause and effect? Correlation could lead some one to say “cancer causes smoking.”
  • Did you identify the past critical assumptions for success?

How fast is knowledge growing?

In 1982, futurist and inventor R. Buckminster Fuller estimated that up until 1900, human knowledge doubled approximately every century, but by 1945 it was doubling every 25 years. In 2020 it was doubling every 12-13 months.2

How do you know if your knowledge is out-of-date?3

Knowledge becomes out of date and decays.  The rate of decay varies by the specific area.  Just as the amount of knowledge is rapidly increasing, the amount of obsolete knowledge is rapidly increasing. Your decisions and actions must be based on the current situation, not on what existed a few years ago.  Your decisions should not be based on hopes, dreams, unvalidated assumptions, and missing or incorrect facts.

What is learning?

“Learning is about acquiring diverse, rare, and valuable chunks of knowledge through people, information, and experiences.”4  Learning must result in value.  You need both diverse and in-depth areas of learning, which will change over time.  Learning is far more than facts and data.  New mental models, frameworks, paradigm, and ways of thinking are all part of learning.

Are company learning efforts effective?

Most companies fail to help their employees learn.

  • 70% of employee report they do not have mastery of the skills needed to do their jobs. Only 25% of respondents believe training measurably improved performance. Only 12% of employees apply the new skills they learn in leadership and development programs to their jobs.5
  • 7% of the leaders polled by a UK business school think their companies develop global leaders effectively.6

What are the challenges to learning?

  • Knowing what to learn and what questions you need to answer. McKinsey states that the first step in strategy is asking “What are the right questions?”7  Are you focused on the right problem? 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.”
  • If people do not apply what they learn, they will forget 42% after 20 minutes, and 75% after 6 days. 8
  • You need to unlearn obsolete knowledge.9
  • Finding the relevant knowledge to be able to address your problems.
  • Being able to filter out the ever-increasing amount of mis-information.
  • Finding the right people with the appropriate knowledge.
  • Learning at the wrong time. You learn best when you have to learn what is needed immediately.
  • Learning the wrong things. Learning what has limited impact on performance and value creation.
  • You don’t have the ability or desire to learn new: mental models, paradigms, or areas of deep expertise.

What areas do you need to learn about?

The following are some of the areas:

  • Understanding the members of your company’s ecosystem. For example, customers: what are the cash paying customers urgent problems and needs for which they are willing and able to pay to solve? How may of these customers are there?
  • Understanding how the ecosystem members interact and impact each other. For example, pressure from various members can result in shareholders voting in board members who are focused on dealing with climate change.
  • What are possible future scenarios and trends, and how will they be different from the past?
  • What are the talent capabilities required to make decisions regarding the company’s competitively differentiated value creation plan?
  • What are the appropriate decision-making processes? Strategic decision making, tactical decision making, and day to day decision making processes are much different.

Some of what you need to learn includes: facts, knowledge, mental frameworks, paradigms, skills, processes, and analytical techniques.

How do you learn?

The key principle of learning is to learn and apply the learning at the time you need it.  This can be done in many ways:

  • Coaches and mentors helping you to address your problems and needs. These coaches and mentors could include colleagues and external advisors. You may have to pay your external advisors for timely access. The value of learning is reduced if you have to wait days or weeks to address your issues.
  • Formal education at which you work through your specific problems and needs.
  • Micro-courses (a few minutes to an hour) to immediately help when you have a problem or need.
  • Online help systems to provide you with immediate answers.
  • Reaching out to experts in your network, both paid and unpaid.

Use the Feynman Technique10

This technique was developed by Richard Feynman, Nobel Laurate Physicist.

  • Write down what you know about the problem or need. This includes facts and assumption.
  • Be able to teach it to a child. Use plain simple words, without acronyms and complex terminology. If you have difficulty in making this short and simple, then your have the opportunity to improve your understanding.
  • Identify what you don’t know. You may not know what you don’t know. Your research may involve contacting others as well as reading.
  • Organize what you’ve learned into a story with simple sentences and analogies. Tell the story of your learning out loud.

Richard Feynman’s example of how to explain what the universe is made of to grade 7,8,9 students. “All things are made of atoms – little particles that move around in perpetual motion, attracting each other when they are a little distance apart, but repelling upon being squeezed into each other”.

Write notes out by hand, not typing into a phone, tablet, or notebook.11

  • Understanding and the ability to apply learnings requires note taking. Take notes whenever you want to lean: e.g. meeting or interviewing people, attending seminars.
  • Research has shown that hand taken notes result in deeper understanding and improved ability to apply the learning, compared to typed notes. Typed notes are usually much longer than hand taken notes.
  • The research hypothesis is that hand taken notes require your brain to think about what you’re seeing and hearing, and to synthesis and process your learning.

What are your next steps?

You must develop a learning plan for your specific situation, be it yourself or your entire company.

  • Document the historical results of your company’s value creation plan?
  • Analyze the historical value creation results? Compare the historical results compare to the competition. List your findings.
  • Document the current talent capabilities and process for making decisions regarding your value creation plan.
  • Define the changes you need to make to the talent and process based on what you’ve learned from: your historical analysis and from others.
  • Create your learning plan for your decision makers. Who needs to learn what and how they will learn.
  • Establish a learning performance monitoring process to address questions such as: how well are individual leaders learning? What is the impact of their learning?

Footnotes:

1 Perter F. Drucker, “The Theory of the Business,” HBR.org, Harvard Business Review,1994 September-October issue, https://hbr.org/1994/09/the-theory-of-the-business

2 Michael Richey, PhD, Chief Learning Scientist, The Boing Company, “Future Systems of Learning and Knowledge Development: Human Capital, Sociotechnical Systems and the flow of Information“, SRI International,  https://www.sri.com/wp-content/uploads/2020/08/NSF-08.06-2020-Future-of-Learning.pdf

3 https://hbr.org/2012/11/be-forewarned-your-knowledge-i

4 Michael Simmons, “The No. 1 Lifelong Habit of Warren Buffett: The 5-Hour Rule”, Medium, https://medium.com/accelerated-intelligence/the-no-1-lifelong-habit-of-warren-buffett-the-5-hour-rule-57884dce03f3

5 Steve Glaveski , “Where companies go wrong with learning and development” Harvard Business Review Oct 2, 2019  https://hbr.org/2019/10/where-companies-go-wrong-with-learning-and-development

6 Pierre Gurdjian, Thomas Halbeisen, and Kevin Lane, Why leadership development programs fail McKinsey Quarterly Jan 1, 21014 https://www.mckinsey.com/featured-insights/leadership/why-leadership-development-programs-fail

7 Chris Bradley, Angus Dawson, and Antoine Montart, “Mastering the building blocks of strategy”, McKinsey, October 2013 article

https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/mastering-the-building-blocks-of-strategy

8 Steve Glaveski, “Where companies go wrong with learning and development”, Harvard Business Review Oct 2, 2019 https://hbr.org/2019/10/where-companies-go-wrong-with-learning-and-development

9 Mark Bonchek  , Why the problem with learning is unlearning. Harvard Business Review November 3, 2016 https://hbr.org/2016/11/why-the-problem-with-learning-is-unlearning)

10  Taylor Pipes, “Learning from the Feynman Technique”, Medium, August 4, 2017 https://medium.com/taking-note/learning-from-the-feynman-technique-5373014ad230

11 Cindi May, “A learning secret: don’t take notes with a laptop”, Scientific American , June 3, 2014 https://www.scientificamerican.com/article/a-learning-secret-don-t-take-notes-with-a-laptop/

What further reading should you do?

The seven essential elements of a life-long learning mindset

Jacqueline Brassey, Nick van Dam, and Katie Coates McKinsey Feb 19, 2019

https://www.mckinsey.com/business-functions/organization/our-insights/seven-essential-elements-of-a-lifelong-learning-mind-set

How do you grow your company’s value?

https://koorandassociates.org/creating-business-value/what-is-value-growth/

Is your company  planning to fail?

https://koorandassociates.org/avoiding-business-failure/

Tom Koor

How do you make strategic decisions?

What is the purpose of this article?

Enable founders, C-Suite, the board of directors, and investors to discuss the talent and process required to make strategic decisions.

You can download a PDF of this article from: How do you make strategic decisions

What are the critical learnings in this article?

  • Make sure you are addressing the right problem before starting the decision-making process.
  • Determine if the problem and decision are tactical vs strategic.
  • There are different types of strategic decisions with different approaches.

Strategic decision making is flawed in most organizations1

A McKinsey survey of executives regarding the quality of their strategic decisions revealed that:1

  • Only 28% thought good strategic decisions were frequent;
  • 12% thought good strategic decisions were infrequent; and
  • 60% thought bad strategic decisions were as frequent as good strategic decisions.

What has the greatest impact on company performance? McKinsey found that it was the quality of the decision-making process. The % of company performance improvement due to:

  • Quality of the decision-making process: 53%
  • Industry/company characteristics: (e.g. consumer tastes, implementation resource capability) 39%
  • Quality and detail of analysis: 8%

What is a strategic decision?

A strategic decision has major impact on the long-term value of the company.  It may even be a “Bet the company decision”. A strategic decision often has uncertainty in costs and benefits, a long-term future which may change, and a dependence on simultaneous outcomes.  Most company decisions are tactical, with limited impact on long-term value. The short-term  future is clear, costs and benefits are known.

What are some examples of a strategic decision?

The following is a partial list:

  • Nominating a board director. Board directors may have the greatest impact on long-term value, given that the appoint and terminate the CEO, approve strategies, plans, and policies. Directors have the ultimate accountability for company performance.
  • The appointment or termination of a CEO.
  • Selling the company.
  • Transforming the company.

Can you actually predict the future?

There are four types of forecasts.

  • There is a single path to a specific outcome.
  • There are a small number of specific scenarios.
  • There is a defined range of scenarios.
  • The unknown – it’s not possible to even define a range of future scenarios.

Is your strategic decision focused on the right problem?

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.” An adequate solution to the right problem is far better than a terrific solution to the wrong problem. Before looking for the best solution, make sure you’re focused on the right problem.

  • What is the basic need or opportunity? What is the scope of the problem?  Who in your company’s ecosystem is impacted?
  • What are the constraints: external (e.g. laws, public opinion, etc.) and internal (e.g. capabilities of your talent, including past experience, the ability to personally transform by learning fundamentally new skills and behaviours)?
  • What requirements must the solution meet?
  • What are the expected outcomes? What value is created or destroyed for the members of your company’s ecosystem?
  • Are the outcomes consistent with your company’s purpose, values, morals, and ethics?
  • How will you measure the outcomes?

 What are the four types of strategic decisions?

  • Proven historical success in your company. An example would be a company that has done dozens of acquisitions successfully and is very likely to make the right acquisition decision.
  • Proven historical success in other companies, but have not been made before in your company, or was made unsuccessfully. An example is an acquisition decision, which has been made countless times in countless companies.
  • A unique decision that has not occurred before externally or within your company, and unlikely to occur again. An example was the decision making regarding the Year 2000 software issue – never happened before and will never happen again. Your company must draw upon people with proven experience with developing solutions to unique problems. There are no: people with prior experience, processes, policies, etc. There is little value to your company in building a long-term team, documenting processes, etc.
  • A unique decision that has not occurred before externally or within your company, but likely to occur again within your company. Your company must draw upon people with proven experience with developing solutions to unique problems. There are no: people with prior experience, processes, policies, etc. Your company must: build a pool of talented people, document the processes and policies, etc.

What is the approach to each of the four types of strategic decision?

  • If your company has successfully addressed this problem in the past, what have you learned? Draw upon the people in your company with past experience and utilize documented processes, policies, etc.
  • If your company has tried and failed to successfully address this problem in the past what have you learned? Your company can draw upon external: people with experience, processes, policies, etc. If your company expects to make these decisions in future, you must: build a pool of talented people, document the processes and policies, etc. The challenge is that often the outcome is not successful, even with outside experts.
  • If the problem has never occurred before and never will occur again, what are the capabilities of the people needed to understand the problem and develop a solution?
  • If the problem has never occurred before but likely will occur again, what are the capabilities of the people needed to understand the problem and develop a solution? How will your company learn from this experience? How will your company retain the learnings, both in the experienced talent and documented knowledge?

Are your able to assess the effectiveness of past strategic decisions?

  • Was success due to the right process and people OR were the wrong people with the wrong process lucky?
  • Was failure due to the wrong process and people OR were the right people and process unlucky?

What has been the past impact of your strategic decisions?

Let’s use the example of board director selection and exiting for companies without a controlling CEO or shareholder.

  • What has been the impact on long-term value in the past 10 years?
  • How does this compare to other companies in your market place?
  • Is your company in the top quartile or bottom quartile?
  • If your are in the bottom quartile, determine whether your board director selection, development, exiting process need improvement of if the board decision making process needs improvement.

How do you know you are going to achieve benefits from your strategic decision?

  • I’ve heard countless consultants say “We developed a great strategy but the company was unable to implement.”
  • Will your company be able to successfully implement your strategic decision?
  • Has your company identified the talent, skills, experience, partnerships, capital, and other resources needed to achieve benefits?
  • If your company doesn’t have all the required resources, how likely is it that your company can acquire them?

Have you identified the decision making and implementation biases people have, and taken action to mitigate them?

Biases include:

  • Confirmation bias: people favour information that supports existing beliefs.
  • Conformity bias: people will go along with what the majority of the group believes.
  • Authority bias: people support what the authority figure believes. The most senior person may not be the authority figure.
  • Loss-aversion: Sticking to a decision, if the facts and assumptions have changed. People have an emotional attachment to a decision they have made.
  • etc.

What are your next steps?

  • Assemble the team to determine or validate what the problem is.
  • Assign one person whose sole focus is taking mitigating actions to address the biases of the decision-making team. This may be an external advisor, given that that bias identification and mitigation can lead to inter-personal challenges and require coaching of the decision-making team.
  • Determine whether you are making a strategic decision to address a strategic problem, or if this is tactical.
  • Identify what type of strategic decision you are making.
  • Review the facts and assumptions regarding the past effectiveness of the decision-making approach. What are the lessons learned in terms of what enables success and what leads to failure. Remember that luck often plays a role.
  • Identify the internal and external talent required for the strategic decision.
  • Review and revise the decision-making process. You may have to create a process if the decision has never before been inside or outside of you company.

Footnotes:

1 “The case for behavioural strategy”, McKinsey Quarterly 2010, Number 2

https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-case-for-behavioral-strategy

What further reading should you do?

Few companies make decisions leading to long-term value creation.

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

Successful companies need external talent, just like Olympic champions do.

https://koorandassociates.org/creating-business-value/what-are-the-three-types-of-talent-successful-companies-require/

Traditional strategic planning dooms companies to failure.

https://koorandassociates.org/strategy-and-strategic-planning/traditional-strategic-planning-dooms-companies-to-failure/

Tom Koor

How do you grow your company’s value? V3

What is the purpose of this article?

Enable a company’s leaders and investors to begin the discussion on how to prepare the company’s value creation plan.  This article outlines the principles that can be used to create and manage the discussion.  This article is not intended to be 100% comprehensive in both breadth and depth. The principles apply to any size company.

You can download a PDF of this article from: How do your grow your company’s value V3

What are the critical learnings in this article?

  • Growing you company’s value requires a competitively differentiated value creation plan, addressing the critical members of the company’s ecosystem e.g. customers, but not only customers.
  • Your company requires competitively differentiated talent in order to develop a competitively differentiated value creation plan. g. if the board of directors and C-Suite are less capable than the competitors’ boards and C-Suites, the company fails at value creation.

Who in the company’s ecosystem are you creating value for?

Ecosystem members could include:

  • Customers
  • Employees
  • Board of Directors
  • C-Suite
  • Shareholders
  • Suppliers and partners
  • The communities in which the company operates
  • Broader society

What is the value you enable your ecosystem members to achieve?

  • Value to customers might include: productivity, saving money, entertainment, improving health, and improving security.
  • Value to employees could include: compensation, enabling their life’s purpose, increasing their value to the current company as well as long-term market place value.

What value do ecosystem members provide your company?

  • Customers might provide: payment, recommending others to your company, and improving your company’s reputation.
  • The community may provide the company with the social license to actually operate. Natural resources companies in many countries now need to consult or even get the support of local communities

How do you share the value obtained by the company?

  • Sharing customer payments includes: deciding how much to charge customers, how much should employees be paid, (for example, should full time employees and full-time contractors be able to make a living income), how much should the board of directors be paid, how much should be allocated to dividends and share buy backs), how much should be spent on activities which improve local communities but generate no income, etc.

How do you decide on how to share the value?

  • The decision process may include consideration of: the company’s purpose, the company’s values, morals, and ethics, laws and regulations, expectations of shareholders and local communities.
  • The board of directors may make these decisions directly, through board approved policies, or delegate some of this decision making to the CEO.

How do you create value for ecosystem members?

  • The specific way your company creates value depends upon your company’s specific situation and characteristic.
  • The assets your company has available include: people (board of directors, C-Suite, employees, contractors, consultants, advisors), processes, technology, intellectual property, trade secrets, supplier/partner relationships, relationships with ecosystem members, and capital.  The reason I put capital last is because there is unlimited capital available for companies that are success at value creation.

What are your company’s challenges is achieving value growth?

Your company is facing competition, often from around the world.  Competitors are always working to be better than your company at:

  • Enabling customers to achieve value and perceive a superior value proposition.
  • Enabling talent (including the board of directors, C-Suite, employees, and contactors) to achieve value. This impacts how talent is attracted retained, developed, and exited.
  • Being productive or lower cost.
  • Attracting the best suppliers and partners.
  • Having better support from the ecosystem.

It can be difficult to assess the root causes of historical value growth.

  • Was success due to competitively differentiated talent and processes OR poor talent and processes but lucky?
  • Was failure due poor talent and processes OR competitively differentiated talent and processes but unlucky?

What are the two most important things to focus on to enable value growth?

  • Meeting the problems and needs of customers better than the competition. This is a combination of growing the number of customers and increasing the problems and needs which are being met. Without customers and without cash, the company does not exist.
  • The most important thing to focus on is the talent. The talent creates and executes the plans to achieve results. There are two groups of talent that must be competitively differentiated: the board of directors and the C-Suite. They company will fail if board the board of directors and C-Suite are less capable than the competition.

Your next steps to create your value creation plan.

In the next three months, you will understand the process to develop your value creation plan.  You’ll go from beginning to end, making whatever assumptions are needed to complete within three months.  Your focus will be on customers and talent – specifically the board of directors chair and the CEO.  In future, you’ll consider more members of your company’s ecosystem.

  • Document your company’s purpose and your company’s values, morals, and ethics. These will guide your decision making and execution.
  • Determine what your customers believe is the value they obtain from your company and how your company is competitively differentiated. Be specific regarding the problems and needs being addressed and the benefits they achieve. You’ll have metrics associated with then.
  • Define internal company customer metrics such as life-time profitability, and customer acquisition costs.
  • Outline future customer scenarios. Describe what is driving changes to: customer problems and needs, the number of customers willing and able to pay for your solution, what customers will be paying.
  • For each scenario, outline the changes and milestones for your company in the next five years in order to grow the total value customers achieve from you and thus grow your profits.
  • Determine the implications of the future scenarios on the required capabilities and characteristics of the board chair and CEO. This requires describing how the board chair and CEO enable company success in the above scenarios.
  • List the changes required to the board chair and CEO selection, assessment, development, and succession processes. This includes describing the type of coaches the board chair and CEO require.
  • Create the ongoing process to monitor, validate and update the value creation plan.
  • Determine which additional elements of the company’s ecosystem need to be included and which assumptions need to be validated as the value creation process evolves.

Further reading

There is overwhelming evidence that most companies are successfully executing their plans to fail and to not grow their value.

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

Do you understand your customers?

https://koorandassociates.org/understanding-customers/do-you-understand-your-customers/

How can the board of directors create value?

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