What are your values and morals? Survey Tool

The following is a survey tool designed to gain individual perspectives regarding values and morals.  This tool can be adapted to a specific company situation.  The tool must be used by a trusted third party in order to maximize the chances of getting valid and confidential input.

The tool can be used anywhere in the company, from front line staff to the board of directors, or controlling shareholders.

I have suggested two decision-making values (making more money and career progression) because I’ve perceived these as very important to some people.

Identify the values and morals based on your complete life i.e. 24 hours a day.  Note any differences between your complete life vs your work life.  The last two columns are solely regarding your work life.  In terms of importance, its fine if more than one value has the same importance (e.g. three values are #1)

The survey collects the following information

  • What are the company’s documented values and morals, if any?
  • Which values and morals are used by your leaders and colleagues?
  • Which values do you believe are moral?
  • What are the most important values you use throughout the year to make decisions and guide your actions? Personal financial success and career progression may be some of these.
  • What are the differences between your values vs what you perceive to be the values of your colleagues and leadership?

 

Value and related decision making, actions, behaviours Is this value, decision making, action or behavior a “moral” characteristic? Which values are most important to you? (#1, #2) Which do you perceive as most important to your work colleagues? Which do you perceive as most important to your management?
 

 

       
 

 

       
 

 

       
Making more money        
Career progression        

How do you find governance information?

 

You are in Ontario, Canada and looking for information about governance.  Where do you go?  The attached document provides a partial list of (mostly) non-profit governance organizations.  I exclude most for-profit organizations such as lawyers, accountants, etc.

The type of governance I focus on is the board of directors of a corporation and its relationship with its ecosystem (e.g. shareholders and members; the CEO; etc.).

This document does not recommend any individual governance advisors or consultants.  There are countless numbers of those.

My focus is Ontario.  I do consider Canadian and International organizations whose governance information and resources may be accessible and helpful to Ontario.

The Governance Resource Directory is a 37 page document.

Please contact me with any corrections, updates, or additions you’d like in the document.  This is a volunteer activity, so it may take some time before I can reflect your input.

Governance Resource Directory

Survey – what is the role of advisory boards?

Survey – what is the role of advisory boards?

I did a survey of people on my LinkedIn network who are on an advisory board or a CEO with an advisory board.  This survey was done because I was appointed chair of an advisory board and wanted to learn from others.  If you are an advisory board member or chair, please contact me – I’d like to include your learnings.

The following contains the email I sent out as well as the responses, which are anonymous.

The email I sent out

Hello XXX

I have a few questions regarding what sort of things you do for your advisory board (I saw your role on your profile). I ask because I’ve been appointed chair of an advisory board for a financial services firm and need to resurrect the board.  I need to learn some details about what other advisory boards do.

Thank you.

Tom

Possible actions:

  • Prepare for and attend regular face-to-face meetings?
  • Available for consultation between meetings?
  • Serve on advisory board committee?
  • Introduce potential clients to the firm?
  • Spend time with potential clients?
  • Introduce other executives to the firm?
  • Provide new business ideas and opportunities?
  • Promote the firm via your personal social media (twitter, website, blogs, Facebook, LinkedIn, etc.)?
  • Provide suggestions and advice regarding functional areas (sales, marketing, finance, HR, etc.)?
  • Have functional meetings outside of regular advisory board meetings?
  • Other????

The anonymous responses

Advisory Board #1 member

That’s right on the money It’s really an opportunity to bring strategic resources and thought leadership to an organization People on the boards usually have some expertise that you can draw on including Sale’s, marketing, finance and leadership. The chair is the quarterback to draw out that experience and knowledge.

Advisory Board #2 member

Happy to help you if I can.

As of this past month, I am Chair of the Program Advisory Council for the XXX program at the XXX School of Business. We basically work with the faculty and students to help support and improve the overall program and the various components within it.

I am also an XXX Advisor on the Board of Directors for the Canadian XXX Council I provide the “XXX” on that Board with a CIO perspective on the various issues that they deal with. In addition, I do serve on various Committees of the Board along with the other Board members. So, I am not sure that my experiences are directly compatible with your Advisory Board role question. However, along with my other two Board of Director roles, I would say the possible actions of #1, 2, 3, 6, 7 and 8 fit best with my general understanding of what needs to be done.

 Advisory Board #3 member

My role is for a small co (very) and it’s really ad hoc to have a halo support group with supplementary skills. If yours is bigger then the types of things you describe could be formalized and scheduled. You want to be mindful of people’s time. Maximize their value add at the time their skills/connections are most useful, minimize procedure…. my 2 cents Congrats and good luck!

Advisory Board #4 member

It can be whatever you define. At the minimum is for pick up the phone when the ceo needs and can go to everything else in your list. At this point my commitment is limited to picking up the phone as I am busy with my own startup. Hope this helps.

Advisory Board #5 CEO who had an advisory board

 Overview

  • The role depends upon the stage of the company and the growth/profitability issues a company faces.
  • In all cases, the network of the advisor is critical. At the very least, the network provides information to the advisor.  In some cases, the advisor may introduce: potential customers, potential investors, potential suppliers, potential new employees.

 Where do you find advisors?

  • They can be senior executives, towards the end of their career, who are somewhat bored and eager to work with other executives on some challenging issues.
  • The executives could come from: current customers, potential customers, other organizations in the company/customer ecosystem.
  • It is key that all advisors be “A” quality. If some are “B” or “C”, then the “A” quality will leave.

What is the role of the advisory board?

  • The advisors provide advice to the CEO and perhaps management.
  • The advisors must have skills, experience relevant to the challenges and issues the company will be facing in the next 2-3 years. g. if going public, then need CFO or another executive who led an IPO.
    1. Advisors should complement the knowledge, skills, and experience of the management team. e. The combination of the advisory board and management team should have the knowledge, skills, and experience relevant to the major challenges and opportunities arising in the next 2-3 years.
  • The board does not make decisions. Thus, requires less information than a decision making fiduciary board. A dashboard of key metrics is useful.
  • The role of the CEO and management is to listen and learn, not to make long presentations.
  • Set the expectations for advisors upfront. Consider a fixed two-year term.
  • If there are 6-8 advisors, there will be a 80% participation rate.
  • There should be no dominant personalities on the board, recognizing that the chair should enable the discussion.
  • The advisors must provide unvarnished input to the CEO and management.
  • Each board meeting and call can be a problem-solving discussion focused on the issues raised by the CEO. It’s not necessary for the advisors to agree on a single solution – what’s important is to maximize the input and learnings to the CEO and management.

What was the advisory board role when you were the CEO?

This was a company with a fiduciary board of directors.

  • The advisory board had a one-day meeting down south in the winter. Fly in day before for dinner. One day meeting, then fly out. The CEO and management attended.
  • Three quarterly advisory board conference calls of 1-2 hours each.
  • All meetings/calls were scheduled 1 month prior to fiduciary board meetings, to enable CEO to learn regarding key issues – almost like a dry run. The CEO also shared strategy and strategic plan with the advisors, to get their comments.
  • The CEO and management also made occasional phone calls to the advisors.
  • The advisors received material before meetings/calls. This enabled the meetings to focus on discussions and not review of material.
  • The advisory board chair was paid $25,000 per year. The advisors were paid $500 to $1,000 per-diem, with out-of-pocket travel costs covered.

Society’s trust in corporate leadership and political leadership is low.

  • Only 15% of Americans aged 18-29 believe “things in the nation are headed in the right direction”.
  • Only 1 country of 38 countries surveyed had a majority of people believing that representative democracy was the only way to govern a country. Only 44% of Canadians had this belief.  Sweden (at 52%) was the only country with a majority belief in democracy.
  • 80% of Canadian believe that “The elites who run our institutions are out of touch with regular people”.
  • 26% of Canadian believe a board of directors, 25% of Canadian believe a CEO.

You may click to download a one page PDF with more facts Low trust in leadership

You may contact me to obtain more detailed reports and more insight into the facts.

This document supports the discussion of  Why are values, morals, and ethics important?

 

U.S. Army Values

Many of your companies have statements regarding company values.  It would be interesting to compare your company’s values with the values of the U.S. Army.

Two question that arises immediately are:

  • What is the purpose of having company values?
  • What are corporate leadership and employees supposed to do with those statements of values?

Values – U.S. Army

The U.S. Army Values document supports the discussion of  Why are values, morals, and ethics important?

 

 

 

Why are values, morals, and ethics important?

Overview

  • What are values, morals, and ethics?
  • How are they used?
  • How do they impact company value growth and preservation?
  • What role should they play in hiring, promotions, and terminations?
  • How do you understand your company’s position?

What are values, morals, and ethics?

People often use these terms interchangeably. The concepts are different, which can result in confusing sets of expectations. e.g. many board of director’s mandates mention meeting “highest ethical standards”, but what does that actually mean? Many in corporate leadership1 believe ethics means compliance with laws, regulations, and company policies.  Many in the broader public associate ethics with morals and doing what is right.

To illustrate the confusion: for a few years Apple Computer only paid .005% income tax on billions of Euros of profit in Ireland.  The CEO stated that what Apple did was alright because all the laws were followed.  Many people felt that paying .005% income tax was “not the right thing to do.”  As it turned out, the European Commission ruled in August 2016 that Ireland’s tax agreement with Apple was illegal and that Apple owed billions of income tax.

The following are my definitions.  You should have your own definitions.  You cannot have a discussion about VME (values, morals, and ethics) if everyone has different definition of what the words.

Values: Values are the rules by which people make decisions about what they should or should not do. Values have different importances, 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 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.  Morals are based on a broader perspective than just the individual. You are judged by others as to whether or not your actions are moral or immoral.  You make a decision based on what you believe is “the right thing to do.” Morals reflect external observable actions and behaviours.

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

VME should also tie back to the purpose of the corporation.2 Is the sole purpose to make as much money as possible, constrained by laws, regulations, and company policies?

How are values, morals and ethics used?

Values and ethics are used by individuals when making decisions regarding their actions and behaviours.

Corporate leadership makes decisions and recommendations within an ecosystem3 where stakeholders and third parties have VME with major differences and conflicts.  Corporate leadership uses their VME to manage the conflicts of interests within corporate leadership, and with stakeholders and third parties.

Lawyers would point out the fiduciary duty e.g. in Canada to act in the best interest of the corporation (fiduciary duty varies by country).  But is that the right thing to do?  Professor Didier Cossin makes the following observation, “The doctrine of maximizing profitability may be used as justification for deceiving customers, polluting the environment, evading taxes, squeezing suppliers, and treating employees as commodities. Companies that operate in this way are not contributors to society. Instead, they are viewed as value extractors. Conscientious directors are able to distinguish good from bad and are more likely to act as stewards for safeguarding long-term, responsible value creation for the common good of humanity. When a company’s purpose is in conflict with the interests of society, board members need to take an ethical stand, exercise care, and make sensible decisions.”4

Documented ethics arise from interactions between the company, stakeholders5, and third parties6. Companies, stakeholders, and third parties all lobby the government to change laws and regulations to benefit what they believe is important (i.e. their values and morals).  How should corporate leadership deal with the conflict of interest regarding laws and regulations which provide value to society vs providing value to the corporation?  Some people believe laws and regulations exist to protect the interests of society as a whole or protect those who cannot protect themselves.  Some companies have Codes of Ethics written to minimize legal risks to corporate leadership.

When, if ever, do “the needs of the many outweigh the needs of the few”?7

 How do values, morals and ethics impact company value growth and preservation?

Many companies have formal ESG (Environment, Social, and Governance) policies.  Commonly these are focused on corporate or shareholder value enhancement.  In other words, ESG is good for growing long-term profits and value.

But what do you do when ESG could reduce long term profits?

Some companies consciously decided to take actions which they believe is better for the broader society but may result in lower profits.  E.g. Vancity Credit Union (in Vancouver, British Columbia) pays its workers a living wage and expects its suppliers to pay their workers a living wage.  On the other hand, Loblaws shareholders, in an early 2018 Annual General Meeting, voted not to pay workers a living wage.

The value from mergers and acquisitions can be threatened when companies have different sets of VME. It can be extremely hard to change the values and moral behaviour of people.  Even ensuring compliance with a new set of documented ethical standards may be a challenge.

VME impacts the type of employees who want to join and stay with your company.  I have met MBA graduates who deliberately decide not to pursue the highest paying jobs, but rather focus on the purpose of the company and its VME.

Shareholders trust the board of directors to make the right decisions.  The board, in turn, delegates the bulk of authority to the CEO.  The board and the CEO must be able to manage a broad range of conflicts of interest, especially personal.  E.g. with average CEO tenure below 4 years, it can be a challenge for the CEO to focus on the long-term, rather than maximizing the value of short-term bonuses and stock options.  Directors have been known to question a merger when their own director roles are in jeopardy.

If the board and CEO have different sets of VME, then the CEO’s decision making, and tone setting for the company, will not be aligned with the board.

Corporate leadership, through their actions and behaviours, communicates what the acceptable VME are. It is important that the leadership, when making difficult decisions, communicates how those decisions are related to VME. Children by the age of seven have already developed a set of values and morals.8 They observe their parents and learn from their parents.

The most difficult decisions made by corporate leadership (e.g. times of crisis, re-organization, major merger, major change in strategy, CEO appointment or termination, etc.) often reveal what the true VME are.  It’s easy to talk about VME when it does not take major personal courage to make a difficult decision.

What role should values, morals, and ethics play in hiring, promotions, and terminations?

Warren Buffet said “You’re looking for three things, generally, in a person: intelligence, energy, and integrity.  And if they don’t have the last one, don’t even bother with the first two”.

You can teach new skills and provide new experiences to corporate leadership.  It can be very hard to change values, morals, and ethics, especially with leaders who have many years of inappropriate VME.

What do you do if you are a SME (Small Medium Enterprise)?9

All of the issues discussed above apply.  It can be more complex in a private SME, with major or controlling shareholders who have different VMEs from the founders or CEO.  VME can be simpler in a startup, with everyone in the same physical space as the founder(s) and learning VME directly from the founder.

Conclusion

Value, morals, and ethics are some of the underlying factors for business success and business failure.

Your next steps

To enable discussion with your corporate leadership, download the following one page slide:

Why are values, morals, and ethics important?

The board and CEO must decide if VME is important enough to warrant time investment by corporate leadership.

What is your current situation?

  • The following next steps are a series of questions, including a survey tool. The intent is to enable corporate leadership to understand the perspectives of various individuals regarding VME.  Once there is that understanding, you’ll then need to decide actions to take, if any.
  • Does corporate leadership have an agreed upon purpose for the corporation? Is the sole purpose to make money?
  • What are the definitions of VME used by your corporate leadership? If your company has documented values, how are they used?  What are employees supposed to do with the values?  How do you know how the employees are using the values, if at all?
  • What are the differences, if any, between VME during “working hours” vs non-working hours?
  • Do you know what the employee point-of-view is?
  • Does all of corporate leadership have the same view?
  • What are the difference between the employee and corporate leadership points-of-view?
  • Read and discuss the values of the United States Army. What are the differences between your company values and morals relative to the U.S. Army.  The Army explicitly identifies morals – do your company values identify morals? The Army values guide individual conduct 24 hours a day. Are your VME intended to guide decision making, actions and behaviours only during working hours or 24 hours a day?  Some would argue that the company has no business in what an employee does in their non-working hours.
  • Look back over the past 5 years. How have VME guided critical board and CEO actions?  g. during crisis, making important one-time decisions such as appointing or terminating a CEO.
  • What questions, if any, are asked of director candidates and CEO candidates to assess their understanding and commitment to the company’s VME? Which VME, if any, are a perquisite for hiring? Which violations of VME result in immediate termination or hold back promotion?
  • Use the VME survey tool to gather input from different groups of people regarding their VME views. Corporate leadership needs to discuss the findings.  If there are differences, determine what actions need to be taken.

Footnotes

1 Corporate Leadership definition: Board of directors, CEO, advisory board and C-Suite.

2 Purpose of the corporation definition: What is the purpose of the corporation and why does it exist?

Is the only purpose of the corporation to create wealth?  Is there a higher purpose, either to a community or to society?  Or you may conclude the only purpose is to create wealth for shareholders and the C-Suite.  Peter Drucker said: “Because the purpose of business is to create a customer, the business enterprise has two–and only two–basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.”

3 Ecosystem definition: A business ecosystem is the network of people and organizations, including stakeholders and third parties directly and indirectly involved in the delivery of a specific product or service through both competition and cooperation. The idea is that each entity in the ecosystem affects 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.

4 “The four tiers of conflict of interest faced by boards of directors”, Professor Didier Cossin and Abraham Longze Lu, IMD Global Board Centre

5 Stakeholder definition: Stakeholders have an economic interest in the corporation: Shareholders, Non-equity capital, Customers/ users, Employees/ unions, Suppliers, partners

6 Third party definition: Politicians, Regulators, Third party standard setters (e.g. Proxy advisory firm, accountants, lawyers), Society

7 “The Wrath of Khan”, Dr. Spock, Star Trek

8 “Teaching young children morals”, Meri Wallace, Psychology Today, April 6, 2018

9 SME Definition: Industry Canada definitions (2018 May 9): Small business: < $5 million in revenue, < 100 employees; Medium business: between $5 million and $20 million in revenue, 100 to 499 employees.

Further reading

“Society’s trust in corporate leadership and political leadership is low”  koorandassociates.org  Society’s trust in corporate leadership and political leadership is low.

“Values – U.S. Army” koorandassociates.org Values – U.S. Army

“Why is trust critical for transformation” koorandassociates.org Why is trust critical for transformation success?

Tools

“What are your values and morals?”, koorandassocicates.org What are your values and morals? Survey Tool

What is different about private equity governance?

Overview

 Private equity governance is driven by value growth, not just compliance.  There’s a 100% focus on realizing major growth in shareholder value, either in the short or long-term. Transformation of the board or C-Suite may be required.  Shareholders make decisions which are often made by the board of a public company.  e.g. CEO appointment or termination. Change management principles are critical.

 Private equity governance has six major differences from many public companies

#1 Private equity governance is driven by realizable value growth, not just compliance.  The key is realizable value growth.  Private equity will exit at some point, thus value growth is based on what someone will be willing to pay for the shares.  Value growth is enabled by three sets of changes: 1) sales growth via acquisitions or organically expanding, such as geographic expansion; 2) improvements in the business model; 3) improvements in the management team.

#2 There’s a 100% focus on realizing major growth in shareholder value.  Decision-making is simple when the most important criteria is “How does this impact future shareholder value?”  Private equity has the mindset of “Who will buy?  Why will they buy? What maximizes the amount they will pay?”

#3 The time frame may be short or long-term.  Some private equity firms make “quick fixes” to enable a quick exit with significant increase in shareholder value.  Some private equity firms focus on long-term growth and planning for a strong future growth story to be able to attract buyers at exit time. Surveys show that many public company directors focus decision making on the short-term.  Many shareholders, including mutual funds, do not have a long-term horizon because they only hold the shares for the short-term.

#4 Transformation of the board or C-Suite may be required.  Change starts at the top.  Director and C-Suite changes may be made.  Many public company transformations fail because the transformation is focused on the bottom layers of the organization, while the top layers are unchanged.

#5 Shareholders make decisions which are often made by the board of a public company.  The decisions which have the greatest impact on realizable value are made by private equity:  when to sell the company, under what terms and conditions; setting the strategy and approving the strategic plan; appointing or terminating the CEO; and approving major business changes such as entering a new line of business or major changes to financial leverage.

Note that all the above decisions could be made by a public company board of directors.  It really comes down to the difference in the people with the authority to make decisions:  people on a typical public company board versus private equity decision makers.

#6 Change management principles are critical: the shareholders, board and C-Suite all have a sense of urgency to achieve financial results from a future exit;  the core group of shareholders, board and C-Suite have the commitment and authority to make all required changes; the core group and overall business have a commonly understood and clear vision of what the future success looks like; all business decisions are based on achieving the vision; there are short term wins; all hiring and promotion decisions as well as all new projects and initiatives help achieve the new vision; leadership development programs and succession plans help achieve the new vision; and  there is regular, perhaps weekly, communications among the shareholders, board and CEO.

 Conclusion

The future vision – there is common understanding among private equity, the board and management as what the future company will look like in order to maximize shareholder value, upon exit.  Everyone is committed to the strategy, the strategic plan which builds a business model maximizing value creation. This is all built on a thorough understanding of the customer and marketplace.

The above is perhaps the greatest difference from a public company board.  A McKinsey survey of company directors showed that many did not understand the strategy, how the company created value, nor the market place.

In order to achieve growth in value, private equity may make changes to: the board, the C-Suite, the strategy, and the strategic plan.  How often does the board of an under-performing public company make those same transformational changes?

 Your next steps

To enable discussion with your shareholders, board of directors, CEO, and advisory board, you should download the following one-page slide:

What is different about private equity governance?

What is public company governance?

Overview

How are your board of directors and governance competitively differentiated?

Compliance governance focuses on the documents and processes to meet legal and regulatory requirements, and other standards.

Value growth and preservation governance focuses on having the right people making decisions with a high impact on value growth and preservation.

The board should discuss the degree to which they are compliance-driven vs value growth and preservation-driven.

How are your board of directors and governance competitively differentiated?

 The for-profit public company is operating in a competitive environment.  Long-term success requires winning against the competition.

Do you need a board of directors and governance that are competitively differentiated?  Can you succeed with a poor board and poor governance?

How do you measure the competitive performance of your board and its governance?  Long-term financial performance of the corporation?  Reputation of the corporation?  How successfully the corporation deals with unexpected events and crises? Employee perception of the corporation, relative to others in the industry?

What are the required people, processes, and technology for the board of directors and governance, based on external perceptions, benchmarks, and targets for competitive differentiation?

Is your board and governance compliance driven?

Compliance is necessary but is insufficient to grow value in a competitive profit-making environment.

Legislation, regulations, and standards define much of what needs to be in formal governance documents e.g. by-laws, mandates and board approved policies.  Accounting standards define financial reporting.  Proxy advisory firms and institutional investors have points-of-view regarding board of directors and governance. Law firms and consultants all have their points-of-view as to what is best-practices governance.

If you are 100% compliant, does this mean you will increase your market share and be more profitable than your competition?

Is your board and governance value growth and preservation-driven?

Each board of directors should discuss and agree upon should be the board of directors and governance role (if any) in driving long-term value growth and preservation?

  • What is the board responsible for? g. ultimate responsibility for long term success of the corporation.
  • What is the definition of governance? g. the OECD definition, which is basically decision-making.
  • What is the purpose of governance? g. grow and preserve the value of the corporation?
  • Which board of directors’ values, ethics, behaviours, actions and decisions will have the greatest impact on the purpose of governance? e.g. appoint or terminate the CEO.

One easy test to determine what the board sees as its role in value growth is to read the mandate of the board of directors.  What does the mandate say about value growth and the board’s role in that? You may have decided to make your formal, published governance document reflect standard industry “boiler plate”.  If so, are there informal documents which describe the directors’ role and governance role in value growth?

Should you examine each director to assess their competitive differentiation relative to other directors in the industry?  What have been their individual accomplishments in terms of: long-term value growth, building and maintaining corporate reputations, dealing with unexpected events and crises, building strong reputations with employees, innovation, etc.

Your next steps

Two core questions remain:  do you need a competitively differentiated board; and what role, if any, does the board and governance have in long term-value growth?

To enable discussion with your board of directors, CEO, and advisory board, download the following one-page slide:

What is public company governance?

What is the corporate governance ecosystem?

Overview

Governance discussions should begin with a view of the ecosystem.  Corporate governance is focused on the board of directors of a corporation and the surrounding ecosystem.

The ecosystem has seven sets of components:

  • Laws, regulations, and standards;
  • Shareholders (or members if a non-profit);
  • “Customers”;
  • Competitors, suppliers and partners;
  • Trends (economy etc.);
  • The public; and

The board should discuss and come to a common understanding of what is governance.

Corporate governance is based on the fact the organization exists as a corporation (i.e. not a trust).

Governance ecosystem components

Governance resides within an ecosystem, where all the components are interacting with each other.  This is a more complex, and more accurate, perspective than merely viewing the components as “stakeholders” that only interact with the corporation.

There are seven components to the governance ecosystem.

#1 The laws, regulations and standards vary, depending upon the type of corporation

  • A “for-profit” corporation exists to make money.
  • A “not-for-profit” corporation exists for some purpose of benefit to society and is not intended to make a profit (and thus does not pay income tax). A subset of a not-for-profit is a “charity”, which is allowed to issue tax receipts.
  • A “crown corporation” exists to carry out government policy

#2 The owners of a corporation depend upon the type of corporation.

  • A “for-profit” has shareholders
  • A “not-for-profit” has members
  • A “crown” has the government as its shareholder

#3 The “customers” of a corporation can be viewed as those “who receive value” vs “those who pay for the value”.

  • A “for-profit” may have customers who pay for what they receive. The “for-profit” may have “users” who pay nothing and others who pay, such as “advertisers”.  Google is an example of the later “for-profit”

#4 Competitors, suppliers, and partners may exist, regardless of the type of corporation.

#5 Trends are affecting every component of the ecosystem. It is important to forecast or make assumptions about what the future trends will be, how they will impact the ecosystem and, finally, how the corporation will be impacted by the future ecosystem.  Trends may include: technology, demographics, economy, politics, regulation, etc.

#6 The public is part of the ecosystem. The public is comprised of many sub-groups, such as the Indigenous Peoples.  Many corporations are finding the “social license to operate” is mandatory for corporate success.  How a corporation conducts (or does not conduct) two-way communications impacts long term success.  The 2017 Edelman Trust Survey for Canada showed that only 36% of the public believed that companies listen to customers.  Perhaps that is why only 26% of the public saw boards of directors as credible and only 25% saw CEOs as credible.

#7 Advisors such as consultants, lawyers etc.  all have points-of-view as to what governance is and what corporations should do regarding governance.

Governance Components of the Corporation

The formal governance components of the corporation are based upon: legislation, regulations, third-party standards (e.g. securities regulators), corporation by-laws, corporation policies.

An informal, but crucial, part of governance that is often overlooked is the advisory board for the CEO.  This board has no decision-making power. Successful corporations often have an advisory board for the CEO.  This board can take many forms:

  • An independent group of advisors.
  • The corporations’ lawyers, accountants, etc.
  • An informal network of people the CEO connects with to discuss issues

What should each board of directors discuss and agree upon?

Compliance with laws, regulations and standards is necessary.  But compliance is not enough to drive value growth or enable success in competitive environments, especially for “for-profit” and “not-for-profit” corporations.

Each corporation exists within a unique ecosystem and for different reasons.  Each board of directors should discuss and agree upon:

  • What is the board responsible for? g. ultimate responsibility for long-term success of the corporation.
  • What is the definition of governance? g. the OECD definition, which is basically decision-making.
  • What is the purpose of governance? g. grow and preserve the value of the corporation?
  • Which board of directors’ values, ethics, behaviours, actions and decisions will have the greatest impact on the purpose of governance? e.g. appoint or terminate the CEO.

The above four questions set out the foundational requirements for the board of directors.  Based on these requirements, which people, processes, and technology are required for the board of directors?

One example illustrates the above: If the board agrees that appointing or terminating the CEO is the board decision with the greatest impact on long term value growth, then what values, ethics, skills, experience, and capabilities must each individual director have in order to make the appropriate vote.

Your next steps

To enable discussion with your board of directors, CEO, and advisory board, download the following one-page slide:

What is the corporate governance ecosystem?

What is the value of a for-profit advisory board?

What is the value of a for-profit advisory board? (See the bottom of this article for information sources.)

A for-profit advisory board is one which exist in companies who focus is on making a profit (i.e. not a charity advisory board).

Advisory boards have a major impact on sales and productivity, comparing the three years after an advisory board vs the three years before an advisory board:  sales growth of 67% vs 32% and productivity growth of 6% vs 3%.

What is an advisory board?

“A group of independent people who advise the CEO (or board of directors) on specific problems and meet on a regular basis.  Board has no voting authority and company has no legal obligation to follow advice.”

The board is independent.  Ideally the members have no other business arrangement with the company other than being on the advisory board.  If the members have other financial arrangement, their advice may be biased.

The advisory board is focused on specific problems. Given the metrics for the advisory board focus on financial results, the specific problems the advisory board deals with are those which have the greatest impact on long-term business value growth and preservation.

 How do you measure value?

There can be two sets of “hard metrics”, especially if it is possible to compare the times before and after the advisory board creation, as well as comparison of any improvements relative to industry benchmarks.

  • What is the impact on sales, earnings, and productivity?
  • What is the impact on key business milestones, growth, and innovation?

It can be difficult to establish a direct cause-and-effect relationship between the advisory board actions and business results.  A key indicator can be whether or not the advisory board impacted the decisions made by the CEO (or by the board of directors).

What are the major benefits of an advisory board, as perceived by companies with advisory boards?

Some of the benefits, according to business leaders (rating on a scale of 1 to 10):

  • Is an essential tool 8.2
  • Allows you to develop a broader vision 8.0
  • Improves strategic business choices 8.0
  • Forces management to look at the company 7.5
  • Challenges the company’s management team 7.5
  • Puts in place a better management structure 7.4
  • Brings rigour in to the company 7.2
  • Reassures shareholders and investors 7.2
  • Avoids costly mistakes 6.7

What is the impact of an advisory board, as perceived by companies with advisory boards?

85% believe that the advisory board had a significant impact on success.

Some of the impacts, according to the business leaders (rating on a scale of 1 to 10):

  • Company vision 7.7
  • Innovation 6.9
  • Risk management 6.8
  • Profitability 6.8
  • Survival 6.6
  • Sales growth 6.6
  • Hiring the best employees 6.2

Who has advisory boards?

  • 75% of SMEs (Small Medium Enterprises) had no board. 19% had board of directors, 3% had advisory board and board of directors (often the advisory board reported to the board of directors), 3% had only advisory board.
  • 11% of companies with more than 100 employees had advisory board.

How do you recruit advisory boards?

56% of the advisories come from the company’s network, 8% from external recruiting such as associations, only 3% from company’s financial institution or investors.

How do you organize an advisory board?

  • The written mandate must have the objectives, terms of reference and time commitment. Based on the objectives (e.g. business development, increase profits etc.) the requirements for individual advisors can be determined. Each advisor commits to reading preparatory documents, actively participating in the meetings and followup.  If business development is a role, then there can be performance bonuses based on business development results.
  • The mandate must be clear – are the advisors expected to act in the best interests of the owner(s) or the best interests of a broader set of stakeholders? For example, a recapitalization could provide capital to the owner but risk the long-term viability of the company.
  • It must be clear how the company and advisory board interact. An advisory board supporting the CEO should only permit informal contact between the CEO and advisory board chair.  Communications should be two-way so that the advisor can alert the company to important events or contacts. The advisory board may meet monthly, quarterly or as required.
  • The role of the chair is crucial, working with management, the board of directors, and the advisory board members.
  • The individual advisor roles must be clear, e.g. help develop business by opening doors, act as a company ambassador at social events, etc.
  • Individual advisors bring specialized experience, knowledge and contacts which the board of directors does not have. The advisor capabilities are not a replacement for capabilities which should be on the board of directors, but rather complement the board of directors.
  • Each advisor must also have a degree of passion and interest in the business.
  • The advisory board has simpler processes than a board of directors, does not require elections, term limits, committees, public disclosure, etc.

 Why don’t companies create advisory boards?

57% believe it is too much work.

The creation of an advisory board does create more work for management, and more fact-based data collection and analysis.  The question for the CEO, board of directors, and/or owners is whether or not the increase in profitability warrants this additional work.

What does an advisory board cost?

The cost is driven by the value the advisors can create as well as the cash available.

  • A small angel-investor-backed start-up may have a volunteer advisory board meeting on an adhoc basis or even once a year. Advisors will focus on survival issues, CEO coaching, and shifts in strategy.
  • A growing company with 4-6 advisors may provide $15,000/yr compensation for each advisor, with more for the chair – and the time commitment may range from 60 to 125 hours a year. The advisors will focus on the long-term direction and initiatives which have a major impact on value growth and preservation.

To enable discussion with your investors, board and management, download the following one-page slide:

What is the value of an an advisory board?

Two key information sources are available for free downloading:

  • “BDC Study Advisory Boards An untapped resource for business”   bdc.ca
  • Small Company Boards Questions for potential advisors and directors  cpacanada.ca