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/

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/

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/

What is corporate governance? V2

What is the purpose of this article?

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

This article does not provide legal advice.

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

 What are the critical learnings in this article?

The value growth of your company will be hindered if decisions and actions are based on conflicting perspectives regarding: the definition of corporate governance, the purpose of corporate governance, and the company’s values, morals, and ethics.

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.

The members of the corporation’s ecosystem make assumptions regarding the corporation’s purpose, values, morals, and ethics based upon observations of: the nature of their relationships, decisions made, and impact of the action plans.

What are the challenges of understanding corporate governance.

Discussion around governance is often very silo based and depends upon the specific background of the governance 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., a partnership or a joint venture.
  • Regulators often start with financial risk management guidelines.
  • Accountants often start with quality of financial statements.
  • Consultants have a variety of different points of view.
  • IT (Information Technology) governance advisors have an IT-centric perspective.
  • Private corporations may have unanimous shareholder agreements, which limit the decision making and accountability of the board of directors by reserving certain decisions for the shareholders.
  • Any corporation could have a voting trust comprised of some or all of the shareholders.
  • Financing agreements may have terms and conditions which constrain the company’s decision making and may even provide the financers with decision making authority in certain situations.
  • Values, morals, 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 disjoint picture of governance with limited shared understanding.

What is the purpose of the corporation?

Is the purpose of the corporation to maximize money for shareholders? Is the purpose to make as much profit as possible?

Larry Fink, in his 2018 letter to CEOs, said “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate…..Without a sense of purpose, no company, either public or private, can achieve its full potential…..And ultimately, that company will provide subpar returns to the investors.”2

 The purpose remains fixed while operating practices, cultural norms, strategies, tactics, processes, structures, and methods continually change in response to changing realities. 3

 What is the purpose of corporate governance?

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

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

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

What are your next steps

The following next steps should be time boxed in a short time frame by limiting scope and using assumptions when necessary.

  • Agree upon the potential value, if any, is of a common understanding of the company’s purpose and the purpose of corporate governance. If there is little or no value, don’t proceed.
  • Document the company’s current ecosystem members and relationships among them.
  • Document the company’s current process for major decision making.
  • Document the company’s current process for monitoring objectives, action plans, and ecosystem relationships.
  • Review the process for making major decisions and revise if necessary in order to make decisions regarding the purpose of corporate governance and the definition of corporate governance. For example, does the CEO make a single recommendation to the board of directors (or does the CEO provide alternatives) based upon analysis?
  • Ask your major shareholders, board of directors, and C-Suite how they would define corporate governance.
  • Ask your major shareholders, board of directors, C-Suite, employees, and other members of the corporation’s ecosystem how they perceive the corporation’s current purpose and its current values, morals, and ethics. Also ask them why they say that i.e. what is the perceived evidence.
  • Ask your major shareholders, board of directors, C-Suite, employees, and other members of the corporation’s ecosystem what changes, if any, should be made to the currently observed purpose and values, morals, and ethics. Also ask why these changes should be made and the impact of these changes.
  • Get the perspective of difference advisors as to the purpose of corporate governance and the definition of corporate governance.
  • Make the decisions regarding: the definition of corporate governance, the purpose of corporate governance, and the company’s values, morals, and ethics.
  • Identify the implications of the above decisions. The impact includes: talent management, value creation plans, board of directors and committee mandates, company policies, etc.

 Footnotes:

1 Based on “G20/OECD Principles of Corporate Governance”, 2015  I added the concept of third parties, https://www.oecd.org/daf/ca/Corporate-Governance-Principles-ENG.pdf

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

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

Further reading

What is the purpose of your company?

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

What are the three types of talent successful companies require?

What is the purpose of this article?

To enable founders, investors, the board of directors, and the C-suite to discuss what type of talent is needed to create and maintain world-leading companies.  I recognize that many companies do not strive to be a world leader or leader in their own country.

You can download a PDF of this article from: What are the three types of talent successful companies require

How do you read this article?

This article uses the analogy of athletes that strive to win at the Olympics.  They seek to be the best in the world.

What are the three types of talent associated with global winners?

  • The team members. These are the people who actually have win the race. They must beat the competition in order to stand on the podium.
  • The trainers. They use a structured process to improve specific aspects of each team members skills e.g. using videos of the team members show what specific changes need to be made. The trainers are deep experts in specific skills.
  • The coaches. They focus on the members minds and mental state. For example, if an athlete cannot visualize in their mind what it looks like as they cross the finish line, they likely will never win. “People cannot do things they cannot imagine”1.  The athletes must also cope with frequent failure. Few win every single competition.

What are the characteristics of the journey to become a global champion?

  • There are fundamental differences between the team, the trainers, and the coaches. g. great coaches are rarely great athletes and great athletes are rarely great coaches.
  • It takes time to become a global champion.
  • People must have the ability to transform themselves, to learn, unlearn, and constantly improve.
  • No one stays a global champion forever.
  • The coaches and trainers change over time. Global champions are supported by trainers and coaches that are also the best in the world.
  • People need to have the potential to reach the next level. People don’t immediately jump to become global champions.
  • Not everyone will become a global champion. It is very competitive. Not everyone has the potential.
  • Very tiny changes in results differentiate global champions from 4th It could be a few hundredths of a second for an athlete.
  • Trying very hard, by itself, is not enough to become a global champion.
  • Luck also plays a role e.g. a leading coach becomes available; a competitor suffers an injury.

What are the three types of talent in your company?

  • The team is comprised of all of the company’s full and part-time employees. This includes everyone from the board of directors to front line staff.  The company is constantly developing the talent of its employees.
  • The trainers include external experts. (e.g. lawyers, accountants, consultants who are industry and functional experts), educational organizations, etc.
  • The coaches go by many names e.g. coach, strategic advisor, mentor.

What are the implications for you and your company?

  • In today’s virtual global economy, you may be competing against global champions, even if you’re in a local market. E.g. Nigeria’s largest ride sharing company is Bolt, based in Estonia, with a valuation of $4.3 billion.
  • It’s hard to become a global champion if your talent (team, trainers, and coaches) is not among the best in the world.
  • Talent around the world is constantly improving. The talent that was successful 20 years ago loses to today’s talent.
  • Growing the value of your company requires growing the value of your talent.

What are your next steps?

  • What is your company’s value creation plan: for the next 1-3 years; for the next 4-6 years?
  • What are the three types of talent you will need in the future?
  • What changes in talent are needed?
  • What is your ongoing process for acquiring, retaining, developing, and exiting your team talent?
  • What is your ongoing process for assessing and changing your training and coaching talent?

 Footnotes

1 Peter Jensen (Olympic coach), Igniting the third factor, Toronto, Performance Coaching Inc., 2008, page 105

How can the shareholders agreement focus everyone on value? V2

What is the purpose of this article?

This article discusses how a shareholders agreement in a private company could help focus everyone on value creation and extraction.

I am not providing legal advice. Please consult a lawyer if you need legal advice on creating, reviewing, or updating a shareholders agreement or other legal governance documents.

You can download a PDF of this article from: How can the shareholders agreement focus everyone on value V2

What are two types of shareholders agreements

#1 USA (Unanimous Shareholder Agreement)

“The written agreement among all of the shareholders of the corporation can wholly or partly restrict the powers of the directors to manage, or supervise the management of the business and the affairs of the corporation”1

#2 Voting trust or pooling agreement

“Some shareholders of a corporation may choose to enter into voting arrangements such as voting trusts, pooling agreements or shareholder agreements under which they agree to vote their shares in a consistent manner.  Voting arrangement of this sort….do not have the effect of reducing the powers and liabilities of directors”1

What are some potential shareholder expectations regarding their investment?

  • limiting some decisions to only the shareholders e.g. hiring, termination, and compensation of the CEO; sale or wind down of the company; terms and conditions of future financing.
  • requiring shareholder approval of various documents: e.g. Board of directors mandate, board committee mandates, company policies, strategic plan, budget.
  • defining the process used by the shareholders to make the above decisions and approvals.
  • defining what information needs to be reported to shareholders at what time and in what format.
  • constraining the business e.g. limit geographical operations, which products and services may or may not be provided, pricing.
  • defining the process and constraints for shareholders to sell their equity.
  • defining the dispute resolution process. This process could result in a forced sale of shareholder equity.
  • describing the ways specific shareholders extract value from the company e.g. dividends; products and services; future sale of shareholder equity.
  • describing how shareholders will support the company e.g. introductions; financing guarantees.

The shareholders may have other expectations as well e.g. the purpose of the company

Some or all of the above expectations might be included in the USA.

How might the USA impact on value creation and value extraction?

I assume the company has a value creation plan and the shareholders have a value extraction plan.  The plans can be directed and constrained by shareholder expectations which are in the USA.

What are the risks of not documenting the shareholder expectations?

The short-term risk is a series of immediate disputes, which could harm both value creation and extraction.  For example, what if the shareholders don’t understand and agree that some shareholder will extract value through low-priced products and services while other shareholders extract value through dividends arising from high priced services to customers. How will management create and execute strategies when they are attempting to limit profits and grow profits at the exact same time?

The long-term risk is that shareholder expectations could change, especially when shareholders are companies.  The companies’ strategies for their investment could change and new executives representing the companies could have different expectations.

What are your next steps?

  • Shareholders should discuss and document their expectations regarding value creation and value extraction. Agreement and consensus are not always required.
  • The challenge is to figure out how to reconcile conflicting expectations. (e.g. one founding shareholder might want to stay with the company for the rest of her life.  Another founding shareholder might want to exit and sell her equity in 5 years for maximum value). This expectation setting process is carried out without lawyers and there is no legal document as an outcome.
  • Then lawyers review the shareholder expectations document. The lawyers point out potential issues and risks, which may result in further shareholder negotiations regarding expectations.  The shareholders decide among the legal options.
  • I assume that the USA will be one of the selected options. The lawyers must craft this.  The process of creating the legal USA may well results in more issues, requiring a negotiated update to the shareholder expectations document.
  • The lawyers will have to craft a dispute resolution process into the USA which is able to deal with future changes of shareholder expectations. Potential outcomes of dispute resolutions include: sale of the company, existing shareholders buying out some other shareholders.
  • The shareholder expectations document needs to reviewed on a regular basis and must be reviewed every time there is a potential new shareholder or change to an existing shareholder.

Footnotes

1 Barry Reiter, Bennett Jones LLP, Directors Duties in Canada, 5th edition, Page 95

Further reading

How can founders and investors create a shareholders agreement?

https://koorandassociates.org/corporate-governance/how-can-founders-and-investors-create-a-shareholders-agreement/

What is the purpose of your company?

Purpose of this article

This article enables the board of directors and C-Suite to begin the discussion regarding company purpose.

You may download a PDF of this article from: https://koorandassociates.files.wordpress.com/2021/03/what-is-the-purpose-of-your-company.pdf

What is purpose?

Purpose answers the question: Why does the company exist?

  • Without cash paying customers, the company does not exist. One aspect of purpose is to address the problems and needs of cash paying customers who are able to and choose to buy the company’s solution.
  • The company also impacts other stakeholders in its ecosystem which includes overall society. This may include providing value to them and extracting value from them. The stakeholders can also impact the value of the company. Some stakeholders may deny the company its social license to operate.
  • What society needs does the company meet?
  • Why should employees work for the company?

What are some perspectives regarding purpose?

  • Only 7% of Fortune 500 CEO’s believe their companies should mainly focus on making profits.1
  • The top two employee priorities in a McKinsey survey were: contributing to society and creating meaningful work. These priorities were the focus of only 21% and 11% of respective company purpose statements.1
  • Larry Fink, in his 2018 letter to CEOs, said “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate…..Without a sense of purpose, no company, either public or private, can achieve its full potential…..And ultimately, that company will provide subpar returns to the investors.”2
  • U.S. Business Roundtable in 1981 “Corporations have a responsibility, first of all, to make available to the public quality goods and services at fair prices, thereby earning a profit that attracts investment to continue and enhance the enterprise, provide jobs, and build the economy.” “Business and society have a symbiotic relationship: The long-term viability of the corporation depends upon its responsibility to the society of which it is a part. The well-being of society also depends upon profitable and responsible business enterprises.”4

What is the value of purpose

Boston Consulting Group analysis revealed that the majority of companies with high purpose scores achieved above median long-term total shareholder returns.  The majority of companies with low purpose scores achieved below median long-term shareholder returns.3

What are the challenges of gaining value from purpose?

  • Company purposes may be “…little more than catchy slogans and posers….so generic they could apply to just about any company….”4
  • There are different legal and regulatory requirements around the world. e.g. The UK Corporate Governance Code states: “To succeed in the long-term, directors and the companies they lead need to build and maintain successful relationships with a wide range of stakeholders. These relationships will be successful and enduring if they are based on respect, trust and mutual benefit.” “A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society.” “ The board should establish the company’s purpose, values and strategy……”
  • What to do the legal and regulatory requirements actually mean when it comes to decision making by the board of directors and officers? The Further Reading section below has the “duty of care of directors and officers” from the Canada Business Corporations Act.
  • There may be multiple purposes for a multi-national or multi-business unit companies.
  • In a private company, the shareholders agreement may restrict a number of key decisions to the shareholders rather than the board of directors or C-Suite.
  • Stakeholders may have different perceptions of what is value and how the company should allocate this value among stakeholders. It may not be possible to meet the expectations of all stakeholders.  There could be situations where a company decision or action does not satisfy any stakeholder.

How does a defined purpose enable a board of directors and C-Suite make difficult decisions?

The following are just a few examples of difficult decisions:

  • Should employees be paid a living wage e.g. live above the poverty line in their community?
  • What should the employer in a single company town do when the plant is not meeting profit objectives, and the middle aged work-force has no other options for employment?
  • How much employment should be shifted to lower paid off shore staff?
  • How much work should be done by lower cost contractors rather than employees?
  • How should the companies profit be allocated among: employees, C-Suite, and shareholders?
  • Should the company be lobbying the government to change laws to reduce the companies taxes or reduce environmental standards?
  • Should the company be structured to minimize or eliminate taxes?
  • etc.

Purpose is tied to values, morals, and ethics

The decision making and behaviour of the board of directors and C-Suite reflects both purpose and their values morals, and ethics.

 What are your next steps?

  • Identify the stakeholders. Interview and survey stakeholders to determine how they perceive the company’s purpose, values, morals, and ethics. How do stakeholders perceive the company relative to other companies?  How has this perception impacted stakeholder actions?
  • Collect the currently documented purpose, values, morals, and ethics. Where do the board of directors agree and disagree on these?
  • Analyze key historical decisions of the board and CEO to identify the degree to which they demonstrated purpose, values, morals, and ethics. How do the historical decisions and behaviours of the board support the purpose, values, and morals.
  • Create your own list of difficult decisions. Discuss how each board director and C-Suite member would make each decision.

Footnotes

1 Purpose: Shifting from why to how, McKinsey Quarterly, April 2020

https://www.mckinsey.com/business-functions/organization/our-insights/purpose-shifting-from-why-to-how

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

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

4 Purpose with the power to transform your organization, Boston Consulting Group, May 2017

https://www.bcg.com/en-ca/publications/2017/transformation-behavior-culture-purpose-power-transform-organization

5 UK Governance Code 2018

https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-Corporate-Governance-Code-FINAL.pdf

Further reading

 Canada Business Corporations Act – 2021 Jan 28 Duty of care of directors and officers

122 (1) Every director and officer of a corporation in exercising their powers and discharging their duties shall

(a) act honestly and in good faith with a view to the best interests of the corporation; and

(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

 Best interests of the corporation

(1.1) When acting with a view to the best interests of the corporation under paragraph (1)(a), the directors and officers of the corporation may consider, but are not limited to, the following factors:

(a) the interests of

(i) shareholders,

(ii) employees,

(iii) retirees and pensioners,

(iv) creditors,

(v) consumers, and

(vi) governments;

(b) the environment; and

(c) the long-term interests of the corporation.

Traditional strategic planning dooms companies to failure.

The purpose of this article is two-fold:

  • Help traditional companies succeed when faced with successfully growing startups.
  • Help startups succeed when competing against traditional companies.

You may download a PDF of this article from: Traditional strategic planning dooms companies to failure

What is traditional strategic planning?

Wikipedia (April 20, 2020 definition)

Strategic planning is an organization’s process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy.  Strategy has many definitions, but generally involves setting strategic goals, determining actions to achieve the goals, and mobilizing resources to execute the actions. A strategy describes how the ends (goals) will be achieved by the means (resources).

Advice from strategy advisors

The following are some example of the advice from advisors regarding strategic planning.  Remember, it is up to the boards of directors to approve the strategy and for the CEO and management team to execute.

McKinsey Article “How to Improve strategic planning”1

  • Start with the issues. g. ask CEOs what the issues are, ask CEOs what the 12-month priorities are, interview middle and lower management to identify the issues.
  • Bring together the right people.
  • Adapt planning cycles to the needs of each business.
  • Implement a strategic-performance-management system.
  • Integrate human-resources systems into the strategic plan.

BCG (Boston Consulting Group) article  “Your strategy process needs a strategy 2

There are five broad approaches to strategy:

  • Classical – analysis, planning, and execution
  • Adaptive – continual experimentation and scaling up of what works. General Electric was the example of a company adopting an adaptive strategy in 2011. I observed that GE’s adaptive strategy took 2011 revenues of  $146.5 billion and profits of $13.1 billion to 2018 revenues of $121.6 billion and a loss of $22.8 billion.
  • Visionary – use of imagination to create a game-changing product, service, or business model.
  • Shaping – collaboration in environments that are simultaneously unpredictable and malleable.
  • Renewal – execution of necessary radical changes when the environment is harsh or there has been a protracted mismatch between the firm’s strategy and its environment

My observations of traditional strategic plans

  • They are inwardly focused and driven by financial objectives set by the board.
  • Limited facts regarding how users/customers behave and perceive the company. However, there are lots of opinions and anecdotes.
  • Significant time is spent on vision and mission.
  • The bulk of the effort is on allocating financial resources.
  • The implicit assumption is that only need to improve what worked last year.

 What are the results of traditional strategic planning?

Few companies survive

Most public companies will not survive. 3

  • A Fortune 500 company will survive an average of 16 years.
  • The typical half-life of a North American public company is 10 years.
  • Global public companies with $250 million+ market cap have a typical half-life of 10 years.
  • 50% of all U.S. companies survive for 5 years.

 Few companies generate significant value.

  • McKinsey analyzed the world’s 2,393 largest corporations from 2010 to 2014. The top 20% generated 158% of the total economic profit (i.e. profit after cost of capital) created by those corporations.  This was an average economic profit of $1,426 million per year. The middle 60% generated little economic profit, an average of $47 million per year. The bottom 20% all generated negative economic profit, with an average loss of $670 million per year.4
  • Mark Leonard, CEO of Constellation Software, said in his final annual 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.” 5

What is the approach used by successfully growing startups?

  • Focus on a target market with a large number of potential users and cash paying customers. e.g. people doing Google searches are users, people paying for ads are customers.
  • Making assumptions regarding users/customers, based on research. These assumptions include: the number potential customers with urgent needs they are willing to pay for, the benefit to the users/customers if their needs are addressed, the degree to which the benefit is greater than the current situation and the benefit achieved from competitors, and the price the customers might be willing to pay.  Document your assumptions regarding the users/customers value propositions.6
  • The most critical part of understanding is interviewing potential users/customers. This may range from 100 to 300 potential user/customer interviews.  This also provides validation that the potential users/customers believe the solution provides more value that the competition. Note that interviewing is very different from sales calls.
  • Quickly create a minimal solution and get it into users/customer hands. Keep experimenting and changing the initial solution until there are a group of delighted users/customers. Then start charging customers. At this point the solution delivery and sales process are not cost-efficient. At this point the startup doing things that do not scale.
  • Continue experimenting in stages, expanding the solution to meet a larger subset of the target users/customers, and growing the number of paying customers. The solution is still not cost efficient.
  • Implement user/customer focused metrics. There is a never-ending process understanding user/customer needs and measuring user/customer delight relative to the competition. Remember what happened to Blackberry – the number of people who needed keyboards on their phones disappeared.
  • Determine when the solution has reached the point of being able to delight the full scope of target users/customers.
  • At this point, make the solution delivery and sales processes cost efficient and rapidly grow the company.
  • Keep exploring and experimenting with new types of users/customers, new distribution channels, and new partners.
  • Resource allocation decisions driven by fact-based metrics on what large numbers of users/customers perceive as valuable. I recall reading a quote from Google’s CFO, when meeting with a product team. “Why aren’t a billion people using this? If there are a billion people using this, why aren’t we making money?”
  • The sales process is designed based on understanding users/customers and enabling them to achieve value. Most traditional sales processes are designed to sell a solution.
  • The investors, board of directors, advisory board, coaches, and mentors have skills, experience, and networks which the founders and management team lack. The founders and management team have a passion to learn and change.

Why do successful startups doom companies with traditional strategic planning?

Successful startup have a combination of factors driving long-term success while traditional companies with traditional strategic planning have a combination of factors driving long-term failure.

  • They constantly document their key assumptions and validate or invalidate those assumptions. Tradition companies don’t document their key assumptions and don’t constantly validate them, which inevitably leads to crises . “The assumptions on which the company has been built and is being run no longer fit reality.”7
  • Their investment decisions start with and are focused on enabling customers to meet urgent needs. Traditional strategic planning often starts what the company’s opinions and needs are e.g. financial objectives, vision, mission, etc.
  • They have ongoing measurement of how users/customers are achieving value. Traditional strategic planning lacks these facts.
  • They have ongoing measurement of how users/customers perceive the startup relative to competition. Traditional strategic planning lacks these facts.
  • They explicitly assume is that user/customer needs and the competition are constantly changing. Traditional companies assume that change is limited.
  • They are constantly conducting experiments with users/customers, channels, and partners to learn what is valuable to change and what isn’t. Traditional strategic planning is focused on a small number of large projects. Traditional companies don’t have a culture that enable and supports the fact that most experiments fail.
  • They have a passionate curiosity and desire to learn.
  • They minimize what they have to invent by drawing upon proven solutions which don’t impact the user/customer perception of competitive value.
  • They have investors, board directors, advisors, and coaches which provide skills, experience, knowledge, and networks the startup lacks. Traditional companies have board directors who lack skills, experience, knowledge and networks that company management lacks or is weak in.

The external environment has also changed dramatically, enabling startups to take customers from traditional companies.

  • There is unlimited capital (e.g. at least $1.5 trillion of uninvested private equity capital) available to fund startups and rapidly growing early stage companies.
  • The investors passionately support the concept of experimentation and realize that most experiments will fail and most startups will fail – a very different mindset from traditional companies
  • The investors are focused on picking talented founders and putting in additional value-added talent to support the founders.
  • It fast, easy, and low cost to get the infrastructure needed to launch a company e.g. financial systems, CRM, billing, etc.
  • It’s become easier to connect with potential customers via social media.
  • Customer needs and expectations are rapidly changing.

Your next steps.

If you are a traditional company with a traditional strategic planning process.

Assess your strategic planning outcomes:

  • The trend for your economic profit generation.
  • Revenue and free cash flow growth.
  • Market share growth.
  • New channels, new partners, new types of users and customers.

How does your planning process compare to the above approach used by successfully scaling startups?

What are your customer metrics?

  • New customer value achievement leading indicator (e.g. for Slack it was 2,000 team messages sent within 60 days).
  • New customer success metric (e.g. % of new customers achieving new customer value achievement indicator within 60-90 days).
  • Net Promoter Score.
  • Customer churn.
  • Customer retention.
  • Customer acquisition costs.
  • Lifetime customer value.

What changes to your planning process do you need to start experimenting with and learning from?

If you are a startup

  • Follow the approach used by successfully growing startups.
  • Ensure that your investors, board of directors, advisory board, coaches, and mentors have skills, knowledge, and networks that you lack or are weak in.
  • Start your metrics with assumptions regarding your user/customer value achievement leading indicator and your user/customer success metrics.
  • Once you have revenue paying customers, start with customer churn and customer retention metrics.
  • Understand your customer acquisition costs and lifetime customer value. You’ll need this understanding to make your startup efficient and scalable later on.

Read the research supporting the value of experimentation in the Further Reading section below

  Footnotes

1 Renée Dye and Oliver Sibony, “How to improve strategic planning”, McKinsey Quarterly, August 2007, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/how-to-improve-strategic-planning

2 Martin Reeves, Julien Legrand, and Jack Fuller November 14, 2018 BCG website, https://www.bcg.com/en-ca/publications/2018/your-strategy-process-needs-a-strategy.aspx

3 “Corporate Longevity”, Credit Suisse, February 7, 2017

4 Chris Bradley, Martin Hirt, and Sven Smit, “Strategy to beat the odds”, McKinsey Quarterly February 2018, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/strategy-to-beat-the-odds

5 https://battleinvestmentgroup.com/effective-directors/

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

7 Peter Drucker, Harvard Business Review, November 2009, Page 90

Further reading – Research supporting the value of rapid learning and experimentation

The Marshmallow Challenge is to build the largest freestanding structure with a marshmallow on top and using 20 spaghetti sticks, one yard of tape, and one yard of string.  This is done in small teams.

  • MBA students build structures with an average height of 10 inches.
  • Lawyers average 15-inch structures.
  • CEOs average 22-inch structures.
  • Kindergarten students average 26-inch structures.

What’s the difference in behaviour between MBA students and kindergarten students?

MBA students

  • First sort through who is the leader.
  • Then identify and debate options.
  • Then agree upon a single plan.
  • Then build the structure.
  • The final step is putting the marshmallow on top.
  • Very often the structure collapses at this point.

Kindergarten students

  • No time spent determining who is the leader, identifying or debating options, or creating a plan.
  • Immediately start to build something, with the marshmallow on top.
  • Keep experimenting and learning, building multiple structures until the time is up.

Major incentives result in MBA students teams almost always building structures which collapse.

  • Incentives, without the right mindset, produce worse results.

Teams made up of CEOs and executive assistants did better than kindergarten students.

  • Achieved about 30 inches.
  • The researchers have the hypothesis that the addition of a very different skill set: facilitation and process, enabled the CEOs to perform better than they could with only fellow CEOs.

My observations

  • The passion to begin learning and experimenting as quickly as possible is critical when the team is doing something that has not be done before.
  • Understand the range of skills needed. That’s why teams of CEOs and admin assistants performed much better than CEOs alone.
  • Understand when your startup is doing something new and unknown vs something that has been done before with a base of proven knowledge. In the Marshmallow Challenge teams of architects and structural engineers did the best of all because they knew how to design weight bearing structures. Your startup must know what skills, experience, knowledge and networks are needed in management, investors, board of directors, advisors and coaches.  Your startup needs to know where the gaps are, which are critical gaps, and how to close those gaps.  Your startup will also draw upon a broad range of existing proven solutions – not everything needs to ab an innovation.

https://www.forbes.com/sites/nathanfurr/2011/04/27/why-kindergartners-make-better-entrepreneurs-than-mbas-and-how-to-fix-it/#5047f0871394

https://hbr.org/2014/12/innovation-leadership-lessons-from-the-marshmallow-challenge

Tom Wujec’s TED Talk regarding findings from the Marshmallow Challenge

https://www.youtube.com/watch?v=H0_yKBitO8M

What are the decision-making challenges faced by directors? (V2)

Directors face five challenges in making decisions:

#1 Have the directors agreed upon which decisions are most critical, and agreed upon the criteria for selecting those decisions?

  • Is the criterion: what has the greatest impact on long-term value creation and preservation?
  • Are the critical decisions: setting the strategy; hiring/terminating CEO; approving CEOs strategic implementation plan; monitoring results of executing the CEOs plan?

#2 Do the directors understand the company?

A McKinsey survey of directors1 revealed:

  • 34% agreed their board fully comprehended strategies.
  • 22% said boards completely aware of how firms created value.
  • 16% said boards had strong understanding of industry dynamics.

#3 Does each individual director have the qualifications to make each critical decision?

  • What have been each director’s past experiences in making each critical decision?
  • What is each director’s relevant knowledge and experience regarding the industry, company strategy, and how the company creates value?
  • What have been the past outcomes of each director assessing and selecting advisors?
  • What are the value, morals, and ethics of each director?
  • Do the directors have the interest, ability, and commitment to understand the company and its industry?

#4 Is there an effective board decision-making process?

  • A McKinsey survey of executives2 revealed 28% of executives thought good strategic decisions were frequent.
  • Critical decisions are complex emotional, social, and political processes. Do the directors understand the typical flaws, and take mitigating actions?

#5 The director selection process is almost always flawed.

  • Directors are ultimately responsible for the long-term success of the corporation.3
  • The vast majority of public company directors fail to achieve long-term success.

Mark Leonard, CEO of Constellation Software, in his final annual CEO letter said:  “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.”    http://www.csisoftware.com/wp-content/uploads/2018/04/Presidents-Letter-April-2018-Final.pdf

Few major companies survive for the long-term:

  • 16% of major companies in 1962 survived until 1998.4
  • Of the 500 companies in the S&P 500 in 1957, only 74 remained on the list in 1997. Only 12 of those 74 outperformed the 1957-1997 S&P index.  An investor who put money into the survivors would have done worse than someone who invested only in the index.4
  • 31% of Fortune 500 companies went bankrupt or were acquired from 1995 to 2004.5
  • 52% of Fortune 500 companies went bankrupt, were acquired, or disappeared between 2000-2015.6
  • 50% of the S&P 500 will not be on the list in 10 years’ time.7
  • Three-quarters of VC-backed firms do not even return all of the investors’ capital. Over 95% do not meet initial projections.8

Why are there so few qualified directors?

The background of many directors does not qualify them to make board-level decisions in today’s rapidly changing world.

  • Many directors are business executive who were not CEOs or members of the C-suite. They were successful because they rose through the ranks of existing companies.  They never had to make company-wide decisions.
  • Some directors are consultants, academics, and others who have never had major P&L or operational accountability.
  • I wonder about why directors who are not qualified to occupy C-suite positions are qualified to make decisions such as whether to: hire a CEO or fire a CEO; sell the company; approve or reject the CEO’s strategy or budget, etc.

Your next steps:

  • To enable discussion with your board and management, download the following one-page PDF.

What are the decision-making challenges faced by directors?

  • Does each director state the board is ultimately responsible for the long-term success of the company? If the board does not agree on this, proceed no further.
  • Document which are the critical board decisions.
  • Define the value creation matrix: what skills, experience, values, morals, and ethics are required to make each of those decisions.
  • Assess each director and remove the unqualified directors immediately, or at the next annual general meeting.
  • Assess future director candidates using the value creation matrix.

This process must be repeated yearly.  In today’s fast-changing world, yesterday’s solutions are not always appropriate for tomorrow’s problems.  Remember: innovation, agility, and transformation start at the top – at the board.

 Footnotes

1 “Corporate Boards need a facelift”, Eric Kutcher, McKinsey, May 04, 2018

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

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

4 “Creative Destruction – why companies that are built to last, underperform the market”, by Richard Foster & Sarah Kaplan

5 “Unstoppable” by Chris Zook, 2007, page 7

6 Accenture 2016

7 “2018 Longevity Report” by Innosight Consulting

8  Deborah Gage, “The venture capital secret: 3 out of 4 start-ups fail”, Wall Street Journal,  https://www.wsj.com/articles/SB10000872396390443720204578004980476429190, September 19, 2012

How to start an advisory board

1      What is the purpose of this document?

2      What is the value of an advisory board?

2.1       What is an advisory board?

2.2       How is an advisory board different from a group of advisors?

2.3       How do you measure advisory board value?

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

2.5       Who has advisory boards?

2.6       How do you recruit advisory boards?

2.7       How do you organize an advisory board?

3      Do you have the capability for an advisory board?

3.1       The CEO has time available

3.2       The CEO has a plan with milestones

3.3       The CEO has a cash flow forecast, budget, and tracking process.

4      How do you get people to serve on your advisory board?

4.1       Document the initial set of mutual expectations

4.2       Send a formal invitation letter to the advisor candidate.

4.3       Invite the best people.

4.4       Advisors may change over time.

5      Sample advisory board invitation letter.

5.1       Your company letterhead.

5.2       Start out with your ask.

5.3       Pitch What are the benefits to this advisory board member?

5.4       Overview of the Company – 1-2 sentences per topic area.

5.5       Advisory board’s mandate and focus – What are the advisory board’s goals?)

5.6       Responsibilities of board members.

5.7       (Close and thank you)

6      Follow Up Your Board Invitation Letter.

7      First meeting of the advisory board.

7.1       Plan the First Meeting Agenda Around a Problem or Discussion Topic.

7.2       Gather the Relevant Background Material

7.3       Create the Meeting Agenda.

7.4       Make Arrangements for Recording the Meeting Minutes

7.5       Provide refreshments

7.6       What might an agenda look like?

7.7       Begin Future Meetings With a Review of Previous Minutes

8      Footnotes

 

1       What is the purpose of this document?

This document outlines how to create an advisory board and the agenda for the first meeting.  This document must be adapted and revised for you specific situation.

The audience for this document is CEOs and founder

 

2       What is the value of an 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 23% and productivity growth of 6% vs 3%.1

2.1      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.  The advisory board has no voting authority and company has no legal obligation to follow advice.

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

2.2      How is an advisory board different from a group of advisors?

Every CEO/Founder has informal advisors.  The advisors know little or nothing about the company, answer very specific pointed questions and devote little time to the company. The engagement with the CEO/Founder is sporadic and ad-doc.

An advisory board has scheduled involvement with the CEO/Founder.  The advisors have an understanding of the company based upon their ongoing involvement as well as the information provided to them by the CEO/Founder.  The advisors have made a long-term commitment of time to the company, a few hours a month or more.

2.3      How do you measure advisory board 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 advice and business results.  A key indicator can be whether or not the advisory board impacts the decisions made by the CEO (or by the board of directors).

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

85% of business leaders believe that the advisory board had a significant impact on success.2

Some of the benefits, according to business leaders (rating on a scale of 1 to 10):3

  • 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 are some of the impacts of an advisory board, according to the business leaders (on a scale of 1 to 10):4

  • 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

2.5      Who has advisory boards?

  • 75% of SMEs (Small Medium Enterprises)5 have no board. 19% have a board of directors only. 6% have an advisory board (Half of those also have a board of directors)6
  • 11% of companies with more than 100 employees have an advisory board.7

2.6      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.8

2.7      How do you organize an advisory board?

  • You need to determine the skills and experience required on your advisory board. Look at your 2-5 year business forecast.  What are the opportunities and challenges over that time-horizon?  What is the talent (skills and experience) you need?  What are the talent gaps when you look at the management team (and board of directors) What is the talent you need on your advisory board?
  • The written advisory board mandate must have the objectives, terms of reference and time commitment. Each advisor commits to reading preparatory documents, actively participating in the meetings and follow-up.  The mandate also addresses advisor out-of-pocket expenses and compensation (if any). If business development is a role, then there can be performance bonuses based on business development results.  The mandate may be the set of mutual expectations i.e. expectations of the CEO/Founder and of the advisors.
  • 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. (e.g. meetings only with the CEO or including C-Suite members?  Are all questions (from management and advisors) funneled through the CEO?  The advisory board may meet weekly, monthly, quarterly as well as urgent ad-hoc meetings.
  • Is there an advisory board chair? If so, 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 or management, but rather be complementary.
  • 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.

3       Do you have the capability for an advisory board?

You have three pre-requisites for your creation of an advisory board.  Much of the focus is on having the documented thinking of the CEO/Founder and documented company plans and results.  If there are no documents, then its too early for an advisory board.  The CEO may have advisors with whom she has an ad-hoc relationship.

3.1      The CEO has time available

The CEO has the time to prepare for meetings, have the meetings, and follow-up from the meetings.  This implies that there are enough team members to allow the CEO to delegate some of her work.  If the company consists of one sole founder, then it’s too early for an advisory board.

3.2      The CEO has a plan with milestones.

The CEO must have a documented set of future milestones.  There is a least an assumption of the company’s future path.  If the CEO has not documented what the company will be achieving in future, it’s to early for an advisory board.  The role of an advisor is not to document where the company is going.

The advisor will help the CEO think through how to achieve critical milestones.

3.3      The CEO has a cash flow forecast, budget, and tracking process.

The cash flow forecast, budget, and tracking process is directly tied to the set of milestones.  There must be a set of documented assumptions as to what resources are required to achieve milestones.  If the CEO has no documented set of assumptions as to the cash required to achieve critical milestones, it’s too early for an advisory board

4       How do you get people to serve on your advisory board?

When talking with prospective members, focus on two things:

  • The impact the advisor will have on the CEO/founders and on the company. People won’t want to be an advisor if they are asked for advice on minor issues and if the CEO/Founder regularly ignores most of the advice.
  • The benefits to the advisor of being on an advisory board, which could include:
    1. Learning new ideas and getting new perspectives.
    2. Expanding their network.
    3. The personal satisfaction of helping a CEO/founder and company succeed.
  • Compensation is not a reason people join an advisory board. If the advisor puts in significant time or when the company goes beyond the startup stage, then compensation is warranted.

Advisors come from the CEO/founders network.  The network may also suggest advisors.

4.1      Document the initial set of mutual expectations

Document the initial set of mutual expectations:

  • What expectations the founder(s) have of the advisory board and of each advisor. E.g.
    1. Hours per month?
    2. Meetings during the business day? During evening? During weekend?
    3. In person meetings or via Skype?
    4. Reading material before each meeting?
    5. Any follow-up from meetings?
    6. Responding to emails and phone calls between meetings?
    7. Investing in the company?
    8. Doing introductions: to potential customers, partners, suppliers, employees?
    9. Represent the company at social events?
    10. Attend meetings with founders?
    11. Attend meetings with potential customers, suppliers, partners, employees?
    12. Attend internal project meetings?
    13. Review and comment on material produced by the company?
  • What expectation each advisor has of the founders.
  • Expectations may be different for each individual advisor

4.2      Send a formal invitation letter to the advisor candidate

The letter needs to include:

  • A brief overview of the company
  • The advisory board’s mandate and role.
  • the responsibility of the advisors and the time commitment expected (how often the board will meet and for how long)
  • Why you think the person would be a great addition
  • The specific contribution the person would make.

4.3      Invite the best people

You have identified the capabilities you need on your advisory board.  Invite the best people you know.  If they are not part of your network, ask someone in your network for an introduction.  You can also cold call them.

4.4      Advisors may change over time

The advisors you have when you are pre-seed with no satisfied customers and no revenue may be different from the advisors you have when you are a global unicorn about to do an IPO

5       Sample advisory board invitation letter

The following draft invitation letter must be sent after you’ve connected with a prospective advisor and have drafted a draft mutual set of expectations.  Note that there is a fixed time frame for the appointment.  The CEO/founder may at any time for any reason end the appointment of the advisor to the advisory board. The letter must be customized for each advisor.

5.1      Your company letterhead

(Prospective Board Member’s Name and Address)

(Date)

Dear (Board Member’s Name):

5.2      Start out with your ask

I’m pleased to invite you to become a member of the FastGrowth Business Advisory for 20__ – __.

5.3      Pitch What are the benefits to this advisory board member?


FastGrowth is one of the AR (Augmented Reality) industry leaders. You have the opportunity to shape the global growth of this industry and literally change how humanity views the world.

FastGrowth is entering the next stage of its business evolution. Growing from 10 to 50 employees in the next 24 months requires reinvention of every aspect of the business: talent, technology, and processes.

Your experience and insight would be the perfect person to help me think through the critical changes and deal with the issues.

I will cover nominal expenses you incur from attending advisory board meetings such as parking.  I don’t expect you to fly in for the meetings.

5.4      Overview of the Company – 1-2 sentences per topic area

FastGrowth was founded in 2014. Currently,

Target customers are …….

Their problems are ….

Our solution is ……….

In 24 months,

Target customers will be ………….

Their problems will be ………….

Our solution will be ……………

 

5.5      Advisory board’s mandate and focus – What are the advisory board’s goals?)

The main purpose of FastGrowth’s Business Advisory Board is to provide management advice about the direction the company should follow. Specific goals for this year are how the company can get ready for Series B funding and manage the deployment of those funds.

5.6      Responsibilities of board members

The Board will have an initial face-to-face 2-hour meeting.  Subsequently, there will be a monthly 1-hour conference call, with a 2-hour face-to-face meeting quarterly.  Your time commitment is approximately 5 hours per month.  You will also need to sign a confidentiality agreement.

5.7      (Close and thank you)

Thank you for considering being a part of FastGrowth’s Advisory Board. I will call you within 7 days. I’m available to discuss any questions you may have. You can reach me by phone at (phone number) or via email at (email address).

Sincerely,

(Your signature)

Name
Title

 

6       Follow Up Your Board Invitation Letter

Follow up your letter with a phone call. If your prospective advisory board member does not have time to talk with you, they will not have time to be on your board.

7       First meeting of the advisory board

7.1      Plan the First Meeting Agenda Around a Problem or Discussion Topic

Your first meeting, therefore, like all your Advisory Board meetings, needs to be planned around a question or problem. You might find it easiest to ​state the problem as a goal. For instance, “We want to raised Series B funds in 9 months time. How might we do this?” Or there may be a general topic “How can we cut our business costs?”

7.2      Gather the Relevant Background Materials

  • Once you’ve decided on the discussion topic, it’s time to gather the materials that your Advisory Board members will need to read before the meeting.
  • Because this is the first Advisory Board meeting, you should include a business plan and any other documents pertinent to the discussion topic, such as charts, graphs and fact sheets illustrating the background of the discussion topic.
  • You should send a copy of these documents to all Advisory Board members one weeks in advance, along with a copy of the agenda. You can distribute material by providing the Advisory Board with access to an online data room.  Later stage companies should use a Board of Directors software packing to manage information distribution.

7.3      Create the Meeting Agenda

  • Below is an example of a first meeting agenda (with comments for running the meeting efficiently) that you need to revised and adopt for your first Advisory Board meeting.
  • Each agenda item is timed; building a time schedule into your meeting and sticking to it ensures that your meeting doesn’t get bogged down and stimulates on-topic discussion.
  • There is no presentation of the pre-reading material. The focus on the meeting if the CEO/Founder learning from the group discussion.
  • Every advisory board meeting must start with the CEO/founders 1-5 minute pitch. The details supporting the pitch are available in the data room for the advisors.

7.4      Make Arrangements for Recording the Meeting Minutes

Make some arrangements for recording the minutes of the meeting. Don’t try to do this yourself; you need to be able to participate fully by listening and contributing. If you don’t have someone who can attend and serve as a secretary, ask an Advisory Board member to record the meeting.

The minutes are brief and capture:

  • What was the discussion topic?
  • What were the issues, challenges?
  • What were the decisions and next steps?

Lots of the discussion will be on flip charts, whiteboard, or electronic meeting software.  The minutes are not intended to capture every word said.

7.5      Provide refreshments

Provide beverage (coffee, tea, water, etc.). Food is required depending upon when the meeting is held, your advisors are busy people.  E.g. Early morning meeting – breakfast; Mid morning meetings – snacks; Mid day meeting – lunch; Afternoon meeting – snacks; Evening meeting dinner.

Food can be sandwiches, pizza etc.  You will have to learn any food allergies and preferences of your advisors.

7.6      What might an agenda look like?

The sample advisory board meeting agenda below includes suggested activities with notes to guide you through the meeting process. You will have to change this to meet your company’s specific situation

[Your Company Name]

Agenda

[Date]

[Location] 

Beginning/Ending Time Activity
7:00 – 7:05 am Introductions
(Assuming your Advisory Board members haven’t met, introduce yourself and all the Board members, giving a brief outline of their expertise.)
7:05 – 7:10 am Why an Advisory Board?
(A brief statement of how you see the Advisory Board operating and the contributions you hope the Advisory Board can make to your company. Include details such as how often the Board will meet.)
7:10 – 7:20 am Questions
(If there are any. If there aren’t, ask your Board Members how they see the Advisory Board operating and how they hope to contribute.)
7:20 – 7:25 am The CEO/Founder does her 1-5 minute pitch
Discussion Topic: [Insert Your Question/Problem Statement Here]
7:25 – 7:30 am Presentation of the Discussion Topic
(An outline of the history of the topic and how it’s presently affecting the company; refrain from giving your views/solutions at this point.)
7:30 – 8:35 am Discussion
(You want to keep the ideas flowing at this stage; don’t reject or dismiss ideas at this point. Do contribute your ideas/views, too.)
8:35 – 8:50 am Proposals/Resolutions
(Evaluating the ideas the group has heard and choosing the best “solutions”.)
8:50 – 8:55 am Summary
(Summarize the topic, the discussion, and the results for the group and tell them what you plan to do.)
8:55 – 8:58 am The CEO/Founder states what has been the value, if any, of the meeting]
8:58 – 9:00 am Schedule of future meetings
9:00 am Adjournment

 

7.7      Begin Future Meetings With a Review of Previous Minutes

The minutes are in the pre-prereading material.  The minutes will show unresolved issues as well as the CEO/Founders decisions and planned actions.  The review will update everyone on the outcomes of the decisions/actions.

8       Footnotes

Advisory Boards: An untapped resource for businesses  March 2014  Business Development Bank of Canada https://www.bdc.ca/en/Documents/analysis_research/bdc_study_advisory_boards.PDF

1 Page 1

2 Page 10

3 Page 9

4 Page 10

6 Page 6

7 Page 11

 

5 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.