Interview

“50% of all CFOs say their CEO has pressurised them to change the numbers”

IMD Professor Didier Cossin on why the rise of stewardship is fundamental to the evolution of our society 

The world is trying to break free from the grip of a pandemic and businesses are doing their best to cope. While they are grappling with lost growth and trimming overheads to stay competitive, the one area that CEOs cannot cut corners on is governance. If they do, sooner than later they end up paying the price through a lower valuation or worse, implosion. Didier Cossin, founder of IMD Global Board Center is an old hand at guiding companies on stewardship. In this interview with Outlook Business, he reiterates why the rise of stewardship is fundamental to the evolution of our society, and therefore, the right way forward for companies.

Governance is really about having the right moral compass. To that extent, can it be taught? Either you have it or you don’t.

I agree with you that integrity, a sense of accountability and responsibility are at the heart of true governance. At the same time, I do believe people can be groomed. There are several leaders who are committing to that, seeing their impact on society and on the organisation they are leading. There are also others who are in full conflict of interest, self-absorbed and greedy. But for those who want to do the homework, it is possible to guide and groom. That is what I do.

How do you go about doing that? What are the key pillars of board effectiveness?

There are four dimensions to board effectiveness. Of the four drivers of good governance, the first one is people. Within people, I look not only at the knowledge and abilities of the individuals but also how focused and dedicated they are. And then, the diversity and complementarity that they have.

The second is information, especially its quality. I see many organisations that are too reliant on internal information. Ideally, internal information should be balanced with external information. Obviously, you need to know what’s going on in the world and many organisations are not very good at capturing that. It is very easy to get internal information but very hard to get good external information.

The third is the structure and processes that you need for good governance. In an organisation, you have several processes — you have a risk process, a strategy process, the nomination process, etc. How you review performance, and all these other processes need to be fine-tuned.

The fourth pillar is really the culture of governance in the company — the dynamics of decision making, what kind of decision styles do you have? Is it autocratic, or one that builds on constructive dissent? At the heart of governance is constructive dissent. A differentiated view built on the view of others enables you to reach a higher level of decision.

What quintessential qualities do you look for in a board member?

First would be knowledge of different things that are pertinent to the organisation. In today’s world, knowledge gets obsolete very quickly, but you cannot discount knowledge. You need a curious mind to be able to integrate a lot of new information and the learning curve is demanding. If at 60 years, you are not willing to learn, you cannot be a good board member. Second, if you think of psychometrics and personality style — introvert versus extrovert, conservative versus open to change, sensitive versus resilient — instead of having a single dimension, the board is better off with diversity in style and thought. That varied thought process throws up its own challenge in terms of communication and that’s why you need a strong and mature person as the chair to bring everyone together, ensure fairness and elevate the conversation to a higher level.

What are the chief causes of governance failure and how can they be addressed collectively by the board, and individually by the board members?

If I look at 95% of organisational failure, it comes from risks not being assessed well. Second is not having the right strategy for the organisation. Third is integrity failure and the fourth is relationship failure between the executives and the non-executives on the board.

If I look at risk, doing a good job of risk assessment means having your own view of risk and not depending on others to assess your risks. The board develops its own view of risk independently. If I think of a strategy, to me, two things are important: First is the recognition that culture is a big part of strategy and having a culture of agility is much more important today than sticking to a plan. Second aspect in avoiding strategy errors is avoiding blind spots. There are so many organisations that run into blind spots with respect to technological transformation, geopolitical transformation and so on.

When I think of integrity, the principle is straightforward. Today, 50% of all CFOs say their CEO has pressurised them to change the numbers, which tells us that integrity failure is everywhere. This is the reality of the world. If you don’t see integrity failure, it’s because you are not looking hard enough. Every organisation must be able to map integrity failure hotspots.

 

Finally, is the quality of the relationship between people at the top and those that make it happen. Despite the difference of power, these relationships have to be congenial. It must be based on trust and it’s important to build that. Else, you will end up with another prominent failure of relationship such as the Volkswagen pollution emission scandal.

A lot of decision making is driven by management’s understanding of the business. The board of directors are not hands-on, so how equipped are they to hold an independent opinion on a company’s business strategy?

Not only should board members be part of these decisions, they are necessary to the success of an organisation. There are risks that the management team might ignore, for instance, a CEO may pose a risk. It’s very possible that the CEO has a certain behaviour, certain attitude and presents a risk for the company as the company evolves. Very entrepreneurial CEOs may not quite have the compliance standards of a large organisation and the non-executive board might see that as a risk.

With respect to strategy, executives often run into blind spots. The evolution of government, what could lead to regulatory change, international relations, change of culture across the globe and many other things are hard to see, especially when you are running on the treadmill. But when you are detached, you have that visibility. Especially in the post COVID world, you need a bit of an elevated view to design future strategy.

I was talking to the chairman of Roche, one of the largest pharmaceutical companies in the world, 50% of diagnostic tests on COVID around the world are done by them. Pharma used to be profit maximising, exploiting all the little niches available, and their social sense was not prime. But, now they are careful not to make too much money on COVID tests. The priority is to be as widespread in the world as possible and you need a certain elevated view to implement that. If you are into profit maximising, cost cutting, etc. all along, you can’t see it.

Hence, you need someone a bit more detached who can tell you, “Oops! On this one, we have to change our strategy.” So, that combination of the executive and non-executive, is very essential. Not to mention diversity, which is vital. If you can provide more diversity on the board, with a combination of people closer to employees, people closer to other parts of the society and so on, you can make a big impact as an organisation.

Since we are talking about for-profit corporations, the incentive system is completely governed by the stock market because that’s the prevailing economic system, and as long as you have this earnings-driven short-termism as the central driver, governance is always going to be a challenge. You have articulated the conundrum saying short-term efficiency is being overwhelmed by medium-term failure. If anything, this is only going to get exaggerated because of the kind of transition we are seeing, especially because of technology. How do you drive this whole idea of governance when the incentive system is so deeply institutionalised in this conventional set up?
To begin with, there is a large link between governance and performance. If you look at 20% of the best governed companies in the S&P 500, you add 20% to performance over the stock market average due to governance, and all sophisticated investors know that. Governance has been the biggest driver of performance across organisations since the past few years and that is why I work with many large sovereign wealth firms because they invest in governance. Whether it is in Norway, Singapore, Saudi Arabia or China, or the World Bank in Washington, everybody knows they need to invest in governance because it is a fundamental driver of performance.

Now, I want to come back to the very fundamental question you have raised. The markets are short-term oriented and the fact that it is in conflict to our social needs. This is the question I have asked myself in my previous book called Inspiring Stewardship, which I wrote with the sponsorship of Singapore’s sovereign wealth firm. To me, it is clear that large investors around the world are changing and they are coming around to stewardship, what I would call value-based governance, which means you leave to the next generation something better than what you got. These concepts are transforming large financial actors. It is still the tip of the iceberg, but the most sophisticated investors know this is a driver.

It is still a challenge, but then also look at the diversity of ownership today. You have private companies owned by private equity, which are conscious about the future, then family-owned enterprises where the family may say ‘Well, we do not want our grandchildren to profit from this company’, and then of course, you also have state-owned companies in the game. This diversity makes the capitalistic system resilient. All these different actors, different forms of ownership are a natural selection process, but that natural selection is more and more based on values because the actors have these values.

Well-meaning is not enough to do well, but the rise of stewardship is fundamental to the evolution of our society. The best example of stewardship I can think of is Henry Ford, the founder of Ford Motors. He was paying his employees 2-3x compared to the national average because he saw they would become his own customers. He was right. So, stewardship is at the heart. Then, to that, you add the four pillars of technical governance that I described earlier. To me, this is the future of business success.

In the absence of tangible metrics, is there a framework for boards to formulate a plan with respect to social inclusion and the environment?

The best boards are very aware of this. I am working with the board of an energy company. It used to be big in oil and gas, but it shifted focus and now is largely into renewables. I was impressed by the fact that four out of the eight board members were aware of their own personal carbon footprint! While this kind of awareness is central, the whole system of evaluating impact has to be developed at the managerial level and the board should be part of that process. Together, they need to map key stakeholders, their respective motivation and the collective impact that the company has on its stakeholders.

Talking of younger and more powerful companies like Google and Facebook, governance is seriously questionable — whether it be how they deal with taxes, or people or privacy issues and so on.

Within tech companies, there is a huge difference in governance quality. Some are much better governed than others. Some are poorly governed, I would classify Facebook into that, Tesla, too, until recently. But some others are quite well governed — Apple or Nvidia in microprocessors, for example. This differentiation reflects in their financial performance. Besides, it is not just performance thus far, but also the downside risk, risk of a big fall which investors greatly care about. Tech companies are as exposed as others to governance failures.

An earlier article of yours on the Red Cross had governance takeaways for today’s leaders. Can you summarise that?

The International Committee of the Red Cross deals with prisoners, with war situations, with violence. It has developed the ability to create an impact while remaining neutral geopolitically. I think every good business leader will be asking them the question: How can you, in a world that is so tense, that is so fragmented even within nations, remain neutral? How do we remain neutral with conflicted views and conflicted parties is now the heart of business.

If you are a weapon manufacturer, you are going to take sides, but for most businesses, it doesn’t make sense. We are not there to fight a war. We are there to profit with society.

It takes a lot of integrity and it takes a lot of listening skills so that each party feels respected. More importantly, you need to have a strong identity, a strong sense of purpose so that the others will respect what you stand for.

They are at the heart of the negotiation between Ukraine and Russia these days because Russia sees Red Cross as a respected party. This is why Xi Jinping, the Chinese leader comes to the United Nations and mentions the Red Cross because he can see them in a world of tension as a potential neutral party.

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