Strategynut

October 16, 2008

Strategynut has moved!

Filed under: Uncategorized — Nicola Rowe @ 10:02 pm

Strategynut has a new look and a new home on the web. Please update your bookmarks and follow me to http://strategynut.com.

October 15, 2008

Why a women-friendly workplace means more than just family-friendly policies

Filed under: HR — Nicola Rowe @ 12:42 pm
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We were sitting in a country residence in southern Germany, peer-bonding. It was a spring evening: warm, full of promise. (The Internet bubble had yet to burst.) The conversation turned, as if steered by an invisible hand, to company cars. Ah! The allure of the new. And yet not so new: we had been on our company’s training programme for baby strategists for more than a month, and the topic had yet to lose its lustre. Was a Mercedes better than a BMW? What were the merits of the BMW Series 3 over the Audi A4? (There followed a detailed excursus concerning the position of the armrest.)

Marissa, one of the other five women in our cohort of thirty-six, made eye contact with me. “I’m getting a Golf,” she said with an air of finality. We stood up, and left the table.

So often, companies adopt family-friendly programmes – flexitime, parental leave – in an effort to attract and retain talented women. And those programmes are important. But creating a women-friendly workplace is about much more than that.

Our blue-chip strategy firm, to give it credit, scratched its head over why women made up only 15% of its incoming class. But where it and its industry peers go wrong is in thinking that a good pregnancy policy is enough. It’s not. It’s not even half the battle. For starters, one commonly-cited statistic says that 40% of German women university graduates never have children. That’s two-fifths of the consulting workforce for whom a family policy is irrelevant.

We suffocate at restaurant tables where the air is thick with cigar smoke (according to Cigar Aficionado, women make up less than 5% of cigar smokers, but you’ll see a lot of cigars when consulting managers get together). We care about our Lufthansa Senator cards (hey, if you wanted the last place on the Thursday 19:35 flight to Frankfurt, you’d want those red leather luggage tags as well), but we don’t much mind about whose hood ornament adorns our cars. And a watch? It’s what you use to tell the time. Quite how men manage to get so much conversational mileage out of cars and watches is a mystery to us.

Most women (like most men) left my firm, but we left in greater proportion. As I watched us fly out through the gates of institutional memory, I decided that we were leaving because we had never felt we belonged. In this context, it was interesting to read a recent McKinsey Quarterly article that urged companies to “encourage mentoring and networking, to establish… targets for diversity, and to find ways of creating a better work-life balance”. The first two here are critical: mentoring, because it’s a way for a firm’s senior members to tell junior staff that they matter, and networking because it allows women executives to meet and talk – about anything, but not about topics they have little interest in.

In sum, attracting and retaining women isn’t just about letting them in the door and enabling them to have babies. It’s about creating a less alien environment. The sooner companies learn to do that, the slower the women they hire will be to become part of the past.

October 14, 2008

Does having a fun workplace make business sense?

Filed under: HR — Nicola Rowe @ 4:41 pm
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Schluss mit Lustig (loosely, “No more fun!”) demanded the German advertising executive and author Judith Mair von Eichborn six years ago in a book arguing that EQ, flexitime and a culture of trust and fun had no place in the modern workplace.

It was a clarion call in 2002, but it went unheeded even in Ms Mair’s own country: Prussian virtues notwithstanding, the internet boom had left enough of a mark on German culture to make even old-economy firms want to offer their employees an enjoyable working environment. And now, with market indices sliding down around our ears, who would want to deny that work should be fun? Certainly, überguru Tom Peters has been plugging the idea for more than a decade.

While the idea of an enjoyable workplace sounds worthy – praiseworthy, even – should employers pursue it? Does it make business sense, as well as emotional sense?

It turns out it does. Former Harvard Business School Professor David Maister studied 29 firms across more than 15 industries in 15 countries. He concluded that firms scoring in the top 20% of his sample for “commitment, enthusiasm and respect” financially outperformed the average of the other four-fifths by 63%. Firms in the top quintile for employee satisfaction outperformed the other quintiles by 42%; for empowerment, 32%. So getting the atmosphere right at work makes business sense: the soft stuff matters.

Google does not reveal the fate of Mair und Andere, the advertising agency which Ms Mair co-founded and where she worked (in a dark-blue uniform) at the time Schluss mit Lustig was released in 2002. But she published Fake for Real, a discussion about the social conflation of truth and fiction, in 2005. Two books in three years! Might Ms Mair’s diligent application of the pen imply that she is… enjoying herself?

October 13, 2008

Evaluating the board of directors

Filed under: Corporate governance — Nicola Rowe @ 5:19 pm
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The modern corporation is used to evaluating performance: employee performance, business unit performance, and, if the company is worth its salt, customer performance. But it’s rare for those in charge of the kit and caboodle to be evaluated themselves: at the turn of the century, only one listed US company in five regularly evaluated its board of directors.

Now, as noted earlier, directors enjoy wide protection from scrutiny – not just from others, but from themselves: a director’s chair comes with a brass nameplate, but rarely a silver mirror. Boards have been reluctant to evaluate themselves for many reasons – some lack the time, some find it more confrontational than clubby, and some simply don’t know how – but this needs to change. The NYSE’s  Rule 303A(9) now requires boards to conduct a self-evaluation at least once a year. So how can a board best evaluate itself – and what should it look out for?

The key question the board must ask itself is, “How well did we perform our duty as a board?” That question points to the two kinds of inquiry it must make: into how well it performed – that is, into how well its own processes functioned – and into how effective it was in fulfilling its duties. The board should start with the second question, asking itself “What did we aim to do this year?” If the company’s governance is good, the answers to this question will be in the company charter, and will include developing long-range strategy, holding management to account for agreed performance goals, approving financial reporting, and so on. The next question must be, “Did we achieve each of our aims effectively?” This should be more than just a tick-and-cross exercise. If the board achieved a goal, it should ask, “Why? What worked well?” This will be useful data for compiling a list of best practices. If a goal was not achieved, or not achieved easily, the board must ask why not. Once it has gone through its performance by goal and collected a list of best practices and concerns, it should take one step back and look at its processes. Which worked well? Which need improvement? In a final step, the board should incorporate its findings into its governance process for the following financial year.

Evaluation should be tied into the board’s annual operating schedule, with annual objectives set at the beginning of the financial year, data collected during the third quarter (once it’s becoming clear whether the board’s expectations of management performance are aligned for the year) and a review session at the end of the year.

October 11, 2008

Do CEOs earn too much?

Filed under: Corporate governance — Nicola Rowe @ 8:03 pm
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Do CEOs earn too much? Even in the 1960s, it must have been easy to say yes: in 1965, according to the Washington Economic Policy Institute, the typical CEO of a US listed company earned 24 times a worker’s average wage, working just two weeks to earn what Joe Schmo took home in a year of punching the clock.

Ah, those were the days. Today, those CEOs’ successors earn more than 260 times the wage of an average worker. Larry Ellison took home the better part of $193 million last year, once the IRS had snapped its jaws.

Many pixels have been pulled over why CEOs earn this much; undoubtedly, the reasons are varied – is it simply supply and demand? Do the risks of the CEO’s chair justify an enormous premium for taking it? – but scholarship has yet to serve us a satisfactory answer. Much more interesting, though, is this related question: never mind why CEOs earn so well – do they earn too much?

It’s a question that can turn up odd bedfellows. The claim that CEOs earn too much can rally the political left as a bloc and financially conservative investors individually. The reason is that there are really only two arguments that justify the claim that CEOs are overpaid: the argument from social justice, which says that it’s fundamentally unfair to pay one section of society so much more than another, and the argument, quite distinct in kind, that it is a poor use of shareholders’ money to lavishly pay a CEO who fails to deliver returns. Proponents of the former argument might object equally to the compensation received by Time Warner CEO Richard Parsons ($53 mio over the five years to May 2007) and that received by Ellison, above. But a shareholder advocate would probably only become enraged by Parsons. That’s because Time Warner underperformed the S&P over that period, its stock advancing 28 percentage points less than the index. Ellison’s Oracle, by contrast, beat the NASDAQ by more than 30% in the last half-decade.

So, next time someone tells you that CEOs earn too much, try to scry for their motives. Are they a socialist – or a shareholder? 

October 8, 2008

The Business Judgment Rule – a pragmatic solution to a pretty problem

Filed under: Corporate governance — Nicola Rowe @ 3:01 pm
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Shrinking back from the legal liability taking up a directorship will involve? Relax. Courts in English-speaking countries have repeatedly refused to look at decisions taken by directors when exercising business judgment. The High Court of Australia put it nicely forty years ago in Harlowes Nominees Pty Ltd. v Woodside:

Directors … may be concerned with a wide range of practical considerations, their judgment, if exercised in good faith and not for irrelevant purposes, is not open to review in the courts.

In other words, creditors and shareholders looking to recover from directors for losses resulting from poor business decisions will be disappointed to know that those decisions are not subject to review by the courts. It’s a massive exemption from liability, and it’s not one enjoyed by doctors, dentists or – until relatively recently, in most Commonwealth countries – even lawyers themselves. So why grant directors such freedom to mess up?

Delve deeply enough into the literature, and you’ll find as many justifications for the rule as you care to name. But there are three central reasons. First, scholars argue that people otherwise qualified to serve as directors won’t do so if their decisions are constantly second-guessed. This is well and good – no one likes to be constantly second-guessed, after all – but it’s not a reason to exempt a person from legal liability. Remember that we’re all responsible for reasonably foreseeable harm caused to others as we go about our daily business. Why should directors – who owe shareholders a fiduciary responsibility beyond what we owe each other in everyday social interaction – be held to a lesser standard than the rest of us?

Secondly, it’s said that courts are not equipped by nature to examine business decisions, and couldn’t act in real time even if they were. But, while it’s true that judges aren’t businesspeople, they’re not architects or forensic psychiatrists, either. That’s why courts call expert witnesses. There’s no reason experienced directors couldn’t be called on to testify about the wisdom of business decisions. And, true, the wheels of justice grind slowly – much more slowly than the wheels of commerce. But most allegations of director misconduct are made after the fact, in the context of an action for damages in the aftermath of bankruptcy, where time is no longer an issue. The courts have mechanisms for acting swiftly – injunctions are frequently granted under urgency – and there’s no reason they couldn’t deliver emergency interim relief in the same way.

The third and final reason given for the business judgment rule is that business requires risk-taking, sometimes even to the point of speculation, and that the directors are free to do just that. The argument here isn’t that, being in a position of responsibility, they should be held to a stricter standard than the rest of us; rather, it’s the reverse. Are the directors spending shareholders’ money irresponsibly on too risky ventures? Then, on this view, it’s up to the shareholders to fire them. Have the directors overcommitted themselves (without going as far as trading recklessly)? Caveat supplier – the firm’s trading partners should have done their due diligence before going into business with them.

Who watches the watchers? The business judgment rule says no one does, as long as the directors are using their powers for proper purposes to make good faith decisions. Why? Logically, the only reason is risk: it’s necessary for business, and someone – in this case, the directors – is allowed to take a lot of it.

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