Prof. Didier Cossin:


059 – Four Pillars of Good Board Governance with Prof. Didier Cossin

Prof. Didier Cossin:


059 – Four Pillars of Good Board Governance with Prof. Didier Cossin

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In this episode, we are joined by Founder and Director of the IMD Global Board Center, Prof. Didier Cossin. Didier is a global expert in governance, and in addition to his role at IMD has served as a consultant to the United Nations, the European Central Bank and multiple major corporations, including HSBC, Vodafone, Schlumberger and Coca-Cola. We speak about four pillars of good board governance: people, information, structure and  processes, and group dynamics.

  • Didier’s definition of board governance as “the art of decision making at the top of organizations”
  • The particular challenge that corporations with a long history face to transform and how this requires board leadership that “breaks the internal mould, breaks bureaucracy and opens up to the world”
  • What Didier has identified as the four pillars that constitute good governance – people, information, structure and processes and group dynamics – with good and bad examples of each

Key Takeaways and Learnings

  • A good assessment of board effectiveness is the extent to which it focuses on the past compared to the future – and that most boards spent too much time looking back
  • A board must ensure it receives the proper balance of internal and external information, of formal and informal information. That the very best board packs are “synthetic” – they use a variety of tools to synthesize the information that tracks the evolution of the key metrics
  • The criticality of the difficult task of organizing a board so its committees are well structured and focused on the issues of most importance to the organization
  • How a Chairman needs have the “art” of stimulating the right discussions, ensuring all views are considered and bringing these together – and the importance of this to enabling a functioning organization

Links and Resources Mentioned in this Podcast

Summary

In this episode, we are joined by Founder and Director of the IMD Global Board Center, Prof. Didier Cossin. Didier is a global expert in governance, and in addition to his role at IMD has served as a consultant to the United Nations, the European Central Bank and multiple major corporations, including HSBC, Vodafone, Schlumberger and Coca-Cola. We speak about four pillars of good board governance: people, information, structure and  processes, and group dynamics.

Prof. Didier Cossin

Prof. Didier Cossin is Professor of Finance and Governance at IMD. As a clinician of governance effectiveness in many regions of the world, he is an advocate of adapting practices to the social, geopolitical, technological and economic transformation through distinctive solutions allowing for long term positive impact. He has taught at Harvard University, and was professor at HEC, University of Lausanne. He holds a PhD from Harvard University and is a former Fulbright Fellow at the MIT. Prof. Didier Cossin is the author and co-author of books, book chapters and many articles, several of which have obtained citations of excellence or other awards.

What Was Covered

  • Didier’s definition of board governance as “the art of decision making at the top of organizations”
  • The particular challenge that corporations with a long history face to transform and how this requires board leadership that “breaks the internal mould, breaks bureaucracy and opens up to the world”
  • What Didier has identified as the four pillars that constitute good governance – people, information, structure and processes and group dynamics – with good and bad examples of each

Key Takeaways and Learnings

  • A good assessment of board effectiveness is the extent to which it focuses on the past compared to the future – and that most boards spent too much time looking back
  • A board must ensure it receives the proper balance of internal and external information, of formal and informal information. That the very best board packs are “synthetic” – they use a variety of tools to synthesize the information that tracks the evolution of the key metrics
  • The criticality of the difficult task of organizing a board so its committees are well structured and focused on the issues of most importance to the organization
  • How a Chairman needs have the “art” of stimulating the right discussions, ensuring all views are considered and bringing these together – and the importance of this to enabling a functioning organization

Links and Resources Mentioned in this Podcast

So, with me today is Didier Cossin, Professor of IMD, and Founder and Director of IMD Global Board Center. Welcome to the Innovation Ecosystem.

It’s a pleasure to be here, Mark.

So, we first met twelve years ago. You were teaching finance to me at Syngenta and then last year we met at an event focusing on chairman and board governance. Now boards and board governance play key roles in companies’ ecosystems. So, what is board governance and why is it important?

So, governance is really the art of decision-making at the top of organizations and obviously, we are in a world that is transforming. Molecular clocks are accelerating, we are seeing social transformation, technological transformation, geopolitical transformation, right? It’s amazing how much the world has changed in the last few years and we know it’s going forward with even more transformation. That by itself requires corporations to transform but just as importantly we know that successful corporations are less and less long-dated. Corporations with a long history are not promised a good future. Actually, typically older corporations tend to underperform today so there is a need for decision-making that somehow breaks the mould, breaks the internal mould, breaks bureaucracy and opens up to the world. This is the role of governance, of good governance, of figuring out the world as it is and how to set the objectives, choose the leadership that will actually provide us success for the future.

So perhaps we can just talk, Didier, a little bit about what the elements are of effective governance. I think you’ve identified four pillars that constitute good governance. Perhaps we can go through those and share some examples of what constitutes good governance and also what constitutes bad governance in each of these pillars?

Yes, with pleasure, Mark. I have to say that what I’m proposing is a system to help people think about the quality of governance. Everybody’s concerned today. Many of your listeners are on boards figuring out what makes their board healthy or unhealthy is one of the drivers, some others will be on boards deciding whether to accept a board membership or not is one of the big decisions for a professional career today and all of your listeners at some point are interacting with a board. So, figuring out what a healthy board is absolutely key, and at the same time, I’ve been confronted with the fact that the academic or scientific analysis of boards does not help us very much. The number of independent directors or size of boards etc. are not really so crucial and I’ve been working with boards very much around the world from China to the US throughout Europe and emerging markets, Singapore and with many different types of organizations and I needed a system that helps us understand what creates great governance and so, we have these four pillars and these four pillars work in many different organizations. They work in international organizations, and work in privately held businesses, in family businesses, in large publicly traded companies. They’re quite straightforward, they are quite simple but let me drill them down for you so that you see each dimension. Number one is the people and we all know that people are one of the drivers, of course, of governance quality but it’s not really the quality of the people, it’s what do they focus on because on many boards people do not focus on the right topic. They will spend a lot of time on past accounts, or on approvals, or on minutes, rather than on looking at what truly matters. A good assessment of that is how much time the board spends on discussing the future versus the past and you have many boards that are spending much too much time on the past.

What should the ideal split be in your mind, for a company, a specific company that is maybe a long product lifecycle, regulated, established, industrial company which could be at risk of being disrupted by digital, by new competitors, whatever it is? How much time?

Obviously in a younger type of company 90% is on the future but on the more stable, organized company you will have to focus some on the past understanding and you will have to take lessons from the past and sometimes it’s also a mistake not to take lessons from your mistakes, right? And so, it’s important to spend some time. My ideal, I would say in a mature company is 40% in the past, 60% on the future. Typically, companies spend 90% on the past and 10% on the future, and they’ll spend just to retreat on strategic thinking which will be around the future but the bias is typically wrong. Now, quality of individuals including diversity of views, the focus, but the energies and dedication that is on the board, you see many sleepy boards, you see many routine boards where people are not dedicated in the ways that make a corporation a success and this is one of the issues with independence. We had the principle of independence. Many mantras in governance for a long time, we had the mantra of governance for your independence, many views of independence as a key driver but then we got people that were so independent that they didn’t know the stuff and they didn’t care and that is not what a board is about so let’s be careful about any of these mantras.

Yeah, and another mantra which is very commonly discussed is the need for diversity, and often diversity might be gender diversity if they come from the same background, but cognitive and perspective diversity are different elements to this. What’s your view on how diversity, how important it is? I guess it’s dependent on the type of business people are in, but how do you think about diversity?

So, if you think of it in a focused world, like military sense, you have to think, first, whether your defensive or offensive as a company, right, and you have to think about the enemy, is it a general culture of complacency or is it digital disruption coming from the outside or is it a Chinese company moving into your turf, and there’s a diversity that has to be targeted. So, number one, right? Diversity is not by itself a factor of success. You have some homogeneous boards that are more successful than diverse boards. A good example is a private equity held company that has a well-structured plan ahead, has a good sense of where it wants to go. There I would like to think that a homogenous board that focuses on implementation, communicates well and is well aligned is going to be more successful. Now, diversity, and by that I don’t mean or need diversity in the sense of gender diversity but mostly diversity of perspectives, diversity of views, brings value when you need innovation, when you need creativity and when you need, also, openness to the world, when you need a more open view of what is going on, but diversity comes with a problem which is a difficulty to communicate. The absolute diversity is the United Nations, and the United Nations is not about efficiency as we know, so it’s figuring out how to have effective diversity. There is the role of the chairman, the processes will matter, but you are right. One of the drivers we look at in terms of board performance is diversity but not only diversity, not only cognitive diversity but also the diversity of personality, right? An extrovert with an introvert can be a good mix, the two can communicate. Someone rather neurotic with someone extremely resilient, the neuroticism of the emotionality will bring values, quicker perception of the outside risks, but typically these people will have a hard time communicating so how do we make sure they do communicate? So, many different dimensions of diversity beyond gender, age diversity matters as well and of course, diversity of competencies.

OK so that’s the first pillar is people. Can we just keep going through the pillars, what’s the next pillar of good governance, if you like?

The second pillar which is absolutely key and where boards typically under invest is information, the quality of the information. I’m not talking only about internal information where they tend to rely on the management sadly-

Because they’re being fed stuff that they don’t have much control over or?

Well, yes, but even more than that because they don’t take a more proactive role in designing what they need to know and management cannot second guess what board members need to know and so there is the need for the board to actually be highly involved in the design of the information and I would say it goes even further – by the way, I should have mentioned that from the start, boards today are not so good, right? The governance system is not so good and so, typically, if you think about the level of responsibilities that they should have, they should have IT the systems designed for what they do. No company does that today, right? The IT investment for board information is much more, it consists mostly of buying an iPad and that’s not what we’re talking about. The impact of these decisions is huge.

So, what is needed then? What is needed in terms of information?

So, what’s needed is internal information but also external information. It’s formal information and informal information. We should not underestimate what we have lost at being transactional from the old times where people were having dinners together and meeting all the time etc. which still occurs on some family businesses. There is a lot of value to the informal side of information as you probably know. Some companies that have set up subsidiaries in Silicon Valley didn’t get any value from their structures but once they are located there and they have drinks with the right people etc. they get all the information and you don’t need to invest anything for that, the informal side, but I would also insist on the external information. How many companies are really following up with the big competitive trends, with the big disruptors, with the new companies that are moving the game, and with simply the social trends that are changing the game, and board members are smart people even if they are not in the industry, even if they are not of the right age they can figure some dimensions out but typically they just don’t have the information.

So, in terms of companies, again, facing disruption, how do you avoid them being overwhelmed with vast reams of information to read in advance of a board meeting? What does really good information management for boards facing disruption look like in your experience?

The best board packages are extremely synthetic. That requires a lot of work, you have whole consultancies dedicated today only to do the board packs.

Really?

That’s very sophisticated. If you’ve had the luck of seeing the GE Board pack and interacting with one of the GE Board members, you have each page as four or five tools, for example, if you look at the culture page you have four or five different tools that synthesizes the evolution of the culture inside the company. If you look at external risk, four or five different tools that give you one page with, of course, the appendices behind etc. a dashboard of what is happening there, so there is the need to be able to build that synthetic view. Only, I would say, very successful companies are able to do that, it’s very hard to do, it’s a lot of investment, and then I said the informal side and keeping abreast. The best board members spend a lot of time on their board membership. We say maximum four or five boards, for a good reason, a good board is a day-

A week.

A week, a day a week, and actually the best they work over weekends and that takes a lot of time and so it’s that accumulation of information, the crossing of information with company information, the external information, and the permanent scanning of information. We live in a world where, of course, there is massive information, at some point I’m sure we will stream that with artificial intelligence etc. but today it’s still our brain doing it.

Yeah, absolutely. Well, also that’s before you even get to the question of what can you believe versus what has actually been manufactured information, and the whole fake news piece. From a board perspective, I presume that doesn’t matter so much, it’s more about having a team that’s actually pulling – and the technology to pull together the information that is relevant.

I’ve come to the point where all information is manufactured and it’s manufactured more or less, and with more or less integrity, but even a New York Times article or Bloomberg article or a Fox News article is, of course, manufactured, and I’m talking about what you see on the Internet, and so everything has a view which means that the management risk report has a view, a management technology report has a view. I’ve had actually very nice boards that are digitally challenged, large organizations in Switzerland where the CIO was doing a presentation to the board and the chairman unsatisfied with the reaction of the board asked one of the board members to do a presentation to management on technology issues, and so there you had the exact opposite which I thought was very nice and led to very intriguing discussions, and led also to deep board work on the transformation of the financial institution.

Interesting. So, two pillars so far – people and information architecture. Third one?

The third pillar is structures and processes. So, I’m talking about classical structures including committee structures that etc. for well-established companies but processes including technology process, strategy process, risk process, I would say culture process, integrity process, evaluation process, board effectiveness improvement process, figuring each of these, which ones are critical to your organization and how good are you as an organization of each of these dimensions. So, structures and processes are something where you need the board’s secretary to be quite proactive about, and of course, the chairman as well, but external board members can bring ideas as well. On average, under sophistication from the boards on that side.

And why is that because it’s enough to be done anyway and no one’s got an appetite for a new committee?

Well, I actually agree with them, you don’t want too many committees and I actually think that the strategy committee by itself is defeating the purpose of a board. The board should be deciding on strategy, and even I see major institutions where they have a risk committee but the risk report doesn’t go to the board, that’s not what you want, right? So, there is more than multiplying committees. I can tell you of some organizations that have twenty committees and you don’t want that, all right, but it’s, of course, having these committees well-structured and focused which is not so easy. You do have committees that are taking the role from the board and that does not work well but the committee itself, the committee structure is less important to me than the series of processes that will ensure board quality, for example, the agenda-setting process, right? Many companies, a CEO with a bit of input from the chairman is setting the agenda. No, that doesn’t work. You need to have a board discussion, what are the important matters to have on the agenda, make sure you have the important topics at the beginning of the agenda and not at the end so that they’re not squeezed, make sure that the timing is right and so the agenda setting is extremely strategic for a board.

Yeah, and you’re touching on the relationship, obviously, between the chief executive and the chairman is at the heart of making this work, but the final pillar is around group dynamics, so maybe we can get to that because that pulls the whole thing together essentially.

Group dynamics and culture, and culture of the board, where we see incredible dysfunctions today right? I mean, you have sleepy boards, routines boards, you have dominated boards, you have disrupted boards. You look at the Uber Board, with a fight between the owners and the splitting of the board around the culture issue, with some that, I would call it on the conservative side, and things that Uber is fine with a culture it has, and some others that sees that unicorn possibly not being led, right, and the world actually completely revisits that culture and you see a compromise of a CEO with probably the fight of the board, and it’s amazing how much you can read in the public actually, and public information. Even the CEO warning the board not to meddle too much. It’s fantastic, and so you see these board dysfunctions, notably with the board of owners and the big fights amongst the board representatives around one dimension. This is of course dysfunctional. You don’t want boards to be consensual, you want boards with tension but that tension has to build towards a better level, towards a higher level, and so my ideal board is where there are challenging discussions that bring to higher ideas. This is quality governance.

Yeah, and I think Warren Buffett, we mentioned earlier on I was at his AGM a couple years ago and he was under pressure for the Coca-Cola, enormous options payout for the executive, and he said that ‘Boards are like a club. Board members are not typically Dobermans, they’re more like Cocker Spaniels and if you keep belching at the table eventually you’ll be eating in the kitchen.’ That’s a dynamic of many boards, right? These are very consensual, there is a lack of diversity. How do good chairmen create this kind of constructive conflict on the board to actually bring out some of the diversity, bring out some of the elements in the information sets that they’ve got to actually create a functioning organization?

You are right that many boards today are not there and it is hard for many boards who have actually raised the issues. I’ve had boards from major organizations, well-known names, that have come to us only for that purpose, to be able to discuss an issue that they were not able to discuss, and leading typically once you are able to open to that topic, leading to dramatic decisions that led by – I know one of the mega caps of Europe led to a transformation that was incredibly successful and so, putting the fish on the table as we say, or putting the reindeer in some countries, is one of the difficulties for boards. How do you deal with that as a chairman and how do you as an independent director not be perceived as a disrupting board member? This is an art, this is an art. In my view, a chairman has to have a certain level of authority while stimulating discussions and opening the discussions, and making sure that everybody speaks and speaks their mind, and somehow having the art of bringing things together at a higher level. This is not an easy art and it’s not because you have been a CEO that you become a great chairman.

Well, I was going to ask about that, that’s the traditional transition, isn’t it?

It is but you have great chairmen that have never been CEO and that were maybe CFO’s, even HR. When I say even HR, I mean coming more from a different angle than the tough executive side. I think there is something about the chairman’s ability to bring people together, but you also have very successful CEOs that make great chairmen. There is that need for inclusion. You also have major chairmen that are poor chairmen. I’ve seen one of the largest institutions in our countries that had a very dominating chairman that led to major difficulties in the organization. I’m not talking about the financial crisis, I’m talking about the last couple of years so it is absolutely – I mean, the chairman’s role is critical for the quality of the board and one of the difficulties I find is when you know that the chairman is not effective and you still want to bring up the effectiveness of the board, and that takes much more effort than having a new chairman.

Yeah, and cultural differences, I mean you talked about Uber, maybe you could talk about some of the big blow-ups of boards, of malfunctioning boards, either BP or BMW-

The obvious one is Volkswagen and the autocratic culture, and what was amazing to me is that you could figure out 2015 several months before the scandal became public, there was a major problem at Volkswagen. When the chairman actually resigned after having badmouthed the CEO in the Spiegel online, and then there was pressure from the union representatives and the state representative, and PH decided to resign. It was a sign of the dysfunction and it’s actually very interesting that Volkswagen, one of the more sophisticated organizations with two hundred billion dollars of sales and six hundred thousand employees, moved into the crisis without a chairman. Quite amazing. UBS moved into the crisis without a CEO and you’re seeing these incredible governance failures happening in what you would think are sophisticated organizations.

Well, BP was another example, they had a chairman but he was missing in action throughout the whole crisis, right?

For sure, yeah, in 2010 during the Macondo field explosion. And you know, Mark, the most impressive is not that, right? This is a chairman missing in action and the culture of BP are very fine inshore and very aggressive that led to the pressure that probably is one of the reasons, that’s for the courts to decide but probably was one of the reasons for the failure. What’s the most impressive to me is that despite shareholders knowing about that and upset about it, and some of the shareholders like Hermes engaging BP even before the crisis on these topics? Who’s chairman today?

Is he still in place?

Of course.

I see.

Mr Svanberg, right?

Extraordinary.

And so, this is some of the governance we had, you know Jurgen Schrempp at Daimler who destroyed singlehandedly a large share of the German economy was able to remain there for ten years I believe, and so this is a problem, this is a problem. Governance dysfunction does not lead necessarily to governance transformation and governance transformation is not easy, and every governance transformation I’ve seen goes around these four pillars; the people, the information, the structures and processes, and the dynamics and the culture.

Yeah. It does beg the question, if, in public companies, people are continuing to remain in place, I mean, ultimately the buck stops with the chairman, one would imagine?

It does not. Any independent director is responsible. The chairman is not the boss of the board. The chairman is only the chairman of the board. He’s there to actually convene the board. Every independent director has to step into his own boots.

Who is accountable then? Who ultimately has prime accountability?

Up until very recently I would have said board members themselves but the world is changing, Mark. More and more large shareholders are engaging boards. They are upset with they’ve seen and what they’re keeping seeing and so now the shareholders are starting to actually put pressure on boards. It used to be that some prominent board members like the chairman of Vodafone would tell me that they did not interact much with shareholders and the board could decide pretty much what they wanted. That world is changing, that world is changing. You are seeing here in the streets of London, in the UK, in the US, but in Germany and around the world, shareholders are engaging, and I’m not talking only about the large sovereign wealth funds but to pension funds, all the big institutional actors. I’m not talking about the shareholder activists, disrupting Clariant or UBS or whatever, or Nestle, of course, I’m talking about the large shareholders doing it more behind the scenes. A major chairman of one of the leading banks in Switzerland was telling me he’s spending 20 to 30% of his time with investors, 20 to 30% of his time. That world is changing.

So, Didier, I know time is short here but as I said this is such an important topic for the overall ecosystem of companies and what you’ve mapped out is a nice way of looking at how boards, almost like a checklist of how boards are functioning, and as you said based on your twenty years of experience this has been helpful for you. Just changing to the questions that I said earlier on. Three final questions – what did you change your mind about recently? And it might be to do with this subject but it could be broader than that.

Right, right, actually to me I live that, right, so I have changed my mind about that as well, and by the way you were saying about checklists, but we do have checklists on this that I use with boards directly, and one of the dimensions that have changed my mind, and it really went to the Buffett quote that you done, is I have changed less my mind than my attitude. I have decided I needed to let go less and to take on better. What do I mean by that? I see so many dysfunctionalities, I work with boards where I see conflicts of interest, where I see people not engage, where I see people try to do the right thing but not doing the right decisions to do the right thing, and I’ve decided I need to say it more and I need to express it more and somehow it goes against my self-interest and it hurts me sometimes-

Does it? Long term, perhaps, it’s the opposite effect.

Well, I don’t even know, and at some point, I don’t even care, but I have had difficult experiences with major institutions where I had somehow to say what I was seeing. Now, to be clear it also means I have to do it better so it’s why I am saying taking on better, right? It’s, how do you express things in such a way, because the doctor that kills a patient is not really a successful doctor, and if a medicine kills a patient, that’s not what you’re aiming for, and so how do I somehow manage to express things in such a way that people are actually taking it on.

Yes, OK. Challenging.

It is.

Second question – have you got a personal work habit or practice that you can share with our listeners that helps make you more effective?

I’ve had a habit that I’ve been developing and it keeps growing actually it’s taking more and more of my time, I hope it’s a good thing, which is my mornings that are getting earlier and earlier because of my personal habits, they are yoga, meditation and prayers, because in some ways the right word for meditation can be prayers, and what I’m seeing there, I would say it could be seen as a purpose. It’s not a purpose, it’s a consequence. It’s, ‘How do I every one of my days with joy and peace, and how do I bring value?’, because I think any value don’t bring these elements is not really what we want to bring to the world, and so how do I, every day, bring awareness but with joy and peace.

Nice.

Well, I try.

Then finally, what was your most significant failure or low, and what did you learn from it and how have you applied that learning?

So you know, Mark, I work with sovereign wealth funds of major countries and other large global institutions but my charity work has been to help nonprofit organizations on their governance, so I’ve helped UNICEF, the Red Cross, etc., these types of organization that matter to the world, have better governance because they need to be effective too, and I have to say that my biggest deception, and it was a professional engagement from my side so very serious but free, I give it for free, and in one of these institutions I’ve been confronted with a situation where despite the name of the organization, there were as under effectiveness from the board members, board members not paying attention during board meetings, texting etc., and when I know the importance of that organization to the world, I try to express it, and clearly I expressed it probably too sharply because I had the mandate to keep working with that institution that got rescinded and so that stopped there, and to me it’s sad because I was really bringing value to them but I was not able to have them see the value I was bringing.

So, the learning from that?

The learning from that is finding the balance. Still, with my changing mind and attitude, I cannot let it go because that’s not what we’re talking about, but being smarter about it and figuring out the human side, and these are very prestigious people, I thought very self-secure, I knew several of them personally, and somehow, I still didn’t have enough insight so it’s figuring out – I work with very sensitive boards, right? I work with a financial institution in Saudi Arabia who work with some other people that I’m used to being sensitive to and somehow, these people that were close to me, I shocked them too much, and so I’m figuring out how to help people transform without shocking them too much.

Yeah. Or maybe you’ve shocked them such that they will move but you’re just not part of their next story.

This is the positive optimistic view which I’d like to see as well.

So, where can people get in touch with you, Didier?

They can be in touch very easily with me on the website, they can reach me directly by email didier.cossin@imd.org

And LinkedIn and Twitter?

On LinkedIn, of course, yeah, yeah. I’m not a Twitter guy. You know boards look at social media, they don’t use social media, so I look I don’t use but LinkedIn, I’m very active.

Well, we’ll put that in the show notes and if there’s any other material, potentially the checklist, anything else that you think would be relevant to this subject.

Yes, I have many articles, I have a forthcoming book, loads of materials on all of these topics.

Well, we’ll put all that in there but thank you very much for your time, Didier. This has been great to see you again after, well, since last year and after the twelve-year hiatus since we first met, but thanks for your time and I’m sure our audience will enjoy it as much as I did. Thank you very much.

Thank you so much, Mark.

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