Bob Jones & the role of independent directors

Just because you give someone a name doesn't mean the title accurately describes their mindset or their subsequent actions. Independence is a mind set, and a label does little to enhance it or even ensure that it is delivered upon.

Equally just because a book is published doesn't mean what it says has any merit. Some books are informational i.e. opinion and some are just down right entertaining.

This blog is in part another book review. This time of Jones on Management by Bob Jones. This book is entertaining, but also clearly opinion. It is widely available and a must read if you want to wet yourself with a collection of put down one liners.

It does, however, trouble me to quote Jones extensively as he was - in my opinion - one of the crop of 1987 failures that took a lot of Kiwi wealth down the toilet. This helped put ordinary Kiwis off the sharemarket forever. That said, he is entertaining.

He breaks the process of business down into its layers of management, and laments how anything actually gets done.

The first layer of people are what he calls the box tickers, these people are the factory line supervisors, the office policeman who make sure processes are followed, or else. He observes this layer is mostly occupied by women as the skills necessary suit their temperament.

The next layer is the head nodders. These are the endless committees to which decisions of apparent magnitude are delegated. He laments pack mentality and pack stupidity. Boards are in his view just another committee of head nodders and as a group this layer of people is completely useless. In his experience the larger the committee the more certain you are of an outstandingly stupid decision. 

Bob has served on a number of head nodding committees, and he observes all that is needed is one person to say that some idiotic idea is sound and the rest sit there nodding their heads in unison so as not to offend.

In selecting new board members, boards crave those who will fall into line and be "team players."  Team player is a nicer word for Bob Jones's head nodders. I often say to chairmen the best director you will ever get is one who will look you in the eye and say "this is crap" and then tell you why.

The hand grenade thrower who challenges everything is infinitely better than a team player. The consultants who pick those to be short listed for board appointments all ask the question: "Do you regard yourself as a team player?" What a dumb question. Has anyone ever answered: "Well, no". I think most can pick a leading question when they see one.

Bob goes on to say most senior managers in an organisation below the CEO are the "eaters for the company." He is also pretty uncharitable on CEOs and the chapter on Placebo managers is enlightening. You can spot a few of these in public companies too. There is also a chapter on leadership. In short leadership is in his view a myth perpetrated by great PR.

The final two chapters are on boards and independent advisors and as my experience converges with Bob's at this point, albeit it from a different perspective, I find that to a significant degree I agree with him but love his humorous delivery.

Selective quoting from his chapter on directors which I think strikes a cord.

"Time and again surprise is expressed following a company failure that it occurred given the purported high calibre of the board. In the case of executive corruption the directors invariably and probably accurately, plead that they were mislead by the executives. Nevertheless that merely proves the futility in the claim that their existence can prevent these occurrences." Think Enron, or closer to home Feltex.

"In each example it would be hard to imagine bigger and more prestigious-name boards but as subsequent events proved, they were never more than ventriloquist's dummies."

Or perhaps head nodders, or in my words seat fillers. What is clear is that reputations hard won in the past, or alternatively garnered from association with others as is often the case, don't count for much and skills and aptitude have to be judged almost daily by shareholders and at least once every three years when the sods come up for re-election.

And how often do such names get judged unfavourably? Virtually never. And worse until the Shareholders Association came along they did not even stand up and address the meetings that were supposed to re-elect these august names such was the collective board arrogance.

"The reality was that these boardroom thespians brought to the table nothing more than their names. You can't even call them mercenary hired guns as they did no shooting. Their only accurate description is prostitutes, selling their bodies for periodic usage."

Think of the names that have lent themselves to disastrous business of late.... Certain finance companies and their leaders.

"Read a public companies annual report and the chairman's report is, more often than not, bland and platitudinous guff mouthing generalities and stating the obvious.

"To get a proper handle on performance and prospects, one must read the CEOs report for he is the fellow in the pilots seat and the directors are simply passengers living it up in the first class section, like so many other first class airline passengers these days, at others expense."

Part of the reason for this is that the chairman will report to shareholders on the same stuff that the CEO will report on. Why does the chairman have to report on performance and prospects? Back to my dog and bark as well line, the CEO runs the business and the CEO should report on it.

The chairman should report on board processes, function and on risk and audit issues. Do they do this... to a point as some of this stuff is now prescribed disclosure along with hundreds of other pages of dross.

Does Bob know what he is talking about? Well probably, he founded a public company that was a high flyer in late 1980s which crashed, and as its CEO and major shareholder and chairman he had a board to help him, which failed or perhaps he failed because he failed to listen to his board, each will have a different perspective. But regardless his board did not help protect his shareholders.

Ron Brierley, not exactly a role model for best governance practises, also laments the role of independent directors which he is forced to have on his board at Guinness Peat Group.

If performance, that being shareholder value creation as nothing else counts, is the measure, then Brierley over his life time should be a governance icon. Sure he has had some rough patches and I have this feeling Coats might be another of them, but he and Tony Gibbs would disagree.

Now back to why we have these labelled independent directors.  Best governance practise as set down by our very own Securities Commission in turn following the international lead that Jane Diplock had a significant hand in dictating. This states that visibly independent directors are better in a governance sense than visibly conflicted directors and that in some way this delivers shareholder value.(They don't make this connection and nor does NZX, because there is no research to prove this to be the case).

NZX via its listing rules prescribes that every public company must have a quota of these people on boards. (As does just about every other exchange).

Thus a bunch of governance propeller heads has convinced the world that a bunch of seat fillers with a label "independent director" in some way improves the lot of shareholders!

Now to what excludes a director from independence. Among other things, if you are an executive or a major shareholder you are not able to use the label independent. Further if you have served more than 9 years you are past your use by date as well and also run the risk of losing your independence because you have come too close to the business, i.e. executive capture. What rot.

But labels are important, most people believe labels. For example if you have a PHD in something some people think you are smarter than if you have no tertiary education at all, and yes generally such a qualification does mean something. It does at least mean you can apply yourself.

Now the Institute of Directors (IOD) has introduced an accreditation programme. You can if you are a member of the IOD be accredited or provisionally accredited  and the hope is that this process will improve the quality of directors seeking office. And it might have if the process had included some form of training and or examination or even apprenticeship.

But of course it doesn't do any of that. It is simply a panel of senior directors, ( the old boys club?) interviewing an applicant and stamping their passport. The IOD however would have the business community believe that this process is in some way a qualification. The stupid sods who do this pay extra fees to the IOD and can then insert on their business card an extra "qualification" and be included in the IOD's "A" list when they are asked to recommend new directors to fill vacancies.

I serve on a few boards and with some stunningly good people. One such person a couple of years ago fessed up to the fact that he had just become accredited. I was astounded. I said to him "you are a smart guy how can you be so insecure as to feel the need to have such a worthless qualification?" 

His answer was simple, he is smarter than me: "Bruce, it is not about me and my insecurities, it is about the rest of society. If they value this and it gets me in the door to add value to business, then I should do it. It is their insecurity not mine".  This underlines that the labels we put on things are important, but certainly also underlines that they do not guarantee substance.

A year or so on the same guy fessed up that he had just resigned from the IOD as his inclusion on the IOD's "A" list had not helped him one jot in securing any further board appointments. When he resigned from the IOD they asked for his accreditation certificate back. So that finally settles the matter in terms of its value as a qualification. If he had earned a qualification he would have been entitled to keep it.

So to bring this to an end it is not the labels that deliver the promise but the people themselves. To judge the quality of the people by the labels ascribed to them means little if anything. Good people regardless of the label of independence or not, or for that matter any other label, will do the right thing.

Intelligent people who work hard and have integrity will add value to the businesses they work with. And in answer to Ron Brierley and for that matter all the governance geeks on the other side of his argument, neither fulltime executive directors nor the independent part timers have a monopoly on such skills and application.

To underline this, the Vertex story is worth remembering. Two directors found a situation of extreme conflict between Vertex and its major shareholder, the Stewart family. It took considerable courage and both risked their careers and personal wealth in the process, as the costs of the fight were at first instance borne by these parities.

One was an independent director, Sandy Maier, and the other was Paddy Boyle the CEO of Vertex and a non independent director. During the course of the battle I helped from the sidelines and both men were as determined as each other to pursue justice. So it was the quality of the man that counted in the end and the labels ascribed to them were irrelevant. In terms of personal cost, Paddy took the brunt of it, he lost his job etc. Given his position, Paddy was the braver of the two.

Over the course of that engagement, Sandy and I have built a relationship of mutual respect and he now helps both I and the Shareholders Association from time to time. 

Next blog... How do we ensure people of quality lead our business?