Small Business Boards: Practice Vs Theory
July 30th, 2011The public and private feedback to my last post lamented that the real world does not usually align with my description of how boards should operate. But others like Dan Stojanovich opined that “boards do need considered, intelligent, informed, compassionate, practical, adventurous, creative, ethical and shrewd thinking, in order for the board to help clarify vision, articulate a binding narrative and motivate people to commit to the plan within an environment and culture which not only facilitates but energises planned achievement.”
The Most Important to Get Right
Human relationships– a Chairman, CEO and board members who collaborate, cooperate and who are effective communicators will usually add more value than a board lacking these qualities.
Therefore as noted in my earlier Blog the Board hires and fires the CEO but the Board must be there to support the CEO and management team. Good interpersonal skills help create an atmosphere where creative tension or constructive conflict is productive in driving innovation whereas adversarial relationships are almost always destructive. Passion is good, independent thought is good but compliant passive participation is bad. Disagreements between board members, CEO and management resolved well usually add value. Constant harmony rarely stimulates innovation and as George Bernard Shaw reminded us more than a century ago “all progress is dependent upon unreasonable men.”
Successful businesses must be able to pay their bills so meeting short term goals is essential but not sufficient to create a successful business in the longer term. Once the bills are being paid then long term thinking is much more important for the future prosperity of any business. A good board focuses on future performance rather than looking back.
Our great economists and philosophers have warned undue influence in the economy, companies or communities leads to poorer outcomes. The Chairman, CEO, board member or employee needs to fill their role properly by making productive contributions without unbalanced or inappropriate influence from others.
Board members should be prepared to roll up their sleeves and drive the work of the board it is not a role for pontificating and issuing critiques on management and operations. The board needs to research, investigate and contribute especially to strategy so they are well equipped to probe and offer strong guidance to management. But they should not meddle in execution and operational detail. In a good company the board is responsible for strategy but the CEO is best placed to articulate the vision and strategy of the company to staff, customers and the broader community.
Board members need to act ethically. This is fundamental as good ethical behaviour makes a difference. Boards need to show that ethical governance can help the company achieve more, better, faster and with greater certainty than is otherwise the case.
A good board enhances the reputation of the company through the reputation and connections of all the board members and these connections to the external world prevents the company from becoming insular and inward looking.
Legal compliance is essential but personal responsibility for achieving the desired goals of the corporation is even more important. If a board spends too much time on completing checklists it will not be spending enough time on adding value to the company. But good check lists can save time and measure what is creating value for the company. See this link for my presentation on verification in step by step business planning.
Finally the Board must take care not to unnecessarily consume the resources of the company including their own remuneration (either cash or equity) but more importantly, management and staff time.
Shareholders and Directors
As Professor Peter Sheldrake pointed out to me after reading my earlier Blog the relationship between shareholders and directors is tricky: in law, directors do not represent shareholders, nor are the ‘accountable’ to them. Directors are accountable to their role as defined in the articles of a company, and, in broad terms they have to fulfil the roles you set out at the beginning. This means monitoring the external relationships and environment of the company, ensuring legal compliance, monitoring performance, determining strategy, and ‘hiring and firing’ the CEO. Shareholders elect directors, but they are electing people to ensure that the company is properly run, not specifically to look after their interests.
The other issue that Peter mentioned is that a key issue for directors today is to ensure that a company is not only legally compliant, but also that proper audits are undertaken: internally to ensure systems and processes are both appropriate and are complied with, and externally that the annual audit is properly conducted, and that actions are undertaken to deal with any shortfalls or concerns that the external audit may reveal.
Better ways of working learning and living
March 29th, 2009Innovation and adaption drives value
The application of new ideas and improvements to existing ideas is at the heart of the knowledge economy, increasing value in the overall economy. Innovation is its currency. Schools, universities, research establishments, public libraries and commercial entities are central to the creation, enhancement and exchange of knowledge. Traditional methods for publishing knowledge, such as newspapers, magazines and books, now compete with websites, blogs, tweets and wikis. These more radical ways of publishing within the knowledge economy enable new forms of knowledge to develop within our community but it means that traditional institutions of the knowledge economy have to change radically or they will no longer exist.
This is happening. Radical changes have resulted from the many incremental changes made to the internet since it was established in 1969. This gradual transformation provided a solid, ubiquitous platform for human communication and collaboration. It is useful to think about these changes in phases:
- Web 0.0 connects technologists –The Internet (1969)
- Web 1.0 connects information –World Wide Web (1991)
- Web 2.0 connects people – Social Networks (2002)
- Web 3.0 connects knowledge – Semantic Web (2006)
- Web 4.0 connects intelligence – Ubiquitous Web (>2010)
Quality ideas not tools
Paradoxically these emerging global forms of the web have reintroduced more traditional storytelling techniques for knowledge exchange. Before the telephone, stories were recounted, listened to or written down. The Bloomsbury Set, for instance, the friends and family of writers, painters, critics and economists including Virginia Woolf, EM Forster and John Maynard Keynes, who congregated in that inner London suburb, challenged the social ideas of the early 20th century, exchanging their thoughts by mail delivered twice a day. With the web, its product, like letters of old, is much more permanent than telephone conversations and will make wonderful source material for analysing the knowledge economy.
Small Businesses need to collaborate to drive innovation so they can grow even in tough times
April 30th, 2009Back in 1996 as Managing Director of Acumentum I was invited to lunch with the managing directors of Quantum Market Research, Campaign Palace, FHA, Geyer Design, Invetech, Cambridge Consulting and Mann Judd. What do these companies have in common we were all providing services that retailers wanted to buy; web design, market research, advertising, branding, interior architectural services, recruitment and accounting services.
Our companies all overlapped in skills and expertise but none of us were competitors. Over the next 10 years we met maybe more than 100 times. We enjoyed each other’s counsel, friendship and trust. In various combinations these companies shared tens of millions of dollars worth of business and we pushed and encouraged each other to become better businesses. We learned how to collaborate.
What is collaboration you ask? It is learning to be open, to be prepared to take risks with others to make all of the group more successful because as a group we can work together to achieve much more than we can on our own. The group collaborates to become more than just the sum of its constituents.
Acumentum would never have been selected to design ANZ Bank’s Intranet “Max” without FHA bringing us in to support their rebranding of the bank. Geyer Design, Quantum and FHA transformed Jeans West.
Survive now prosper later
Small to medium sized enterprises must collaborate to improve their productivity and maximise their wealth. The global financial crisis has reduced demand for services including information technology and communication services and to survive this crisis we all need to perform at our best. Anything less threatens our survival. Collaborating with similar likeminded companies will help you not only survive the GFC but will put you in an excellent position to accelerate your activities to enjoy the positive business cycle that will inevitably follow.
Whilst we might start out like the lone wolf we all soon learn to hunt in packs. Anthropologists inform us that when our forebears learnt to hunt in packs their daily intake of protein increased and they grew taller and stronger. In teams we learn better co-ordination, co-operation and collaboration which reduce risk and improve outcomes.
Our ancestors began their long journey toward our digital economy making and catching everything they needed to survive. Over more than 100,000 years the human race learned to specialise and organise into teams to maximise achievement. Examination of our complex economies particularly how we human behave clearly shows that team work, leadership and trust have significant impact on economic performance.
The importance of trust
Stories from our childhood glorify the wonderful inventions of the lone genius but in our working lives we have all recognised that today’s great inventions usually result from substantial collaboration, often from teams spread all around the world. It seems obvious that more complex problems are best addressed in teams. Using teams to solve complex problems takes more than good project management and co-ordination it takes real collaboration. Real collaboration demands time, resources and most importantly trust.
Massive collaboration dramatically increases the rate of innovation. When teams of experts work on a small piece of a very big problem and collaborate effectively, very big problems are solved in shorter and shorter timeframes.
Collaborating with others to create new ideas, to share and develop those ideas to create new value has been shown by economic researchers to be a superior strategy than individual invention. Researchers like McKinsey’s Beinhocker have shown that much greater economic value is being produced in economies that have high levels of trust because that is a much more productive environment for collaboration and sharing for mutual benefit.
Levels of Trust vs GDP per capita
Recently I finished reading Eric Beinhocker’s wonderful book The Origins of Wealth. This book helped explain why the collaboration strategies I had developed over 23 years of running my own business, worked. Beinhocker provides extensive evidence and theory on why organisations that can build on lessons learned and who create a culture of trust succeed where others fail. This graph clearly shows that economies that are built on high levels of trust generally have much greater GDP per capita than those economies with low levels of trust.
It is insightful to notice that economies with common characteristics often have similar positioning on this graph. The former communist countries have inherent lack of trust and poor economic performance. Notice that China is a major exception amongst the communist countries and may well benefit from their high levels of trust in building their economic performance over the coming years.
Solving the complex creates value
The small business environment covers the complex and chaotic to the complicated and simple. All small business operators know that if it is simple everyone can do it. Once a product or service is made simple, it becomes a commodity and then you must compete, either on quality of service or price, and it is usually price. Small ICT businesses have difficulty providing scale and competing on price. The best small businesses outperform others because they are flexible or nimble and more efficient or all three. They are able to make sense of the chaotic, master complexity and sort out the complicated.
In working through the complex I am often reminded of that wonderful quote from Oliver Wendell Homes that much admired American jurist, who said “I would not give a fig for simplicity this side of complexity but I would give my life for simplicity on the other side of complexity”. I believe very strongly that leaders in small business need to collaborate effectively with other small businesses to get to the other side of complexity and in doing so generate substantial value for their customers. By sharing this increase in value with their customers they build trust with their customers and customers value dealing with them. So small business should look for other small businesses working in complimentary areas, facing similar challenges where solutions to complex problems can create substantial value. Rapid innovation, delivering greater value to customers builds sustainable businesses that create more wealth for their shareholders, staff and customers.
Ever since Adam Smith described the influence of the invisible hand to describe the self regulating affect of markets and wrote in Wealth of Nations that increased specialisation in the division of labour increases wealth, businesses have focussed on what they do best. “Stick to the knitting” is a well warn catch cry. There is substantial published evidence that increased specialisation leads to increased wealth. Yet so many small businesses see the best way to grow their business is to do more things for their established customers. The opposite strategy of finding more customers wanting their “thing” is far more successful. But winning new customers on your own is hard; collaborating to share your customer base with trusted partners is far more successful.
Creating value from trusted relationships
Capitalising on the valuable trusted relationships is a sound growth strategy for most small businesses. Because these relationships are valuable don’t give them away easily. But when you are able to identify capable expert collaborative partners, when your ability to assess other suppliers in complimentary fields to your own you can provide your customers with valuable solutions to important problems they face, you are creating value for you, your customer and your collaborative partner. Because your customers trust you they do not have to do as much work evaluating a new product or service. But the bottom line is your customer trusts you. Don’t breach their trust because if you do you will destroy value.
How to collaborate
In choosing a collaborative partner seek out complementary skills and capabilities so that working together, sharing their ideas and developing new solutions additional value is created which you can choose to share with your combined customer bases.
Effective collaboration does need high levels of trust and cannot be achieved overnight. So make sure that the desired outcomes from any collaborative process justify the effort and resources required.
In these tough times small businesses may not have enough work to keep their valuable employees occupied. They may not be able to pay next month’s salary bill or valuable employees might be getting bored or frustrated at doing work that is below their skill level. If two or three small businesses with similar skilled employees share those employees they will be able to continue to provide staff with challenging work and share the costs to help them through the down turn.
The best strategies in the world are worthless until they are properly executed. So whatever the goal for your collaboration it must motivate action.
As you go about choosing who should be in your CollabIT group it is important to think carefully and do your due diligence on each other. Decide who’s in and who’s out. Then as you go about building trust and start collaborating to create new value take note of what works and share it with other groups.
In choosing who should be in your group it is important to be close enough in skills and expertise to be able to work together on valuable complex opportunities but you don’t want to be collaborating with your direct competitor. Experience shows that whilst there may be 5 or 6 companies in a collaborative group most projects are done with one or two collaborative partners at a time.
It is vital that you know what your core specialisation is. You need to ensure that you constantly improve this specialisation because over time if you stand still your collaborative partners may conclude you are no longer adding valuable specialised expertise to the group and they will move on.
Once a reasonable level of trust has been created very complex problems can be addressed. Because trust has already been established in the group lengthy legal agreements are not required before exploration for the new project can begin. Hence a good collaborative group adds value because they can begin more quickly than the traditional consortium.
Do you have a good story about collaboration? Would you like to share it with other small businesses? Visit CollabIT Victoria group on LinkedIN.
The Web is changing how we live and how we create wealth
July 29th, 2009Acumentum’s catch cry was “Creating Better Ways of Working, Learning and Living” and now 10 years later the world’s web designers and entrepreneurs have changed how we live. eBay has given us an online garage sale, Facebook a much better way to share photos and organise parties, and no one would search for a new job or buy a car or house without spending hours and hours researching these most important decisions using the Web.
In short the Web has changed the way we make decisions and because of this it has changed the way our economy works. The way we co-ordinate, co-operate and collaborate has been radically changed because we can rapidly and globally share ideas to engage others. By engaging others with our ideas whilst building trust we more efficiently conduct economic activity so we create more value. Hence we create more wealth.
It has taken more than 40 years for the Web to achieve this impact on all our lives. My first experience of a global network was IBM Profs network in 1978. It was only 7 years earlier that the very first email was sent by computer engineer Ray Tomlinson in 1971. Since first using Profs I have seen 4 major evolutions which could be described as:
Web 0.0 linking the technologists from say 1969
Web 1.0 linking information pages from 1991
Web 2.0 linking people in social networks from 2002
Web 3.0 linking knowledge from around now
What we need to learn from these major phases of evolution is that it is the new forms of organisation that are important and never the technology itself. Without electricity we could not have computers but to see computers as an extension of electricity is pretty meaningless.
So by studying how organisations have changed in the past we can gain insight into how modern web-based ways of co-ordinating, co-operating and collaborating will change how we structure commercial activity and organisations in the future.
As film technology exploded after Warner funded the development of cinematic sound with the Jazz Singer in 1927 we soon had Gone With The Wind (1939) and The Third Man (1947). But it wasn’t just the cinematic experience that changed; the organisations making films also soon went through a revolution too. The monolithic studios of the 1930’s have now been replaced by new flexible forms of talent organisation and we have seen new ways of structuring film production companies and sharing risk.
It is now our challenge to see what forms of organisation and structure work best in the twenty-first century. What forms of organisations will encourage ideas? How can we structure our teams to best manage creative tension to generate the most valuable ideas? Who is creating the value and how should they be rewarded?
Connecting knowledge with people
Those that quickly learn to collaborate will create the most value. What the explosion of online services shows is that the only way to stay in front is to run fast. Past achievements and horded assets will not account for much. Look at how quickly Google has eclipsed Microsoft. Our past will only be valuable if we can use it to connect with people to generate new and important ideas that others value. The lone genius looks like a dying breed. People who can co-ordinate, co-operate and collaborate best have a much higher likelihood of creating the winning ideas and hence the most value.
There is no place to hide today. The world is now a village and you will be known for what you are and what you deliver. Tools to manage reputation will emerge. These tools will aggregate what you do with others and how often you work with them rather publishing what someone else has said about you.
This enormous connected village means there are people out there that know what you need to know to achieve what you what to achieve. The most successful people in the future will be those who are best connected to those people.
Now are you prepared to back yourself solo against the world or do you think you would rather call a few friends, friends who could be anyone of the 2 billion people connected to the internet today? Some of these two billion people can help you generate better ideas and workout better ways of executing to create the most value in the shortest period of time.
Specialising – providing enhanced skills, knowledge and expertise
But will 2 billion connected brains just swamp all of us mere mortals? What strategies do we need to deploy to survive and prosper?
Most people today use specialists for most services they need to live. At home we have outsourced painting, plumbing, lawn-mowing, garden design, food preparation and house work. At the office most small businesses have outsourced IT support, printing, human resource management, and recruitment just to cover a few services from a very large list. The very best firms identify what it is that they are exceptional at and focus on that to drive their business; all else they outsource.
Ever since Adam Smith described the need for increased specialisation in the division of labour in his book Wealth of Nations, businesses have been learning to focus on what they do best. “Stick to the knitting” is not a new catch cry. Today there is considerable evidence that increased specialisation results in increased GDP per capita.
The problem with increased specialisation is that our customers want whole solutions and the ease of buying them at the one shop. For larger organisations dealing with a myriad of smaller companies brings with it increased risk and higher transaction costs.
The automotive industry solved these problems by creating tier one, two and three suppliers, aggregating parts through each level until cars are produced by the global manufacturers. In this way a smaller business can design the very best seat covers and provide those to the supplier who makes the seats who provides the seat to supplier who assembles the car interior solution who provides all that to the global manufacturer. The auto industry invented “just-in-time” processes to make this new way of organising work possible.
Now that people everywhere use the Web to communicate and socialise it is becoming possible to invent “just-in-time” processes for every industry and service sector by knitting together different type of organisations with very different characteristics. Small, agile and flexible organisations will combine with others, both small and large, in an effort to produce the best results. Just as the Internet was designed to continue operating despite losing parts of the network, new forms of organisation will also be able to continue to operate at high levels of performance as the cells that they are made from rapidly change.
It is widely acknowledged that businesses have had to innovate or they have died what is now emerging is that companies need to collaborate or they will die.
Business Planning: It’s a Lot More Than Strategy
August 24th, 2009The word ’strategic’ has become pretty meaningless through overuse. What is strategic and what is tactical? Is strategy just about direction and tactics just about the doing or operations? Company boards are said to be responsible for strategy and the management team responsible for operations. But boards seem to spend most of their time reviewing management decisions, operations and shadowing the management team. Therefore it must be easier to review actions than set direction and allocate resources. How can we best develop strategy and also excel at execution?
A start-up has a small bundle of cash and some highly energetic people who are passionate about an idea. Each and every day they make decisions about spending their limited cash and what they do with the 86,400 seconds each of them has each day to get things done. Every dollar and every second can be spent on many things but can only be spent once.
Strategic planning is about deciding how to achieve the best possible results with your available resources. Each choice sets up future possibilities and closes off others. So strategic planning is about making the best choices. For a company to make the best choices it must continually learn from experience. But it is in the doing that strategy and operations intersect. Good choices must be well executed to achieve outstanding results. Ultimately good business planning is about changing behaviour within the company so that the right things are done and they must be done right to achieve the best possible outcome.
Why is Planning Important?
I’ve often heard it said that planning is a waste of time because whatever you plan for your business it never turns out the way you plan it. My response to this is that planning is like training to run a race; it is fitness preparation for future business activities. Much like a thought experiment it exercises our brains and provides a review of our resources to run a variety of races without actually expending the energy and resources to run each race.
In being prepared to run one type of race we will be better placed to run another when the opportunity is presented to us. Our dilemmas are many as we might prepare for a marathon to only find out we have a short sprint to run but planning is important because a well prepared marathon runner can still beat a couch potato over 100 meters. Having prepared our company for plan A even if we are forced to make up plan Z on the run our preparations for plan A are more likely to prepare us for any eventually than doing no preparation at all.
So strategic planning is more about learning to be ready, fit and able to meet any opportunity than it is about preparing for a specific anticipated future opportunity. It is about honing the organisation’s skills, culture and resources to be agile and capable of performing in the emerging economic environment.
Business Planning as a Learning Process
To improve the outcomes achieved by any business it is essential to create a continuous learning culture, one that constantly strives for, not accepting anything less, than a high performance culture. Research into learning identifies that people learn best in a realistic or ‘authentic’ environment where they can learn by doing.
At Acumentum we achieved this by three integrated strategies. Firstly we established a 90 day induction process for every employee with a tailored, more detailed, induction for our Industry Based Learning interns. Secondly we created a formal coaching and mentoring system right across the company so that every member of the team had a mentor and a ‘management’, ‘design’ and ‘technical’ coach. This created a lattice of relationships to encourage everyone to share in everyone else’s success. The third and cornerstone strategy was to run an annual three day business planning and learning workshop (usually off site) to kick the year off, set major goals and provide hands on learning activities to ensure the company had the skills to implement the business plan.
A strong thread through all three of these strategic programmes was to establish and foster the core values and foundations of our culture. Values cannot be found in a book or learned at a conference or inspired by a guru. The values of a company are inherent in the people who make up the company. Understanding those values helps ensure that the people recruited, share those values and work together to help shape the culture as the company grows.
I have seen a team of people who were engaged and passionate about what they were doing and outstanding results flowed from this. I’ve also personally made the mistake of failing to exclude people, who whilst being impressive, did not share the same values and were not culturally in tune with the team. Looking back the damage done was heart-breaking.
The Role for Leadership and Management
Business books talks more about leadership than management. However my experience suggests success seems to demand both. In small business that means the leaders need to know how to lead as well as manage their company. Leadership takes many forms with few silver bullets. You can lead from the front or behind and with gusto or stealth. In all cases leaders need to be authentic, consistent and connected with their team. Whilst Groucho Marx may have said “To be successful you need to be sincere and once you can fake that you’ve got it made” it is only a matter of time before a team will be undermined by a lack of authenticity, inconsistency or spin.
Effective business planning begins with the leadership group clearly setting down what it is that they are really, truly, madly, deeply passionate about. They need to know and be able to communicate what will be achieved by this passion and why others should join them. Your plans need to empower and engage your followers. People become engaged when they see that they can make a difference. People need to believe in what they are doing. It is not surprising that credibility comes from ‘credo’ or ‘I believe’.
Developing a High Performance Culture
The path to be the best in the world at anything is long and arduous. In his insightful book ‘Outliers’ Malcolm Gladwell suggests that it takes 10,000 hours to become an expert in anything of substance. That the real secret of success is that to achieve these 10,000 hours of practice before others, requires early access to the right opportunities.
A business cannot afford to pay for 10,000 hours of learning for all staff so the business needs to set goals where skills and expertise already exist. Learning objectives should be a fundamental part of the business plan to ensure that all activities of the business build skills and create assets that enhance the future earnings of the company.
By accepting mundane and low value projects and opportunities the company is limiting its scope for future work. You are only as good as your last project. The value of and skill required for the next project must be a little better than the last. In this way you steadily move up the value chain.
A high performance culture also requires that we unlearn certain bad habits. The planning and development process should consciously identify unproductive behaviours and determinedly set about removing them. Be aware it is much harder to unlearn something than to learn it in the first place!
The Planning Process
The planning process should be well structured and easily understood. The role of the board, leadership team and operational groups should be clearly understood by everyone in the company. The company strategy should be set by the board, communicated and executed by the leadership group with the support of the whole company.
Acumentum explored a number of approaches and settled on the following widely accepted process:
Session One: The Audit – what is the current state of the business?
In setting out on any journey it is essential to know from where you are starting. A good plan must be built on the solid foundation of a realistic view of where the business is today and that is not where you wanted the business to be today; it must be exactly and accurately where the business is today.
Start with understanding your environment. Evidence based decisions require hard facts. Look for data more than opinions. What market(s) do you operate in? What type of organisations are typical customers? How many ideal customer organisations exist in your target market(s)? What value is created by your core business activities? On average how long have current customers been customers? What is the average spend, of all current customers, top 3 customers and bottom 3 customers? How many new customers has the company won over each of the past two years? What has been the average monthly invoicing of these new customers? How many customers has the company lost in each of the last years? What was the average monthly invoicing of these lost customers? Who are your competitors? How many competitors actively target the market(s)? What are the major competitive issues? How easy is it to attract staff? What organisations or institutions will provide you with ideal recruits? How mature is this industry sector? How fast has your company grown over the past 3 years (Revenue, Gross Margin, EBIT)?
Session Two: Assess – what does the evidence tell us?
Once you have gathered the facts they must be carefully assessed. Leave predicting the future to soothsayers and mystics. Examine the evidence you have gathered and create likely scenarios for your business. What evidence is there that this sector will continue to grow? What technological or economic forces that might impact this industry? What would we do if our customers no longer required our main product or service?
Acumentum received millions of dollars designing and building websites in the 90’s. Because there were so few examples to copy and university graduates had not been studying how to do this we employed designers who could create things from scratch, people who could write the rule book and we were able to charge a premium for their work. Our 2002 business plan failed to ask the question what we would do when our customers no longer needed this level of service or wanted to hire more specialised design services.
Session Three: The Plan – Goals, Objectives and the Action Plan
The planning part is rather straightforward; goals, objectives (Specific, Measureable, Achievable, Results oriented, Time framed) and a plan of actions that will achieve the goals. Where does the company want (need) to be in 3 years time? The goals must be realistic but not conservative. Three years is a realistic timeframe that requires action now; anything greater is too far over the horizon, anything shorter is problem solving. Goals must be set within the purpose of the organisation. What is the organisation’s purpose or meaning? Why does it exist? And whilst “profit” may seem the obvious purpose of any commercial organisation; profit is to an organisation as oxygen is to life, vital but not sufficient.
The plan must not only clearly identify what actions must be done but what resources are required to carry them out successfully. Looking back on the many plans produced at Acumentum not enough of the plan actually got done. This possibly was because we failed to accurately identify what resources (time, tools and materials) would be required to successfully execute the plan. What do we need done to get there from here? A further mistake we often made was not to carefully consider what alternatives do we have to get there? Rather than just look at one plan, what alternative plans are there; if we invest in x this year what will happen rather than investing in x or y next year or in year 3? What combination of options will give us the best results? And what level of certainty/risk is there in this plan of action? In the end, your plan is a choice of options with tradeoffs.
One of the founding staff members at Acumentum Roly Maxwell often said “what you can’t inspect don’t expect”. An alternative cliché says it slightly differently, “if you can’t measure it you can’t manage it”. The key lesson I’ve learned in business planning is that your action plan must ensure that your objectives are aligned with your goals and that all the planned actions are directed at achieving the objectives. If people engage with the plan and understand the alignment of goals, objectives and actions they will get things done. The team will then know what has to be done, why and when.
Session Four: Doing it!
For a plan to be well executed in any small business it must become an integral part of everyday business. Very few, if any, small businesses have the spare resources to allocate to implement a new plan. To change behaviours in the business and to ensure that those people allocated the responsibility for each task in the action plan understand the value of their tasks in the everyday operation of the business, the action plan must become a real project not something everyone does in their spare time.
Progress must be measured and the everyday management system that provides metrics for the operation of the business must incorporate the measuring of progress towards business plan goals.
Ongoing Verification and Review
Everyday management must verify that what has been agreed to be done is being done and that what was anticipated to be achieved is being achieved. One of the big challenges for every business owner is to be able to stop working in the business and start working on the business. A structured review process for the business plan is one of the best ways to assist in this transition. Quarterly reviews of financial, marketing and human resources strategies helps elevate the thinking processes to questioning the direction and allocation of resources.
Conclusion
Effective business planning creates fit agile companies that can respond and exploit the best opportunities that come their way. The continuous learning approach sets real challenges for us to be better today than yesterday but we know that we are not as good today as we will be tomorrow. As we learn we grow and become more capable but always ensuring that the company is fit and capable of taking on the challenges it faces. Always stretching but never straining!
If you would like to view a 15 slide 28 minute audio presentation lick here.
Mass Collaboration is Driving Specialisation
September 23rd, 2009The things we are best at we enjoy doing
The converse is also true the things we don’t do so well we rarely enjoy doing.
Most small businesses are built around the passion and specific expertise of the founder. But there are many things that must be done if a small business is to grow and prosper. Cold calls must be made to find prospects. Proposal written before contracts are signed. The work must be done well to meet the needs of the customers. Invoices must be prepared and sent before the cash can be collected for all the good work done. The accounts must be kept to financially manage the business.
Be honest with yourself. Think about your own business and I am confident that you will, like most small business owners, recognise that you only do a few of these things better than most. To run your business you think you have to do it all but do you? Should you?
Back in about 2004 Acumentum had been employing an enthusiastic and knowledgeable techo to look after our network to make sure that all our expensive designers and programmers didn’t waste time configuring and maintaining their PCs and software. He earned about $50K a year. Having mastered our 30 PC network he accepted an offer of a more exciting job working on a larger and more complex network. We wished Martin well. We advertised and appointed a replacement but a week later the new techo resigned (because he got a better position he was going for). Right at that frustrating moment one of the owners of The Grid made a cold call to our office and not surprisingly he was very well received as he had a wonderful solution to our problem! I think we even gave him an espresso coffee and a sticky bun.
The Grid are specialists at setting up and maintaining PC networks. Rather than costing me $50,000 salary plus payroll tax, Workcover, sick leave… I needn’t go on. They put a proposal for $22,000 per year covering every working day of the year! No payroll tax or Workcover but critically no calls in the morning saying I’m sick can’t come in today.
Earlier this year I began coaching David Markus the founder and Managing Director of Combo. Combo (www.combo.com.au) is a firm that provides outsourced technical support for computer and telephone networks. They have worked extremely hard at refining their specialty. Learning how to do things more effectively, more reliably, at a higher quality and ultimately at a much lower cost than their customers could possibly do themselves.
By setting up the network to refined standards, configuring software so that it meets requirements and providing online access for experts to assess and fix problems Combo have improved the productivity of their customers whilst substantially reducing their costs. They can do this because they learn better techniques and better solutions every day. New standards emerge and costs are reduced. Everyone is a winner.
Increased specialisation is driving innovation which is creating real value and ultimately wealth
This is not a new idea. Adam Smith wrote in 1776, six years after Captain Cook sailed into Botany Bay, that “the greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labour.” That is productivity gains are achieved by breaking the work into its specialised parts.
Over the 235 years since Adam Smith identified the importance of specialisation, economic success has clearly demonstrated the value in freeing up workers to focus on what they do best, creating efficiencies through learning better ways of accomplishing the chosen specialised tasks, improving the process by breaking the tasks into simpler tasks and providing opportunities for the specialists to innovate and invent better ways of achieving the outcome.
In this time industry has also learnt the cost of mind numbing repetition and worker disconnection that reduces productivity and over relatively recent times work practices have focussed on motivation and responsibility to drive quality and productivity.
All this has produced highly innovative outsourced businesses that provide products and services to save time, improve quality or lower costs. Phil Ruthven, Australia’s best known futurologist, has been forecasting the outsourcing of cooking, cleaning and education from our homes for more than 20 years. Think about the last time you went to a good butcher. Not only do they dice the beef but they will also add the marinade and provide you with the ready ingredients so that all you need to do is cook.
As the NBN is rolled out and every business and every home gets 100mb (which will soon become a gigabit) Internet access to their desktops it will be possible to divide up the tasks even further and new and even more innovative businesses will emerge.
Small business owners are self reliant, action oriented, results focussed people
Will the characteristics of successful small business owners hinder owners in taking advantage of the emerging outsourcing businesses that can improve the quality and lower the costs of many of the tasks they do internally today?
In 1937 Ronald H Coarse published a paper titled “The nature of the Firm” in which he argued “A firm will tend to expand until the costs of organising an extra transaction within the firm becomes equal to the costs of carrying out the same transaction on the open market. As long as it is cheaper to perform a transaction inside your firm keep it there. But if it cheaper to go to the marketplace do not try to do it internally.”
In 2009 the enormous range of potential suppliers (usually over the Internet) of ever increasing range of tasks makes the cost of carrying out most things externally cheaper than continuing to do them in-house.
Smart businesses today use their business planning process to thoroughly review every task they perform in their business. Each team within the business should be encouraged to compare what they do every day and decide if someone else can do it better and or cheaper. They should be using this process to constantly focus on what they do best.
But even with those things that people do best they need to be using the Internet to help them do it even better. “Someone outside your organisation today knows how to answer your specific question, solve your specific problem, or take advantage of your current opportunity better than you do. You need to find them, and find a way to work with them collaboratively and productively with them.” (Wikinomics: How Mass Collaboration Changes Everything)
Addressing Business Frustrations can add Value to Your Business
October 30th, 2009A Q&A flashed up on my LinkedIN home page recently asking “What is Your Biggest Business Frustration?”Reading through the many responses I was reminded of what I was taught at IBM, focus on those things that are within your ability and facility to fix and a much later lesson that being held responsible to fix things for which you have no authority will send you insane.
Using my 23 years of experience owning and operating several small businesses I created the following approaches to help any business owner address the frustrations from the LinkedIN Q&A:
1. Turn your frustration with customers failing to value your ideas, time and assets by building real partnerships with your customer or supplier to increase the value of your services by improving productivity and quality and then share the dividend with them.
2. Work with industry associations to develop partnerships with governments for when they are both providing services (licence, regulate, delivery) to industry or being customers for products and services from industry.
3. Engage employees in the purpose, execution and value creation in your business and share the increased value with them.
4. Engage directors, shareholders, potential investors and experienced entrepreneurs in establishing an accurate appreciation of the value of your business and the future rewards from it so that the risks and rewards from their investment are more accurately able to be identified.
5. Develop strategies that achieve the largest returns on the assets (people, expertise, IP, capital, facilities, suppliers and customers) of your business based on providing products and services at a quality and price that your customers are prepared to pay.
6. Recognise that whilst owners often are employees of a business, employees are mostly not owners in the real sense of share ownership of the business. Confusing this frustrates the owner and irritates the employees.
Customers
It’s obvious but worth stating, to survive and prosper all businesses must recover all their expenses plus make a reasonable profit. Some of the profit is rightfully returned to the shareholders and usually most of it invested in improving the business. Therefore it is in the interests of long term customers that their suppliers make a reasonable profit so that the sunk costs of the supplier’s understanding a customer’s business can deliver future value.
When a customer fails to respect the value and ownership of ideas (Governments are the worst offenders) by taking proposals from industry and shopping the best around to get the cheapest company to build it, the customer is increasing the costs for better businesses whose ideas are taken, must be recovered their costs from their other customers.
A variant of this is when a customer demands that suppliers present their design solution, without payment, as part of the selection process. Inevitably, despite claims to the contrary, the ideas provided by the losing companies and not paid for by customers are consciously or unconsciously utilised in implementing the solution. I was outraged recently by the mindless media attacking the Victorian Government when they provided a payment to the losing bidder in the Desalination Plant tender process for recognition that their participation, ideas and comparative value had come at a real cost to the losing bidder and benefit to the project, government and taxpayer.
Government
Governments are lampooned and we all continue to laugh at Yes Minister but despite this, our society would not and could not operate without government. There is too much paperwork for business so governments must be forced to improve how information is gathered and they must ensure that only information that is useful and used should be collected.
Public servants and the public service culture is focused on process whilst industry would prefer a more outcomes focus that supports them in driving value in our economy, yet at the first sign of unfairness or the appearance of unfairness, lobbyists and the media cry foul and demand the Ministers scalp.
In working with government, industry must ensure that outputs are efficient but that value is measured by the outcomes achieved. Too often when it suits us we take our fees and are happy to hide behind the delivery of a specified item knowing that whilst we have delivered to specification the customer will not achieve their desired outcome.
So when we decry public servants for looking busy and executing processes that produce little in terms of value and complaining about their lack of risk taking and constant care to avoid making any mistakes we should recognise we can’t have it both ways.
The solution is for industry to work closely with government, each doing what they are best at, but the tax payer will continue to lose if we privatise the profits and socialise the losses.
Employees
In the Tipping Point Malcolm Gladwell has written about the vital role played by special people who can ignite a social epidemic. He highlights the critical role Paul Revere played in the mass mobilisation of citizens of New England against the British after the Boston Tea party at the start of the American Revolution. In my local community of Woodend two young mothers; Kellie Duff and Jane Walduck similarly ignited a social epidemic to build a children’s park. Kellie and Jane mobilised 100’s of people to work tirelessly to not only raise $600,000 but provide more than $400,000 of in-kind services to build a wonderful place for our children to learn and play.
Every successful company needs people who not just know how to do things but know how to engage people and they know what it takes to achieve the goals for their company. Business owners can bleat about employees who fail to work at work and employees can rail against bosses who fail to give them the support and authority to get things done. Value is created when goals are set, resources allocated, measures agreed and rewards for outcomes delivered to motivate the team for the next round. The success lies in a team that has complete clarity and unity of purpose, a breadth of exceptional, driven talent that naturally coordinates, overcomes whatever obstacle that is presented and actually emerges stronger for it at the end. Plus of course, leadership that is unwavering, inspiring and supportive.
Whether it is a debate about CEO remuneration or pay for performance for all employees it is essential to match the actual achievement with the reward paid. The complexity comes when outcomes are difficult to measure. At one level sales are easy and a commission rate set but poor sales people know that they can survive for months or even a year or two on a good base with a car and expense allowance. Business Owners learn that top sales people are free (their total costs are met by the additional business they bring to the company) and poor sales people cost you a bomb!
There are dangers in focussing too much on the short term and failing to recognise what builds future value. Valuable employees need time to think to develop their skills and expertise. In today’s 24X7 world, people “jet ski” across a broad ocean of online information delivered to us all by the Internet but make sure that your team does a bit of scuba diving to plumb the depths of real expertise and knowledge.
In the 80’s the Hawke Labor Government introduced the Training Guarantee Act to force businesses to invest in the training and development of their workforce. It did not solve the problem and what looked like a good idea was soon abandoned.
Whatever the process, remuneration must be fairly be aligned to reward the creation of value. Over the 23 years I operated my own business I was often told after I fired someone that everyone in the team resented that they had carried a non performer for too long! People know that when they see a colleague slacking off and working on non value adding activities that it is their efforts and the value that they are creating that is paying that person’s salary. I had a favourite saying that I don’t pay your salary you have to earn it.
Good people don’t blame others when thing don’t work out. They examine what has happened and ask themselves, why did that person not understand my position or point of view? They ask, what did I miss? How could I have presented it better? Good employees know that when a customer rejects a brilliant idea or design then they need to learn why. They never dismiss the customer as stupid or an idiot.
Having written about frustrations with Customers, Government and Employees I’ll take a look at frustration with Investors, Returns and Business Ownership.
How will the NBN impact the Digital Economy?
December 29th, 2009During 2009 I frequently heard people ask “What will be the impact of the NBN on the digital economy?” In 2007 when the ALP first launched their bold Broadband strategy they were focused on lowering the telecommunications costs for small business and reversing the decline in economic productivity.
Now as we enter 2010 it is becoming rather meaningless to continue to specify the ‘digital’ economy as being separate or distinctive from the economy as a whole. Whilst it was sensible to label Internet mail as email in the 70’s the time for labelling things digital or ‘e’ this or that has now past.
The economy is the labour, capital and land resources, and the economic agents that socially participate in the production, exchange, distribution, and consumption of goods and services and in 2010 all of that is driven by electronic and digital technology.
Or as the 1992 campaign slogan hung in Bill Clinton’s campaign headquarters “It’s the economy, stupid” must keep us all on message to direct our efforts to where it really counts – the economy.
Following the tumultuous adjustments in all economies after the collapse of Lehman Brothers in 2008 the GFC illustrated just how little we understand about how our economies really work. Writers such as Eric Beinhocker and Robert Shiller have questioned traditional assumptions and examined the extent human behaviour is taken into account in economic models. This has highlighted for me the importance of trust and its role in creating economic value. See my earlier post discussing the relationship between trust and GDP.
Therefore if the NBN is to provide a major fillip to the Australian economy, then those that govern NBN Co must understand how applications will drive substantial value creation in the real economy. In my contribution to the book Melbourne Global Smart City published by Fast Th!nking I was asked to describe how technology had contributed to what makes Melbourne special. In this essay I argued that Melbourne is a city of knowledge and ideas and that our openness in all our endeavours creates a special personality of place that makes Melbourne a wonderful place to live. Technology has magnified our capacity to create value by enabling us to create better ways of working, learning and living. The NBN has the potential to accelerate this innovation and make Australia an even better place to live.
It is not that difficult to imagine a truly connected world; houses, offices, people, automobiles, roads, rail, retail, distribution, manufacturing, resources and the environment. Analysing collected data to utilise past trends with real time events to optimise decisions. What is the optimal route to work at 7:30am Monday morning? What is the lowest cost or carbon footprint, shortest distance or least time? There has been a crash on the freeway with real-time traffic data which route should you now take? If vehicles communicate with other vehicles in close proximity safety can be improved. Connections between shoppers, retail outlets, distribution channels and factories will optimise choice, cost and profits. By monitoring soil moisture content, weather conditions and forecasts ensure agricultural production will be maximised and water usage reduced. With every person or connection providing information about a place, an event, an action or condition effort can be captured and shared. Augmented reality can provide an overlay of information about a place, the building in the place or the service operating out of the building. Information can come from anyone; government, owners, customers or tourists.
All this data provides the means to gain enormous insight into what engages, motivates and influences human behaviour. If such insight is the purview of a select few or used by the majority to dictate to the minorities then the foundations of our democratic society will be threatened. However the very power of ubiquitous connections and an open internet should provide the means to enhance our democracy and not be the seeds of its destruction.
The powers I speak of are the ability for individual to contribute and participate and for the individual to control who accesses and assesses their contributions and participations. In this way people must be able to protect their privacy, property and safety. An improved political economy will need to:
- Establish and enhance trust; trust in data, applications and people. If people have little trust in these things then the potential for any investment in a national broadband network to improve the way we work, learn and live will be severely limited.
- Establish and maintain a reliable means of exchange for value. Such a system must provide an economic, efficient, safe and secure way for making all payments both large and small. Just look at the iTunes App Store for the iPhone. With small payments like $1.99 for applications it changes buying behaviour and people buy millions of dollars of games and applications. Apple has just announced that revenue from their Apps Store is 28 times the revenue this Christmas compared to last Christmas. Australia should set the policy framework so that Banks (or others) can provide efficient payments for information, applications and services in a safe and equitable commercial setting.
- Establish an equitable globally system of taxation and funding for public services and the operation of nation states and international trade. This is going to be difficult as smart operators move their capital, resources and means of production to the lowest cost economies whilst servicing the highest cost economies where their margins are maximised. This complex, global, political system must be resolved in a fair and equitable manner.
- Enhance the systems that protect property especially intellectual property and copyright to ensure equity in order to encourage investment in property. When people have little confidence in the probability that they will be rewarded for their investment they do not invest. Without investment innovation stops and the economy collapses. When a $1,000,000 invested in physical property (house) can remain in the family for generations and a similar investment in creating and marketing music that relies on copyright will disappear 70 years after creator’s death. When so much of our economy is based on knowledge and intellectual property a much more consistent property system must emerge.
The future prospects for our planet threatened by climate change (man-made or otherwise) and the complexity of our globalised economy make any future projections foolhardy. Whether the seeds of our destruction have already been sown or if the combined genius of the world can overcome any obstacles to create a better place to work, learn and live we shall just have to wait and see.
Swatch: Big Companies Behaving Badly
February 27th, 2010It is very poor strategy in our connected world to create a monopoly after sales service structure to price gouge your customers because you think you can. Swatch, the abbreviation of Swiss Watch that now owns many of the major brands including Tissot, Longines and Omega refuses to support your local jeweller in the High Street to repair and service any of their watches. You only have one choice which is to send your watch to Swatch. With no alternative comes poor service and high prices.
Three Months to Repair a Watch – Not Good Enough
In October last year my adored Longuines watch stopped working after 15 years. It had been the replacement for the Tissot watch my mother had bought me for my 21 birthday. My mum died back in 2004 so I’d rather fix than replace my watch. We have a delightful jeweller in Woodend. The proprietor is the sponsor of the Woodend Cricket Club and highly respected in the town. In a small town the local traders look after their customers.
Instead of capitalising on the goodwill of small businesses in every High Street in towns and suburbs across the nation Swatch refuse to provide jewellers the tools, parts and service guides so they can do what they do best; looking after their customers. When my watch stopped working last October my jeweller informed me he couldn’t service my watch because Swatch demanded that owners of their watches deal directly and only with Swatch.
Not wanting to travel to Glen Iris on the other side of Melbourne I was told I could send my watch by registered mail for service. No, they couldn’t tell me what it would cost as they would need to examine the watch first. Fair enough. So I sent my watch. A few weeks went by and nothing. Upon enquiry I was informed quotes can take up to 6 weeks “our service department is very busy.” Just before Christmas I get a letter. That’s right an old fashioned letter delivered by Australia Post. Using the email address on the letter I replied immediately questioning the high price of repairs but with no other choice had to authorise the repairs. No response. I telephoned to enquire about progress. No progress sir, you need to send your credit card details for payment before repairs can begin! I email a digitally signed pdf with the requested details immediately.
A month later I get a message on my mobile phone; your watch is ready for collection from Glen Iris! I called back asking why my earlier instructions to return the watch by registered mail were not followed. That’s not in our system sir but yes they would send it. A week passes no sign of my watch. When I called “Grant” ( we have become very familiar over the past couple of months so we are now on first name terms) informed me we can’t send you your watch you haven’t paid for the repairs. Exasperated I exploded you have my digitally signed credit card authorisation! Grant meekly responded, we couldn’t open it we can’t open pdf files as we don’t have that software.
As Adam Smith set out in Wealth of Nations in 1776 competition for customers drives innovation and quality of service. Where monopolies are permitted there is no innovation and usually very poor customer service. The anti-trust laws evolved to break monopolies and consumer protection laws to protect the customer. Being the sort of chap I am I usually take action when I see things are not right and being on first name terms with Grant I asked for the name of their Australian Managing Director. I am not allowed to tell you was Grants indignant reply. Thanks Grant I’ll Google it was my reply.
Well what did I find? A lot more than the name of their Managing Director!
Companies Performing Poorly in One Area Usually Perform Poorly in Many Others
Kevin Rollenhagen is the executive board member responsible for Australia where I can read a message from the CEO who tells me that the Swatch Group is exceptional (bad at customer service that is I add) but there is no opportunity on the old fashioned website to send a message, make a complaint or in any way begin a conversation with Swatch. Clearly they are a very ‘old worlde’ company.
Surprise surprise what was the next link in Google “Swatch Accused of Price Fixing in Australia” followed by another link to a story in the most authoritative daily newspaper in Australia The Age that “Swatch is ripping you off: ex boss“.
So why would Swatch create this culture of such poor customer service? Why would they not see that the local jeweller would more than earn his handling fee ( and more if he was accredited by Swatch to repair their watches)? Perhaps they see having well informed and knowledgeable jewellers across the nation as being able to push back and demand better service? Perhaps they see customer service costs as a burden a drain on their profits? The world’s got news for companies like Swatch your not much longer for this world! Customers who got poor service in years gone by told a few friends but today with Twitter, Facebook and other Social Media platforms they can tell 100’s of thousands if not millions.
The Australian Information Industry Association, of which I’m the Victorian Deputy Chair, actively works to get the big global companies (IBM, Microsoft, Google, SAP…) in our industry to work closely with small businesses. This collaboration has been most productive. Small companies innovate and grow or they die. They provide expertise and drive that can be leveraged by large global businesses. The CollabIT programme which has a LinkedIN Group for companies to find trusted relationships has been very successful and is strongly supported by the Victorian Government. There is clearly a need for a similar programme in the watch and jewellery business.
What examples have you of poor frustrating customer service or where companies think they can bully their smaller suppliers or customers? Please add them here through the comments section below.
If Everything is Free Who’s Able to Pay for Lunch?
March 7th, 2010“Copyright is dead, it’s an outmoded concept destroyed by students all over the world who refuse to pay for any digital content, especially music” opined the Professor. He continued his argument saying “like drug laws copyright laws just turn students into criminals, young people just don’t respect copyright and download all their music for free and copyright laws won’t stop downloading so they are irrelevant and should be abolished .” He went on to argue that song writers need to give their music away to promote their concerts where they can earn a living. With a son who graduated in music from Latrobe University and who has been trying to make a living from music for more than 10 years I reflected on how often you hear such arguments from well paid people, often paid from the public purse, but who would have no idea how to live on the door take from small audiences and low pay for performing at music venues around town.
With trillions of devices connected to the Internet we can now share, measure and exchange most things we value, including music. Developments in technology provide us with choices. We can choose to regulate our economy in many different ways but we need to ensure that those regulations create a dynamic and vibrant society. We need to motivate those that create new things whether that be music or memes or stories or services by giving them the power to set their price and conditions that apply. Modern technology gives us almost unlimited choices in how we design such a system.
Our economy and particularly our monetary system has evolved enabling sharing, measuring and exchanging of goods with strangers. Whilst the village economy could rely on memory and reputation to balance the books, commerce with strangers required an independent valuation mechanism and means of exchange, which is what we now know as money. Exchange of physical goods required laws to help define and control what was exchanged and over time complex property rights emerged to support an efficient economy. Today more than 50% of the value being exchanged in our economy is based on knowledge and ideas which makes the laws controlling intellectual property critical yet they are a muddled mess.
In this Blog I would like to summarise the arguments raging about the current copyright system, review the current law of copyright and patents and discuss a new and more effective system that encourages innovation and invention whilst rewarding investment in creation.
Technology mostly in the form of the Internet has driven massive innovation in how digital assets of books, music, film and software can be created, tested, deployed and published. This technology has changed the means and methods of exchange in what we have been calling the digital economy. But as the Internet has now so permeated the broader economy it no longer making sense to distinguish the “digital economy” so let’s examine how the economy more broadly should operate to improve the human condition.
The debate about copyright
If there ever was a paradox then copyright is one. It is easy to agree with both sides of this argument. When an author labours for a lifetime and produces a substantial body of work why should the ownership of that work vaporise 70 years after his death (It is more complicated than this see link). If he had chosen to apply his labour to build physical objects of similar value then his heirs could enjoy that value for an unlimited time. Alternatively why should a company that freely utilised the ideas from earlier stories involving animals and fairy tales strictly control the use of a mouse, or a rabbit or a deer in film and television? If Christopher Marlowe and Thomas Kyd had been given the same copyright protection in the 1590’s as Disney has been given for Mickey Mouse, would the works of William Shakespeare have achieved the same recognition 500 years later? For in the words of Sir Isaac Newton William Shakespeare stood on the shoulders of giants and in his case the giants were Marlowe and Kyd.
The impact on our society of getting the laws of copyright wrong is dramatic and affects us all. On the one hand we all like to get free music and not have to pay for our newspapers. On the other if our favourite musicians have no time to write and record new songs because they are exhausted from touring and if the exactitude of our newspapers suffers because of their reliance on citizen journalists then the quality of our lives is diminished. When the advertising revenue stream for major newspapers is taken by Google because they can freely place their ads alongside any newspaper content then who will be paying the salary of the investigative journalist working on the next Watergate break in? It is not the sensational story that is important it is the constant enquiry into the power and politics of every nation that keeps our institutions honest and operating with some level of transparency. Our copyright laws should provide proper and adequate protection with appropriate remedies to enable creators of content the choice of how their assets are utilised.
“A large, diverse society cannot survive without property; a large, diverse and modern society cannot flourish without intellectual property.” In his wonderful book Free Culture Lawrence Lessig argues that creators of intellectual property rely on the the ideas and knowledge that went before them. That innovation requires access to those ideas and knowledge in the public domain. If the Law causes or at least permits the public domain to become barren innovation will be adversely affected. Consequently we need choices that reward creation but build the public domain of knowledge and ideas.
The popular argument for free is based on the 100 year old third party payment model where the content creator provides the content consumer with free or low cost access to the content because a third party (the advertiser who wants access to the consumer) who provides a revenue stream to the content producer. The model worked well for media and brilliantly for Google. Construction Data Management applied this model to the construction industry by collecting building plans from architects without cost in exchange for providing the architects with costing data by region and CDM in turn built a revenue stream from manufacturers by charging them for access to information on building projects to help their sales team sell building components to construction projects. However contortions of this model can reduce economic efficiency when the cost of providing information to the paying third party is much greater than the consumer paying a lower price for information they seek. Put another way the total costs within the economy have to be met by someone and a more efficient system with lower total costs and less “wastage” will provide a higher growth in GDP and ultimately a high standard of living for its citizens.
Chris Anderson the great advocate of “Free” does concede in his book that “Everyone can use a Free business model, but all too typically only the number one company can get really rich with it.” It is not surprising that the two major advocates for open and free; Google and Apple are also the most guarded and proprietary about their core revenue generating digital assets and benefit greatly from others providing their digital assets free. Free music for Apple’s idevices and free searchable content for Google’s ads. The challenge we are now confronted with is that where traditionally the market lead held 60% market share with number two 30% and number three perhaps 5% in the Free market online the winners like Google take 95% market share and society is unlikely to be better off.
The greatest advocates for copyright protection today is Hollywood and it was these film studios who took on iiNet in the Australian Federal Court charging iiNet with authorising their customers’ illegal downloading of music files. One wit described this as an argument to charge VicRoads with aiding and abetting armed robbery because the robbers used their roads to escape. The irony here is Hollywood was created by film producers moving to the West Coast of USA to avoid paying royalties to Edison in the more regulated East where he held patents on cinematographic cameras. Other cases have seen the Recording Industry Association of America sue Jesse Jordan for breach of copyright because his search engine enabled students to find and download music files. With US legislation providing greater damages for downloading two songs in breach of copyright than for medical negligence by a surgeon in removing the wrong limb in an operation it is clear that our copyright laws are in a mess.
How Might the System be Improved?
Harvard law professor William Fisher has suggested that all content capable of digital transmission be marked with a digital watermark and governments regulate a system developed by entrepreneurs to measure usage and collect payments based on this watermark. The important thing is to assure creators compensation without breaking the Internet. Developing this idea further it is now technically possible to:
- allow digital files to be loaned as we currently loan a paper book with an iPod/Pad/Phone or Kindle suspending access to a file on one device for a pre-set period while it is active on another
- allow digital files to be permanently transferred (sold) to another device
- that copyright holders may set fees for permitting permanent transfer (selling) or temporary transfer (lending) of files
- that ‘fair use’ permissions be set for limited extracts of file content and be secured with a digital watermark
- that ‘fair use’ fee structure be set by copyright holder at publication
- that to obtain copyright a digital work must be lodged and registered
- to sustain a copyright the copyright owner must renew their registration say every 5 years and failing to register or renew a copyright renders that copyright to the public domain
The US Congress and other parliaments have been extending copyright protection for authors since 1908 taking it from 14 years to an authors lifetime plus 70 years or 95 years for a corporation. If this continues, as it is likely to do, we are operating under permanent copyright protection by stealth. The complexity in obtaining copyright clearance has pretty much made it impossible to reuse copyrighted material and the cost of doing so makes that one of if not the major cost of any production. See Australian Copyright Council for a more detailed description.
To simplify the system we need to strengthen copyright. But to reduce the high legal fees involved in current copyright cases we need to make as clear as possible what rights are held by the copyright holder by making those rights narrow and clearly defined. By narrow rights I would propose that derivatives from a copyright work be separated from the work itself and be limited to a very short term perhaps 10 years. That is where a film is made based on a book or a musical is created from music innovators will be free to create new works but fees for reuse of existing works in their original form will require payment of a copyright fee. By restricting the broader rights it is justified to provide permanent copyright for the narrower rights suggested.
Conclusion
Our parliaments have often modified copyright as technologies developed (printing, photography, radio, film, telephone, networks and computers) providing different rights with new technologies (eg composers are paid whilst performers are not for music played on radio). As the Internet delivers the most major change to the sharing and measurement of digital files it is vital that innovation is encouraged and creators are paid. We need to simplify and automate the regulation of copyright and protect the public domain of intellectual property. Dynamic and vibrant societies are rarely dominated by monopolies and so it is vital that we encourage our legislators to protect the interests of the broad community of creators so that fair and equitable payment systems are allowed to emerge.
The Digital Economy: It’s the Economy Stupid
April 30th, 2010The Digital Economy is The Economy as everything we do is digitised and everything is becoming connected to everything else. Improved technology in the connected economy is vital to “Creating Better Ways of Working Learning and Living” but improved technology is not sufficient in achieving these goals, the connected economy will fail to achieve its full potential for humanity without better ways of organising and managing people and things.
Technology has fascinated mankind and was core to the epic journey portrayed by Arthur C Clarke and Stanley Kubrick beginning with that memorable opening image of the primitive club in the hand of the humanoid in 2001: A Space Odyssey and sending a chill down our spines as Dave Bowman asked:
“Open the pod bay doors, HAL”
And HAL replies
“I’m sorry Dave, I can’t do that”.
As a small child growing up in Gippsland in the 60’s science fiction created an expectation of personal air travel vehicles in the Jetsons where working life in 2062 was for George at least the pressing of a single computer button but complaints about the remaining inconveniences in life still remained. Maxwell Smart more accurately anticipated not just mobile phones and devices but wearable communications devices albeit just a phone in his shoe.
The Challenge
Our challenge and what we need to hear from our political leaders in this election year is how they will provide policy settings that will encourage the development of systems that build trust in data, applications and people, get our strong banking system to deliver frictionless payment systems where value is exchanged efficiently, provide new legislation so that intellectual property rights work in this modern economy, provide online security so that people and communities feel safe and global taxation can be levied appropriately so that public infrastructure is paid for equitably reflecting the benefits delivered by that infrastructure. It will be these policy responses that enable solutions to these major challenges that will determine what level of return we get from our $43 b investment in the NBN technology.
The Emerging Connected Economy
It is often felt that we are at a dawn of a new age, that this moment has significance unlike most of what has gone before. Tom Stoppard wrote in Arcadia “A door like this has cracked open five or six times since we got up on our hind legs” and goes on to highlight that relativity and quantum mechanics has yet to provide A theory for Everything pointing out that we can’t even predict the next drop from a dripping tap when it gets irregular. Each drip sets up the conditions for the next, the smallest variation blows prediction apart…”
Yet even with Stoppard’s warning the impact of a truly connected world built on an internet connecting billions of people and trillions of things does feel like a momentous, epic achievement that will impact humanity for eons. How will connecting billions of people and trillions of things benefit our world?
What will we be able to achieve with our NBN at 1GB? With an Internet that provides instantaneous access to all digitized content ever created all in an interoperable world where everything we design can be stored, shared and reused? For any situation existing data and applications can be mashed together so that you never have to reinvent the wheel again. Take a picture of that building in front of you, use that image to search and learn about its heritage, property title, identify its tenants, and receive their special offers. When objects can both sense the environment and communicate, they become tools for understanding complexity and responding to it swiftly.
The Internet of Things, sensors and actuators embedded in physical objects—from roadways to pacemakers—are linked through wired and wireless networks, using the same Internet Protocol (IP) that connects the Internet.
What we thought was for the future is here now. Pill-shaped microcameras already traverse the human digestive tract and send back thousands of images to pinpoint sources of illness. Precision farming equipment with wireless links to data collected from remote satellites and ground sensors can take into account crop conditions and adjust the way each individual part of a field is farmed—for instance, by spreading extra fertilizer on areas that need more nutrients.
We will soon see freeways with lanes that set speed of cars capable of disabling errant or stolen vehicles. We will see cars that can connect with one another to form pelotons or connected car fleets that will save 30% or so in fuel costs. But it will require electric cars that can share the power consumption in such pelotons between front and following cars otherwise who will be happy to take up pole position?
New insurance products are emerging requiring location sensors in customers’ cars to set the price of insurance on how a car is driven as well as where it travels. Pricing can be customized to the actual risks of operating a vehicle rather than based on proxies such as a driver’s age, gender, or place of residence.
Manufacturers of jet engines retain ownership of their products while charging airlines for the amount of thrust used. Aeroplane manufacturers are building airframes with networked sensors that send continuous data on product wear and tear to their computers, allowing for proactive maintenance and reducing unplanned downtime.
In retail environments some companies are gathering data from thousands of shoppers as they journey through their stores. Sensor readings and videos note how long they linger at individual displays and record what they ultimately buy at the cash register. Analysis of this data helps to increase revenues by optimizing retail layouts.
Whilst funding models are clearly important in developing our health system eHealth was sadly neglected in the recent stoush between our PM and all the state premiers. Today patients can be monitored not only during periodic visits to their doctor for weight, blood pressure, and heart rate and rhythm. Sensors placed on the patient can now monitor many of these signs remotely and continuously, giving practitioners early warning of conditions that would otherwise lead to unplanned hospitalizations and expensive emergency care. Better management of congestive heart failure alone could reduce hospitalisation and treatment costs by a billion dollars annually in each of the developed economies.
If our politicians stop caving in to voters automation and control system can utilise time-of-use pricing and better information to empower residential consumers to shut down air conditioners or delay running dishwashers during peak times. Commercial customers can shift energy-intensive processes and production away from high-priced periods of peak energy demand to low-priced off-peak hours.
I like the way IBM puts it: Instrumented, Interconnected, Intelligent. Systems not only need to do what they are supposed to, rather they need to do it in the most efficient way producing the most effective outcome. Interconnect systems talk to one another to achieve powerful outcome such as irrigation systems being connected to weather systems.
I have also heard it put as awareness that a device is aware of other devises and can communicate what is relevant to that other device.
I began by saying that the applications and systems that utilise the NBN technology will be more important to achieving societal benefits than the technology itself. I will end by listing the economic policy responses necessary to maximise our return on the $43 billion investment cover five areas:
- creating trust throughout the economy but most importantly in the connected economy
- providing frictionless payment systems
- legislating an IP environment that fosters innovation and invention
- establishing security systems that protects our citizens and all connected resources; and
- develop a national and global taxation system that can fund the required infrastructure and services for a dynamic and vibrant society
The Digital Economy: It’s the Economy Stupid
May 21st, 2010Presentation to the Australian Computer Society
Summary
The Digital Economy is The Economy as everything we do is digitised and everything will soon be connected to everything else. Technology is vital to “Creating Better Ways of Working Learning and Living” but technology is not sufficient. The connected economy will not achieve its full potential without better ways of organising and managing people and things.
Our Challenge
Our challenge today is to realise that vision. In this election year we need to hear from our political leaders about how they will help us realise this vision for the connected economy. Such a vision requires more than technology it requires systems that build trust in data, applications and people, frictionless payment systems, online security so that people and communities feel safe, new legislation to ensure that intellectual property rights work in this connected economy and root and branch taxation reform of the global and national taxation systems to meet the demands of the connected economy.
Australian Computer Society Digital Economy Conference 21 May 2010
Solutions Required
- An automated, online copyright registration system that provides permanent but limited copyright for all digital assets.
- A frictionless payments system that is open to competition and where banks are responsible for protecting transactions and people’s identity online.
- Walled gardens where citizen are safe to conduct transactions where their identify and reputation has some form of protection and guarantee.
- Global and nation state taxation systems that are equitable in the global connected economy.
Beyond Broadband an Essential Investment for Our Future
August 31st, 2010As a 40 year veteran of the computer industry I’ve seen firsthand what technology has provided Australia and would urge the Independents to examine the major parties’ policies carefully and not reduce the debate to a simple choice between internet speeds and cost. It is much more than that; it is a choice between preparing for our future or simply making do.
In 1996 when my daughter was born I remember nursing her as I surfed the Web with my then 18 year old son. I can vividly remember him saying “Dad I wonder what we will be doing on the Web when she is my age”. That will be in 2014, the end of the current budget cycle.
We quickly suggested things getting faster, more disk space and of course cheaper and cheaper technology. Gordon Moore, the founder of Intel, had been right for 30 years with his law that computing power doubles every two years so we have not been surprised by terabyte disks and 20MB broadband, we would have been surprised if they had not appeared.
That is why a network based on installed copper and wireless technologies that will only be capable of meeting speeds a bit faster than we can get today needs to be carefully questioned. Moore’s law has been right for nearly 50 years so we know the rest of the world will have access to 1GB to the desktop in 3 to 5 years and 10 times that speed in a decade. Our current infrastructure is 40 years old and needs to be replaced with network technology that will serve us well for the next 40 years.
What we need our leaders to be contemplating is the investment necessary to build a future for a sustainable, dynamic society. One that is capable of making a leading contribution to the global community whilst achieving a vibrant and equitable society at home. We need our leaders to have an appreciation of technology to be able to make the important decisions necessary to drive innovation and creativity so that we can design better ways of working, learning and living for all Australians no matter where they live.
Back in 1996 it was hard to imagine Twitter, Facebook and eBay let alone the impact of social media on politics and war. Amazingly there were people back in 1996 thinking about these things that were not just an extension of what currently existed but creating entirely new concepts.
I was asked to speak at a seminar at the University of Melbourne alongside an artist known as Stelarc. His presentation was very confronting as he described his recent art installation in Paris where he had connected electrodes to his arms and legs that were stimulated by people in Amsterdam and London over the Web. This was the first global collaboration around physical movement and expression.
Around this time the company I had founded a few years earlier won the tender to build what we now know to be a Web portal for the Victorian Government. We didn’t realise it at the time but the design team were helping to invent a whole new way for governments to communicate and engage with their constituency. Stelarc had pushed us to think about how someone in one city could create a reaction in another. The artist had stimulated the scientists who in turn worked with the engineers to build a much better world.
If we had limited our thinking because our audience only had 28K modems we would not have imagined joined up government, citizen participation and connected communities. The connected and very digital economy of the future will see extraordinary innovations. We can dream and fantasise about what these applications might be but if we compare what we have today with what was available in 1996 we do know that there will be plenty of applications in 10 years time that will demand every bit of broadband and every byte of storage that technology can deliver.
This week the Independents should be asking both leaders to present their vision for our economic future. What are their detailed responses for not just building a national broadband network but what are their plans for taking advantage of their proposed infrastructure investments? That is, what trains do they envisage running on the track they propose to build?
There should be questions about their policies to move our rather traditional payments systems into the online future of tomorrow, how will they improve security on the Web so that Australians can feel safe using the Web or paying their bills and how will they sort out the copyright mess created by file sharing and fast downloads? Beyond getting the basics of a digital connected economy right what policies do they have to improve productivity through better health services in the home or regional centres, developing more authentic collaborative learning activities involving students, parents, teachers and business and how will they use the network to optimise the use of energy, water and other resources?
It is important that we invest our public money wisely. We should demand that major government projects include research, planning and good governance. A business plan is very useful when you are planning a business in a mature industry but I can assure you that if I had tried to document all the anticipated revenues for my Internet businesses over the last 16 years I would have invested in nothing and returned to paid employment! The Independents should be examining the broadband plans of both parties to identify what they have planned and why each of the options was chosen. The exact applications in the future cannot be anticipated and nor can the revenues generated by them either so what we must demand is professional preparation and competent project governance to ensure we invest wisely for our future.
Set Direction Align Actions to Goals
April 23rd, 2011Engage your staff to align their every day tasks to company goals
Since I sold my business in 2007 I have worked with a number of talented entrepreneurs to rapidly grow their businesses. I’ve enjoyed sharing my 25 years experience but because I no longer have the pressures of running my own business I’ve been able to reflect on our decisions and actions and feel I’ve been much more objective about what is working and which strategies have added the most value. In this Blog I discuss how the ideas in my earlier Blogs and this presentation have been applied and what have I’ve learnt.
In competitive fast growing markets the leaders of successful companies rarely have the time to work on their business as they are too busy working in it. This is a cliché but it is true. So what I’ve learnt over the past 3 years is to break down the business planning process into a number of sessions that range from an hour to 2 and 3 hours with a one day session to assemble “The Plan” and to work out how to execute it well.
Someone in my position has to coach the founder and CEO to step back during these sessions to both let the leadership team step up to work on the strategy of the business but also for the CEO to take a helicopter view of the business and see the bigger picture of how the business is creating value for its customers and achieving above average returns in the target market.
To support the process outlined in the presentation linked to above I created a Google Docs spreadsheet (using the one online spreadsheet avoids version problems and it can be used synchronously in f2f sessions or from geographically separate locations asynchronously) with a tab for each part of the process:
Preparation - a single place to record links or brief summaries of important input material (purpose, performance, assets) and the one page summary of the previous plan.
Assessment - a record of the issues, shortcomings, achievements and major opportunities facing the business that are worked on by the leadership team in a 3 hour session to arrive at the major goals and to conduct a SWOT analysis of the business.
Risk - the leadership team works on a prioritised list of the identified risks to ensure that the company has documented approaches to mitigate each risk.
Plan Summary – it is a long and exhausting days work to produce a plan that details goals for each major area of the business detailing the primary and enabling objectives together with measures, targets and approaches to achieve each goal. Individuals are identified for each key task to achieve each milestone. Once this is done the finance plan with budgets can be completed. Financial constraints and objectives may require a further plan iteration.
Execution - the probability of achieving any plan is significantly increased if the company empowers every person in the company to hold everyone else to account for what each person has committed to achieve in the plan. This tab has in one place the business goals, objectives, who benefits, who is responsible and how will the outcome be verified.
Verification - for each goal what has been planned to be done and how will it be verified, what has been achieved and when.
Review - at the end of the planning cycle but before the next planning process begins each member of the leadership team records of their assessment of the process and identifies how or what needs to be improved.
What has been learnt
The entire process from the initial preparation session to the presentation and communication of the completed plan to all the staff (after the signed off execution plan) takes at least 5 weeks. The process should not be rushed. Each leader needs to run one or two preparation meetings with their team to record the team’s issues and receive the team’s input to the Assessment session. As the process unfolds it is important that each leader continues to inform their team about progress and sets appropriate expectations for the evolving plan. We have found that communicating with both customers and suppliers encourages them to contribute valuable ideas and expectations of the company. An open process where all stakeholders are engaged tends to ensure a realistic plan is produced and ultimately helps to maximise the company’s performance.
Increasing Business Value in Business Planning
May 8th, 2011How to make the best decisions on what your business should do in the short and medium term
At this time of the year many small businesses are in the middle of their planning for the next financial year. Some engage external facilitators, others involve their trusted business advisor or accountant. No matter how it is done the goal is to make the most of your resources and add as much value to your business as is possible. Easier said than done!
To increase the value of the business, business planning must influence everyday activities so that all activities are aligned with the company goals. Critically these activities have to produce the outcomes necessary to achieve the desired company goals. Business planning has to make the right decision to direct how the resources of the company are going to be utilised. The best decisions create the most value for the business. The best strategic decisions deliver competitive advantages that are difficult to emulate but usually are expensive to unwind.
But how do you make the right decisions? Ever since I started my business in 1985 I have wrestled with this challenge. Like my 11 year old son you ask, are we there yet? Give me that silver bullet. Give me the ‘One Minute Decision Maker’ guide to making the right decisions to maximise my profits. I might not have a silver bullet and I certainly don’t proffer a wealth creation guide for idiots. This is hard stuff that requires deep insight, diligence and good judgement. But I can share a process that seems to work for some.
Connecting the big vision to the right activities that maximise profits
The process that I outlined in my last Blog described in some detail a phased approached to business planning. What I would like to do here is discuss the very difficult task of how to move from two or three audacious goals to an effective business plan. An effective business plan has to firstly win the trust and respect of the staff because without that it is just a con job on other parties whether they be the bank, an investor or the board.
The starting point is three (and I would argue there should not be more than three) goals that are not too audacious to the point where they are unrealistic but also they should not be too conservative, like Goldilocks’ porridge they need to be just right. For these three goals to be just right there needs to be sufficient major opportunities to realise the goals. Major opportunities are known to the imaginative, the hard working, the connected and the collaborative people in any market. They are not plucked out of thin air they are documented carefully with hard evidence to support their inclusion in your business plan. They must be real or your plan will only guide you, like Don Quixote, to tilt at windmills.
Whilst the above is difficult now comes the hard part. The major or primary objectives, together with important sub or enabling objectives to achieve the goals and realise the major opportunities must be identified. For each line of objectives the measures, targets, resources and milestones must be detailed in the plan. This provides the financial information to construct the budget.
You have now completed the first iteration. Does this project the right revenue growth, the desired EBIT all within the financial constraints to fund the business (cash flow, retained earnings or debt)? If the leadership team are aggressive and ambitious the budget and detailed project plans will show that hard choices now must be made. There will be not enough time for staff to do the work, the profit targets will make it difficult to hire additional resources and the leadership team has to choose what to do and what not to do. Some objectives will produce more value than others and decisions must be made. Do you invest more this year or delay a major expense till next year when the company will have more free cash flow? The value of this process is you have done the hard work to properly inform the choices you make. Those choices will determine how good you are as a leadership team.
By having the leadership team challenge all the assumptions and implications of this planning process the optimised business plan and financial budget can be signed off knowing that the staff will have the trust and respect for the plan because they have been engaged in the process. In a future Blog I will describe my ideas for how a good business plan should be executed and verified to maximise the chances of achieving its desired outcomes.
Company Boards that Create Value
June 16th, 2011The value that a board can bring a small to medium sized company is to:
- assess the context and environment within which the company operates
- provide independent evaluation of management
- access to important relationships not otherwise available to management
- drive strategic planning, and
- verify the execution of plans
Directors need to give valuable insights, assessments, contacts/networks and leverage to bring about results not otherwise available to the company or they need to be able to get those things or they should get off the board.
Get the Basics Right
Getting the board and management structure right is tricky. Boards must set the goals (desired results) and strategy (approach to achieve results) for the company whilst ensuring that the necessary resources to execute the plans are available to management. Management has the responsibility to plan and execute but both management and the board need to verify that what was planned to be done was done and that the right decisions were made when changes were needed. That is, the planning process is left to management, but the board describes the desired results toward which plans are directed.
It is the duty of a board to hire and fire the CEO and to properly evaluate the performance of the company. But who evaluates the board’s performance? Because the board has to evaluate itself it must do so transparently and hold itself accountable to shareholders, management and staff. However this is more difficult because in most small companies the shareholders, management and staff often have common membership.
Shareholders, as the owners of the company, appoint the directors to act on their behalf to be responsible for the company’s overall business performance and to ensure that the company complies with all its legal obligations. The following table (developed from an idea by Robert Tricker International Corporate Governance 1994) sets out the functions of the board.
|
Compliance |
Performance |
||
|
Hire/fire work with and through the CEO |
External |
Ensure accountability and that the company complies with all legislation and obligations it has with the outside world. |
Develops high level goals and aspirations of the company and through the CEO formulates the strategy and ensures that the necessary resources are available to execute the plan. |
| Internal |
Monitors and verifies that the CEO has systems in place for achieving the goals in the business plan within the approved budgets. |
Sets the perimeter within which the company operates and approves all necessary policies for the operation of the business. |
|
|
Looking backwards |
Looking Forwards |
If the board meetings are not so much the board’s meeting but become the manager’s meeting for the board there is a problem. It is important that the board does not fall into a role of rerunning the sales forecast, rerunning the management team’s handling of difficult issues and guiding the CEO in doing his job. The board must clearly state what value it will deliver to the company. It must then inform all stakeholders how its contribution will be evaluated.
A board exists to govern the company not to manage it. That is the board is formed to provide the accountability link between owners and operators (CEO and the management team). But in addition to providing the link between owners and operators the board also provides the link between the broader society and the operators, meaning that the board is responsible for governing the company so that it meets the expectations of society especially those expectations codified in law. The board’s job is fulfilled only if it properly defines expectations and demands achievement. Whilst the board may advise management and the chairman may coach and mentor the CEO, in the end those things do not matter. The central challenge is can the board command (not the same as dictate) in such a way that management is optimally empowered and challenged at the same time? Proper accountability comes from the board having the authority as well as the obligation to demand results.
The Detail
To perform its duty the board can delegate authority to committees and to the CEO. A board needs a chair that is responsible for the board itself proceeding successfully just as the CEO is responsible for the company proceeding successfully. It is important to clarify the different roles:
- The board is accountable to the shareholders for the company achieving what it should (such as profit, Return on Equity, long term company value, etc.) and avoiding what is unacceptable (such as excessive risk, illegality, unethical conduct, etc.).
- The board must be able to define success and failure for the CEO and then assess the CEO against those measures.
- The chair is accountable to the board for chairing the process so that directors fulfil their commitment that they made when becoming a director of the company. The chair is not the “boss” of the board, but its empowered servant whose task is tied to board, not CEO performance. (If the chair is accountable for CEO performance, the chair becomes the de facto CEO.)
- The CEO is accountable to the board for fulfilling the board’s definition of business achievement and avoiding the board’s prohibitions (as in point 1. above). The CEO is not accountable for board performance, nor is the CEO accountable to the chair. The board cannot direct the CEO in how to do their job, only what results they must produce and what policies they must follow.
There is a fundamental dilemma here because a responsible board must maintain control over the CEO but a responsible board will also want to provide the CEO with all the managerial power and latitude possible. The board has to achieve optimal board control while granting the CEO optimal CEO/management freedom.
How is this achieved? The board sets out the desired results in an affirmative, prescriptive way (what must be done) whilst only controlling corporate “means” in a limiting, proscriptive way (describing what cannot be done). Elaborating this further:
- Controlling results in an affirmative and prescriptive way by expressing to the CEO its performance expectations with respect to company profit (EBIT), share price (or company value), or whatever the board’s judgement is in relation to appropriate benchmarks of corporate success from the shareholders’ perspective.
- Controlling means in a limiting and proscriptive way by expressing to the CEO their boundaries around acceptable managerial decisions. This approach preserves great ranges of managerial prerogatives yet keeps that range within the board’s “limits of acceptability.” The board is not telling the CEO how to run the business but constructs an arena, directing the CEO to work within it.
Consequently the ultimate impact of the board on the way the company is run is by their choice of CEO and if they are not happy with how their choice is running the company they have the power, authority and responsibility to replace the CEO.
No single director, including the chair, has any authority over the CEO. The board jealously guards its wholeness and its authoritative voice as a group. The CEO should not be confronted with a list of various directors’ individual wishes, but only with the expectations of the board as a group. Getting to that point calls for diversity and dialogue within the board and on many issues will require extensive input from others (such as management, auditors, shareholders, investment bankers, etc.). Management is included in this dialogue, but should not steer it or be responsible for it.
Getting the Right Directors
Selecting independent directors with the skills and experience to effectively govern the company is the key. What skill gaps exist in the current board? Does the company intend to expand the shareholder base, raise capital or undertake a series of acquisitions? Look for directors with knowledge in the industry or an upstream or downstream industry or who understand the market.
In addition there are personal qualities that every director needs to have – commercially savvy, good judgement, personal integrity, credibility, good reputation, able to work collegiately, strategic thinking, a working knowledge of finance and accounting, good grasp of governance, good communicator.
The board and stakeholders
It is important that the board defines the relationship with each of its “significant others” so as to preserve the wholeness of the board as the single, authoritative position as the owner’s representative.
Shareholders Directors represent shareholders so it follows that directors must act on shareholder concerns and wishes. But by law the director must act in accordance with the best interests of the company itself and not any one particular shareholder.
Board/Chair The board has the responsibility to govern the company. The role of the chair is to ensure the board process is conducted well. The chair is an instrumentality of the board and great care must be taken to prevent the board from becoming the instrumentality of the chair. The chair exists to aid the board in being accountable to its stakeholders particularly the shareholders and it is not the chair’s role to supervise the CEO. That role belongs to the board collectively.
CEO The board is the CEO’s superior, not the chair; hence, the CEO is not supervised or instructed by the chair. (Directors individually may relate with the CEO and their subordinates in whatever ways they find mutually acceptable but such relationships have no authority. Only the board and CEO have that relationship.)
Committees Committees can be created by the board but they are always under board control. To preserve the board-CEO relationship, they cannot be given authority over the CEO and should not be allowed to fragment directors’ sense of whole board responsibility. While board committees can be given a task to help the board with some aspect of its job, it is interfering with management when a board committee is assigned to help or advise management on some topic. A committee’s charge, then, can only be derived from some decision area that the board has retained to itself. For example, shareholder relations, audit, and CEO compensation are such topics; human resources would not be.
Executive directors There is an inherent conflict in being, at the same time, a director and an executive working for the CEO who works for the board of directors. Board access to the wisdom and knowledge of upper management does not require them being directors. Appointment of executive directors should be done with great care and avoided if at all possible.
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