IIR Governance Congress
Dubai, April, 2008
Introduction
Over
the last several years, the epidemic of corporate scandals in the capital
markets - at times described as Enronitis – has triggered an inquiry into a
cure for this destructive disease.
As
always, the first step in curing a disease is to create that cure. The next step, a step I am taking at this
time, is to reveal that cure as a root cause solution to the problem.
On
behalf of IIR Middle East, I am pleased and honored to introduce our keynote
speaker for this morning, Mr. Mark W. Sickles, the author of Shareholder Value
Assurance and The Cure for Enronitis.
But
before I do, I would like to show you a short video of one of Mark’s television
appearances on Money Matters, where Mark was asked to speak on the topic of
corporate governance, at the time the Enron trial was coming to a close.
Introduction
(After the Video)
“Here’s
what we’re going to do.”
“It’s
the right thing to do.”
“And
we’re going to do it.”
What
a simple yet powerful way to sum up the essence of Mark Sickles and his topic
for this morning’s keynote speech, Strategic Governance!
So
now, it is my pleasure and honor to introduce to you, the author of Shareholder
Value Assurance and The Cure for Enronitis, Mark W. Sickles.
MWS
comments
Good
morning everyone. It is indeed a great
pleasure and honor to be here with you in Dubai,
and to experience first hand the creation of your unique approach to
sustainable prosperity and the emerging oasis economies.
It’s
interesting that those comments I made on Money Matters back in May of 2005 –
here’s what we’re going to do, it’s the right thing to do, and we’re going to
do it - seem more appropriate for business leaders today, nearly three years
later.
In
the Unites Sates, this is true in large part due to the currently increasing
degree of activism by shareholders.
These shareholders, whether individuals or institutions, owners or
traders, pension funds, sovereign wealth funds or hedge funds, are free to have
economic, political, and social agendas.
But
business leaders – directors and officers - are not free to support these
agendas at the expense of long-term shareholder value.
This
challenging dynamic calls for strategic governance, a principle-based,
systematic approach to assure stakeholder alignment, sustainable competitive
advantage, and long-term success.
This
strategic approach to governance, all based on the systems level of thought and
action, is creating a breakthrough in business transparency by establishing a
common language, common ground, and common cause for the inextricably linked
fields of corporate governance, long-terms shareholder value, and investment
decision-making.
Because
it is the foundation of strategic governance, let’s spend a moment considering
what is meant by “the systems level of thought and action”.
The
Systems View
As
Dr. W. Edwards Deming said to us all years ago, “it would be better if we
worked together as a system, with the aim for everybody to win.”
With
this good counsel in mind, consider this conclusion reached by a task force of
US-based political officials: You can have a bad society with a good economy,
but you cannot have a good society with a bad economy, because you need the
resources derived from that good economy to fund what constitutes a good
society.
In
other words, there is a systematic, interdependent relationship between
political, economic, and social endeavors:
The
political enables the economic, and together, the political and economic enable
the social.
Isn’t
this what’s happening here in the Middle East? It is my understanding that Middle Eastern
political leaders are creating conditions conducive to economic diversification
into multiple industry sectors such as information technology, bio-technology,
pharmaceuticals, healthcare, consumer products, and petro-chemicals so your
pursuit of sustained prosperity for society at large is not overly dependent on
a continuously booming oil sector. And
if so, this is an excellent example of the interdependent relationship between
political, economic, and social well-being.
Managing
this system of politics, economy and society is the right thing to do because,
to paraphrase Dr. Deming, it enables all stakeholders to win.
Investors
should therefore select investments they believe will provide them with the
returns to pursue their political and social agendas, or achieve their
short-term economic objectives.
And
as owners of the firms, these same investors may actively engage directors and
officers in conversations aimed at maximizing the achievement of their agendas
and objectives, as a long as what? As
long as their activism does not distract or derail directors and officers from
their constant purpose of long-term shareholder value.
For
when leaders allow themselves to be derailed from this constant purpose, they
abandon the principles of strategic governance; they abandon the systems level
of thought and action; they abandon their commitment to strong leadership.
And
when they allow this all to happen, as evidenced in this era of Enronitis, everyone
does not win, do they?
In
the US,
a common excuse for leaders who fail to create long-term shareholder value is
that they are pressured by the capital markets to produce short-term
results. This suggests that short- term performance
and long-term performance are mutually exclusive, that a choice must be made:
one or the other.
But
this “one of the other” view of things belies the fact that management is not a
game of choice, but instead, a game of paradox; not compromise, but synthesize;
not either; both.
Should
we improve margins, or grow market share? Both!
Should
we increase operating income, or lower our cost of capital? Both! Should we manage for the short-term, or manage
for the long-term? That’s right - both!
Managing
at the systems level - speaking a common language, sharing a common ground,
pursuing a common cause - will transform these conflicting agendas into
complementary agendas, so that, as Deming proposed, everyone may win. This is the essence of strategic governance!
Private
Equity
While
increasing shareholder activism is the hot topic in the US, I understand that private equity and what
BusinessWeek magazine recently termed “buy-out fever” is the hot topic here in
the Middle East.
Generally,
private equity targets companies with unrealized value due to missing
management systems needed to create positive synergy, where the performance of
the whole is greater than the sum performance of the parts. But creating this value, producing this
positive synergy, is the responsibility of leadership – the firm’s directors
and officers. So why leave it to private
equity?
Years
ago, I was a member of the executive team of a third generation, family-owned
business. The board of directors, to its
credit, was highly intolerant of poor performance. These directors said - correctly so - that if
we, the management team, could not provide the shareholders with greater
returns than those being produce by alternative investments of comparable risk,
then they, the board, would advise the family shareholders to sell the firm and
make that alternative investment that would give them the returns they deserved.
The
purpose of the Tuesday master class on Strategic Governance is to provide
attending delegates with a toolkit for functioning as strategic assets and
sources of competitive advantage to create these superior returns without
having to sell the firm in the process.
After
all, that is our job as business leaders, isn’t it? And if so, let’s spend the rest of our time
this morning discussing some of the problems with governance that has hindered
peak performance, and how strategic governance is a root cause solution to
these problems.
The
Problems with Governance
Allow me to pose these problems with governance by
sharing with you three interrelated quotes from three extraordinary
individuals.
The first we have already discussed: Dr Deming and
his quote about working at the systems level with the aim for everyone to win.
The
second quote is by English play write George Bernard Shaw who said, “The single
biggest problem with communication is the illusion that it has taken place”. We think we’re communicating but we’re really
not. And if we’re not communicating,
then we’re not working interdependently, because interdependence requires
effective communication. And if we are
not working interdependently, then we are not working at the system level of
thought and action.
Failure
to communicate and work at the systems level sub-optimizes performance, which
leads us to our third quote by retired GE CEO Jack Welch, who said that, “Left
to their own devices, too many companies fail to install effective governance
practices that would make them more competitive.” These companies fail to install these
effective governance practices because these practices exist at the systems
level!
The
Solution: Strategic Governance
A
common language, common ground, and common cause to:
·
Integrate
governance, strategy, and mission
·
Develop and
exploit strategic assets to create sustainable competitive advantages
·
Create “smart”
organizations enabling ordinary people to achieve extraordinary results
·
Maximize the
market value of your firm.
Conclusion
When
you master and apply strategic governance, you will build organizations that
are great places to work. These great
workplaces enable the creation of great workforces that deliver great value to
customers and shareholders. Think of the
political, economic, and social implications!
In
closing, I sincerely hope you have heard enough on this exciting topic to go
back to your firm and say, “Strategic Governance, skillfully tailored to our
needs and our environment: It’s the right thing to do, and we’re going to do
it.
Thank you for your kind attention, and now I would
be happy to answer any questions your may have.
