26 July 2017 by Henry Ker
Ken Olisa talks to Governance and Compliance about technology changing business, how unicorns are pigs with lipstick, and his time at ENRC and IPSA.
There were three stages in the development of technology in business. Stage one was doing things better and producing gains in efficiency. Controlling stock on a computer was much more efficient than doing it manually on inventory control cards.
So the first wave, of which I was a part in the seventies and eighties, did things better, but did nothing that had not been done before.
Then came innovation – doing better things. Businesses began to operate in ways that had not been possible before. A good example was ATMs. Supplying cash to customers 24/7 was only possible because of the power of computing.
In both these phases, the cost and complexity meant that technology was largely the preserve of the established organisations – the incumbents who controlled industrial sectors – and its application contributed to maintaining the status quo.
The current stage – and the one I guess will last forever – is where technology becomes an industrial disrupter, putting incumbents on the defensive. Start-ups and other disrupters apply technology with the intention of tearing down the existing order of things.
There is also a challenge, as regulation tends to lag behind circumstances. Because things at the front change so quickly, there is a built-in delay between an issue appearing and the regulatory response.
A good example is Uber, which took advantage of the regulators’ definition of a ‘taximeter’ and used technology – a cloud-based app rather than an in-vehicle device – to avoid the constraints of being a taxi. Similarly they are redefining ‘employee’ as leaders in the so-called gig economy.
Because they cannot – creating something of sustainable substance from zero to a billion in a matter of months defies the laws of physics.
The unicorn love affair is a consequence of the investment world’s obsession with how much money they put to work rather than its impact.
Think of the headline statistics – how much money was lent, and how much of that was lost. How much was invested or raised. With only a handful of noble exceptions, the reported data entirely ignores how many jobs were created, how much tax was paid, and how much wealth was created. There is no focus at all on outputs or outcomes.
“Corporate governance is about enhancing competitive advantage”
We have recently seen two spectacular examples of porcine lipstickification. One was the advertising unicorn Ve Interactive, which went into administration and nearly disappeared [Ve, at one point valued at $1 billion, went into administration in April, although it survived]. Another was payments company Powa Technologies [once valued at $2.7 billion, Powa went bankrupt in February 2016].
It is, of course, no more difficult to go instantaneously from a valuation of a billion to one of zero than it is to travel in the opposite direction – because in both cases the billion was illusionary. It existed only in the star-struck eyes of the owners, whether managers or investors.
There should be no difference. A board has three responsibilities. First, to make sure a strategy is in place. Second, to ensure that strategy is executed to the best of the organisation’s ability, given its capacity and the environment.
The third responsibility is to make sure the organisation respects and conforms to all relevant regulations and laws. So the board’s three jobs are strategy, execution, and compliance.
You then configure the board to deliver these, depending on the circumstances. While never losing sight of its three jobs, a board of an organisation in crisis must become executive and get involved wherever necessary to avert the crisis, whereas if a company meets all its targets, the board can operate in a much more observational and supervisory way.
Boards therefore need to be flexible and move across the spectrum between these two positions – engaged or supervisory – and that is true at any organisation.
I do not think whether the purpose of the organisation is charitable, profitable or somewhere between the two affects these basic principles.
Unfortunately, some people who go into the charity sector are ill-equipped to perform the three board roles. They do not know what a strategy is and assume it is the business plan for the year, and that they cannot add anything of value to its execution. So the sector sometimes gets well-meaning people who unfortunately are ill-equipped to be directors.
However, I would not overstate the public and business sectors’ superiority. You only have to see how many issues there are in those sectors to see that competence is not a universal characteristic of boards outside the charity sector.
There is certainly a danger of becoming institutionalised, but if term limits were a priori a good thing to have, no family business could survive more than a generation. Some of the greatest institutions on the planet are family businesses surviving many generations.
I go back to the point I just made about the purpose of the board being to perform three tasks. The job of the board is to convince itself and its stakeholders that it is, in fact, discharging its three responsibilities properly.
That is the test. If there are people who suffer from groupthink and do stupid things and the organisation suffers they fail that test.
But whether they have been there one minute or 100 years is not an indicator of any of that. You have lots of jobsworths saying you have to have term limits because that refreshes the board – but why?
Warren Buffet did not step down after three, six or nine years from Berkshire Hathaway. I don’t see Jeff Bezos standing down from the helm of his creation – Amazon – any time soon. Term limits, per se, do not make any sense to me at all.
It is a random idea from the UK Governance Code which has been hijacked by bureaucrats and applied all over the place with neither rhyme nor reason.
And even the UK Governance Code does not mandate term limits; it works on comply or explain. The explanation is that those long-serving board members are making a robust contribution to the definition and delivery of strategy and the conformance to rules.
There are two dimensions to the answer. One concerns the trust in people in positions of responsibility. The second is confidence in the system or process – its ‘fairness’. The principal parallel is that both are matters of trust and fairness.
The MPs’ expenses scandal was minute in scale, atomic even, compared to any kind of financial scandal happening in any country, at any time. But it was not the amount of money that was the issue; it was the affront to public trust, just as it is with executive remuneration.
If you lose the trust of the public, you lose the right to the respect on which you depend to be able to do things, whether you are a business, an MP, or a citizen.
“No one is free of societal responsibility and when it all goes wrong and trust is damaged, the consequences can be dramatic, as they were for Parliament”
The governance system broke down partly because the people under scrutiny were also judge and jury of the process. There was a big fight before we were appointed, about whether the expenses data would be made public or not.
MPs said they should decide how expenses are organised, and also police the management of expenses and, if something goes wrong, decide what to do about it and how to repay the money. The prevailing view in the Palace of Westminster was it was none of the public’s business. It was the MPs’ business to run Parliament.
But that was demonstrably wrong as subsequent events showed. As in every other walk of public life, politicians also only operate with a licence – one which comes from public trust. This should be obvious in politics because we vote for them.
It is less obvious in business, but it is still true, and what the Philip Green and BHS controversy reminded everybody was that even if you are a private company you still have obligations to the wider public because a) they buy from you, and b) they have pensions and other rights.
No one is free of societal responsibility and when it all goes wrong and trust is damaged, the consequences can be dramatic, as they were for Parliament.
The ENRC controversy
In 2007, Ken Olisa was appointed as a non-executive director of Eurasian Natural Resources Corporation (ENRC), a FTSE 100 mining group, whose shareholders included the Kazakhstan government. In 2011, he was voted off the board by more than 83% of shareholders’ votes, a move he famously declared as being ‘more Soviet than City’.
‘Difficult experience’ is an appropriately British understatement! In fact, I am the first-ever director of a FTSE 100 company to be fired at an AGM – the consequence of a titanic clash between independent directors and the rest.
If the personal interests of board members drive their behaviours, they cannot, by definition, be acting in the best interests of all stakeholders. With a majority of independent board members, decisions can be taken free of conflicted perspectives.
Now, of course, everybody is partially conflicted, because non-executives on boards want to keep their jobs and/or their reputations, so it is not possible to eliminate all conflicts, but you can reduce them.
At ENRC, there was a huge cultural gulf between the British view of how you conform to the expectations of FTSE 100 companies, and the view of the former owners and other people on the board. They just did not get the subtlety of the UK Governance Code.
The other camp said that they, as former owners or their associates, would never do something that would damage the prospects of the company and reduce its value, given that a lot of their wealth is tied up in the company. Therefore they argued, they were doing the right things – QED.
We got that point, and it has a lot of merit. But we needed to be assured of it, not just told to take their actions on trust. Indeed, we believed we might have been able to add some value to those ‘right things’.
But we failed to persuade our colleagues, who essentially just wanted to be left alone, arguing that their interests, by definition, must be aligned with everybody else’s interests as they accounted for 80% of the shareholders.
“Everybody is partially conflicted, because non-executives want to keep their jobs and reputations”
The ‘more Soviet than City’ comment was a particular statement about the way Sir Richard Sykes and I were treated in the run-up to our being fired at the AGM. The meeting was on a Wednesday and, on the Monday before, the Kazakh government voted on the standard resolutions reappointing the auditors, directors, and so forth.
All the directors stood for reappointment and the Kazakh government voted for all of us. Given the Government’s influence, their decision pretty much ensured that the other related shareholders would vote for us to be reappointed.
But on the Tuesday, after the market closed, the Government sent in a revised proxy ballot reversing their earlier position and firing Sir Richard and me. At the next day’s AGM and when the votes were counted Sir Richard and I were eliminated by some enormous percentage – more than 80% of the shares voted against us. A manoeuvre of which Trotsky would have been proud!
That is what I meant by ‘more Soviet than City’. The City way would have entailed shareholders signalling their intentions in the newspapers weeks in advance, complaining and warning about things; there would have been discussions with the chairman, and so on.
If the company failed to bend to the shareholders’ demands and the unpopular directors refused to stand down voluntarily, then they, like us, would have been fired. But it would not have been the result of some kind of Kafkaesque stunt.
UK corporate governance is not bad, but it could do with being redirected. As with so much in life, it has tended to drift towards mechanical box-ticking compliance and away from its Cadbury roots of adherence to generally accepted principles.
Corporate governance is about enhancing competitive advantage, not about demonstrating conformity. Good corporate governance is like good personal health – if you are a healthy business, operating well, then you will fare better.
It is a factor for competitive advantage, not just for organisations, but for the nation. It is in the UK’s best interest to establish a governance environment which offers advantages to well-run companies, which are then attracted to float and raise capital in this country.
For example, the ‘comply or explain’ principle in UK corporate governance practice separates us from the US, which is purely concerned with following the rules. In America if you want to do something and it is against the rules you try and find a way around it through an inconsistency in the rules.
And inevitably it is highly likely that a loophole will exist because, as I said earlier, regulation will always lag reality.
Finding a way around principles is much harder. ‘Comply or explain’ ensures there is no escape from either following what is deemed as best practice or elaborating on how the alternative path delivers value to all stakeholders.
In an attempt to reverse the drift towards tick-box compliance we have done a lot of work on defining corporate governance at the Institute of Directors (IoD). We identified some 50 factors that need to be taken into account when deciding whether corporate governance is good or bad inside an organisation. They are not necessarily bad factors, but they are indicators of potential problems.
The IoD’s Good Governance Initiative is based on the belief that once you know what the critical factors are, you can make decisions in relation to them. But, importantly, running a business is more of an art than a science and so a board must decide which factors are important and whether the indicators highlight the need to take action.
This is not currently the way the UK Code operates but, as practitioners rather than regulators, it is the way that the IoD believes it should work.
I used to joke about the difference between slavish conformance and principles-based action with my version of Schrödinger’s cat. 100.5 to 102.5 degrees is the optimum body temperature for a cat. There are however, two ways of achieving it. One is to ensure your pet leads a healthy lifestyle and the other is to encase it in a hermetically sealed box maintained at a constant temperature of 101.5.
Both tick the temperature compliance box, but only one supports a healthy animal.
|Ken Olisa is Chair of Restoration Partners; the Lord-Lieutenant of Greater London; Deputy Chair of the Institute of Directors; a director of Thomson Reuters; and Chairman of Independent Audit, among other appointments.|