Feature

posted 3 Aug 2005 in Volume 8 Issue 10

KM comes to the boardroom

Spectacular failures of governance and management in the United States, Canada, Europe and other parts of the world are clarion calls for the application of knowledge management principles and practices in boardrooms around the globe. By Jerry Ash

Governance can no longer be defined as choosing and monitoring the CEO. Nor can today’s governing boards rely solely on the knowledge fed to them by their senior executives. Governing in complex organisations engaged in rapidly changing local and global environments begs for governing boards to relentlessly pursue knowledge to build an understanding of their businesses, related industry sectors, the economy and society at large in order to make the strategic decisions that will ensure their success and longevity.

Today, meeting that challenge is no easy task. The various stakeholders of corporations, not-for-profit organisations and governments expect more than the narrow-minded pursuit of profitability, service delivery or enhanced public policy. They expect governors to take a more globally networked perspective, be transparent and ethical in their decision-making, and act in a fully knowledgeable manner about the risks and potentials for innovation for their organisations. The savvy board of directors recognises that these non-economic challenges are as critical to their success as was the narrow financial focus on ROI in the past.

The operating environment has become more complex and faster-paced than ever before, making part-time service in governance broader, deeper and more time-consuming. Every board needs knowledge management.

This report is based primarily on the thoughts and discussion of global KM practitioners, led by Doug Macnamara.

The situation

The high-profile failures of governance and management in the US are not unique occurrences peculiar to that country. One only need mention the word “Enron” to speak volumes about the failures of governance and management in the US; but Europe has its own “Enron”– Parmalat, the Italian dairy and juice giant that collapsed in an $18bn fraud case.

A few years ago, a Canadian company called Laidlaw Inc was a diverse conglomerate with a portfolio that included waste management, school bussing, and ambulance services. At one point, Laidlaw took over another waste management company in the US at the height of the market. The CEO and board were congratulated by analysts as the company’s assets and cash flow blossomed and it became the dominant player in North America – on paper.

But in reality, value creation wasn’t achieved and the numbers couldn’t be sustained. The company went bankrupt, but not before significant stock options were cashed and the valuable elements (education and ambulance services) were sold off to help cover the losses from the waste management business; finally being restructured into a smaller, only bussing transportation company.

Why did the Laidlaw board end up in bankruptcy without solving the core value issue, as the board of Air Canada did when it sought bankruptcy protection and spent almost two years working out a new, more sustainable strategy?

The probable answer: Many senior leaders and old-guard (even some new-guard) board members got caught up in the game, perspectives and questionable practices that they believed to be the ‘norm’. Worse, it is questionable how much is ever fully discussed with boards. Even if it were, it is questionable how many board members would understand; how many would challenge the sophisticated mechanisms of management, question ethics or the sustainability of strategies. Without knowledge, boards simply don’t know.

Regulation trumps good intentions

Although executive conduct, judgment and malfeasance have dominated business news in recent years, executive behaviour and strategic failure is not the epidemic it appears to be. Typical board members are generally filled with good intentions. Well-intentioned individuals who are trying to serve the best interest of multiple groups of stakeholders, often simultaneously, populate the vast majority of corporate and not-for-profit boards, governing councils and cabinets. Many are highly competent and seasoned leaders and directors that prepare well for meetings, represent the organisation publicly and serve on various committees.

But few board members possess adequate knowledge, which means most boards are vulnerable to becoming tomorrow’s bad news. The question is whether good intentioned governing practices are good enough. The real work of governance – whether paid or voluntary – must go beyond good intentions. It is high value, highly demanding intellectual and practical work, and it takes dedication, knowledge, understanding and focus to do it well.

Government is betting against the effectiveness of good intentions. The creation of the Sarbanes-Oxley Act in the US; the revised standards for corporate disclosure and governance practice by the various securities commissions plus the proposed Bill C-21 affecting not-for-profit/charity governance in Canada; and other recommendations around the world including the Cadbury Commission/London Stock Exchange, the OECD, the German Panel on Corporate Governance, the Hong Kong Code of best practices; and many more government initiatives assume good intentions are not enough. Instead, the demand of today’s boards of directors is for new practices and significantly enhanced engagement by the board in oversight, risk management, community/stakeholder/government relations, and a full understanding of the complex networks surrounding the organisation.

Most importantly, the demand is for ethics of truth, trust and transparency.

Transparency: Clarion call from stakeholders

Transparent (adj.): 1. Letting light pass without distortion. 2. Free from pretense or deceit. Synonyms: Apparent, Clear, Frank, Obvious. Antonym: Secret, Opaque.

Secrecy, wheeling and dealing, self-service, and ignorance are no longer acceptable to investors who have been burned by not being in the know because their representatives – their boards – have either been deceptive or not in the know.

Transparency of governance and management has become a hot topic in business, government, international aid and more. It is, of course, contrary to traditional principles and practices of the past and remains troublesome to the leadership of today. Transparency is not universally accepted or interpreted the same way even across North America, let alone around the world. However, transparency has been a topic discussed far longer than the problems revealed by the latest business news.

The large-scale movement toward transparency actually took hold 20 some years ago in the area of international aid and politics. Organisations such as the International Monetary Fund (IMF) and the World Bank, which were providing economic relief and loans to countries such as the Philippines, Indonesia, Thailand, Brazil, Argentina and others, wanted to be sure that the money was being properly used and managed. Politically, these world bodies wanted to see democratic elections without bribery and cronyism, so that the political leadership would be more stable (with the support of their people). Financially, these same bodies wanted to see an open accounting of how the money flowed to different projects, and indeed to the people of the country served, again without being diverted to personal bank accounts or fraudulent activities/companies of those in power.

At the same time, however, business in North America and Europe was noticeably non-transparent, and only somewhat willing to let the outside world see financial conditions, management decision-making and internal workings. Indeed, corporate spy games were very much alive. Nevertheless, there was an inherent trust at the time, by shareholders, employees and the citizenry, that their leaders were doing the right things, and it wasn’t their place (for competitive or privacy reasons) to ask for evidence.

During the last 20 years conditions have changed remarkably:

More of the common citizenry holds investments directly or indirectly (through mutual funds or pensions) in public companies;
A more educated and experienced citizenry has witnessed, first-hand, untrustworthy senior leaders – they are more confident that they can/should ask for evidence of respectability;
The gulf in remuneration between senior leaders and average employees has noticeably widened, and left disgruntled workforce members;
The local, national and international media have written investigative exposés about many untruthful businesses, political and even not-for-profit leadership situations.
Bankruptcies have soared;
Various political leaders in the very countries that the IMF and World Bank initially were concerned about, as well as the G8, became embroiled in public scandals regarding kick-backs, fund diversion and cronyism;
Private-sector-investment scams and unfair insider trading situations have proliferated.

Indeed, abuse has become so public and so obvious that many of the people who assured us they could be trusted, appear to have been improperly using funds, accounting rules and loopholes, and making poorly considered decisions for the benefit of an elite few. Those citizens or employees in the ‘dark’ have been often lied to, taken advantage of, or had their taxes or funds used in a manner they did not agree to. The very bases of democracy, free capitalism and level-investment markets are currently threatened.

West, East; developed, developing: trust is no longer assumed – it must be proven. The privilege of leadership and the attendant follower-ship must now be earned through open and honest communication – transparency.

“As the expectations for transparency grow,” Macnamara says, “and the demand for public accountability from our senior leaders develops; senior leaders will need to create new systems and develop new practices among themselves and their colleagues. Secrecy and competitive behaviour will regularly be challenged by new collaborations, and the expectation of openness will continue to demand more access to and information from senior leadership. Transparency also has the great potential of creating a ‘level playing field’ for investors, customers and employees, while enhancing knowledge sharing and creativity among members of knowledge networks.”

Transparency is making life a little uncomfortable for a large majority of leaders, but those who embrace these principles and find ways of integrating them into the operational flow of their organisations should see great benefits returned to their organisation, teams and communities. And, who knows, we as leaders may even eventually regain the trust and respect of our communities.

Global similarities/differences in governance

Doug Macnamara joined the Banff Centre for Management in 1994 and served as vice president and later general manager until July 2001 when he left to set up his own consultancy. Among many accomplishments at the Banff Centre he led the development of dedicated programming areas for Aboriginal leadership and management, as well as community and not-for-profit leadership. He also invented unique competency profiling and active learning processes for boards and management. Now, after four years on his own, Macnamara is a storehouse of knowledge on governance.

“To some extent,” he observes, “Britain, America and Canada approach governance and transparency more or less the same.” The main difference being the Americans favour a rules-based approach with an enforcement body to oversee compliance, whereas Canadians and Brits tend to prefer the establishment of generally agreed-upon principles, then ensuring the community/media hold organisations to such principles. But generally speaking, our concepts of the corporation, rule of law and community accountability are close to being the same.

“Though less experienced directly with it,” Macnamara says, “I have been told by many close friends that the Germans, who often have union representatives and/or staff members on their boards often have a much broader social sense for transparency, knowledge-exchange, collaboration and sustainability.”

Japan and Korea on the other hand are dominated by cross-held Kiretsu ownership and thus take a more networked, sustainability/protection approach. “This in itself tends to cause significant risk aversion,” says Macnamara, something that is beneficial in areas of executive-worker compensation disparity, or quality concern, and consumer/client focus, yet is not so beneficial when it comes to breakthrough risk, or new market creation.

Clearly, cultural expectations and experience with transparency affect interpretation of “good” or “better” practices. As Eastern Europe, South/Central America and the Arab world come on-stream with governance and transparency, there will be further variations.

Can we define a common global approach to governance and transparency? The OECD and Transparency International, a non-governmental organisation devoted to combating corruption, are two organisations that have facilitated broad agreement from 150+ nations to such principles. The next great effort is to get everyone:

a) Aware of these principles;

b) Interpreting how to apply them to their unique circumstances/culture;

c) Generating broad social/community knowledge and expectation in order to hold those in governance accountable for their actions.

Assumptions, beliefs and lack of understanding

Macnamara has continued to work with governing bodies in North American indigenous communities, corporations, large non-profit organisations and charities in Canada. He has also carried out a large governance project in Indonesia, several engagements in Iran, a couple of leadership projects in Europe, and led several attempts to build partnerships in countries such as Qatar, the United Arab Emirates, Kuwait and Oman.

He spent over five years in a partnership in Japan aimed at building environmental leadership practices.

“What is very interesting,” says Macnamara, “is that we all hold very significant assumptions and beliefs that drive our values, thinking and finally actions, but most of our very senior leaders/governors have very little concrete understanding of their own values/beliefs and assumptions.”

Indigenous North Americans are all very different so there is no “common” amongst them. Some have remained true to an ancient spirituality, community/tribal identity and connection with the land. Others have adopted Christianity. Some have developed their own unique blend.

Indonesia, Gulf States and Iran are all Islamic countries, but with different separations between church and state, plus differences in interpretation of how their religion is interpreted in everyday life.

Canada and the US are not homogenous either. From one corporation to another Macnamara sees completely different “senses” for what transparency in governance means in practical daily behaviour. For example, one corporate board will see that transparency about corporate strategy and goals is a disadvantage to its competitiveness and thus inappropriate for its duty to shareholders. Another board will see that openness is a huge collaborative advantage engaging broader creativity, innovation, commitment and sustainable shareholder benefit.

And the variation isn’t restricted to corporations. Professional associations – to whom we often look to help define “professional practice” and community standards – have incredibly divergent views and beliefs about transparency and broader accountability. Charities and not-for-profits are similarly diverse in their interpretation of such fundamental principles.

To make sense of the divergent views, Macnamara says we have to understand several key points:

Senior leaders in any community/culture have generally come from a ‘privileged’ class or caste;
Governors/executives must strive to create a balance between individualism and the greater good. They have significant resources and ability to aggregate insight in a way most people cannot, and so they have a responsibility to others;
We cannot simply leave good governance and leadership to government to define. Everyone in these senior leadership positions must step forward and dig deep inside themselves to define what their collective values are, how they see their governance role(s) and how they will action it;
Even governance experts and consultants cannot “tell” others how they should act. Instead we must facilitate them to define standards for themselves;
The ultimate point – we have to discover what our values really are, and what they mean in action. This is a process of knowledge management. It is also a challenge of non-knowledge management (the manipulation of knowledge). Because so many leaders have been caught up in ‘the game’, they have lost touch with what’s right or wrong. They need to know what they know and what they need to know to guide their organisations forward to sustainability and relevance for the future.

“Failure to do so,” says Macnamara,“is how we get Enron, Hollinger International, Berlusconi, and more.”

The good news is that, in general, board members want to expand their reach into issues that shed light on the longer-term health of their companies. Research reported in the latest McKinsey Quarterly shows that fully 70 per cent of the directors surveyed want to know more about customers, competitors, suppliers, the likes and dislikes of consumers, market share, brand strength, levels of satisfaction with products, and so forth. Upward of half want to know more about the state of the organisation, including the skills and capabilities needed to realise the corporate business strategy, both now and in the future. Two in five respondents are eager for insights into external networks, such as the nature and level of regulatory and government risk, as well as public, media and community attitudes toward the business.

Educating the board

Movement of the board to an era of transparency requires education and Macnamara says the effectiveness of board training depends on how it is delivered. “A staff-led, CEO-led or corporate secretary-led training initiative has a very different set of assumptions and locus of control than that led, for instance, by the governance committee of the board.

“Ideally, board training and KM efforts will be led by the governance committee or the board as a whole and supported by staff,” he says. “Many people who support the board have never been a board member of a similar size/complexity/contexted organisation. Indeed, many have not even been at the VP or CEO level.

So, their context is always very different than that of the board members – not less important, but different.

“I have often commented that you can look up one level and appreciate somewhat the job and context of your boss; but even then you don’t fully understand their situation. Looking up two levels is even more difficult, perhaps impossible. Other than the CEO, support staff has a very difficult time grasping the whole perspective, responsibility and detail of being a board member.”

Finding the KM savvy leader at the board level is rare. How, then, does a staff member lead the board toward KM and transparency? Board members by virtue of being on the board have an inherent sense of self-value based on the knowledge they do have and bring to the table. Many want to believe they know it all, certainly more than a subordinate.

As in the introduction of KM at any level or in any other organisational silo, what will work is the recruitment of internal knowledge advocates who see – or are helped to see – the advantage of developing a learning board where directors can share knowledge, search for knowledge and develop new knowledge themselves, just as they expect their organisations to do. Then they can turn to knowledge-savvy staff for support in facing issues that may need a KM solution. But the trainer or KM leader is the facilitator, not the leader.

Corporate education is already an accepted practice, calling on staff for support. It is the most readily available entry point for the introduction and development of KM. Crossover KM, as described in the Knowledgeworks column, April issue of Inside Knowledge, can play a critical role in bringing KM to the board table through the organisation’s education department.

Conclusion

In observing and working with a variety of governing bodies, Doug Macnamara is struck by several paradoxes in a world that is increasingly complex and fast-paced:

How can a board that meets 3-4 times a year know enough about what is going on in an organisation and the industry/community it operates within to exert good judgment? Yet, how can they gather more frequently given busy schedules?
How does a non-profit board comprised of individuals with little or no executive and/or industry experience empower the CEO? Yet how do we ensure independence of directors, representation of community, and diversity of perspective?
How does a board exert oversight without establishment of clear outcomes and values for the CEO/management team to report against? Yet how do governors really know what is important to measure given only a very part-time attention to the ‘business’?
How does the board exert effective public communication, community engagement and allow access if everything is delegated/handled by a corporate communications department reporting to a CEO?
How does an individual with the title ‘Chairman, President and CEO’ avoid conflicts of interest?
How do we get enough time from directors/governors/council/cabinet members to actively fulfill their:

- Duty of knowledge
- Duty of care
- Duty of skill and prudence
- Duty of diligence
- Duty of trusteeship and investment
- Duty of management/delegation
- Fiduciary duty

Start with the duty of knowledge

A board member is expected to know more than the “common person” about the organisation and its “business”. This includes knowledge of the governing by-laws and the operating bases of the business or government or association or charity.

Governors must also understand the marketplace and/or community in which it operates and how the organisation delivers its products and services. This might require regular reading of newspapers, web-reports, and/or industry journals. For council members or cabinet ministers, this means clearly understanding what their government programmes actually do, as well as the kinds of clients and contractors used.

It also means understanding how they might affect the various inter-regional or international trade agreements in place. For these and non-government situations, this duty likely requires regular interaction with other communities, their own community members, clients, other stakeholders, etc, so as to understand the value their organisation provides and how it is seen in the community/marketplace.

These duties do not mean doing the work that the CEO/management team is hired to perform. They do mean understanding the dynamics, issues, trends surrounding the organisation and its products and services so that appropriate vision, outcomes and measures can be established by the board and acted upon by management and staff.

It means a dramatic change in corporate culture at the very top that will allow CEOs and board members to do their jobs unimpeded by the other but with an openness that will build truth, trust and transparency, putting to rest the inadequate industrial era view that a board’s job is simply to hire and fire the CEO.

For more, see www.kwork.org/Stars/Macnamara/macnamara.html

To read the complete AOK STAR Series Dialogue with Doug Macnamara, go to: www.kwork.org/Stars/stars.html

Jerry Ash is special correspondent for Inside Knowledge. He can be contacted at jash@kwork.org.

Sidebar: The board members were good people, but couldn’t govern

Having access to wise counsel does not always result in good governance when the board is focused only on the immediacy of the stock market and disconnected from networked intelligence.

“I watched in horror this past year as a client organisation went bankrupt,” says Macnamara. “As complex as these things are, there were many elements involved. But the board contributed to the situation by delaying, and delaying, and delaying again their support for a management proposal to diversify into some new ventures. When they finally did decide, they then forced the executive team to go ahead full speed, even though the executives were now worried that the window of opportunity had closed.”

The organisation built up over $500,000 in debt as a result of plugging ahead despite being late in the process. The CEO presented a rescue plan to the board that was rejected. The CEO was fired, and the board decided to declare bankruptcy rather than work it out. The board made this decision on the advice of lawyers, not management consultants.

“In the end they couldn’t even liquidate enough assets to pay off the bank charges and the lawyer fees,” Macnamara recalls. Now each board member is personally liable for a share of these unpaid fees and they must forever disclose to bankers and other board recruitment processes that they have been a part of a bankruptcy. Of course there were also the employees, suppliers, and creditors left in the lurch, and the spillover effect in the community.

“The board members were basically good people,” says Macnamara, “but for whatever reason just didn’t know enough to be good governors! Nothing had probably ever prepared them for the task and they were too proud to take training.”