Digital trends and observations from Davos 2018

Posted in Aktuellt, Allmänt, Board work / Styrelsearbete, Digitalisering / Internet on February 6th, 2018 by admin

The massive snowfall in Davos this year certainly made getting around a little more challenging compared to years past, but that did nothing to dampen the conversation. We were fortunate to be at this year’s World Economic Forum, and after dozens of conversations with executives from around the world, we wanted to share a number of things that struck us about what we heard.

AI is growing up: Augmenting humans and social good
AI is top of mind for many executives, but the application of AI—and, more broadly, advanced analytics—is generating more thoughtful and nuanced conversations. While there are serious concerns about the social implications of AI, the reality is that it’s hard to see how machines can really be effective on their own, just as it’s hard to see how humans can work as well without machines. The most thoughtful organizations are looking to understand how AI can most effectively augment humans.

That idea of augmentation is playing through in other areas too. If you have good AI, you need processes to ensure the insights it generates are used. This is harder than it sounds. You can’t simply have a machine spitting out advice because people just won’t read it. By the same token, it doesn’t help to automate poor decisions. It’s all about finding ways to get the various technologies focused on what they do best, and then working together with humans to drive better results.

It was inspiring also to see how much focus there is on harnessing AI for social good. There is a significant opportunity for AI to help with big problems, from predicting the absence of rain in a region to managing mass immigration flows. While businesses are moving ahead quickly with AI, NGOs and regulators are far behind when it comes to the talent and capabilities needed. That may be changing, however. Increasingly there are courses on AI and social good being offered at cutting-edge technical universities, where there is strong interest from top students.

Gaining traction: Distributed ledgers (e.g., blockchain) and ecosystems
There is also a massive debate emerging around distributed ledger technology (more commonly referred to as blockchain, though that’s actually just one example of distributed ledger technology) specifically around its applications to businesses. There’s still lots of hype—often shaped by lack of true understanding of what the technology is—but also some real substance beyond its use for the cryptocurrencies that have been in the headlines. The promise of distributed ledgers lies in their ability to reliably, securely, and transparently access and share targeted sets of data.

Let’s take the example of sepsis, a dangerous but very preventable disease. Technology can help prevent sepsis by linking signals the body generates to historical health data. The analysis of this combined data could then signal danger signs before other symptoms arise and drive timely medical interventions. Distributed ledger technology could enable that kind of merging of data and analytics in a way that’s very hard to do today. Another example is banks that want to lend in emerging markets, where there is often no credit risk data, but widespread mobile phone usage. Through distributed ledgers, banks could access telco data to see potential customers’ phone bill payment records as a quick and reliable measure for loan suitability.

Distributed ledgers are also important for unlocking the cumulative power of ecoystems, which are increasingly a focus for businesses. It’s becoming clear to even the largest and most successful companies that they can’t do everything on their own. They are now concentrating much more on engaging in ecosystems of businesses, platforms, vendors, agencies, and the like through formal and informal partnerships, synergistic agreements, alliances, and other arrangements. However, ecosystems don’t happen at scale yet because of the difficulties getting different data systems to speak to each other with current technology. Distributed ledgers are the key ingredient to enable that level of communication and analysis.

Businesses are starting to put pilot teams together to understand how distributed ledgers work, and what the implications are for their businesses. We’re on the verge of some very interesting business models emerging from this.

Who’s got talent?
Almost everyone we spoke with mentioned how important the talent question has become. Of course, talent is always an issue but it’s now a CEO topic. There were three flavors of the talent challenge which we noticed:

“I need to get my hands on some quality data scientists.” There is a limited number of these kinds of people, so the competition is intense (and expensive).
“I need to train my senior people and managers to understand how to work with and lead these data scientists.”
“I need to do something about the percolating social implications.” Many leaders are concerned about the implications that displacement of jobs by automation will have on society. Added to that is the fact that much of the employment growth in Western countries is in the gig economy. Leaders are looking at re-skilling as a cheaper and more effective approach than paying to hire and train new people. But that then requires the development of the capacity to develop, administer, and adapt a constant training function, because the reality is that many employees will need to be constantly learning and adapting. That includes thinking through the skills needed in three to five years, and beginning to develop that now before it’s too late.

Bold moves and what they mean for the organization
Many business leaders are thinking much more boldly about the changes they should make. One executive at an oil services business realized that they needed excellent advanced analytics capability to help manage their pipelines (such as for maintenance). His approach was to hire the best entrepreneur he could find and set up a self-standing business to specifically build out this capability. Not only did this executive believe it was the best way to build up an important capability quickly, it was also a talent play.

These bold moves are inextricably tied to organizational issues. Building out new businesses or figuring out how (or whether) to move to full-scale agile ways of working through the business raises all sorts of thorny questions: what does the governance look like? How do you make investment decisions? These are exactly the kinds of questions that reflect a deeper commitment to transformations at the core of the business.

The tough talk: Cybersecurity and looming “Techlash”

Overall, the feeling was very positive that the business outlook was good and the economy is flying. But below the surface there were very real and potentially damaging concerns. Cybersecurity is foremost among them, with companies locked in an arms race to stay ahead of (or even catch up to) highly sophisticated cyber criminals. It’s a big issue with CEOs and boards, and some of the business world’s best minds are trying to understand how to get the upper hand.

One other undercurrent of concern was around the idea of a “techlash,” or backlash against tech companies driven by fears that they are becoming too large and monopolistic. At one level is the basic concern that tech companies are just outcompeting incumbents, but beyond that there’s a sense that large tech companies are dictating terms to the marketplace, not taking privacy concerns seriously enough, and unfocused on the social implications of technology. Yes, to some degree this is driven by jealousy at the success these new tech businesses have enjoyed and the natural discomfort that comes with disruption. But there is also real concern as well with what’s happening to our society with these changes, and a sense that not all of it is good.

Despite the complexity of some of these issues and concerns, we were encouraged to see the discussion about them. Dialog is an indication of innovation to come.

Source: McKinsey.com, 2 February 2018
Authors: Nicolaus Henke and Paul Willmott
About the authors: Nicolaus Henke and Paul Willmott are senior partners in McKinsey’s London office.
Link

Ompröva om VD skall ingå i styrelsen

Posted in Aktuellt, Board work / Styrelsearbete on February 2nd, 2018 by admin

Di skrev 31/1 att Skanska SKA B nya vd Anders Danielsson inte får någon styrelseplats. Ett skäl är att Danielsson ska vara “mer operativ” än sin företrädare. Det är bra. Om företrädaren varit mer operativ kanske problemen för efterträdaren inte hade varit så omfattande.

Styrelsen kan uppleva det som bekvämt med en drivande vd som ledamot. Men risken är att vd får för stort inflytande i frågor som i grunden är styrelsefrågor. Styrelsens diskussioner påverkas av att vd sitter i rummet.

Det finns inga fördelar med att blanda ihop parternas olika roller. Strategin är i första hand styrelsens ansvar, det operativa är ledningens. I slutändan är det styrelsen som tillsätter och avsätter vd och är dess överordnade. De olika perspektiven är en del av styrkan i styrmodellen.

Det handlar inte om att isolera vd, som ju ändå är involverad i och med att hen ofta är med på mötena som föredragande. Vd bör ha en god och löpande kontakt med ordföranden som är ett viktigt bollplank.

Hexagon är ett bra exempel på hur styrelsen gjort sig sårbar och beroende av vd Ola Rollén, som även är styrelseledamot. Samtidigt kan man i fall som Rolléns, när vd även är en betydande aktieägare, tvingas göra avsteg från principen eftersom en storägare bör kunna komma i fråga för styrelseplats.

De fyra storbankerna gör olika val, i SEB och Handelsbanken har vd styrelseplats, men inte i Nordea och Swedbank. Det är värt att notera att HQ hade en tradition av att ha vd i styrelsen, men efter kraschen har både Sven Hagströmer i investmentbolaget Creades, och Mats Qviberg i Öresund, undvikit detta.

USA har rakt motsatt modell, vd är ofta även ordförande. Det skapar en stark maktkoncentration och gör det mycket svårare att ifrågasätta eller sparka vd, vilket är en riskfaktor. Häromdagen förlängde JP Morgan Chases vd och ordförande Jamie Dimon sitt förordnande i ytterligare fem år, vilket totalt innebär 17 år på posten. Det sägs att man inte ska ändra ett vinnande lag. Men laget bör inte heller göra sig beroende av en enskild spelare.

Svenska företag gör rätt i att skilja på rollerna och bör i större utsträckning ompröva vd:s styrelseplats.

Källa: DI.se, 2 februari 2018
Länk
Av: Lotta Engzell-Larsson

A Sense of Purpose

Posted in Aktuellt, Board work / Styrelsearbete on January 18th, 2018 by admin

LARRY FINK’s ANNUAL LETTER TO CEOs

Dear CEO,

As BlackRock approaches its 30th anniversary this year, I have had the opportunity to reflect on the most pressing issues facing investors today and how BlackRock must adapt to serve our clients more effectively. It is a great privilege and responsibility to manage the assets clients have entrusted to us, most of which are invested for long-term goals such as retirement. As a fiduciary, BlackRock engages with companies to drive the sustainable, long-term growth that our clients need to meet their goals.

In 2017, equities enjoyed an extraordinary run – with record highs across a wide range of sectors – and yet popular frustration and apprehension about the future simultaneously reached new heights. We are seeing a paradox of high returns and high anxiety. Since the financial crisis, those with capital have reaped enormous benefits. At the same time, many individuals across the world are facing a combination of low rates, low wage growth, and inadequate retirement systems. Many don’t have the financial capacity, the resources, or the tools to save effectively; those who are invested are too often over-allocated to cash. For millions, the prospect of a secure retirement is slipping further and further away – especially among workers with less education, whose job security is increasingly tenuous. I believe these trends are a major source of the anxiety and polarization that we see across the world today.

We also see many governments failing to prepare for the future, on issues ranging from retirement and infrastructure to automation and worker retraining. As a result, society increasingly is turning to the private sector and asking that companies respond to broader societal challenges. Indeed, the public expectations of your company have never been greater. Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.

Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders. It will succumb to short-term pressures to distribute earnings, and, in the process, sacrifice investments in employee development, innovation, and capital expenditures that are necessary for long-term growth. It will remain exposed to activist campaigns that articulate a clearer goal, even if that goal serves only the shortest and narrowest of objectives. And ultimately, that company will provide subpar returns to the investors who depend on it to finance their retirement, home purchases, or higher education.

A new model for corporate governance
Globally, investors’ increasing use of index funds is driving a transformation in BlackRock’s fiduciary responsibility and the wider landscape of corporate governance. In the $1.7 trillion in active funds we manage, BlackRock can choose to sell the securities of a company if we are doubtful about its strategic direction or long-term growth. In managing our index funds, however, BlackRock cannot express its disapproval by selling the company’s securities as long as that company remains in the relevant index. As a result, our responsibility to engage and vote is more important than ever. In this sense, index investors are the ultimate long-term investors – providing patient capital for companies to grow and prosper.

Just as the responsibilities your company faces have grown, so too have the responsibilities of asset managers. We must be active, engaged agents on behalf of the clients invested with BlackRock, who are the true owners of your company. This responsibility goes beyond casting proxy votes at annual meetings – it means investing the time and resources necessary to foster long-term value.

The time has come for a new model of shareholder engagement – one that strengthens and deepens communication between shareholders and the companies that they own. I have written before that companies have been too focused on quarterly results; similarly, shareholder engagement has been too focused on annual meetings and proxy votes. If engagement is to be meaningful and productive – if we collectively are going to focus on benefitting shareholders instead of wasting time and money in proxy fights – then engagement needs to be a year-round conversation about improving long-term value.

BlackRock recognizes and embraces our responsibility to help drive this change. Over the past several years, we have undertaken a concentrated effort to evolve our approach, led by Michelle Edkins, our global head of investment stewardship. Since 2011, Michelle has helped transform our practice from one predominantly focused on proxy voting towards an approach based on engagement with companies.

The growth of indexing demands that we now take this function to a new level. Reflecting the growing importance of investment stewardship, I have asked Barbara Novick, Vice Chairman and a co-founder of BlackRock, to oversee the firm’s efforts. Michelle will continue to lead the global investment stewardship group day-to-day. We also intend to double the size of the investment stewardship team over the next three years. The growth of our team will help foster even more effective engagement with your company by building a framework for deeper, more frequent, and more productive conversations.

Your strategy, your board, and your purpose
In order to make engagement with shareholders as productive as possible, companies must be able to describe their strategy for long-term growth. I want to reiterate our request, outlined in past letters, that you publicly articulate your company’s strategic framework for long-term value creation and explicitly affirm that it has been reviewed by your board of directors. This demonstrates to investors that your board is engaged with the strategic direction of the company. When we meet with directors, we also expect them to describe the Board process for overseeing your strategy.

The statement of long-term strategy is essential to understanding a company’s actions and policies, its preparation for potential challenges, and the context of its shorter-term decisions. Your company’s strategy must articulate a path to achieve financial performance. To sustain that performance, however, you must also understand the societal impact of your business as well as the ways that broad, structural trends – from slow wage growth to rising automation to climate change – affect your potential for growth.

These strategy statements are not meant to be set in stone – rather, they should continue to evolve along with the business environment and explicitly recognize possible areas of investor dissatisfaction. Of course, we recognize that the market is far more comfortable with 10Qs and colored proxy cards than complex strategy discussions. But a central reason for the rise of activism – and wasteful proxy fights – is that companies have not been explicit enough about their long-term strategies.

In the United States, for example, companies should explain to investors how the significant changes to tax law fit into their long-term strategy. What will you do with increased after-tax cash flow, and how will you use it to create long-term value? This is a particularly critical moment for companies to explain their long-term plans to investors. Tax changes will embolden those activists with a short-term focus to demand answers on the use of increased cash flows, and companies who have not already developed and explained their plans will find it difficult to defend against these campaigns. The U.S. tax bill is only one such example – regardless of a company’s jurisdiction, it is your responsibility to explain to shareholders how major legislative or regulatory changes will impact not just next year’s balance sheet, but also your long-term strategy for growth.

Where activists do offer valuable ideas – which is more often than some detractors suggest – we encourage companies to begin discussions early, to engage with shareholders like BlackRock, and to bring other critical stakeholders to the table. But when a company waits until a proxy proposal to engage or fails to express its long-term strategy in a compelling manner, we believe the opportunity for meaningful dialogue has often already been missed.

The board’s engagement in developing your long-term strategy is essential because an engaged board and a long-term approach are valuable indicators of a company’s ability to create long-term value for shareholders. Just as we seek deeper conversation between companies and shareholders, we also ask that directors assume deeper involvement with a firm’s long-term strategy. Boards meet only periodically, but their responsibility is continuous. Directors whose knowledge is derived only from sporadic meetings are not fulfilling their duty to shareholders. Likewise, executives who view boards as a nuisance only undermine themselves and the company’s prospects for long-term growth.

We also will continue to emphasize the importance of a diverse board. Boards with a diverse mix of genders, ethnicities, career experiences, and ways of thinking have, as a result, a more diverse and aware mindset. They are less likely to succumb to groupthink or miss new threats to a company’s business model. And they are better able to identify opportunities that promote long-term growth.

Furthermore, the board is essential to helping a company articulate and pursue its purpose, as well as respond to the questions that are increasingly important to its investors, its consumers, and the communities in which it operates. In the current environment, these stakeholders are demanding that companies exercise leadership on a broader range of issues. And they are right to: a company’s ability to manage environmental, social, and governance matters demonstrates the leadership and good governance that is so essential to sustainable growth, which is why we are increasingly integrating these issues into our investment process.

Companies must ask themselves: What role do we play in the community? How are we managing our impact on the environment? Are we working to create a diverse workforce? Are we adapting to technological change? Are we providing the retraining and opportunities that our employees and our business will need to adjust to an increasingly automated world? Are we using behavioral finance and other tools to prepare workers for retirement, so that they invest in a way that that will help them achieve their goals?

As we enter 2018, BlackRock is eager to participate in discussions about long-term value creation and work to build a better framework for serving all your stakeholders. Today, our clients – who are your company’s owners – are asking you to demonstrate the leadership and clarity that will drive not only their own investment returns, but also the prosperity and security of their fellow citizens. We look forward to engaging with you on these issues.

Source: Blackrock.com, January 2018
Link

Tidsinsats och arvodering i svenskt styrelsearbete samt kommande ersättningsregler

Posted in Aktuellt, Board work / Styrelsearbete on January 10th, 2018 by admin

Det torde nu vara klargjort vad gäller kommande beskattning av styrelsearvoden (se mer nedan).
Inför kommande diskussioner avseende eventuella justeringar av arvoden har vi, inom ramen för vårt arbete med faktabaserade styrelseutvärderingar, tittat närmare på några frågor kopplade till insats och arvodering.

Resultatet baserar sig på drygt 300 ledamöter under de senaste 18 månaderna.
Drygt 60% av deltagande styrelser är noterade bolag och en tredjedel PE-ägda bolag.

Hur mycket tid lägger Du på Ditt styrelseuppdrag?
– 55% lägger upp till 250 timmar på sitt styrelseengagemang
– 25% mellan 250 och 350 timmar.

Hur mycket tid lägger Du på Ditt uppdrag som styrelseordförande?
– 32% mer än 450 timmar
– 60% mer än 350 timmar

I vårt arbete med styrelser händer det att ledamöter berättar att ”det här uppdraget har tagit väldigt mycket mer tid än vad jag förväntade mig”. Av detta skäl har vi tittat närmare på frågan:
Har detta uppdrag motsvarat Dina förväntningar vad gäller Din tidsinsats?
– Hela 84% anser att uppdraget har motsvarat ledamotens förväntningar. Detta tyder på en
”realistisk införsäljning” när den nya ledamoten approcheras.

Hur ser man då avslutningsvis på ersättningen för sitt styrelseengagemang?
Är arvodet rimligt i förhållande till tidsinsatsen?
– 46% håller med ”fullt ut” att styrelsearvodet är rimligt (52% i gruppen ordföranden).
– 24% håller inte med om att ersättningen är rimlig

Nedan finner Du en kortare sammanställning av de nya skattereglerna avseende styrelsearvoden:
Skatteverket har förtydligat sitt ställningstagande avseende övergångsperioden. Detta innebär en förlängning av den övergångsperiod där arvoden kan utbetalas till fakturerande företag utan beskattningskonsekvenser för parterna enligt nedan:
När det gäller redan ingångna avtal kan dessa fortlöpa viss tid utan beskattningskonsekvenser för inkomstbeskattningen. Detta bör dock som begränsning enbart gälla de avtal som ingåtts före HFDs dom och gäller under perioden fram till nästkommande årsstämma, dock senast under 2018.
Domen innebär att styrelsearvoden ska beskattas som inkomst av tjänst och kan inte längre faktureras till styrelsemedlems bolag. Några få undantag kan göras för avgränsade uppdrag för specifika insatser i andra företag.
Enligt skatteverket ska motsvarande bedömning och hantering även gälla ifråga om socialavgifter.

Johan Mathson
Partner
Lagercrantz Associates

The board’s new innovation imperative

Posted in Aktuellt, Board work / Styrelsearbete on January 9th, 2018 by admin

The challenge of leading innovation is bringing about a sea change in corporate governance. Boards, once the dependably cautious voices urging management to mitigate risk, are increasingly calling for breakthrough innovation in the scramble for competitive advantage. We see this shift playing out across industries—notably at such companies as Ford, Coca-Cola, Nestlé, and Unilever, which are all struggling to address slowing sales in their core businesses.

Embracing innovation and its inherent risks requires that boards and senior management develop new ways of working together. As Mark Ganz, the CEO of Cambia Health Solutions—a company at the forefront of innovation in the health care space—told us, board meetings no longer consist of PowerPoint presentations by management followed by a few perfunctory questions from the board. “The model has changed,” he explained. “We now bring the board ideas that are not fully baked and say, ‘Help us with this.’” It took some time for the board to realize that management was asking not for the answer but for engagement, he said, but “once they got used to it, it dramatically improved the board–management partnership and the value board members bring to the work of the company.”

The desire to create new and different ways of working is not always accompanied by the ability to do so, however. Adopting new roles and norms feels uncomfortable—even unnatural—to most people. To help address this knowing-doing gap, we spoke with directors and CEOs from a range of industries about their boards’ capacity to support innovation and risk management. The results were sobering, though the tide seems to be turning. A few of the directors in our study were clearly laggards, even going so far as to argue that innovation was irrelevant in their very mature industries. A handful were trailblazers, like Mark Ganz. The majority were just beginning to work their way through the challenges of governing innovation, some more deliberately and successfully than others.

Through our research, we identified the common obstacles most boards face and gleaned insight into how boards can reshape their roles to effectively foster and support the kind of innovation that leads to substantial growth.

Why Boards Struggle with Innovation
Boards increasingly believe that to fulfill their obligation to ensure the long-term well-being of their companies, they have to support management in developing a compelling innovation strategy. And that means learning to embrace risk while continuing to mitigate and manage it as much as possible. In this inverted risk paradigm, boards are discovering that avoiding risk is the riskiest proposition of all. Paula Price, a director at Accenture, Dollar General, and Western Digital Corporation, told us that boards should aim to develop the organization’s “capacity to pivot” into uncharted territory with new products, services, business models, or ways of organizing or getting work done. Standing still or waiting to see how things turn out are not considered serious options in today’s often tumultuous environment. A member of one automobile company’s board confessed that they had discouraged management from making the leap to electric cars for years; now he feared that the company was playing catch-up.

CEOs and top management appropriately have more power than board members over corporate affairs and major decisions. But without the full support of the board, management is unlikely to take the big bets required to innovate. What frustrations do board members report when asked about fulfilling their growing obligation to govern innovation? We found four main concerns:

An outdated innovation and risk agenda.
Most board members report that the lion’s share of their attention around innovation goes toward improving the organization’s capacity to execute its current strategy—that is, innovation to sustain the core: developing product line extensions, reducing cost structures to maintain healthy operating margins, improving customer-intimacy and -centricity to address rising customer expectations, and responding to new regulatory regimes and cybersecurity threats.

At the same time, these board members realize that doing the same things better, faster, and more cheaply is not enough. It is not enough, for instance, to make improvements that reduce costs in the supply chain. Companies are now trying to deploy digital supply chains that will allow them to offer different value propositions to customers and even create new business models. As one director put it, “Significant disruption is taking place, and whatever company is at the top today will not be at the top in 10 years. [We] must differentiate ourselves.” Another observed that his board’s “bias for short-term results” was stifling innovation; instead of pursuing breakthrough initiatives, the company was focused on evolutionary ones. Many directors acknowledged that it was not easy for CEOs to make the bold moves required to keep their companies competitive—especially given the growing demands of activist investors—and that boards were not doing enough to encourage management to pursue admittedly riskier initiatives that could reinvent the business.

Insufficient time.
Making time for innovation as an ongoing topic of boardroom conversation is a luxury few board members feel they have. Especially in industries undergoing regulatory changes, such as financial services, energy, and health care, directors reported feeling “overwhelmed” simply attending to the basics of compliance and financial monitoring. Even companies that were performing well struggled to dedicate time to innovation activities. Hasbro CEO Brian Goldner acknowledged the challenge: “It’s easy to focus only on the core business when it’s going great, but you have to find board time to focus on growth and disruptive activities.” Directors we spoke with understood the need to invest in strategic discussion and debate about innovation—as another CEO put it, “To think you can sit in the boardroom and talk strategy once a year means you’re out of the game and out to lunch”—yet competing pressures on their attention made it hard to find the time for proper consideration.

Lack of expertise.
Many directors—particularly CEOs—express frustration that their boards lack the level of industry expertise and innovation experience necessary to make well-informed risk-reward assessments about proposals. One CEO we spoke with said he actually avoided innovation discussions with the board because he believed that the directors “were too far from the market” to assess the true expected value of a particular innovation project.

Unproductive interactions between the board and management.

Historically, companies have maintained a bright line between the board of directors and senior management. Under this governance model, management’s role evolved into “telling and selling” strategy and the board’s role became to ratify the senior team’s vision. Many of the directors we spoke with consider these practices to be outdated; however, navigating new roles for the board and management in setting innovation strategy is proving to be the toughest challenge of all.

“Sometimes you need to create tension to stimulate thinking, ideas, and innovation.”

Many board members reported a reluctance to ask their most-pressing questions, because they don’t want to be perceived as “micromanaging” or “second-guessing management” or as criticizing the CEO in front of his or her team. Meanwhile, several CEOs told us that their boards’ arm’s-length behavior inhibited the understanding and support required to forge ahead and innovate. When boards do dig into the details of management’s innovation proposals, their tough questioning can sometimes be perceived as hostile. Several CEOs experienced such interactions as evaluative of their own performance rather than of the quality of the ideas under discussion, and many complained that the board’s responses can be “harsh” or “unfair.” In some of our interviews, we could see the emotional toll of these often-heated interactions on the faces of board members and CEOs.

(Re)Building the Board for Innovation
The research is clear: Innovation requires passionate discussion, debate, and even conflict—most often among individuals with diverse perspectives. To find better ways of governing innovation, more boards are revisiting both their board composition and the way in which they interact. However, directors are often reluctant to speak publicly—including to us—about how their boards operate, making it hard for boards to share best practices. This is especially problematic when it comes to innovation—an area where directors often feel there is work to be done. Our research revealed four key areas for improvement:

Asking the Thorny Questions
When adding or replacing members, boards should take a disciplined approach, seeking members whose expertise complements that of the existing board and, more important, that of management. For example, a director of a traditional operations-focused company reported seeking board members with experience leading exceptional customer-service-oriented companies. Tom Wilson, the CEO of Allstate, pointed out that it was a board member from the manufacturing sector working with OEMs and some of the hot start-ups in the connected car space who was able to offer unique insights into consumer behavior.

In addition, most board members we spoke with wanted more people with technology experience—so-called “digital directors.” They believed that directors from organizations reputed to be tech pioneers were likely to be more familiar with the challenges that come with doing innovative work and better prepared to offer informed advice on how to address them. They also wanted directors with the capacity to assess whether or not their companies were investing sufficiently in technology and associated talent.

To further bolster out-of-the-box thinking, a few boards are explicitly including intellectual or problem-solving diversity—difficult qualities to assess—in their composition matrices. Most directors we spoke with expressed concerns about whether their board composition was representative of their customers and stakeholders (with regard to factors such as gender, nationality, race, and ethnicity). And a handful of boards are making serious efforts to bring in younger-than-usual candidates, including Millennials, betting on potential rather than experience—a dramatic shift from the traditional approach.

For diverse individuals to collaborate effectively, they need shared experiences and knowledge to serve as a foundation for their interactions and decision making. Forward-thinking companies actively develop the collective literacy and contextual intelligence of the board—cultivating, in particular, a shared set of assumptions about where their industry and markets are going so that they are prepared to make the right risk/reward judgment calls together with management. Nearly half of the directors we spoke with bring in experts from different or adjacent industries to hold “master classes.” Some hold sessions with angel investors and venture capitalists to gain their industry insight. Others make visits to technology hubs such as Silicon Valley, accelerators in emerging markets, and companies and academic laboratories working on the cutting edge of a given area. A few told us they meet with key customers in small groups, while others say that their entire boards attend industry conferences together. Directors reported that all these activities prompt important discussions about their appetite for innovation by exposing them to “next practices,” not just best practices.

Creative abrasion.
This is the ability to develop a marketplace of ideas not from a single flash of insight but from a series of sparks generated through rigorous discourse and debate. Boards today recognize that creative abrasion is a core capability needed to engage in innovative problem-solving. One board member remarked, “Critical thinking is imperative, and that involves putting some friction into [the discussion] to fight the status quo.” Another stated, “Sometimes you need to create tension to stimulate thinking, ideas, and innovation.”

Indeed, the “mostly silent” board member is no longer seen as doing the job. The outspoken director once perceived as a “gadfly” is now accepted, even welcomed, in the boardroom. Boards need to learn to “tolerate some chaos” in meetings, according to one board member, if they expect management to engage in creative thinking. They must build a culture in which contrarian viewpoints are heard, even actively seeking directors with the “willingness and the dynamism to really mix it up in the boardroom,” as one CEO told us.

We weren’t surprised to hear that many boards are reluctant to have the frank conversations required for innovation because the dynamics of creative abrasion are so tough to manage. The default for many board members is to avoid conflict and become “too polite.” Facilitating creative abrasion is a delicate dance: Boards that are too supportive fail to sufficiently challenge proposals, but too much confrontation can stifle people’s willingness to offer ideas.

Redefining the partnership.
Balancing the board’s legal power and management’s executive power is not easy, but for innovation discussions to happen, neither side can dominate. Boards need to build a strong partnership with management and a sense of shared ownership of the innovation strategy. Allstate CEO Tom Wilson told us that unlike most boards, which meet to discuss strategy once a year, his board holds two separate strategy meetings: One is a dialogue about the company’s capabilities and market position and is focused on learning; the other is for decision making.

Directors say they are wary of CEOs who “play it safe.”
Some CEOs are getting more comfortable using the board as a thought partner. One described his board meetings now as “great idea-sparring sessions,” with a healthy degree of conflict and debate. As one of his board members admitted, she had to learn “how to have her nose in, but her fingers out.” Understandably, these sessions can be emotionally draining; some CEOs said they felt that their boards sometimes overstepped or “came on too strong.” The CEO of a Fortune 100 retailer told us, “I’ve learned from watching other CEOs and boards that if a board gets too far in the weeds, it is deadly.” Boards can avoid these issues by clarifying expectations at the outset.

Our research indicates that management teams are increasingly willing to make themselves vulnerable, embracing the board’s probing questions about their big-bet ideas and even discussing efforts that didn’t pan out. The more courageous CEOs we spoke with said they now seek more input from their board rather than less. One said he encourages dialogue with the board by asking management to share not only recommendations but also the other alternatives that were considered and rejected. Without this transparency, he explained, board members get frustrated and feel as though they are being “sold stuff” by management.

Getting to a place where management teams feel they can bring forward a portfolio of ideas, some of which are more developed than others, requires a real partnership mindset with boards—a shift in the conventional relationship between the two bodies. As former CEO of Mastercard Bob Selander told us, “Some people like to think that one big idea will lead to massive change, yet great boards recognize that it takes ongoing discussions about lots of ideas—the good and the bad—to produce breakthrough results.” For one CEO, this meant coaching his executives to expect and be open to hard questions and criticism, acknowledging that it’s not easy for his team to expose themselves (and their proposals) to negative reactions from individuals who often have less expertise about the matters at hand. “We had to be very explicit about saying, ‘We are not asking for your approval; we are still trying to figure this out,’” another CEO told us. Another said that trust was essential in building a collaborative mindset. “There’s a sense now that when we get done with a conversation, neither side feels beat up. Instead we feel like we got to a better decision.”

Encouraging risk and living with failure.
Boards know their companies must pursue not only incremental improvements but also breakthrough innovation. To foster both kinds of activity, they have to create a culture that is receptive to risk and the inevitable failure that comes with innovative problem solving. However, boards are not—and should not be—interested in innovating for innovation’s sake. To avoid innovation activity that doesn’t “move the needle,” CEOs and board members we spoke with focused on taking risks on efforts that were most likely to create shareholder value in the long term.

Determining whether an innovation at scale will be worth the investment is a very difficult proposition. One board member told us, “Discounted cash flow analyses won’t help us make a discussion about a breakthrough idea.” This is especially the case in large companies where, as one CEO observed, it is always difficult to make a significant impact on top-line growth.

Most board members in our study admit that they struggle with how to weigh shorter-term financial outcomes against other measures—such as customer-experience or market-share metrics, which might be better indicators of whether an innovation will bear fruit and improve the company’s competitive position in the long run. Rather than rely on outcome metrics, some boards are beginning to depend more on process measures when evaluating innovation initiatives. For example, one board member said that he frequently asked his team what the company was learning about its customers as it experimented. In some cases, boards also track vitality indices—the percentage of total revenue that comes from new products and services—to measure the organization’s innovation capacity as a whole.

About the Research

READ MORE
We know from a deep body of research that many—even most—innovation efforts fail. So boards must learn to recognize when an initiative should be abandoned. A number of board members said they wanted their companies to figure out how to “fail fast and learn fast” so that they can get on with other endeavors. Some directors said they now make sure to state aloud in board meetings that some innovation efforts should be expected to fail. Although none of the board members we interviewed reported having discussions about the difference between “praiseworthy” and “blameworthy” failures, as Harvard Business School professor Amy Edmondson calls them, they recognize that you can’t plan your way to an innovation, you have to act your way there, and that there are bound to be missteps along the way. Indeed, board members say they are wary of CEOs who “play it safe,” as one described. A sizable number of the search committee chairs we spoke with said they are skeptical of executive candidates who have never experienced failure and look for potential CEO successors to show, as another director said, “stretch efforts that included missteps and learning from them.”

CONCLUSION
Governing innovation is not for the faint of heart. The journey takes time and determination. It takes the courage to act in the long-term interests of the organization even when markets are more short-sighted. It takes the determination to fight the natural human aversion to risk and the fortitude to engage in creative abrasion.

Balancing power between the board and management has never been easy, but our study suggests that as more boards are embracing new norms, a new contract between boards and management is emerging, making it possible, at last, for directors and CEOs to work together to support and facilitate innovation.

Source: HBR.com, January 2018
Authors: Linda A. Hill and George Davis
About the authors: Linda A. Hill is the Wallace Brett Donham Professor of Business Administration at Harvard Business School. She is author of Becoming a Manager and coauthor of Being the Boss and Collective Genius. George Davis was formerly the Global CEO & Board Practice Leader at Egon Zehnder and is currently the executive vice president of MacAndrews & Forbes.
Link

How to create an agile organization

Posted in Aktuellt, Board work / Styrelsearbete, Executive Team / Ledningsgruppsarbete, Leadership / Ledarskap on October 24th, 2017 by admin

Transforming companies to achieve organizational agility is in its early days but already yielding positive returns. While the paths can vary, survey findings suggest how to start.

Rapid changes in competition, demand, technology, and regulations have made it more important than ever for organizations to be able to respond and adapt quickly. But according to a recent McKinsey Global Survey, organizational agility—the ability to quickly reconfigure strategy, structure, processes, people, and technology toward value-creating and value-protecting opportunities—is elusive for most. Many respondents say their companies have not yet fully implemented agile ways of working, either company-wide or in the performance units where they work, though the advantages are clear. Respondents in agile units report better performance than all others do, and companies in more volatile or uncertain environments are more likely than others to be pursuing agile transformations.

Few companies are yet reaping these benefits, but that may soon change; the results also indicate that organizational agility is catching fire. For many respondents, agility ranks as a high strategic priority in their performance units. Moreover, companies are transforming activities in several parts of the organization—from innovation and customer experience to operations and strategy—to become more agile. Finally, respondents in all sectors believe more of their employees should be working in agile ways. For organizations and their performance units that aren’t yet agile, the path to achieving agility depends on their starting points. But the results indicate some clear guidance on how and where they can improve, whether they are lacking in stability or dynamism.

Organizational agility is on the rise
Across industries and regions, most survey participants agree that the world around them is changing, and quickly. Business environments are increasingly complex and volatile, with two-thirds of respondents saying their sectors are characterized by rapid change. In such environments, the need for companies to demonstrate agility is top of mind: the more unstable that respondents say their environments are, the more likely they are to say their companies have begun agile transformations.

To date, though, few organization-wide agile transformations have been completed. Only 4 percent of all respondents say their companies have fully implemented one, though another 37 percent say company-wide transformations are in progress. When asked where their companies apply agile ways of working,3 respondents most often identify activities that are closest to the customer: innovation, customer experience, sales and servicing, and product management. This is not too surprising, since customer centricity is cited most often—followed by productivity and employee engagement—as the objective of agile transformations. Companies are also focusing on internal end-to-end processes. At least four in ten respondents say their companies are applying agile ways of working in processes related to operations, strategy, and technology, while roughly one-third say they are doing so in supply-chain management and talent management.

Looking forward, the results suggest that companies have higher aspirations for agility. Three-quarters of respondents say organizational agility is a top or top-three priority on their units’ agendas, and more transformations appear to be on the way. Of those who have not begun agile transformations, more than half say plans for either unit-level or company-wide transformations are in the works. Respondents across industries also report a desire to scale up agile ways of working. On average, they believe 68 percent of their companies’ employees should be working in agile ways, compared with the 44 percent of employees who currently do. By industry, respondents in telecom and the electric-power and natural-gas industries report the biggest differences between their actual and ideal shares of employees working in agile ways—followed closely by respondents in several other industries: media and entertainment, the public sector, oil and gas, pharma, and advanced industries.

What’s more, the survey also confirms that agility pays off. Eighty-one percent of respondents in agile units report a moderate or significant increase in overall performance since their transformations began. And on average, respondents in agile units are 1.5 times more likely than others to report financial outperformance relative to peers, and 1.7 times more likely to report outperforming their peers on nonfinancial measures.

Agile organizations excel at both stability and dynamism
In previous work, we have determined that, to be agile, an organization needs to be both dynamic and stable.7 Dynamic practices enable companies to respond nimbly and quickly to new challenges and opportunities, while stable practices cultivate reliability and efficiency by establishing a backbone of elements that don’t need to change frequently. The survey scored organizations across eighteen practices (see sidebar, “Eighteen practices for organizational agility.”), which our research suggests are all critical for achieving organizational agility. According to the results, less than one-quarter of performance units are agile. The remaining performance units lack either dynamism, stability, or both.

Of the 18 practices, the 3 where agile units most often excel relate to strategy and people. More than 90 percent of agile respondents say that their leaders provide actionable strategic guidance (that is, each team’s daily work is guided by concrete outcomes that advance the strategy); that they have established a shared vision and purpose (namely, that people feel personally and emotionally engaged in their work and are actively involved in refining the strategic direction); and that people in their unit are entrepreneurial (in other words, they proactively identify and pursue opportunities to develop in their daily work). By contrast, just about half of their peers in nonagile units say the same.

After strategy, agile units most often follow four stable practices related to process and people: entrepreneurial drive, shared and servant leadership, standardized ways of working, and cohesive community. When looking more closely at standardized ways of working, the agile units excel most on two actions: the unit’s processes are enabled by shared digital platforms and tools (91 percent, compared with 54 percent for others), and processes are standardized, including the use of a common language and common tools (cited by 90 percent of agile respondents and just 58 percent of all others).

Among the dynamic practices, process—and information transparency, in particular—is a strength for agile units. Within transparency, for example, 90 percent of agile respondents say information on everything from customers to financials is freely available to employees. Among their peers in other units, only 49 percent say the same. The second practice where agile units most differ from others is in rapid iteration and experimentation. More than 80 percent of agile respondents say their companies’ new products and services are developed in close interaction with customers and that ideas and prototypes are field-tested early in the development process, so units can quickly gather data on possible improvements.

The path to agility depends on the starting point

For the performance units that aren’t yet agile, the survey results suggest clear guidance for how to move forward. But organizational agility is not a one-size-fits-all undertaking. The specific practices a unit or organization should focus on to become agile depend on whether it is currently bureaucratic, start-up, or trapped.

Bureaucratic units
By definition, bureaucratic units are relatively low in dynamism and most often characterized by reliability, standard ways of working, risk aversion, silos, and efficiency. To overcome the established norms that keep them from moving fast, these units need to develop further their dynamic practices and modify their stable backbones, especially on practices related to people, process, and structure.

First is the need to address the dynamic practices where, compared with agile units, the bureaucratic units are furthest behind. Only 29 percent of bureaucratic respondents, for example, report following rapid iteration and experimentation, while 81 percent of agile respondents say the same. A particular weakness in this area is the use of minimum viable products to quickly test new ideas: just 19 percent of bureaucratic respondents report doing so, compared with 74 percent of agile respondents. After that, the largest gap between bureaucratic units and agile units is their ability to roll out suitable technology, systems, and tools that support agile ways of working.

At the same time, bureaucratic units also have room to improve on certain stable practices. For example, bureaucratic units are furthest behind in performance orientation; in agile units, employees are far more likely to provide each other with continuous feedback on both their behavior and their business outcomes. What’s more, leaders in these units are better at embracing shared and servant leadership by more frequently incentivizing team-oriented behavior and investing in employee development. And it’s much more common in agile units to create small teams that are fully accountable for completing a defined process or service.

Start-up units
Start-up units, on the other hand, are low in stability and characterized as creative, ad hoc, constantly shifting focus, unpredictable, and reinventing the wheel. These organizations tend to act quickly but often lack discipline and systematic execution. To overcome the tendencies that keep them from sustaining effective operations, these units need to further develop all of their stable practices—and also broaden their use of the dynamic practices related to process and strategy in order to maintain sufficient speed.

First is focusing on a stronger overall stable backbone. On average, 55 percent of start-up respondents report that they implement all nine stable practices, compared with 88 percent of agile respondents who report the same. According to the results, a particular sore spot is people-related practices—especially shared and servant leadership. For example, just under half of start-up respondents say their leaders involve employees in strategic and organizational decisions that affect them, compared with 85 percent of their agile peers. Similar to bureaucratic units, respondents at start-up units also report challenges with process, particularly with regard to performance orientation. Within that practice, only 44 percent of respondents at start-up units say their people provide each other with continuous feedback on both their behavior and their business outcomes; 80 percent at agile units report the same.

Start-up units also have room to improve their use of dynamic practices, particularly in process and strategy. According to respondents, the agile units excel much more often than their start-up counterparts at information transparency—for example, holding events where people and teams share their work with the unit. Moreover, agile respondents are much more likely to say new knowledge and capabilities are available to the whole unit, which enables continuous learning. On the strategy front, the start-up units are furthest behind their agile peers on flexible resource allocation—more specifically, deploying their key resources to new pilots and initiatives based on progress against milestones.

Trapped units
The trapped units are often associated with firefighting, politics, a lack of coordination, protecting turf, and local tribes. These organizations find themselves lacking both a stable backbone and dynamic capabilities. In applying the stable practices, the trapped units are most behind on those related to people: specifically, shared and servant leadership and entrepreneurial drive. Just 13 percent of respondents at trapped units say they follow shared and servant leadership, compared with 89 percent of their agile peers. The dynamic practices in which they are furthest behind are process related, especially continuous learning and rapid iteration and experimentation.

Looking ahead
In response to the challenges that the survey results revealed, here are some principles executives and their units or organizations should act upon, whether or not they have already begun agile transformations:

Embrace the magnitude of the change. Based on the survey, the biggest challenges during agile transformations are cultural—in particular, the misalignment between agile ways of working and the daily requirements of people’s jobs, a lack of collaboration across levels and units, and employee resistance to changes. In our experience, agile transformations are more likely to succeed when they are supported by comprehensive change-management actions to cocreate an agile-friendly culture and mind-sets. These actions should cover four main aspects. First, leaders and people across the organization align on the mind-sets and behaviors they need to move toward. Second, they role-model the new mind-sets and behaviors and hold each other accountable for making these changes. Third, employees are supported in developing the new skills they need to succeed in the future organization. And finally, formal mechanisms are put in place to reinforce the changes, rewarding and incentivizing people to demonstrate new behaviors.8
Be clear on the vision. The results show that agile units excel most at creating a shared vision and purpose and aligning on this vision through actionable strategic guidance. In contrast, at companies that have not yet started a transformation, one of the most common limitations is the inability to create a meaningful or clearly communicated vision. An important first step in deciding whether to start an agile transformation is clearly articulating what benefits are expected and how to measure the transformation’s impact. This vision of the new organization must be collectively held and supported by the top leadership.
Decide where and how to start. Respondents whose organizations have not started agile transformations most often say it’s because they lack a clear implementation plan. While the right plan will vary by company, depending on its vision, companies should first identify the part(s) of the organization that they want to transform and how (for example, by prototyping the changes in smaller parts of the performance unit before scaling them up, or by making changes to more foundational elements that go beyond a single unit). Second, they should assess which of the 18 agile practices the organization most needs to strengthen in order to achieve agility, so that the actions taken across strategy, structure, process, people, and technology are mutually reinforcing. Third, they should determine the resources and time frame that the transformation requires, so the effort maintains its momentum but the scope remains manageable at any point in time.

Source: McKinsey.com, Octobr 2017
Authors: Karin Ahlbäck, Clemens Fahrbach, Monica Murarka and Olli Salo.
About the author: The contributors to the development and analysis of this survey include Karin Ahlbäck, a consultant in McKinsey’s London office; Clemens Fahrbach, a consultant in the Munich office; Monica Murarka, a senior expert in the San Francisco office; and Olli Salo, an associate partner in the Helsinki office.
Link

Shifting the board’s focus from compliance to engagement

Posted in Aktuellt, Board work / Styrelsearbete on September 28th, 2017 by admin

Board members today must grapple with increasingly complex matters of strategy and risk. In response, many companies are rethinking board meetings to enhance alignment, energize the board and elevate its performance.

In a conversation with a board chair and a CEO following a successful board search, we asked if their recently completed board review had surfaced any issues regarding the chair of the governance committee. The board chair was a bit surprised and asked what prompted our question. We then discussed what “good” looked like for a governance committee chair, and compared that benchmark of behaviors with the experience and inclinations of the incumbent. It quickly became evident that the board review they had undergone had relied too heavily on a simple questionnaire, which, to make matters worse, was analyzed in a cursory way by an outside firm. This “check the box” compliance-oriented exercise rarely leads to a meaningful improvement of board effectiveness and engagement.

Given that today’s investors scrutinize a company’s board of directors as closely as its financial results, boards increasingly are seeking more thorough board reviews to help ensure that their team interactions and processes are aligned. A proper board effectiveness review goes beyond the standard questionnaire and is centered on individual behaviors and team dynamics and interactions.

Each board has its own set of issues, depending on the history, structure and personalities involved. Even so, in the more than 550 board effectiveness reviews that Egon Zehnder has conducted, we have seen a common challenge emerge: The ongoing struggle to stay focused on strategy and not get bogged down with administrative and procedural matters. And it is a struggle: As more and more topics, from digitalization to diversity, are added to the board’s agenda, it becomes increasingly difficult even to track the various issues that directors must monitor, let alone for directors to step back and consider those issues in a larger context. The reality is that the board’s processes and information flow can unwittingly be at cross purposes with a strategic perspective. These are the sorts of derailers that a thorough board effectiveness review can uncover, while also putting in place mechanisms for ongoing, rather than periodic, feedback.

The board meeting today: Documentation and the agenda
Consider how the typical two-day board meeting unfolds. Approximately two weeks before the meeting, members receive the agenda and supporting materials to review. In the hard-copy era, the thickness of the board book was limited by the size of the FedEx box it was shipped in. Today, however, most companies use digital board books accessed through tablets. These applications are rightly heralded for their convenience, but they also remove any physical constraints on the amount of material distributed to the board. As a result, we have found that board members are inundated with reports, presentation decks and miscellaneous analyses on everything from investor relations to cybersecurity to safety compliance. Board members are sometimes surprised to learn that they contribute to this problem by their own requests for additional information. This is why some governance experts have sounded an alarm on a “boardroom information crisis”; it becomes harder and harder for even the most diligent board members to absorb, digest and reflect on all the material they are given. Managing the deluge of data crowds out the time needed to ask important questions. The board book material, instead of supporting the agenda, can detract from the agenda items truly needing attention.

We see this when we examine how typical board meetings unfold. The first day is frequently devoted to committee meetings. The board then gathers for dinner and then convenes the next day to work through the board agenda. At some point in the afternoon the meeting adjourns and everyone departs.

On its face, there is nothing objectionable about this structure, but a better approach is to recognize that significant amounts of committee work today can be conducted by teleconference, allowing the committee to work through many issues before the board meeting. This is not to say that the entire committee agenda can be dealt by phone, but that there are many ways of being more effective in filtering what requires the attention of the full board.

The board meeting reconsidered: Deep dives and discussion
What would a board meeting look like if the meeting were designed to maximize meaningful strategic discussion? Two to three weeks before the board meeting, a much thinner board book would be distributed. It would start with a one- or two-page letter from the CEO and board chair. The CEO would summarize the state of the company and frame key issues, and the chairman would outline the agenda for the upcoming board meeting, The agenda would include more time for discussion and debate, and be centered on a select number of strategic issues, sizable operating issues and major risk items. The supporting material in the board book would provide background on those topics. Of course, other administrative matters will still need to be discussed, but the majority of time would center on priorities that could unlock value.

For example, instead of reviewing in detail an investor relations presentation that has already been vetted and approved by the CFO and CEO, the board might be asked to consider the key issues and concerns that shareholders and analysts have most recently surfaced and flagged. Instead of the company’s latest 100-page sustainability report, the quarterly board book might include a summary of metrics and performance indicators while reserving a full-board “deep dive” discussion for once a year.

Committee chairs would conduct many agenda items by conference call. When the directors arrive on the first day, instead of breaking into committees, the entire board would meet for a detailed briefing by the CEO on the most pressing matters. A working dinner would follow, during which directors would discuss specific topics and could begin to identify points of agreement and divergence. The next day, the board would meet for a frank discussion to stretch and challenge assumptions and to work toward decisions. While some of the board meeting will have to be devoted to procedural matters, the board’s major focus is kept on a higher, strategic plane. The board chair of one of the world’s largest public companies recently shared with us his realization that when he was CEO and chairman of a prior company, he didn’t devote sufficient time to the board agenda. Only later did he realize that getting the agenda right has a sizable impact on board performance.

In an earlier day, it was sufficient for boards to monitor management’s performance, approve major decisions and ensure conformity with a much smaller set of regulations. But in today’s much more complex environment, it is not enough for boards to be stewards; they, like management, need to create value. The board does this when it focuses on its role as advisor and resource to management, rather than its mere overseer. Rethinking board meetings, considering team dynamics and providing open feedback to board members can align the board with this goal. That, in turn, will energize the board and elevate its performance.

Source: Egonzehnder.com, September 2017
Link
Authors: Steven V Goodman, Egon Zehnder, Houston, Calgary and Roopa Mehendale Foley,
Egon Zehnder, Dallas

Culture for a digital age

Posted in Aktuellt, Board work / Styrelsearbete, Digitalisering / Internet, Leadership / Ledarskap, Strategy implementation / Strategiimplementering on August 23rd, 2017 by admin

Risk aversion, weak customer focus, and siloed mind-sets have long bedeviled organizations. In a digital world, solving these cultural problems is no longer optional.

Shortcomings in organizational culture are one of the main barriers to company success in the digital age. That is a central finding from McKinsey’s recent survey of global executives, which highlighted three digital-culture deficiencies: functional and departmental silos, a fear of taking risks, and difficulty forming and acting on a single view of the customer.

Each obstacle is a long-standing difficulty that has become more costly in the digital age. When risk aversion holds sway, underinvestment in strategic opportunities and sluggish responses to quick-changing customer needs and market dynamics can be the result. When a unified understanding of customers is lacking, companies struggle to mobilize employees around integrated touchpoints, journeys, and consistent experiences, while often failing to discern where to best place their bets as digital broadens customer choice and the actions companies can take in response. And when silos characterize the organization, responses to rapidly evolving customer needs are often too narrow, with key signals missed or acted upon too slowly, simply because they were seen by the wrong part of the company.

Can fixes to culture be made directly? Or does cultural change emerge as a matter of course as executives work to update strategy or improve processes?1 In our experience, executives who wait for organizational cultures to change organically will move too slowly as digital penetration grows, blurs the boundaries between sectors, and boosts competitive intensity. Our research, which shows that cultural obstacles correlate clearly with negative economic performance, supports this view. So do the experiences of leading players such as BBVA, GE, and Nordstrom, which have shown what it looks like when companies support their digital strategies and investments with deliberate efforts to make their cultures more responsive to customers, more willing to take risks, and better connected across functions.

Executives must be proactive in shaping and measuring culture, approaching it with the same rigor and discipline with which they tackle operational transformations. This includes changing structural and tactical elements in an organization that run counter to the culture change they are trying to achieve. The critical cultural intervention points identified by respondents to our 2016 digital survey—risk aversion, customer focus, and silos—are a valuable road map for leaders seeking to persevere in reshaping their organization’s culture. The remainder of this article discusses each of these challenges in turn, spelling out a focused set of reinforcing practices to jump-start change.

Calculated risks

Too often, management writers talk about risk in broad-brush terms, suggesting that if executives simply encourage experimentation and don’t punish failure, everything will take care of itself. But risk and failure profoundly challenge us as human beings. As Ed Catmull of Pixar said in a 2016 McKinsey Quarterly interview, “One of the things about failure is that it’s asymmetrical with respect to time. When you look back and see failure, you say, ‘It made me what I am!’ But looking forward, you think, ‘I don’t know what is going to happen and I don’t want to fail.’ The difficulty is that when you’re running an experiment, it’s forward looking. We have to try extra hard to make it safe to fail.”

The balancing act Catmull described applies to companies, perhaps even more than to individuals. Capital markets have typically been averse to investments that are hard to understand, that underperform, or that take a long time to reach fruition. And the digital era has complicated matters: On the one hand, willingness to experiment, adapt, and to invest in new, potentially risky areas has become critically important. On the other, taking risks has become more frightening because transparency is greater, competitive advantage is less durable, and the cost of failure is high, given the prevalence of winner-take-all dynamics.

Leaders hoping to strike the right balance have two critical priorities that are mutually reinforcing at a time when fast-follower strategies have become less safe. One is to embed a mind-set of risk taking and innovation through all ranks of the enterprise. The second is for executives themselves to act boldly once they have decided on a specific digital play—which may well require changing mind-sets about risk, and inspiring key executives and boards to think more like venture capitalists.

An appetite for risk
Building a culture where people feel comfortable trying things that might fail starts with senior leaders’ attitudes and role modeling. They must break the status quo of hierarchical decision making, overcome a focus on optimizing rather than innovating, and celebrate learning from failure. It helps considerably when executives make it clear through actions that they trust the front lines to make meaningful decisions. ING and several other companies have tackled this imperative head-on, providing agile coaches to help management learn how to get out of the way after setting overall direction for objectives, budgets, and timing.

However, delegating authority only works if the employees have the skills, mind-sets, and information access to make good on it. Outside hires from start-ups or established digital natives can help inject disruptive thinking that is a source of innovative energy and empowerment. Starbucks, for example, has launched a digital-ventures team, hiring vice presidents from Google, Microsoft, and Razorfish to help drive outside thinking.

Also empowering for frontline workers (and risk dampening for organizations) is information itself. For example, equipping call-center employees with real-time analysis on account profiles, or data on usage and profitability, helps them take small-scale risks as they modify offers and adjust targeting in real time. In the retail and hospitality industries, companies are giving frontline employees both the information (such as segment and purchase history) and the decision authority they need to resolve customer issues on the spot, without having to escalate to management. Such information helps connect the front line to the company’s strategic vision, which provides a compass for decision making on things such as what sort of discount or incentive to offer in resolving a conflict or what “next product to buy” to tee up. Benefits include improvements in the customer experiences (due to faster resolution) and greater consistency across the business in spotting and resolving problems. This lowers cost at the same time it improves customer satisfaction. In addition, frontline risk taking enables more rapid innovation by speeding up iterations and decision making to support nimbler, test-and-learn approaches. These same dynamics prevail in manufacturing, with new algorithms enabling predictive maintenance that no longer requires sign-off from higher-level managers.

Regardless of industry, the critical question for executives concerned with their organization’s risk appetite is whether they are trusting their employees, at all levels, to make big enough bets without subjecting them to red tape. Many CFOs have decided to shift all but the largest investment decisions into the business units to speed up the process. The CFO at one global 500 consumer-goods company now signs off only on expenditures above $250,000. Until recently, any spend decision over $1,000 required the CFO’s approval.

Making bold bets
At the same time they are letting go of some decisions, senior leaders also are responsible for driving bold, decisive actions that enable the business to pivot rapidly, sometimes at very large scale. Such moves require risk taking, including aggressive goal setting and nimble resource reallocation.

A culture of digital aspirations. Goals should reflect the pace of disruption in a company’s industry. The New York Times set the aspiration to double its digital revenues within five years, enabled in part by the launch of T Brand Studio as a new business model. In the face of Amazon, Nordstrom committed more than $1.4 billion in technology capital investments to enable rich cross-channel experiences. The Irish bank AIB decided customers should be able to open an account in under ten minutes (90 percent faster than the norm prevailing at the time). AIB invested to achieve this goal and saw a 25 percent lift in accounts opened, along with a 20 percent drop in costs. In many industries facing digital disruption, this is the pace and scale at which executives need to be willing to play.

Embracing resource reallocation. Nimble resource reallocation is typically needed to back up such goals. In many incumbents, though, M&A and capital-expenditure decisions are too slow, with too many roadblocks in the way. They need to be retooled to take on more of a venture-capitalist approach to rapid sizing, testing, investing, and disinvesting. The top teams at a large global financial-services player and an IT-services company have been reevaluating all of their businesses with a five- to ten-year time horizon, determining which ones they will need to exit, where they need to invest, and where they can stay the course. Such moves tax the risk capacity of executives; but when the moves are made, they also shake things up and move the needle on a company’s risk culture.

The financial markets are double-edged swords when it comes to bold moves. While they remain preoccupied with short-term earnings, they are also cognizant of cautionary tales such as Blockbuster’s 2010 bankruptcy, just three years after the launch of Netflix’s streaming-video business. Companies like GE have nonetheless plunged ahead with long-term, digitally oriented strategies. In aggressively shedding some of its traditional business units, investing significantly to build out its Predix platform, and launching GE Digital, its first new business unit in 75 years, with more than $1 billion invested in 2016, GE’s top team has embraced disciplined risk taking while building for the future.

Customers, customers, customers
Although companies have long declared their intention to get close to their customers, the digital age is forcing them to actually do it, as well as providing them with better means to do so. Accustomed to best-in-class user experiences both on- and off-line with companies such as Amazon and Apple, customers increasingly expect companies to respond swiftly to inquiries, to customize products and services seamlessly, and to provide easy access to the information customers need, when they need it.

A customer-centric organizational culture, in other words, is more than merely a good thing—it’s becoming a matter of survival. The good news is that getting closer to your customers can help reduce the risk of experimentation (as customers help cocreate products through open innovation) and support fast-paced change. Rather than having to guess what’s working in a given product or service before launching it—and then waiting to see if your guess is right after the launch takes place—companies can now make adjustments nearly real-time by developing product and service features with direct input from end users. This is already taking place in products from Legos to aircraft engines. The process not only helps derisk product development, it tightens the relationship between companies and their customers, often providing valuable proprietary data and insights about how customers think about and use the products or services being created.

Data and tools
Underlying the new customer-centricity are diverse tools and data. Connecting the right data to the right decisions can help build a common understanding of customer needs into an organizational culture, fostering a virtuous cycle that reinforces customer-centricity. Amazon’s ability to use customers’ previous purchases to offer them additional items in which they might be interested is a significant element in its success. The virtuous circle they’ve created includes customer reviews (to reassure and reinforce other shoppers), along with the algorithms that share “what customers who looked at this item also bought.” Of course, Amazon has also invested heavily in automated warehouses and a sophisticated distribution model. But even those were tied to the customer desire to receive merchandise faster.

A unifying force
At its best, customer-centricity extends far beyond marketing and product design to become a unifying cultural element that drives all core decisions across all areas of the business. That includes operations, where in many organizations it’s often the furthest from view, and strategy, which must be regularly refreshed if it is to serve as a reliable guide in today’s rapidly changing environment. Customer-centric cultures anticipate emerging patterns in the behavior of customers and tailor relevant interactions with them by dynamically integrating structured data, such as demographics and purchase history, with unstructured data, such as social media and voice analytics.

The insurance company Progressive illustrates the unifying role played by strong customer focus. Progressive’s ability to persuade customers to install the company’s Snapshot device to monitor driving behavior is revolutionizing the insurance space, and not just as a marketing tool. Snapshot helps attract the good drivers who are the most profitable customers, since those individuals are the ones most likely to be attracted by the offer of better discounts based on driving behavior. It also gives the company’s underwriters actual data in place of models and guesswork. This new technology is one that Progressive can monetize into a business unit to serve other insurers as well.

Busting silos
Some observers might consider organizational silos—so named for parallel parts of the org chart that don’t intersect—a structural issue rather than a cultural one. But silos are more than just lines and boxes. The narrow, parochial mentality of workers who hesitate to share information or collaborate across functions and departments can be corrosive to organizational culture.

Silos are a perennial problem that have become more costly because, in the words of Cognizant CEO Francisco D’Souza, “the interdisciplinary requirement of digital continues to grow. The possibilities created by combining data science, design, and human science underscore the importance both of working cross-functionally and of driving customer-centricity into the everyday operations of the business. Many organizations have yet to unlock that potential.”2 The executives we surveyed appeared to agree, ranking siloed thinking and behavior number one among obstacles to a healthy digital culture.

How can you tell if your own organization is too siloed? Discussions with CEOs who have led old-line companies through successful digital transformations indicate two primary symptoms: inadequate information, and insufficient accountability or coordination on enterprise-wide initiatives.

Getting informed
Digital information breakdowns echo the familiar story of the blind men and the elephant. When employees lack insight into the broader context in which a business competes, they are less likely to recognize the threat of disruption or digital opportunity when they see it and to know when the rest of the organization should be alerted. They can only interpret what they encounter through the lens of their own narrow area of endeavor.

The corollary to this is that every part of the organization reaches different conclusions about their digital priorities, based on incomplete or simply different information. This contributes to breaks in strategic and operating consistency that consumers are fast to spot. There isn’t the luxury of time in today’s digital world for each division to discover the same insight; a digital attacker or more agile incumbent is likely to swoop in before the siloed organization even knows it should be mounting a response. So the first imperative for companies looking to break out of a siloed mentality is to inspire within employees a common sense of the overall direction and purpose of the company. Data and thoughtful management rotation often play a role.

Data-driven transparency. Data can help solve the blind-men-and-the-elephant problem. A social-services company, for instance, created a customer-engagement group to better understand how customers interact with the company’s products and brands across silos—and where customers were running into difficulty. Among other things, this required close examination of how the company collected, analyzed, and distributed data across silos. The team discovered, for example, that some customers were cancelling their memberships because of the deluge of marketing outreaches they were receiving from the company. To address this, the team combined customer databases and propensity models across silos to create visibility and centralized access rights with regard to who could reach out to members and when. Among other achievements, this team:

created segment-specific trainings that offered an integrated view of each segment’s suite of needs and offerings that would meet them
drew on information from different parts of the organization to give a more developed picture on engagement, retention, and the total number of touches associated with various segments and customers
showed the net effect of the entire organization’s activities through the customer’s eyes
embedded this information into key processes to ensure information was accessible in a cross-disciplinary way—breaking siloed viewpoints and narrow understandings of the overall business model
Management rotation. Another way to achieve better alignment on the company’s direction is to rotate executives between siloed functions and business units. At the luxury retailer Nordstrom, for example, two key executives exchanged roles in 2014: Erik Nordstrom, formerly president of the company’s brick-and-mortar stores, became president of Nordstrom Direct, the company’s online store, while Jamie Nordstrom, formerly president of Nordstrom Direct, became president of the brick-and-mortar stores. This type of rotation can be done at different levels in an organization and helps create a more consistent understanding between different business units regarding the company’s aspirations and capabilities, as well as helping create informal networks as employees build relationships in different departments.

Instilling accountability
The second distinctive symptom of a siloed culture is the tendency for employees to believe a given problem or issue is someone else’s responsibility, not their own. Companies can counter this by institutionalizing mechanisms to help support cross-functional collaboration through flexibly deployed teams. That was the case at ING, which, because it identifies more as a technology company than a financial-services company, has turned to tech firms for inspiration, not banks. Spotify, in particular, has provided a much-talked-about model of multidisciplinary teams, or squads, made up of a mix of employees from diverse functions, including marketers, engineers, product developers, and commercial specialists. All are united by a shared view of the customer and a common definition of success. These squads roll up into bigger groups called tribes, which focus on end-to-end business outcomes, forcing a broader picture on all team members. The team members are also held mutually accountable for the outcome, eliminating the “not my job” mind-set that so many other organizations find themselves trapped in. While this model works best in IT functions, it is slowly making its way into other areas of the business. Key elements of the model (such as end-to-end outcome ownership) are also being mapped into more traditional teams to try to bring at least pieces of this mind-set into more traditional companies.

Start by finding mechanisms, whether digital, structural, or process, that help build a shared understanding of business priorities and why they matter. Change happens fast and from unpredictable places, and the more context you give your employees, the better they will be able to make the right decisions when it does. To achieve this, organizations must remove the barriers that keep people from collaborating, and build new mechanisms for cutting through (or eliminating altogether) the red tape and bureaucracy that many incumbents have built up over time.

Cultural changes within corporate institutions will always be slower and more complex than the technological changes that necessitate them. That makes it even more critical for executives to take a proactive stance on culture. Leaders won’t achieve the speed and agility they need unless they build organizational cultures that perform well across functions and business units, embrace risk, and focus obsessively on customers.

Source: McKinsey.com, August 2017
By Julie Goran, Laura LaBerge, and Ramesh Srinivasan
About the authors: Julie Goran is a partner in McKinsey’s New York office, where Ramesh Srinivasan is a senior partner; Laura LaBerge is a senior practice manager of Digital McKinsey and is based in the Stamford office.
Link

How CEOs can work with an active board

Posted in Aktuellt, Board work / Styrelsearbete, Executive Coaching on August 10th, 2017 by admin

At companies of almost all sizes, across all sectors, boards are undergoing a profound transformation. Largely as a result of intensifying shareholder intolerance of mediocre or poor corporate performance, the ceremonial boards of the past are being replaced by active boards that are more demanding of managers and more intrusive in their affairs.

This change can be daunting and frustrating for CEOs. However, based on our experience of advising CEOs, operating as CEOs, and sitting on boards, we have found that executives can be effective in the new environment by revamping their interactions with their boards. It consists of four approaches.

Work with board members individually as well as in the group — and selectively seek their help. It’s remarkable how many CEOs focus mainly on formal boardroom relationships. Yet by investing the time in regular one-to-one informal interactions, a CEO will help address the new active board members’ sense of duty to get close to the business. Through a personal dialogue, the CEO can better enlist them in important initiatives and address issues before they become crises. In addition, by creating a personal bond with the individual directors, the CEO lessens the odds that they will undermine or blindside him.

It is especially important to create a bond with the lead director and/or the chair. As boards have become more active, the lead director and board chair hold the keys to setting productive agendas and managing issues with the total board or individual members. One of us served on an active board that included members who frequently threatened to derail agendas and process with counterproductive questions. The CEO quietly recruited the lead director and chair to restore order, which they did. As boards have become more active, the lead director and board chair hold the keys to setting productive agendas and managing issues with the total board or individual members.

CEOs should consider recruiting one board member as an informal advisor. This must be done with great care and an ear for political nuances. For example, as one CEO we know discovered, a prospective board advisor actually had his eye on the CEO role for himself — hardly the right confidant! By using already-scheduled one-on-ones to assess board members for this advisory role, the CEO can better identify an appropriate advisory board member. This board member can be of great value as a sounding board and a guide to working effectively with the rest of the board.

Communicate less formally, more intensively, more often. Many CEOs and their teams still deliver traditional 80-slide PowerPoint summary presentations at board meetings. But given that today’s boards increasingly want a substantive dialogue, we advise replacing the presentation with a thoughtful, verbal review and Q&A around critical updates, challenges, and opportunities. (Further background can be provided in brief pre-reading material.)

This will show that the CEO is using his or her face-to-face time with the board for serious discussion. It will focus board activism on topics where the CEO will benefit from directors’ insight and counsel. And by taking the lead in inviting the board to engage on business-critical matters, the CEO can better manage the process and avoid one of the biggest downsides of the active board: disruptive interference by board members in business operations.

It may seem obvious that CEOs should communicate with board members regularly and substantively between board meetings. But in reality, CEOs often communicate mainly when there is a problem. Many also have difficulty regularly addressing a balanced mix of important topics.

One very effective approach to this issue is regular CEO letters to the board. The management of this letter should be delegated to a top lieutenant such as the head of communications or the COO. A monthly rhythm has proven effective with many boards. To assure balanced, relevant content, the letter should routinely address a fixed set of regular topics (e.g., business-environment trends, business updates, people/talent news, and early warnings of potential upside and downside developments).

Expose Level 3 and 4 managers to the board. While boards in the past were typically focused on CEO succession planning and the talent among the CEO’s direct reports, active boards are also very interested in the levels below. They rightly see these executives as the future leaders and the operational leaders of today who should be driving performance. Active board members will therefore seek to get to know them.

Some CEOs feel this is overly intrusive or worry that the lower-level executives are not ready for board exposure. But, in fact, it’s positive to have board members engaging with deeper levels of talent. They learn more about the business and the next generation of the company’s leaders. Board members can also give the CEO valuable feedback about the people they meet and their view of the company’s overall bench strength. And for the executives, the right kind of exposure to board members is a great development opportunity.

The CEO should take the lead with the board in driving the engagement process, which will allow him or her to have greater influence over it. She can select the highest potential individuals for the interactions and organize the interactions so that they are most productive — for example, by holding them as one-to-ones over a breakfast or dinner. She can also brief the executives in advance on the style of the board member and potential question areas and brief the board members on the executives they will meet.

Handle strategic planning… strategically. Older-style boards typically become involved only at the end of the strategic-planning process — typically in a board meeting devoted to review and approval of the strategy. By contrast, active boards often push to be involved from the start because the strategy is so important to the company’s performance.

The notion of involving the board in strategic planning can make CEOs anxious and defensive. They fear that the board may undermine the planning process due to insufficient knowledge about the business. They also worry that board involvement in strategic planning will be the thin edge of a wedge and lead to board interference in day-to-day management of the company.

The key to navigating this challenge is to keep strategic planning in the hands of management but to invite the board to provide advice and feedback from the beginning. One good way to do this is to involve the board early in deciding on the right, big-picture, strategic direction for the company, without getting into the details. The CEO and her team can develop and present to the board several options to the board, explaining why each has merit. Then the executives can solicit board input on each but not ask for a vote. In this way, the CEO and her team can gain valuable board perspective that will strengthen all the choices that are developed and obtain early board buy-in for both the options and the ultimate strategic plan that’s chosen.

The CEO can then provide periodic updates on the strategic-planning process through letters to the board and board meetings. This allows the board to stay engaged and provide input but keeps the control over the actual process with the executive team, where it belongs.

Active boards are a corporate reality. How to work with them effectively should be one of the most important items on the CEO agenda. As we have outlined, the CEO has an opportunity not only to manage this new relationship but also to make the active board an asset in building long-term, high performance of the company.

Source:hbr.com (Harvard Business Review)
Authors: Ken Banta and Stephen D.Garrow
Link

How anxiety affects CEO decision making

Posted in Aktuellt, Board work / Styrelsearbete, Leadership / Ledarskap on June 29th, 2017 by admin

While top executives tend to be thought of as a confident bunch, they are no less susceptible to anxiety than the rest of us. After all, they routinely have to make important decisions, often under conditions of uncertainty, that affect countless people, organizations, and industries.

It is less clear, though, what this anxiety means for how they do their jobs. Psychology research has shown that anxiety influences decision making—for example, job anxiety can cause people to fixate on potential threats, thus missing big opportunities. This made us wonder whether boards or employees should be worried about anxiety influencing their CEO’s strategic decision making in ways that might hold back their firm.

We interviewed 84 CEOs and other top executives of major corporations to find out. They described some of the toughest decisions they had faced in their roles. Overall we collected data on 174 big decisions, such as those relating to acquisitions, major product launches, new foreign market entries, and complex corporate restructurings. We analyzed transcripts to assess whether executives’ language focused on opportunities or threats. Then we surveyed the people who knew them best – their spouses (mostly wives, but a few husbands), close friends and family, and their chief lieutenants (COOs, general counsels, etc.) – to get more information about their personal lives and how they handled tough decisions. We combined this with archival data about their businesses, competitors, and industries. Finally, we conducted a follow-up survey of employees at the lower levels of these organizations to see how their anxiety levels compared to top executives.

We found that more-anxious leaders (those that were described as experiencing job anxiety “to some extent,” “to a considerable extent,” or “to a great extent”) took fewer strategic risks than their less anxious peers in order to avoid potential losses. Job anxiety reduced the attractiveness of big strategic bets for the company, despite their potential to drive large gains.

This isn’t necessarily a bad thing, as excessive risks can lead companies into ruin. But smart risks are often key to driving corporate growth, and our results suggest that anxious executives may, in their overriding desire to avoid threats, miss out on high-upside strategic opportunities and thus limit growth.

However, context matters. Researchers have shown that executives facing loss contexts (e.g., when the company has recently underperformed relative to peers) are more inclined to make big strategic bets that, if successful, can undo the loss. Conversely, executives facing gain contexts (e.g., when the company has recently performed better than its peers) eschew risky bets in favor of safer alternatives that offer more predictable, albeit lower upside, returns.

This suggests that while anxiety may lead executives to avoid risky strategic initiatives, such tendencies may be counteracted when the executive is facing a loss context that calls for bold action. We found that job anxiety exerts a weaker effect on risk-taking in loss contexts, while gain contexts exacerbate anxious executives’ risk-reducing tendencies.

For example, consider the case of a tech CEO in our sample who was described as experiencing “a considerable extent” of job anxiety by his close friends and family. This CEO was facing an important strategic decision for his firm regarding future growth, and made the decision to sell the firm to a larger rival rather than pursue the potentially much higher upside of independent growth as a standalone business.

Already naturally inclined to play it safe, anxious executives are especially careful not to upset the apple cart when things are going well. While a conservative bias might sound reasonable, or even admirable, markets might very well see this as a serious threat to shareholder interests if it causes a firm to miss out on promising opportunities that would propel growth.

Our results also showed that anxiety drives some executives to stack the deck. Prior research has shown that one of the ways anxious individuals deal with their worries is to lean on trusted others for support and protection, a phenomenon known as “social buffering.” Similarly, we found that anxious executives are more likely to staff their teams with loyal subordinates whom they know and trust. This is especially true in loss contexts, where threats loom large. Anxious executives are particularly driven to close ranks within their teams and stack their inner decision-making circle with loyalists. This effect disappears in gain contexts where anxious executives are presumably less compelled to create a protective shield against perceived threats.

The main takeaway is that top executives are influenced by job anxiety just like the rest of us, but because the impact of their biases can have serious downstream consequences for thousands of employees, shareholders, and stakeholders, leaders should ask:

Maybe the paranoid are more likely to survive, but at what cost? Intel CEO Andy Grove famously noted that paranoia can be a good thing for executives when it compels them to keep a close eye on their environment. Our results suggest, however, that overly anxious (and perhaps paranoid) executives may be less willing to make the big strategic bets that could catapult the company to long-term success. Serious consideration of both potential upside and downside outcomes is necessary for forming a clear-eyed assessment of firm strategy, but anxiety may cause executives to become myopic to such balanced views.

Who is asking the tough questions? One can hardly fault anxious executives for relying upon subordinates that they trust. But this could come with drawbacks if a sense of loyalty prevents subordinates from asking difficult questions or otherwise engaging in healthy debate with leaders. Executives are well-advised to put together teams that are nevertheless unafraid to challenge them when the situation calls for it.

What can boards do? Boards may not have an easy way to assess anxiety in executives, but they should realize that anxiousness plays a meaningful role in the fortunes of their firms. For instance, an anxious executive’s risk-averse outlook may run counter to the board’s (or shareholder’s) vision for bold strategies.

Although a CEO is unlikely to report to their board that they are feeling anxious about their job, boards can be proactive in looking for signs of stress that may bias executive decision-making, perhaps through informal conversations with executives’ close colleagues. They can also offer social support and encouragement to help mute some of the more dysfunctional effects of executive job anxiety. And to avoid anxious leaders surrounding themselves with loyalists, board members can protect the firm by requiring CEOs to present multiple strategic options before making big decisions, or by asking individuals other than the CEO to present opposing options.

Source: Harvard Business Review, July 19, 2016
Authors:Mike Mannor, Adam WowakViva, Ona BartkusLuis and R. Gomez-Mejia
Link