Labour flexibility is a value, and it has a price (scarcity principle)

Labour flexibility is a value, and it has a price (scarcity principle)

Work review eyes pay premium for zero-hours contracts

Stopping ‘lazy’ bosses shifting risk to employees a priority

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MALTAway, A PERSONAL TRAINER FOR EVERY CORPORATION

Requiring companies to pay a premium wage on zero-hours contracts could discourage “lazy employers” from pushing risk on to workers, according to the man reviewing employment rights for the government.

“The problem in the labour market is not security of work, it’s security of income,” Mr Taylor, Tony Blair’s former policy chief, said in an interview.

Mr Taylor was appointed by Theresa May in October to lead an independent review of whether “employment regulation and practices are keeping pace with the changing world of work”.

Employment in Britain is at a record high, but the rise of self-employment; of the “gig economy” of short-term, freelance work; and of zero-hours contracts has sparked debate about whether the changes to the way people work bring welcome flexibility or worrying insecurity.

Mr Taylor told the FT he wanted to discourage employers from forcing workers to accept new burdens that were once shouldered by businesses.

Forcing companies to pay a top-up on the minimum wage for hours not guaranteed in advance is one idea he is considering to redress employers’ demands for “one-sided flexibility” from workers. It would not apply to workers who choose their hours.

According to official data, there were 905,000 people on zero-hours contracts in the final quarter of 2016, 101,000 more than the previous year. Some of these workers are free to turn down the work offered by employers, but Mr Taylor has heard evidence that others do not have that flexibility.

“We’ve been hearing today about people in the social care sector who are told ‘be ready to leave the house at 7 in the morning’, then a phone call [comes to say] ‘no we haven’t any work for you today’,” he said.
He believes that if employers were made to pay a higher rate for every “non-guaranteed” hour the person had to work, they would be incentivised to guarantee more hours in advance.

“I think we can encourage employers to be a bit less lazy about transferring risk, even if it means [an employer] offers 15 hours a week rather than one hour, at least that’s 15 hours that I can know I’m going to be able to pay my mortgage.”

However, he stressed the idea was only a possibility and was still “up for debate”. “The drawback is we don’t want a proliferation of different minimum wages, because there’s something good about the fact the minimum wage is simple and everyone understands it.” It might also be difficult to distinguish between two-sided and one-sided flexibility and to define how much notice must be given.

The CBI employer’s group, said it was “vital” that the success of the minimum wage was not “put at risk by complexity or the unintended consequences . . . [of] trying to reshape employment contracts using a wage rate”.
Mr Taylor and the three members of his expert panel are halfway through a series of regional visits across the UK, where they are meeting employers, unions, experts and workers in town-hall style events. They will publish their recommendations in mid-June. The government will then respond.

Not long after Matthew Taylor was appointed by the government to review the changes to the UK labour market, a barrister sent him a copy of a recent speech about UK employment law. It was 64 pages long. “Dear Matthew,” the barrister wrote, “here’s my speech — I’m afraid it’s a rather superficial account.”

Mr Taylor won a ripple of sympathetic laughter in Cardiff this week when he told this anecdote to a room of academics, trade unionists, employers and members of the public.
Over the course of the next two hours, their debate gave a taste of the wide-ranging and complex issues on Mr Taylor’s plate: a supply teacher complained she was earning half what she should be; a Deliveroo employee said couriers did not want to lose their flexibility; a trade unionist had a spat with the leader of a recruitment trade body over a wrinkle in employment law relating to agency workers’ pay, which is known as the “Swedish derogation”.

Mr Taylor’s ideas for policy recommendations are similarly wide-ranging. They vary in scope from employability skills to zero-hours contracts to longer-term recommendations about the direction of tax and benefit policies.

The UK’s growing “gig economy” is one of the thorniest issues on his agenda. Legal battles have broken out across the UK over whether workers for companies like Uber and Deliveroo are truly “self-employed”. So far, these questions are being settled very slowly by employment tribunals.

Uber lost a test case last year after judges ruled the company had misclassified two drivers as “self-employed” so owed them the minimum wage and holiday pay. However, Uber continues to treat drivers as self-employed while the company appeals against the decision.

If people think good work is impossible, or they think it’s incompatible with business competitiveness, then we’re in trouble
Matthew Taylor
“We all agree in the review, the law should do more of the work and the courts should do less of the work,” Mr Taylor said. He wants to “define in primary legislation” the principles that distinguish “self-employment” status from “worker” status — people in the latter group have more rights than the self-employed but fewer rights than full “employees”.

He is also considering the idea of reversing the burden of proof so that individual workers do not have to go to court to settle disputes over their employment status.

Instead they could ask an intermediary organisation such as Acas for a judgment. The onus would then be on the employer to challenge that decision in the courts.

Mr Taylor and his team have been unusually open about their ideas, even when they are only on the drawing board. “There’s virtually nothing I’ll say to you that I didn’t say last time I met my Number 10 minders,” he said. “[It] means we may float ideas that don’t end up in the report, but I think that’s a price worth paying for openness.”

Mr Taylor, now the chief executive of the RSA — the Royal Society for the encouragement of Arts, Manufactures and Commerce — is a savvy political operator who led the Number 10 policy unit for several years under Mr Blair. He has seen independent reviews fail in the past, their policy recommendations left to languish on dusty shelves. As a result, he wants to build support for the Taylor Review before it is published. Next month, he will launch a national campaign to encourage people to discuss the notion “good work” and what it means to them.

“If people think good work is impossible, or they think it’s incompatible with business competitiveness, then we’re in trouble,” he said. “So I want to have that conversation and win that argument.”

https://www.ft.com/content/84abe8ea-20f7-11e7-a454-ab04428977f9

 

PE firms way would benefit multibusiness enterprise

PE firms way would benefit multibusiness enterprise

Successful PE firms model practices that would benefit any multibusiness enterprise—as well as some that break the public-company mold.

In many respects, successful private-equity (PE) firms seem to defy economic logic. They acquire most of their businesses through some form of auction, where competitive bidding drives prices above what other potential buyers are willing to pay. Because they manage portfolios of discrete businesses, their acquisitions rarely reap substantial synergies. Their ability to survive, let alone thrive, depends on sustaining returns that attract limited partners to reinvest every few years. And unlike traditionally organized public companies, PE firms can’t underperform for very long, because their track records directly affect their ability to tap into capital markets.

Yet a number of prominent private-equity firms have succeeded for decades, earning healthy returns for investors and founders alike. So it’s not surprising that some public-company managers would look in that direction for new models to address their own myriad challenges—around aspects of governance, operations, and active ownership, among other things.1The way private-equity firms manage strategic planning, for example, offers lessons that might help public companies adapt to an environment marked by heightened shareholder pressure for performance and a fast-paced business cycle.

In our experience, successful private-equity firms excel at some practices that public companies should—but often don’t. These include detaching themselves from the tyranny of quarterly-earnings guidance, deploying highly disciplined business-unit strategies, and developing a competitive advantage in M&A. We believe many public companies would benefit from applying a private equity–like approach more aggressively in these areas, even by going to lengths that might seem unorthodox.

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Don’t be tyrannized by the short term

Private equity’s most powerful advantage may simply be that it is private. These firms can restructure and invest for the future while avoiding the glare of quarterly analysts’ calls and the business media. They can also communicate more intimately with a much smaller investment community, so they don’t broadcast their strategies and growth advantages to competitors. Our research shows that public-company managers can also gain shareholder support for long-term programs by communicating convincingly and making the right progress metrics clear to the investment community.

In the first 100 days after an acquisition, some successful PE firms explicitly collaborate with the new portfolio company during an intensive planning process. Over this period, management and the board develop a five- to seven-year plan, agreeing on new markets, channels, or products; assessing the capital needed to execute these initiatives; and developing an explicit set of new metrics and corresponding management incentives. In addition, they identify tactical near-term moves to build positive momentum from the deal’s most readily apparent benefits.

Such efforts require a highly disciplined, rigorous emphasis on metrics that reflect longer-term value, like cash flow, rather than short-term ones, like earnings per share (EPS). Many private-equity firms separate the financing of a business from its operating performance, which they get management teams to focus on by using cash flow–based measures, such as earnings before interest, taxes, depreciation, and amortization (EBITDA) and free cash flow. EPS reflects nonoperating factors (such as interest and tax expenses) that rely on a deal’s structure, but EBITDA depends more on operating performance. Free cash flow also takes into account the capital expenditures and additional working capital required to generate profits; EPS does not.

During the 100-day planning process, private-equity firms are more active than public companies in considering the furthest horizons of strategic planning. Public companies often focus on nearer-term objectives, including existing baseline products and emerging product lines, though longer-term bets can help to create significant longer-term value. Typically, private-equity firms more actively identify and emphasize strategic planning’s third horizon—including new markets and products—and diligently make tactical bets on it. For example, when PE firm Clayton Dubilier & Rice (CD&R) acquired PharMEDium for $900 million, in 2014, it hadn’t previously invested in outpatient care. But managers identified this as a major growth opportunity and made a calculated bet that paid off handsomely. CD&R ultimately sold the business for $2.6 billion.

Public companies could emulate much of this. Quarterly earnings can’t be ignored, but long-term shareholder value depends heavily on the generation of free cash and on the third horizon of future growth trajectories. Public companies should also explore the intensive 100-day planning process PE firms put in place after acquisitions, whether every other year or after the transition to a new leadership team.

Create disciplined business-unit strategies

A multibusiness company is the sum of its parts: if strategies for the underlying units aren’t focused and robust, neither will the overall picture. Success requires picking winners and backing them fully—something that often eludes public companies looking for the next new thing. Indeed, most of them pass only three out of ten tests of business-unit strategy.2Although financial theory suggests that capital should always be available for attractive investments, public companies that are constrained, for example, by their EPS commitments to Wall Street or by planned dividends often face intense competition for internal resources. Too often, they spread those resources thinly across business units. The right strategy means little if it isn’t fully resourced.

Private-equity firms don’t plan strategy around business units, but their investment theses for portfolio companies amount to the same thing. They’re a plan for investing across a portfolio of businesses, basing the allocation of capital on ROIC relative to risk, and explicit plans for creating incremental value in each business. PE firms do focus less than public ones on the strategic fit of companies in their portfolios—a tech company in a portfolio of heavy-industry businesses wouldn’t be a concern because they’re managed separately. But the portfolio-management objectives and disciplines ought to be similar. Both public companies and PE firms should evaluate a similar set of expansion options to assess market context, potential returns, and potential risks.

PE firms develop, monitor, and act upon performance metrics built around an investment thesis. That’s in sharp contrast with the one-size-fits-all metrics public companies often use to evaluate diverse business units—an approach that overlooks differences among them resulting from their position in the investment cycle, their prospective roles in the overall portfolio, and the different market and competitive contexts in which they operate. Although tailoring metrics to reflect these differences is hard work, it gives corporate management a much clearer picture of each unit’s progress.

Public companies could go further. Unlike PE firms, for example, they traditionally manage the balance sheets of a business unit against the needs of the enterprise as a whole. But should they always do so? Instead of divesting a slow-growing but cash-generating legacy business unit, should they have it issue its own nonrecourse debt? This would save the tax and transaction costs of divestiture, and potentially preserve additional upside. Would it make sense to bring outside capital into a high-risk emerging business unit—as Google X (now known as X) did for some of its nascent healthcare ventures? This approach would help investors to see the long-term value of such units, which would be more directly exposed to the discipline of the capital markets.

In addition, public companies could emulate the governance of private-equity firms at the business-unit level, where each portfolio company has its own board of directors. These boards are generally controlled at the firm level, but they are often supplemented by knowledgeable and senior outsiders with a meaningful equity stake. Since board activities focus on only one business unit, they can effectively surface, grasp, and debate the critical strategic, organizational, and operational issues it faces. While creating true governance boards for business units isn’t a realistic option for a public company, nothing prevents it from appointing advisory boards, with incentives based on the creation of value at the specific business units they oversee. In fact, freedom from formal governance responsibilities may make such boards more effective, allowing them to spend significant amounts of time on strategy and on developing management.

Finally, public companies could do more to compensate business-unit managers based on their own results. Compensation for private-equity fund managers typically reflects the results of the fund as a whole, but the pay of management teams at portfolio companies strictly reflects their own company’s value creation. This means that portfolio company executives in a lagging business can’t hope to be carried along by strong results at the fund level. It also means that executives in high-performing portfolio companies won’t be affected by the poor performance of entities over which they have no influence. This is a powerful motivator in both directions.

Could it make sense, for example, for multibusiness public companies to link incentive compensation for business-unit managers not to traditional stock options but rather to “phantom” stocks3that reflect changes in the intrinsic value of their business units? That would be counterproductive where businesses are highly interdependent, but in many cases at least some parts of a company operate more independently. And such an approach could generate the kind of entrepreneurial focus on value that private-equity firms get from the management teams of their portfolio companies. In the 1980s, Genzyme, for example, pioneered many tracking stocks for specific business units, and John Malone used them recently for those of conglomerate Liberty Media.

Develop M&A capabilities as a competitive advantage

Among public, nonbanking companies, those that routinely acquire and integrate clearly outperform their peers.4That fact should make unearthing, closing, and extracting value from attractive acquisitions a functional skill—like the effectiveness of the sales force, manufacturing, or R&D. Many public companies don’t treat it that way, but the best private-equity firms do, building and institutionalizing M&A skills as a competitive advantage.

Public companies that do behave like successful PE firms engage in M&A around a handful of explicit themes, supported by both organic and acquired assets to meet specific objectives. Achieving this competitive advantage calls for proactively identifying attractive strategic targets, often outside banker-led deal processes. It calls for managing a reputation as a bold, focused acquirer that can offer real mentorship and distinctive capabilities. And it calls for effective commercial and financial diligence based on the detailed information available to acquirers after signing letters of intent. Other requirements include reassessing synergy targets, adjusting them as appropriate to provide a margin of safety, and being highly disciplined about the price paid for acquisitions, to ensure accretion.5Most public companies seek to develop these skills, but many don’t dedicate enough time or resources.

http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/what-private-equity-strategy-planners-can-teach-public-companies?cid=other-eml-alt-mip-mck-oth-1610

Professional services, are Clients Loyal to Your Firm, or the People in It?

Professional services, Are Clients Loyal to Your Firm, or the People in It?

MALTAWAY BOARD GOVERNANCE AND NON EXECUTIVE DIRECTOR (NED)

Furthermore having a NED with international experience in the BOARD, reinforce widely the diversity, independence and compliance requirements for a better Corporate Governance, Leadership and Business results

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Employee turnover can be a big challenge for companies. But it creates a unique problem for professional services firms, which have to worry about employees taking clients with them if they leave.

Because of the client-facing and customized nature of service work, such as in law or consulting, clients can become loyal to individual employees rather than firms. This impacts firms of all sizes, and it can be quite costly. For example, when bond manager Bill Gross left Pacific Investment Management Co (Pimco) in 2014 to join rival firm Janus Capital, his clients quickly withdrew over $23.5 billion from Pimco funds. The industry was then thrown into intense competition to win over these clients over, with a number of them choosing to follow Gross. Small business owners and entrepreneurs also focus on increasing their client retention rates should their employees leave. However, due to data limitations, large-scale empirical research on this subject has been lacking.

I decided to look at the issue in the context of the federal lobbying industry. In a forthcoming study in the Strategic Management Journal, I empirically investigated when clients follow federal lobbyists who switch firms. The Lobbying Disclosure Act of 1995 (LDA) and Honest Leadership and Open Government Act of 2007 (HLOGA) mandate that lobbying firms file reports for every client they actively lobbied for on a biannual (LDA) or quarterly (HLOGA) basis. These reports include the lobbyists registered to each client, the dollar amount of lobbying revenue earned from that client, and the specific issues lobbied for on their behalf. This data let me link individual lobbyists to their clients over time and observe when clients followed lobbyists who switched firms. My final sample consisted of over 1,800 lobbyists who switched firms between 1998 and 2014. I analyzed the decisions of approximately 18,000 clients (to stay with their current firm or follow their lobbyist).

There were a few significant findings. First, the duration of a client’s relationship, with both the lobbyist and the lobbying firm, influenced where client loyalty resided. I found evidence that, on average, the probability that a client follows an employee who switches firms increases by nearly 2% for each six-month period that the client works with the lobbyist, but decreases by approximately 1% for each six-month period that the client enlists the services of the lobbying firm. This means that a client who hires a lobbying firm and works with a specific lobbyist from day one will be more likely to follow the lobbyist to another firm than a similar client whose relationship with the firm preceded the relationship with the lobbyist. The relative magnitude of these effects is not small: On average, the probability that a client follows a lobbyist doubles after the lobbyist serves the client for 3.5 years.

The way that a client relationship is structured is also important. Clients served by teams are much less likely to follow an employee who quits than those who work with single individuals. To put that in perspective, on average, the probability that a client follows a lobbyist decreases by approximately 2.5% with each additional team member who works directly with the client. In fact, using teams even helps firms retain clients who have an extensive history of working with one lobbyist. The vast majority of clients in my sample worked with teams.

The characteristics of team members matter as well. When clients work with teams of specialists, they are more likely to stay loyal to the firm than when they work with teams of generalists. By specialists, I mean employees who focus on a single area; in the context of lobbying, specialists are those who lobby primarily on a single issue, be it defense, education, energy, or any other of the 79 defined issue topics. Generalists tend to lobby across the board on a variety of issues. My analysis suggests that although teams are helpful for guarding against client loss, they’re more effective when the team comprises specialists rather than generalists. I reason that more specialization and division of labor within teams makes it harder for any individual lobbyist to replicate the services that the team can provide.

That said, one risk of using teams to manage clients is that team members may collectively leave to join a competitor or start their own firm. About 19% of lobbyists quit with a coworker, a phenomenon we call “co-mobility.” When this happens, the likelihood that a client follows skyrockets — but only if team members had jointly served the client prior to exit. In other words, if two employees quit together but a client has only worked with one of them, the client is not more likely to follow. This highlights the precarious position that managers are in when it comes to maintaining client relationships. Because professional service firms are increasingly serving clients with collaborative teams, firms should try to find ways to reduce the incentive for whole teams to quit.

My study focused on lobbyists, but these effects should generalize to other professional services firms, which share a number of characteristics with lobbying firms. Outside of the professional services industry the results are less clear, but we could imagine similar patterns for customer-facing positions in settings outside of professional services. That said, some important questions remain. For example, do firms benefit from hiring employees who bring clients from their old firms? The answer may seem to be yes, but recruiting these employees could result in a winner’s curse where hiring firms overestimate the value these employee will create and systematically overpay them. Another area worth investigating is how and when firms use nonsolicitation clauses to legally prevent employees from taking clients when they leave. Ultimately, however, clients may move as they please, so my findings provide initial evidence that can help managers identify which clients are most at risk of defecting as well as some advice on how to structure relationships to keep their loyalty.
https://hbr.org/2017/01/research-are-clients-loyal-to-your-firm-or-the-people-in-it

 

Executives and Salespeople Are Misaligned and the Effects Are Costly

When you have a Board role, remember this post and keep your focus straight on the shareholders’ interest … MALTAWAY BOARD GOVERNANCE AND NON-EXECUTIVE DIRECTOR (NED)

U.S. companies spend over $900 billion on their sales forces, which is three times more than they spend on all ad media. Sales is, by far, the most expensive part of strategy execution for most firms. Yet, on average, companies deliver only 50% to 60% of the financial performance that their strategies and sales forecasts have promised. And more than half of executives (56%) say that their biggest challenge is ensuring that their daily decisions about strategy and resource allocation are in alignment with their companies’ strategies. That’s a lot of wasted money and effort.

So what’s the problem?

According to an assessment of over 700 sales professionals and senior executives conducted by GrowthPlay — a sales-focused consulting firm where one of us is Managing Director — the problem stems from gaps between the perceptions, attitudes, and information flows between executives and sales reps.

The assessment asked respondents — executives, middle managers, and sale reps from companies of all sizes in a variety of industries such as consumer goods, telecommunications, manufacturing, wholesaling, and travel/hospitality — to answer a series of questions about how well their companies’ strategic directions inform six critical elements of their sales approaches: their target customers, the sales tasks generated by those customers’ buying journeys, the type of sales people best suited to perform those tasks, how the firm organizes its sales and other go-to-market efforts, and the cross-functional interactions required to sell and deliver value to customers.

The results show that executives feel that they have a high level of understanding of their companies’ strategic priorities, while sales reps — who aren’t typically in the planning meetings, on the conference calls, or roaming the halls with the people crafting strategy — said they did not.

There are other gaps, too. For example, leaders sees deficiencies in most categories related to core sales tasks and sales personnel. The only category in which executives rate more positively than salespeople is compensation, which isn’t surprising since executives determines pay policies!

 

From these results, a broad story emerges: Senior leaders have a better relative understanding of the company’s direction than sale reps, but are concerned that they don’t have the right sales processes and people.

For their part, salespeople are confident in their abilities to execute, but admit they have little understanding of the strategic direction, and its implications for their behavior, at their respective companies.

To add to that, the groups are far apart on basic elements such as recruiting, hiring, training, and role alignment. You can see why a simple statement —“I’m from Corporate and I’m here to help you”— is one of the oldest jokes in many firms.

If and when leaders want to make changes, misalignment sets up a costly and frustrating cycle.

The sales force gets better and better at things that leaders and customers value less and less while remaining unclear about performance expectations.

Companies fail to get the most out of the $12 billion a year they spend on sales enablement tools and the billions more on CRM technology.

And hiring the right candidates also becomes a problem, especially as new buying processes, driven by online technologies, reshape selling tasks. If information isn’t flowing between senior execs and front-line customer-contact people, leaderswon’t be able to keep up with the new skills and sales tasks they should be hiring for.

If any or all of these steps are taken without improving the sales team’s understanding of the company’s business objectives, the result is a “competency trap”: the salesforce gets better at their routines, but these same routines keep the firm, and its top team, from gaining experience with procedures more relevant to changing market conditions.

In order to achieve alignment, companies need to break these routines and treat causes, not symptoms. This is often difficult because multiple stakeholders across functions must invest in a new approach while still meeting their own obligations to keep the current business running. But good planning and proper leadership support can help.

Consider a large home energy provider in a mature, commoditized market where deregulation is driving down revenue and profit. To spur growth, the company committed to a strategy of diversifying their product offering. This meant transforming a salesforce, which had been conditioned to sell on price, to sell value-added services.

Here is what the leadership team did:

They linked strategy to behaviors. Beginning with conversations with frontline salespeople and managers, they asked, “Are the salespeople having a conversation that helps customers see the value of these services?” In the cases where reps weren’t, the team identified the selling behaviors that needed to be abandoned and then established a new sales process and set of sales tasks that needed to be clarified and executed.

They changed their approach to training. They also committed to an intensive effort that spread the learning out over a series of weeks, allowing the incumbent salespeople to apply behaviors gradually rather than trying to learn the entire process at once.  The process was tweaked for the new hires and incorporated into their on-boarding. This is aligned with what research tells us about the importance of deliberate practice in training for results. Acquiring new behavioral skills (versus concepts) requires repetition; people must try a new behavior multiple times before it becomes practiced enough to be comfortable and effective.

Simultaneously, sales managers went through a series of development sessions to develop their coaching skills. The goal was to focus performance conversations on how sales people were serving their customers and the value-selling process inherent in the strategy.

They revamped their compensation and performance evaluations. Commissions were adjusted to reflect the importance of the value-added services, and additional incentives were added to reward those sales reps that exhibited the behaviors required to execute the strategy, not only the revenue outcomes. Further, adherence to the sales process was added to the salesperson’s evaluation scorecard and, perhaps most important, reviews were now taken seriously — by managers and individual reps — as a strategy execution and development tool, not only a compensation discussion.

They changed their hiring/recruiting efforts. The biggest personnel shift related to front-line sales managers.  The company began evaluating potential managers based on their ability to coach and reinforce the process, not simply on their performance as a salesperson.

Sales performance and competitive positioning have improved significantly for this company. Its leadership articulated the firm’s strategy in a clear and consistent manner and analyzed the gap between the current sales tasks and those required to meet the new strategic objectives. And while their approach involved elements of training, compensation, performance reviews, and hiring practices, it was the sequence in which they addressed those areas that drove alignment.

https://hbr.org/2017/01/executives-and-salespeople-are-misaligned-and-the-effects-are-costly

How Boards Can Set a New CEO

How Boards Can Set a New CEO Up for Success

Few people have more experience with CEO successions than Ram Charan. For more than three decades, Charan has been involved in CEO searches in the United States, China, Japan, India, Brazil, and Europe, as a director, an adviser, or a member of the selection committee. Charan recently shared best practices on CEO selections in an article for HBR, The Secrets of Great CEO Selection. In a telephone interview, edited and condensed below, Charan shared how the succession process doesn’t end the moment a new chief executive is appointed: setting your CEO up for success is as important as finding the right CEO in the first place.

MALTAWAY BOARD GOVERNANCE AND NED

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HBR: You’ve written about how directors must not assume the succession process is complete once the new executive takes over. Can you elaborate?

Charan: In almost all cases, people coming into the CEO job have not ever had the CEO experience. For most, it is a quantum leap to go from a division or function to being the CEO of an entire company. Therefore, to set a new CEO up for success, the first thing they will need is context on the big picture, perhaps with the exception of CEOs who have already been on the board, or somebody who has been a CEO of a similar, but smaller, company — these people already understand the landscape.

But for those who are coming from a divisional function, the content of the job has changed overnight. And that content needs a very wide cognitive bandwidth, because a large part of the job is dealing with externals and outside scrutiny — this is often the first time a CEO deals in a very real way with shareholders, with the board, with being a corporate representative for customers, for the government, and for international governments. The complexity of the job and the coordination activities are exponentially different. The time demands are huge. CEOs must figure out which way to take the business, which critical issues to focus on, and how to get commitment from both inside and outside the company.

People spend their entire careers preparing for this job, but until you are in the saddle, you really don’t know how well prepared you are for the task at hand.

How can new CEOs get the support they need to make this quantum leap?

CEOs need to become much more aware of what assistance, coaching, problem-solving skills, additional networks, and wisdom are necessary to move forward. Most CEOs are intelligent people with a good track record. They’re keen and ambitious. So, have some faith in them. It’s not a good idea for the board to be imposing about who should be a mentor, a consigliere, or a coach. Let the new CEO decide what he or she needs — their effectiveness will be heavily dependent on the people they surround themselves with. I have enough evidence — over 50 years’ worth — that this approach works.

You’ve written about how it’s important to accept that every CEO pick will have weaknesses, and that ensuring a CEO’s success requires acknowledging that you have to plan for their imperfections. What are some of the things boards can do to account for some of those weaknesses upfront?

There is no such thing as a perfect person. But ask yourself: What are the real skills and talents of this person, and how does this fit with the job requirements at the moment?  Then, ask what’s preventing this person from succeeding. Once you know the answer to that, there are a number of ways to work at the problem. The most effective way is to have one of the CEO’s direct reports compensate for areas of weakness. Keep in mind that this person has to be a very trusted person, whose ambition is not to create instability for the CEO.

A second option is to find a board director who is sincere, who has the right expertise, whose ego is contained, and who knows he’s not running the company, who can become a sounding board. And sometimes, you need to find a trustworthy third party who can be an unbiased sounding board.

What happens when a board begins to worry that they’ve made a mistake in hiring a CEO? How much of a grace period should a new CEO get?

 This is a major issue. And there are really two issues at play here. First, a mistake was made. Second, a change has to be made. And the board has to deal with both.

Let’s start with the mistake that’s been made. In most boards, there are usually one or two directors who are first able to detect that a mistake has been made. But they proceed cautiously and don’t talk about it in the board room until more evidence emerges. Instead, they watch for signals that the CEO’s presentations about performance don’t align with actual performance numbers. Then, they watch for the CEO to signal to the media about low performance metrics. Here, the board chairman has a huge responsibility to be a liaison to the CEO, to build a trustworthy relationship, and see how the board can help. In doing so, of course, they can find out if maybe the CEO is just not a good fit. And once this idea begins to roll in the minds of one or two directors, others will begin to see it. Most of the time, a board will want to give clearer goals to the CEO about what is expected, and wait one more years to see results, during which they begin to come to conclusions about whether to extend the contract or to let the CEO go. It takes most boards about two years to cut their losses.

Should someone on the board be raising issues with CEOs more quickly, and more directly?

Every business is complex. Boards of directors, in most cases, meet four to six times a year. They’re often not full-time directors. Many lead directors are external chairmen, and are not quite investing the time that they’re supposed to invest.  Most directors don’t know the business that well. So it takes some time to make major decisions like whether or not to let a CEO go. But the board is ultimately accountable for and responsible for these decisions.

https://hbr.org/2016/11/how-boards-can-set-a-new-ceo-up-for-success

The Compass of Success the rules to have a successful carreer, while remaining free

The Compass of Success

the rules to have a successful carreer, while remaining free

 

«The most important jouney is not the one in distant lands but within ourselves»

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This book starts from powerful questions such as: how can I find out what are my strength and talent? Do you love what you do? How can I understand the complexity of organizations? How can I find a job in a company that fits with my values? How can I build trust and meaningful relations? What is the price you are willing to pay, the difficult trade-off, the time to go? How can I protect my ethical values, while remain free? What really matters? How can I then define a successful career?

The book explains with a creative and engaging mix of coaching, management theories short cases and storytelling, how you can find your compass, you true passion, how to find the job that fully fits with your talent and values. Then the author helps to intelligently use your radar to understand organizations, their cultures, how to decode complexity and build authentic trust and cooperation. The author offers meaningful questions, reflections and many helpful and practical tools to find a job and on developing a moral compass, a solid value system that will anchor you with your jobs, whatever it will be.   Chapters like the “Price you pay,” and “The pact with the devil” will offer practical tools, thoughts and learning about trade-off and difficult choices that everybody will have to make in their careers and, again, how important is to have a strong moral compass. By reading Paolo’s book, the very same concept of successful career will be radically transformed in something very different from our current mental model, more profound and relevant to all of us, not only for few elected. The new concept of what is a successful career and what really matters, will contribute to improving the way we relate to each other as human beings while having a successful career.

In the mist of the 4th industrial revolution, in an age of radical transformation and upheaval, we need to anchor our being to our values. The “Compass of success” helps us to pause and reflect about who we are, what do we stand for and how to remain free.

Paolo Gallo is the Chief Human Resources Officer at the World Economic Forum. The author has been the Chief Learning Officer at the World Bank in Washington DC and Director of Human Resources at the EBRD in London. Paolo Gallo has worked in more than 70 countries and also at the International Finance Corporation in Washington DC and, at the beginning of his c. areer ,at Citigroup in Milan, London and New York. Paolo Gallo is a certified coach at Georgetown University, he graduated from Bocconi University in Milan and Chartered Fellow FCIPD, UK, collaborates with Bocconi University and Hult-Ashridge Business School UK and he is a regular author and for the World Economic Forum agenda Blog, Forbes and HBR Italia

Italian version and deeper details here

Index Funds Are Fueling Out-of-Whack CEO Pay Packages

Index Funds Are Fueling Out-of-Whack CEO Pay Packages

CEOs get paid handsomely. The pay of top managers has risen faster than those of other star earners. Often they’re paid generously even as the firms they head underperform relative to their peers.

Such performance-insensitive pay packages seem to defy both common sense and established economic theory on optimal incentives. Top management compensation packages guarantee a high level of pay, but are often only weakly linked to the performance of the firm relative to its industry competitors. Why, then, do company boards and shareholders of most firms approve those packages?

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We propose an answer to that question in our new research paper. By endorsing performance-insensitive compensation packages, broadly diversified investors are indeed incentivizing CEOs for good performance. Except that the performance that they’re rewarding is industry performance, not company performance. Why? These days, most firms’ most powerful shareholders tend to benefit more from the performance of the entire industry than the performance of an individual firm.

To understand this new explanation for seemingly exorbitant CEO pay, it’s important to understand a recent, fundamental shift in the ownership of U.S. public companies. Nowadays, the same handful of large, diversified asset management companies controls a significant proportion of US corporations.

For example, BlackRock is the largest shareholder of about one in five publicly-listed US corporations, often including the largest competitors in the same industry. Similarly, Fidelity is the largest shareholder of one in ten public companies and frequently owns stakes of 10-15% or more. Even Bill Gates’ ownership of about 5% of Microsoft’s stock is small compared to the top five diversified institutional owners’ holdings, which amount to more than 23%.

Magnifying their already large individual power, large asset managers also appear to coordinate many corporate governance activities, including those regarding compensation. The potential of coordination among BlackRock, Vanguard, and State Street is particularly potent given that their combined power makes themthe largest shareholder of 88% of all S&P 500 firms.

This sweeping development known as “common ownership” – the same firms owning the competing firms in the same industry – is relatively new. Twenty years ago, BlackRock and Vanguard were only very rarely among the top ten shareholders of any firm. On average, common ownership concentration has almost doubled in the last 20 years in the construction, manufacturing, finance, and services sectors.

Our research reveals that common ownership has had a significant impact on the structure of executive compensation. In industries with high common ownership concentration, top executives are rewarded less for the performance of their own firm but rewarded more just for general industry performance.

To understand the effect of common ownership on CEO pay packages, we analyzed total pay (including the value of stock and option grants) of the top five executives of S&P 1500 firms (which cover 90% of U.S. market capitalization) and 500 additional public companies. We studied those pay packages in relation to the firm’s performance, rival firms’ performance, measures of market concentration, and common ownership of the industry. We also examined interactions of profit, concentration, and common ownership variables. This allowed us to estimate both the sensitivity of CEO compensation to the performance of their own firm and of the industry’s other firms, as well the impact that common ownership has on these sensitivities. (We used a variation in ownership caused by a mutual fund trading scandal in 2003 to strengthen a causal interpretation of the link between common ownership concentration and top management incentives.)

We found that when firms in an industry are more commonly owned, top managers receive pay packages that are much less performance-sensitive. In other words, these managers are rewarded less for outperforming their competitors. This difference in compensation has a sizeable effect. In industries with little common ownership, executive pay is about 50% more responsive to changes in their own firm’s shareholder wealth than in industries with high common ownership.

What’s more, in industries with high common ownership, top managers receive almost twice as much pay for the good performance of their competitors as managers do in industries with low common ownership. This effect is even more pronounced for CEOs alone. Essentially, CEOs are rewarded more for the good performance of their competitors than they are for the performance of the company they run.

It’s not just the incentive package. The base pay reflects this, too. Our research shows that top managers’ base pay – the part of pay that does not depend on firm or industry performance – is also higher in industries with high common ownership.

In short, our research suggests that BlackRock, Vanguard, State Street, and other large asset management companies may be endorsing high, performance-insensitive compensation packages, because those don’t encourage competition among portfolio firms. These packages may be inducing managers to carefully consider the impact of their strategic choices on other portfolio firms.

Large asset managers have economic reasons not to incentivize competition among firms they own. After all, their revenue and their investors’ wealth depend on the total value of the portfolios they hold. As a result, it is not in their interest that one portfolio firm competes vigorously against another firm in their portfolio, such as engaging in a price war.

It is not clear that large, diversified shareholders such as BlackRock intentionally choose performance-insensitive CEO compensation for the explicit goal of discouraging intra-industry competition. They may choose it for other reasons, for example, to encourage cooperation or innovation. Maybe it’s not a conscious choice at all. It could simply be that large, diversified investors let performance-insensitive executive compensation slide because their corporate governance efforts are more passive than those of undiversified activist investors.

Still, other empirical studies have identified anti-competitive effects of common ownership. It has resulted in higher prices in the airline and banking industries. The underlying economic rationale is quite simple: if shareholders own not only one, but two or more firms competing in the same industry, these shareholders reap larger gains if the firms they own cooperate rather than compete aggressivelyagainst each other.

A question left open by the previous research is exactly how investors manage to convince the top executives of portfolio firms not to engage in costly price wars against each other, and instead to practice restraint when it comes to competitive strategy. One way to induce managers to act in their investors’ economic interest is executive pay.

But paying executives more when they outperform a competitor (academics call such a reward scheme “relative performance evaluation”) would have the effect of pitting one firm’s CEO against the other and of inducing such costly price wars.

There’s evidence of this dynamic in the tension between smaller undiversified investors (such as hedge funds) and large asset management companies. Whereas the former fight for more performance-sensitive pay that is benchmarked against competitors, the latter vote against them, instead often passing high and performance-insensitive pay that discourages competition between firms in the same industry.

This is an issue – and a tension – that we expect to grow as the trend toward common ownership continues. Our research sheds light on the changing nature of executive compensation, and apparent negative effects of weaker competition and more performance-insensitive pay. However, there may also be positive effects to common ownership. It’s possible that increased cooperation between firms benefits consumers. Certainly, people have benefited from the low-cost, diversified exposure to the stock market that large asset managers offer.

We hope our findings will lead to a better understanding of the effects of common ownership. Shareholders appear to benefit from diversification and higher industry profitability, and there are potential benefits to society from greater cooperation between firms. However, there is a negative impact on consumers due to reduced competition. Ultimately, we hope effective solutions can be reached to resolve the growing tension between shareholders, consumers, and society.

https://hbr.org/2016/10/research-index-funds-are-fueling-out-of-whack-ceo-pay-packages