TRANSCRIPT
MATT VOICEOVER
Welcome back to Sound-Up Governance. My name is Matt Fullbrook and this episode continues my conversation with my great friend, Andrew Escobar, who's a governance nerd, corporate director, open finance expert, and big thinker based, like me, in Toronto. I shared with Andrew an exercise that I've conducted with boards, executives and other curious people in the governance space more than a thousand times over the past 12 plus years. If that sounds like an obsession, it's because it is. I wanted to talk through it with Andrew because I feel like it's a shortcut to having one of the most important and potentially difficult conversations that boards can have. Check it out.
MATT
Despite the fact that we've known each other for a while and talked about governance a lot, you have not witnessed. The thing that I have done more than any other thing with the groups that I've worked with, which is an exercise that is boringly titled "To Whom do you Owe a Duty?" And what I do is I give them a list in alphabetical order of 10, we can call them generically stakeholders, that range from internal stuff like employees and senior management and the board to like one, circle out like shareholders and customers and community, that kind of thing, maybe a little bit farther out like regulators, and then all the way out to like the planet. And I always put "myself as a director" on the list. And I say, here's 10 stakeholders. You've got a group of, whether it's classmates or fellow directors or whatever, you have 15 minutes to rank them based on, from the perspective of a director, to whom do we owe the greatest duty through to whom do we owe the least duty? The corporation's always on the list too. And I say the only instructions I give beyond that are, I say ties are illegal, so everything has to have its own unique ranking. And I'm not going to define duty for you. If you think that's an important conversation, then you can talk about that in your 15 minutes. How confident are you in your board life that there has been implicit or, even better, explicit alignment among the people in the room when it comes to whom do we owe a duty when we're making, whether it's all decisions or this specific decision or whatever.
ANDREW ESCOBAR
I don't think that's ever been explicit. Can't think of... one, I've never done that exercise formally. But two, even if we had, I think we would have possibly arrived at different answers or some conflict on the top. But I'd like to think that, at least on the one board where I have the most experience or had the most experience, we would have probably arrived at very similar answers for those like maybe one or two spots. Because that speaks to me to purpose of the organization, purpose of the corporation. So I like that way of thinking about it because it speed runs the big question around purpose and framing it in terms of various stakeholders.
MATT FULLBROOK
When someone, and I'm sure you've heard in board contexts or classrooms or whatever, when someone says "we owe our duty to the corporation," which is fundamentally factually correct in Canada, what do you think that means?
ANDREW ESCOBAR
I think that's the correct answer, but it doesn't actually share any useful information. If I tell you that your duty is to the corporation, well then what? What does that actually mean? Alone, It doesn't actually mean much. That is a useful place to start because I think you need to square that with anything that you arrive at, like what is our purpose here? What, what are we doing? What are the decisions that we're here to make? I think it can come back to in the best interest of the corporation that is where your duty lies. But that actually doesn't provide any useful help to a new director, In particular. You've got to explore what that actually means. And it's going to be different to each board, each organization.
MATT FULLBROOK
Okay, so then the punchline of the exercise is, and they don't usually see this explicitly, but the moment that I describe it they're like, "yeah, right." Is that you can choose any pair of the of stakeholders from the list. And let's say the number one and number two most frequently are the corporation and shareholders or members or whatever, in whatever order. Most commonly those are the top two. And I'll say, "okay, well can we imagine a decision we might have to make in the real world where the long term interests of the corporation and the short term interests of shareholders might be misaligned?" And everyone's like, "yeah, and actually, yeah, we could think of thousands! Almost every time we spend money." And so I say, "great, but you choose literally any pair on the list and think of real world decisions where the interests of these pairs are misaligned with each other. You can't make a decision, there's no such thing as a decision that a board might make where everyone benefits. Right? Someone gets harmed in some way, and I don't mean necessarily like harmed in a way that they care about, But even if it's just an opportunity cost harm, there is harm. In your board experience, are we thinking both about the how do we maximize positive impact but also saying, yeah, by doing that this is the harm we're causing?
ANDREW ESCOBAR
I'm going to guess - this is a guess - that most boards don't like to focus on the harm, or maybe not even the harm, the deprioritization of certain stakeholders. But it's there. I, I don't know if that's a useful way to think about it. Right? The harm? I'd like to think that you focus on the good as opposed to the harm. But they're both like, they're both there, they're both present. With every decision you're going to make, there's going to be consequences that you either can see or not see. They might be short term or long term in nature. And you're making that conscious decision. But that is why, again, I think that for me, it actually comes back to purpose and values and like that. Maybe not full alignment, but that general understanding is important because that's how you're making decision. You actually might be a board that is prioritizing a certain constituency or stakeholder more than others. You might be optimizing for the short term and that guides your decision making. The challenge is how can you be honest about that with yourselves as a board and signal that to others. Right? Because whether that's a for profit listed company or a small, not for profit, if you can signal that, like, that helps other people make decisions, like, do I actually want to be a member of this organization? Because this is how they make decisions, do I actually want to, Should I get out of that stock? I don't like what they're doing. In terms of their short term outlook, their long term outlook. How do you signal that is important? That is your purpose, that is your values. And so there always will be both sides of it. But you're going to prioritize one or the other and it's going to always come back to purpose and values. Or rather it should.
MATT VOICEOVER
Before we wrap up, I should explain to anyone who's not familiar with the law in Canada and similar jurisdictions what were talking about here. It's true that our laws tell directors that they owe their primary duty to the corporation. If you look at the language of the laws and how they've been interpreted in the courts, what it really means is that boards need to consider the interests of all the individuals and groups that stand to be affected by the corporation's actions. Not that they must benefit all of those stakeholders, but that they can't neglect them. And that's what we'll talk about more in the next episode. If you want to know more about today's music, which I had exactly 10 minutes to create, have a look at the music notes at the bottom of the post at groundupgovernance.com thanks for listening. There's a reason why every content creator asks you to, like, subscribe and spread the word, and it's because that's what keeps shows like this alive. So what are you waiting for? See you next time.
MUSIC NOTES
It’s actually true that I only had 10 minutes to make the music for this episode. I used the PO-12 Rhythm by Teenage Engineering and made a simple beat and that’s all she wrote. If you noticed the copy of MF Doom’s Operation Doomsday on the turntable in the thumbnail photo, it doesn’t have any relevance or meaning to the music or episode. It was just the coolest looking backdrop for the photo I could find with no time to spare (i.e. 1 minute) in my office.
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