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Sound-Up Governance (Ep 19) - Do we need to reform governance education? (feat. Paul Smith)
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Sound-Up Governance (Ep 19) - Do we need to reform governance education? (feat. Paul Smith)

Part two of a governance deep-dive with the Founder of Future Directors Institute

TRANSCRIPT

Matt VO

Welcome back to Sound-Up Governance. This episode is part two of what it turns out will be a three-part adventure featuring Paul Smith of the Future Directors Institute in Australia. Paul came by my office in December 2022 to chat about, well, literally anything that crossed our minds over the course of a couple of hours. Last time, we talked about stakeholder capitalism and director duties and all that fundamental stuff. Here in part two, we zero in on something we've both spent a ton of time working on: governance education, including how we think it could be re-thought and improved. As you'll quickly hear, there was also some scotch involved. Oh, and we were simultaneously recording ourselves on camera. But the footage didn't turn out so good. So, please just laugh at us when we speak as if you can actually see what we're doing. Without further delay, here's part two of my conversation with Paul Smith.

Matt 

Tell me about education.

Paul Smith 

Tell me about education.

Matt 

Start from the beginning.

Paul Smith 

So there was Adam and Eve. And they were taught a lesson, which they completely ignored. Notice how I spun that? That was quite nice, actually. I was quite impressed with myself. Scotch is really kicking in. No. Okay, starting again.

Matt 

Wait, you had Scotch in your coffee?

Paul Smith 

Is that not what was going on? We're having Irish coffees?

Matt 

Yeah. It's just Scotch, for the record.

Paul Smith 

Yeah, a little bit of water for me, because I'm a bit of a... can't drink neat. So starting again, I wanted us to talk about education, specifically in the governance space, in the board or corporate governance space. And, you know, education institutions director institutions have been around for decades, supposedly educating all of the board world across the full range of company types of industries. And yet, we still have problems in the boardroom. People don't really even understand their basic roles and responsibilities.

Matt 

But the question is, is it about the way? Is it about the content? Is it about who's in the room? Is it about who's teaching?

Paul Smith 

I think it's an open ended question? It really is an open question like, where is there a problem? First of all, is there a problem? Is everybody doing the best that possibly can be done? If there is a problem, is it a problem with the demand side with the boards? Or is this problem with supply side the education institutions? And you and I both are in education and governance education, you know, you independently you also through the Institute in Canada. Myself, also, through Future Directors, but also through different agencies, like different Institutes around the world?

Matt 

I have a question about... because Australia has got a much more extensive, Governance industry than Canada.

Paul Smith 

Really extensive!

Matt 

Yeah. So, I'm interested...

Paul Smith 

Actually, crazily so, given the size of our population,

Matt 

No, it's really, it's really intense.

Paul Smith 

But we can get into the reasons why,

Matt 

I think Sure. Before we get into the sort of history of it, to what extent does the governance industry or maybe we can start with the AICD, and you can expand to whatever other institutions you think are relevant.

Matt VO

AICD is the Australian Institute of Company Directors, which describes itself as "the largest director membership organization in the world," and that they "develop the skills and capabilities of leaders for the benefit of society." They do this through the delivery of hugely popular governance courses, and also through the development of toolkits and other resources for boards. The equivalent in Canada is the ICD or Institute of Corporate Directors in the US, it's the NACD, or National Association of Corporate Directors. In other words, similar associations or Institute's exist all over the place. Anyway, back to the a AICD.

Matt 

To what extent do they have their own ideas that they're trying to perpetuate versus - at least this is my experience with the institutions whether it be the Institute of Corporate Directors or the universities or whatever - they just kind of take the educators that get the best, like evaluations and say "go!" They don't really police the content very much. So they don't get if you go across the whole spectrum of offerings is not a really consistent message about what about all the basic stuff you're talking about.

Paul Smith 

I would say that there's some consistency,

Matt 

Okay

Paul Smith 

Around it all, because the main one, the main, the main thing is the company directors course, like it's the introductory, very technical roles, responsibilities, definitions, very consistent delivered by different facilitators. And then lots of case studies, huge amounts of case studies. And scenarios, which then become the foundations for your testing, in order to forget your post nominals.

Matt 

Did you take the course?

Paul Smith 

I refuse to.

Matt 

Have you been in the room?

Paul Smith 

I've been in the room with a number of them, yeah. And I've also interviewed a lot of people who have done it. And some people say wonderful. Some people say the worst week of my life. Most people say I knew a good 50 to 80% of the content already. Because they've been in boards, or done MBAs or run businesses, even been C suite. A lot of it's quite intuitive.

Matt 

That's through the Institute?

Paul Smith 

That's through that Institute,

Matt 

the AICD,

Paul Smith 

the AICD, the Australian Institute of Company Directors. And again, like anything else, subjectively evaluating the quality of the content comes down to the individual.

Matt 

So they probably don't ask questions about that

Paul Smith 

So would they describe themselves. I'm sorry to focus on them. But there's such a big presence in your world.

Paul Smith 

A lot of people. Yeah, well, they do they get feedback, right. And I'm sure like everybody else they get feedback on their content, and it does evolve. And many people think it's really good quality. I don't have a problem with the quality of the content so much as I don't think, for me, there's no guidance within that of where it needs to go. It's more here it is. It's not like they're trying to shift mindsets, or trying to evolve anything. It's more a case of here's the information presented in a certain way. Go and do what you what you want with it. You know, and they're not trying to advocate for, I've never seen them coming across as an advocacy group of trying to raise, they talk about wanting to raise standards, but through more people doing their stuff rather than lifting the whole game.

Matt 

Well you know that the largest Institute in the world?

Matt 

Yes. And it's an unbelievable success.

Paul Smith 

Yeah, 50,000 members. They're a nonprofit. They've been around for I dunno, decades. They're a massive institution. And we have a word, you know, 25 million people in our country. But we have a huge amount of companies and organizations for such a small country. Seven... close to 70,000 registered charities, 15,000 schools, three and 3000 plus listed companies, two and a half million small to medium to large private businesses. A whole bunch of more nonprofits, so who aren't charities. You know, conservatively, there's about half a millon to a million non-executive directors. So non-executive, so ignoring all the business, small business owners and the family business, everything like that. Of a working population, about 11 million people. So there's no wonder there's a massive,

Matt 

Is that directors or seats?

Paul Smith 

That's directors.

Matt 

So how many seats are there?

Paul Smith 

Well, it depends. It's different. I don't I wouldn't know how to look at every single constitution. A lot. You think

Matt 

It would probably be 10 times that!

Paul Smith 

Yeah. Potentially.

Matt 

So 5 million people sit on boards out of 11 million?

Paul Smith 

No, I would No, no, not that many. That's how many people actually sit on boards right now. That's what I'm saying. half million to a million sit on boards. Sit on board as non executive.

Matt 

So people when we don't yeah. So it's that many people sitting on who knows how many boards?

Paul Smith 

Yes, yes, yes. Because I do I do account for some double up.

Matt 

Yeah, got it. Got it.

Paul Smith 

And obviously, because you've the majority of board directors in Australia will be a single seat rather than multiple, because you'd have less professionals. And majority will be unpaid in charitable school situations, the majority. So what that's bred in Australia, you've got the AICD. Then you've got the governance Institute, which is the old corporate secretaries, company secretaries group. Similar to most countries, they have those and they've sort of morphed into a more wider governance thing. Then you've got all the ancillary groups, all the consultants, the other trainers. Most are focused either on the trainers are focused on entry point, like helping you into the boardroom in the first place. And that's where it sort of that I always say that's where 90% of the market operates from the education point of view is getting you in. And then the rest of consultants working with boards on reviews and evaluations and training. It's a massive industry in Australia for such a small country. And yet, and I think, generally, I would say going around the world, held up as have quite a high standard and mature standard of corporate governance.

Matt 

If we were Yeah, for sure. If we were looking at corporate governance success as the structure of an industry around it, you guys would win. So I think, though, what you're getting at or what you were getting at when you prompted this conversation about education, and this is why I wanted to start with them instead of with you. So you're starting a thing in education? I know it's not just education. But that's sort of a big part of the headline. Clearly, you think there's something new you can do. You've got the most educated directors in the world. So now what? What do you guys do?

Paul Smith 

The problem with the current space is it's inaccessible for a whole bunch of people.

Matt 

Right, you got 500,000 people, how many of them can can access it?

Paul Smith 

10-20%. And that's just the ones in the room right now, you talk about all the ones that aren't in the room, or the ones that need even the basic governance, you know, the small, small, medium sized businesses that don't think of governance the same way a NED might, non-executive might think about it, or fiduciary. They're still fiduciary boards, but it might be one or two people, founders of a business owner of a business. I would say, yeah, 10 to 20%. The reason why it's not accessible is because they've got older models, which are expensive. So it's out of reach, or it's geographical or time based. You know, it's on our time in that city. And if you're in a regional place, or you don't have that time, you don't have those money, that's an accessibility thing. I think there's also for me, there's the new take on it all. For me, it's bringing new things to the boardroom, which aren't really taught as much, whether it's the human side, the board dynamics, the cultural element of, you know, boards looking at themselves and going, "how can we do our job better as a group of human beings?" To some of these new topics that are coming through this sort of more meta issues that are being taught to upskill board directors to help them make better decisions or identify risks, the risks, they don't have any exposure to because I've had no history with. You know, think about a, one of the fundamental roles of a board is to identify roadblocks based on their experiences, and the more diverse experiences you have in business or in life, the more you can identify potential roadblocks to any given strategy. But when these roadblocks are brand new, and no one's exposed to them before, and there aren't many of those, even cybersecurity has been around for decades. But in Australia at the moment, cybersecurity is the thing so that everybody's jumping on that, "Okay, gotta get educated on cybersecurity." But I'm thinking beyond that, like, what can what are we teaching them that's even beyond that? Yeah. And also, how are we teaching that? You know, what you'll find in many countries, especially in Australia, we get the cyber security agencies or educators or even the Big Four consulting firms are the ones who are brought in to teach this stuff. I'm thinking, why don't we get taught by a hacker about cybersecurity? The ones who are actually breaking down the systems in the first place, the ones who are 10 years ahead of where most of these groups are? That for me is the the evolution of sort of the education space. So it's like multifaceted in that respect.

Matt 

How important is it for it to be everyone in the room understands it walking in, versus it's communicated to them in the moment in a way that everybody can understand. So do we walk in? Do we all have to walk into the room with a base understanding? How important is that versus Let's make sure that when we're talking about it, we're using? You know,

Paul Smith 

That's great question. I think, ideally, both. In the real world, it's how it's communicated. So they can put a lens over it, which stress tests it. I don't expect every director to be across every thing. It's just impossible. It's just too much going on now. There's a base level of understanding needs to be there. But that can be communicated in real time. Yeah. And I think that's the problem is often these very technical issues. There, those groups find it hard to communicate to the boardroom, what's going on, so the boardroom can actually do their job. So I think that's where there's a little bit of give and take, but this is the problem. Board members only have a certain amount of time. So what you might end up seeing is people being able to take on fewer roles. And then you're gonna have a shortfall. There's already a shortfall of quality board directors. And so it is. There's so many big mega trends that are coming out in terms of I'm already seeing people step away from board roles because they're tired, and they can't manage that many and they want to give up they're giving up the voluntary ones in the first place.

Matt 

Charity board members have to be volunteers in Australia?

Paul Smith 

No don't have to be it's a choice.

Matt 

Okay, they have to be here.

Paul Smith 

So you're not allowed to be paid here?

Matt 

No, not in a charity.

Paul Smith 

In Australia, you can be paid. But it comes down to the individual organization decide whether they want to do that. Generally, by and large, they're unpaid. I don't like the word volunteer. Because it feels like it's not a serious thing where it's just unpaid. Like, it's still a job to be a board director, when you say volunteer doesn't feel like it's a job. And I think, yeah, it's just something I've come to learn myself is I don't, the word volunteer, means I'm giving up my time to do something good. Whereas unpaid, I've got a job to do. I'm just not getting paid for it. It's just semantics, really.

Matt 

No, that's fair enough. So I,

Paul Smith 

it's interesting, I didn't know that that here. It's law. You can't be paid.

Matt 

In Ontario. It might be the case all across Canada. There's many, many other varieties of not for profits, where you're allowed to pay board members, like associations

Paul Smith 

It's just charities we're talking about

Matt 

So, the reason why I asked about this distinction between you know, everybody coming into the room with a baseline understanding versus communication of this stuff in a way that everyone can understand is exactly what you just described, which is we can't expect everybody to come into the room understanding enough about everything. But also, I'm, I have an increasing belief that governance education focuses too much on directors. I think it needs to focus more like the balance needs to shift towards senior executives. Partly because they influence board effectiveness more than the board does through because they control the flow of information. They control the content and style of the pre reads and presentations. They're the ones who make the conversation prompts at the end. The board has the authority to do whatever they want. But they're mostly going they're walking through the doors that senior executives open for them, mostly. And that's fine. Right? They've delegated the authority to senior management to run the organization. So that's, that's a natural, maybe not perfect balance. And I wonder if there might be a remarkable opportunity to maybe double the impact of governance, education, if it's more focused on senior executives.

Paul Smith 

On senior executives. I completely agree and actually by extension, you could say, owners, shareholders, members, you know, donors need to be educated, because they're the ones who are controlling often what the board are up

Matt 

They put people on the board.

Paul Smith 

Yeah. So if they actually had and, again, I use the word empathy here, if you're talking about all three of those main groups, right, senior management management board,

Matt 

We've over-invested in directors

Paul Smith 

Call it "shareholder" as a catch all of the money people, you know, donors, government, whatever. Those three groups all need to have empathy for each other. And under a really high level of governance. Because they're all governing. All three of those groups are governing one is board, you know, but and you think about enterprise governance, they're all involved in making decisions which impact the corporation

Matt 

I think the front lines are involved

Paul Smith 

Yeah. Oh, everybody. Yeah, I'm, uh, you know, if we're gonna go there, I think everybody should be not only involved in governance in some way...

Well they are whether they want to or not.

Paul Smith 

Well exactly, yeah. But there's there needs to be a level of understanding. And it's, it's not taught in schools. It's not taught in some schools do, but they talk about it as decision making, critical thinking. And I think that's the stuff which is great to be teaching. And I think that's where, for me, the opportunity sets is you're right, senior management, we definitely need to upskill them. And that happens a lot. Like a lot of people who go and do courses in Australia are actually from management.

Right but we're often teaching them. In my experience, maybe it's different in Australia. In Canada, the courses, I teach the one tiny little course that I know of in Canada that's intended to help senior executives be more effective when they're working with their boards.

Paul Smith 

Yeah, that's mostly what is taught.

Matt 

Oh, that's so you guys do that.

Paul Smith 

Yeah. Or, they'll go and do the company directors course

Paul Smith 

Which is, which is twofold reason for that: 1. them becoming a director, and 2. them working with a board, but it hasn't been. I think there's a gap there, is turning it around

Right which is different. They're learning to be a good director or learning the basics, right,

Matt 

Agreed!

Paul Smith 

Whereas it's like how do you work really well with your board? What are the board but equally, I think I don't think the board gets taught how to work really well with management.

Matt 

No, I agree. And part of the reason why this occurred to me to talk about was because I kind of feel like the important substance of this is not subject specific. Right? So it's not let's get the board as familiar as possible with cybersecurity. It's about and this the reason why those of you who know me know I'm obsessed with Thing Explainer, but I

Paul Smith 

You know, you showed me that I got a copy for my son, and which is really for me.

Matt 

And I gift it to CEOs all the time because I'm just gonna randomly open a page and it's... the page is,

Paul Smith 

This is the one this is the one just for my listeners, this is the book where they are only allowed to use a certain number of words, isn't it like how many words they've got?

Matt 

It's the it's the the, the top 1000 most common words in the English language

Paul Smith 

That's all they're allowed to use to, to explain things.

Matt 

I opened it to the to the weirdest page. So I'm going to switch to another random page. Yeah, so this is the first one. So I don't even need to describe it. But I show it to CEOs. And it's on the first page is like a blueprint style illustration of the International Space Station with a bunch of really accessible descriptions. Not just accessible, because it's using only the 1000 most common English words, but it's also fun. And it points out the interesting stuff. And

Paul Smith 

Let's clarify fun fun if you're an absolute nerd, like we are.

Matt 

No, come on. It's fun! Who doesn't want to understand the International Space Station a little bit better? And so and and because it's brief, it's one page or it's... right, it's just one page, and not a lot of text. Maybe 200 words, 300 words. And you come out of it and you're like, "Oh, I kind of understand what the International Space Station is for. I didn't need to learn any new words." And we can do this with a cybersecurity issue. Right? It's possible. Not necessarily in that style. This takes a remarkably specialized skill set to do that. But it is possible to communicate in a way that you can bring a lay audience into a subject to the extent where they can think critically about it and have a conversation and make suggestions and work together to come up with

Paul Smith 

Well it's not like they're being asked to change the technology around.

Matt 

Right!

Paul Smith 

You know, again, I think often we find we have to teach boards this level of technical knowledge, which A. will probably go over most of their heads, right, but doesn't help them do their job properly.

Matt 

And this is it. So I want to take exactly what we're talking about back to the this bigger question of education. Because this started... before we started recording here, we were talking about the flaws and so on of of director education and governance education. I think this is maybe the most important one, which is what evolves, is we're trying to put subject headlines that are relevant: cryptocurrency or you know, AI or whatever. And all those matter. That's fine. Tell stories about cryptocurrency and AI and cybersecurity and whatever, it's fine. But no matter how much you understand about that stuff, you're not, it doesn't make you a good director. And if it matters, and there can think of all kinds of reasons why it would, if it matters to have an expert on that stuff in the room, or maybe two great get those. They still need to be trained to be a good director. Right? Being an expert in a thing doesn't make you a good director. And I think where my problem is the lack of emphasis on what's the difference between someone who's doing the job, and someone who's doing it awesome. We the education programs that I'm familiar with focus too much on "you need to come into the room understanding everything." And too little on "how do we actually once we got people in the room who understand all that stuff, how do we be a good board?"

Paul Smith 

Yeah. Yeah. because it focuses on the individual as opposed to collective. Because if you think about a board, it's a whole, it's a collective unit making decisions together. Often what happens is you've got that one specialist in the room every diverts to so it's not a collective decision. It's the case of an individual session that everybody else ratifies because they go, "I don't understand."

Matt 

I have a hack for that, by the way, have I told you my hack?

Paul Smith 

No.

Matt 

Because one of the biggest problems with expertise is the more expertise you have in a technical area, the worse your forecasting gets related to that area of expertise. And this has been scientifically or experimentally proven in doctors and stock pickers and a bunch of different stuff. The most famous stat being a physician who's 100% confident in their diagnosis is wrong 40% of the time. So that's roughly random. But what you want is not it's not doesn't mean don't trust your doctor, it means you want a doctor who's got lower confidence, right? Because if this if they've 100% confidence in their diagnosis, that means get a second opinion. And because there's this weird relationship between confidence and forecasting accuracy, I've been trying to work with my clients and the courses that I work with to say, "look, that doesn't mean you don't want experts in the room, right? Just because they're bad forecasters doesn't mean they can't be good directors." But it means you're screwing up if you engaging them in a forecasting role, right? Because we can we all know now that they're going to suck at that. So engage them, instead of asking them the question, ask them what questions we should be talking about. "Hey, Paul, you're an expert in governance, what are the questions we need to be exploring?" Right? And that's gonna make you feel good. Because you're an expert. And you're engaging us it's not, there's no ego damage,

Paul Smith 

It just reverses. It just, instead of putting it on one person, you turn it into the one person educate, you know, educating or upskilling. Everybody else by asking them. Yeah, how,

Matt 

And engaging us in a conversation where even the people who don't know anything are able to contribute, because

Paul Smith 

It goes back to the whole critical thinking element, right? And then you've got these brains around the room who can engage that way. So then the question comes back down to how, what level of knowledge do they need to even be able to engage there? None?

Matt 

I don't know. Because I think the problem here is we can expand this. So maybe the better way to put it is if we have an organization with a set of complex operations, the people in the room have to be able to understand the nature of those operations. That's a pretty broad statement, right? They need to be able to when I when I describe the risks and opportunities facing this organization, you don't want people in the room to go, "Huh? I don't get it!" Right, you need people to actually be able to fundamentally understand what this is for. Beyond that, other than being able, because we've got financial oversight requirements, so people need to be able to confidently say, "Yeah, this looks pretty good to me when it comes to the finances." Other than that, you know, as long as you understand the "so what?" of the organization and what it does, I think there's a lot of leeway. Right? And you may need at any individual moment, you may need a specific domain expert in ABC.

Paul Smith 

But you often don't need them in the boardroom. And that's what committee structures can be used for. That's what advisory groups can be used for,

Matt 

Or consultants

Paul Smith 

Yeah whatever you want.

Matt 

But even if you did decide you wanted them on the board, you don't necessarily need them forever, and you don't need 10 of them.

Paul Smith 

Okay, so given, let's let's assume that is the case, then. How and what should we be educating our boards on?

Matt VO

Oh, yeah! How's that for a cliffhanger baby? Man, listening back to this conversation has been so fun for me. I love that Paul has such a strong drive to reshape corporate directors and such a powerful willingness to let go of convention. It's no wonder that once we get going, it's hard to stop us. Thanks for listening to Sound-Up Governance. As usual, please send me an email or voice memo to soundup@groundupgovernance.com if you have any objections or complaints or insights or ideas for future guests and episodes. See you next time.

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