TRANSCRIPT
Matt VO
Welcome back to Sound-Up Governance. I'm Matt Fullbrook. And as much as we all like to imagine that we're one of a kind, it turns out there's someone who's basically 99% the same as me when it comes to corporate governance stuff. His name is Paul Smith, and he calls himself a "boardroom futurist." Not coincidentally, he's also the founder of the Future Directors Institute, the purpose of which is, quote, "to create generations of board directors fit for their future, and the world's." In other words, like me, Paul wants to start a movement. The thing is, even though Paul and I have spent loads of virtual time together over the years, we'd never met face to face until December 2022. You see, he's based in Australia, and I'm in Toronto. So we took advantage of the fact that we were finally in the same place at the same time and settled into my office/man cave for some scotch and a long chat. This will be another two-parter with episode one starting now. Oh, and I should say that this conversation was completely extemporaneous...and not entirely fact checked. So although I can confidently say you'll learn something, you're also listening to two excited day drinking dudes. So, use your judgment.
Paul Smith
Are we just going to talk?
Matt
Yeah, I had a conversation this week with my good buddy Kev, who's just become the chair of the Ontario Securities Commission. And the whole point, and he ran the Toronto Stock Exchange, the whole point, not the whole point, I'm being an asshole.
Paul Smith
You're usually obnoxious.
Matt
Yes, I am obnoxious. I was being a bit of a jerk. So, part of the function of the stock exchange and the Securities Commission when it comes to governance is rules.
Paul Smith
Yeah
Matt
right?
Paul Smith
Yeah.
Matt
The way Kev put it, which I really liked, when it comes to the stock exchanges, especially is... Well, I'm using my words instead of his, we're basically a store. And so we've got to be responsible for the quality of our product. Cool. So I expected him to be really kind of all in on the idea of or the equivalency or close to it of governance and compliance. And he's like, "those aren't the same at all." I said, Okay, well,
Paul Smith
That's really good.
Matt
I mean, he's, he's my,
Paul Smith
You sparked up a little bit.
Matt
Yeah! So I said, I was like, okay, so I shared my definition of good governance. And his response was something along the lines of and I'll go back and listen to the tape something along the lines of, "doesn't everybody think it's that?" And I'm just like "no, dude!"
Matt VO
So I'm talking here about part of my conversation with Kev Cowan, which was covered in episodes 14 and 17 of Sound-Up Governance. Why are Paul and I laughing? It's not at Kev, of course. In fact, Paul and Kev and I are all in complete agreement. It's just Kev's surprise that other people have a different view of good governance than ours. In our respective travels, Paul and I, we've had the same experience: that most people think completely differently than us.
Matt
I wonder, and I know you don't spend a lot of time thinking about this, and neither do I. But I wonder if you can talk through it for a second. What, even conceivably, what role could the institutions play in actually helping with real good governance?
Paul Smith
That's a really good question. Because as you say that their focus, their focus is really on rule setting. And the rules after really vague and bland.
Matt
Or really specific and bland,
Paul Smith
Or really specific and bland. That's right. There's no middle ground. It's just one of the two. I got it's the same with the Corporations Act in Australia, similar here. It's like do what is you know, essentially do what is right without defining what is right and wrong. You know, I always distilled it down to don't fuck up. So I think standards setting. So instead of rules, which seems to be protecting the downside, I think standards in terms of upping everybody is the way to do it. But again, it comes down to anything else, you know, how do you create standards when there's no universal agreement around what that standard needs to be? Is it standards of behavior? Is this to ethical standards? I think this is really important. I think, you know, and I know you've got the stock exchange would have, which is really their rules around listing and you know, the sort of more structural rules and then you have the Securities Commission, which is in Australia is called ASIC it's the Australian Securities and Investments, something I can't remember, off top my head off top my head, everybody just call it ASIC. And that's really about much winding corporate rules, not just listing rules. So it's includes every company setup, whether it's a charitable company, or a private company or a listed company. So I think what we need to see more of is groups coming out with really high standards of governance of behavior of board directors, rather than just rules. And they feel like, you might think they're the same thing, but that they're, they're subtly different. And then you saw the ISO have come out with some new corporate governance standards. And there's a lot of focus on purpose and values, which is really encouraging to see. The ISO are getting involved in everything at the moment, you know, they're putting out standards left, right and center for new things. But what's really interesting is that they seem to be focused more... like beyond Europe, ISO doesn't really get looking a lot of time into Asia, North America tends to ignore ISO stuff. So yeah, that would be the starting point for me. Just changing and reviewing, like, acts as well. You know, I think a lot of these corporations acts are just way out of date
Matt
No, that's true. Okay, so let's,
Paul Smith
Is that where you had meant me to go?
Matt
No, I totally let me see if we can just spontaneously come up with something. So if there were going to be a standard that we would want, because the idea here is there's something that everyone is supposed to do. Right, so we're coming up with a not a one size fits all, necessarily, but we're coming up with something that applies to everyone. And, and is related to governance.
Paul Smith
So I think for me, these are, again, this is where it gets tricky, right? So we're talking about moral, ethical standards of behavior. Going back to the stakeholder stuff we were talking about off off beforehand, maybe we should just can't bring that up, again, is the exercise you do with people where you ask them to rank, you know, these 10 stakeholders,
Matt
This is the "to whom do owe a duty?" exercise that everyone who knows me knows, because I'm obsessed with it.
Paul Smith
But if I'm if this is going through my audience, which it will be, no one knows. So I might ask you to quickly review that,
Matt
Really briefly, I craft a list of 10 stakeholders, it might be generic, if it's for a generic audience, it might be somewhat more specific, if it's for an organization. And ideally, inside an organization, we've got board members and senior executives together, put them in blended groups, they take this list of 10 stakeholders, some of which are internal, like employees and senior management and the board, some of which are one circle outside of that, like shareholders and strategic partners and customers, that kind of thing. And some of which are way outside, like the environment. And I always put "myself" there as a director, too. And I asked them to go in the groups, they get 15 minutes to come to an agreement on the ranking of those stakeholders based on to whom as a director, you owe the greatest duty goes at the top and to whom, as a director you owe the least duty is at the bottom. And I give no further instruction than that.
Paul Smith
Yeah, you're not allowed to have any equal places. I'm losing my mic.
Matt
Here. I can fix it. Gotta do it without losing my scotch.
Paul Smith
It's good scotch as well. You don't wanna lose it. There we go. We're back. Yeah, really tough exercise, and no equals. And it has to be...
Matt
Yeah, it used to be that I would get people coming back with ties. And I just I've outlawed that. Ties means you're cheating.
Paul Smith
So if you've got no, we won't dwell on too much. You've got shareholders. Let's assume we're looking at privately owned business or public company listed companies. They've got owners or shareholders. You've got staff. You've got what other ones would you have regulators, society, environment, customers
Matt
I don't usually say "society." I'll say something more like community so it's tangible to them. And they can define it however they like.
Paul Smith
Customers or clients. Yeah. Really, really hard to define that. But you're saying that invariably they they put shareholders at the top? Because of the duty of the board?
Matt
Yeah, they'll say so if there's shareholders or equivalent, it might be members, for example. Shareholders goes one or two, and the organization on whose board you're sitting goes the other one of one or two in most cases.
Paul Smith
It's really interesting that as a stakeholder, you put your organization has a stakeholder which is fascinating,
Matt
Do you know where that comes from, I can tell you exactly where it comes from. There's so people like me. So people who educate boards and directors have taken the bizarre nature of the Canadian statute around the duties of directors. And because it's bizarre, and because it basically tells you, you have a duty to everybody, and there's no rule telling you how to prioritize them, that's been digested by lawyers into something that that they believe directors can understand, which is the expression, "as a director, your primary fiduciary duty is to the corporation." That's been articulated everywhere, for especially in Canada, and whenever I hear it, and I'm not trying to be too much of a jerk, although I'm trying to be a little bit of a jerk. Whenever I hear it, I say, "Cool. What does that mean?"
Paul Smith
Well it's all stakeholders we're talking about.
Matt
Well, we know that. Yeah. But when you've been told you have a primary fiduciary duty to the corporation, without context, how would you... If someone came to you and said, "what does that mean?" What would you say?
Paul Smith
Okay, so it's really hard for me to answer that in the context of what would I say when I know...
Matt
I'll tell you what people say, because it'll, and this is what I would say, if I didn't have context, either, I'd say, "Well, clearly, I have a duty to protect the long term success of the corporation."
Paul Smith
Yeah, usually it's called looking after the company in perpetuity. Right? Yeah. Decisions...
Matt
Which we both know, isn't the job of a board.
Paul Smith
No. Should be!
Matt
Well, okay. I'm gonna challenge you on that. Can you imagine a set of circumstances, simple or complex, where the right decision would be to kill the company?
Paul Smith
Let's bring Elon Musk into this conversation.
Matt
OK yeah right.
Paul Smith
Yes.
Matt
Same!
Paul Smith
Charities.
Matt
Great example!
Paul Smith
They're entire job is to, their entire mission statement really beyond what they're trying to do is to plan their own obsolescence.
Matt
Or it should be
Paul Smith
Yeah, it should be. Is it like, that's, I could go down that rabbit hole.
Matt
A computer in every classroom. Curing cancer. Whatever it is...
Paul Smith
Once it's done, yeah. Move on to the next problem.
Matt
Yeah, that's why visions are great. Right? Lets us know when we did it.
Paul Smith
It's always been my things like, what's the number overriding mission statement of every single charitable group is to basically go out of business, but from a positive perspective, not a negative perspective.
Matt
So we can imagine, and that's a really good example, but we could imagine any number of ways that it could be reasonable for a board to say, "You know what we're done. Now's the time." And I think that that's one piece, where we've trained it out of boards to imagine the counterfactual to the exist in perpetuity thing. I've started to try to argue that survival isn't the same as good governance.
Paul Smith
No, that's good point. It's a really good point.
Matt
And I don't I'm not saying that I, you know, I've cracked some code or something. But I do think that we, that all these expressions, maybe here's my point: expressions like "noses in fingers out," or like, "we have a primary fiduciary duty to the corporation," or whatever it is, these oversimplifying expressions are actually working against their own purpose. I see board of directors in boardrooms all the time weaponizing these phrases so that it closes down conversation and...
Paul Smith
It stops them having to actually fulfill their fiduciary duty by saying, you know, but it's noses in fingers out. I actually, so I've just come from this Capacity Canada thing, which is amazing. And I, I, you know, excuse my language shat all over "noses in fingers out," not itself, because in itself, there's nothing wrong with it, but it's so one dimensional. It basically just completely closes off the opportunity. So I like the phrase "zoom in and zoom out as necessary." You know, so because it completely changes the dynamic, because you might have an early stage board that needs to be a bit more zoomed in bit more operational. But then you've got a really mature I don't mean old, I just mean mature and sophisticated group that might have that, that really clear boundary and defining boundary where yes, it is noses in fingers out, but even that, in itself is just seems a bit archaic these days. It, I think should be fit for purpose, you know. So again, it's just it narrows the scope of a board. I don't know where we got where we're going, but we're going back to Corporations Act and stuff and we've...I got used to do the stakeholder mapping exercise know where were we going with that?
Matt
I was we originally talking about the role of institutions and you were talking about setting standards.
Paul Smith
Yes, that's right. Yeah. And what standards we want to do. So I want to go back to something else you mentioned, which is and it's probably very similar in Australia and most places around the world there was a legal case, which defined how boards needed to act.
Matt
We've got two famous ones here. Well, one much more famous than the other.
Matt VO
I went on here to not entirely accurately describe the Peoples v. Wise and BCE versus 1976 Debenture Holders cases that both influenced the current legal duties of directors in Canada. In the wake of those cases, the Canada Business Corporations Act says that quote, "when acting with a view to the best interests of the corporation, the directors and officers of the corporation may consider but are not limited to the following factors: A. the interests of shareholders, employees, retirees and pensioners, creditors, consumers and governments; B. the environment; and C. the long term interests of the corporation. Which brings us to the substance of this part of my discussion with Paul, which was:
Matt
And ultimately what they did about it was they didn't say, "Okay, you owe a duty to shareholders and debt holders," because they would have been obnoxious. But they said, "you have a duty to consider the interests of anyone who stands to be affected by corporate actions."
Paul Smith
And yet, so this is in that's a that's legal precedent now, and yet, that's not followed through.
Matt
Well, how can you when, so, the moment that a person becomes a director, and this applies to any incorporated entity in Canada, right, it's not just ones that have debt holders, or shareholders. And when you become a director, you get a manual, maybe, and maybe a little bit of training, and the training basically tells you, your job is that you owe duty to the corporation
Paul Smith
without defining the corporation
Matt
Without defining duty or corporation. And, and then they don't actually explain to you even if they did explain that they don't say this is what it means to do the job well.
Paul Smith
Welcome to our world.
Matt
Yeah. And I feel like I empathize.
Paul Smith
Totally.
Matt
And I wonder, and I actually, I won't name names because the it's it. Yeah... it would cause a stir in the closely knit Canadian governance community. But I remember when I was first approaching boards, and saying, "What's the point of a board?" Right? I don't do this as much anymore. But I would I would do a little like Word Cloud exercise where you get people like, tell me what the point of a board is.
Paul Smith
Yeah.
Matt
And this person I this to said, "You can't do that in boardrooms," I said, "I can't? What okay, what what am I doing wrong?" They said, "they already know that. It's, it's patronizing." And I just like, I mean, my experience so far has been that they don't know it. And it's not that they can't know it, it's that they've never been prompted to wonder about it. Right? And who would prompt them?
Paul Smith
It might be the phrasing, "what's the point of a board?" Because it comes across have? You know, does it have a point?
Matt
And I don't remember if I used those exact words
Paul Smith
I doubt you used those words. When we do our training, we, you know, we do the whole sort of crowdsourcing, "what does a board do?" Or like words associated the board, and people come out with accountability, governance, strategy, risk, you know, old white men often comes out like what words do you associate with the boardroom? It's similar sort of exercise, right? And you do it with.... And this is the interesting thing you do with a whole bunch of board members or aspiring board directors, and you come up with invariably with a whole bunch of the similar words. But what I find really interesting is the word "governance" sits in there as a word like It's like its own little category, amongst all the other things where as opposed to really what do they do? They govern. And in everything else within that is part of that.
Matt
I do this exact exercise you're describing, I still do this because I'm obsessed with definitions now. I do that with the term "corporate governance." And I did it today. I do it every almost every day. And today, one of the words that came up is...The question is, what "in one word, in one word what what are you thinking about when you think about corporate governance?" and someone put "governor." Okay, let's open our minds a little bit. Can we expand by one circle from...But then to be fair, I don't know about you. For me, if you had asked me up until five, six years ago, if you'd asked me, "What's corporate governance?" despite the fact that that was my area of study and expertise, and celebrity to a certain extent, I would have basically said, "well, corporate governance is the way that corporations are governed." It wasn't until I spent time figuring out what I thought it meant, and trying to articulate it in a sentence up until then, I wouldn't have been able to tell you,
Paul Smith
But if you do if we break that one down corporate governance is how corporate corporations are governed. All it does is just
Paul Smith
Yeah, right. It's nothing!
Paul Smith
It just breaks that two words into a larger sentence and saying nothing at all.
Matt
It's stupid. No, it's like it's self referential bullshit. The only
Paul Smith
It's like the book you mentioned earlier.
Matt
Yeah, yeah. Oh, yeah. Okay,
Paul Smith
we're gonna get there?
Matt
No we won't go there right now.
Paul Smith
Might piss off some people
Matt
No, no, no. That's gonna be out. So there's, we're talking about I, on one of my podcasts, Sound-Up Governance, there's an episode coming up where I'm doing like a reaction style thing to corporate governance material that's out there. And it's all so bad. It's partly because writing is hard. So I don't want to be too hard on people. But the fact is the most celebrated thinkers in this space, their definitions of corporate governance are awful. Their definitions of good governance are worse. And that's the material that's out there. If you go to Amazon and say "corporate governance book," that's what you're getting?
Paul Smith
Well, if you can decipher their words in the first place.
Matt
Yeah, "a system of a system for a system."
Paul Smith
Yeah, it's a reminds me of someone describing to me the Australian Association of Associations and want to how far can you go down that list is an association of associated of associations, and then someone was describing to me the, the Strategic Planning Society of Societies.
Paul Smith
There's all these wonderful, again, these wonderful little this groups, but that's what they were doing is like there's a system within a system within system but it wasn't. It was just, again, I'd prefer writing, especially business writing like that - corporate writing - which is in plain language. But I think a lot of these people are ex lawyers, and they don't know how to write like that.
Matt
Oh no.
Matt
It's partly that.
Paul Smith
And they also want to sound really clever.
Matt
It's partly that,
Paul Smith
And they probably are really clever.
Matt
It's maybe mostly that! The the other piece is that there's... so let's take corporate governance as a field of inquiry, science. I actually came across a paper, this is one of the ones I'm going to refer to because the one this was I call it a "palate cleanser," it was actually great. Because these these researchers, from a few different universities, this is a brand new paper 2022. It was a synthesis or an attempted synthesis of corporate governance science over the years. They analyzed 511 papers, and they decided that I'm exaggerating a little bit, but not not a lot, they decided that they could they could come up with nothing, because there was insufficient consistency of definition, and bad methodology. And so if that's them, synthesizing the entire history of corporate governance study... it's basically saying there's nothing there.
Paul Smith
Yeah. That sounds fair.
Matt
I think part of the problem and here's why I like my... the world of my definitions. Is that if we stopped trying to look for a connection between specific structures, or policies, or practices, or disclosure, or whatever, and financial performance - because those none of those things are actually going to link to each other, even the ones that the data suggests might link causally, if you take 10 steps back and say, "Okay, but how could those things be causally linked in the real world? Forget what the data says, How could it be that those two things are causally linked." It doesn't, it doesn't occur to the scientists to wonder that. Partly because we're trying to make connections between two things that are too far apart, trying to connect things from boardroom to financial performance and it's too far. There's too much noise in between. So if we take it out of the world of looking for the corporate governance ephemera that causes good performance, if we instead say, "Well, what if corporate governance is making decisions and good governance is good conditions for making decisions." There's a lot of really good science about that. Very deeply, experimentally driven, and also, even better, well-translated by smart people into stuff that anyone can read and understand and be inspired by. So that to me is a win, even if I'm wrong, at least we're talking about something that you can understand.
Paul Smith
Yeah. And easy to define, easy to measure.
Matt
Yeah.
Paul Smith
I think that's some of the conversations I've been having this week, whilst in Canada have been about measuring the effective, you know, if we talk about good governance as being, you know, good stewardship, effective decision making an creating the conditions for all of that, which you and I wholeheartedly agree on. Unsurprisingly. How do you measure that? That's some of the conversations I've been having. How do you measure the effectiveness of an individual director? How do you measure the effectiveness of a Board? How do you create the causal links between... We've asked it we've had this discussion beforehand as well, I think. I can't remember if we actually came to an agreement. How do you create the causal links between really good governance and performance optimization.
Matt
And what kind of performance?
Paul Smith
Yeah. And that's the thing, you have to define the performance of an organization. Again, if we're going back to the the Act that says, you know, you have to make decisions in the best interests of the company. And again, you might add in perpetuity or long term, is that financial sustainability? Is it the health of the workforce? And that's all changed. But if we just take it as the financial success, which again, how do you define financial success? They're still around? Or they're making huge profits, or the owners are getting huge returns? And that's the thing you can go down these little nth degree rabbit holes of defining, defining, defining and that's why it's really hard to
Matt
I don't know that I like this idea of trying to connect, governance and performance if governance is defined as or if good governance is about intentionally creating the conditions. And the reason why, in my first iteration of my definition, I put effective before decisions instead of effective before conditions. So now it's intentionally creating effective conditions for making decisions. It used to be intentionally creating conditions for effective decisions. And
Paul Smith
Because decisions are just decisions,
Matt
You don't you can't know what the result is going to be
Paul Smith
There's too much ambiguity, right?
Matt
You can't know if you knew there would be no decision to be made.
Paul Smith
Well, if we knew as well, there would be no point in the board.
Matt
Right.
Paul Smith
It could be one person.
Matt
we can control the process, we can control the conditions, we can't control the result, we can control how we react to the result. But I would argue that good governance can lead to killing the corporation by accident. It's possible. The same way that bad governance can lead to excellent financial performance.
Paul Smith
So why do we worry about it so much? It a law of averages here that, you know, good governance tends to be associated with good outcomes? You know, you can have the extremes where bad governance can lead to good outcomes? Or is it a case of the influence the board isn't as much as we'd like to think it is?
Matt
I think, let's I'm gonna, I'm gonna answer that don't have a perfect answer. I'm going to react to two parts of it. One is, it's not just about the result. So let's just really let's acknowledge at least or try to acknowledge that the thing that we're not only controlling for success, we're controlling for trying to create effective conditions. Right? So that's one piece. The other piece is anyone can accidentally make the right choice, right? And so that's why bad governance can sometimes lead to good decisions. But wouldn't we rather make a good decision through optimized conditions instead of a good decision by accident?
Paul Smith
And that's it, isn't it? That's, yeah, it comes down to the probability of it working out.
Matt
And we can never know what the counterfactual would be. We went
Paul Smith
You can't have a controlled experiment, can you? You can't have a shadow board. And you have two companies, you know that suddenly, we're getting into sort of multiverse situations
Matt
Exactly, where we might look at it and say, "well, that decision killed the company, you should have gone down path B". And we don't know path B might have killed us faster.
Paul Smith
Yeah. So effectively, what we might be saying is, there's almost no point in trying to measure anything like that.
Matt
I think we want to so the execution is separate from governance. Right execution involves making decisions. The decision part of execution, I still argue is governance, but getting stuff done is different. Right? And that's so there is a difference in my mind between governance and management. But governance and management are done by almost everybody. Right? If one part is doing stuff, one part is making decisions. The other part is doing stuff. Right? So doing stuff well still matters,
Paul Smith
Well, making decisions or still doing stuff.
Matt
Right. Okay. You're right.
Paul Smith
never the same thing. So I don't know want to split hairs.
Matt
You're right. But we still need people to do stuff well
Paul Smith
Yes. Can I just pause for a sec?
Matt
Sure.
Paul Smith
Need to go to the bathroom.
Matt
Yeah, yeah
Paul Smith
Excuse me, everyone
Matt
No sweat.
Matt VO
And with that restroom break, we'll pause until next time when we'll return with Paul Smith for a continuation of two excited day drinking dudes talking about corporate governance. Thanks, as always, for tuning into Sound-Up Governance. If you have any questions or complaints or ideas for future guests or episodes, please send an email or voice memo to soundup@groundupgovernance.com. See you next time.
Sound-Up Governance (ep18) - An Australian and a Canadian walk into a bar... (feat. Paul Smith)