Tag Archives: corporate governance

To the Edge of the Gap with Satya Nadella

It’s hard to believe that the people around Microsoft CEO Satya Nadella did not prepare him for a question about the pay gap at the Grace Hopper Celebration of Women in Computing conference, and even harder to believe that they would advise him to tell women to stop asking for a raise and place their “faith,” instead, in “karma.” Nadella must have gone off script, or lost his talking points on the way to Phoenix. He tried to backpedal on Twitter later in the day, but by then the damage was done.

There is a transcript of the mess here. Nadella starts by talking about the inefficiencies of “HR systems” and ends up endorsing a corporate caste system, in which karma determines station. He advises talented women that the arc of Microsoft universe is long, but bends toward justice: they should keep the faith, keep working and just keep quiet about the whole equal pay thing.

Today, he’s repented, in an email to Microsoft employees: “if you think you deserve a raise, just ask for it.” He’s also committed, he says, to closing the pay gap at Microsoft. The trouble is, telling women they should “just ask” for raises may indicate that the CEO has found a formula that will allow him to remove his foot from his mouth, but it isn’t going to solve the problem.

In fact, research by the organization Catalyst — which I’ve written about in another post — shows that while the system may reward men in roughly the way Nadella describes, giving them “the right raises as [they] go along,” it does not so reward women; and when women ask for raises, their requests go unmet. It’s hard to have faith in a system like that.

The whole incident brings me back, of course, to my ongoing interest in the power of asking, which is the power in question here.

“Just ask” sounds like permission; but permission does not necessarily entail power. What’s fascinating about the Catalyst research on what happens when women ask for raises is that it clearly shows that the power of asking is a power we have to confer on others: it’s the power we give the other to make claims (or demands) on us.

We confer that power when we recognize the other’s status as a second person, or — to put it another way — when we recognize in them an authority equal to our own.

Respect that authority, and we are mutually accountable to each other. Disrespect or disregard it, and we deny others the status of persons, make them instruments of our will or means to our ends. We dehumanize them, or fail to acknowledge them as fully human.

Of course, respect of this fundamental order is not something Nadella can institute at Microsoft by tweeting about “bias,” emailing his apologies or by executive fiat. But a good place to start the broader conversation about closing the pay gap (at Microsoft, in the tech industry or throughout the business world) might be to see it, and approach it and address it as a basic power gap that only true respect for persons can bridge.

A Fifth Note on the First CEO: The Postwar Fad

We don’t usually think of corporate boardrooms as places where fads start or take hold. But that’s probably the the best way to account for the adoption of the CEO title by American corporations in the postwar period. Or at least that’s the view urged in this 1999 paper by Allison and Potts, which a reader shared in a comment on my post about the postwar provenance of the term CEO: from the mid 1950s to the mid 1970s, the adoption of the Chief Executive Officer title spread, primarily through “board interlocks” — or through individuals serving on multiple corporate boards.

Allison and Potts present the title’s diffusion through corporate networks as a “no brainer,” “an innovation largely without consequence to adopters.” It was a case, they say, of “contact-only diffusion” or “diffusion with contagion,” in which no serious choices or business decisions had to be made; the title may have helped clarify the difference between President and Chairman, but for the companies Allison and Potts study there was no “non-trivial economic benefit or cost” involved. Companies adopted the title Chief Executive Officer largely because they were emulating other companies: “diffusion of the CEO title was strictly mimetic, a true fad.”

cumulativeCEO
Everybody was doing it. Container Corporation of America started the trend in the late 1940s: why, Allison and Potts don’t explain, but I hope to make some sense of that at some point in the future; it’s intriguing, to say the least, that the company led by Walter Paepcke — Aspen booster, patron of the arts, and promoter of big ideas — led the way. In 1955, CCA was the only one of the largest 200 industrial companies in the United States that had a Chief Executive Officer. By 1975, all but one of the bunch had adopted the title.

CEO Titles

The fad takes hold in four stages: an early period, from 1955-1961;1962-1965, when adoption rates climb dramatically; a late middle period, from 66-71; and a final period where we see adoption rates drop off, mainly due to the remaining number of small adopters.

Though Allison and Potts don’t distinguish the adoption of the Chief Executive Officer title from the use of the acronym CEO, it’s in that late middle period, which they call the “inflection point” of the fad, where we start to see the first traces of the acronym “CEO” in the Harvard Business Review and other business publications. Shareholder value theory makes its debut in 1970. By the time the fad has run its course, in 1976, Jensen and Meckling have published their theory of the firm: the CEO has been identified as the primary “agent” of the firm’s success. He has also begun to enjoy unprecedented political influence, social prestige and cultural celebrity. What began as a boardroom fad has produced a new icon of American power.

The Breach at Mount Polley Represents a Failure of Governance

The Imperial Metals Corporation’s Board of Directors claims “ultimate responsibility” for the company and its business operations, but we have yet to learn exactly how the Board will exercise responsibility after the Mount Polley disaster. It’s not even clear the Board is capable of responding to the spill with anything but the public displays of emotion and concern we’ve already seen, weak assurances that the disaster has been “stabilized” and vague promises to do better next time. None of that amounts to taking responsibility.

Deregulation, lax regulation and staffing cutbacks on the government side are being blamed for the breach of the tailings pond. There are charges of collusion: “The government isn’t inspecting the mines, and the mining companies know it,” says consultant and advocate Glenda Ferris. But the breach at Mount Polley also represents a failure of internal or corporate governance at Imperial Metals: the board does not appear qualified to deal with the risks the mining company’s operations actually entail.

The Mount Polley breach has shown just how big those risks are, and how extensive are the responsibilities they carry. Imperial’s operations have created an environmental catastrophe (in the words of Phil Owens, Professor at University of Northern British Columbia). The last assessment I saw reported that Imperial Metals has released over 10 million cubic meters of water and 4.5 million cubic meters of toxic waste into surrounding rivers and waterways. The sudden rush of toxic waters was so powerful it took down trees in its wake.

There are important human rights considerations here as well, now that Imperial has compromised access to clean water throughout the region for who knows how long. Reassurances from Imperial Metals president Brian Kynoch that the water “in our tailings” is “very close to drinking water quality” are an insult to the intelligence, and make a mockery of serious human rights claims.

It’s not a question whether the mining company is a “bad actor,” or whether it’s “unfair” to portray them that way, as British Columbia energy minister Bill Bennett complained earlier today. It‘s a question of competence: who’s seated at the boardroom table before anything like this happens, and whether they are able to meet the serious responsibilities that go along with running a mining operation.

No one on the Imperials Metal board has environmental or human rights credentials. The company’s sulfide mining operations — and those of any mining company — require people with both. They should have a boardroom seat as well as a real say in how business gets done and how to mitigate mining’s risks. Until then, talking about “ultimate responsibility” is just guff.

 

Where Are the Women in Mining?

Glencore remains the only FTSE 100 company that does not have a woman on its board of directors. At the shareholder’s meeting at the start of this week, Chairman Tony Hayward promised that the company would remedy the situation by year’s end; but some big institutional investors have grown impatient, and UK business secretary Vince Cable said “it is simply not credible that one company cannot find any suitable women.”

The problem is industry-wide. A 2013 report by Amanda van Dyke (of Palisade Capital and Chair of the organization Women in Mining) and Stephney Dallmann (of PwC) found that mining companies “have the lowest number of women on boards of any listed industry group in the world.”

Maybe that doesn’t come as a great surprise to those familiar with mining, but within the industry there are companies who seem to be doing more than bluffing or hoping the issue will go away. Most of those are high profile global players. Women’s numbers decline steadily as we move down the ranks to the so-called juniors; and the likelihood that women will have a board seat or participate in a board committee also varies by territory. (South Africa leads the pack: over 21% of the committee seats of listed South African mining companies are occupied by women.)

Canada boasts the highest number of listed mining companies, and the “large mining companies in Canada are much further down the road [than smaller firms] in terms of their understanding of the importance of the role women play on boards.” The top-tier Canadian companies with high market capitalization (and the increased visibility that comes with size) have nearly 14% of board directorships held by women, but among the bottom 400 of the world’s top 500 miners, Canada has “the lowest participation on board committees by women, at 5.9%.”

The authors acknowledge that many of these companies are at early stages of development and they have only a few board seats to fill; but if they expect to grow and mature (as they do), there is no time like the present to lead or at least follow the lead of the big league players. When the same men keep winning the game of musical chairs — and when they sit next to each other (as they do) not just on one board, but on several, and their affiliations stretch back over decades — the result is likely to be not just over-familiarity but insularity, both of which are likely to impair and impede judgment. Meetings become a day at the club; the boardroom becomes an echo chamber.

As van Dyke and Dallmann note in a 2014 follow up report, it’s misleading to say, as many mining company executives do when pressed, that the small number of women directors correlates in a meaningful way with the lack of women with mining-related degrees. Only 32% of men on boards of mining companies have an engineering degree. So “there is no shortage of women in the talent pool;” according to van Dyke and Dallmann, “there is simply a perception of a lack of available female talent.”

This blinkered view of reality has real-world consequences, for shareholders and stakeholders in the communities where the miners operate. Mining companies with women on their boards see performance improvements on a number of fronts, from financial to social and environmental performance. “Sustainability” — as measured by water use, Bloomberg ESG score, UN Global Compact participation, Community Spend, and CSR or Sustainability Committee — improves across the board. For example, average total water use by mining companies “decreases steadily with an increase of women” in director roles — though it’s not entirely clear to me why that should be so — and “the amount [mining] companies spend on community projects and initiatives increases with the number of women on the board.” The authors are careful not to urge any hasty conclusions, but after surveying the data they are compelled to suggest that “the security of a company’s social licence to operate may be improved by having women on the board.”

I would go one step further: it’s difficult to countenance a mining company asking for social license to operate even as it deliberately insulates itself from social reality.

Is Respect Really All That Simple?

Last week, John Ruggie addressed the UN Global Compact Leaders Summit, where a “new global architecture” for corporate sustainability was unveiled and celebrated. Ruggie started out by talking about the special challenges — the “problems without passports” — that the world’s “tightly-coupled” systems present, and the inadequacy of our “largely self-interested politics” to address them. This was not, however, the brief he’d been given, so he had to move on; and I hope he’ll have more to say on the topic in the future. Instead, Ruggie had been asked, he said, “to say a word about respect,” and — not surprisingly — he took the opportunity to talk about the UN Guiding Principles on Business and Human Rights, and how the framework helps companies meet their obligations to respect human rights.

I have been asked to say a word about respect, specifically about respecting human
rights. Its meaning is simple: treat people with dignity, be they workers, communities in which you operate, or other stakeholders. But while the meaning is simple, mere declarations of respect by business no longer suffice: companies must have systems in place to know and show that they respect rights. This is where the UN Guiding Principles on Business and Human Rights come in. [pdf.]

Fair enough, but I found myself pausing here, and wondering whether the meaning of “respect” is really so simple as Ruggie makes it out to be, or at least whether “treat people with dignity” is sufficient guidance.

I understand that Ruggie’s intention here is largely rhetorical: we all know what respect means, but we need more than fine words, declarations and definitions. We need practical and consistent ways of acknowledging, checking and demonstrating human rights commitments — “systems” like the UN Guiding Principles.

Still, there are good reasons to start unpacking — and challenging — this simple definition, if only to ward off misconceptions.

First, to say that “[to] respect” human rights means “[to] treat people with dignity” (and leave it at that) invites confusion, because it passes the semantic buck from respect to dignity. If we are to treat people “with dignity” — if that’s our definition of respect — then we had better have a good working definition of dignity to govern or temper our treatment of others.

Of course, the word “dignity” is a staple of human rights discourse, so we’ve got to make allowances for shorthand here. If we don’t — if we want to take the long route and spell things out — we will most likely find our way back to Kant’s moral theory. I’m not going to attempt a summary here except to say that for Kant, dignity imposes absolute and non-negotiable constraints on our treatment of other people. Our dignity derives from our moral stature as free, rational and autonomous agents — ends in ourselves — and cannot be discussed in terms of relative value (or usefulness, or any other relative terms). It must be respected: in other words, dignity imposes strict and inviolable limits, absolute constraints, on how we treat others and how others treat us.

Most obviously people may not be treated merely as means to our ends; and that caveat is especially important when it comes to business, where, for starters, people are valued and evaluated as priced labor or “talent,” in terms of services of they perform or as “human resources.” To respect the dignity of people — “be they workers, communities in which you operate, or other stakeholders” — is to recognize them as persons (or ends in themselves) and not just mere functions in an efficiency equation.

This is hasty pudding, but suffice it to say that in the Kantian idea of dignity there is the suggestion that respect follows from our recognition of others as persons: this is an idea suggested by the word “respect” itself, which comes from the Latin respicere, to look back, to give a second look. Every person deserves a second look — or I should say, demands it. Recognition is something we demand of others and others demand of us.

I like to put it this way: respect is always the first, and sometimes the only thing we ask of each other. How we respond to this demand will depend in all cases upon whether we understand that our dignity as persons makes us mutually accountable or answerable to each other in the first place. So before we can talk about how we “treat” others — before we jump, with Ruggie, to considerations of behavior — let’s take a couple of steps back, and make sure that when we talk about respect we are also talking about recognition as well as accountability.

Of course all of this may be implied in Ruggie’s definition, and I wonder if recognition and accountability are just other ways of saying that companies must “know and show” that they respect human rights. My concern is that when you gather business leaders at the UN and tell them that to respect human rights is to treat people with dignity, you may leave them with the mistaken impression that dignity is something they have the power to confer on others, rather than something that makes them answerable to others. Dignity is not something the mighty can grant or deny the meek, and respect is not another word for benevolent gestures companies might make toward communities, workers and other stakeholders. Where people stand, business must yield.

Is Every Conversation Illegal? A Follow-Up on Shareholder Engagement

In a comment on Jackson and Gilshan’s “Call on U.S. Independent Directors to Develop Shareholder Engagement Strategies” — which I discussed in a previous post — Robert A.G. Monks sounds pessimistic.

If I read him correctly, he doesn’t think we’ll ever manage to create “an open and trusting format” of the kind Jackson and Gilshan recommend, where shareholders may “discuss the full range of company business with a director.” Monks says that what’s “missing” from the American scene is precisely a “framework for effective shareholder dialogue,” but he thinks that will remain “only aspirational on our side of the Atlantic.” Why? because there are legal obstacles that make companies skittish: “Indeed, counsel for the board of a NYSE listed company has explained to me – patiently – why it would be illegal for an individual board member to meet with me to discuss company business.”

A longtime shareholder activist who has written about a range of corporate governance issues, Monks wields a great deal of authority on these topics, so I defer to his experience and hope to benefit from his insights. I can appreciate, too, how frustrating it must be to be told that the law — and what he calls “orthodoxy” — prevent discussion. But I hope he’s not recommending we resign ourselves to the status quo.

Understanding, respecting and obeying the law is one thing, hiding behind it another. It doesn’t sound as if the counsel at the NYSE-listed company was hiding or trying to put Monks off, but you can also easily imagine that companies might take refuge in the assertion that the law and orthodoxy just won’t allow them to meet with or engage shareholders.

As I said in my reply to Monks’s comment, it might be illegal for an individual shareholder to sit down and whisper about company business with an individual director, but that isn’t the only possible scenario. There are still good faith efforts to be made, on both sides. A circuit of small gatherings, thoughtfully planned and dedicated to a particular theme, could offer one model. Shareholder proxy resolutions offer another opportunity for conversation — among directors, shareholders and stakeholders — before the resolutions are submitted or come to a vote.

In many cases, the shared experience of the conversation will be just as important as, if not more important than the content.

So the point here is not to multiply examples, but to suggest (as Monks himself suggests at the end of his comment) that there is good work to do on this front. The challenge, as I see it, is to create meaningful opportunities for face to face conversation and communication — for ongoing, purposeful “engagement”; the basic aim is to defuse antagonism, allow people to make connections, or simply ensure that everybody is in possession of relevant facts.

That there are legal obstacles here is no reason to give up. To my way of thinking, it’s all the more reason to develop a framework that U.S. owners and directors can use.

Quakers vs. Bankers

Earth Quaker Action PNC Bank

This story from The Pittsburgh Post-Gazette could almost serve as a postscript to what I had to say yesterday about shareholder engagement and the value of face-to-face dialogue.

On Tuesday, PNC Bank Chairman and CEO James Rohr abruptly shut down the annual shareholders meeting at the August Wilson Center in Pittsburgh. He was still delivering his opening remarks when protesters from the Earth Quaker Action Team started calling out the names of individual board members and “asking them to state their position on mountaintop mining.” Rohr’s response? He called the protesters (who are, let’s not forget, PNC shareholders) “out of order, cut short his prepared remarks, played a brief video and adjourned the proceeding roughly 15 minutes after it began.”

appmttoprmvl

An image from the Google Earth Appalachian Mountain Top Removal Tour, created by Appalachian Voices.

According to Earth Quaker, PNC is “one of the nation’s two largest financiers of mountaintop coal mining,” and the Bank had met earlier demands to divest from companies doing mountaintop removal with equivocation, saying it “no longer financed companies with a majority of their business tied to the practice.” The bank failed to add — in a curious omission — that there are no companies with a majority of the business tied to the destructive practice.

George Lakey, one of the Earth Quaker Action members present at the meeting, describes on the Earth Quake Action blog why he and his fellow share-owning Quakers had “decided to break the rules”:

Twice before Earth Quaker Action Team members had gone to the annual shareholders meeting of PNC Bank and obeyed their rules, spoken out during the allotted time in the meeting, expressed our concern about PNC’s large role in mountaintop removal coal mining and the climate crisis. We’d supported people from Appalachia to be there, speaking to PNC’s board about the injury and death that stems from PNC’s choice to put profits first. We’d brought the eighty-year-old grandson of one of PNC’s founders to tell them an evil banking practice was not what his grandpa had in mind.

We even walked 200 miles across Pennsylvania, witnessing in PNC bank branches along the way, to lift up to Pennsylvanians the full reality of the “green bank” that “helps children grow up great.”

But to no avail. In fact, explained Amy Brimmer, director of Earth Quaker Action to the Gazette reporter, “executives have refused to meet with them.” Why the refusal? Instead of a quiet conversation with a group of Quakers (who are very good at quiet conversation!), Rohr had to contend with shouting and singing and (I would add) an ignominious end to his term as CEO. Lakey continues:

After each board member was addressed by name, we again sang from many parts of the room, “Which side are you on?”

James Rohr threw up his hands and declared the meeting adjourned. Ingrid Lakey began to sing “This little light of mine,” we joined in, and sang joyfully as we slowly left the room along with the other shareholders.

I’m not so sure everybody was singing along. A proposal by Boston Common Asset Management calling on the bank to recognize and report on its response to climate change went down in defeat at the meeting. It’s not as if the hippies were about to take over. The bank’s investments were not at risk. Rohr had nothing to fear, except, perhaps, the truth about PNC’s investments in Appalachian mining.

By Tuesday, it was already too late to remedy the situation. Let’s hope incoming CEO Bill Demchak and the PNC board take the opportunity to set this right.

Some Thoughts on Gilshan and Jackson’s Call for Face-to-Face Dialogue Between Independent Directors and Shareholders

To make this long post a little easier to navigate, I’ve divided it in two. The second part deals directly with the article by Gilshan and Jackson posted on the Harvard Law School Forum on Corporate Governance. The first part explains how I came to that article and provides some context. I could have published only the second part, but in the first part of this post I explore some ideas and make some connections that are important to me — maybe only to me. So I kept it.

1

The frustration of Rio Tinto shareholders meeting – which I blogged about here — had its source in what I described as a lack of serious engagement with shareholders, or at least certain shareholders, by the Rio Tinto board. Shareholders who brought a broad range of social, human rights and environmental issues to the board’s attention – and took pains to describe the business risks they posed – were met with polite indulgence, a touch of condescension and a deaf ear.

Looking back on the meeting, I wonder if the board would have treated these people differently if instead of bringing questions for the board they had put resolutions to their fellow Rio Tinto shareholders. Given how these resolutions usually go, I wonder, too, whether environmental and human rights resolutions would have really gotten a fair hearing, or a very warm reception, at the London gathering.

As it happened, Walsh and du Plessis stuck to what was clearly a question-taking strategy to make the board appear gracious and open: they thanked shareholders for traveling from all corners of the earth to address them, complimented people on how sincere and well-spoken they were, and they gave lip service to “respect.” To be fair, they hardly had time to get through all the questions (controversy follows Rio Tinto wherever it goes in the world), and there was no time for follow-up or the give and take these matters require. So they stonewalled where they could, punted where they had to, and got through it.

I’ve been trying to think about ways to make meetings like these better. It’s related to my interest in non-coercive dialogue and the way that language and power work, which I’ve written about a number of times (here,here and here, for instance) in connection with what I call the power of asking. It’s connected, too, with my love of the Upper Peninsula of Michigan, which developed in the course of working on my film, and my concern that the new mining boom there, if it is allowed to proceed unchecked, will spoil the UP and endanger life on Lake Superior. So I have some personal stakes here. But there’s also a side of the issue that goes far beyond my own interests, and is really about the healthy governance of institutions and about the possibility of institutional renewal.

Part of the trouble, as I see it, might be that the Annual General Meeting is the only chance these shareholders get to address the board directly and in person, face-to-face. They may have corresponded and met with company representatives, but it’s not every day that a representative of Mongolian herders or Keweenaw Bay Ojibwe or the NRDC can talk face-to-face with Jan du Plessis or Sam Walsh. The AGM provides that opportunity – or at least it brings everybody into the same hotel ballroom, stages the exchange and creates the illusion that a conversation of some sort took place. It’s a poor substitute for a real conversation – nothing that even remotely approaches a dialogue in which both parties feel heard and heeded; and I would be surprised if most shareholders would not like to see some other format emerge, one that allowed for richer, more continuous and deeper exchanges, or at least something a little more nuanced and intelligent than a question period followed by voting.

This is something both boards and shareholders need to remedy, not just so they can feel heard and listened to – which is not a trivial concern – but also so they can serve the long-term interests of the companies they direct and own. One way to make AGMs more successful might be to extend the conversation and create other opportunities for owners and directors to engage.

2

For Deborah Gilshan and Catherine Jackson, both of whom work on corporate governance issues from inside investment houses, it might even be time to rethink the entire shareholder communications process. Noting that in U.S. companies communication between shareholders and directors often runs “unilaterally through press statements and proxy disclosures rather than in face-to-face exchanges,” Gilshan and Jackson suggest a more “pro-active” approach. In a post that appeared today on the Harvard Law School Forum on Corporate Governance, Gilshan and Jackson “Call On U.S. Independent Directors to Develop Shareholder Engagement Strategies.” They advocate making “independent director meetings with shareholders… a routine part of a board’s approach to outreach with its shareholders.”

Engagement is a two way process and pro-active companies reach out to shareholders in addition to shareholders reaching out to companies. Voting, in itself, can be a blunt instrument and engagement is critical to enhance the voting process, to make it more meaningful and representative of the views of shareholders.

Ultimately, engagement between shareholders and independent directors increases the responsibilities on both parties. Directors are accountable to shareholders as their representatives in the boardroom, and dialogue between both parties is part of that framework of accountability. Engagement with shareholders should be embraced by independent directors as an opportunity to demonstrate their effectiveness and to create long term relationships with shareholders based on mutual respect and understanding.

Face-to-face meetings and conversations should be part of “an integrated approach in which governance matters are addressed as routinely as financial and operating results,” Gilshan and Jackson argue. Of course it will take “appropriate resources to support these activities,” but that’s probably a drop in the bucket, especially when you consider what the alternative — friction, fights, failure — already costs.

Gilshan and Jackson note that in many U.S. companies shareholder communications are delegated to management – which tends to see “investor relations” as an exercise in public relations — and many boards simply don’t respond to shareholder communications. It’s tempting to think that social media, mobile and the internet will continue to transform these activities, but that’s not going to bridge the communications gap. It starts with the board and owners recognizing that they have an important mutual responsibility to one another; and technology doesn’t relieve them of that responsibility. Sitting down together in the same place and talking together, person to person, without the mediation and interruptions of technology, may not resolve all your difficulties: you may not ultimately see eye to eye, but at least you will have looked one another in the eyes. Social proximity allows us to take measure of each other in ways technology – which relies on and creates distance – does not. I would like to think, along with Gilshan and Jackson, that “mutual respect and understanding” will necessarily come out of these meetings. But at the very least, you can meet someone in person just to know how far apart you really are. And I suppose that’s one kind of respect.

In the work I’ve done as a consultant and facilitator on these issues, I’ve learned that the real challenges come when you start to consider engagement “strategy.” One question that comes immediately to mind is how to ensure that independent directors are meeting with a broad spectrum of shareholders, and not just high profile activists, big investment houses, or institutional shareholders (like pension funds). This is especially important when it comes to social, environmental and human rights concerns, which may not necessarily be on the radar of bigger shareholders, but nevertheless represent (among other things) important business and reputational risks for any board to consider.

Then there is the question of keeping the dialogue honest. This is a huge subject, but I will confine myself to a single caveat. That has to do with attempts to “manage” the dialogue from the company’s side. As Gilshan and Jackson observe, “some independent directors are actively seeking input from their shareholders to pre-emptively manage situations, while others are interested in understanding shareholder views on certain matters.” But understanding is one thing; and managing is another. If the objective in meeting with shareholders is to manage their concerns rather than address or at least represent them to the board, then the director is doing everyone a disservice. Sure, meeting with shareholders and talking with them about their concerns will help defuse tensions and make confrontations at the AGM less likely, but the aim here ought to be understanding and above all a deep appreciation of the shareholder’s concerns.

Another question hangs over all of this, and over all opportunities for dialogue: the question of power. How can directors and shareholders meet on equal footing? In some cases this won’t be a problem. In others, it is the problem: the deck is stacked. It’s worth thinking about how face-to-face dialogues might alter that power dynamic. Equal footing can be very hard to achieve but there are a number of approaches that can be taken to ameliorate the situation — establishing a neutral place for the meeting, sharing personal stories, using the services of a facilitator, defining terms and boundaries in advance of the meeting – but these measures would have to mutually agreed upon; and it’s probably best if the rules of engagement for any dialogue are something both shareholders and the board create together, to the extent possible.

The quality of any face-to-face meeting, the quality of any dialogue, is going to come down to the commitments that both sides make and how well they uphold those commitments. Activists can easily demonize companies and boards, especially in high stakes situations; and boards can tire and be dismissive of shareholders who tell them what’s at stake: they seem disruptive (and they are, I would say, but in a positive way) and so removed from the real business at hand – mining, banking, or whatever the case may be. There’s the urge to put them off or direct them to people whose job it is to manage and handle them, through corporate social responsibility channels and community outreach programs. That’s just another way of delegating to management some of the director’s most serious responsibilities.

Rio Tinto and the Rhetoric of Respect – Notes from the 2013 AGM

“Your mining is not unproblematic.” That understatement nicely summed up the Rio Tinto Annual General Meeting held yesterday morning in London. But by the time a representative from the London Mining Network had uttered it near the end of the question period, Rio Tinto Chairman Jan du Plessis appeared to have stopped listening.

Up to that point it had been a lively and contentious meeting. Shareholders were miffed about the company’s blunders in Mozambique and the Alcan write off and confused by the executive compensation scheme. Some wanted to know why Tom Albanese wasn’t there to answer for the company’s troubles in 2012, when he was still CEO; another said it was time to stop scapegoating Albanese, and hold the board accountable: “every few years,” he said, we have “a resounding chaotic blunder…What has the board done?”

They were not the only ones to talk about blunders and bad decisions that put the company at risk. Activists, environmentalists and indigenous leaders who attended the meeting testified to the destructive effects of Rio Tinto’s large-scale industrial mining operations on the land, local communities, and traditional ways of life. These speakers all said they and the groups they represent would continue to oppose the company. In fact, their opposition is only growing; a couple even suggested that Rio Tinto could start cutting costs (a big priority for the mining giant right now) by abandoning or divesting from places where mining operations are not welcome. The message to shareholders was clear: protests, lawsuits and continued local opposition will put projects at risk, disrupt schedules and cost money.

Did the board get the message? Not likely. When an Alaskan Yupik elder spoke in opposition to the Pebble Mine project and urged the company to divest, Rio Tinto CEO Sam Walsh thanked him for his “sincerity” and both du Plessis and Walsh complimented the elder on how “articulate” he was. It was a patronizing gesture, a pat on the head, not serious engagement. There were some further comments shouted from the audience but du Plessis shut the discussion down and moved to the next question.

Du Plessis repeated a talking point about how much he respects those who had to travel long distances to attend the meeting, but (as I saw it) this was an effort to recover from a stumble. Only minutes earlier he had impatiently dismissed a question about the Eagle Mine – citing “shoddy environmental protections,” poor design work, “fraudulently issued permits,” and the fact that the mine desecrates ground sacred to the Keweenaw Bay Ojibwe — as “not particularly new.” He was having none of it.

There was lots of talk at the meeting about respect, and I’m afraid “respect” is becoming a word corporate boards use to deflect criticism and politely dismiss human rights, environmental and ethical issues. (Whether this is the unfortunate rhetorical fallout of the Ruggie Protect-Respect-Remedy human rights framework is a question for another day.)

For example, when asked what Rio Tinto has done to improve the lot of miners in South Africa, du Plessis responded that the company has developed “very healthy, respectful relationships not just with employees but with the community” in its South African operations. But what sorts of real commitments do those relationships entail? While the company is “not anti-union” –Walsh rejected that characterization — it nevertheless wants a free hand to “maintain direct contact with all our employees” for the sake of safety, efficiency, and (Walsh iced the cake with this) “value.”

One participant said that he couldn’t see how Rio Tinto reconciled its “corporate rhetoric” with its “actions on the ground.” At Oak Flat in Arizona, he went on to explain, Rio Tinto is trying to gain control of public lands sacred to the Apache. The reply was (again): “we will be respectful.” The company would like to “open up direct dialogue” on the Oak Flat project; the trouble is, dialogue can only be direct and truly respectful if the other party actually has an opportunity to be heard and – this is important — heeded.

Dialogue, community engagement, respect, responsibility – all these were floated at the meeting as remedies to the many problems communities face when Rio Tinto moves in. But what doesn’t get taken into account is that the company and these communities are not on equal footing. Nowhere near it. Rio Tinto has enormous influence and power, billions to invest, and – it should not be forgotten – shareholders who want a return on their investment.

So, during the question period, a woman representing Mongolian herders who will be displaced and deprived of water by Rio Tinto’s Oyu Tolgoi project spoke eloquently about a looming “catastrophe.” She had a soft voice that trembled a little as she spoke. Walsh listened, thanked her for traveling all that way to speak, and then replied that in Mongolia (as in Michigan and elsewhere) the company has “developed a participatory environmental water monitoring program.” If you see something, say something, I guess.

Never mind that she had just finished telling him about the threat of toxic leaks, environmental damage, pollution and river diversion. The IFC and “the people of Mongolia,” Walsh said, will hold Rio Tinto to account. He can’t really believe they will. The community of herders has little recourse and not even a fraction of the power Rio Tinto has; and Oyu Tolgoi, when completed, will account for 36 percent of Mongolia’s GDP. The scales are hopelessly tipped in Rio Tinto’s favor.

Maybe the question period of a shareholders meeting is not the place to have constructive dialogue on serious issues. Maybe those conversations have to happen after the meeting is over, or even behind closed doors. But if and when they do happen, will Rio Tinto really be listening?

Strategy’s Eclipse and the Big Chief

One of the more provocative business articles I’ve read lately appeared just last week, on forbes.com. It’s a piece by Steve Denning about the collapse of the consulting firm Monitor. The article has already generated thousands of comments and what its own author, in a follow-up post, calls a lot of “social media brouhaha”.

Most of the discussion so far focuses on Denning’s analysis of Monitor’s collapse. He traces the firm’s demise to Michael Porter’s flawed idea that “sustainable competitive advantage” could be gained in markets “by studying the numbers and the existing structure of the industry.” Monitor, in Denning’s view, was selling an “illusory product” that merely “supports and advances the pretensions of the C-suite.” Where Monitor’s approach to strategy failed was where it matters now more than ever: helping businesses connect with or “delight” customers, or innovate, or do things that customers (or, for that matter, society as a whole) want them to do.

Not everyone agrees with this analysis, of course, and Denning has been responding to criticism and comment on the Forbes site and on Twitter. I am more intrigued by what Monitor’s downfall might signify – whether it indicates that there are larger changes afoot.

Denning himself wonders if the firm’s collapse marks the end of an “era”. Several of his readers and Tweeters (including me) have suggested that pure strategy plays are simply no longer viable. But that observation only scratches the surface, I think. The downfall of Monitor may indicate something else as well – a larger change in the configuration of CEO or executive power within the enterprise, and the end of a certain idea or iconography of the CEO.

Denning approaches this very thought as he lays out his historical argument, which is basically the story of how Michael Porter got lucky and launched Monitor at precisely the right moment. When Monitor first appeared on the scene in 1979, writes Denning, a new era was dawning:

Pursuit of shareholder value (“the dumbest idea in the world”) was just getting going with a vengeance. The C-suite was starting to realize that they could cash in, big time. Along comes Michael Porter with a rain dance that justifies their cashing in. Porter arrived at just the right time. Hopefully that era is now coming to an end. People are starting to see the rain dance for what it is.

I would hasten to add that the dumbest idea in the world, the doctrine of shareholder value, helped usher in another very bad idea that is still very much with us — the idea of the “CEO” that started to take hold at roughly around the time that acronym first appeared on the scene, in the early 1970s. The CEO is largely an invention of that period.

I’ve taken up this theme in a few posts (here and here and here). A number of journalists and academics have addressed this same point, directly and indirectly. For Rakesh Khurana, the cultish construct of the CEO emerges out of the transition from managerial to investor capitalism. In response to the growing power of institutional investors (like pension funds, bank trusts, insurance firms, endowment funds, and money managers), boards had, by the 1980s, come to focus almost exclusively on the search for an outside celebrity CEO “savior” who would not only appease and appeal to newly-empowered institutional investors but also make a big splash in the newly-emergent American business press.

Needless to say, this further consolidated decision-making power at the top of the corporate hierarchy. At the same time, the newly powerful CEO had become a cultural icon of celebrity and success. We made a totem of corporate executive power.

If the mantra of investor capitalism was “shareholder value,” the central mystery of the new faith was the “agency” problem (as described in a now-canonical 1976 paper by Jensen and Meckling [pdf]). The interests of shareholders and managers were now to be “aligned.” Results have been mixed: a myopia set in, putting the “focus more on the short-term management of the share price,” writes Christopher Bennett on a Conference Board blog post, “and less on the long-term management of the business.”

In a Washington Post Op Ed, Michael Useem (who’s written the book on investor capitalism) takes it one step further. He connects the “unrelenting pressure of the equity market on company leaders to meet quarterly TSR expectations” with the offshoring of operations, “regardless of the impact on the domestic workforce.” Worse, it’s invited leaders to behave like sociopaths, or at least irresponsibly: “an incessant equity-market demand on company leaders to focus on their own advantage whatever the disadvantage for others” has made “fewer executives and directors…able to step forward to advocate what is required for a vibrant economy, not just what is required for their own prosperity.”

Shareholder value may have not have been the dumbest idea ever, as Denning would have it, but it was, at best, a Faustian bargain for American society. It was an important article of faith — and not just for the believers, but for society as a whole, during the period in which the celebrity CEO took on his (yes, usually his) unique features and cast, all the trappings of his office.

Strategy, especially Monitor’s brand of strategy, played a crucial role here. Denning refers us to a passage in Matthew Stewart’s The Management Myth:

Porter’s theory thus played to the image of the CEO as a kind of superior being. As Stewart notes, “For all the strategy pioneers, strategy achieves its most perfect embodiment in the person at the top of management: the CEO. Embedded in strategic planning are the assumptions, first, that strategy is a decision-making sport involving the selection of markets and products; second, that the decisions are responsible for all of the value creation of a firm (or at least the “excess profits,” in Porter’s model); and, third, that the decider is the CEO. Strategy, says Porter, speaking for all the strategists, is thus ‘the ultimate act of choice.’ ‘The chief strategist of an organization has to be the leader— the CEO.”

With the passing of Monitor, this concept of strategy may start to go by the board. And so, with any luck, will the idea of the CEO as the “superdecider” (Denning’s word) or super-anything. The rain dance is over, and we can now see the Big Chief as he really is.