One Minute Governance

224. Is benchmarking a sensible way to set CEO pay?

This season, every episode of OMG focuses on a question that directors really need to answer.

OMG is written, produced, narrated and scored by Matt Fullbrook.

 

TRANSCRIPT:

Question #22: Is benchmarking a sensible way to set CEO pay? If you haven’t listened to the previous episode about knowing whether your CEO is doing an awesome job or not, you might want to take a sec and do that. A very large proportion of organizations I meet, and probably 99% of listed companies in the Western world all set their CEO’s compensation amount and structure in large part based on comparisons to their peers, also known as “benchmarking”. This makes sense if you believe that the most important part of CEO compensation is to avoid having your CEO quit and leave for another organization that pays better. The thing is, we have no idea how low a CEO’s pay would have to go before they might quit. And if we combine that with the stuff from the previous episode about how hard it is to know whether a CEO is any good or not, then we’re left with an important question. The one that’s the subject of today’s episode. One of the main problems with basing CEO pay on benchmarking is that it causes CEO pay to increase rapidly from a starting point that was already unjustifiably high. But even if we don’t care too much about the amount, benchmarking also lets boards off the hook of thinking too hard about what truly effective compensation really looks like. I promise you the answer to that question is not “effective compensation for our CEO looks like whatever everyone else is doing.” So, is benchmarking really a sensible way to set CEO pay?

223. How do we really know if our CEO is doing an awesome job?

This season, every episode of OMG focuses on a question that directors really need to answer.

OMG is written, produced, narrated and scored by Matt Fullbrook.

 

TRANSCRIPT:

Question #21: How do we really know if our CEO is doing an awesome job? Did you know that there’s no evidence that the market for CEOs is efficient? An efficient market is one where supply and demand are basically equal. When a job market is efficient it means that both sides of a potential transaction have lots of information about each other and they are able to confidently assess the talent of the candidates, the appropriateness of the compensation, etc. We don’t have any of that for CEOs. There’s a great summary of this in Larcker and Tayan’s amazing paper Seven Gaping Holes in our Knowledge of Corporate Governance, which I’ve referenced a few times on this show. Anyway, since we have no objective way of knowing whether our CEO is the most qualified person for the job, or whether we’re paying them appropriately, it raises an even more urgent question of how good they might be at their job. You can’t just say, “well the company is really profitable and shareholders are happy, therefore the CEO must be amazing.” Why? Partly because to confidently prove that the CEO is the cause of that success would require you to get rid of the CEO and see what happens. Or to have a multiverse with an infinite number of different CEOs so you can compare them against each other. And how many stories can we think of where a CEO had great performance at the time, but once they were gone we realized that they’d done lots of damage in the process. But answering this question should start, in my opinion, with an open-ended and open-minded conversation about what doing an awesome job really means. In terms of actions AND results.

222. What *really* motivates our CEO?

This season, every episode of OMG focuses on a question that directors really need to answer.

OMG is written, produced, narrated and scored by Matt Fullbrook.

 

TRANSCRIPT:

Question #20:  What *really* motivates our CEO? If you have the patience to follow me on LinkedIn, you may have noticed me complaining loudly about executive compensation a couple of times in the past year. I think it’s totally broken, and nobody seems to have any interest in fixing it. The fact is, we have no idea what a CEO is actually worth to a firm and we have no idea how different compensation approaches and amounts cause CEOs to behave. And in the meantime, the obsession with benchmarking CEO pay against other CEOs is designed specifically to cause pay to go up forever, thus exacerbating the wealth gap…which we actually DO know is provably bad for everybody. And part of the reason why I find this so infuriating is that the core of the solution to these problems starts with a really simple question, which happens to be the subject of today’s episode. Let’s imagine that it turns out that our CEO likes money. Likes it A LOT! And that’s convenient, because we happen to be paying them in money and not, say, salamanders. So that’s great. Except what if there’s something that might motivate our CEO even more than money (or salamanders). What if it turns out that if we gave them Friday afternoons off they would jump out of bed every morning and work 10x harder, even if we paid them half as much money? Or what if they would literally give up EVERYTHING to dance the Macarena with Taylor Swift? We could craft some huge and ambitious 5-year operational goals and spend that time convincing Tay Tay to get to work on jumping and turning 90 degrees to her left. People are complicated, and so are their interests and motivations. What could you learn by exploring this question?

221. How, specifically, do our board evaluations make us better?

This season, every episode of OMG focuses on a question that directors really need to answer.

OMG is written, produced, narrated and scored by Matt Fullbrook.

 

TRANSCRIPT:

Question #19: How, specifically, do our board evaluations make us better? I’ve had the amazing privilege of working with many, many boards on board evaluations over the years. I would guess that the first one I ever worked on was 20-ish years ago and the most recent one was within the past couple of months. Most board evaluations take tonnes of time and money to conduct. They involve some combination of interviews and/or surveys and analysis and reporting and facilitation. If you’re really unlucky as a board, your board evaluation tells you that everything is perfect. It might feel good, but deep down you know you might be pretty good, but definitely not perfect. But even the lucky ones basically never get their money’s worth. Let me put it this way: a great board evaluation should make give you fuel to be tangibly better tomorrow than you were yesterday. Right? Otherwise, what’s the point? Hence today’s question: how do our evaluations make us better? When exploring this question, try to have high standards. As in, try not to settle for “well, we added one more item to consent agenda and that saved us 46 seconds at the last meeting!” And don’t confuse NEW behaviour with BETTER behaviour. Just because something might have changed doesn’t mean it has improved. My hope is that exploring this question will increase your expectations of your board evaluations overall, and of the consultants you hire to conduct them.

220. How do we hope to spend our time?

This season, every episode of OMG focuses on a question that directors really need to answer.

OMG is written, produced, narrated and scored by Matt Fullbrook.

 

TRANSCRIPT

Question #18: How do we hope to spend our time? Today and in general. Time scarcity is probably the thing that makes board work most complicated. I guess that’s kind of like saying that time scarcity is what makes life most complicated. Still, my point stands. One of the most remarkable things about my work with boards over the years is how similarly different boards tend to spend their time. This is especially true considering that boards really have tonnes of control over what they do and how they do it. Boards could choose to spend an entire year composing a rock opera about a tarantula and an aardvark who become best friends and travel the world, as long as they do the bare minimum of compliance. It wouldn’t be a particularly smart or savvy way to approach their work, but still…it’s up to them. And that’s really my point: if boards can basically do whatever they want with their time, why do they mostly all do the same things? And funny enough, the pile of standard board stuff seems to expand to fill exactly as much time as we have allocated for meetings – or maybe a bit more, but never less. This means boards have a convenient excuse not to try anything new: we don’t have time! But what if we permitted ourselves one conversation – maybe during a strategic retreat so as not to intrude on precious board meeting time – where we pretended that none of what we tend to spend our time on were mandatory. What WOULD we spend our time on. What topics, what conversations, what presentations, what meals and breaks, how much time on which things? Maybe we could take one tiny step toward that dream at every meeting.

219. What information do we hope to receive?

This season, every episode of OMG focuses on a question that directors really need to answer.

OMG is written, produced, narrated and scored by Matt Fullbrook.

 

TRANSCRIPT

Question #17: What information do we hope to receive? Building on the last episode about what conversations we hope to have, it’s hard to have a useful conversation without useful information. Now think about all the things that go into making information useful. When it comes to boards, we put a lot of energy into making sure the information we get is comprehensive, relevant and clear. All of that helps a lot. But the challenge of informing a board is obviously waaay more complicated than that. You’ve got a group of people who are guaranteed to have different personalities, preferences and lifestyles. In other words, if they could all design their own ideal pre-reads, each of them would want something different. Now layer on top of that the fact that most boards are made up of people with different skills and technical expertise, so they’d all want and need different levels of explanation and complexity or simplicity for different topics. Given all that, it’s probably impossible to hit the bullseye. But information doesn’t have to come as pre-READS, right? Sometimes using various media to convey information is like a hack to unlock the needs of different people in the room. It’s why most books now come in physical, digital and audio formats. And if you add video, images and illustrations, tables and graphs to the mix. Heck, I bet someone out there could even imagine how to inform boards through taste and smell. So ask yourselves, what information do we hope to receive, and when and how much and what medium, and every other question that might help.

218. What conversations do we hope to have at the next board meeting?

This season, every episode of OMG focuses on a question that directors really need to answer.

OMG is written, produced, narrated and scored by Matt Fullbrook.

 

TRANSCRIPT

Question #16: What conversations do we hope to have at the next board meeting? We tend to have really careful and smart plans for board meetings. Even organizations that lean more to the informal or experimental still usually have predictable and well-structured board meeting agendas and objectives. How well we adhere to the plans is another story. It’s hard to predict how long each presentation and conversation will *actually* take. And it’s way more common for things to take longer than expected rather than going home an hour early. Either way, we plan topics, we assign speakers, we might even clearly identify certain things as being information-only, or topics for discussion (but not decision), or decision items or educational or whatever. All that clarity helps to keep us focused and informed and useful. But it misses a potentially important element: what exactly do we want to talk about? How do we want that discussion to feel and flow? Whose perspectives do we really need to take into consideration? How do we plan to ensure that we receive those perspectives? When do we want the conversation to happen, and – most importantly – what’s the actual point? As in, when the conversation is over, what do we hope we will have accomplished? After all, if this is well-defined then it becomes way easier to, for example, put a time limit on it and expect to stick to that time limit. More importantly, it increases the probability that the meeting will be useful to everyone involved.

 

217. What do we actually know about AI?

This season, every episode of OMG focuses on a question that directors really need to answer.

OMG is written, produced, narrated and scored by Matt Fullbrook.

 

TRANSCRIPT

Question #15: What do we actually know about AI? Let me be clear: this question is not the same as “have we all used ChatGPT?” It’s also not “Do we know how to provide useful prompts to chatGPT?” Or anything directly about ChatGPT or its competitors at all. At least not necessarily. Instead, the substance of this question is “what do we know about how AI works, how it could work, about its potential applications, and what might it take to deploy those applications?” There’s a reason why people who really do understand AI are hugely divided when it comes to how dangerous it’s likely to be, how disruptive it will be and to whom and when. They don’t agree on what applications of AI will most improve or harm people’s lives. So, let’s not pretend that your board is gonna solve all that. But still, even ChatGPT and other large language models are already better and faster certain useful tasks than people who’ve spent their lives getting good at doing those same tasks. We can get more than passable essays, emails, images, songs, speeches, etc. in seconds basically for free. AI is also really good at pattern-based learning that lets it do cool stuff like reviewing medical imaging even better than people. Better, even, than pigeons, who are also better than people at reviewing medical imaging. True story! But none of that is about how AI works, or how it could work, or how it might be useful to you or your company or its customers. Your board may not easily find the answers to any of those questions at first. Some of them might have no real answers other than what you gain through trial and error, or experimentation. But let’s get back to the actual question at hand: What do we actually know about AI? The answer might be “nothing at all!” Even that’s a better starting point than not talking about it. But get moving!

216. When was the last time we asked management how we might do a better job? (Question #14)

This season, every episode of OMG focuses on a question that directors really need to answer.

OMG is written, produced, narrated and scored by Matt Fullbrook.

 

TRANSCRIPT:

Question #14: When was the last time we asked management how we might do a better job? There are some really useful and normal things that boards do to make sure they’re doing a good job. For instance, most chairs build constructive relationships with CEOs and keep a regular dialogue going about how things are going. Most boards also do some form of board evaluation – formal or otherwise – to highlight problems and opportunities for improvement. The intent of this episode’s question isn’t to undermine the value of those endeavours. They’re obviously good and important things to do. But the question remains. When was the last time WE asked management how we might do a better job? As in, demonstrating a collective interest in learning from management – also collectively – how we might serve them better. In a way, I’m just trying to reiterate the substance of the previous two episodes in a new way. Suppose, for example, the board – while in camera or in executive session or whatever – agrees that the chair will request that the CEO gather feedback from their team based on a few questions. Questions like: “what are some things the board could do before or during or after board meetings that you would find really helpful?” Or, “what’s something that tends to happen before or during or after board meetings that you find really unhelpful?” You could even ask for feedback on specific behaviours or processes if you like. Most importantly, you must be prepared to respond to their feedback – either by actually doing a better job, or by clearly explaining why you think things are better they way they are.

215. To what extent does the stuff we do get in management's way? (Question #13)

This season, every episode of OMG focuses on a question that directors really need to answer.

OMG is written, produced, narrated and scored by Matt Fullbrook.

 

TRANSCRIPT:

Question #13: To what extent does the stuff we do get in management’s way? Most of us have had a boss at some point in our lives. More than that, most of us have had the pleasure of working for a great boss, and also the pain of working for an awful boss. When I think of awful bosses, I think of people who get in the way of you doing a great job. I think of people who pile you with work that distracts you from the things that really need to get done. I think of people who lack curiosity about what might make you feel excited to show up to work. I think of people who sorta feel like they’re cosplaying as what they think bosses are supposed to be without worrying too much about whether they’re doing anything useful or harmful. They’re not necessarily hostile or cruel…just not invested in making sure their employees have the conditions they need to thrive. Instead, they’re invested making sure they feel like they’re ticked a bunch of “boss-ish” boxes and can say, “good for me! I bossed like a boss today!”  Now, imagine a bad boss that’s actually a whole bunch of bad bosses smooshed together, like a board. I meet boards sometimes who believe that, because they’re the boss, it means they don’t have to serve or support the CEO. But that’s a misunderstanding of any authoritative role. Take stock of the stuff that you do as a board, and the burden it places on management. Some of that burden is essential and value-added. But, I bet some of the burden is optional and value-neutral or worse. And it takes management’s attention and time away from doing things that might make your organization better.

214. To what extent does the stuff we do help management? (Question #12)

This season, every episode of OMG focuses on a question that directors really need to answer.

OMG is written, produced, narrated and scored by Matt Fullbrook.

 

TRANSCRIPT:

Question #12: To what extent does the stuff we do help management? One of the unspoken themes of this season of OMG is that there are lots of things about boards that we tend to take for granted. Well, I’m here to say out loud that it’s not granted that boards do stuff that’s useful to management. It’s a fair assumption that boards, in general, really want to be useful to management. It’s also true, however, that boards feel a lot of pressure to spend time and energy on compliance, ask some probing questions and then basically call it a day. “Matt,” you might say, “compliance and probing questions ARE helpful to management!” And sure, that’s technically true. Being non-compliant is bad. Not being questioned can be bad, too, especially because questions can reveal persistent blind spots or validate our assumptions. Both good! But what if boards asked themselves what they might start doing or stop doing that could make the lives of senior executives better? And I’m not talking about a compensation increase. I’m talking about increasing the probability that executives might leave board and committee meetings with new ideas, new momentum, and feeling like they have the support to do an awesome job. Yes, obviously this is a bit of a tall order. But it’s not impossible! And while thinking about this question, if the only answer your board can come up with is some version of butt-covering, then I’m here to argue that you’ve got a big opportunity to do better.

 

213. Why is our boardroom laid out the way it is? (Question #11)

This season, every episode of OMG focuses on a question that directors really need to answer.

OMG is written, produced, narrated and scored by Matt Fullbrook.

 

TRANSCRIPT:

Question #11: Why is our boardroom laid out the way it is? This question was basically at the beginning of the origin story of my current definition of good governance – the one about intentionally cultivating effective conditions. At the time, I had been in somewhere between 200 and 300 boardrooms and it struck me one day that every single one of them was functionally identical. And because of that I’m highly confident that *your* boardroom is functionally identical to essentially all other boardrooms. But why? Seriously! Why is your boardroom laid out the way it is? Here’s another way to think through it. What are the things you hope will happen in your boardroom? What are the behaviours you hope to experience and observe? What are the feelings you hope people will feel? What conversations do you hope will happen? If you could start with a blank slate, what elements would you include and how? From the type and style of furniture to the use of technology to the lighting and windows and everything else. Every time I’ve had this conversation with an organization, the dream layout bears little resemblance to a typical boardroom. I’m not advising you throw out your board table and start from scratch – at least not if you don’t want to. But if the layout of the room isn’t ideal for the stuff you hope to happen in the room, then you might want to cultivate other conditions to compensate.

212. What existential threats might the business face? (Question #10)

This season, every episode of OMG focuses on a question that directors really need to answer.

OMG is written, produced, narrated and scored by Matt Fullbrook.

 

TRANSCRIPT:

Question #10: What existential threats might the business face? Considering how obsessed I am with corporate governance, it’s a bit strange how little I focus on risk, huh? I’m about as far as possible from being a technical expert in risk – like an actuary or whatever – but still, I’m not going to try to deny the relationship between risk and governance. I mean, we obviously don’t have effective conditions for making a decision if we lack awareness of the stuff that might go wrong and the probability that those things might happen. In a way, today’s question is an element of question 9 from the last episode. In other words, we don’t really have a deep understanding of the business if we don’t understand the stuff that could, y’know, kill the business. Let me be clear, there is no way to know everything. We like to judge leaders in hindsight for not predicting the unpredictable. We similarly like to put leaders on a pedestal for being super frickin lucky. So, I’m not talking about doing the impossible. I’m just talking about investing in the study of the potential fatal flaws of our business model, structure, competitive positioning, physical or geographical positioning, etc. What is it about what we do, how we do it, who is doing it, and where we do it that might leave us vulnerable to a killshot. Work hard at this question. Poke and prod every potential flaw, and even every area of apparent strength – even just to prove that it is indeed as strong as you thought. Every company has vulnerabilities. When you identify one, it raises more questions like, “what might it take to shore up our defenses, and is it worth it?” Because you may just choose to leave the flaws as is. But it should be a choice! And having that choice starts with asking the question.

211. To what extent does every director really understand the business? (Question #9)

This season, every episode of OMG focuses on a question that directors really need to answer.

OMG is written, produced, narrated and scored by Matt Fullbrook.

 

TRANSCRIPT:

Question #9: To what extent does every director really understand the business? I’ve been pretty outspoken over the years about my thoughts on board composition. In general, I think boards tend not to be sufficiently open-minded about who “belongs” on boards – I hope you could hear the air quotes there. There’s basically no evidence or consensus that suggests *any* specific type of experience or expertise, or any type of personality or any demographic characteristics might be associated with business performance. This is part of the reason why I prefer to think about governance as being in the world of decision-making, a realm where there *is* plenty of decisive science to help us to understand how we might mess up and what we can do about it. Still, boards fundamentally exist to run corporations, and even if they choose to hire managers and other employees to do the operational work it doesn’t change the fact that boards are responsible for literally everything that happens in an incorporated entity. So, no matter your experience or skillset or personality. No matter who appointed or elected you to the board. No matter what other valuable things you might be bringing to the table, if you don’t understand how the business of the corporation works it’s going to be *really* difficult to be useful as a director. Where does the corporation get money from. Why do its customers or funders choose to give it money? How does the corporation spend money, and why? What are the nuances of its structure, and why are they the way they are? What is the competitive landscape? What does the balance sheet look like and why? Why does the corporation do the things it does and not do the things it doesn’t do? What might kill it? I know this is a podcast episode about one question: “to what extent does every director understand the business?”, but an infinite number of other questions live inside it. Collectively, you should be striving for the answer to this episode’s question to be “to a super frickin great extent, thank you very much.”

210. What do we even mean when we talk about "duty?" (Question #8)

This season, every episode of OMG focuses on a question that directors really need to answer.

OMG is written, produced, narrated and scored by Matt Fullbrook.

 

TRANSCRIPT:

Question #8: What do we even mean when we talk about “duty?” As in how the word “duty” applies to the work of the board and directors. In the previous episode, I suggested in passing that you might want to ask this question, and now I’m making it a bit more explicit. I can say with reasonable confidence – from my experience, at least – that directors and executives refer frequently to a board’s duties without taking a moment to make sure everyone knows what they’re talking about. Fiduciary duty? Moral duty? Ethical duty? Regulatory compliance? And even once you get that part clear, there’s no guarantee that you agree on what your duties are, or even that your own understanding is rooted in fact. Let me give an example. Here in Canada, if you ask “to whom do you owe your primary fiduciary duty?” most directors will confidently answer “to the corporation.” This is a technically correct, but altogether incomplete answer. Many of the directors who provide this answer are unable to confidently answer the simple follow-up question: “OK, what does it mean to have a duty to the corporation?” The legal answer to this question is simultaneously specific and complex. I won’t give away the punchline, because in addition to being specific and complex, it’s also boring and not useful outside of Canada. In any case, I hope my point is clear. If you’re going to bring up board and director duties, take a second to make sure that everyone knows what you’re talking about, and try to make sure that you, yourself, can explain exactly what discharging those duties might entail. Duty is a loaded word. Let’s make sure we’re walking the walk.