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Leadership: leaving a positive legacy in the boardroom
To reach their full potential, Business School boards and executive teams should follow a five-point action plan, conducting a review that is based on the seven levers of effective boards, writes Sabine Dembkowski
Regulatory pressures, investor demands, innovative competitors and the array of internal and external disruptors challenge the traditional working styles of boards and top executive teams. The social and traditional media is better equipped than ever before to expose the failures and shortcomings of any business board.
In fact, a 2016 study by London Business School’s Leadership Institute concluded that ‘there are some pockets of good practice in the boardroom but, largely, boards have some way to go to reach their fullest potential’.
Another recent study, cited in an article for Harvard Business Review by McKinsey’s Global Managing Director, Dominic Barton, and Mark Wiseman, President and CEO of Canada’s largest pension fund, found that a mere 22% of directors believe their boards are ‘completely aware’ of how their firms create value. Only a sobering 16% claimed that their boards have a strong understanding of the dynamics of their firms’ industries.
These findings are in line with what we, as board advisers, see almost every day in our assignments and interactions with boards.
Clearly all the tick-box exercises created around governance, and the reports about good practice, have had little positive impact. It is surprising that pension funds and investors have not rung the alarm bells and demanded systematic development programmes for every board and top executive team.
The new normal
The context within which boards and top executive teams have to operate has changed. Board members are faced with enormous complexities, competing priorities and pressures. Simple one-dimensional mechanisms and responses do not do justice to the new-normal environment. It is easier to describe what an effective board and executive team looks like than to follow the path to get there.
Academics, governance experts and business consultants are quick to state that an effective board and top executive team needs to be flexible, high-performing and outward focused, and a fresh term for a governance theory is emerging in the academic literature: engagement theory (see box).
According to Naomi Chambers, Professor of Healthcare Management at Manchester Business School, University of Manchester, the emerging proposition is that boards need to embody a culture of high trust across the executive and non-executive divide, together with robust challenge and a tight grip on delivering results.
Since a one-size-fits-all blueprint for an effective board does not exist, any spreading of ‘best practice’ and box-ticking exercises can only be part of the answer.
For the creation of effective boards, plus executive teams that thrive in the ‘new-normal environment’, there needs to be a system that, on the one hand provides an evidence-based approach to ensure that boards are clear about levers that are known to make a board more effective, but also has the ability to unlock the potential of each individual, as well as the collective.
This system should combine a digital solution with fine human interaction, since time-consuming interview processes will hardly enthuse board members.
Five-point action plan for boards
The following five points form a framework for developing an effective board strategy:
1.Ensure that any board audit / board development is an integral part of the value-creation process. Anyone engaged in conducting a board audit and/or board development programmes must have an in-depth understanding of the value-creation plan of the organisation and integrate the insight into the audit / programme.
2.Provide for an evidence-based approach. A lot of data can be collected but it is only useful if it is the right data. In our analysis, we found that more often than not, board audits touch on issues/themes where there is no evidence whatsoever that could have an impact on effectiveness and value creation.
3.Ensure you provide management with real data. The members of executive boards are achievers and clever people in their own right. They want to succeed and develop, look good and develop their own careers. In our experience, they do engage if they see real hard data that provides them with genuine insight that is really relevant to their role.
4.Provide the management with a safe, neutral and confidential environment to reflect on the data collected and explore which actions would help them to strengthen their own position and that of the collective board, in relation to the value creation plan.
5. Establish a mechanism so that data can be collected on a continuous basis and the executive board can monitor progress.
Once you have ensured that this action plan is in place you need to identify the crucial levers of effective boards. Standard assessments of leadership competencies and psychometric tests may provide some useful insights, but all are insufficient for the creation of more effective boards and executive teams, and for understanding how you can have a greater impact in the boardroom and leave a positive legacy.
Our research shows that there are seven levers you can pull to create more effective boards and executive teams.
1. The composition of the board
It is crucial to understand how different areas of expertise and preferred role behaviours in a group setting complement each other and fit into the development cycle of the organisation, the strategic challenges of the organisation and the value creation plan.
2. The ability of the board to use the strength of its members
It is important that the individual members of the executive board understand their own strengths, how they are perceived, the collective strengths of the group and how all can be leveraged to implement and execute the value creation plan.
3. Clarity about roles and responsibilities
Ill-defined roles and grey areas of responsibility are the norm rather than the exception. Clarity and transparency of roles and responsibilities need to be in place.
4. Joint vision
A clear and common vision and orientation is pivotal. Transparency at the outset is vital.
5. Ability to resolve conflicts between the board and management
Effective executive boards and their members understand how to resolve conflicts between the board and the next management level.
6. The structure and organisation of the board’s work
The organisation of the executive board’s work depends critically on the board secretaries and the interplay of the chairman and CEO. Effective boards understand how to organise and structure their work.
7. Regular reviews and reflections about the board’s work
Regular time-outs, where board members can connect, leave the daily work behind and reflect on their work are crucial to success.
To conclude, if you are an executive who would like to make a mark and leave a strong positive legacy, you are well advised to follow the outlined five-point action plan, conducting a board and top executive team review that is based on the seven levers of effective boards. If you wish to establish a process for continuous improvement, apply the same audit questions and remember the real value does not lie in the data alone but the interaction with the data.
Dr Sabine Dembkowski is a Partner at Better Boards Limited.
Sabine is a management consultant and top executive coach working for and with DAX/FTSE10-listed companies, global corporate groups, private equity firms, leading consulting firms and mid-sized German businesses.
After studying business management in Cologne and completing a PhD in Bristol, Sabine worked as a management consultant in various leadership positions for AT Kearney and Monitor Company in London. Driven by a passion to get down to the ‘nuts and bolts’ and create real, long-lasting change in organisations, she set up two businesses: The Coaching Centre and Better Boards.
Further reading
Petersen, R. and Rollings, V. (2016): “Beyond Governance – How boards are changing in a diverse, digital world”, Leadership Institute, London Business School.
Barton, D. and Wiseman, M. (2015): “Where boards fall short”, Harvard Business Review, January – February.
Chambers, N. (2012): “Viewpoint – healthcare board governance”, Journal of Health Organisation and Management”, Vol. 26, No. 1, pp. 6-14.
Mastering mobile internet strategy in China
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Why the tortoise can beat the hare in investment strategy
The benefits of low-volatility investing outweigh those of high-risk stocks, argues Pim van Vliet, in an interview with David Woods-Hale
For generations, investors have believed that risk and return are inseparable. Just ask the huge banks who invested billions in sub-prime mortgages prior to 2008. But is it time we accepted the truth: this just isn’t the case anymore? Pim van Vliet, the founder and fund manager of the multi-billion-dollar Conservative Equity funds at Robeco, has set out to rewrite the rule book on investment strategy.
In his book, High Returns from Low Risk: A Remarkable Stock Market Paradox, van Vliet combines the latest research with stock market data going back to 1929 to prove that investing in low-risk stocks gives surprisingly high returns – significantly better than those generated by high-risk stocks.
The low-risk funds, in which van Vliet specialises, are based on academic research and provide investors with a stable source of income from the stock market.
He is a guest lecturer at several universities, the author of numerous financial publications and travels the world advocating low-volatility investing. Together with investment specialist Jan de Koning, van Vliet has presented his counter-intuitive story as a modern upbeat stock market equivalent of ‘the tortoise and the hare’. And he explains why investing in low-risk stocks works and will continue to work, even once more people become aware of the paradox.
But this theory flies in the face of traditional and accepted thought regarding classic investment theory – so how did he build a theory that goes against the grain?
‘High risk does not bring more return,’ he explains. ‘It’s a paradox and I want to get the message out there. Unfortunately, this is an inconvenient truth for the finance community and it’s puzzled me for half my life.
‘It’s because we define risk in the wrong way, but when I was able to reconcile the paradox and started to research and apply the knowledge I was accumulating, by managing low-risk funds for investors, we were able to generate high risk-adjusted returns by investing in low-risk stocks, which attracted billions of dollars
The concept of investing in low-risk stocks for high returns is a compelling argument, but at odds with the views of some economists. Van Vliet, outlines his own hypothesis as follows, explaining: ‘My investment hypothesis is evidence-based: any idea on investing should be validated by empirical data. Although this approach is common in the field of medicine, it’s not in the world of finance.’
He pauses, then adds: ‘In general – at a high level – the truth still holds: more risk will equate to more return. In the long run, stocks will earn higher returns than bonds for example. But if you dig a level deeper down, this idea fails within the stock market and also within the bond market. Lower-risk stocks provide higher returns than higher-risk stocks. The slow stock beats the fast stock. I explore this at length in my book.
‘Benchmarking provides an important explanation for this effect. If you have stocks with lower risk factors, you will be less affected by the stock market. Imagine a stock posting a fixed return of 10% per year. That stock has – in absolute terms – 0% risk. However, when adopting a relative perspective this low-risk stock would lag behind if the market is delivering a return of 40% in a year, or be well ahead of the market during a market loss of -20%. This 30% return gap – whether positive or negative – is perceived as relative risk. It is the misalignment of interest here that poses a problem, because the role of an investor is different to that of a money manager. A professional investor is paid to take risks with people’s money to generate return and if they are not taking these risks, they could be shunned. In other words: due to benchmarking low-risk stocks become unattractive.’
Van Vliet compares his investment hypothesis similar in idea to the fable of the tortoise and the hare in that ‘slow and steady’ often wins the race but there is a human nature lesson here as well as advice for financial strategy.
‘Most people want to bet on hares,’ he says. ‘In psychology, finance and literature it’s the moves in the market that generate the most attention and they drive up prices in stocks, which in turn makes the news. Tortoises are never in the news. Volatility makes headlines – this exacerbates a culture of short-termism and people who are bullish and want a quick buck.’
Van Vliet is quick to point there is fine line between ‘bullish’ and ‘reckless’ when it comes to investment and he worries that investors in general are too quick to ‘shun’ more defensive equity funds.
He elaborates: ‘For this reason, society is experiencing a collective sense of over-confidence [in that they want to invest in high-risk funds]. This is really good for people’s mental wellbeing but it’s bad for financial health.’
Tortoises, according to van Vliet, are stable companies and defensive funds that ‘never seem to go up’ in stock market terms. But, as the saying goes, at least, fortune favours the brave – and in van Vliet’s analysis, it’s those that invest in risky funds that view themselves as brave. He counters this assumption.
Re-defining bravery
‘Low-risk investors are brave,’ he asserts. ‘They are seen as conservative, but in reality they are not following the crowd. It’s like the character in The Pilgrim’s Progress, following a tough long road, but leading to a good end result.’
To capitalise on the low-risk anomaly, a long-term investment vision is required. The advantage of a low-volatility strategy is that the stocks involved will fall less than other stocks in a declining market. Once the market recovers, low-volatility stocks have less ground to make up to recover and start yielding positive returns again.
Citing the experiences of the world’s second-richest man as an example, van Vliet explains that Warren Buffett is inclined to take a long-term view when it comes to his investments. Instead of following the crowd, Buffett has built his career and success on seeking out undervalued investments. Although Buffett’s portfolio has lagged behind the market several times during his career, he has beaten the market average decisively over time.
For Buffett, average is doing what everybody else is doing; to rise above the average, you need to measure yourself by what he terms the ‘inner scorecard’ – judging yourself by your own standards and rather than the world’s.
A sustainable approach
But where do ethics fit into a low-risk investment strategy? Does van Vliet agree that a values-led, sustainable approach to investing is becoming more important in the current financial climate?
He explains: ‘Low-risk portfolios make for sustainable, long-term investments, but in terms of ethics, the key consideration is how we, as investors, take care of our clients’ money – perhaps by investing in green companies or more sustainable funds for that reason.
‘High-risk and low-risk investments have the same mechanisms. And low-risk investments drive up risky projects. I’m not saying that a degree of risk is not a good thing – but prudent decision making is more important.’
Does van Vliet therefore believe that would-be investors have to be finance experts to understand the intricacies of the market?
‘You can over-train for a marathon,’ he explains. ‘You need information about the markets and I’ve outlined this in my own work – but the secret to successful investment is wisdom [rather than market knowledge only]. For example, the latest “hare” in the market place is FinTech and investors are keen to invest here. The truth is that some of these FinTech organisations will win, but most will lose.’
He sums up by adding: ‘I think a good philosophy for investment is “some risk”. Putting this into the context of diet, a moderate amount of vitamins and salt is a good thing – but not taken to the extreme. There is no such thing as “no risk” as the risk spectrum is not linear. You have to create a bit of risk to generate value. If there is no risk, your investments will be negative. I believe the ideal investment choice, is what I call the “conservative middle”, which is a situation between very high and very low risk.
‘We often are attracted to the extremes, but ancient philosophers wisely pointed to the virtue in the middle. Too much risk hurts long-term wealth creation, but a moderate amount of stock market risk is good. There are more and more companies that live and work according to this prudent investment principle, from private equity firms to family businesses. This is the secret to sustainable investing.’
Dr Pim van Vliet is a Senior Portfolio Manager within the Quantitative Equities team of Robeco, an international asset manager with
a strong belief in sustainable investing, quantitative techniques and constant innovation. His primary responsibility is Robeco’s conservative equity strategies.
Van Vliet has published articles in the Journal of Banking and Finance, Management Science, the Journal of Portfolio Management and other academic journals, plus a book on the topic of low-volatility investing. He is a guest lecturer at several universities, advocating low-volatility investing at international seminars, and holds a PhD and
MSc (cum laude) in Financial and Business Economics from Erasmus University, Rotterdam.