We’re proud to have been able to publish excerpts from SAMI Associate Garry Honey’s new book, “Navigating Uncertainty” over recent weeks. Navigating Uncertainty is designed for leadership teams to understand, get comfortable with, and mitigate business risk – and is equally applicable, whichever type of organisation you lead. This week is our last excerpt and is taken from the book's conclusion.
Directors on the board collectively make decisions that affect the future of the organisation, they do this with incomplete information and inevitably a degree of uncertainty. There is an overwhelming fear of making a bad call that damages the value of the firm or organisation. I call this Fear-of-Getting-It-Wrong or FOGIW. After thirty years of an evolving code of corporate governance there are still areas of judgement where boards can and do get it wrong.
Research into toxic corporate culture shows that the incentive system for rewarding performance is a core determinant. If you reward the highest sales or fee earners you end up with a culture focused on sales and profit to the exclusion of almost everything else. Despite increasing regulation there is still no suitable replacement incentive system and many organisations still cling to the Friedman belief that the main aim of a business is to reward shareholders. This brings them into conflict with ESG demands to consider responsibility to a wider range of stakeholders where performance metrics are not always financial.
There is already a backlash against ESG in some countries where it is seen as a political overlay on a commercial system. The Sustainable Development Goals set out by the United Nations to some eyes have an idealistic slant towards socialist thinking at odds with pure capitalism, much as Friedman said in 1960. A commercial organisation will always seek efficiency in cheaper resources, especially labour.
Boards often struggle to implement an ESG policy fully compliant with what institutional investors demand, or at least the expectations of fund managers who compile sustainable funds. It is not always possible to tick the boxes for all three Environment, Society and Governance attributes as the list is exhaustive and at times more philanthropic than commercial.
A major food retailer in the UK was a leader in environmental attributes through climate consciousness: recycled packaging, waste management, and customer focus. The board were proud of their market lead in this area, but surprised when they were not included in any sustainable funds. It transpired that female staff in stores were paid lower rates than their male equivalents and this was a red flag to fund managers looking at the Societal section of ESG compliance.
The checklist for ESG has grown to such an extent that any business forced to examine the sustainability of its supply chain will find that at some point it is exploiting a resource that either damages the environment or in some way threatens one of the 17 SDGs drawn up by the United Nations. It is arguable that ESG is an attempt to remind any business of its ultimate value to society, yet most businesses were created to deliver profit and address shareholder primacy.
The Friedman v Fink debate about purpose is one that most boards must face and come to a decision. In the absence of any effective alternative performance measurement, money and profit is what determines success of failure. It also determines CEO remuneration as the leader of the organisation and this is something that the renumeration committee grapples with annually. Performance is judged on the delivery of sustainable growth, and morality sits below finance.
There remain two big questions for any board. The first is: To whom are we responsible, and who will judge whether we do a good job? Shareholders and fund managers or society and politicians? If this is split between two audiences, can we really satisfy demands of both? This question is closely linked to the second which is: What is the purpose of our organisation and are we working to deliver it? Are we practising good corporate stewardship and caring for the organisation on behalf of our successors? Can we reconcile short term performance metrics with long term performance? Not easy if you consider both quarterly results and climate change!
Against the background of these fundamental questions you have to set the contrasting personal ambitions of each board member, the collective cognitive bias that is present at each meeting, and the ever-changing operating environment that will impact the nature and urgency or any identified risk. It helps if you can separate the puzzles from the mysteries but above all success requires luck. Remember that in predicting any future outcome there are only two categories: lucky and wrong.Written by Garry Honey, SAMI Associate and founder of Chiron Risk and first published Autumn 2023. The views expressed are those of the author(s) and not necessarily of SAMI Consulting. SAMI Consulting was founded in 1989 by Shell and St Andrews University. They have undertaken scenario planning projects for a wide range of UK and international organisations. Their core skill is providing the link between futures research and strategy. If you enjoyed this blog from SAMI Consulting, the home of scenario planning, please sign up for our monthly newsletter at newreader@samiconsulting.co.uk and/or browse our website at http://www.samiconsulting.co.uk Featured image by Katharina N. from Pixabay
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