I chatted with Peter at a recent social event, and asked him to reflect upon his decision, and the experience that followed.  Here’s what he said:  “Everyone thought I was crazy to leave the big bank, but I did it because I wanted to broaden my experience.  I was growing steadily at my previous organization, but my trajectory was limited within one silo of the bank.  I joined the small bank because I would get to do a bit of everything, and face the challenge of delivering aggressive growth without the benefit of the global brand or huge stockpiles of cash….”

“And how did it actually pan out in the last three years since you made the move,” I asked.  Without any hesitation, and with much excitement in his voice, he said, “It was undoubtedly the best move I ever made.  Since coming here, I have made four acquisitions, expanded into two new business areas, and am dealing with issues and challenges that I could never have imagined at the big bank.  Contrary to conventional wisdom, I have learned more here in the last three years than I learned in 17 years at the big bank.  If I had not done this, I would never know what I did not know.”

Peter went on to tell me how important it is to work in a small organization at some point in one’s career, and believed that a start-up experience would be even better.  When I asked him what convinced him to ultimately take the counter intuitive step of leaving an international marquee name for a relatively unknown smaller outfit, he said “It was my move to Guam as country manager six years ago.  I had very little direct supervision as my boss was in Hong Kong, but I had to deal with all kinds of issues I had no idea about.  I often found myself learning on the fly to solve problems for which no guidance was available anywhere in the global system…  besides it being one of my best learning experiences, I found the Guam stint very rewarding.  It was highly gratifying to see our various initiatives going all the way from conception to fruition… So when the headhunter called about the regional bank, I knew it was time to replicate the Guam fun on a slightly larger platform.  I knew instantly that the Southeast Asian bank job will give me the opportunity to operate on a scale much bigger than Guam, and yet it will be small enough to manage effectively”

I have not stopped thinking about our conversation since.  As I reflect upon my own career, I could not agree more with Ron.  He is dead right.  By 2009, I too, had spent 20 plus years at blue chips like American Express, Goldman Sachs, Morgan Stanley and Coca-Cola.  At the last two, I was Chief Learning Officer.  In other words, I had reached the top of my career in Talent and Leadership Development – the field I absolutely love.  Unless I ventured into general HR or moved into a business division – both of which I had ruled out a long time ago – there were no bigger jobs for me to be promoted into.  This was not an issue at all because the money was good, the work was satisfying,  and I could do a CLO job comfortably and happily for the rest of my career.  The only problem was, I wasn’t growing in terms of experience or intellect.

I asked myself what I wanted next. I thought to myself, if I get bored with my industry, I could always look for a CLO job in another industry.  If all I wanted was stability for myself and my family, I was in the right job.  But is that all I wanted? Clearly, I wanted to continue growing.  So I started laying the groundwork to start my own consulting firm.  Before actually quitting my job, I decided I would write a book – something I had always wanted to do.  I spent the next year researching and writing the book, while at the same time made preparations to start my business.  At the end of the year as I was finishing up my manuscript of what ultimately published as “Too Many Bosses, Too Few Leaders,”  and as I was giving final touches to my business plan, I thought it was time to take the plunge.

However, before I could do so, a unique offer came along – an opportunity to move to Malaysia to head a not-for-profit executive education and research center that had ambitions to grow all over Asia and the Middle East.  Even while many around me told me not to take the risk of going to a small outfit in Malaysia, I knew at once that it was the exact opportunity I was waiting for.  I would be the perfect platform for me to work with a small team and offer meaningful leadership development programs, research and consulting to organizations that needed it the most.  So after due consideration, I took the challenge and moved to Kuala Lumpur with my family.

As I look back over my career so far, I can safely say I have learned and grown more in the last four years than in the previous twenty.  The first of the four years was dedicated to writing the book and shaping a business plan in New York. For the following three, I have been in Kuala Lumpur as CEO of the Iclif Leadership & Governance Center.  Writing the book has been one of the most rewarding things I have ever done.  For years I had told myself that I did not have the time to write, but when I actually did it, I realized I had not learned so much in years. Later at Iclif, from understanding customer needs to creating new products, to learning how to navigate in a complex Asian market, to dealing with disappointments and recovering from mistakes, to developing and implementing a growth strategy, this job has been one continuous process of learning and growing.

Perhaps the biggest learning came from the need to shed the senior executive mindset and adopt an entrepreneurial way of operating.  Without the comfortable cover of a globally recognized brand name on my business card, my small team and I had to create and grow a business from scratch.  I quickly realized that the things that mattered when I was a senior executive at a Fortune 500 company (e.g. internal politics, the next promotion) did not matter at all any more.  Amongst other things, I had to learn to work with limited resources, and stay focused on the thing that mattered the most – growing the business.  I had to learn how to be confident and humble at the same time, and to stay resilient in the face of setbacks.  And even while this is the hardest I have ever worked in my career, it has been the most gratifying and emotionally rewarding.  As the business (and the number of employees)  is growing faster than we expected, we are now learning how to shed the startup mindset and operate more systematically in order to keep on top of our growth.  I can easily see myself doing what I do now for the rest of my career because each day brings a new challenge, and the learning never stops.

Peter and I are not the only ones who have such experience to report.  Many who have left big firms to join or start boutiques report a similar level of learning, growth and fun. I have had the pleasure of listening to over a thousand career success stories, and have found a common theme:  Two career transitions provide the biggest opportunities to learn and grow –

1. Making a move to an entirely new area of work that you are passionate about
2. Working in a small start-up or an existing small set-up where one has end-to-end responsibility

Early in my career I was a currency trader at a bank.  When I realized that I wanted to work in the talent and leadership development arena, I switched to HR.  Most around me thought it was a big mistake, but it turned out to be one of the best decisions I ever made because I found my calling.  Years later, deciding to become an author and researcher was another key decision that I will always be glad I made.  Finally, as I said before, moving to Malaysia to head and grow Iclif  has been the most fun I’ve had in my entire career.

Are you learning and growing as much as you would like to? Are you having as much fun in your job as you deserve to?  Do you have the above two transitions (aka risks) in your career portfolio?

The post To Continue Growing, Quit The Big Job appeared first on The Iclif Leadership and Governance Centre.

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It is very likely that Malaysia has benefited from the current economic imbalance these past couple of years, which has seen greater investors seek safer Asian shores. As the argument goes, the current volatility in major markets such as China, the eurozone and United States have sent investors seeking safe harbour farther afield, with many landing in Malaysia.

Presumably, these economies will eventually get their act together, thus levelling the global economy once again. Investor focus will no longer be concentrated on a handful of countries, and we will return to the status quo.

There is no doubt that Malaysia has done well on its own merits; nonetheless, I believe that we are all in general agreement that more can be done to transform Malaysia into a more attractive destination that pulls investors rather than just have them pushed here. Three areas stand out in particular: talent, leadership and corporate culture.

However, it should be important to note that these are not problems unique to Malaysia. Rather, they are issues that all of Asia is presently grappling with but it is here that we have a significant advantage over our regional peers: we know that these areas are indeed problems for our country.

In my experience, I have often found that a problem acknowledged is a problem half-solved. While many of our Asian peers are content with the status quo for whatever reason, Malaysia has shown considerable moxy in spelling out its problems and undertaking an ambitious, holistic plan the transformation programmes under Pemandu to provide fixes.

Malaysia is showing considerable leadership over its peers in this regard, and though its efforts have been laudable so far, I believe that further tweaks can be made to the overall programme. As an international organisation specialising in leadership issues, my work at Iclif puts me in regular contact with multinational corporations from around the world, many of whom are looking to establish a South-East Asian presence.

When the possibility of Malaysia arises, the question of talent invariably pops up: What kind of people do you have there? Do they have the ability we need to run an international organisation? Are your local universities producing top people?

The answer to these questions is, if we are honest, yes but not in sufficient quantity. Through agencies such as Talent Corp and other government programmes, Malaysia is making a commendable effort to fix the paucity of issues but more needs to be done.

In the short-term, we have no choice but to depend on the import of foreign talent and the country must make the right accommodation to expedite the hiring of expatriates. They are important resources that will not only fill the needs of incoming organisations, but can also bring valuable experience and knowledge for greater local development.

At the same time, we need to grow our own world-class talent, but this will take time and resources that we may not have at present. This leads me to my second point: the cultivation and establishment of world-class universities in Malaysia.

Though Malaysia is now home to numerous foreign universities boasting foreign syllabus, few of them hold the credentials of an A-grade world-class university. Access to tertiary education is no doubt important, but access is no substitute for quality.

Without world-class institutions, Malaysia cannot produce that important class of domestic talent who combine vital local knowledge with best-in-class practices. These resources become vital hires for international companies who need employees with a thorough grounding of the local industry while retaining broad, regional vision.

And it’s not only a question of talent; the quality and quantity of leaders in Malaysia also needs to significantly improve. While there is no doubt some examples of good, strong leaders here, there are, unfortunately, not many. Malaysia needs leaders, not bosses: we need a generation of inspiring, target- and performance-oriented chiefs who have a clear idea of the macro picture who yet retain the ability to motivate their followers to do the same.

Which brings me to the third point: corporate culture in Malaysia and Asia generally needs to significantly improve. The power-distance relationship between leaders and followers has fomented two negative attributes: a sense of entitlement amongst leaders and a disenfranchised following.

Unlike the practices of more developed markets where leaders take significant effort to close the distance with their followers, the Asian culture in general seems further cleave those at the top from those at the bottom. This creates a company culture that ostensibly does not have a shared goal or vision, which can translate lost opportunities and an unfocused workforce.

The power-distance has the potential destroys innovation and creates an insular environment where only the yes-men are given a voice. Relationships break-down and crystallises a boss/worker dichotomy, which is not helpful to anyone. I have put the problem down elsewhere in another way: we need leaders, not bosses.

Whatever the reasons behind this power distance, the issue is one of the fundamental questions of leadership: recognising the value of a plurality of views while maintaining the ability to pursue the singular objective of the company. While it may sound easy enough encapsulated in a sentence, putting it into motion is an entirely different story.

Let me summarise what I’ve been trying to say here: Malaysia has the potential to be one of the leading countries, if not the leading country, in the region and continent, but there is a steep road ahead in getting there. The Malaysian government has to be lauded for its decision to enact initiatives to address weaknesses in the economy because that is the very first, and most important, step in arriving at a solution.

I am also in agreement that for Malaysia to change, it will need the co-operation of all involved, from politicians to leaders to workers, and even to the ordinary man on the street. I am so far impressed by the changes being wrought here and I look forward to seeing more of the same in the coming years.

l Rajeev Peshawaria is executive director and CEO of The Iclif Leadership & Governance Centre

The post Helping Malaysia along its transformational path appeared first on The Iclif Leadership and Governance Centre.

1. Assurances that there is a clear separation of the roles of the board and management – “Boards govern and direct, management manages”;
2. An adequate understanding of the technical aspects of decisions, relying on access to third party expert advice when needed, with protection afforded by the “business judgment” rule;
3. A single-minded  fiduciary duty to the shareholders;
4. The time required to master the issues at hand;
5. Independent means and is therefore easily able to resign if necessary.

I argue that each of these fundamental assumptions are being challenged by the current realities faced by directors of financial institutions (FIs) and that the time may have come to turn being an FI director into a profession.

Blurring of the boundaries

Even though most codes of corporate governance state explicitly there is a clear separation of roles between the board and management, the law is more ambivalent.  In both Malaysia and Australia the Companies Acts state that boards “direct and manage”, presumably to allow boards to intervene when a company is in a state of terminal disarray or when the CEO has been terminated and there is no immediate replacement.  This ambiguity is useful for politicians and the media because it permits them to shout “where was the board?” when things go wrong, even if they are clearly not things a board can get involved in without second-guessing management.

In the court of public opinion there is no such fine distinction when things go wrong.  Take the case of Marcus Agius, the non-executive Chairman of Barclays, when he was being cross-examined by the UK Treasury Committee looking into Barclays’ LIBOR fixing, shown by the following exchange[1]:

Michael Fallon: “If you were concerned, as you have just told us, that the bank’s funding position should not be misinterpreted, and you were concerned about that, why weren’t you involved with Mr Diamond in telling your staff to get involved with the regulatory authorities as a matter of urgency?”

Marcus Agius: “For two reasons.  One is I know there were many conversations, not all of which would have been reported to me.  Separately because, for the avoidance of doubt – and maybe I should have made the point earlier – there is of course a distinction between what the board does and what the executive does.  The executive is there to run the bank.  The board does not run the bank.  I stayed unusually connected with the senior management because of my concerns, but I did not make any executive decisions.  That was not my job.”

Michael Fallon: “The question is: what does it say about your senior management team that in the end an instruction to manipulate LIBOR was not questioned?”

Marcus Agius: “You are seeking to put me in Mr Del Missier’s shoes, which I do not think is right.”

Michael Fallon: “But you have overall responsibility for the culture of the bank.  That is why you have resigned.  Is there not something odd about the culture of the bank that nobody actually questioned this kind of instruction?”

Directors are accountable and are expected to know how management is implementing what they have been authorised to do; they cannot hide behind the separation of roles.

Need to understand the technicalities

There are two more reasons why the boundaries are blurring.  The first comes from the setting of CEO KPIs and remuneration. The Remuneration Committee and the Risk Committees must understand the long-term implications of the KPIs they agree with CEOs, as well the likely impact of remuneration on how CEOs will behave.  This demands an increasingly granular level of technical understanding of the strategic choices being made, their impact on the risk profile and appetite of the organisation, not just during the CEO’s tenure, but long after as well.  That in turn requires a very high level of technical understanding of how the business works, its drivers of value and the riskiness of the choices made both in terms of products offered, lines of business, concentration risk in customers and industries served, as well as in terms of differing time horizons.

The fact that banks in the UK are now having to pay fines of more than £10 billion for mis-selling PPI products with boards reviewing how to incentivize sales forces shows that boards need to challenge the philosophies, structures and consequences of commission-based pay-plans on bank culture and customer retention at a detailed level.  At least three major global banks have announced they are raising the importance of reputation risk in the way senior people are paid.  Once again, boards will have to really understand the dynamics of the HR policies they oversee and the unintended consequences of whatever system they introduce, because clever, unscrupulous people will always succeed in “gaming the system”.  The Nomination and Remuneration Committees will have to get involved in modelling possible outcomes and knowing personally the key players so they can trust them to do what was intended.

The recent Centro decision in Australia puts the spotlight firmly on accounting standards and conventions, requiring individual directors to

• Read, understand and consider the contents of financial statements before approving them;
• Understand the basis on which the financial statements have been prepared and to satisfy themselves in relation to the accuracy of the those financial statements;
• Be familiar with fundamentals of the business and have requisite financial literacy to understand basic accounting conventions—even when recently changed.

This last point means that individual directors must understand the impact of IFRS changes on their banks, even when they are not qualified accountants – something even auditors find difficult.

Can directors still rely on expert opinions?

In the past, directors could rely on expert third party opinions to protect them from the charge of dereliction of the duty of care.  Two recent Australian court decisions may have changed that: the James Hardie and Centro cases.  Both find that relying on expert third party opinion is not enough, and in the case of the James Hardie ruling, the directors were held to a higher standard of care for failing to ensure the minutes were 100 per cent accurate, down to literally a one word difference in a press release months after the original minutes were approved.

Directors are now being asked to get a second opinion on a second opinion, perhaps because of the poor performance of rating agencies in according AAA ratings to what were, in fact, junk mortgage-backed securities in the subprime crisis.

Reconciling dual fiduciary duties

Directors of FIs uniquely have a dual fiduciary duty: to the shareholders as well as to depositors (for banks) and policy-holders (for insurers).  What was already a demanding duty has now become much more difficult.  Depositors and policy-holders are interested in stability and a guaranteed return – they seek to be protected from the downsides of systemic risk and volatility.  Shareholders, on the other hand, are interested in the upside, looking for maximum ROE and growth or else in shorting the stock; so some will welcome volatility, possibly  creating between them systemic risk.  How are directors supposed to reconcile such different perspectives without a detailed understanding of the asset-liability portfolio of the bank, the effects of leverage and liquidity on VAR and whether the risk measures are adequate to cope with “Black Swan” events?  As if that is not difficult enough, the speed with which the balance sheet can grow through leverage and collapse through a run on the bank makes it infinitely more challenging for a non-banker to understand.

Time needed to discharge the duty of care

The Walker Report made it clear that to discharge the duty of care properly, independent directors need to spend between 30 and 38 days a year per directorship.  This means that a director can have no more than five directorships (as recommended in the Malaysian Code on Corporate Governance 2012).  Directors who are appointed to boards of FIs as a reward for past service elsewhere must realise they cannot just sit back and relax; they have a heavy responsibility and workload to oversee the future direction of the bank and ensure it creates sustainable value for shareholders and depositors.

Financial Independence

If directors are to spend the time needed to master the technicalities at the level of granularity suggested in this article, they need to be trained properly and paid accordingly to a) reflect the opportunity cost of their time; b) to acquire the necessary technical skills to fulfil their role; and c) to reflect the very real risks they face should anything go wrong.  The resulting dilemma is that once they are properly paid, they are likely no longer to be financially independent; making it harder for them to resign when that is what is needed.

Is professionalising FI directors the answer?

FI directors are held to a higher standard than directors of other public listed companies because of

1. The systemic risk their organisations pose to society;
2. The need for a much greater level of detailed technical understanding, where products and services offered are often difficult to understand;
3. Resulting strategic and systemic risks which are often not clear even to the originators of financial innovation (vide Long Term Capital Management);
4. The dual fiduciary duty to depositors and shareholders with potentially conflicting interests;
5. The time needed to master the complexities if they are to discharge the duty of care.

In these circumstances it may be unrealistic to expect a talented amateur to give the right amount of time and attention to master the intricacies of the business to fulfil the duties of care and commitment.

It is perhaps no accident that the toughest court decisions regarding directors come from Australia where the Australian Institute of Company Directors (AICD) has a professional qualification for becoming and remaining a chartered director.  Canada, New Zealand, South Africa, Switzerland and the UK also have professional qualifications for directors.  Perhaps it is time to create a professional qualification specifically for FI directors, given the higher standards they must meet because of the greater complexity and systemic risks they face in fulfilling their roles and responsibilities.

The post Are the days of the Talented Amateur Director Over in Financial Services? appeared first on The Iclif Leadership and Governance Centre.

Blurring boundaries

Although the Malaysian Code of Corporate Governance 2012 states there is a clear separation of roles between the board and management, the law is more ambivalent. In both Malaysia and Australia the Companies Acts state that boards “direct and manage”, presumably to allow boards to intervene when a company is in a state of terminal disarray or when the CEO has been terminated and there is no immediate replacement. This ambiguity is useful for politicians and the media because it permits them to shout “where was the board?” when things go wrong.

In the court of public opinion there is no such fine distinction when things go wrong. Take the case of Marcus Agius, the non-executive chairman of Barclays, when he was being cross-examined by the UK Treasury Committee regarding Barclays’ Libor fixing (July 10), shown by the following exchange:

Michael Fallon:“If you were concerned that the bank’s funding position should not be misinterpreted, why weren’t you involved with Mr (Robert) Diamond in telling your staff to get involved with the regulatory authorities as a matter of urgency?”

Marcus Agius: “ because, for the avoidance of doubt and maybe I should have made the point earlier there is of course a distinction between what the board does and what the executive does. The executive is there to run the bank. The board does not run the bank. I stayed unusually connected with the senior management because of my concerns, but I did not make any executive decisions. That was not my job.”

Michael Fallon: “The question is: what does it say about your senior management team that in the end, an instruction to manipulate Libor was not questioned?… You have overall responsibility for the culture of the bank. That is why you have resigned.”

Directors are accountable and are expected to know how management is implementing what they have been authorised to do; they cannot hide behind the separation of roles. Understanding of technicalities

There are two more reasons why the boundaries are blurring. The first comes from the setting of CEO KPIs and remuneration. The remuneration committee and the risk committees must understand the long-term implications of the KPIs they agree with CEOs, as well as the likely impact of remuneration on how CEOs will behave. This demands an increasingly granular level of technical understanding of the strategic choices being made, their impact on the risk profile and appetite of the organisation, not just during the CEO’s tenure, but long after as well. That in turn requires a very high level of technical understanding of how the business works, its drivers of value and the riskiness of the choices made both in terms of products offered, lines of business, concentration risk in customers and industries served, as well as in terms of differing time horizons.

The recent Centro decision in Australia puts the spotlight firmly on accounting standards and conventions. The Australian Securities and Investments Commission (Asic) alleged that the directors did not take reasonable steps to comply with their financial reporting obligations and had failed in their duty of care. When taken to court, the judge agreed with Asic that the financial statements failed to properly classify certain interest bearing liabilities as current, and to disclose large guarantees as a material non-adjusting subsequent event. The judge found that the directors knew or should have known of the current interest bearing liabilities and guarantees; that they should have been aware of the relevant accounting principles; and that they should have made relevant enquiries, but had failed to take these steps. The lesson of Centro is that individual directors must:

• Read, understand and consider the contents of financial statements before approving them;
• Understand the basis on which the financial statements have been prepared and to satisfy themselves in relation to the accuracy of the those financial statements; and
• Be familiar withfundamentals of the business andhaverequisite financial literacyto understand basic accounting conventions-even when recently changed.

This last point means that individual directors must understand the impact of IFRS changes on their businesses, even when they are not qualified accountants something even auditors find difficult.

Expert opinions

In the past, directors could rely on expert third party opinions to protect them from the charge of dereliction of the duty of care. Another recent Australian court decision may have changed that is the James Hardie case. In this case there were two points of contention.

The first was that despite receiving expert advice from PwC (PriceWaterhouseCoopers) and Access Economics that the funds set aside would be sufficient to meet all legitimate present and future asbestosis claims, the directors were liable when this proved not be the case and there was shortfall of over A$1bil.

The second was the directors’ defence that the board could not have approved the press release stating that the liabilities were “fully funded” because it had been modified by management subsequent to the board meeting and before the release and that there were other errors in the minutes that cast doubts on the validity of the minutes. This defence was not accepted by the court. The directors were held to a higher standard of care for failing to ensure the minutes were 100% accurate, down to literally the one-word difference “fully funded” instead of “funded” in the press release that appeared months after the original minutes had been approved. The seven directors were banned from serving as directors of public-listed companies for five years and consequently fined A$30,000 each.

It is perhaps no accident that the toughest court decisions regarding directors come from Australia where the Australian Institute of Company Directors has a professional qualification for becoming and remaining a chartered director.

Canada, New Zealand, South Africa, Switzerland and the United Kingdom also have professional qualifications for directors. Perhaps, it is time to create a professional qualification for independent directors, given the higher standards they are being asked to meet.

The post Three things make role of independent directors more challenging appeared first on The Iclif Leadership and Governance Centre.

Principle 1: Respect must be earned, it cannot be commanded

Recently, an Asian politician traveling in his car reached a tollbooth.  When asked to pay the toll, the driver informed the attendant that his boss was a Member of Parliament (MP) and was therefore entitled to pass without paying tolls.  Aware of the rules, the attendant agreed but demanded to see the politician’s ID before letting the car pass.  Enraged by the audacity of a “mere toll booth attendant” demanding his ID, the MP stepped out of the car wielding a gun and threatened the attendant.  Later when the CCTV footage of the gun wielding MP was flashed all over national television, he made this statement in his defense, “I am a MP and therefore deserve to be respected.”

Contrast the above with a scene I witnessed almost 20 years ago when I was an entry level professional at an international financial services company.  A retired former CEO of the company was visiting the office, and was making his way to each desk to greet employees.  I noticed that as he approached each department, everyone stood up to welcome him.  No one sat down until he had left the area even though he repeatedly told people to sit down and continue working.  When I asked later why this was the case, I learned that when he was CEO, he took personal interest in each employee’s career, made it a point to remember their names, and “was there” for his people whenever they needed hm.  One co-worker summed it up nicely by saying, “Standing up to greet him is our small way to salute him for the respect he gave us while he was the boss.”

Question 1. Do you earn the respect of your people through your values based behavior, or do you attempt to command it because of your position? 

Principle 2: There are hardly any zero sum games in life

Whether we like it or not, conflict is a big (and necessary) part of our professional and personal lives.  The fact that constructive conflict leads to innovation and overall progress is well known – it is conflict that challenges humans to come up with solutions to pressing problems of society.  Equally well known is the fact that in life there are hardly any zero sum games. In other words, a conflict rarely means that for one party to win, the other must lose.  Yet, we forget this basic principle when we find ourselves in a conflict situation. Despite what history has told us time and time again, instead of trying to negotiate win-win agreements, we act as adversaries and try to finish off our opponents.

After years of hopeless and bloody conflict over the Israeli occupation of Egypt’s Sinai Peninsula, when President Sadat of Egypt sat down with Prime Minister Begin of Israel to negotiate in 1978, they were able to find a solution that worked equally well for both parties.  Key to their success was the fact that they agreed to act as partners (rather than adversaries) to find a win-win solution.  The original problem was: Who keeps the Sinai Peninsula.  Once they openly shared their needs and interests – why each country wanted the peninsula – it was clear that Egypt wanted the peninsula back from Israeli occupation because of sovereignty considerations, and Israel wanted to keep it because of security concerns.  Discussions also revealed that they both wanted peace in the region.  After they agreed to sit on the same side of the table to find a win-win solution, the re-framed problem became: How can we work together to meet Egypt’s need for sovereignty while also addressing Israel’s security concerns? Eventually, Israel agreed to hand the peninsula back to Egypt on the assurance that it would become a de-militarized zone ultimately monitored by the United Nations.

This, and countless other examples in business, political and personal life show that most conflict can be resolved in a way that fully meets the needs of both parties.  Collaborating with the adversary, however, is a pre-requisite for such an outcome.  Unfortunately, as well known as this fact is, most conflict remains unresolved because people see zero sums games in conflict even while there are so few of them.  In a majority of situations, a win-win outcome is possible.

Question 2: When in a conflict situation, do you always try to beat your opponents or do you invite them to collaborate on a win-win outcome? 

Principle 3: Happiness and misery are both creations of one’s own mind

From very humble beginnings, John rose to become a very successful trader at a leading investment bank.  At a relatively young age, he became Managing Director and head of the equities trading floor of the firm.  By any yardstick, he was extremely wealthy and successful.  His family and friends were suitably proud of him. However, when he compared himself with a few other more successful traders on the street, he began to feel inadequate.  Even though he had already stashed away several millions in investments and bought the best of cars and houses, he felt miserable about the fact that a few others had more than he did.  His need to prove himself finally motivated him to initiate trading positions well beyond his limits.  Blinded by his ability to read the markets correctly, he was convinced that he would be able to reverse his large positions profitably long before anyone would find out about the limit violations.  Unfortunately for him, the markets moved against him and he ended up losing a massive amount of money for his firm.  He is now facing criminal charges.

Like John, many of us feel happy or miserable by comparing ourselves to others. In this sense our sources of happiness and misery are both extrinsic, and we have little control over them. A better strategy is to have clarity of personal purpose and values, and to judge the extent of our happiness and success from an intrinsic perspective. How we feel is, and should be, entirely up to us.  We don’t need others to decide how we feel.  For example, when faced with immense grief, the human mind has the power to choose between self-pity/alcoholism or refocus attention on creating a positive future.  Yet, we forego this choice and allow ourselves to go deeper into our misery.  The fact is – no one has the power to make us feel bad, only we ourselves do.  Conversely, we also have all the power we need to feel good.  The question is not about what happens to us, but about how we chose to react.

Question 3: Who controls how you feel – you or other people and events around you?

Principle 4: Forgiveness is not a sign of weakness

Throughout history, revenge and violent aggression have prolonged conflict instead of solving it.  Yet, the human race refuses to learn from its own experience.  When we are attacked or harmed by someone in any way, the natural human instinct is to seek revenge.  Why? Because we feel hurt and violated by the unfair act of the attacker.  In this situation, it only seems fair to teach the attacker a lesson, right? Wrong!

Imagine if Mahatma Gandhi had the same idea while fighting for India’s independence?  His is one of the most powerful examples of leadership in recent history; yet, it is devoid of the use of any violent force or revenge.  He fought the might of the British Empire with weapons of mass construction (not mass destruction) like simple truth, humility, non-violence, and forgiveness. The famous quote sums it all: “An eye for an eye will leave the whole world blind.”

Imagine if after serving 27 years of a wrongful prison sentence, Nelson Mandela had ordered revenge.  What would South Africa look like today?  Instead of using the force of revenge, he used the power of forgiveness to build the foundations of the Rainbow Nation.

Contrary to conventional wisdom, forgiveness requires huge inner strength.  Those who see it as a sign of weakness are the ones that are weak, not the forgiver.

Question 4: When you are hurt or harmed by someone, what is your natural instinct? After initial anger and sadness, are you able to reorient yourself towards forgiveness? 

Principle 5: Humility and empathy form the bedrock of powerful leadership

Since moving back to Asia in 2010, I have been struck by the high power-distance culture in most Asian countries.  Be it Malaysia, Singapore, India, Korea or Indonesia, Asians revere authority and never challenge it.  A senior person (as defined by hierarchy or age) is neither questioned nor given feedback, even if he is wrong.  In our programs and seminars in Asia we often ask delegates why they don’t speak up or provide feedback if they feel strongly about something.  Repeatedly, we hear the same answer, “The Boss wants to hear none of it.  We tried a few times, only to have our hands bitten off.”

Conversely, we ask CEO’s and other C Suite executives if they really know what motivates each of their direct reports.  Many answer in the affirmative, but based only on their assumptions and not on any deep knowledge about the needs, hopes and aspirations of their subordinates.  On being asked a simple question “When was the last time you sat down with one of your subordinates to ask them,” most of them are unable to answer.

In today’s increasingly complex world, leaders need to be both humble and confident.  They must be humble enough to understand that they cannot create a better future alone. At the same time, they must have confidence in their leadership ability to co-create it with others.  Being humble as a leader means making it safe for people to speak up without retribution, and keeping an open mind to admit mistakes or change opinion.  Having confidence in one’s leadership ability is about practicing genuine curiosity and empathy in order to get to know what really makes people tick.

Question 5: Do you have humble-confidence? How can you develop it further?

So how can one avoid these traps? There are no magic pills, but the following three-step approach helps a lot in re-wiring the brain:

• Think about the principles, refine them, and make them a part of your personal belief system.
• Practice using them. Practice, practice, practice!
• Make it a habit to reflect on your behavior each time you violate one of the principles, and visualize doing it differently the next time.

Over time, the principles will become second nature and the brain will stop denying them. This approach sounds simplistic but it is not.  Science now confirms that the brain can change itself.  By regularly reminding oneself of these principles, and by repeatedly visualizing behavior in accordance with them, new neural pathways can be created in the brain.  Current research in Neuroplasticity – the brain’s amazing ability to learn new things and form new habits – is challenging the old notion that the brain’s ability is fixed and hard to change. In fact it is just the opposite. Neural connections can be re-wired simply by visualization and practice.

I have seen many people benefit from adopting the five principles, and have observed them getting better at applying them over time. Initially, it is difficult to go into collaboration mode when faced with a conflict. Over time, the brain trains itself to start looking for a win-win outcome right from the word go.  Similarly, while it initially seems unimaginable to forgive someone who hurts you, once the brain is re-wired, forgiveness becomes a habit.

So go ahead and re-wire the brain. Because you can!

The post Five Denials of the Human Brain appeared first on The Iclif Leadership and Governance Centre.

Most definitions place significant emphasis on enterprise value preservation, which largely comprises of rules, regulatory compliance, risk management, and other types of watchdog activities.  Clearly, value preservation  is an important duty of the Board of Directors.  In the aftermath of the 2008 global financial crisis and the recession that followed, defending against downsides has become more important than ever before.  However, there is another equally important side to the board’s responsibilities – enterprise value enhancement – that I believe might be slightly under served by boards today.

Consider the following. By some estimates, 65% of a company’s stock price is attributable to intangible value, promises of future economic benefits based on  the quality of leadership and management, the company’s ability to innovate, the depth of talent, employee engagement, etc.  While most boards recognize this duty to ensure that management does all it can to maximize this future value as well as stave off present dangers, in this article, I want to offer a simple but powerful information system that can help boards better fulfill this duty.

Before I do so, consider a question my colleagues and I have been asking senior management teams over the past 12 years

On a 1-10 scale where 1 is “well below our potential” and 10 is “at peak potential,” how is your organization currently performing in the marketplace?

The average answer we get each time we ask is around 6.5.  This means, by their own admission, captains of industry are saying they can be 35% more successful without adding any more resources.  Can you imagine if your organization were 35% more successful? What can management do to go after that elusive 35%? And what can boards do to find out if management is indeed doing it?  To answer these questions, lets first take a quick look at what companies do to destroy value.  In his book, “The Self Destructing Habits of Good Companies, And How to Break Them,” Jagdish N Sheth lists the following seven habits that eventually make good companies go bad:

1. DENIAL: Refusal to recognize or acknowledge reality
2. ARROGANCE: Overblown self image that just doesn’t square up with the facts
3. COMPLACENCY: Sense of security from the belief that past successes will continue indefinitley
4. COMPETENCY DEPENDENCE: Limited vision due to over dependence on one core competency
5. COMPETITIVE MYOPIA: Defining your competition too narrowly
6. VOLUME OBSESSION: Rising costs and falling margins
7. TERRITORIAL IMPULSE: CULTURE CONFLICTS AND TURF WARS WITHIN A COMPANY’S SILOS

Again, how can the board safeguard against the possibility of one or more of the above habits taking root in the company? More importantly, how can board members coach senior management when they see the symptoms?  A good place to start might be to better understand what is really going on in the company.  If a company is not achieving its full potential, the first people to find out are usually the employees.  A simple way to find out, therefore, is to ask them.

A few years ago, I devised a simple framework that links current company performance to future value.   The premise:  a company must proactively shape and maintain three pillars of sustainable growth that I call B-B-N: Brains (vision and strategy), Bones (organizational architecture) and Nerves (culture) of the business.  I have described this framework in a fair amount of detail inToo Many Bosses, Too Few Leaders (Free Press 2011) and in other articles and blog posts:

http://rajeevpeshawaria.com/articles/

However, in each of the earlier texts, I looked at B-B-N from the perspective of the management. I described it as a framework through which management can stay in touch with reality and take corrective action proactively.  My purpose in this piece is to present B-B-N as a source of information for the board of directors, and explain how board members can use the information to help management in maximizing the future intangible value of the enterprise.

The process begins with a very quick survey.  Employees are asked to rate each of the following statements on a 1-5 scale where 1 is ‘strongly disagree,’ 2 is ‘disagree,’ 3 is ‘neither agree nor disagree,’ 4 is ‘agree,’ and 5 is ‘strongly agree.’

BRAINS: Mission, Vision and Strategy

1. We have a compelling vision for future success
2. We have a clearly differentiated strategy to achieve our vision
3. Vision and strategy are so clear that they guide resource allocation and decision making
4. We have clearly recognizable core capabilities that give us our competitive edge
5. Everyone in the organization can clearly and consistently articulate our value proposition to clients

BONES: Organizational Architecture

1. We have top quality talent with the right skills and experience in all key jobs
2. Our supporting systems and structures (e.g. performance management, promotion processes) encourage desired performance
3. Roles, responsibilities, and decision rights are defined as clearly as possible
4. Our people and resources are deployed in a way that best supports the execution of our strategy
5. Formal organization structure enables building and strengthening our core differentiating capabilities

NERVES: Culture

1. We have a well defined cultural philosophy (who we are and what we stand for), that helps maximize and preserve franchise value
2. Our compensation & rewards practices encourage desired behaviors that maximize and preserve franchise value
3. Through their actions, our leaders set the right example for others
4. We focus both on short term success and long term capability building
5. Our culture is one of listening, learning and constant renewal

The desired response score for each of the survey statements should be 4 or 5.  In other words, if management is doing a good enough job of enhancing future value, employees must either agree or strongly agree to each of the above statements. Any response score below 4 means there is work to be done.  For example, if management feels it has done a huge amount of work in formulating and communicating a compelling vision and strategy, employees should agree or strongly agree to the five statements under the Brains section.  If the average response is 3 or below, it means either that the strategy is not compelling, or that management needs to do a better job of communicating and cascading it.  In either case, it (management) has work to do. The B-B-N survey is an instant pulse check to find out if management actions are perceived (by employees) to be hitting the bull’s eye or not.

The results of this survey can easily be plotted on a one-page graph to provide quick visual stimulation.  To make the data richer, companies may add another question in the end asking for verbatim comments to substantiate ratings to the 15 statements. I have successfully used this tool with many management teams across the world to help them generate ideas for growth acceleration.  However, like any other information tool, the data needs to be used with good judgment after taking the broader business landscape into account.  The employee perspective is just one perspective, but an important one for boards and management to consider.

If boards insist on seeing the results of this survey on a periodic basis, they can engage in a very healthy dialogue with management about what can be done to address issues if any.  Some board members (with their own vast corporate experience) can even coach senior management once they understand the crux of the issues. I know one CEO who regularly sits down with his chairman to discuss the company’s B-B-N scores and seeks her feedback and coaching.  When I asked him why he does so and were their any risks involved in opening up the whole kimono with the Chairman, he said, “… on the contrary, I see only upside in sharing the information with the Chainman and seeking her guidance.  There’s a double bottom line here …. 1) by sharing honestly, I involve her in addressing the problem(s).  Rather than a jury, the board now becomes a partner.  And 2) I almost always get good coaching … there are very few places a CEO can go to for good coaching, but your board is one of them…. and we tend to under use this source …”

Most companies administer lengthy employee satisfaction surveys. But, as one of my colleagues points out, satisfaction surveys only measure if people are happy with the pay and rations.  The B-B-N survey takes only seven minutes to fill out, but gives real and tangible information about the impact of the actions of the senior management team in driving long term sustainable growth as perceived by employees.  For board members, it can be a powerful tool in fulfilling their duties without micro-managing the CEO.

The post The Other Duty of Corporate Governance appeared first on The Iclif Leadership and Governance Centre.

We can increase yields dramatically by cloning oil palms.  Yet the more we reduce the plant gene pool in our attempts to raise yields, the more plantations become vulnerable to pests because all the oil palms have the same genetic makeup.  So although too much cloning is fruitful in the short term it can lead to long term catastrophe.  Equally, too much diversity in a plantation leads to low yields.  Consequently we need to reconcile the short term benefits of cloning – increased productivity – with the long term benefits of diversity – increased resilience and resistance to catastrophe.

The same applies to senior management and boards.  There are great advantages in everyone coming from the same background, sharing the same culture and the same history, even in belonging to the same age group.  They think in the same way, share the same assumptions and find it easy to trust each other.  They share the same values and “way of doing things”.   This reduces the frictional costs doing business dramatically: people don’t need legally binding contracts to perform as required; they don’t need enormous manuals codifying how to do things.  They know what to do and what is expected of them.  They may even have a common “language” – special words and associated ideas – expediting communication and reinforcing a sense of team.

Armed forces everywhere have long understood these benefits and foster regimental “esprit de corps” based on shared history, common myths and well-defined expectations of behaviour.  They make belonging to the regiment special – literally worth dying for.

This works well as long as the world does not change dramatically – the managerial equivalent of new pest attacks on cloned oil plantations.  In business this peril is known as “groupthink”.  “Groupthink” suffers from two serious problems.  First, it is the tendency for people to converge on a consensus without sufficient thought, even if the consensus is wrong.  Even more serious is the fact that members of a like-minded group are more likely to be wrong than members of a diverse group – 46% versus 25%.  Worse still, the like-minded groups “perceived themselves as having more confidence, consensus, and effective interaction.”[1] The second reason is that ‘groupthinkers’ have great difficulty challenging received wisdom – the so-called “sacred cows” all businesses have to a greater or lesser degree.  This is made even harder if the company has a great track record of success.  It becomes almost impossible for ‘groupthinkers’ to think the unthinkable: that the formula for success may have gone stale or that the outside world has changed so much that the context invalidates the assumptions on which the business was built.  It often takes outsiders with a different perspective to appreciate this, because they have no stake in preserving the status quo.

So we need diversity to protect us from the perils of “groupthink”.  The question is what kind of diversity and how much?  This is a particularly difficult question for boards where leading practice suggests optimum board size ranges between 7 and 11 members.

Do we need people of different ages to represent the values and aspirations of their respective cohorts so that companies can serve the different target groups better?  Do we need people of different education and income levels as these often determine what people want to buy and whether they are prepared to join the company?  What experience and skills do we need: lawyers, accountants, production engineers, financiers?  Are people with public service experience an asset? If yes, do we want civil servants, police chiefs, soldiers, judges or diplomats?  If we are going abroad do we need people from the countries where we intend to operate because they can give us insight into their cultures?

As if answering these questions were not difficult enough, we also need to consider interpersonal dynamics and whether the diverse candidates we decide we want to recruit can in fact work well together.  Do they share the same assumptions about their role and the purpose of business?  Do they have the same understanding of what is meant by performance management?  Do they have the same values, ethical foundations and respect for the law?  Do they agree about what confers status, the impact of power distance on behaviour, the value of individuality and being part of a team?  If they don’t, how do we go about helping them work together as a united team where each contributes to the success of all by bringing his or her unique perspective to bear without undermining mutual respect and trust?

It helps greatly if there is a well thought through induction program exposing newcomers to the business fundamentals, the drivers of value creation and the foundation myths and company history.  It also helps if there is a clear statement of values: behaviours that are rewarded and behaviours that are punished; and a code of conduct everybody understands to minimise the grey areas where misunderstandings flourish.

Even though it is difficult to reconcile diversity with shared values, companies that succeed, create unique cultures incorporating the best of both worlds, making it impossible for their competitors to copy them.  Perhaps an analogy from football will help make the point more forcefully.

Take the case of Arsenal.  Everybody thought with the departures of Cesc Fabregas and Samir Nasri they were finished in 2011.  Indeed, at first it looked as though Arsene Wenger’s critics were right, except Arsenal ended up in third place by the end of the year, largely thanks to Robin Van Persie.  When Van Persie left for Manchester United and Alex Song left for Spain this year, again Arsene Wenger’s critics said Arsenal was finished and Wenger had “lost the plot”.  And yet it now seems Arsenal is playing better than ever.  Why?  Maybe it is because Arsene Wenger knows what he is doing after all – he has created such a strong culture that newcomers like Podolski, Cazorla and hopefully Giroud – players from three different countries, with different styles and skills – are moulded quickly to fit with the others, creating not just a more balanced team, but a more self-reliant set of players because they cannot opt out and pass the ball to Fabregas or Van Persie. They have to do the work themselves, playing Arsenal’s style of beautiful football successfully.

The lesson may be that creating a strong enough culture is the only way to reconcile diverse talents and mould them into a winning team.

The post Do we need diversity? appeared first on The Iclif Leadership and Governance Centre.

He was a most respected and trusted person because he took a deep personal interest in the people to whom he lent money; always making sure that the borrowers could repay; refusing to lend to people who could not afford to borrow. He knew his customers very well, was often a family friend, believing he and his bank did well when his customer benefited from the relationship. It was a win-win’ world most of the time, based on trust and the industry had the support of the public and regulators.

Financial services innovation brought us the credit card, allowing more people to live their dreams and to limit the amount of cash people had to carry with them. Banks invented securitisation, allowing companies to invest with greater flexibility by bringing forward the returns from future cash flows. The use of options and derivatives reduced risk for genuine trades based on underlying transactions. Above all, banks served their purpose as conduits for excess money from savers to cash-starved investors, allowing economies to grow and people to get richer.

Then we had the era of low interest rates because of Alan Greenspan’s attempts to keep the US economy going after the dotcom bust in 2001 and 9/11. This period of low interest rates and excess liquidity drove investors and bankers to hunt for yield to meet the unsustainably high returns investors demanded of bank CEOs and their boards. CEO pay was linked to ROE, encouraging CEOs to gamble recklessly with leverage, using the rapidly growing derivatives markets, which were given wrong ratings by conflicted credit rating agencies.

The resulting behaviour of banks, in particular investment banks, led to reckless disregard for the systemic risk they posed, destroying the trust the public, politicians and regulators in the UK and US had in banks. In last year’s Edelman Trust barometer’, five out six people in the UK and three out of four in the US did not trust their bank to “do the right thing”. That was before the Barclays LIBOR scandal, the JP Morgan “London Whale” surprise loss and HSBC’s money laundering problems. I dread to think what the scores will be for 2012!

Yet the dramatic fall from favour in the UK in 2011 is not surprising given the enormous fines the leading banks and insurance companies are paying for mis-selling products to retail clients, fines totalling £8bil at the last count. Add the enormous pay packages bankers were awarding themselves after they had brought the global economy to its knees, costing millions of hardworking people their jobs and everybody a need to tighten their belts packages which bore no relationship to the value created for investors – and I understand why they fell from favour.

The pillars of capitalism

What happened to the concept of trust? After all, few industries depend more on trust than financial services where a stranger asks you to give him your money so he can make you richer as a result of his advice and the skills of the bank’s investment department. I think there are four reasons for this decline in the trustworthiness of Western banks.

First, the three pillars of capitalism – deferred gratification, mutuality and trust have been weakened by changes in what is offered and how it is offered. Deferred gratification is the basis of investment: we invest today for something better tomorrow. I grew up with the saying “Anything that is worth having is worth waiting for”. Unfortunately the invention of the credit card destroyed that belief. The original advertisement for Access, one of the first two credit cards in England put it bluntly: “We take the waiting out of wanting!” Mutuality assumes you will treat people the way you want to be treated. It depends on long term personal relationships because bad behaviour will destroy the relationship so people avoid upsetting each other. When a relationship is impersonal or one-off, bad behaviour does not get punished because there is no possibility of pay-back. As banks did away with branches and replaced them with ATMs and e-enabled transactions, relationships became impersonal. Increasingly people could get away with bad behaviour because they no longer knew each other. The subprime value chain undermined the last element of trust because it was built on the “greater fool theory of finance” a kind of musical chairs where toxic assets were passed from one company to another so nobody felt responsible for or understood the creditworthiness of the underlying asset. This was made possible by credit rating agencies rating junk as Triple A. Finally commission selling creates such pressure on bank sales forces it is not surprising there have been mis-selling scandals.

Second, the culture of banks in the West seems to have become really toxic so regulators, commentators and legislators in both the US and the UK are calling for a need to fix it. A recent survey of 500 top managers of banks in Wall Street and London shows just how toxic: 39% believed their competitors had behaved unethically or illegally; 26% said they had first-hand experience of unethical or illegal behaviour; 24% believed they had to be unethical to succeed in financial services; and 30% said that this was because of remuneration.

Third, was it perhaps a mistake to combine different types of business in the attempt to create financial supermarkets? Life assurance was combined with branch banking because it was a cost effective way of distributing products through the branch. Yet nobody thought about the brand implications of combining highly respected retail banking with selling life assurance an industry which, in the UK at least, was regarded as on a par with used car selling for trustworthiness. Investment banking was combined with deposit taking so that they could get access to the huge balance sheets of deposit takers and use leverage to raise ROE.

The original idea was that commercial bankers would control investment bankers and keep the system safe. In practice, however, the investment bankers won and took over leadership positions in the combined banks introducing a different culture. As a result both customers and shareholders suffered because financial innovation became less customer-centric than it had been in the past.

In the words of Nobel Laureate, Joseph Stiglitz: “Innovation means greater customer satisfaction at lower prices, except in financial services where it means more opacity and higher fees”.

Investors have also fared badly as is shown by the big US banking conglomerates’ market capitalisation being worth less than their book value.

Finally, pay seems to have risen remarkably fast in banking and the result seems to have been to reward short term risky behaviour without due regard for the long term consequences of front-end loaded business, making short term profits with long tail losses.

Malaysian scenario

Could Malaysia face the same problems? It depends on whether there are banks deemed too big to fail’ which then take excessive risks with their balance sheets because of the implicit government guarantee.

It depends on CEO KPIs and how they are set. If KPIs reward excessive short term risk taking at the expense of long term sustainability, then we should not be surprised if there are problems. It also depends on whether the pressure of commission selling undermines the effectiveness of banks’ Know Your Customer’ policies.

Above all, it depends on banks adhering to their own risk management and compliance policies and not violating them.

Making sure the compliance and risk management functions have the power they need and that the policies are followed in practice is the role of the CEO supported by the board, as was made abundantly clear to the chairman of Barclays during the Parliamentary hearings into the LIBOR case and the Congressional hearings into the HSBC case.

As was pointed out time and again it is the responsibility of the board to ensure the soundness of the culture and Tone at the Top’. This is just as true in Malaysia as it is in the UK.

Preventing a replay in Malaysia of the scandals plaguing banks in the West is the responsibility of bank boards, guided by Bank Negara supervision. It is a heavy responsibility given the systemic impact of bank scandals.

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