Patricia Meredith - Better Boardrooms

This is the third book in a trilogy. The first volume, Catalytic Governance: Leading Change in the Information Age, co-authored with Steven Rosell and Ged Davis, set out a process for leading transformative change. It was based on our experience with the Canadian Task Force for the Payments System Review. The second book, Stumbling Giants: Transforming Canadas Banks for the Information Age, co-authored with James Darroch, examined how poorly positioned the Canadian banks are to withstand the social and technological tsunami sweeping over financial services. That book was primarily aimed at the enthusiastic young bankers who realize that their industry must change if it is to regain its reputation as a vibrant enabler of economic growth. But, as James and I made clear, the dreams of these men and women will not be realized unless a broad cross-section of Canadians policy makers and regulators, customers, suppliers, investors, and, not least, the bankers themselves work together to create a banking system better suited to the twenty-first century.

This, my third book, covers a much bigger and more pressing challenge: the need for a new system of corporate governance that takes account of the fast-changing business environment. The shortcomings of our present governance system have been on my mind ever since I became head of corporate strategy at Canadian Imperial Bank of Commerce, in 1993. I thought I had come up with some answers ten years ago, when I wrote my PhD dissertation on the impact of disruptive change on the residential mortgage industry, but my ideas turned out to be based more on hope than on reality. My view was that companies did not respond to disruptive change because they failed to see the longer-term implications of what was going on around them, and because conflicts of interest and inertia got in the way of real change. In a nutshell, as a former Canadian bank CEO said to me after a friendly discussion about trends in the financial services industry, It isnt going to happen on my watch, and I am not going to do anything about it. It became clear to me that if the chief executive would not do anything to fix a broken system, neither would anyone else, including the board of directors.

I have been working on strategy, uncertainty, and governance for twenty-five years, yet I am only now starting to fully grasp the challenges of managing strategic risk in the information age. Much of my initial thinking was based on my experience with public, private, and not-for-profit boards. But the traditional approach has failed dismally, as most incumbents struggle to compete effectively against upstart rivals in an entirely new environment the information age, marked by a seismic shift from traditional industries spawned by the Industrial Revolution to an economy based on data. The information-age model is based on a commodity that is quickly and widely disseminated using computing and communications technology. Its hallmarks are high up-front investments in intangibles and very low reproduction costs, the inverse of the industrial age. As a result, the information economy requires entirely new governance processes that prioritize timely engagement, dialogue, and learning, rather than expert meetings long after the opportunity has presented itself.

At first, I thought that companies could avoid the tremendous loss of financial and human resources that takes place when they fail to adapt if only their boards of directors paid more attention to changes in the external environment, and then focused on turning those challenges into opportunities. Sadly, Ive discovered that the conflicts of interest that confront corporate managers have also infiltrated the boardroom. The fact is that very few late-career executives or directors are brave enough to initiate transformative change. They would much prefer their company just to tread water until they retire, and to dump the problem in their successors laps.

Four men have awakened me to the failure of existing governance structures to recognize and respond to the changes that are buffeting business, especially in North America and Britain.

I was fortunate to meet Jim Williams of Williams Inference Global in 1994. For more than forty years, Jim scanned newspapers and periodicals, finding investment ideas in hidden and unintended messages. He picked up the technique from Connecticuts Carniglia brothers: Ettore, a physician, and Francis, a veterinarian. From them he learned the fundamentals of sound diagnosis: keep an open mind, observe carefully, and let conclusions emerge. Jims approach was to find anomalies, which according to American physicist, historian, and philosopher Thomas Kuhn, is the first step in recognizing a scientific revolution. Jim taught me to identify anomalies, watch if they form a pattern, and then draw inferences about their longer-term impact on a company or industry. He recognized the Internets impact on business a decade before its widespread adoption. Running through his work is the message that recognizing disruptive change early is critical to a companys long-term well-being. Failing to do so is sure to lead to disaster.