Board failure (1/2): why boards are worst when they need to be best, where they still add value, and the lost art of strategy, with Roger Martin

🎙️ You can listen to the full podcast interview with Roger on Apple Podcasts, Spotify and YouTube.

Roger Martin, ranked the world's #1 management thinker, has advised the boards of Procter & Gamble, Lego, Ford, BHP, Verizon and more.

Tune in to hear his thoughts on:

• Do you see value in boards? (2:06)
• Where do you see value in NFP and private, investor-backed boards? (5:13)
• Can boards perform their monitoring function effectively? (10:05)
• Why do you think boards struggle to perform their stewardship role? (11:26)
• How do the best boards think about strategy? (17:33)
• How can boards determine whether their strategy will win? (18:53)
• Are there a finite number of ways organisations can win? (23:17), and
• What is the board’s role in developing strategy? (26:02) 

*This is an AI-generated transcript and contains inaccuracies*

Oliver Cummings: Roger, I want to start talking to you about the board. Historically, you have been refreshingly critical of the board as agent model. In a great discussion on the topic, you once said words to the effect of, the agency theory argues that managers are imperfect agents who won't act in shareholders best interests, so we have to discipline them.

What's our tool? The board of directors. An agent for an agent problem. Where on earth did this logic come from? Either there is an agency problem or there is not an agency problem. And we shouldn't be bothering with any of this crap. But the idea that a board will discipline management is a fantasy. I think of boards like fire insurance that works except when there is a fire.

Roger, you've been both a CEO with a board and an independent director. Do you see any value in boards? 

Roger Martin: Well, let me make sure I've qualified it, which is that's referring to [00:03:00] the governance boards of publicly traded companies, where there's a regulatory requirement to have such a board. Do I see value in boards, public sector boards, nonprofits, etc.

It was some of the funnest times I've had in my life have been serving on boards of that sort. So, The question is governance boards of for profit publicly traded companies, and there the value is much lower than people think on average, and while some boards function well, I would say if you just take The FTSE or the S& P 500, on average, I think the boards are net neutral, right?

So they have, on average, no value. They cost a lot and take a lot of time. That doesn't mean there aren't well performing boards, but the state of board governance, in my view, is quite low. It's mainly because management generally doesn't [00:04:00] want them. Now, there are some managers who want a board and want that board to govern them and give them advice, etc.

Interestingly enough, Those are the managers who don't need one. Like I put A. G. Lafley, my friend and co author in that category. A. G. Lafley had a great board. They did great stuff, uh, together. Um, it's because he didn't need it, right? And so, yeah, he would actually go to the board with real questions, have real dialogue with the board, take their advice why it's because he was an awesome CEO and just wanted to be awesomer for, for Procter Gamble.

But, The CEO of Enron wanted to make sure his board was completely in the dark, didn't know anything, and wouldn't stop him from raping and pillaging the company. We needed insurance. We, the capital markets, let's say, we needed the insurance. In the Enron case, got none of it, right, because of the way boards work.

In P& G, we didn't. AG would have been [00:05:00] just fine with, without the board, but he was even better because he had a great board. That's the logical conundrum. When we need boards most, we have them least. 

Oliver Cummings: So why is it that you see value in the non profit space and where do private investor backed companies sit on that spectrum for 

Roger Martin: you?

So for privately held companies, it really depends on the owner. The owner. doesn't need to have a board, although often there are some regulatory thing you have to have them, but they don't actually have to do anything. They don't, in most cases, they don't have to approve the strategy or approve the budget or capital expenditures, etc.

So if you've got a private entity that wants to be better, They can get a board that will help make them better and what they do with the board is completely up to them as opposed, not completely, but 90 percent up to them as opposed to publicly traded company in a [00:06:00] major capital market. There are a whole bunch of rules and regs around it.

But for nonprofits, though, the reason I think that many of those boards are really helpful is because there's much less overlap. So the members of the board typically know different stuff than the people on the board. Running the non profit and I'll just give you an example of one board. I just, I look back with nothing but absolute fondness for the hospital for sick children in Toronto.

It's one of the best children's hospitals in the world. Typically, it gets ranked in the top, the top three with your Great Ormond Street. Fabulous, tertiary, quaternary, a kid's hospital and they were docs, right? Management were docs, medically trained people, the CEO during my time as a nurse, and they were all eager to get management thoughts and advice.

Now, if we spent our time on the board telling you [00:07:00] morons do it our way, well, that wouldn't have worked out so well. But they were really interested when we said, well, you know, this sort of medical procedural problem, right? There are actually managerial insights and knowledge that you could actually bring to bear on.

And they'd be like all over like a cheap suit. They'd be like, wow, that's interesting. So we could take some of those total quality principles and apply it in this way we hadn't thought of. So there's a greater non overlap of skill sets and a greater interest in the knowledge that Folks with these non overlapping skill sets can bring same held for Tennis Canada.

That was a bunch of tennis people and they were interested in what non tennis people, tennis enthusiasts, but who had other skills did. In corporate life, in widely traded, publicly held big corporation, it's full of what? Businessmen and women. And what's the board full of? Mainly businessmen and women. And [00:08:00] so there's this greater overlap.

And so generally speaking, they are more defensive and guarded about it. Sort of like, well, are you saying you're just a smarter business person than I am? So I don't like that. And I'm here 24 seven. You show up every once in a while. Why don't you just shut up and listen? Is. To a great extent, the attitude of management, most of them, is it all of the time, no, I will never tar the whole thing with one brush.

But that is less conducive to true collaboration than this non overlapping thing that happens in all of these non profits. 

Oliver Cummings: It reminds me of that wonderful Michael Stanier concept of the advice monster, never give anyone advice because you probably haven't understood the problem. If you've understood the problem, you probably haven't got the solution.

And if you've understood the problem and you've got the solution, they're not going to listen to you anyway. Because the implication is you're smarter than 

Roger Martin: them. 

Oliver Cummings: Which I think I don't like when I said that. 

Roger Martin: I like him. [00:09:00] I like him. He is a character. Uh, for, for, for sure. But yeah, it's, it's, it's the, the problem, right?

Is that most people Managers don't want advice most of the time, and a board is kind of intimidating. You kind of, well, if you're the CEO, you report to the board. You're not getting advice from sort of a peer or a subordinate. You're getting advice from somebody who can hire or fire you, and then everybody else who works for the CEO.

It's sort of the same by implication. So that's why it's, you know, Hard to create and it takes a lot of work to create a productive relationship between a board and CEO slash senior management where they get advice because they want advice and the board members think I should give advice because they actually want it rather than I should bite my tongue because they actually don't want it and this is just going to be an irritation.

I should [00:10:00] just smile and and wait for cocktails. 

Oliver Cummings: Reminds me if we had a previous guest professor Andrew Kakabadze who talked about different roles the boards can take ranging at one end of the spectrum from the monitoring function, which is that sort of dealing with the agent who needs to be disciplined to the other end of the spectrum to a stewardship function and what he calls a boundary spanner, unlocking through networks, you know, past experiences or whatever.

And it sounds to me. I've understood, right, you are dismissing the value of a board at that monitoring end of the function. 

Roger Martin: They're totally outgunned. The board, the board and Enron is just a perfect case in point. Who was the chair of the audit committee of Enron's board? The dean of the Stanford Business School who was one of the top five and probably top three and maybe the top accounting scholar on the face of the planet.

Missed everything. So the [00:11:00] ability to actually monitor is very shaky, indeed. And again, the problem with monitoring is proportionate to the likely downside of lack of monitoring. Eiji didn't need any monitoring. He was self monitoring. Skillings. And Enron needed monitoring badly, and he made sure that monitoring was impossible.

And what 

Oliver Cummings: about that stewardship function? As a CEO, I really value having a bunch of people around the table that I can bounce ideas off, that I can run my strategy past and get them to sort of critique it, make it better. And as a board, given you have control over who the CEO is, is why is there not more value coming from boards?

If you can change the CEO to be someone who does want value from the board, and then that board can help to make the strategy or whatever else that might be better because of the experience that they've got. Why is [00:12:00] that not working? 

Roger Martin: Well, it's because CEO is the bottleneck. I'll give you a little story.

I have a friend, super successful CEO of a company who I've done a bunch of strategy work for over the course of his career. He's the chair of a very large publicly traded company in the U. S. Sort of a Fortune 100 company or maybe Fortune 50, something like that. Gigantic company. He, as chair of the board, knows that that company has just gone through a strategy exercise, but it is a planning exercise.

They have no strategy. They have a plan. They need a strategy. He introduces me and says to the CEO, you know, we kind of, you need to upgrade your strategy. And the CEO does this. slow walk, right? It's, oh, yeah, you know, it's so hard to carve out time to have a meeting. And so then we have a meeting, and oh, we'll get right back to you.

And then four months pass, and then I sort of badger him because [00:13:00] I have to sort of respond to my friend that I'm actually doing something. And they're, Oh, we've decided to go, you know, kind of a different direction because we've got a lot of execution to do now and next year we'll, uh, kind of, we'll check in with you.

I just had to say, like, don't, right? I don't want to talk to you people. I don't want to waste my time actually trying to do something that you have no interest in. So there you have the chairman telling the CEO, you have a problem. And. You need to fix that problem and the CEO is saying, basically, not on your life.

I'm not doing that because I don't want to do that. And I've told my friend, I said, you know, you should be gearing up for firing him. You're going to have to fire him. And because he's incompetent, he doesn't have a strategy. He doesn't know he doesn't have a strategy, doesn't want to get a strategy.

You've offered to help and he's not doing it. And that I could, I could repeat that [00:14:00] story kind of many times. And because this is a not unusual situation where somebody knows that another was the lead director of another company. So many CEOs do not want advice of any sort from their board. They want their board to shut up and nod approvingly at whatever they do.

And that's a non trivial percentage of CEOs. So the board is, in some sense, got one choice. And this is what I warned the CEO of, or the chair of. I just said, listen, you should be getting prepared. You're probably not going to fire him in the next six months, but you'll need to fire him because he sent me his strategy and it was garbage.

It was absolutely garbage. And so I can, you know, I'm enough of a strategy expert, such as it is, to be able to say, I know when a company executes a garbage strategy like this, what's going to [00:15:00] happen. So get prepared now. But it's going to take, my bet is, 18 months to two years to pull together the coalition of the board and to see crappy results for a couple of years where shareholders and customers are all going to take it in the teeth and that's what's going to have to happen.

Then they're going to bring on another CEO and There's a decent chance that CEO is not going to get it either and not going to be interested in advice. Even though my CEO friend has been a phenomenally successful, he turned around a big company, you know, had a great track record before and then went and went to a turnaround situation, turned it around and blah, blah, blah, blah, blah.

Oh, no, no, I'm smarter than him, says the CEO. And I don't have to listen to my chair. Have you ever seen a CEO get value out of their board in a listed company environment? Sure. I mean, that's what I say. It depends on the CEO. AG did. I remember helping him go [00:16:00] to the board on, Big questions where he put it to the board.

Hey, based on your experience, I could do A, B, C, ears and mouth. He even did a really cool thing where he said, well, I've put internal people in charge of making the best possible case for a different group, best possible case for B, another group, best possible case for C, each of them has got an hour to present to you.

And then you have an hour of Q and A with them, or maybe it was 45 minutes. I forget. And then I want your advice on A, B or C. What's not to like about that? Right? Dragon's Den of strategic 

Oliver Cummings: choices. 

Roger Martin: Yeah. Yeah. And each of the groups really felt that their answer was the right one, the best for Procter and Gamble.

And the board gave him really helpful advice. So I've seen it. But the irony, the great irony is AG didn't need it. If he wouldn't have gotten it, he would have probably made the right decision anyway. But on balance. One, the board helped legitimize what was a [00:17:00] controversial decision. It was on what was the world's largest outsourcing at the time, the largest outsourcing in history as of the time it was done.

So it was a big controversial decision. So getting the board's approval for the way they were going to go about and do it was really helpful, but he didn't need it. When shareholders need a board to be effective, really need a board to be effective, it's least likely that it will be effective. That's the paradoxical conundrum we have in, in board governance.

Oliver Cummings: Let's move on to talk about strategy, which you've touched on a bit there. When you ask, when you ask a board today what their strategy is, what does good look like? 

Roger Martin: Well, again, it's the minority. Strategies become the lost art, unfortunately. It's been overtaken by planning, and so most boards think a strategy is something they think of as a strategic plan, which is a list of sensible sounding [00:18:00] initiatives, each with a price tag associated with it.

So that would be the dominant definition of strategy in boards and a dominant definition of strategy in senior management teams, too. So between 80 and 90 percent of what is called strategy, strategy is an integrative set of choices that that compels customers to take the action you wish. And most aren't an integrative set of choices.

They're a laundry list. And so again, the people who need help with strategy are least likely to get it. The CEO that my friend was chair of desperately needs strategy advice, and he's going to make absolutely certain that he doesn't get it like absolutely certain there is no way he's going to get helpful advice from anybody.

And that's one of the sad things about the state of strategy in the world today. 

Oliver Cummings: In Playing to Win, you talk about those five integrated choices. I guess the one [00:19:00] that always stands out to me is the how will you win question. How does a board member get comfortable that their organization's response is correct?

will indeed win and is a sustainable winning choice. 

Roger Martin: Yeah, I mean, I give people a little test for that, right? I, you know, I say the win for it to be a sustainable win, to be an actual win, it's got to be backed by stuff in the fourth box, right? Must have capabilities, Spike, must have capabilities. that pass the can't won't test either competitors can't they're simply unable even if they tried to match your capability that's necessary for you to win or they won't they it's too sort of tricky for them they have mixed motives they're like auto oems who say i don't want electric to succeed and so i'm just not going to build electric cars and tesla gets to have a 10 year head start on electric cars so that's [00:20:00] what i encourage i say Make sure there's a theory of the win, so how to win should be a theory of how, in the place you've chosen to play, you will actually be able to play in a superior fashion.

What's your theory? These customers are going to like our offering more and value it more, or we can do this at a lower cost than our competitors? Oh, and what capabilities back that? And can we demonstrate that we have or are building and can do so faster, better than our competitors? So, I would say to board members, they just have to, you know, pull the string through it.

That aspiration, that winning aspiration, one, is it an aspiration for winning? Is it related to the where to play, how to win? Is there any where to play, how to win shift? If we narrowed our where to play, would it make the how to win more powerful? Or if we broaden it, would it make it more powerful? Have we calibrated those two together so that they're the most powerful pair?

And then the reality check. Do we have capabilities [00:21:00] that pass the camp won't test are they reflected in our management systems and build and maintain our must have capabilities that enable us to win where we've chosen to play it to meet our winning aspiration. It's just an integrated set of choices.

And if instead they come with a laundry list and say, well, we're going to build this plant and we're going to hire some salespeople and we're going to adopt it. Total quality and we're, we have this new talent management system and we're going to do a new bond issue for 2 billion. That's our strategic plan.

Could you please approve it? And boards generally do because they say, well, building out plan is that stupid? No, that's good. They're having a talent management. Is that stupid? No, it's not getting some more capital on the balance sheet. Well, okay. Well, all the getting's good. Is that stupid? No. And so because a bunch of things are non stupid, the board says, hooray, go CEO, this is fantastic.

And then three years or five years later, when all of that non stupid stuff ends up with being [00:22:00] producing a completely mediocre or worse than that result, the board will say, well. We reviewed their strategy, it made sense and the management was enthused about it and we did all that. I guess it must have been random, unexpected events.

We were unlucky. Unlucky. It's really sad. There you go. That's corporate 

Oliver Cummings: life. One of the previous guests we had on the podcast was Hamilton Helmer, who has his seven powers as these modes that organizations can aspire towards achieving a sustainable, I guess, claim to win strategy. Do you subscribe to his thinking there?

Is that effectively what organizations should be aiming for? One of those seven powers? And if so, do you see a broader set than that? Or is that not how you would integrate those two concepts? 

Roger Martin: You know. I leafed through that book at one point because somebody told me I should, I probably should read it more carefully, like, it made [00:23:00] sense to me that you could create a categorization scheme for, if you will, how to win, and that seems to be what he has in there.

It sounds sensible to me. Have I attempted to, you know, kind of integrate that? Say, no, so I'm not capable in some sense of answering your, your question. 

Oliver Cummings: I guess to put it another way, do you see a finite number of ways that an organization can win? 

Roger Martin: Yes and no. So I am, if you will, portarian in this respect.

The fundamental microeconomics of business will tell you there are two ways. You can be in an industry where you're a price taker and you have a lower cost position than others. So you are facing what you see as a flat demand curve. That's one fundamental microeconomic state of the world. There's another where you're facing a downward sloping demand curve, which is because people think that what you're offering has a certain specialness to it.

And if you charge a lot [00:24:00] for it, Fewer people will buy it. If you charge a little for it, more people will buy it. That is a differentiator. You have established something that causes you to face a sloped demand curve rather than a flat demand curve. So there are, and always have been, and always will be, two generic strategies.

Now, how you, in the former case, create a low cost position, there are two strategies. So many ways to do that, how you create differentiation, there are so many ways to do that as well. So I think there's a really great variety of ways you pull off the result, which is we are acting as a cost leader, we're acting as a differentiator.

Now, just as I've said, there are two. If Helmer is saying there are seven, which I believe that's what the book says, it's not different. There may be all of the myriad ways that I [00:25:00] think you can get advantage. 27 of them would fit under Helmer B, Helmer 2, or whatever, and so it may be nested in that way.

But my reaction is, to a great extent, that advantage is very situational. And this is one reason there's a lot about strategy I don't like these days, which is sort of like, somehow these strategies are universal, you should universally do this, and it doesn't matter what industry you're in, what customers, no, it's very situational, you can have a strategy strategy.

That works wonderfully for one set of customers, one place and is a complete bust elsewhere. What's the best, arguably the most accomplished ride hailing company on the face of the planet? Uber. How did it do in China? Got his face shot off. Annihilated. Has to head back tail between its legs. How could that be?

Because it's got the best strategy. It's got the best strategy for a bunch of where to plays, but [00:26:00] not all. I found 

Oliver Cummings: it difficult as both a CEO and a board member creating and communicating clear strategies. It's actually one of the questions we have this community, the board members, where they can come and ask questions and tap into the hive mind of the community and it's one that's come up I'd say a bit recently where one of the questions is, who owns the strategy?

Is it the board? Is it the CEO? How does that integrate? You've written some really good stuff on this which actually has really helped me but I'd love to hear in your own words how you think about that strategy. planning process for a board and executive 

Roger Martin: that take place. Well, you've asked kind of a number of questions in there.

I do think actually asking the question who kind of owns it is maybe not so helpful, right? Like, it is the job of management to come up with a strategy. It's the job of the board to give advice on that while it's being created and do of course say, yeah, we are, Behind this, we affirm the strategy. So, so it's a bit of a joint ownership.

[00:27:00] I think if you are a CEO and you actually want to get value from the board, it's your responsibility to set up interaction with the board that facilitates that. And an interaction with the board that facilitates that is not it. Going away, creating a strategy, coming to the board and saying, here's our strategy, please say yes, which is by the way, 90 percent of the time is that's what it is.

And you're going to get nothing of value. All you get is irritation. They'll be irritated. You'll be irritated. And so if you actually want to have a dialogue with the board, my advice is have them along for the whole journey. Including right up front saying, what problem are we trying to solve with this strategy effort?

And if the answer is, I don't know, then don't even bother doing strategy. It'll be a complete waste of your time. The worst reason for doing strategy is it's September and we always start strategy in September. You know, that's a dreadful reason. [00:28:00] The only good reason is. We have this gap between what we wish were happening and what is happening, and we'd like to fix that gap.

I'd go to the board and say, that's the gap we're going after in this strategy. If you see a different gap or a different way to define that gap, some nuances around it, or you'd rather have us working on something else, tell us now, because otherwise you're going to be sadly disappointed, because we're going to come back with an answer for that.

And if you say, I couldn't care less about that, you'll be all upset. Okay, fair enough, so you go and you agree on that with the board, and you go away and come up with ways to make that problem go away, A, B, C, or you can come up with these three ways to make that go away. And I recommend doing something called reverse engineering, which is to say what would have to be true for A to be a great idea, what would have to be true, on the other hand, for B to be a better idea, what would have to be true for C to be a better idea than an A or B, and go back to the board and say, you know, that problem we all agreed on that we were going [00:29:00] after.

We have three answers. They're very different answers. A, B, and C. For us to choose A, we'd have to believe this. For us to choose B, we'd have to believe this. For us to choose C, we'd have to believe this. Then I argue that you should ask the board, do you see a D? that we should have thought of, that we haven't, that you'd want us to add into this mix?

Yes, no? If they say yes, do you say good? Fantastic? You might even want to reverse engineer it in real time or reverse engineer it offline. Come back to them and say, we've reverse engineered your D. And ask them, is one of A, B, and C you're just so allergic to for reasons that we may not have, not have known that it's just not worth pursuing?

Let's say they say, no, those are all fine, but we'd like you to add d. And then you say, and do you agree with the what would have to be trues? Like, this is what would have to be true about customers for A to be good. This would have to be true about our competitors for A to be, A to be good, etc. If you think that what would have to be [00:30:00] trues are incomplete, inaccurate, whatever, help us out, help us come away with it.

So, you come away from that meeting with an agreement with the board on what answers are on the table and what would have to be true for those. And I even go one step further and say, of all those things that would have to be true, what are the ones that you're least comfortable are true or can be made true?

Those are the barriers to choice. If it's like, customers would have to believe this, and Management board says, I don't know if we can even convince them to believe that. You'll never choose C because you don't believe that. So if you want C in the game, you would have to say that's a barrier and we'd have to go off and test that.

So you come away with agreement with the board. What's possibilities are on the table? What would have to be true? And what are the things that you're most worried about? As management, you go away and study those things that they're most worried about so that you can come back to the board [00:31:00] and say, remember, we're going to work on this problem.

We all agreed on that. We agreed it's A, B, C, D. Here's what would have to be true. Here's the things we worried about. We did this analysis and this analysis and this modeling, this simulation, this whatever, whatever. And we've come to the conclusion B is the best alternative. And here's why. Because for A, for C, and here's why.

At that point, in my experience, the board says, great, let's do it. Literally, that's all I've ever seen. Why? It's because. They were along for the whole ride and they've had their chance to input in ways that are both important to them in their stewardship kind of role and just logically consistent for them and the company has gone off and done work that's consistent with that.

And even if they said, I think it's going to be C. Or, I really like D, generally they just say, that's not the way that cookie [00:32:00] crumbled. The work, the thinking, took us to a different place. So, if, as management, you want to get lots from the board, that's the way to do it. Most management doesn't. Most management wants to come up with whatever they want to do, and then tell the board at the end, and have the board nod and say, Oh, good for you, excellent, nicely done.

Can we have cigars and cognac now? 

Oliver Cummings: That's all we have time for with Roger in this episode, but we will be releasing the second part of our conversation next week, where he considers the board's role in communicating strategy, whether there's such a thing as a business that is a strategic loss cause, and how he used board level strategy to achieve unlikely wins turning the then unfancied Rotman Business School and Tennis Canada into global leaders.

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