Unnatural Control – The Importance of diversity in operational control for small and mid-sized businesses

The division of control for larger companies is well defined; they have multiple executive employees, many times they have an independent board of directors, they may also have shareholders who represent a modicum of control within the organisation.  This division of control provides a system of built-in checks and balances that mitigates operational, financial, and infrastructure risks within the organisation while also providing the type of differentiation from a decision-making standpoint that fosters innovation and growth within the organisation.

While it is an imperfect system of management, there are significant benefits to this type of diversity as it relates to the internal controls within an organisation.  Without these controls larger organisations would be subject to the decisions and management of a singular individual and group of similar-minded individuals.  Not only does this increase the operational risks associated with that company, it also decreases the attractiveness of that company to investors, consumers, strategic partners, and lending institutions.  When one defined management structure is in full control of the company the reality of the situation is that eventually that group or individual will be wrong.  With that understanding it is much less likely that another entity will want to have a vested interest in the organisation.

Taking these issues into consideration, small and medium-sized organisations must understand that the same benefits of diversity that benefit larger companies would also benefit smaller entities if they were implemented correctly.  In trying times, smaller organisations have much less room for error and are generally in a less-advantageous position to grow and develop; and in these times there may be problems that threaten the solvency and sustainability of the organisation.  In these times only depending on one set of views from the management team can be both dangerous and counterproductive.  While many organisations that are considered small or mid-sized have partners running the organisation (and are not under the management of a singular individual) they are being run by like-minded individuals who don’t have diverse views on running the organisation.  This article is directed at those organisations and its purpose is to discuss the advantages of implementing a diverse management infrastructure more similar to larger corporations than simply depending on the views of a single management body.

When we are discussing diversifying the management team we don’t necessarily mean developing a board of directors, because for small (closely-held) organisation a board of advisors can be just as effective.  In addition we are also not solely focusing on external management bodies as I have found that an internal management body that focuses on bringing diverse personnel together for the purpose of organisational decision-making also provides a major advantage.  Below I have specified some of the ways that privately held organisations can diversify their management infrastructure; and in coming articles we will review each of these in further detail.

1. An external board of advisors – Simply creating a board from some key executives, strategic alliances, industry experts (or professional experts), and possibly from customers or people who represent your customer base.
2. An internal management body – Taking division heads for key operational departments and bringing them together for the purpose of decision-making and operational direction.
3. Division of Executive Power – When the owner or the president of the company goes outside of the organisation to fill key operational positions (such as CEO, Vice-President of Marketing, Chief Informational Officer (depending on industry), Vice-President of Sales, etc.)
4. EquitySale(Strategic Partnership) – From this perspective I am generally referring to a Venture Capital or Private Equity situation.  When companies are entering a new stage of business and the current management team believes that they may not be equipped to handle the growth of the business, the ownership may decide to sell off some of the equity to one of these entities in exchange for cash and management direction.  In these instances the Venture Capital firm or the Private Equity firm will not only provide financial assistance, they will also provide organisational support by providing access to strategic alliances, potential customers, and most importantly they can appoint experts to the board and insert experts into the management team which can be extremely beneficial for management.

While these aren’t the only methods of diversifying the management or decision-making infrastructure they do provide examples of how a company can mitigate its operational risk by diversifying the method upon which they make decisions and take risks.

The benefits of this are many, but for this article we will only concentrate on three:

1.    Risk Management – The old saying goes “Never put all of your eggs in one basket”, well a company      should never let all its decision be made by one person. – As it relates to risk, being overly dependent on one entity (be it one person or a few people who have similar interests) is in a word – dangerous.  Even the most expert managers and owners make mistakes, and in times where each operational risk carries with it the sustainability of the organisation, it is not prudent for all decision making to be centralized in one entity.  Through proper diversification companies can benefit from multiple perspectives as it relates to running the company.  Be it financial decisions, strategic decisions, human resource decisions, or development decisions, the ability to have a multitude of informed people making those decisions is generally more advantageous.  Furthermore, if this is done properly and with full transparency then individual goals, interests, or wants shouldn’t put the company in a poor position. The fact is that everybody has independent interests and when those conflict with the interests of the company a singular management perspective can be extremely detrimental, where diversity can generally make sure that those independent interests don’t cause undue harm to the entire organisation.

2. Growth and Development – The easiest way for an organisation to grow is to take advantage of opportunities when they arise.  When you have a diverse management structure that values the ideas and thoughts of a multitude of individuals the company is in a much better position to find growth and development opportunities.  When a singular management vision is the only one that is adhered to then the company is at the mercy of that singular ideology; if it is too conservative or too aggressive the company is forced to deal with it.  The issue is that when that ideology is singular; that single-mindedness will undoubtedly miss opportunities.  When multiple people are tasked with making these decisions then they are going to be focused on finding these opportunities which (in basic math terms) means there will be more opportunities.  Furthermore, the diversity gives the company choices as to what direction to go into; which can be extremely beneficial.

3.  Access -  When a company has strong partners, or multiple decision makers, that company makes itself more attractive to those entities that are capable of drastically improving operations and selling opportunities.  When a company obtains venture partners who have well-respected industry contacts then they obtain access to strategic alliances, suppliers, logistical partners, and customers that they wouldn’t have had access to. When a company has strong sales or development partners, they can then make themselves more attractive to lending institutions or public relations entities that can help the company grow.  If the company chooses the right partners, they can have access that would simply be unobtainable if they didn’t have the diverse management structure.

 

Simply stated, diversity has its drawbacks; decision-making is a slower process; there will be conflicts, and there is the potential that the system of checks and balances will mean that some lucrative opportunities are missed.  However, this type of set-up also insulates companies against many of the risks that have destroyed small and mid-sized companies over the last three years.  There is a reason why even the most respected leaders (the Buffets, the Gates, the Bransons) have a team of advisors; because not doing this leaves the fate of companies in the hands of an individual; and eventually leads to failure.

By – Vijay Mistri: Assists and advises CEO’s, Directors, Executives, Entrepreneurs and professionals, achieve standards of excellence on the four core pillars- Strategy, Risk, Finance and Best practice in order to build stronger brands and increase performance and efficiency. www.rentadirector.com  email:vijay@rentadirector.com

 

Sustainability Secret – What Company Directors and Executives Miss Out

We are faced with some of the most difficult times in the corporate world which has led to some of the  biggest failures.

My main purpose for this blog is to reveal what I consider to be the missing ingredient for many organisations. This is simple yet powerful. It can be achieved with ease yet business people don’t make the relevant changes to drive their organisations back on track.

Sometime ago, I was Chairing a hospital board on a Governance facilitation and the first thing I learnt was that the directors present didn’t understand the processes thoroughly. Sadly discussions were not well coordinated and were short sighted. We have witnessed a big name, Kodak filing bankruptcy.

This article is applicable to all small, medium and large organisations. What I would like to reveal can change the face of how you operate. I list the 4 fundamental know how which all directors and executives must have.

1) Strategy-

Many directors do not have a full grip of strategy. If at any time, you feel isolated as a director from a company or you feel your points do not sound valid to the rest,  you have not coordinated and linked long term with short term goals. You have not been part of the team managing  to permeate the message to the managers who in turn would be able to empower the rest of the team. But what actually do I mean by, understanding the strategy fully? There is a whole list of what you need to do, but I will give you two important points. Have a brief or summary of the strategy which you have gone through FULLY at least 7 times in a span of 3 weeks . Take out time and understand the strategy completely page by page. Make notes and refer to the detailed strategy. Within 6 months, you must master your detailed strategy. If you can at the very least do these two things, you are on the path of achieving progress for your organisation. Finally, make a list of relevant questions leading to new thinking as you will start picking these very easily. These may be for Management(or for the board depending on the size and complexity) but are important starting steps.

So what happens if you don’t have a strategy? Well, you need to learn the full process and functions, mapping your existing resources with care and construct a future based plan. ( You could use a consultant to help).

The whole idea is for you to forge ahead with your resources acting as drivers.

2) Risk Management-

Risk management is crucial to your overall processes. There can be internal risks such as staff utility, machinery and infrastructure issues, succession planning, failure in execution as well as a myriad of  activity challenges leading to adverse performance shifts.  External risks can be strenuous. Regulatory changes, currency and commodity price change risks, political commonly impact an organisations overall performance.

A few years ago, a client of mine was facing a high cost exposure as operations were decentralised with varied locations. Rentals were high and coordination and communication was a big problem. We laid out a 10 year plan to centralise in one location and noted that benefits outweighed costs in the future. Unit executives were called in and I lead the discussion on what the overall benefits would be. I also discussed a few challenges and how we would be able to overcome these as a group. The level of energy went from low to high as executives saw that no one would step on each other’s toes. Rather, there would be synergy and bigger incentives both personal as well as for the company. The result was that the operations went on to improve and increase significantly.

It is extremely important for boards to explore all aspects of risk . This can be done using either a risk committee or a risk expert or officer, again depending on the size of the organisation. Risks can either be qualitative or quantitative. A point to note, is that discussions of material substance needs board attention and intervention. They have to discuss all points impacting any management decision and collectively support a motion which is meaningful as well as exhausting all alternates and Plan B’s. Learning everything you can relating to executive risk management for your organisation will enable you to switch into a better connectivity and linkage with long term.

3) Finance:

If there is one area which all executives and directors MUST know is finance. After all, finance is the lifeblood of all organisations. Knowing financial statements, working capital movements, Key Performance indicators and what they mean for your organisation is crucial. Astra Zeneca in the UK announced about 7,300 job cuts globally due to patent expiry out of which 350 is from research and development. Whether this move is justifiable or not, I am unsure but it surely raises questions. Did the board and the executives not see this coming in their long term plan? Compare this with Apple which has competition from Sony, Motorola, Samsung and other companies who have similar products. Yet Apple dominates the mobile phone and tablet markets and build capacity instead of reducing capacity. I am aware that this may not be the right comparison but wish to make a point. Was there something different that Astra Zeneca could have done which would not result in job losses? I am sure if we ask their executives– what would you have differently if you could turn back the clock? they would have a whole load of missed out opportunities which may be right in front of their eyes.

The point I wish to make is to be bold enough to make the right decisions and be a driver towards company growth. This can come through having a thorough know how on your organisation’s financials.

4) Best Practice: 

At present there is big discussions on governance and how it impacts organisations. Companies are asked to be owner accountable and more focused and disciplined, owning up to failures. The key to good governance and best practice is to have a set of principles which are carefully set out with the company’s core purpose at its centre. The other key element is to ensure that Values are central. Ethics plays a key role and dynamic discussions are called for. It is not only about having a chairman or a lead director, but to have a group of individuals who are passionate to drive the organisation further through contributing and attending meetings. Some company cultures and behaviours need to change and this can only be done through engaged discussions and respect for all directors and executives. Information must be very clear and succinct and to the point. There has to be oversight mechanisms which are meant to improve measures and operations and not act as a  watchdog protocol. A winning company is one which has shareholders and stakeholders who trust the custodians of the organisation and who are confident and stand by the company’s good as well as challenging times. This can only happen is they have full faith in the organisation. This applies to smaller companies as well who can use similar practices to build upon their existing standards.

In summary the four areas which will drive company excellence is to have deeper insight, deeper understanding and clarity for directors and executives in Strategy, Risk, Executive Finance and Best practice. These four, if properly coordinated will drive your company to a stringer structured company.

Vijay Mistri assists Directors, Executives, CEO’s and professionals, sharpen their executive competence and have world class standards of excellence enabling them to build stronger companies, performance and brands.  He is the CEO and Founder of Rentadirector. www.rentadirector.com – email: vijay@rentadirector.com