Archive for the ‘Direction, Strategy and Planning’ Category

Train wreck RIM and its dysfunctional board: Critics weigh in

New RIM CEO Thorsten Heins is in denial (see “RIM CEO Welcomes Critics to Happy-Fun Rainbow Land”). Investors view the company as in a death spiral. It has lost 95% of its value and is laying off 1000s of employees. RIM is expected to be sued for misrepresentation based on this denial.

A board, however, should never be in denial. Recall one of its directors, Roger Martin, stating that there was no one who could have replaced former co-CEOs Jim Balsillie and Mike Lazaridis (see also

RIM BOARD MEMBER: Our Critics Are Idiots — We Had No Choice But To Run The Company Into The Ground). Martin was also highly critical of external criticism.

Now RIM is holding its annual general meeting this week wherein many of its current directors will be eligible for re-election.

It took the RIM board years to finally accede in 2012 to a non-executive chair (see the 8 page report here), a practice recommended in Canada since 1994. What about RIM’s directors? Did, or do, they have the right skills and competencies? Could this tragedy and waste of what was once the second largest Canadian company have been prevented? If so, how? What if the board of directors was actually effective? Drawing on posts and commentary within the LinkedIn group Boards and Advisors, some commentators weigh in.

On the composition of the RIM board, by experienced non-executive chair and activist investor Henry D. Wolfe:

“What might be the situation today regarding RIM’s performance and stockholder value if the following board had been in place:

1.           A strong non-executive chairman with a stellar track record of value creation, tough but non-autocratic leadership skills and a mindset of high expectations and shareholder value maximization. This individual would be the key to ensuring that board functioned with shareholder value maximization and management accountability fully at the forefront. In other words, he or she would provide the leadership and tone that brings the specific expertise of the directors into focus for the shareholders.

2.           Two marketing executives with the track record and experience that would be in alignment with RIM’s needs. The key here is not just marketing experience and track record but the specific type of marketing experience that is directly relevant and of value to RIM.

3.           Two technology executives with the track record and experience that would be in alignment with RIM’s needs. The key is the same here as noted above for the marketing oriented directors.

4.           One or two partners from a hedge fund like ValueAct Capital. ValueAct is an activist hedge fund that takes a cooperative approach with boards and management after making an investment and usually seek one or two board seats. They focus on technology companies and bring very sophisticated and exceptional value maximization skills to the boardroom.

5.           One or two additional directors selected based on other strategic or operational needs of RIM not addressed by the marketing and technology directors.

In other words, what if the board was selected based on RELEVANT skills (including value creation skills), expertise, track record and direct ability to add to the performance and ultimate value of RIM?”

On distancing RIM from its past, by CEO and non-executive director Lucy P. Marcus:

“RIM needs revolution, not evolution, and yet it has chosen to replace its co-CEOs with a company insider, Thorsten Heins, one of RIM’s two chief operating officers. While this may provide some continuity, what RIM needs right now are fresh eyes and ideas.

RIM’s newly appointed independent chair, Barbara Stymiest, has been on the board for five years, and though she comes with strong credentials, she may be too closely associated with past failures to be truly independent.”

On RIM’s governance review report, by former Federal Cabinet Minister and Member of Parliament, the Hon. Joseph Volpe:

“…a seven month gestation to produce an eight page, pro-forma note reflecting Management’s concession to the minimum requested by the Marketplace! As I read the report, the Board implicitly accepts the very passive role in the affairs of RIM that Management has assigned it. Perhaps, sadly, both Parties are right. The Co-CEOs developed a product, marketed it and created great wealth in the process for all involved. The Board, created and dominated by the Co-CEOs basked in that credit.”

On RIM’s current weaknesses and failings, by futurist, director and advisor Frank Feather:

“RIM was and is a one-trick pony. That is okay, so long as it keeps its innovative edge. But it also needs to seek out adjacencies to build other revenue streams, as Apple has demonstrated. …

But relying on technocratic founders and like-minded COO, the company stayed with its one-trick pony and even became complacent that growth and market leadership would continue forever – the mark of arrogance or laziness.

It is easy “not” to make decisions when things are going well. But not rocking the boat can be the worst risk, as has transpired. Again, the Board is at fault here.

As well, of course, flush with money, the founders went off on tangents, aspiring to acquire a sports franchise. Even if that had been successful, I doubt it would have brought any adjacent revenue to RIM. Meanwhile, the technical focus of RIM became negligent, as eyes and minds of the CEOs went elsewhere. The Board should have reigned them in and told them to focus on business or they would replace them as CEOs. The Board failed to act on this matter, and it greatly contributed to the company floundering.

So there is a long list of Board failings.

…I suggest that RIM would be an entirely different company today, with still a leading-edge product, indeed with a stable of complementary products, also with adjacent service revenues of some major significance. It would have been a slick value-generating machine.

RIM had (still has, IMHO) two major weaknesses: a weak Boardroom team, and a weak management team, with management leading the Board by the nose, and was short-sightedly focused on tweaking existing technology rather than creating new game-changing appliances and services. It is a class is case of myopia, and poor team development.”

On implementing major change, the role of the Chair, and CEO succession, by Henry D. Wolfe:

“When major change is needed, restructuring the board should be the FIRST step. I can speak to this first hand as my business focus has been and continues to be on dealing with under-performing companies. After an initial in-depth analysis, the first step is always a restructuring of the board before any further action is taken. Although there is more complexity involved than this comment section will allow, said simply, if you get the board right and laser focused on performance and value maximization, then all else will cascade down from that level. …

The big question regarding Stymiest is whether or not she has what it takes to LEAD and all that that implies. Will she be able to lead the board, including the necessary restructuring to turn around the company and ensure value maximizing strategies are evaluated and executed? Will she be tough enough to lead the board to hold the CEO and his team accountable for results? Will she be aggressive enough to ruffle feathers among incumbent directors to the degree needed? Will she be able to reverse the management driven nature of the board? …

One major flaw jumped out in Stymiest’s comments. The “succession plan” was developed by the former co-CEO’s rather than the board. The former co-CEOs initiated the execution of this plan, not the board. Her comments about independence of the board (and again, independence is overrated) ring hollow. As I suggested in a previous post re RIM, this is nothing more than a shuffle; it is not the shakeup that was needed. With a few exceptions, board made up of “corporate” people are incapable of a real shakeup.”

What are the chances that the above changes and reforms will occur? It is highly unlikely that they will if many or most of the current RIM directors are re-elected this week. What is needed at RIM is the avoidance of denial by the board; a demonstration of leadership; and directors with the relevant skills, experience and track records to restore value for shareholders.

Why boards of directors lack courage

Last night on the national news, embattled imaging-seller Kodak was compared to Research in Motion by a commentator comparing both companies’ inability to exploit advantages that they originally created. Regarding Kodak, one younger woman who was interviewed remarked, “What is film?”

A few weeks ago, I took a friend into a Black’s Photography store to have a digital picture taken for a LinkedIn profile picture. I asked the employee if he could take several digital pictures and email them to us so we could select one. The person had not even heard of social media, let alone LinkedIn, and said that the store could only take passport photos in hard copy form. Then we drove up the street to another picture store. This time we were told that there is a $300 “sitting fee” to have a picture taken. I took my friend’s picture myself with my digital camera and we downloaded the picture into LinkedIn in less than 15 minutes. I replaced my blackberry phone with an iPhone about three years ago. I doubt these photography stores – and maybe even RIM – will exist in their present form in the next few years.

Kodak is on the brink of bankruptcy. Three of its directors resigned this week. In a Harvard Business Review blog, an adjunct professor Simon Wong wrote a post questioning whether independent directors should flee their companies in times of trouble. Wong argued that it’s problematic for such directors to leave when they are “most needed.” Professor Michael Useem from Wharton maintained that leadership means you “stay the course.”

I would argue the opposite. The very people who caused the problem are unlikely the ones to solve it. These directors are probably “least needed.”

The question is not whether failed directors should stay on boards, but why they were not replaced sooner. Directors should be much easier to hire and fire by shareholders. Today, it’s virtually impossible to do either easily. These two things need to change for corporate governance to improve.

Kodak’s business model should have changed two years ago and maybe if shareholders could replace the directors more easily who were incapable of changing the management and business model, this actually would have been better.

Shareholders should not have to fight long, expensive public relations or proxy battles or arm-twist behind closed doors to effect change because they have no legal channel to do otherwise. Right now in Canada, shareholders cannot even vote “against” a director (they must either vote “for” or “withhold”), and a director can be elected to a board with a single vote “for” under existing legislation. This also needs to change to give power to shareholders to nominate and replace board members of the companies they own.

Currently, troubled boards drag their feet, are silent, write letters, conduct studies, avoid meetings, and refrain from making the tough changes necessary. They do so simply because they can. We see examples of this almost on a weekly basis. Why is this so? Self-interest and lack of courage.

The self-interest is obvious. Directors are conflicted as they are assessing their own performance and would rather not advocate their own replacement. Change will unlikely come from within.

Regarding lack of courage, experienced non-executive chair and activist investor, Henry D. Wolfe, a member of the LinkedIn Group, Boards and Advisors, when speaking of directorial courage from an investor’s perspective, wrote yesterday:

“From an investor’s perspective, if I am aware that directors in a company in which I have a position are acting cowardly because they fear the ramifications, then I would be inclined to take action to replace those directors with individuals who will not shirk from taking the action necessary, including speaking their mind, to aggressively pursue the maximization of the funds that I have invested.”

Why do boards lack courage, or the willingness to act during non-performance and significant declines in shareholder value? Three reasons: they are not truly independent (I have written about director independence earlier); they lack the recent and relevant industry experience to know what to do; and they lack leadership. They therefore become captured by management, defaulting to process and denial rather than making tough choices in the interests of shareholders.

Corporate governance is a rather genteel sport at present. Many directors of companies have not led or significantly influenced the very industries as executives on whose corporate boards they sit. Be it technology, transportation, mining or financial services, if you scrutinize failed or underperforming boards or companies – really scrutinize – this serious shortcoming – the lack of industry experience and leadership – will become obvious. Many more directors need to have been the primary person responsible for driving superior performance and redefining competitive dynamics within the industry for corporate boards to be effective. These directors should be sourced globally. Local accountants, lawyers, business school deans, consultants, politicians, and even CEOs of unrelated industries are nice but they should be the minority. A majority of these latter individuals is not the recipe for an effective board. Sadly, many corporate boards look like this, are dated, and are in dire need of renewal and diversification.

Lastly, and most importantly, boards need to be independently led, in substance and form. First and foremost, the nonexecutive chair should have a deep and full understanding of value creation for shareholders and a mindset for the longer term; be disciplined and focused on strategy development and execution; and be able to lead and inspire – really lead – independent directors and maximize their engagement, performance and focus on the most critical objectives. Any board that is ineffective likely has an ineffective chair.

Then, and only then – when a board is independent, composed of industry leaders, and effectively led – will it rise up and have the will to act. The fact this has not happened yet in many troubled companies means change must occur by shareholders rather than from within. Regulators would be well served to enable corporate governance changes to be facilitated by investors.

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