1: Will your organization adapt or fail?

“Life short, art long, opportunity fleeting, experience misleading, judgment difficult.”

Hippocrates 400 BCE

In 2400 years, nothing has changed in human nature, but everything else has. The first quarter of the 21st century has witnessed colliding wave trains of change from every direction - social, political, economic, technological, demographic, legal, environmental – you name it. The momentum of change, its mass and velocity, is accelerating exponentially. We are in an era of extreme uncertainty, complexity and instability.

One result is that corporate life is getting much shorter. Since 1957, the average life expectancy of an S&P 500 company has declined by more than 70%, and it is still falling (1). Today’s organizations may have shorter life spans because conventional collective decision-making processes are unable to keep pace with the external rate of change.

This manifests itself in several ways. There are numerous examples of boards (and their executives) who did not recognize and seize upon existential external opportunities, which later became existential threats. Others recognized the need for change but failed to execute the needed changes. Others failed to detect internal control weaknesses and fraud. For example, between 1999 and 2010, CEOs or CFOs were involved in 89 percent of SEC-prosecuted fraud cases (2).

This is despite numerous governance reforms over the past 50 years that have largely focused on board structural issues such as independence, composition, and director tenure. Those reforms, while necessary, were not sufficient, as they tended to prioritize form over substance in collective decision-making processes. The board’s function is to make effective decisions. Form should follow function, not the reverse.

Conventional governance has tended to approach decision-making in isolation rather than as a system. Currently, there is no comprehensive framework for adaptive governance to enable and accelerate the collective decision-making functions and powers of the board. There is no coherent and practical way of better organizing the board’s most valuable and irreplaceable resource: its own time.

The nature of business and the “rules” are changing. What worked in the past may not work today and in the future. Judgment is indeed difficult. Creative destruction is alive and well. Organizations succeed by creating, delivering, capturing, and protecting value. When they cease to do so, they fail. The overarching duty of every board is to enable its organization’s success despite uncertainty, complexity, and inevitable adversity.

If longevity is the measure of adaptation, then many boards have failed and are likely to continue to fail despite their best efforts. Directors are spending more and more time on board matters and are being inundated with more and more data. It is unlikely to help and may even exacerbate the situation.

Boards, by their nature, must make decisions collectively. Assuming the directors of failed companies were smart and well-intentioned, what went wrong? If whether to adapt or fail is the overarching governance question, then how best to adapt?

People and organizations are not perfect and cannot be perfected. Sooner or later, all will succumb. But can this be forestalled? Can more value be created, delivered, captured and protected? Can corporate longevity be increased? A few organizations have gone from leaders to laggards and then back to leaders. What are the most important things a board can do something about? What lessons can be learned from the successes and failures of others?

Will your organization adapt or fail? That is the existential governance question. While complex systems tend to fail in complex ways, a practical framework for adaptive governance to enable a board’s collective decision-making need not and, in fact, must not be complex itself.

This series is aimed at directors of boards of organizations large and small, complex and simple and for-profit and not-for-profit. The focus is on the powers and role of the board and only indirectly on the roles of the executives and third parties. For example, when we discuss the key decisions that require board approvals, we discuss the board’s role in seeing its due diligence requirements are met but not the roles of executives and others in performing such due diligence.

However, the series is also aimed at executives, corporate secretaries, internal auditors and others who frequently work with the board to help improve their ability to support and enable boards to more quickly achieve a common and synergistic understanding of key issues and options.

The 21st-century acceleration of change poses both greater threats and greater opportunities. Rapid adaptative choices demand situational awareness and decision discipline. Once the opportunity to adapt has passed, good choices were either made or not. Only time will tell. It’s your choice.

For more information about the Governance of Public Retirement Systems see Board Smart 3.0 (Click Here) or contact slussow@boardsmart.com.