Connectedness – The New Differentiator

 

Worldisflat

Back in 2005 Thomas Friedman wrote about the globalized world in his bestseller book ‘The World Is Flat’. The world was inthe process of being transformed to a level – and global – playing field opening up new opportunities.  7-8 years later Friedman’s observations of the early adopters have become mainstream business. But, one of the consequences of opening up the world is that we are left with an overwhelming amount of information and options.  What we need is the ability to take advantage of globalisation, without getting caught up in examining and analysing the huge sea of endless information, and variety of choice.

This is where ‘connectedness’ comes in. Given that it is impossible for us to read everything and speak to everyone, we need to be connected to people we trust to bring us relevant resources to our attention. The better these connections are, the better the result will be.

We use the term ‘Connectedness’ to describe the concept of being ‘smartly’ connected.  When you are smart about the connections you establish and maintain, you keep a balance between the following aspects:

  • Quality vs. quantity: Having too many connections is distracting and with too few you become too reliant.
  • Diversity vs. conformity: Diversity is critical for innovation and conformity may better serve continuous improvement
  • Open vs. closed: Having unique connections that no one else have can put you in a better position, but a closed network can also bring much needed focus and attention

Depending on your business objectives you set the appropriate balance to deliver the best outcome. Connectedness is applicable at individual, team, business unit, organisation and inter-organisational levels. High performing individuals are exactly that because they are able to get things done faster by leveraging their connections to access resources. This is true for all organisational levels.

Connectedness doesn’t happen by chance, but fortunately it isn’t all the difficult. First you need to determine what your network looks like today, and then you need to figure out what it should look like to enable you to meet the demands of the future. Advances in both mapping and visualisation techniques greatly assist in making it much more accessible for mainstream businesses. Being ‘smart’ about building your connections for the future will optimise the investment where it provides the highest return. What’s the point of being connected to 100 people if you can develop a close relationship with one person who already knows the same 100 people?

Smart networking’ is about understanding the various roles that people play in connecting you with the resources you need. ‘Central connectors’ are those people around you who know lots of other people. Examples of central connectors include head-hunters, politicians and journalists. These people can be of very high value providing access to resources you might not have discovered, or might not be able to access directly.

Brokers’ are those who connect communities of otherwise disconnected people. For example, think of a person who is an accountant during the day, but plays in a band in the evenings. Brokers play a special role as potential innovators being able to solve problems by seeing solutions through their experiences drawn from various different communities.

Finally, we have the ‘peripheral specialists’ who have special knowledge, but often operate as lone wolves. You will need these people for their deep insights. But, if those are the only ones you know you risk missing out on the multiplier effect you can get from the relationships connectors and brokers can bring to bear.

Trusting that your network will provide access to the resources you need is a departure from the ‘island’ mentality we are used to. You may feel as it you are somewhat loosing control by having to rely on others. But there simply isn’t an alternative anymore. In a ‘flat world’ your level of connectedness will drive success, as you shorten fact-finding and decision making cycles. This makes the ROI for connectedness compelling as other organisations are pacified by an overwhelming amount of information, conflicting advice and endless options.

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Cai Kjaer is a presenter at the Hargraves 2013 Innovation Conference and is speaking on 13 March on the topic of connectedness as the new driver for innovation and organisational performance. You can reach Cai at cai.kjaer@optimice.com.au, or connect on LinkedIn www.linkedin.com/in/caikjaer.

Are Board Turnover Rates Limiting Diversity Opportunities and Growth?


Turnover p1

Let’s face it, sought after board positions on publicly listed companies are not advertised in the newspaper. Despite listed companies being “owned” by the shareholders, when you receive your invitation to attend the annual general meeting to vote for the re-election of existing directors or installation of a new director recommended by the chairperson, it is likely that you will accede to the chairperson to vote on your behalf. Even when there are owners with a significant shareholding it can still be difficult to achieve board representation, as evidenced by Gina Reinhart’s attempts to gain seats on the Fairfax Media board. The majority of directors who submit themselves for re-election will typically succeed. In the USA only 2% of directors leave through stepping down, being dismissed or not being re-elected. They will typically only leave voluntarily. Perhaps the most endangered board members are the CEO and executive directors, who may potentially suffer dismissal from their company roles, and hence the board, should poor performances demand it.

So with this in mind, who is managing the appropriate level of board renewal? What is an appropriate level of renewal for company boards? If ‘vacancies’ are so rare, what impacts will that have on the timing of the board diversity agenda? Even if board quotas were to be implemented, would it be realistic to ask companies to double or triple their board renewal rates to meet a quota?

Turnover p2Continuing our theme of analysing ASX board data in support of the diversity agenda, we have looked at current ASX board turnover rates, and as expected, board turnover rates are often lower than inside the companies that they represent. We measured board turnover by averaging the year-to-year changes in board memberships since 2004. We found that of the 539 companies listed for the full period, 212 have on average 10.2% annual turnover.  25 companies had experienced no changes at all over the 8-year period. Of the 1652 companies listed for more than 12 months the average annual turnover is just 13%, and for the ASX200 10.7%. With an average board size of less than 5 for the ASX as a whole, this means on average only 1 board seat will become available every 2 years. For the ASX200 the average board size is a little higher at 7.7 members so about 165 board seats on the ASX200 would on average, become available each year.

Turnover p4For the gender diversity supporters, current board renewal rates will become a natural governor on progress. Without forced quotas, which means regulatory removal of current board members, a desired 40% participation rate cannot happen overnight. Even if optimistically, 25% of all ASX200 board vacancies were granted to women and no existing female board members were to lose their positions to males, the 40% target would take over 9 years to achieve. This a best-case scenario. As we move beyond the ASX200 with female participation closer to 10% and average board sizes of less than 5, the period for achieving these targets moves out to 13 years.

What is a ‘Good’ Renewal Rate for Boards?

While the above statistics might suggest that current board renewal rates are too low, what is a ‘good’ board renewal percentage? To investigate this we use the Compound Annual Growth Rates (CAGR) for Market Capitalization and Revenue for the 539 companies that have been continuously listed on the ASX since 2004. In looking for a ‘Sweet Spot” for board turnover/renewal percentages we plotted the CAGR against the %Annual Turnover:

Turnover p5The data indicates that there is a tendency toward a ‘Sweet Spot’ around the 15-20% range, which is significantly beyond current performance.  While the optimum is not strongly defined, if we combine this %Turnover result with our earlier analysis of network connectivity, which also showed a similar result, the business case for increasing network connectivity and board renewal to the ‘magic’ 15% +/- 2 mark, becomes far stronger. When we apply this ‘rule’ to turnover/renewal rates we find that the 80 companies in this sweet spot earned a 22.8% CAGR in capital growth and 13.1% in CAGR in revenue.  Turnover p6Those firms with less than 5% turnover/renewal earned only 6.5% CAGR in capital growth and 6.4% CAGR in revenue. The two indicators are interdependent in terms of opportunities for increasing diversity. Higher turnover/renewal rates provide more opportunity for adding diversity of thought and experience. If those new additions are also well connected then the benefit will multiply.

Is there an Industry Sector Effect?

By introducing some context in the way of industry sector classifications we can start to understand whether turnover/renewal rates are related to the dynamics or otherwise of the particular industry sector that a company operates within. The following graphic classifies turnover/renewal rates by industry sector:

 Yurnover p7

If we look at the extremes we can see that Media, Technology Hardware & Equipment, Energy, Mining & Metals and Insurance are the only sectors with renewal rates approaching the sweet spot. One could argue that there have been significant change activities, both in terms of high growth (Mining & Metals, Energy, Technology Hardware) or structural changes in the industry forced by new technologies (Media, Insurance), that has forced renewal in these sectors. In these more dynamic times, these sectors have responded through greater levels of board renewal. At the other end of the scale Paper & Forest Products and Consumer Durables & Apparel have experienced negative growth in capital value and revenue over the past 8 years, indicating that board renewal is long overdue. The other sectors showing negative growth include Automobiles & Components, Construction Materials, Food, Beverage & Tobacco and Pharmaceuticals & Biotechnology.  These sectors might also benefit from increasing the levels of board turnover/renewal and inviting greater diversity of thought and experience onto their boards.

Some Closing Thoughts

Much of the discussion around diversity on boards has focused on gender diversity and growing the proportion of female participants on boards. Recent articles have pointed to the fact that while at the ASX 200 level, new reporting regulations have led to an increase in female participation above 15%, but beyond the top 200 this percentage falls to around 10%. Concerns had also been raised that female participation on boards was more concentrated for females as it is for males, with females by far having more multiple board memberships. Our own research has identified this effect in our “Sisterhood goes missing at Board Level” article. We followed this up by looking to build the business case for diversity through recruiting ‘appropriately networked’ directors to your board. We identified a “sweet spot” for having directors with ~7 to 9 board interlocks, representing some 15% +/- of the board membership.

 What this article addressed is the size of the ‘opportunity’ for increased levels of diversity afforded by higher turnover/renewal rates of boards. A lower than optimal rate effectively limits the scope for increased diversity and also achieving optimal financial performance. We found that firms operating with turnover/renewal rates between 13-17% enjoyed a 16% greater CAGR in Market value than those with rates of 5% or less.

The message is clear. Annual turnover/renewal percentages need to increase from the current average to over the 15% mark to optimise both diversity and financial benefits to the firm.