Governance Bites #98: purpose and governance, with Steven Moe

In this episode, Mark Banicevich asks Steven Moe about purpose and governance. He asks what we mean by "purpose", the role of governance in an organisation, and why purpose is at the heart of governance. They discuss how purpose influences governance and board meanings practically, other tools a board can use to understand and implement purpose, and repercussions that may exist if the board deviates from the entity's purpose. Steven also shares advice he would give to a new director. 
Steven Moe is a Partner of commercial law at Parry Field Lawyers in Christchurch, and an experienced director. Steven qualified as a lawyer in New Zealand, and worked for more than a decade on corporate transactions worth billions of dollars while based in London, Tokyo and Sydney. He has written several legal books, including “Start-ups legal toolkit”, “Social Enterprises in New Zealand: and “Capital raising for founders”. Steven also facilitates governance law on the Company Director Course for the Institute of Directors (IoD). His Seeds Podcast, which he founded in 2017, has almost 400 episodes, interviewing interesting people about their lives. He also hosts the Board Matters podcast for the IoD, now in its third season. 
Simon Sinek, ‘Start with why’, TED Talk, https://www.youtube.com/watch?v=2Ss78LfY3nE 
Parry Field Lawyers, 'Legal opinion on enabling impact investing', https://www.parryfield.com/wp-content/uploads/2024/03/Legal-Opinion-on-Enabling-Impact-Investing-Parry-Field-002.pdf
Steven Moe’s profile on LinkedIn (he is happy to connect with you): https://www.linkedin.com/in/steven-moe-0b3b008a/
Seeds podcast with 430+ interviews www.theseeds.nz
Board Matters podcast https://open.spotify.com/show/6aHNCIYEOwqoghkGlwKruU 
Parry Field Lawyers governance resources: https://www.parryfield.com/advisory/governance/governance-essentials/
#governance, #leadership, #corporategovernance, #boardcraft, #decisionmaking, #makingadifference, #ceo, #governancebites, #boardroom, #director, #purpose

Transcript

0:00

Hey, kia ora everyone. It's Steven Moe here. I'm a lawyer and I work a lot in governance, and I'm really delighted to be here for this session where we're going to be looking at purpose and the role that that can play in governance. Hi, welcome to Governance Bites. My name is Mark Banicevich, and as you just heard, I have the pleasure again to spend time with Steven Moe. Steven, thank you very much for your time. It's a pleasure to be here. I'm looking forward to this one. You're such a knowledgeable and experienced director and lawyer that your time is so valuable. I really appreciate you spending it with me, and this topic of purpose and governance is going to be a really interesting one. To frame the question, what do we mean when we talk about purpose? Whose purpose are we talking about? Well, to me, it's really simple. It's the purpose of the company. So, that's the core of what I'm going to be coming back to as we're talking about this. And I think that we've done a kind of a disservice to our companies. Can I be open and honest with you here? We don't require companies to say what their purpose is. So, what I mean by that is that you and I could set up a company within 10 or 15 minutes. What do we need? The name of the company, the name of a shareholder, the name of a director. Three ingredients to create the company. We do not have to say what is the purpose of the company or what is the mission of the company. And this is actually different to how it used to be back under the previous Companies Act. The 1977 Act, with the Articles of Association. That's right. So, there's, we can have a debate about the merits of this, but back in the day, you had to actually say what you were there for. It may have gotten abused because people started putting in everything that they possibly could, but the principle, I think, has some validity to it, which is, if you were to look at a charity, it's a different context. A charity could be a charitable trust or company or incorporated society, and all of you deal with them, I'm sure, whether it's a sports group, a religious group, you know, education group, school. They have to say what their purpose is in order to qualify to become a charitable entity. So, you have, for them, you have to advance education, reduce poverty, advance religion, or be a purpose beneficial to the community. So, we require this of a certain class of entities. There's 29,000 registered charities, and we require them to say what their purpose is, but we don't require it of companies, and there's 731,000 of those. So, I just think that we're missing a little bit here, and that it would be helpful if a company articulated what its purpose was. Because ultimately, I don't know, you no doubt have seen the Simon Sinek videos,"Start with why." So, his challenge is,"What's your why? Like, why do you exist?" And I think that that's the challenge that we in governance need to be asking for our boards and for our companies. Like, "Start with why."What is the purpose?" And so, yeah, what is the company's purpose? Why are we here? Why are we having a conversation? It's around getting that balance, isn't it? Because, as you say, the Articles of Association became a shopping list. Part of that was probably because in those days, it was far more difficult and complex to set up a company. So, lawyers would have shell companies sitting on the shelf that had everything in the Articles of Association, so you can use this company, whereas now, with it being, as you say, 10 or 15 minutes to set one up, it shouldn't be a big deal to change your purpose if your purpose changes. Yeah, but having your purpose there would be very valuable. Well, it's a, I just think it's a deficiency. I'm putting our minds, this is really hard to do, but a hundred years from now, I think that we will probably require more of entities that are operating. I think over time, there will be a blurring of charities and companies, and all different entity types, and we'll realise that to have a social licence to operate, you need to be at least doing something positive in the world. Yes. So, you know, you can talk about negative screening and stuff like, "I'm not going to invest in coal mines,"and I'm not going to invest in nuclear power plants."I'm not going to invest in tobacco," and all that, but I think there might be a positive reframing in the future where actually, if you're going to operate a company, you have to be clear on your purpose, and it has to in some way be helping rather than extracting or taking away. That would be great to see. And we are starting to see more social purpose companies arise and B Corps, and those sorts. There is a trend in that way, isn't there? There are. But probably just doesn't hit many of the 731,000 companies. That's right. But I think it would be helpful if it was framed that way. I know some people are rolling their eyes, going, "No, that's just extra admin and things," but I actually genuinely think it would help cause people to reflect, "Why have we set this company up?" It should be the most basic thing. Like, you should be able to give me the elevator pitch in 10 seconds."Why do we exist?" And if you have that lens, it helps governance, because if the governance knows why you exist, then they can make their decisions. That is also one of the most important and first things that the governance body should establish, isn't it? What is the purpose of the entity? It's one of the key elements of the first of the Four Pillars from The Institute of Directors. It's from'The Fish Rots from the Head' [by Bob Garrett]. It's all very much, "What's the purpose of the company?" before determining the strategy. Going broader than that then, what is the role of governance in an organisation? Well, to me, it's another word we haven't used yet, which is strategy. So, to me, the governance is there to be looking to the future. I'm sure some people have heard this picture, but management is on the ship, fixing the little leak there, painting that part of the side of the ship."Oh, there's a rip in the sail. We got to fix that right away." Like, day-to-day things. Governance is in the helicopter, 5 km above the ship, looking to the future. Can't see the little rip in the sail or the little leak there. Not concerned with that. I'm concerned about the iceberg, which is dead ahead, and you will crash into it if you don't change course now. That's true governance. That's thinking into the future, and strategy helps you to know where you're headed. Because if you don't change course now, you're going to crash and burn. So, you might as well, or we, we're going to head towards that island over there in the distance, and we can see it. We know where we're headed. You on the ship can't see it, but we can see it because we're up here at the high level. I think it's going to tie very well into that analogy. Why is purpose at the heart of governance? So, to me, that's how you then make decisions about the strategy and governance, because if you know, if you're crystal clear on your purpose, "Why do we exist? What are we here for?" then the governance is going to be able to make decisions that help to make sure that the purpose is happening. So, it's kind of a simple answer, but that's because. It sets the swimming lanes for the board. Yeah, that's right. Yeah, and it removes distraction, because all of a sudden,"Wow, there's this government contract over here."We could do suicide prevention for university students.""Yeah, but what's our purpose? Why were we set up?" You know, like,"We were set up to help run a preschool." That's not at all related. So, let's stay focused on. If you want to do that, start another entity. That's right, we'll do a subsidiary, or we'll set up another thing, but let's stay focused on what we're here for. How does purpose influence governance and board meetings in a practical sense? Well, to me, if we've done this well, and if the directors are all on board with, "What is our purpose?" then this is something that they would be calling each other back to, and they would be saying, "Yeah, what's"our purpose though? Why are, like, this contract?" I'm using it as the example, but "There's this amazing"government contract for$20 million. Let's go for it.""Wait, wait a minute. What's our purpose again? Why were we set up?" You know, "We're here to run a preschool, not to do"mental health suicide prevention for university students." So, I think it would, it helps governance to maintain their focus. And it's not to necessarily say that this entity that was designed to run a preschool may not pivot and change its purpose to be about mental health, but that is a fundamental change to the entity. It would be, yeah, yeah. And I'm giving it as an example for people listening. It might be more subtle than that. But if you aren't clear on your purpose as a board, guess what? None of your employees are going to be. Your customers are going to be unclear what you're there for. You know, like the stakeholders, you name it. It's a flow-on implication in many different ways. Yes. So, how does purpose guide board decision-making? How does the board ensure that it happens? Well, I'd be wanting to, when you come to every decision, you that this is the filter that you're using is,"How does this relate back to our purpose?"Are we advancing our purpose?" The Companies Act [1993] puts it a little bit different. So, in section 131, it talks about the directors need to act in the best interest of the company. So, in a way, the best interest of the company, it's another way of phrasing it. In my world, we're talking about, "What's the purpose?"What's the best interest of the company?" And that's how I think of it. So, yeah, I think it should be there, front of mind for all decisions. And do your filters also include then, "How does this fit"within our strategy?" and things as well? Yeah, well, that would be the next- Layer down. - sort of practical side is, "What is our strategy?" So, I think that needs to be clear as well. And I think, you know, we're talking as if purpose never changes, but actually, I think it can change, and indeed, probably should change at the right moment. So that, you know, we're making it up, but that preschool, what if there is no more funding for preschools, or there's no need in that community, but there is a massive need for the mental health provision for university students, and actually, everything we know from the preschool world and the facilities, the staff, everything is transferable,"Let's change our purpose, and let's go after this." I have no problem with that, but do it constructively, proactively. And consciously. And consciously. Another prime example of that is where a company's purpose is disrupted by technology. Western Union, fine example, where originally there was something to do with train tracks, I think, and then they pivoted to telegram and then to transfer money using that service. So, you know, and I don't know what they do now because you transfer money with something like Wise for a few cents. So, an entity that is completely disrupted by technology has to change its purpose or it will die. That's right. Blockbuster. It's all about bricks and mortar stores because we want people to walk in our store, rent the video cassette, take it home, and bring it back. They were offered Netflix, from what I understand, and turned it down because it was so outside of the paradigm of their construct, which is bricks and mortar stores, and they weren't able to see that actually, that our purpose, like for them, actually, the purpose is probably, "We want to entertain people and"make it a business." So, actually, Netflix or downloadable, you know, streaming and stuff like that, actually, it's really in line with our purpose, but they didn't have the vision to see beyond the short term. Kodak's another example. You know, "We do this way"of taking photos. You know, digital, that will"never catch on." So, you know, they. Although Polaroid's making it come back. That's true. Yeah, yeah. Which is quite fun. But it comes back to what you were saying before about the helicopter view, looking so far ahead. And what you've just alluded to there is being careful not to define your purpose too narrowly, because if you define it too narrowly, then you find yourself getting caught up. That's right. Blockbuster being a great example of that. And it's okay to change the purpose. The other context just to throw in is sometimes boards, so I'm talking now about like charities or trust boards, they might say, "Well, our"purpose is this, to do this," and let's say it's advancing education, and they've been endowed with $10 million. That $10 million then gets invested into long-term bank deposits, so they get some interest from it. But it's not advancing their purpose. My challenge, and I wrote a legal opinion about this, I can send you the link, is actually, those trustees need to think about the purpose that they were given the money for and then use the money to invest it in a way that advances their purpose. So, it's a different conception, slightly different to what we're talking about here, but purpose at the heart of an organisation would guide where you invested surplus funds. So, as an example, Save the Children in Australia have set up a fund. They're getting people investing. They got $15 million. What is that $15 million being used for? Investing in startups that are to do with children. So, clean water, you know, apps about learning, education-focused initiatives. They're investing that $15 million in startups that will benefit children. The profits come back to Save the Children, but not only do they get the profits, they helped companies to advance the purpose of supporting children. It would be fascinating to see whether the composition of the board had to change as a result, because those sorts of ventures and investments are a very different skill set from putting money into a managed fund, or the bank. And it might need to actually, yeah, you'd have to, every organisation's going to be different, but you might have to think about, "Do we have"a progressive enough board to be able to consider this?" Back to your skills matrix that you mentioned in an earlier conversation. That's right. And, but also, on this particular point, sometimes I think we think charities, "Well, the trustees will be there for"the next 20 years, 30 years." I'd rather see a higher rotation so that we get new perspectives and new people coming in. Absolutely. What additional tools help a board to understand and implement its purpose? I would say every year there should be a day or two away as a board where you're coming back to the purpose and thinking about your strategy. And then what I would recommend is one page only trying to describe it, because if you, it's easy to write 20 pages or 50 pages. It's hard to write one page. Blaise Pascal! And having, you know, having at the top, "Here is our purpose," or some people might call it vision statement, or mission, or I don't know. I'm not, I don't care what you call it, but you get the point is, there's some statement there that everybody in the organisation from the directors right through to the person who's coming to clean up at the end of the day, everyone is clear about what our purpose is. And if you can do that well, the next generation, that's what they want to see. You know, like the new employees are coming through. They're, they're 22. They've just finished university. If you can't articulate your purpose well, they're probably going to go somewhere else. So, it's actually beneficial to attract talent, keep you focused, and allow you to communicate to your customers and others,"Why are we here?" So, I'd like to see one page. Could be about what's the strategy. This is our vision or this is our purpose, and then maybe some targets of what you're aiming for. Yeah. Hopefully SMART targets. You know, like [specific] measurable, achievable, realistic, time-bound. Yes. Yeah, great. Thank you. What repercussions or liability may exist if a board deviates from its purpose or makes a decision contrary to its purpose? Is there any liability that can exist there? Well, I guess it depends how far they're going away. So, if you did articulate your purpose and it was in your constitution and then you did something totally different, I guess in theory there could be some sort of a claim that you've breached why you were set up, if it's in, you know, legally binding documents. Right. But I guess my view would be, if it needs to change, then change it. Go to your shareholders and say, "Look, we're modifying." Like, I help startups all the time, and you used the word, I think, pivot, and sometimes you have to pivot. You can't just keep doing what you've been doing, which are Kodak and Blockbuster. Would you know, we look at it. So, yeah, I would say that ultimately, the liability might come if you were acting totally outside of your purpose and then, you know, if you went bankrupt, or were trading recklessly, then there might be implications. Right, right. One final question for you. What advice would would you give a new director? That's a great question, and I think it comes back to kind of an induction awareness or actually having the chance to talk with the chair and the other directors and the CEO, "What is our purpose?"Why are we here?" If anybody hasn't watched the little, it's like five minutes of Simon Sinek talking about the power of why. [Link in video description] Basically, he says,"We get so focused on how we do things or what we do that we"forget about why we do them." So, if I was a new director, I would be coming into the boardroom and saying,"What is our purpose? Like, why are we here?" because I really want to understand that as the beating heart of our organisation. Right. And if I can extrapolate slightly from that, it's maybe have an idea of what a good induction process looks like and be involved in that and make sure you're getting a good induction. Rather than being passive. Be proactive. Yep, exactly. Yep, yep. Be proactive, be constructive, ask for it if you're not getting it.

But here's the rub: 18:31

maybe they don't know their purpose because, like we said, they don't have to say what it is, and maybe this is your role as the new director: is to challenge the status quo. And if they can't tell you what the purpose is, maybe that's the true value that you're bringing to this position. Is, "Hey board, I've asked you"what our purpose is. No one seems to know."I talked to you and you and you, and none, you all told"me different things. Let's get on the same table."Here's a blank sheet of paper. Why are we here?"What is our purpose? Because if we don't know why"we're here, I guarantee you those employees don't know,"and I guarantee you that our customers don't know, you know?" So, it's actually not bad, but it's selfish, because it's helping the organisation to be able to tell its story. Absolutely. And as you imply, that's a question you're not asking in your first board meeting. You're asking it through your interview process, through your due diligence process, so that you're coming armed with knowing either what the purpose is in your first board meeting, or knowing that no one knows what the purpose is, and it is a challenge that needs to be solved. Yeah. Yeah, yeah. But I like the way you frame it. You know, you're so positive, be constructive about this. Like, if they don't have a purpose, then this is your chance to add the value. Great. Steven, again, thank you so much for your time. I love these conversations. I look forward to catching up again soon. It's been really valuable. Thank you. That sounds great. Thank you. See you next episode. Thank you for watching this episode of Governance Bites. We have more episodes on YouTube and your favourite podcast channel, where I interview directors and experts on various topics relating to Boards of Directors and governance. We'd love to see you back, and please like, subscribe, and share the videos and podcasts.