Governance Bites #123: Parsley on Fish, with Dr John Peebles

Unlock the essentials of effective governance with Dr John Peebles, author of the insightful and intentionally non-serious book, 'Parsley on Fish'. In this episode of Governance Bites, Mark Banicevcih talks with Dr Peebles about simplifying corporate governance principles, drawing on 30 years of experience. Learn why boards can't be "decorative but useless," why financial literacy is crucial, and the importance of having a robust process for electing a Chair. Dr Peebles shares his vital 'Three Gs' rule for directors and discusses challenging prevailing governance orthodoxies. Tune in for essential, bite-sized advice for every director and aspiring leader!
 Dr. John Peebles is a highly experienced board director, governance consultant, and executive search advisor. In 2008, he was named one of the 50 most influential search consultants in the world by Business Week. His extensive board experience includes current roles as Chairman of Premier Lifestyle Villages Limited and past roles as a Director for The Broadcasting Corporation of New Zealand.
 Dr. Peebles holds a Doctorate in Business and Administration from Massey University. His doctoral research focused on corporate governance, specifically investigating who determines the board's agenda in New Zealand's public companies. He found that directors often passively accept established agenda-setting systems, and his study suggests that competence and transparent boardroom processes are more critical to good governance than factors such as director independence, age, or gender.
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Transcript

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Good morning. I'm John Peebles. I have a doctorate in corporate governance, an MBA [Master of Business Administration], one or two other minor things, and I chair a couple of companies, including a retirement village, a waste company, and so on. And I'm here today talking with Mark about one or two aspects of governance. Hi. Welcome to Governance Bites. My name is Mark Banicevich, and as you just heard today, I have the absolute honour to spend time with Dr. John Peebles. Dr. Peebles, thank you very much for your time. You're very welcome. The topic of today is actually your book, Parsley on Fish. I really appreciated getting a copy of this and reading it. I found it a very accessible and insightful book to read. You published it first in 2014 after you just completed your PhD [Doctor of Philosophy]. Having just written a PhD, why on earth did you decide to write a book? I really needed to get it out of my system. My wife hates it when I describe it as a lavatory read. I wanted to simplify what I'd been doing in the PhD and get it down to something pretty accessible for everybody, really something that a director, an aspiring director could jump in, grab and say, "These are the basics." And that's basically what it is. Right. Well, and tell us about the title, "Parsley on Fish"."Parsley on Fish" was an expression that I came across when I was doing research, and I ran across a man who was a man called [Irving S.] Olds, who'd been president of US [United States] Steel, and he complained at the time that his directors were like parsley on fish, decorative but useless. And it appealed to my strange sense of humour, and I somehow had that buried at the back of my mind that when I'd finished the serious side, I'd write something not so serious. That reminds me of a conversation that I had with my old boss early on in the series. He's a really insightful man, and probably one of the most well-read people I know. And he ran the intelligence team at the Financial Markets Authority. Now does a lot of directorships and actually also advises on tax in a lot of countries in Africa. And he said, "I thought boards of directors were a bunch of old white men sitting around asking stupid questions." So very much in the same vein. But yeah, now a lot more insight into what governance is. Yes, it's a simple, it's an attempt to simplify all the rubbish that's written about governance. Yes. And probably make it easier for people to pick it up and say, "What are the essentials?" I like the structure that you've used, too. You've got the A-Z of governance tips. Illustrated with, you know, discussion on the side and then an illustration of the letter on the other side. This makes a book like a series of tips rather than a framework. How did the book end up in that format? I decided that I needed to limit it or I'd have gone on forever. And so instead of writing a thousand-page book, I said 26 letters in the alphabet. Let's see if we can break this into alphabetical form and think about a piece of advice per page. And it's then drawn from either research or from 30 years' experience dealing with boards. Right. And some of the wise counsel that some of the directors have thrown at me. Okay, as Blaise Pascal suggested, that would probably take longer than a thousand-page book. Definitely, and if you want a thousand-page book, there's a couple I can recommend, but I haven't personally read them, although I have used them as doorstops. How did your views, or how do your views on governance compare with the prevailing orthodoxy? Are you reinforcing it or challenging it? There's some parts that are challenged, because in some parts of governance we get people who call themselves professional directors. They seem to think that's a layer above everything, and it's not. You're there as part of a group responsible to the shareholders to make a buck. And you also have a responsibility into the community in which you live, because you survive in that community with their permission. And you have to think about both of those things, but at the end of the day, we can talk about all the other strange things that go on in  governance and how complex it is, but you're there to make money for the shareholders. That's why they gave you the money in the first place, to invest in the company. And so what I tried to do is say, if you're looking at those essentials, what are they? Right, yes. What feedback have you had from directors or boards who've read the book? I get quite a bit of feedback. My own prof from my PhD sent me a simple text saying he admired the illustrations, which he knew very well I didn't do. And then we've had quite a bit of feedback from people, particularly where they've used it for training courses or incoming directors. And it's not uncommon for someone to ring me and say,"Can I get 20 copies, we're doing a course on this or we're doing a course on that,"and we just want to use is as a discussion document." And so it's very good for that. It's quick to absorb. There's not that much there. As I say, it is a lavatory read. You can go in and read it and come back out and you've read it. I mean, it's pretty straightforward. So it's very simple and it's designed for that. Right. You had the pictures commissioned for the book, didn't you? I did indeed. We commissioned someone to actually draw the thing and showed them the copy and then turned them loose. Now, although it's got 26 amazing tips in it, if directors could take away only one thing from the book, what would you want them to take away? Probably one page in there, we talk about the "three Gs".  And that is where the chairman should say to all aspiring directors coming on board, and repeat it several times, by the way, in the interview, "You're here to get, give, or get off." And if you think about that, you're here to get us something, to give us something. It's either expertise or some knowledge or some things that we don't have. And if you can't do either of those, you're here to get off. And once a year, the chairman does not need to call in me to do a board evaluation. He needs simply to have coffee. So when I ring you up and say, "It's time we had our coffee and talked about the three Gs," you're going to be hearing that, "What did you give us this year? What did you get for us this year?"Is it time you got off?" Right, that makes it, in fact, you stole one of my questions. I was going to ask you that later on about the three Gs, because that was one that really stood out for me. And when I first read it in the book, I was thinking, get, give, or get off, what does get mean then? And I understand that it's about getting resources or things for the entity. Or getting expertise, or being connected to something in which in some way you can work with the company. You know, board chairmen often will say, "So-and-so doesn't do anything at the board table." He mightn't. There's a lot of people who do show pony stuff at the board table. I don't mind if a board director, I've had people say to me,"So-and-so doesn't do anything." And I've gone away and said to them, "Look," just sit down quietly."This is what he did with the chief executive last month." And board directors are people who should be aiding the purpose of the business, and not necessarily show ponying it at the end of the day. I hate the term professional director. You're there as a person to help the business function well and look after the shareholders' money and make sure they get a satisfactory return. At the same time, think about that corporate social responsibility. And if you asked me to say to you how many companies in New Zealand seriously exercise corporate social responsibility, I could probably count them on the fingers of one hand, where they really say we exist here and we should exist here with the people in our community and we should be part of it. Now you had 26 pages, 26 little bite-sized topics in the book. Is there anything you wanted to put in that ultimately made it as number 27 or 28? What was on the cutting room floor? I think the difficulty in some of the things is that if you use examples of certain stuff, you're into quite litigious territory and you're better not to go there. And there are some things at times you'd better not to put in, and you should rely on that being common sense amongst the gang of directors, that they should tackle those issues and do it properly. Right. Yes. Now this was, my next question, I'm looking at my list down here, where I was going to ask you about one thing from the book being the three Gs, but you've already talked about that. So I'm going to pick on another thing. Something else that came quite clearly through the book in a number of pages was around the importance of financial literacy for directors. You've got C around cash is king, you've got Q around the, I think it's Q [yes] around the quick ratio and other key ratios that you follow. Yeah. Can you talk a little bit about the importance of directors really being able to get their head around the numbers of the business, and what sort of things are ideal for a director to know? A lot of directors, anyone thinks they can be a director and they think that they can all do all of these aspects. Actually, you need to be financially pretty literate because the four main things that a director is there for,[1] you're there for risk to manage it, [2] there for performance to manage it, [3] and you're there for strategy, all require good analytical financial skills. And at the end of the day, the only fourth job is to appoint the only officer of the board, and that's the chief executive. But if you don't have the skills to manage or manipulate the numbers and to understand the numbers, you're in deep trouble. So the financial side is absolutely crucial. And the piece in there about the financial literacy came from one key recovery man, who I remember very well indeed, who said, "I want quick and liquidity ratios in front of me."I need to know where the cash is, and I need to know what kept my chief financial officer awake at night." Yes, yeah, I remember reading that in the book. That was a really nice summary of those three things to want to know and to follow. Well, it keeps you out of danger if you've got that stuff. And one of the things, I work in the financial services industry, and under the Financial Markets Conduct Act, a lot of entities now require a license. And for manager of managed investment schemes, peer-to-peer lenders, crowdfunders, those sorts of entities, one of the requirements for them is around solvency. The crazy thing is, they have to perform a net tangible assets test each month. Right. which is a terrible measure of solvency. Well, is it really? I mean, I look at in the industry, the first, the first, one of the first boards I took on a particular area, which was a property area. Yes. The first thing I did was say,"What's the debt equity level?" Yes. And it was non-existent, so I thought no matter how badly I ran it, I probably still couldn't muck it up. And so you go looking for it. So if you've got, and certain industries shouldn't have more debt in proportion to equity than a good norm. They're hard to manage otherwise. You don't need to be up to your chin in debt and submerged once a month when you're paying your bills. Yes. You have to be able to survive and be able to manoeuvre the business, not just worry about your debt. Which is where your quick and liquidity ratios are so important. Absolutely. And to me, as a measure of solvency, they're the ratios you look at. But I look at a number of things. I'd go straight to that debt equity ratio. So if I was looking at a property company, I'd say 30 to 35% maximum debt to equity. Yes. I wouldn't want to go above that. If I do go above that, and there are a number of companies that are driven by property, then you're in dangerous territory. Yes. It's a lot safer if you're 5% debt to equity, because recessions happen, markets plateau, you have to be very careful. And there's also things like your cash flows. You have often in companies seasonal cash flows. Yes. And you really have to understand what your ability is to handle that, the resilience the business has got. So that's the sort of stuff you'd look at. And they're simple things. Yes, they are. Absolutely. The next question you may have already answered, but I'm going to ask it anyway, just in case you have some other thoughts around this. Your favourite tips from the book. What would you say, for example, is the best page? We've talked about some of the cash issues. We've talked about the three Gs. Is there anything else that kind of stands out for you? I think one of the things that I've tried to emphasise through here, and it probably features on several pages, is that running a business is about good process. And that all stems from the guy at the top, and that's the chairman. Now one of the things you need to think about is how do we elect our chairman? And in many cases, we go to a lot of trouble to elect the directors, but then we go to very little trouble to elect the chair. He's just, it's a consensus or the nice guy or the next one in line. Right. There's no real thought given by the board to say,"Hey, wait a minute, what are our problems for the next three years?"What are the things we have to achieve? And do we have someone in here who's right for that task?" Right. And if we don't, then we should be thinking about whether we appoint internally, or whether we go out externally for the appointment on the chair. Because I reckon that's crucial. 91% of all decisions are made by the chair and the chief executive. Your chair's going to dominate that. And he's the one that's responsible for good process. Right. So it's about good process. That's a really interesting point. I'll have to keep in mind that concept of, as you say, the traditional approach of appointing the chair is the board gets around the table in their first meeting together, once you've got the, after the AGM [Annual General Meeting], for example, and they decide who the chair is going to be. And maybe it needs to be a more robust process. If you want to look at how robust it isn't in some cases, there's an old book that came out in the US on one of the major public listed companies where the chairman was arranging flights and golf club memberships and other things for his board directors. It's not surprising he stayed in power. So there's all sorts of things like that. And some of the best studies that we've seen came out of Stanford, Chicago, and Wharton, in their courses that they ran on red flags at the board table, things that you should be looking at and questioning. And it's not unusual to get a question of, "What should we do?" I got a question earlier this week from someone who said to me, "This is going on, John,"how do I tackle it with the chairman?" And my argument is, well, you've got to put it on the table, no surprises, tell them it's coming onto the table. Put it on the table at the board meeting and if they don't like it or they don't like you after you've put it on the table, resign. Because at the end of the day, if your integrity is challenged, you're in deep trouble. So you have to be absolute, it's about values and integrity. Yes, great. Thank you. Would you consider writing another book on governance and if so, how would it differ? I'm actually struggling writing a novel instead, and I've got to 32,000 words on one and then I've got another book on the blocks which I'm playing with and I don't get enough time, so I peck at it in between doing work on governance and other projects and it's very frustrating. So one of these days when I retire, maybe I will one day, will be enough time to actually finish this book off because it's been sitting there for about four or five years. You're saying it's a fiction book, rather than non-fiction. It's a fiction book, yeah. Well, you, know, a lot of people would say being an ex-journalist, you're pretty good at writing fiction. So I used to try and stick to the facts, but fiction certainly comes into it occasionally. Right, one final question for you. Where can you get a copy of the book? Just apply on the website, [link in the description] and the guys will make sure you get a copy delivered. Oh, fantastic. So, it's pretty easy. John, thank you very much for your time. It's been, conversations with you are amazing, so I really appreciate it. Very welcome. I'll look forward to catching up again soon. Thanks, Mark. And we'll 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.