In our discussion, David shares insights from years on the boards of major corporations. He urges CEOs to engage board members for strategic guidance, not just oversight. David sees board meetings as chances to focus on the future, offering strategies like independent incubators and migrating innovations from edge to core. He emphasizes selecting directors individually and fostering a strong chair-CEO relationship. For startups, he advises gradually building an advisory board of experts and wisely anticipating disruption.
With four decades of leadership experience spanning multiple industries and roles, David Beatty is a highly accomplished strategist and governance expert. He led a major North American food manufacturer, served as CEO of a closed-end investment trust, and taught strategy at Rotman School of Management. Beatty has served on 39 boards, chairing 9 public companies, and created director education programs. He focuses on helping boards and CEOs collaborate to anticipate disruption and invest time wisely. Beatty has been recognized with the Order of Canada and a lifetime achievement award from the International Corporate Governance Network.
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(00:02):
Welcome to Disrupt Disruption, aseries of intimate interviews
with global thought leaders and practitioners operating at the
intersection of business, leadership and technology.
We're discussing all things innovation and disruption and
how to not only survive, but thrive in these times of
exponentially accelerating change.
Trusted by CE O's founders and leaders globally for the latest
(00:23):
take on business models, methods, culture and leadership,
we cut to the chase, debunk the hype, and get real.
You're in great company. I'm your host, Pascal Fenet,
cofounder of B Radical. Hey everybody.
Pascal Fenet. Here we are back with another
episode of Disrupt Disruption, and today I'm particularly
(00:45):
excited to have with me Professor David Beatty.
David is the Chair of the Sharonand David Johnson Center for
Governance Innovation and the Professor of Strategy at the
Rodman School of Management at the University of Toronto.
Previously he was the President of one of North America's
largest food manufacturing companies.
In his long career he had 39 different Board of Directors
(01:09):
seats in Canada, America, Mexico, Australia and England,
and has been Chairman of nine public companies.
And so much more. We will link to David's bio in
the show notes so you can look him up.
Highly recommend it. David, I'm excited to have you
on this podcast. Thanks for joining us.
My pleasure, Pascal. David, I'd be curious, with your
(01:33):
experience and particularly yourwork with boards of large
corporations, privately held, publicly traded companies,
conceptually, how do you even think about disruption?
What does it mean for you? How do you talk to boards about
it? What are the the I guess the
gutters? Yeah, that's a very deep
(01:55):
question, Pascal. I wish there was a stroke of
light from God and say there's three things you have to do to
get it right. But they're not everything is
contextual, as you know, when large, complex corporations run
by human beings. And so there's no immediate
answer that I can give you. I always start with Anna
Karenina. Every happy family is happy in
(02:16):
its own way. Every unhappy family is unhappy
in its own way. So if you know one family
business, you know literally onefamily business.
If you're familiar with a board of directors, you know that
board of directors. So having a board cope with
disruption. Is a huge challenge for them.
(02:37):
They're basically good at policing functions, oversight,
making sure management's not stealing too much, complying
with all the agencies, boards and commissions who oversight
you, either the SEC or industrially or somehow.
And that policing function is generally well done, although
(02:57):
there's some wonderful examples like Wells Fargo.
Where apparently nobody on the bank board knew that for 10
years the company was systematically stealing from its
customers, even though there were 1300 former employees suing
the company in a class action lawsuit because they had been
wrongfully dismissed. The only way they could meet
(03:17):
their targets was to fabricate accounts and they refused to do
it. So they were fired 1300 of them
in the class action lawsuit and apparently not one director was
aware of this. So.
It shows they're very kind of introspective.
They're often captured by their CEO.
So I think Mr. Stump, there would have been no question as
(03:39):
chair and CEO of Wells Fargo Bank that the directors he put
around that table were ones thathe felt he could rely on to
trust in him. But on the board, you eat what
you're fed, so Mr. Stump is feeding you materials.
You don't happen to ask the question, or if you ask the
question. What about that lawsuit, John?
(04:00):
Oh, well, that's just David. We get them every day.
Oh, okay, fine. So it's very difficult to move
them beyond that policing function.
And as I say, even that's often not well done into what I'd call
a value creation or value protection or value evolution
role. This is basically how I see
(04:21):
boards. They have an A function and A/B
A is to make sure that management.
Is not stealing too much and B is to try to add value and of
great interest to that perspective.
Mackenzie's book The year last January, I think it was called
the 76 best CE O's in the Universe something like that,
where they interviewed the people they deemed to be the
(04:43):
very best executives alive and asked them what their cognitive
biases were in various functionsand duties and when it came to
the board. The cognitive bias that really
worked for these successful CE O's was help the board, help me
do my job. In other words, you think about
(05:03):
them as a group of really experienced executives, like
having having a McKinsey advisory roundtable.
And so your job as CEO is to help them help you.
So to begin with, dealing with disruption, a, there's got to be
an openness that the CEO is not going to be a John Stump and
(05:23):
shut you down at every opportunity just to get through
the board meeting, but that the CEO is actively trying to engage
you as a director in the challenges the company faces.
And if that doesn't happen, nothing will happen because
basically boards are met made-upof part timers.
(05:44):
Who have experienced but not expertise in the particular
business they're overseeing generally and who do a lot of
other stuff. So they're very busy.
One of the private equity guys from Chicago wrote a book on
governance and he's described publicly traded companies as
having satisfactory underperformance like Pascal.
(06:05):
Are we playing golf this afternoon at 3?
And I'm at the board meeting at till two, so I'll have to leave
the board at 2:15 no matter what's happening.
In order to get to the golf course to be with you.
So I'm a part timer, I have a lot of other activities and I
know nothing. I'm gifted, but I'm a gifted
amateur. So it's very difficult to get a
board to think about conceptually about disruption as
(06:28):
a threat to their own ongoing corporation unless and until the
CEO is willing to share with them his or her concerns because
they just don't know enough about the business.
That being said. In larger corporations with a
huge amount of resources, let's say a Canadian bank, one of the
(06:49):
chairs of one of the Canadian banks, talking about ES&G and
what that meant. The board asked the management
team, what is this stuff all about and what difference does
it make to our bank? And the answer came back, well,
we're not sure, so why don't we hire somebody?
So the bank had the resources togo out and hire somebody with an
(07:09):
ESG label on their forehead. And then six months later, after
two or three board meetings, theboard would ask well, what is
this person discovered. So immediately is delegated down
into the organization and then within a year it's probably put
down into the operating departments of the bank.
So it gets included in the bank's consideration of all of
(07:32):
its functioning and business andreported back up.
Smaller companies don't have thebenefit of that kind of resource
to say, I don't know what this DE and I stuff is.
I don't know what ES&G is. I don't know what artificial
intelligence is. I don't know what machine
learning is. And until you get to a size
(07:53):
where you can afford to say, well, if you don't, if we don't
understand the impact that machine learning and artificial
intelligence is going to have ontwo of our core businesses.
We better find out, you know, higher bane, higher McKenzie,
higher BCG. But if I'd say I'd love to, but
I don't happen to have $100 million sitting on the sidelines
at the moment, then you're in a very difficult spot.
(08:14):
So size I think matters a lot. The ability of the board to be
encouraged to ask questions by the CEO matters a lot, and the
expertise of the directors around that table matter a lot,
so. Long answer, but it's all
contextually dependent, I think.Pascal, you just brought up a
(08:38):
whole. I took a bunch of notes here,
and you brought up a whole bunchof topics I would love to dig a
little deeper into. Let me start with your Anna
Karina opening statement, which,by the way, you're the first
person who ever brought classic literature into a conversation
about disruption. Love it.
You made this point. Which, in other words, at least
(08:58):
it sounds to me, is that the transferability of insight
between organizations somewhat limited.
Maybe it doesn't even exist. Which brings me to an
interesting point. I happen to write a book about
disruption. Now I'm starting to question
myself, are these insights even transferable?
You know, can we actually get toan abstraction layer, a useful
(09:21):
abstraction layer of insights which we can give to companies
to make the stuff work? Hard, Ayanna Karenina.
The first line in Tolstoy's great book, I said very, very, I
think prescient line. Happy families are all happy the
same way. Unhappy families are unhappy,
each in their own way. Yes.
(09:42):
So are there insights that wouldbe conceptually useful for
everybody? Yeah.
I think understanding my characterization of the
separation between the management and the board as
having these three features of time.
A board typically invests 250 hours a year, the management
teams investing 4000. So what's that 8%?
(10:03):
And typically the board understands zero about the
business they they join the company board.
I mean I might have been CEO of a major food company, but I'm in
the Bank of Montreal board. Like what do I know about
banking? Zero.
And then thirdly. I've got a lot of other things
going on in my life. Whereas hopefully the management
team is completely devoted to running the business.
(10:24):
I've got two other publicly traded boards.
I have my philanthropy, I got mygrandkids, I have my teaching.
I mean and and and. And I'm a busy guy.
So typically this notion of satisfactory underperformance
creeps in all the time. But I think if you start from
the conceptual knowledge of the difference along those 3 lines
between the management team and what they do.
(10:47):
And the board and what they do is going to give both sides of
the information chasm managementteam knows everything, the board
knows nothing. So to feed the board garbage,
you're going to get nothing back.
And if that's what how you want to treat your board as the CEO,
presumably that's how it's goingto be.
But if you follow the McKinsey advice and conceptually say you
(11:08):
know what as a CEO and the senior management team.
Our core job with respect to theboards to see if they can help
us run this company better. So we got to be open with them.
We have to be transparent with them.
I have to have an absolutely intimate relationship with the
chair of the board. I'm going to work with that man
(11:29):
or woman constantly on trying toimprove each board meeting to
add value. I in my teaching, I just, I
never asked the question or try not to.
How did you spend your time as adirector at the last meeting?
The expenses are gone. I try to say how did you invest
your time? Because if I'm using the word
invest, then hopefully you're maybe thinking return on that
(11:52):
investment. This is a very hard job to get a
return on the investment of a director's time.
This is the value added piece, not the Policing Compliance
oversight piece. And then in my boards, I work as
the chair, probably twice as hard as any other person on the
board. Because I am trying to build an
(12:12):
agenda so that the investment ofour time will yield a return to
the management team and the company of that investment and
we do annual reviews of the board.
But basically I regard each board meeting as an opportunity
to make the next board meeting more effective.
So I spend a ton of time. Doing exit interviews, not only
(12:35):
with the directors, one-on-one. I don't ask how did the meeting
go? Pascal and colleagues and every
say, oh fine, David, it was great.
I'm going to point my finger at you and say Pascal, and I'm
going to look you in the eye andI'm going to say Pascal, What
could we have done to get more of a return from our time in
this last meeting? Tell me, speak to me.
Would you have too much of this?Too much of that?
(12:56):
And then two days after each board meeting, I'll phone you
again because then I'm hoping the silt in the river will have
settled to the bottom, the waterwill be clear and you'll be able
to say, you know, David, if we did on this differently, I think
we might have got a better return.
So as the chair, I really work the agenda as an investment
decision, and I like to try to focus that time on one of three
(13:20):
lines of sight. So when you think about a board,
it has hindsight that's looking in the rear view mirror, our
accounts, our audits, our compliance oversight, where are
we today? Wait a minute, I thought we were
supposed to be in Boston. Pascal, what the heck went
wrong? We're in Washington.
I mean, is this an operational issue or there's something
massive change in our business? And then thirdly is foresight,
(13:42):
which I described simply is where do we want to be when we
grow up and who's going to get us there?
So I always try and and analyze a board meeting according to
those 3 lines of sight. You did a survey with Mackenzie
of 275 directors, I guess this is a decade ago.
And we asked them according to these three lines of sight, how
(14:02):
did you invest your time generally as a director in your
operational duties and answer came back sort of 60% of our
time was spent in hindsight and oversight.
Or 70% and 30% and foresight. So we then asked them the next
question, how should you have invested your time?
(14:23):
Not how did you, but how should you?
And the answer flipped of course.
So we should be investing much more time on worrying about the
future changes to our core businesses, competitive
intensity. I mean the hindsight stuff is
all compliance policing. Fine, has to be done.
But let's not use our board meeting our board time.
(14:44):
Has a time to do that. Think of us as a whole bunch of
really gifted experts in variousthings.
How do we get involved in understanding the business and
how it might change? So disruption I think comes to a
board that is mature. And by that I mean has this
ability to help the management, has a great chair to manage its
(15:05):
investment decisions and that the chair has a good
relationship with the CEO. The chair and the CEO don't
trust each other. The game's over.
I actually left a Fortune 500 board because of the divisions
between the chair and the CEO. I just said that there's no way
I can be an effective, value added director in this
relationship. So disruption, very complex
(15:29):
tools. Yeah, I think there are insights
that are useful. It's good to hear.
I, I, I be curious you know one thing which which I hear comes
through for you over and over again is really this notion
around it starts with the CEO actually being willing to do the
the work as in engaging in meaningful way with the board.
And clearly also I think you know like doing the right stuff
(15:53):
on the company side. As a matter of fact, we
actually, I believe that at least for our clients that the
German, there's a German saying which translates really awfully
or poorly into English. But the German saying is the
fish sting from cuff and translates into the fish rots
from the head. Yep, it's a very German thing to
say. So I'd be curious to to
understand. So do you think this is
(16:15):
something, if you're thinking about the the CEO of a company,
is it so paramount in your worldthat you say if the CEO is not
on board in doing these things, then all hope is lost?
Or do you believe that organizations despite a CEO can
(16:37):
be successful? Yeah.
I do. But I think you're that as a as
a board, though, your sacred task, the one preeminent test
above all others, is to select the CEO.
And if you get that wrong, for whatever reason, the person's A
psychopath, narcissistic psychopath.
As certain nations have discovered to their discomfort,
(17:00):
you're really going to have a catastrophe.
So I spend a lot of time. In the work we do, teaching
corporate governance, trying to instill in people a the sacred
nature of that task, like everybody is dependent upon you.
It's the virtually the only taska board does entirely by itself,
(17:21):
which is an interesting little feature of it.
And most boards, while they workat it, I don't think they'd work
nearly hard enough at it. For example, most large
corporations, yes, have an HR committee.
That HR committee ensures, of course, that there's a training
plan for everybody in the bank or the industrial enterprise, so
(17:45):
we have candidates inside. But I don't think the real
development passed based upon people's individual strengths
and weaknesses and needs that are deep enough.
There really should be a very concentrated effort to have a
plan for Pascal Fanette over thenext five years to develop
fully. Into a potential CEO candidate.
(18:08):
And what does that mean? Well, what do CEO's do?
Their job is different from anybody else.
So we spend a lot of time on differences of a CEO.
And then you ask what are the attributes you would need in
order to make that person successful in that part of the
business? And does this person have that
skill set? The Harvard Business Review.
(18:29):
Work on successful CEO's. I think they do it every two
years. They take the top 1200 CEO's and
their performance in the world over the last three years and
they rank them 80% financial, 20% non financial.
Goodness knows how they do it, but let's assume they do it
intelligently. The consequence of that is it
82% year after year after year, 82% of their selection of the
(18:53):
top 100 CEO's are promoted from within.
So your odds are substantially enhanced if you are promoting
from within. And that means are you training
really diligently working at these skill sets.
And I think that's a job that's very undernourished.
Interesting. I'd love to dig into a question
(19:15):
which I find on this podcast hasbeen very controversial as in
very varying degrees of perspective.
And this is really the question around when you look at large
corporations, privately held or publicly traded, can they
actually even do disruptive innovation as may be defined by
(19:37):
Clayton Christian? Or are they doomed, for better
or worse, to essentially be in the world of sustaining
innovation and then once a disruptive innovation comes
along, to hopefully be in a position to acquire or partner
or something while I on that spectrum, I don't.
Think there's any necessary death that's going to occur,
(20:00):
although the Google believes it's something in north of 60%
of today's S&P 500 companies won't be there in 10 years.
So Mr. Pinchi has a rather jaundice view of the survival
potential of publicly traded companies at all.
I did some work with Stanford and on this question we asked
(20:20):
what our boards doing today in response.
And we took a look at Walmart, who has three directors in their
40s or early 50s. I said wow, that's because they
are. They are regarding themselves as
a competitor to Amazon. So that's what they're doing.
We then asked how many directorson the S&P 500 are under 40.
(20:47):
We couldn't find that because there wasn't a listing, but we
could find under 50 and there were 4%.
There were 16% above 70. Very interesting.
So there's four times as many directors in their 70s as there
were in their 50s. That was one thing.
So we found that age was not something that boards had
responded to, and there may be good reasons for that, Gina
(21:07):
Rometty of IBM said David, sure,I'd love to have some young whiz
kid on here, but you know, I runbusinesses in 135 different
countries. I can't have for Ford to have a
pinch hitter on a board for a very narrow subject matter, no
matter how important. So maybe that's right.
So picking skill sets, you take the retired CEO of IBM rather
(21:27):
than the 40 year old upandcomer and put her on your board and
you build a skill sets a more common device.
And this is in 92 of the S&P 5 hundreds.
At my last count, 92 of them have got independent sort of
incubators. So you acquire talent, you
(21:47):
acquire companies, but you keep them completely separate
systemically from the operation.And that's I think a very
powerful way of getting around embedded bureaucracies while not
losing your potential to innovate.
One board I was on, Colliers Global Commercial Real Estate,
we've bought two companies. They sit next door to the head
(22:08):
office of the core company, but they are attached to it in no
way except personal people walking in.
None of the financial systems, none of the HR systems come from
Colliers to the fintech companies.
So by having them adjacent to you but not part of you, you
hope that you'll be able to pickup on important, dramatic
(22:30):
changes that do deserve to be migrated into the core company.
So that's another device. The 4th one I'll mention is
tasking the CEO. This is something a board can
do, the Marriott board said to its previous CEO, Arnie.
We want you to invest 30% of your time in understanding how
(22:53):
Airbnb might impact our businessbecause it's taking a lot of
share, it's growing, it's got competitors and we are the
largest traditional hotel business in the world.
But how's this going to impact it?
So Arnie turned around to the gentleman who was then running
Asia Pacific, Craig Smith. He said to Craig, I want you to
(23:14):
invest half your time, half yourtime and understanding what's
going on in China in our industry.
And Craig said, that's a great idea, Arnie.
But I've got 3000 hotels, 500,000 employees and he said
that's fine, Craig delegated. I want you to invest half your
time. He ended up doing a joint
venture with Alibaba. Alibaba came public on the New
(23:35):
York Stock Exchange is the largest IPO ever.
I mean amazing. And it is transforming the
business because they're taking insights from Alibaba and the
way the Chinese hotel and hospitality industry works and
they're beginning to feed them into Marriott.
So independent incubators I think are really highly
(23:56):
functional way to go to get around bureaucracies and
establish infrastructure. There's so much interesting
stuff I would love to dig into. You made a comment which I
literally just wrote this down because really made my ears
prick up. You talked about this idea
around the core and the edge andthe idea and you use the Collier
(24:17):
example, the idea being that youuse the edge to observe what is
worth migrating into the core. That I find a really fascinating
idea, because what I typically hear is much more the.
John Hagel style school of the core becomes the new edge.
Like this idea that this new thing will become so big and
(24:41):
like is so radically different that it will just take over what
is in the core. And I always thought this, I
believe that is exceedingly rareactually like happening in the
real world. Besides the fact that it's
really hard to do, be curious toto hear your thoughts a little
bit more on this like how do youdo that?
How do you set this up this migration this like?
(25:02):
What is a good way to think about this structurally to do
this successfully? Well, I have one example from
IBM in the mid 90s, which you may remember.
They brought in Lou Gerstner from American Express as the
company was going bankrupt. Huge global technology company
going bankrupt. They brought in Lou Gerstner,
and he brought in as one of 23 vice presidents the CEO of IBM
(25:27):
Canada, a man named John Thompson.
A year later, John was the only vice president left, and he had
become vice chairman. And he spent his entire year
traveling around visiting customers, visiting plants,
talking to employees, seeking competitors.
And he came back to Lou and he said, Lou, I've traveled more
miles, met more people both in and outside the company than any
(25:50):
executive in the last 20 years of IBM.
And I really think I've got a handle on what's happening.
And we are perfect, absolutely perfect at one thing.
And Gerstner smiled broadly, looking to the answer and says,
that's great, John, what is it? And he says, crushing all new
ideas. Now this is a company that had
to radically transform itself from inside.
(26:12):
And the one thing the number twoperson in the company came back
with after having traveled the world was we're perfect at
crushing all new ideas. That then led to the two of them
coming up with a pretty radical solution.
And that was that John, as vice chairman of the company, would
pick 12 technology projects. He'd be given a budget.
(26:35):
I think he was given something like, I don't know, 204 hundred
million a year, non trivial. And he was given the right to
choose anybody. He wanted to run them and he
could pay them whatever he wanted.
And they were not part of any IBM system at all.
But they did depend upon his power of Mr. Gerstner.
So John set off as an independent incubator and I
(26:57):
think Fast forward five years, his mission was to create new
billion dollar businesses. I think he created three of them
out of the 12 that he'd started with.
It was done completely outside the mainstream but within the
structure and the senior management team.
And so his advice is always beenyou can't take cash flow away
(27:17):
from an operating business. If I'm running, let's say I'm in
charge of the hotel business in the Kingdom of Saudi Arabia, and
I'm really keen on its potential, I'm going to say to
you, Pascal, what do you mean you're taking away half my free
cash flow. I got 10 things to invest in for
every dollar. And you say, no, no, no, no,
David, I'm cutting you back. Every executive will defend
(27:39):
almost to the death their right to reinvest every single dollar
they earn as a free cash flow. And there's a particularly
distressing McKinsey chart that came from a came from a decade
ago. It showed reinvestment rates
over the last 20 years of companies in in the business
lines of business. They were 3% was the number that
(28:03):
it was and it was absolutely flat over the decades.
In other words, people, executives believe they have a
profound right to reinvest theirown free cash flow in their
businesses. I mean, this is the core
profitability, Pascal, and you're telling me I can't
reinvest in the core business and you're not going to say to
me, well, David, you're going tobe irrelevant in three years if
(28:24):
we don't find a new way of doingit.
So the John Thompson, IBM makingelephants dance way, I think is
probably still the only way you can do it.
You've got to get somebody at the top to say I'm taking 20% of
the free cash flow from every operating division.
Maybe I'll discriminate between A and B, but basically and I'm
going to give that to my incubator manager.
(28:46):
And then incubator manager is going to be my, my closest best
business colleague. And together we are going to be
the instrumentation of change. We're the levers that are going
to go back to Pascal and say actually Pascal, we're going to
sell your business. You're going to be gone.
You're the taxi company, we're Uber, you're going to be gone in
two years, gone, not just depressed, gone.
(29:07):
So we're going to sell you now. So it takes the leadership
inside of the top and I think you get the new World Vision by
farming it out in an incubator to a very senior executive who
you trust and know completely. So it comes back to top
leadership, comes back to the fish.
Yeah, very much hope, very much,very much.
Now boards can encourage that. You know, this is where I could
(29:30):
sit down with you as my CEO and say, I'm not sure how artificial
intelligence is going to impact us, but let's set up a program
where maybe you and I go to somesomewhere, somehow.
We listen to to Nick Darbo Garno, recently retired chief
evangelist at Google, and just get some insight from him.
Maybe we send some people off within the operating businesses.
(29:52):
Maybe we hire somebody inside togive us an insight.
Maybe we start an incubator. I think it's really dependent
upon the chair to initiate with the CEO the discussion on what
are we going to do about this. The answers could range from a
little to education to actually starting an incubator.
(30:12):
Interesting. I'd be curious kind of probably
as to wrap this absolutely fascinating conversation up.
We talked a lot about boards, and we talked about boards and
their role and their abilities to influence innovation and
disruption in organizations. Mostly from a perspective of
large publicly traded company boards.
So typically boards which are institutionalized.
(30:34):
I'd be curious to hear if you'rethinking about smaller companies
and a lot of the listeners to this podcast they have, you
know, medium sized companies. They might be typically might be
privately held. So there might not be the legal
requirement to actually have a board yet.
I hear a lot and even startups have advisory boards for
(30:55):
example. I'd be curious to hear your
advice to a CEO or a founder on how do you think about if you
first of all should you have a board, even if it's an Advisory
Board? And then how do you think about
setting it up and then placing the right people so that it is
actually effective versus it is just the thing you have on your
(31:17):
website? Good question.
My advice to startups is build the board one person at a time.
I had one startup, he said to meI need a board by June because
I'm going to go public in September.
I said my advice would be get one director and see if that
director helps you and adds value.
Then sit down with that one and add another one.
(31:38):
So ask yourself what skills do we need around this table that
we don't have that would improveour decision making and build it
brick by brick. The evidence is very clear that
one bad director on a board doesmore to damage the board than 11
directors that are trying to build a board that works to add
value to the company. Make a mistake on that and you
(32:01):
really are in a lot of difficulty.
So #1, build a board slowly. Number two, I would say every
CEO, every entrepreneur has to invest some number.
Give me the number 1015% in worrying about competitive
disruption. And typically that doesn't
(32:22):
happen because every CEO entrepreneur has got 156 things
to do by lunch. You got to make, you just sort
of have to say what are the three things I need to get done
in the next quarter that give methe best chance to survive.
So yeah, I got a whole bunch of stuff to do, I got to get the
letterhead, I've got to get a point of sale machine, you know,
blah, blah, blah, blah. But what is really going to
(32:44):
create the longterm potential for this business to succeed?
Because most of the startups don't.
And one of those answers is where you're investing your
time. Make that very conscious, and I
would, I would assert you've gotto invest at least 10% of your
time and worrying about your competitors and the nature of
technology around you. Who's leading and follow the
(33:05):
leader. On that note, as you just said
the 10% maybe as a as a last comment on this we had Bill
Passmore on this podcast was over at Columbia University
wrote a whole bunch of books and.
He gave me this mental frameworkor numbers basically, which are.
He talks about the 10105 role where he says that in his book
(33:29):
the top 10% of your people should spend 10% of their time
thinking five years out. And it's as good as a rule of
thumb I think as any. What I find fascinating is when
I speak to. Executives and organizations,
and I typically ask them to like, how much time did you
spend deliberately actually thinking about the future, say,
last week? The response is typically a
(33:52):
somewhat shameful 0. So my question is, how much time
should we actually invest? Yeah, you invest your time.
It's an investment decision. Unless you're very different
from the rest of us. We both have 24 hours.
Question is how do you, how do you invest that time in the next
24 hours? Where is it going?
At least ensure there is some time being invested in the
(34:15):
future every week. And maybe you can't do it today
because you're with your bankersand then you're with your
insurance agent and and and and and.
But I think every week you should set a target and then ask
yourself, if I didn't make that target, why not?
Because that's a failure. That is a distinct failure and
it's likely going to impact yourbusiness survival rate or
(34:38):
potential. And I would then say what did I
learn from that investment last week and does that indicate that
I should be investing more or less.
So it's a, it's a permeable investment decision that can go
up or down. And if you get out there and
find, hey, I'm in the lead with this technology, I'm the one
penetrating the new markets, then I don't need to worry about
(34:59):
that as much. The pace of change, I might be
leading it. If I'm #3, maybe I got to invest
three times my money, my time infinding out what the numbers one
and two are doing, don't know. And then I would I would
definitely set up though I thinkto help the discipline.
I would definitely set up somebody who I say has seen the
(35:20):
movie before, being with a startup, seeing the just this
incredible amount of detail it has to be gone through but is
able to discern and to help you invest your time in a much more
success oriented way. Because I've seen the movie
Pascal, don't do that today. Today I want you to go over
(35:42):
there and meet with them because.
So an Advisory Board should be adisciplinary force in a startup
and a young company for sure. And the same holds true for
family companies. If they're too centrally
focused, their vision is going to be hugely truncated.
Unless they have some external advisors, I don't think it has
to be a board to move to a fiduciary responsibility.
(36:06):
But I think there has to be an intimacy in the relationship
that allows you to speak truth to power and to say Pascal, the
way you invested your week last week is going to ensure you're
going to fail within the next 12months.
Now listen to me or I'm going togo and do something else.
David, on that note, thank you so much for this conversation.
(36:28):
It was great. I loved how we went from.
Talking about innovation, disruption to the role of the
board, to the necessity for leaders to really stand up and
do the hard work and be willing to do the hard work and do the
the hard decisions. And I learned so much.
I will eradicate the word spend from my vocabulary, at least
(36:48):
when I'm talking about time, andwe'll replace it with the word
invest. And I think we should all do
that. Yeah.
Well, if there's one take away, that would be it.
Invest your time wisely, prudently and consistently
evaluate that past investment decision so you can get a higher
prospect of a return in the future for the board, the CEO,
(37:09):
the relationships, everything. I absolutely have nothing to add
to that. David, thank you so much.
This was a phenomenal conversation.
Thank you. Thank you, Pascal.
Hey, it's. Pascal, thanks for tuning in on
this episode of Disrupt Disruption.
If you want more, check out the other episodes we have on this
podcast. And if you liked it, do us a
(37:30):
favor. Go on your podcasting platform
of choice, iTunes, Google Play, whatever it is, and leave a
quick review. It helps tremendously with
getting the insights from our guests out into the world.
If you have any questions, send me an e-mail.
You can reach me at pascal@vnet.com.
Thank you so much for listening and I will hear you here soon.
Welcome to Disrupt Disruption, aseries of intimate interviews
with global thought leaders and practitioners operating at the
intersection of business, leadership and technology.
We're discussing all things innovation and disruption and
how to not only survive, but thrive in these times of
exponentially accelerating change.
Trusted by CE O's founders and leaders globally for the latest
(00:23):
take on business models, methods, culture and leadership,
we cut to the chase, debunk the hype, and get real.
You're in great company. I'm your host, Pascal Fenet,
cofounder of B Radical. Hey everybody.
Pascal Fenet. Here we are back with another
episode of Disrupt Disruption, and today I'm particularly
(00:45):
excited to have with me Professor David Beatty.
David is the Chair of the Sharonand David Johnson Center for
Governance Innovation and the Professor of Strategy at the
Rodman School of Management at the University of Toronto.
Previously he was the President of one of North America's
largest food manufacturing companies.
In his long career he had 39 different Board of Directors
(01:09):
seats in Canada, America, Mexico, Australia and England,
and has been Chairman of nine public companies.
And so much more. We will link to David's bio in
the show notes so you can look him up.
Highly recommend it. David, I'm excited to have you
on this podcast. Thanks for joining us.
My pleasure, Pascal. David, I'd be curious, with your
(01:33):
experience and particularly yourwork with boards of large
corporations, privately held, publicly traded companies,
conceptually, how do you even think about disruption?
What does it mean for you? How do you talk to boards about
it? What are the the I guess the
gutters? Yeah, that's a very deep
(01:55):
question, Pascal. I wish there was a stroke of
light from God and say there's three things you have to do to
get it right. But they're not everything is
contextual, as you know, when large, complex corporations run
by human beings. And so there's no immediate
answer that I can give you. I always start with Anna
Karenina. Every happy family is happy in
(02:16):
its own way. Every unhappy family is unhappy
in its own way. So if you know one family
business, you know literally onefamily business.
If you're familiar with a board of directors, you know that
board of directors. So having a board cope with
disruption. Is a huge challenge for them.
(02:37):
They're basically good at policing functions, oversight,
making sure management's not stealing too much, complying
with all the agencies, boards and commissions who oversight
you, either the SEC or industrially or somehow.
And that policing function is generally well done, although
(02:57):
there's some wonderful examples like Wells Fargo.
Where apparently nobody on the bank board knew that for 10
years the company was systematically stealing from its
customers, even though there were 1300 former employees suing
the company in a class action lawsuit because they had been
wrongfully dismissed. The only way they could meet
(03:17):
their targets was to fabricate accounts and they refused to do
it. So they were fired 1300 of them
in the class action lawsuit and apparently not one director was
aware of this. So.
It shows they're very kind of introspective.
They're often captured by their CEO.
So I think Mr. Stump, there would have been no question as
(03:39):
chair and CEO of Wells Fargo Bank that the directors he put
around that table were ones thathe felt he could rely on to
trust in him. But on the board, you eat what
you're fed, so Mr. Stump is feeding you materials.
You don't happen to ask the question, or if you ask the
question. What about that lawsuit, John?
(04:00):
Oh, well, that's just David. We get them every day.
Oh, okay, fine. So it's very difficult to move
them beyond that policing function.
And as I say, even that's often not well done into what I'd call
a value creation or value protection or value evolution
role. This is basically how I see
(04:21):
boards. They have an A function and A/B
A is to make sure that management.
Is not stealing too much and B is to try to add value and of
great interest to that perspective.
Mackenzie's book The year last January, I think it was called
the 76 best CE O's in the Universe something like that,
where they interviewed the people they deemed to be the
(04:43):
very best executives alive and asked them what their cognitive
biases were in various functionsand duties and when it came to
the board. The cognitive bias that really
worked for these successful CE O's was help the board, help me
do my job. In other words, you think about
(05:03):
them as a group of really experienced executives, like
having having a McKinsey advisory roundtable.
And so your job as CEO is to help them help you.
So to begin with, dealing with disruption, a, there's got to be
an openness that the CEO is not going to be a John Stump and
(05:23):
shut you down at every opportunity just to get through
the board meeting, but that the CEO is actively trying to engage
you as a director in the challenges the company faces.
And if that doesn't happen, nothing will happen because
basically boards are met made-upof part timers.
(05:44):
Who have experienced but not expertise in the particular
business they're overseeing generally and who do a lot of
other stuff. So they're very busy.
One of the private equity guys from Chicago wrote a book on
governance and he's described publicly traded companies as
having satisfactory underperformance like Pascal.
(06:05):
Are we playing golf this afternoon at 3?
And I'm at the board meeting at till two, so I'll have to leave
the board at 2:15 no matter what's happening.
In order to get to the golf course to be with you.
So I'm a part timer, I have a lot of other activities and I
know nothing. I'm gifted, but I'm a gifted
amateur. So it's very difficult to get a
board to think about conceptually about disruption as
(06:28):
a threat to their own ongoing corporation unless and until the
CEO is willing to share with them his or her concerns because
they just don't know enough about the business.
That being said. In larger corporations with a
huge amount of resources, let's say a Canadian bank, one of the
(06:49):
chairs of one of the Canadian banks, talking about ES&G and
what that meant. The board asked the management
team, what is this stuff all about and what difference does
it make to our bank? And the answer came back, well,
we're not sure, so why don't we hire somebody?
So the bank had the resources togo out and hire somebody with an
(07:09):
ESG label on their forehead. And then six months later, after
two or three board meetings, theboard would ask well, what is
this person discovered. So immediately is delegated down
into the organization and then within a year it's probably put
down into the operating departments of the bank.
So it gets included in the bank's consideration of all of
(07:32):
its functioning and business andreported back up.
Smaller companies don't have thebenefit of that kind of resource
to say, I don't know what this DE and I stuff is.
I don't know what ES&G is. I don't know what artificial
intelligence is. I don't know what machine
learning is. And until you get to a size
(07:53):
where you can afford to say, well, if you don't, if we don't
understand the impact that machine learning and artificial
intelligence is going to have ontwo of our core businesses.
We better find out, you know, higher bane, higher McKenzie,
higher BCG. But if I'd say I'd love to, but
I don't happen to have $100 million sitting on the sidelines
at the moment, then you're in a very difficult spot.
(08:14):
So size I think matters a lot. The ability of the board to be
encouraged to ask questions by the CEO matters a lot, and the
expertise of the directors around that table matter a lot,
so. Long answer, but it's all
contextually dependent, I think.Pascal, you just brought up a
(08:38):
whole. I took a bunch of notes here,
and you brought up a whole bunchof topics I would love to dig a
little deeper into. Let me start with your Anna
Karina opening statement, which,by the way, you're the first
person who ever brought classic literature into a conversation
about disruption. Love it.
You made this point. Which, in other words, at least
(08:58):
it sounds to me, is that the transferability of insight
between organizations somewhat limited.
Maybe it doesn't even exist. Which brings me to an
interesting point. I happen to write a book about
disruption. Now I'm starting to question
myself, are these insights even transferable?
You know, can we actually get toan abstraction layer, a useful
(09:21):
abstraction layer of insights which we can give to companies
to make the stuff work? Hard, Ayanna Karenina.
The first line in Tolstoy's great book, I said very, very, I
think prescient line. Happy families are all happy the
same way. Unhappy families are unhappy,
each in their own way. Yes.
(09:42):
So are there insights that wouldbe conceptually useful for
everybody? Yeah.
I think understanding my characterization of the
separation between the management and the board as
having these three features of time.
A board typically invests 250 hours a year, the management
teams investing 4000. So what's that 8%?
(10:03):
And typically the board understands zero about the
business they they join the company board.
I mean I might have been CEO of a major food company, but I'm in
the Bank of Montreal board. Like what do I know about
banking? Zero.
And then thirdly. I've got a lot of other things
going on in my life. Whereas hopefully the management
team is completely devoted to running the business.
(10:24):
I've got two other publicly traded boards.
I have my philanthropy, I got mygrandkids, I have my teaching.
I mean and and and. And I'm a busy guy.
So typically this notion of satisfactory underperformance
creeps in all the time. But I think if you start from
the conceptual knowledge of the difference along those 3 lines
between the management team and what they do.
(10:47):
And the board and what they do is going to give both sides of
the information chasm managementteam knows everything, the board
knows nothing. So to feed the board garbage,
you're going to get nothing back.
And if that's what how you want to treat your board as the CEO,
presumably that's how it's goingto be.
But if you follow the McKinsey advice and conceptually say you
(11:08):
know what as a CEO and the senior management team.
Our core job with respect to theboards to see if they can help
us run this company better. So we got to be open with them.
We have to be transparent with them.
I have to have an absolutely intimate relationship with the
chair of the board. I'm going to work with that man
(11:29):
or woman constantly on trying toimprove each board meeting to
add value. I in my teaching, I just, I
never asked the question or try not to.
How did you spend your time as adirector at the last meeting?
The expenses are gone. I try to say how did you invest
your time? Because if I'm using the word
invest, then hopefully you're maybe thinking return on that
(11:52):
investment. This is a very hard job to get a
return on the investment of a director's time.
This is the value added piece, not the Policing Compliance
oversight piece. And then in my boards, I work as
the chair, probably twice as hard as any other person on the
board. Because I am trying to build an
(12:12):
agenda so that the investment ofour time will yield a return to
the management team and the company of that investment and
we do annual reviews of the board.
But basically I regard each board meeting as an opportunity
to make the next board meeting more effective.
So I spend a ton of time. Doing exit interviews, not only
(12:35):
with the directors, one-on-one. I don't ask how did the meeting
go? Pascal and colleagues and every
say, oh fine, David, it was great.
I'm going to point my finger at you and say Pascal, and I'm
going to look you in the eye andI'm going to say Pascal, What
could we have done to get more of a return from our time in
this last meeting? Tell me, speak to me.
Would you have too much of this?Too much of that?
(12:56):
And then two days after each board meeting, I'll phone you
again because then I'm hoping the silt in the river will have
settled to the bottom, the waterwill be clear and you'll be able
to say, you know, David, if we did on this differently, I think
we might have got a better return.
So as the chair, I really work the agenda as an investment
decision, and I like to try to focus that time on one of three
(13:20):
lines of sight. So when you think about a board,
it has hindsight that's looking in the rear view mirror, our
accounts, our audits, our compliance oversight, where are
we today? Wait a minute, I thought we were
supposed to be in Boston. Pascal, what the heck went
wrong? We're in Washington.
I mean, is this an operational issue or there's something
massive change in our business? And then thirdly is foresight,
(13:42):
which I described simply is where do we want to be when we
grow up and who's going to get us there?
So I always try and and analyze a board meeting according to
those 3 lines of sight. You did a survey with Mackenzie
of 275 directors, I guess this is a decade ago.
And we asked them according to these three lines of sight, how
(14:02):
did you invest your time generally as a director in your
operational duties and answer came back sort of 60% of our
time was spent in hindsight and oversight.
Or 70% and 30% and foresight. So we then asked them the next
question, how should you have invested your time?
(14:23):
Not how did you, but how should you?
And the answer flipped of course.
So we should be investing much more time on worrying about the
future changes to our core businesses, competitive
intensity. I mean the hindsight stuff is
all compliance policing. Fine, has to be done.
But let's not use our board meeting our board time.
(14:44):
Has a time to do that. Think of us as a whole bunch of
really gifted experts in variousthings.
How do we get involved in understanding the business and
how it might change? So disruption I think comes to a
board that is mature. And by that I mean has this
ability to help the management, has a great chair to manage its
(15:05):
investment decisions and that the chair has a good
relationship with the CEO. The chair and the CEO don't
trust each other. The game's over.
I actually left a Fortune 500 board because of the divisions
between the chair and the CEO. I just said that there's no way
I can be an effective, value added director in this
relationship. So disruption, very complex
(15:29):
tools. Yeah, I think there are insights
that are useful. It's good to hear.
I, I, I be curious you know one thing which which I hear comes
through for you over and over again is really this notion
around it starts with the CEO actually being willing to do the
the work as in engaging in meaningful way with the board.
And clearly also I think you know like doing the right stuff
(15:53):
on the company side. As a matter of fact, we
actually, I believe that at least for our clients that the
German, there's a German saying which translates really awfully
or poorly into English. But the German saying is the
fish sting from cuff and translates into the fish rots
from the head. Yep, it's a very German thing to
say. So I'd be curious to to
understand. So do you think this is
(16:15):
something, if you're thinking about the the CEO of a company,
is it so paramount in your worldthat you say if the CEO is not
on board in doing these things, then all hope is lost?
Or do you believe that organizations despite a CEO can
(16:37):
be successful? Yeah.
I do. But I think you're that as a as
a board, though, your sacred task, the one preeminent test
above all others, is to select the CEO.
And if you get that wrong, for whatever reason, the person's A
psychopath, narcissistic psychopath.
As certain nations have discovered to their discomfort,
(17:00):
you're really going to have a catastrophe.
So I spend a lot of time. In the work we do, teaching
corporate governance, trying to instill in people a the sacred
nature of that task, like everybody is dependent upon you.
It's the virtually the only taska board does entirely by itself,
(17:21):
which is an interesting little feature of it.
And most boards, while they workat it, I don't think they'd work
nearly hard enough at it. For example, most large
corporations, yes, have an HR committee.
That HR committee ensures, of course, that there's a training
plan for everybody in the bank or the industrial enterprise, so
(17:45):
we have candidates inside. But I don't think the real
development passed based upon people's individual strengths
and weaknesses and needs that are deep enough.
There really should be a very concentrated effort to have a
plan for Pascal Fanette over thenext five years to develop
fully. Into a potential CEO candidate.
(18:08):
And what does that mean? Well, what do CEO's do?
Their job is different from anybody else.
So we spend a lot of time on differences of a CEO.
And then you ask what are the attributes you would need in
order to make that person successful in that part of the
business? And does this person have that
skill set? The Harvard Business Review.
(18:29):
Work on successful CEO's. I think they do it every two
years. They take the top 1200 CEO's and
their performance in the world over the last three years and
they rank them 80% financial, 20% non financial.
Goodness knows how they do it, but let's assume they do it
intelligently. The consequence of that is it
82% year after year after year, 82% of their selection of the
(18:53):
top 100 CEO's are promoted from within.
So your odds are substantially enhanced if you are promoting
from within. And that means are you training
really diligently working at these skill sets.
And I think that's a job that's very undernourished.
Interesting. I'd love to dig into a question
(19:15):
which I find on this podcast hasbeen very controversial as in
very varying degrees of perspective.
And this is really the question around when you look at large
corporations, privately held or publicly traded, can they
actually even do disruptive innovation as may be defined by
(19:37):
Clayton Christian? Or are they doomed, for better
or worse, to essentially be in the world of sustaining
innovation and then once a disruptive innovation comes
along, to hopefully be in a position to acquire or partner
or something while I on that spectrum, I don't.
Think there's any necessary death that's going to occur,
(20:00):
although the Google believes it's something in north of 60%
of today's S&P 500 companies won't be there in 10 years.
So Mr. Pinchi has a rather jaundice view of the survival
potential of publicly traded companies at all.
I did some work with Stanford and on this question we asked
(20:20):
what our boards doing today in response.
And we took a look at Walmart, who has three directors in their
40s or early 50s. I said wow, that's because they
are. They are regarding themselves as
a competitor to Amazon. So that's what they're doing.
We then asked how many directorson the S&P 500 are under 40.
(20:47):
We couldn't find that because there wasn't a listing, but we
could find under 50 and there were 4%.
There were 16% above 70. Very interesting.
So there's four times as many directors in their 70s as there
were in their 50s. That was one thing.
So we found that age was not something that boards had
responded to, and there may be good reasons for that, Gina
(21:07):
Rometty of IBM said David, sure,I'd love to have some young whiz
kid on here, but you know, I runbusinesses in 135 different
countries. I can't have for Ford to have a
pinch hitter on a board for a very narrow subject matter, no
matter how important. So maybe that's right.
So picking skill sets, you take the retired CEO of IBM rather
(21:27):
than the 40 year old upandcomer and put her on your board and
you build a skill sets a more common device.
And this is in 92 of the S&P 5 hundreds.
At my last count, 92 of them have got independent sort of
incubators. So you acquire talent, you
(21:47):
acquire companies, but you keep them completely separate
systemically from the operation.And that's I think a very
powerful way of getting around embedded bureaucracies while not
losing your potential to innovate.
One board I was on, Colliers Global Commercial Real Estate,
we've bought two companies. They sit next door to the head
(22:08):
office of the core company, but they are attached to it in no
way except personal people walking in.
None of the financial systems, none of the HR systems come from
Colliers to the fintech companies.
So by having them adjacent to you but not part of you, you
hope that you'll be able to pickup on important, dramatic
(22:30):
changes that do deserve to be migrated into the core company.
So that's another device. The 4th one I'll mention is
tasking the CEO. This is something a board can
do, the Marriott board said to its previous CEO, Arnie.
We want you to invest 30% of your time in understanding how
(22:53):
Airbnb might impact our businessbecause it's taking a lot of
share, it's growing, it's got competitors and we are the
largest traditional hotel business in the world.
But how's this going to impact it?
So Arnie turned around to the gentleman who was then running
Asia Pacific, Craig Smith. He said to Craig, I want you to
(23:14):
invest half your time, half yourtime and understanding what's
going on in China in our industry.
And Craig said, that's a great idea, Arnie.
But I've got 3000 hotels, 500,000 employees and he said
that's fine, Craig delegated. I want you to invest half your
time. He ended up doing a joint
venture with Alibaba. Alibaba came public on the New
(23:35):
York Stock Exchange is the largest IPO ever.
I mean amazing. And it is transforming the
business because they're taking insights from Alibaba and the
way the Chinese hotel and hospitality industry works and
they're beginning to feed them into Marriott.
So independent incubators I think are really highly
(23:56):
functional way to go to get around bureaucracies and
establish infrastructure. There's so much interesting
stuff I would love to dig into. You made a comment which I
literally just wrote this down because really made my ears
prick up. You talked about this idea
around the core and the edge andthe idea and you use the Collier
(24:17):
example, the idea being that youuse the edge to observe what is
worth migrating into the core. That I find a really fascinating
idea, because what I typically hear is much more the.
John Hagel style school of the core becomes the new edge.
Like this idea that this new thing will become so big and
(24:41):
like is so radically different that it will just take over what
is in the core. And I always thought this, I
believe that is exceedingly rareactually like happening in the
real world. Besides the fact that it's
really hard to do, be curious toto hear your thoughts a little
bit more on this like how do youdo that?
How do you set this up this migration this like?
(25:02):
What is a good way to think about this structurally to do
this successfully? Well, I have one example from
IBM in the mid 90s, which you may remember.
They brought in Lou Gerstner from American Express as the
company was going bankrupt. Huge global technology company
going bankrupt. They brought in Lou Gerstner,
and he brought in as one of 23 vice presidents the CEO of IBM
(25:27):
Canada, a man named John Thompson.
A year later, John was the only vice president left, and he had
become vice chairman. And he spent his entire year
traveling around visiting customers, visiting plants,
talking to employees, seeking competitors.
And he came back to Lou and he said, Lou, I've traveled more
miles, met more people both in and outside the company than any
(25:50):
executive in the last 20 years of IBM.
And I really think I've got a handle on what's happening.
And we are perfect, absolutely perfect at one thing.
And Gerstner smiled broadly, looking to the answer and says,
that's great, John, what is it? And he says, crushing all new
ideas. Now this is a company that had
to radically transform itself from inside.
(26:12):
And the one thing the number twoperson in the company came back
with after having traveled the world was we're perfect at
crushing all new ideas. That then led to the two of them
coming up with a pretty radical solution.
And that was that John, as vice chairman of the company, would
pick 12 technology projects. He'd be given a budget.
(26:35):
I think he was given something like, I don't know, 204 hundred
million a year, non trivial. And he was given the right to
choose anybody. He wanted to run them and he
could pay them whatever he wanted.
And they were not part of any IBM system at all.
But they did depend upon his power of Mr. Gerstner.
So John set off as an independent incubator and I
(26:57):
think Fast forward five years, his mission was to create new
billion dollar businesses. I think he created three of them
out of the 12 that he'd started with.
It was done completely outside the mainstream but within the
structure and the senior management team.
And so his advice is always beenyou can't take cash flow away
(27:17):
from an operating business. If I'm running, let's say I'm in
charge of the hotel business in the Kingdom of Saudi Arabia, and
I'm really keen on its potential, I'm going to say to
you, Pascal, what do you mean you're taking away half my free
cash flow. I got 10 things to invest in for
every dollar. And you say, no, no, no, no,
David, I'm cutting you back. Every executive will defend
(27:39):
almost to the death their right to reinvest every single dollar
they earn as a free cash flow. And there's a particularly
distressing McKinsey chart that came from a came from a decade
ago. It showed reinvestment rates
over the last 20 years of companies in in the business
lines of business. They were 3% was the number that
(28:03):
it was and it was absolutely flat over the decades.
In other words, people, executives believe they have a
profound right to reinvest theirown free cash flow in their
businesses. I mean, this is the core
profitability, Pascal, and you're telling me I can't
reinvest in the core business and you're not going to say to
me, well, David, you're going tobe irrelevant in three years if
(28:24):
we don't find a new way of doingit.
So the John Thompson, IBM makingelephants dance way, I think is
probably still the only way you can do it.
You've got to get somebody at the top to say I'm taking 20% of
the free cash flow from every operating division.
Maybe I'll discriminate between A and B, but basically and I'm
going to give that to my incubator manager.
(28:46):
And then incubator manager is going to be my, my closest best
business colleague. And together we are going to be
the instrumentation of change. We're the levers that are going
to go back to Pascal and say actually Pascal, we're going to
sell your business. You're going to be gone.
You're the taxi company, we're Uber, you're going to be gone in
two years, gone, not just depressed, gone.
(29:07):
So we're going to sell you now. So it takes the leadership
inside of the top and I think you get the new World Vision by
farming it out in an incubator to a very senior executive who
you trust and know completely. So it comes back to top
leadership, comes back to the fish.
Yeah, very much hope, very much,very much.
Now boards can encourage that. You know, this is where I could
(29:30):
sit down with you as my CEO and say, I'm not sure how artificial
intelligence is going to impact us, but let's set up a program
where maybe you and I go to somesomewhere, somehow.
We listen to to Nick Darbo Garno, recently retired chief
evangelist at Google, and just get some insight from him.
Maybe we send some people off within the operating businesses.
(29:52):
Maybe we hire somebody inside togive us an insight.
Maybe we start an incubator. I think it's really dependent
upon the chair to initiate with the CEO the discussion on what
are we going to do about this. The answers could range from a
little to education to actually starting an incubator.
(30:12):
Interesting. I'd be curious kind of probably
as to wrap this absolutely fascinating conversation up.
We talked a lot about boards, and we talked about boards and
their role and their abilities to influence innovation and
disruption in organizations. Mostly from a perspective of
large publicly traded company boards.
So typically boards which are institutionalized.
(30:34):
I'd be curious to hear if you'rethinking about smaller companies
and a lot of the listeners to this podcast they have, you
know, medium sized companies. They might be typically might be
privately held. So there might not be the legal
requirement to actually have a board yet.
I hear a lot and even startups have advisory boards for
(30:55):
example. I'd be curious to hear your
advice to a CEO or a founder on how do you think about if you
first of all should you have a board, even if it's an Advisory
Board? And then how do you think about
setting it up and then placing the right people so that it is
actually effective versus it is just the thing you have on your
(31:17):
website? Good question.
My advice to startups is build the board one person at a time.
I had one startup, he said to meI need a board by June because
I'm going to go public in September.
I said my advice would be get one director and see if that
director helps you and adds value.
Then sit down with that one and add another one.
(31:38):
So ask yourself what skills do we need around this table that
we don't have that would improveour decision making and build it
brick by brick. The evidence is very clear that
one bad director on a board doesmore to damage the board than 11
directors that are trying to build a board that works to add
value to the company. Make a mistake on that and you
(32:01):
really are in a lot of difficulty.
So #1, build a board slowly. Number two, I would say every
CEO, every entrepreneur has to invest some number.
Give me the number 1015% in worrying about competitive
disruption. And typically that doesn't
(32:22):
happen because every CEO entrepreneur has got 156 things
to do by lunch. You got to make, you just sort
of have to say what are the three things I need to get done
in the next quarter that give methe best chance to survive.
So yeah, I got a whole bunch of stuff to do, I got to get the
letterhead, I've got to get a point of sale machine, you know,
blah, blah, blah, blah. But what is really going to
(32:44):
create the longterm potential for this business to succeed?
Because most of the startups don't.
And one of those answers is where you're investing your
time. Make that very conscious, and I
would, I would assert you've gotto invest at least 10% of your
time and worrying about your competitors and the nature of
technology around you. Who's leading and follow the
(33:05):
leader. On that note, as you just said
the 10% maybe as a as a last comment on this we had Bill
Passmore on this podcast was over at Columbia University
wrote a whole bunch of books and.
He gave me this mental frameworkor numbers basically, which are.
He talks about the 10105 role where he says that in his book
(33:29):
the top 10% of your people should spend 10% of their time
thinking five years out. And it's as good as a rule of
thumb I think as any. What I find fascinating is when
I speak to. Executives and organizations,
and I typically ask them to like, how much time did you
spend deliberately actually thinking about the future, say,
last week? The response is typically a
(33:52):
somewhat shameful 0. So my question is, how much time
should we actually invest? Yeah, you invest your time.
It's an investment decision. Unless you're very different
from the rest of us. We both have 24 hours.
Question is how do you, how do you invest that time in the next
24 hours? Where is it going?
At least ensure there is some time being invested in the
(34:15):
future every week. And maybe you can't do it today
because you're with your bankersand then you're with your
insurance agent and and and and and.
But I think every week you should set a target and then ask
yourself, if I didn't make that target, why not?
Because that's a failure. That is a distinct failure and
it's likely going to impact yourbusiness survival rate or
(34:38):
potential. And I would then say what did I
learn from that investment last week and does that indicate that
I should be investing more or less.
So it's a, it's a permeable investment decision that can go
up or down. And if you get out there and
find, hey, I'm in the lead with this technology, I'm the one
penetrating the new markets, then I don't need to worry about
(34:59):
that as much. The pace of change, I might be
leading it. If I'm #3, maybe I got to invest
three times my money, my time infinding out what the numbers one
and two are doing, don't know. And then I would I would
definitely set up though I thinkto help the discipline.
I would definitely set up somebody who I say has seen the
(35:20):
movie before, being with a startup, seeing the just this
incredible amount of detail it has to be gone through but is
able to discern and to help you invest your time in a much more
success oriented way. Because I've seen the movie
Pascal, don't do that today. Today I want you to go over
(35:42):
there and meet with them because.
So an Advisory Board should be adisciplinary force in a startup
and a young company for sure. And the same holds true for
family companies. If they're too centrally
focused, their vision is going to be hugely truncated.
Unless they have some external advisors, I don't think it has
to be a board to move to a fiduciary responsibility.
(36:06):
But I think there has to be an intimacy in the relationship
that allows you to speak truth to power and to say Pascal, the
way you invested your week last week is going to ensure you're
going to fail within the next 12months.
Now listen to me or I'm going togo and do something else.
David, on that note, thank you so much for this conversation.
(36:28):
It was great. I loved how we went from.
Talking about innovation, disruption to the role of the
board, to the necessity for leaders to really stand up and
do the hard work and be willing to do the hard work and do the
the hard decisions. And I learned so much.
I will eradicate the word spend from my vocabulary, at least
(36:48):
when I'm talking about time, andwe'll replace it with the word
invest. And I think we should all do
that. Yeah.
Well, if there's one take away, that would be it.
Invest your time wisely, prudently and consistently
evaluate that past investment decision so you can get a higher
prospect of a return in the future for the board, the CEO,
(37:09):
the relationships, everything. I absolutely have nothing to add
to that. David, thank you so much.
This was a phenomenal conversation.
Thank you. Thank you, Pascal.
Hey, it's. Pascal, thanks for tuning in on
this episode of Disrupt Disruption.
If you want more, check out the other episodes we have on this
podcast. And if you liked it, do us a
(37:30):
favor. Go on your podcasting platform
of choice, iTunes, Google Play, whatever it is, and leave a
quick review. It helps tremendously with
getting the insights from our guests out into the world.
If you have any questions, send me an e-mail.
You can reach me at pascal@vnet.com.
Thank you so much for listening and I will hear you here soon.
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