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The real impact of corporate governance isn't about compliance or structure or policies, it's about the conditions that impact decision-making. Sound-Up Governance features fresh perspectives to help boards and executives to be a bit better tomorrow than they were yesterday.
Matt VO
Welcome back to Sound-Up Governance. It's episode 31, which is part two of a two part conversation where Nate Schmold, my Ground-Up Governance partner, interviews me about the corporate governance stuff that he's interested in. And it's really cool to understand what's interesting through his eyes and cover the ground that he really wanted to chat about. And we talked about empathy as potentially a non-negotiable board skill. And we wondered if Nate could just be a great director and, and all kinds of other stuff. So thanks for tuning in. Let's dive right back in to part two of my conversation with Nate Schmold.
Matt
So it's a journey, it's less about, did we...did we achieve this result? And more about what's the nature and shape of the journey in service of making decisions? I don't know if that sounds really nerdy and woowoo. But I still believe it.
Nate Schmold
Well, are there ways to be scientific about it? I mean, like in game development, we have that benefit of having the multiple universes. And you know, it's called or I mean, in software development, it's a/b testing, you know, you give a percentage of users this version, you give a percentage of users this version, and then you compare the results of each one. It seems like, you know, when you're dealing with human beings in a live scenario, that's the biggest variable. And, you know, you can't you can a/b test the exact same afternoon with the same mood and the same, you know, group of people, but is there some sort of scientific way that you can track your experimentation? Or is it more like a feel?
Matt
No, I think that the the answer is, is sort of "yes, although..." So the yes is, this is one of the great benefits of framing, corporate governance around decision making is there's a lot of really fun and good science around how people and groups of people make decisions and what tends to screw them up, including cognitive biases, and and, you know, all kinds of other mistakes that we make. And so the science around that can inform when we're being intentional about the conditions, we can say, "Okay, well, we're being intentional, because we know that we're going to get tripped up by confirmation bias, we know that we're going to have a tendency to frame our decisions too narrowly, we know that we might get, you know, overcome by emotion that's not serving us well, because the science tells us that's what's going to happen." We know that we're going to, we're going to have the planning fallacy that that makes us say, I don't know if you know, planning fallacy. It's great. I think it's called planning fallacy. It's that we... this is the reason why projects big projects are always late and over budget is because when we're planning on stuff, we're not only overconfident in the in how cheap and fast it's going to be. But we look at all the other projects like ours that have happened, we see that they're all they've all been longer and more expensive than what we're predicting. And we say, "Yeah, but ours is different." Even though we have no, we have no evidence to suggest that ours is different.
Nate Schmold
You have proof that is the opposite.
Matt
Yeah. So if we acknowledge that all of these things are going to get in our way, that's the science. And then we can say, "alright, because we know all that stuff is going to screw us up, let's be intentional about our conditions, so that were controlling for some of the mistakes that were likely to make." So this is less this a different scientific angle than you're asking. It's not can we, after the fact, scientifically show whether we had good governance or not, it's more before the fact let's let the science inform us about how we're probably going to mess this up. And be intentional about not messing up so bad. Does that make sense?
Nate Schmold
That makes perfect sense. Yeah. And I yeah, I think that's a that's, that's helpful. It's just being putting, like, putting a structure to the the wisdom and the intelligence that's going into the decision making.
Matt
Yeah, because people are really bad at decisions. Like really bad.
Nate Schmold
Well, that's kind of I have a question here. It's not really a question. Um, let's see if I can figure out what I was trying to ask here. I just wrote "human empathy, question mark, corporate empathy, question mark." Is there a place is it Is there a place? Like, are you thinking about? What's a good way a word what I'm trying to what I'm trying to figure out here? What percentage if you had a pie chart that had human empathy, so like, empathy towards the individual in a boardroom, and empathy towards the corporation? Or you know, the group of people? What's the relationship between those two factors? And how important is one over the other? Like, how are you... Or is it literally like, if it was a Venn diagram, are they just overlapping? 100%? Are you trying to account for, are you trying to think of all of that stuff at the same time?
Matt
Let me make sure that I understand the question, because I think I've got an interpretation, but I want to make sure I understand your intent. So the empathy is from whom? So the empathy is towards individuals or towards a group, but from whom? Who's the one who's being empathetic?
Nate Schmold
I would say, let's say a board member. Let's say, somebody who's on a board. Are they only thinking, and this is this is again, this is coming out of my my naivety - who are they, who are they serving? And are they thinking about in terms of like, appealing to somebody else on the board or appealing to who, ou know, like... Yeah, it's very hard for me to... I think you kind of know what I'm getting at.
Matt
You've accidentally stumbled into the one of my great obsessions in this space. And I won't get into too much detail. But there's an exercise that I've done over and over probably over 1000 times. I do it everywhere I go. In boardrooms, I've done it, I've done it three times this week. I do it in boardrooms, I do it in conferences, classrooms. I do it all the time. It's the only part of my repertoire that stayed constant for a decade. And I'm obsessed with it. And it's the question is "to whom do you owe a duty from the perspective of a director?" and give them a list of stakeholders. And some of those stakeholders will it'll include the board, it'll include senior management, but it'll also include outside people, like shareholders and customers, it'll include the environment or the planet, I'll include, one of them on the list is always myself as a director. And the myself one is an interesting illustration of the question you're asking, which is when these groups... I put them in groups to try to agree on ranking the stakeholders from the one to whom we owe them greatest duty to the one to whom we owe the least duty. And it's it's an obnoxious question, but it's a lot of fun to work through. And myself is a good illustration, because the most common place for it to land on the list is at the bottom, because people generally will interpret it as "well, I don't know a duty to myself, that would be self interest. And that would be a conflict of interest."
Nate Schmold
Right.
Matt
But then some... next most common place for it to be is at the top, because some people interpreted as being true to your own values. And so if we think of it as self interest, or if we think of it as being true to your values, it completely changes the vibe or tone of it. And in fact, you can make an argument for any of these stakeholders that they could be anywhere on the list, right, you can make an argument for the environment, being at the top of the list, under certain circumstances or in the context of certain decisions, you can make an argument for regulators being at the top of the list, although that one's much harder. But making this even more complicated. I'm sure you've never, Nate, looked at the Canada Business Corporations Act and the section on it that defines the duties of a corporate director. But I know this is gonna be really silly, but follow along with me for a second. So because this is the law, and the Act says that directors' primary fiduciary duty, so their duty to look after someone else's interests, they owe their primary duty to the corporation, on whose board they sit. And here's how they describe what that means. "When acting with a view to the best interests of the corporation, the directors and officers of the corporation may consider but are not limited to the following factors. A," there's three of them A, B, and C. A is "the interests of shareholders, employees, retirees and pensioners, creditors, consumers and governments." So we may consider those things, but we're not limited to them, "B the environment and C the long term interests of the corporation." These are all it's a list of things that we could consider but we don't have to And, and we're not limited to them because we could come up with other things. Basically, what it means I think, is we're actually supposed to try to be empathetic to every individual and every group that stands to be affected by the decisions that we make. We can't make all of them happy. Right? There's no decision that is good for all of shareholders, employees, retirees, and pensioners, creditors, consumers and governments. There's no such thing as as as making a decision that makes all of them happy, it can't be done. But we have to think about them, we have to imagine the impact that we could have on them in making this decision. And we have to confidently say, "Yeah, we're making this decision, despite the fact that we know it's going to be kind of bad for the government, or it's going to be kind of bad for consumers." And say it out loud to each other. And, and so I think this is a really long way of saying even in the law, or at least my interpretation of it is a directive for boards to be empathetic across all of what you described, and more. Right, and not just to individuals, not just to the group, but to everyone outside who could be affected by what we're doing. So that's a long answer. But that's, that's where I that's my interpretation.
Nate Schmold
Well, that's, I mean, yeah, I made it sound like this. The that question came from hearing you talk about how a board should be thinking about how it's impacting and, you know, that's, that's good corporate governance is to be accounting for, you know, those possibilities and who you're going to impact. So, it's actually, it helps me quite a bit to know that it's basically like, an empathy chamber. Like, you know, that's where it's drawing from. So that kind of leads to my next question is with that, you know, it's a certain type of person who is capable of empathy and empathy on that level. So I'm assuming that means that, you know, boardrooms are filled with these types of people who are super good at empathizing with other human beings. And,
Matt
yeah, yeah, they definitely are. That's true.
Nate Schmold
Okay, let me just simplify, let me simplify the the question to make it a little less incendiary. Who, who are the type of people who end up in this space? Like, what's, what's their education? What's their background? Like, how do, what's the, what's the mentality and the desire? Like, where do they come from? You know, is it, is it a wide array of people? Like, is it a very, like, I have no idea. Like, I just don't know, like, if I imagine, if I imagine the type of person in the space, I don't even really know, like, I'm getting a really good sense, because of Ground-Up Governance, and, you know, the interviews that you're doing like, like, is that a, is that a good representation? Or are you? Are you okay? Yeah, I'll let you answer.
Matt
There's, there's a significant gatekeeping problem. And I don't think it's, I don't think that the intent is bad. But I think it's best characterized by, if anyone who's listening - and we've, you know, we've got a super sample bias going on with the listener base. These are people who, just by virtue of hearing this have already demonstrated a curiosity about the topic that's beyond the sort of status quo - but if even for the people who are listening, if you imagine what are the characteristics in your boardrooms that make the amazing people in the room amazing? Right. So what's the difference between the amazing people in the schlubs? And it's never gonna be only "this person has this career or that expertise," right? Because no one just walks into the room and is... the joke I always make is, yeah, maybe you want a lawyer in the room, but you don't want any old lawyer. You want a good director! And what's the difference? And the answer that most of the people who are hearing this are probably thinking, "Well, you know, the people who are most effective in this room are the ones who are curious. They're the ones who are really, really interested in listening to other people's perspectives and welcome disagreement. They're the ones who have the courage to speak truth to power. They're the ones who have the courage to put up their hand and admit when they don't understand something. They're the ones who are willing to change their minds when presented with new and and conflicting information." And we don't really recruit in general, for those characteristics, we'll recruit for the resume stuff.
Nate Schmold
Yeah.
Matt
And not be too careful about the stuff that makes someone great. And it might be an easy or tempting argument to say, "Well, you can't measure that stuff." And I say, bullshit, right? We do it when we like the board does it when they're hiring a new CEO, they do personality assessments for what they're worth, they spend tons of time interviewing them and seeing whether there's a cultural fit, and so on, and so on, and so on. And fire people who don't demonstrate these characteristics. But in boardrooms, it's perfectly fine to be kind of laissez faire about it and like hope that someone's actually going to contribute, I'm exaggerating a little bit, but I think you get my point. So the it's the gatekeeping problem is that we've got this picture, a convention, about what directors are supposed to come into the room with, that might even include ridiculous things like previous board experience. So you'd automatically discount someone who might be a great director, because they haven't been a great director, because they haven't been a director somewhere else. It's like, I don't know if you're a sports fan. But why do they keep recycling the same head coaches and managers and stuff? Like who failed on five other teams, you'd rather hire them than hire someone new? Who might be good? Like, why do you want the guy who failed over and over and over again? And by failed I mean lost, right? But you'd rather hire the person who's got... who's done it before, even if they did it badly. And I'm saying like, no, I'd rather put the stuff that makes someone great at the top of the list. And maybe we say, okay, well, we have to have a lawyer. So let's get a roster of 10 lawyers, whoever they are, forget about whether they've got previous board experience, maybe we care, but it doesn't, let's not put that at the top of the list. And then let's test whether they've got the things, whether they got the stuff to make them great or not. And if they don't, if none of them do, none of them make it because who needs a bad director? Right. So I don't know if I'm directly answering your question, but I'm trying.
Nate Schmold
No, I think yeah, it's that that helps. And I guess, yeah, like, it's kind of like my final my final question, but it's like, is this is, is getting into this space and becoming like involved with a board or becoming involved with corporate governance in general, like, is that something that like, is it do you naturally tend to it because of other involvements in, like, you know, your involvement in another in the corporation? And you sort of tend towards that? Or is it something that you can, you know, aspire and work your way to? Or like, how do you? How do you get into it?
Matt
Yeah, there's there's a lot of problems in the answer to your question. So where do I start? There's a significant barrier to people who could be great at this, and believing that they could be great, so they won't put up their hand in the first place. And that's a conversation that I'm starting to have more frequently. In fact, the previous two episodes of, of Sound-Up Governance, I talked to people kind of about that. And we're like, how do we help people, especially younger professionals, understand that they have what it takes, right? That they belong, because they do. But then the other side of it is the gatekeeping problem. I heard a story from a friend of mine recently, who's young and very capable, in fact, experienced corporate director who was in the running to be on a particular board. And, frankly, even on paper, I would suspect was the best candidate. I can't imagine anyone who would be better. Except for the fact that this person is very young, and was told, "hey, you know what, sorry. Why don't you go and get some experience on a smaller organization's board first, and then come back?" And I was thinking, let's imagine this person was 60, and had the same amount of board experience and the same amount of professional expertise, the same amount of everything else. Imagine saying to that 60 year old, "you know what, go and get a bunch of years of experience on a smaller organization's board first" It doesn't happen, right? It's 100%, it was a 100% an age thing. The board maybe didn't realize that, you know, maybe it wasn't conscious. But the barrier is real. And so it's easy enough for me to be out there saying, "Hey, you do belong, put up your hand, you're qualified, you're capable, you have what it takes to be great." And if the door's just gonna be shut for them, not because of their resume, not because of their experience or expertise, but just simply because there's this bias, conscious or not. This is what you and I are doing, man, we're trying to change that. I mean, it sincerely, I'm not saying that we were succeeding, maybe we are, maybe we're not. But the work that we're doing is, at least in part, an effort to try to convince people that the status quo is bad. And it's not that hard, and as you said before maybe not very expensive, to do better. In fact, the barrier's essentially zero like to be good to go from being non intentional to being intentional. It's just like a decision, like, "Oh, I'm gonna be intentional now." And all of a sudden, you're good. So I, you know, I'm trying not to be too dogmatic here. But I, the gatekeeping problem is real and bad, and I promise we're working on it
Nate Schmold
Well, and even past that it's like the, like, I assume, like, to someone like me like it, this whole world seems like a, like I'm on the outside looking in. It'll, there's, there's just not like an opportunity to be like, it's just like a, it's like this weird, you know, like garden in the sky of like, talking about, like, a boardroom is just something I'll never, I'll never be in.
Matt
Too abstract.
Nate Schmold
But I think it's the kind of thing where if, like, am I wrong? It's the kind of thing where if my interest grew, and I was at a company, like is it or I was involved in an organization that had a board, then that's where, you know, I would start to, I would start to learn more about it. And that kind of like, it's, it's a natural progression, like you don't know, when no one starts, from my point of view of like, not knowing anything, and just like searching out like a board to be on
Matt
You can! You can! I mean, there's no but but that's it. It's like, honestly, there's nothing about... just to pick up the example that I used before and expand it a little bit. There's nothing about the people who have more conventional board or director profiles that made it more obvious that they should be on boards. They just it's an it's partly an entitlement thing. I'm, you know, I'll exaggerate to make a point. But like, the older, whiter male-er, richer you are, the more obvious it seems to you that you belong there. And so you're just like, yeah, I belong there so I'm going to put up my hand and you're probably gonna get it. Whereas honestly, you know, Nate, there's nothing that stopping you from waking up tomorrow and just deciding that you'd belong, and giving it a shot. It'll probably take longer. But the I think the the biggest obstacle is this assumption on on the part of everybody in the system, that there's only a certain type of person that belongs. And I'm, I'm here to argue that that certain of that convention of the certain type of person that belongs, they're not all that great, or there's nothing about them that's special. Right? There's nothing about them that's special that other people don't just have everywhere else too. And I think if we were more selective for the aptitude to contribute to good governance as we frame it, or as I frame it, the pool changes, right? The pool of talent changes, and it doesn't mean we don't want old rich white guys, but it means we want a very specific type of old rich white guy who's interested in in that intentionally cultivating effective conditions for making decisions. And, and, and having the mindset to be constructive in service of that. And if they're not, I don't care how much experience they have, they don't belong. I just asked chatGPT, for what it's worth, "Why aren't there more young people on boards of directors?" And it gave a lot more words than this, but I'll give you the list of headlines. "Lack of experience." Fair enough, you know, makes sense of if we are as a board of, I don't know, a, like robot company, you probably want some people who are experienced with robots. So you don't want people who've got no experience with robots? Not a you don't want everybody who has no experience with robots. "Limited networks" is a really big deal, right? Because it's still a lot about, you know, if, if I am on a board, and I know you, I'm more likely to be like, "Oh, Nate, we've got a board seat coming up. And I think you'd be perfect." Right? So now, just who, you know, still matters. And I'm not saying that in a cynical way. Like, it's just easier to identify people, you know. So yes, younger people tend to have limited limited networks. "Age bias," which we talked about. And, and I like this, just "Lack of diversity" is one of the things on the list. And and it says, "Finally, there may be a lack of diversity on boards of directors, including age diversity. Many boards are dominated by older individuals, which can create a culture that is less welcoming to younger individuals." So and, in essence, chatGPT is suggesting that a lack of diversity is self perpetuating, which I think is probably a big part of the problem. So thanks, chatGPT.
Nate Schmold
Thanks, chatGPT!
Matt
A previous previous guest on the podcast.
Nate Schmold
Yeah, for sure. Snoop GPT.
Matt
Oh, I should put I should take this and put it through the Snoop thing.
Nate Schmold
That was, you answered all my questions today.
Matt
Well, I you know what? I had one objective, and that was to answer all your questions. So I'm glad that I did.
Nate Schmold
Success!
Matt
No, Nate, you're amazing. This is fun. And I it's a, it's a fun, one of the things that makes our vibe so useful to me. And you know, I think in this particular way, it's a more uni-directional value. Transfer is, is I eat and sleep and breathe this shit. And you get a lot of tunnel vision, when you eat and sleep and breathe is something. So this is really useful for me to know what you think is interesting. So that I can understand what's likely to be interesting to anyone who's not me. So this was really fun.
Nate Schmold
Cool. Well, yeah, I was I was excited about when you were talking about it. I was excited to. Yeah, these questions have kind of been bubbling in the back of my mind. And I mean, who knows? Like I probably could have answered a lot of them myself just delving deeper into into things but it was pleasurable to ask you and get the straight from the Matt's mouth.
Matt VO
What a fun conversation. It was really interesting listening and watching back through this and just sort of seeing my reactions and Nate's reactions and seeing how we bounced ideas off each other. And I really encourage any of you in the corporate governance space to strongly consider spending some time talking to someone who's sincerely interested and sincerely naive and have them ask you questions so that you can be forced to see things a little bit from their perspective and find new ways to explore the things that have maybe become conventional thinking for you. Thanks, once again, for tuning in to Sound-Up Governance. If you have any questions or comments or suggestions or complaints or anything, please send an email or voice memo or whatever you like to soundup@groundupgovernance.com And I look forward to seeing you next time.