Corporate Governance Can Be a Growth Strategy

Welcome to HBR on strategy, case studies and conversations with the world's top business and management experts hand selected to help you unlock new ways of doing business. Jorge Quintanilla Nielsen started the private asset management firm Capital Safi in Bolivia in 2007 and planned to expand across South America. But there was a problem. As a private firm, Capital Safi isn't required to have a board to expand. Quintanilla Nielsen knew he needed to strengthen the firm's governance. To do that, he recruited six board members and established a governance committee, an assessment process for the board, and succession plans for all board members and company executives. Today, we bring you a conversation about the role of corporate governance and growth strategy with Harvard Business School professor Viji Narayanan. Narayanan studied the evolution of Capital Safi's growth and governance and wrote a case about how the firm has used good corporate governance to attract new investors. In this episode, you'll learn how Kintania Nielsen seeks board members with a variety of perspectives. You'll also learn how the board guides the firm's growth risks and overall strategy. This episode originally aired on cold call in October 2022. Here it is.

Hey, Cold Call listeners. If you're anything like me, you may have daydreamed about what it would be like to step back from your daily grind and ease into semi retirement by sitting on a few corporate boards. I mean, how hard could it be? You go to a few meetings, ask a couple of questions to show that you read the prep materials, and collect a sizable check for your efforts. Well, I hate to burst your bubble, but corporate governance ain't what it used to be. According to Fortune magazine, in 2021, board meetings increased by 19% and tensions are high, with 47% of board leaders saying they wish that a fellow director would quit. And they're expected to know a lot about technology, strategy, finance, operations and people. As if that weren't enough, board members face growing pressure to act on environmental, social and governance issues. Gone are the days of shareholder primacy. The fact is, these days, corporate boards are expected to earn their keep. And that can be a good thing for the rest of us. Today on Cold Call, we've invited Professor Viji Narayanan to discuss the case entitled Building the Governance to Take Capital Safi to the Next Level. I'm your host, Brian Kenny, and you're listening to Cold Call on the HBR Presents Network. Viji Narayanan studies management accounting with a particular focus on performance evaluation and incentives. He's a first timer on Cold Call. Viji, thanks for Joining me today.

My pleasure, Brian.

This is a really interesting case. We were hoping to have the protagonist here with us today, Jorge Quintanilla Nielsen. Unfortunately, he wasn't able to join us at the last minute, but I know you can tell the story. You wrote the case. You had two co authors joining you on the case. One is Asis Martinez Jerez, the other is Mariana Kal. This is a case that takes place in Bolivia and we're going to talk about corporate governance as it applies there. But I think the lessons that come out of the case are broader and, and can apply to corporate governance anywhere. Let me ask you to start just by telling us what the central theme of the case is and what's your cold call when you start the case in class?

So let me start with the second question. What's my cold call? I cold call a student and I want them to say, what changes would you make to corporate governance at Capital Safi? I like to start with an action oriented cold call. And so this puts them on the spot. And it's a little bit of a red herring because I think this is like very, very good. So I'm filled with extreme curiosity to know what my students are going to say on how to improve this, because if I knew what would improve corporate governance here, I would have already told Kaplosafi because Jorge was my student in GMP and the amp. So I wrote this case because I thought they're doing something terrific and amazing in terms of corporate governance.

Yeah. And how does this relate to the kind of things that you think about as a scholar?

For me, this very good lab, because it's a private company, it's not required to do most of the things that it does in the realm of corporate governance. Yet we see mostly corporate governance in public companies and we never ask the question, are those institutions there? Are those practices there? Because they're required to have those, you know, maybe regulatory overreach or is this something inherently valuable that even in the absence of regulation, some of these things would be there? So that's why this is very interesting for me to see a private company that has sort of gone beyond what they're required to do because they see inherent value in good corporate governance.

Yeah. And I think corporate governance is one of those topics that people don't necessarily spend a lot of time thinking about. They know there's a board there. They don't really know necessarily what the board does. And I was being a little sarcastic in my opening, but I do think people see it as Kind of a cushy job. Well, if they read this case, they won't think that anymore. Right.

Particularly if you're not required to do it, you're going to be very careful that you get what you pay for. So you're going to be very demanding of your board and be careful what you ask for. When the board shows up, they're going to be demanding of you. It's like holding each other accountable to a high standard. That's precisely what they've done.

That's great. Let's talk a little bit about Capital Safi. What business are they in? Just so our listeners can ground themselves there. They're an investment firm, but what do they invest in?

So they're an asset management company and they invest a little bit more than half in private debt. They also have some sovereign debt and public debt, but I would primarily say they are in private debt. In Bolivia, they are the largest such company in their segment and they have like four funds within Capital Safi that focus on four different sectors.

I mentioned Jorge. He is the protagonist in the case. He's the founder of the firm. Can you tell us a little bit about his background and why he decided to start the firm?

I believe Jorge came to the US from Bolivia when he maybe was 14 years old or something, completed school or here and definitely did his undergrad in Georgia. Then he went to Kellogg where he got his mba. He worked, I think, in the US for a while and then he went back to South America, worked at Citibank. And I think the startup bug, you know, caught up with him and he wanted to do something on his own. And he saw there were certain practices that he was familiar with, certain institutions that were happening that were not happening in his home country in Bolivia. So he wanted to be the change that he wanted to see. So he went back to Bolivia and set up Capital Safi. There are a lot of things that he was pioneering, like even the first commercial paper that was issued, things like that. And certainly setting up this asset management company is another one where he's certainly one of the pioneers in Bolivia.

Yeah, I think the case mentions that his parents thought he was crazy not to stay. He was on a great path. He was with Goldman Sachs.

He had like excellent jobs. You know, he had a great educational qualification. I think his dad was a physician and mom was an artist. And so, well, paying salary, job is something that they thought like, why would you walk away from that? And, you know, he wanted to do something different.

So how is Capital Safi different than other Institutions like it in Bolivia are there things that make it sort of distinctive.

So I would contrast them with other institutions in other developing countries more broadly than just Bolivia. I would say very often asset management companies, or most companies tend to be part of a conglomerate. And it's like so and so business house has this new asset management company that's good for the investors because they know that family name is behind this company so they can invest more confidently. The regulators sort of know who they're dealing with. Even the companies where they're investing in, they know where the money is coming from. So all around, if you're coming from a conglomerate, a business house, it's sort of the known devil. Here's a situation where Jorge doesn't come from established family and he's sort of a professional manager trying to start something from ground up in a space where reputation is extremely important. When it comes to dealing with other people's money, everyone worries. The first thing is how is my money safe? The investors, the regulators and even the companies where you're investing your money worry about who is this person behind the money. Reputation becomes important. So how do you crack this? Where do you start? If you don't have a reputation to build on that for the last several generations, your family is like a well known name. I think that's where he was very clever to sort of use corporate governance and board members and professional management and professional education to make up for that. And in fact lead with your weakness is to convert that into a strength is to say we may not have been around for 100 years, but boy, everything we do is squeaky clean. We are going to set the bar for professional management and corporate governance and that's what you're going to trust.

Yeah. And squeaky clean matters a lot in this part of the world. We'll talk about that in a little bit. Because corruption is a problem not just there, but in many parts of the world.

Squeaky clean is important all over the world.

Yeah, yeah, exactly. How would Jorge's team describe him? What kind of a leader is he?

I think they would describe him as very objective and data driven and very democratic. If you ever look for a third objective, I would say the big believer, empowerment, decentralization and educating people that work for him is a strong believer in business education.

So let's talk about the board, let's talk a little bit about the composition of the board. But I'm wondering how he was able to convince people to join him in, in this effort and what his expectations are for them. When they come onto the board.

I think the way he convinced people to join the board is that started out small and he would bring in directors to serve on some committees like the Audit Committee, the HR committee, and then over time those members would understand his style of functioning and he would understand their style of functioning. And after a few years they would come onto the main board. That is a very interesting practice. I've not seen that in too many other boards. It makes a lot of sense to me because personal chemistry is important. And when you're invited to join a board or when you're on the board and you're inviting someone else to join you, there's a lot of mutual feeling out of each other, like, do I trust them? Am I going to be on the same wavelength? By serving on some committees beforehand, I think both sides get to see each other sort of. What are the instincts? What are their values? Do they diversify us? Do they bring a different perspective? The person gets to see, is my perspective actually valued? Do they follow through? So it just builds comfort over time. So that's an interesting feature of how people were added to their board. And over time they have had fewer insiders or executives and add more independent directors have been added to the board. Again, I don't think a lot of this is required by law, but that sort of or gay preference.

So I don't know how comfortable is too comfortable. I guess it's a weird way to ask the question, but I'm wondering, shouldn't you be bringing people onto the board who are going to challenge you and make you uncomfortable?

I think that's exactly so. I've attended the board meetings.

Yeah. What's it like?

It's like our classrooms there is like real live debate and people take opposing points of view and Jorge is often the moderator of the case discussion. I don't speak Spanish and it was happening in Spanish, but I could watch the emotions and the body language. It was, you know, they challenge each other and they don't take it to the extent of like, I disagree and I want you to minute that I disagree. I'll vote against this resolution. They're very professional, but they challenge each other. Over time they reach sort of consensus, they build consensus. It's the process that sometimes takes like two or three board meetings to get to that consensus. But it's not like always, yes board. So they're not looking at Jorge and saying what does he want me to say? And they're not trying to curry favors with the CEO. They speak their mind and I think that's what he values. Part of what he's looking for is this diversity of opinion. Are they going to push me? Are they going to challenge me? And he surrounded himself with people that will push him and challenge him. So there's not a bunch of people that say, yes.

Is that different than it was maybe, I don't know, 20 years ago with boards. I think there is this perception that boards are kind of rubber stamps for the CEO. I mean, is now the expectation that boards are going to do more to hold leadership accountable in firms?

That's certainly the expectation. In my experience in public companies, it's still a bit unusual in private organizations. And that's what's remarkable here, that they have performance evaluation for everybody, the CEO and every board member. And after each board meeting, they collect feedback on how did we do today? What did we not discuss? What could we have done better? So this relentless focus on not having status quo, like continuously improving, is quite remarkable about this board.

How many board members are there? I should have asked that at the outset.

People say, like, 6 to 9 is sort of the right size. It's probably in the lower end of that spectrum and they've steadily increased it. They started with two, four, and now it's like six or seven. They have someone called a trustee that's, I think, very specific to Bolivia, that also attends the board meetings. So with that person, it sort of becomes like 7.

How do they think about something? I don't know if you've spoke with Jorge about this directly, but going back to the corruption theme, how do you guard against that? Is there a vetting process for board members, an onboarding process that helps to reinforce the values that the firm has?

Which corruption are we talking about? Right. Are we worried that, you know, board members show up and sort of like, collect their sitting fees and they're not doing their job and just saying yes to the management? Or are we worried that are they monitoring the executives closely enough? Are they setting up good control systems? Do they have good risk management practices? It kind of goes both ways.

Yeah.

And I think the good thing about this is both sides are doing their job. So they have picked people that are heavy hitters. They are people that are done well in the professional careers. And if things went wrong here, they have something to lose. They have a reputation already. So you're, in fact, borrowing the reputation of these professionals who are joining your board. They hold themselves to high standards. They have high expectations of the board members. They send all the reading material at least a week in advance. And everyone comes prepared so they don't waste time regurgitating case facts. It's assumed that you've read it, it's assumed you've gone through the analysis, you've seen the spreadsheets, and you go straight to the discussion. You go straight to where there could be.

Sounds like Harvard Business School, doesn't it?

Yes. Better classes go that way. So, so, and it's, you know, sometimes when we're just leading a case, we are like, I wish I had more information here. The board packet is really thick. All the extra information is actually there a week before. If you saw something and you wanted them to add more, you could call them and you tell them like, hey, you need to provide us more. So that before you show up at the meeting, there's a lot of information. So people are coming prepared. That sets the tone that we are going to hold each other to very high standards of preparation, participation. It rubs off on everything else and it goes the other direction as well. The board members are aware that they have been hired by this board to play a governance role, to play a supervisory role, to check on compliance, to think about risk management. So they're asking really tough questions. It's not enough to ask those questions. You need to follow through. You say, I want this data and the next board meeting, if you forgot about it, then there's no accountability. So at the end of the board meeting, both sides know what is the extra information I asked for, who's responsible for it, when it will be provided, and then there's a follow through on it. And if need be, we'll bring it up again in the next board meeting.

Yeah, this sounds like a lot of work actually for both sides, right? It's a lot of work for the firm and it's a lot of work for these directors. Like what else is Torgay asking the directors to do?

You know, the board itself is looking at strategic things like where should we expand, which countries, which asset classes should we move into. So they're looking at that landscape and figuring out where are the opportunities. They're also looking at where are the threats, what are the regulatory risk for us, what does the risk management look like? What can go wrong? You lose your name, your reputation, you lost everything in this industry, franchise risk is really big deal. So they're worried about what can go wrong and they're paid to worry about these things. But they're also holding people accountable. You have targets, you say, okay, how are we going to get there? What is our action plan? So it gets a little bit more from the big picture strategy to something more medium term to short term. So you're not getting into the operations of the company, but you're holding them accountable for results. There also a sense of like, are we staying within our lane? In the sense that both from a strategic perspective and sort of from a code of conduct perspective, are we straying from sort of either our scope or straying from our core values? All of this is rolled into the function of the board. So it's doing all of these things simultaneously.

Well, and to your original point, it sounds like they are very involved in a helpful way. I don't mean like they're meddling, because I think sometimes people worry about the board getting too deep into things, but it sounds like they are working hard alongside the firm's leadership to help them chart a course. Is this unusual in terms of board engagement with a firm? Are they more engaged than you would normally see?

Let me just give you a perspective. They are less than at the time of the case, less than half a billion dollars. Asset center management, that's tiny in the world of finance. The bottom line is $1.3 million. It's a very small company. This level of professionalism, rigor effort on governance practices, in my experience, is quite unusual. Larger companies, of course, you see, this.

Is Jorge asking too much of them. I mean, could this have negative consequences at some point down the road?

I think in his mind, he's already a much larger company than is reflected on his balance sheet. He has hopes and aspirations to expand in other Latin American countries. He's thinking of Colombia, he's thinking of Peru. How do I expand? How do I impress the investors in those countries? How do I impress the regulators in those countries? How do I attract multinational agencies to invest in my organization? His governance is a few steps ahead of the size of his balance sheet.

If you will, which is probably okay for a CEO. He's aspirational.

So if they grow the way he's planning to grow, I don't think this is asking too much. But if this is how they're going to be in terms of size, then maybe this is overkill. Yeah.

And I guess part of what I'm also wondering is if the board feels like he's not getting it done, like he's the problem, what does that mean for him?

You know, this is very surprising. He owns the majority of the stock in the company. You wouldn't get that feeling from attending a board meeting. He's evaluated. They have succession plans for him. In many organizations, they don't want to talk about succession planning. Like I'm indispensable, maybe an assumption, I'm immortal. No, here explicitly every person on the board and every executive, including the CEO, they have a succession plan in place and they have an annual performance evaluation for every single person, including the CEO. So the CEO is being held accountable. So far their performance has been very good and the performance is endogenous. A CEO cares and a board that takes pride in their performance, they tend to do well. So they are doing well so far. So it's sort of a hypothetical question. If they did not do well, will they hold them accountable? I would imagine they wouldn't given just the personalities involved.

And we've certainly seen that in other situations, of course, where the board has said we've had enough with the CEO, he's not getting it done or she's not getting it done. So we know that that can happen.

It can. And very bad scenario. That is part of the job description of the board. You're watching out for the company and everything else is secondary. You put the company first.

Yeah. The case describes the three step rule, which is one of the ways that I think that they sort through issues and questions that they have. Can you describe that a little bit?

You know, when you look at boards and people ask questions like, you know, is there real debate in your board? People do really disagree. How many times have you voted against a resolution and do you have your comments where you disagreed minuted? And I find this a very strange question because it's divorced from sort of the process by which things get done in well functioning boards. And I would make a distinction between differences in estimates or opinions versus difference in values. You really want diversity of opinions in estimates and perspectives on. I think this is going to be the next big thing. I'm not so sure that this is going to be the next best thing. Cryptocurrency, take your pick what it is, you're going to have different perspectives on it. And in fact you learn when each person argues for their perspective. This is very different from having fundamental differences in values on someone views, what the regulations are. That's all I'm going to do, no more than that versus someone says no, I'm going to lead with values that are core and important to me. The environment is so important, society is important and so I'm going to lead with that. If you have different perspectives on this on the board, on what is core values of the organization should be, then you're going to have A very, very difficult time on the board. So now let's come back to the three step process. I think they're aligned on their values and they do that when they select the people to come on the board. And that's why it takes a few years to figure out are we aligned on values. But in terms of estimates, priorities, in terms of like what could happen to more forecasts, differences, I think that's where in fact the strength of the board comes from, that you have multiple perspectives. If there's an important topic, they broach the topic, give them whatever material they've accumulated. People read it and they come back and they think about like, so where are the sharp divides going to be on the board? Let's identify those. Where are the places where we don't have enough information? Where we'd like you to collect even more information that might help answer those questions. Where we have some sharp divisions and then in the second board meeting they get further resolution. They're ironing out differences. People saying, okay, I can see your point of view. Or they might be like, you know, I still think this is not such a hot idea, but you guys have convinced me that there's momentum here. Enough of you are impressed. Now let me tell you how we can do this better. So you close ranks after you might have played the devil's advocate or taken the other perspective, but once collectively you decide this is the way we're going, you close ranks. It's not like they're done there. It's like they give more time to stew on this and sort of the official resolution is will be passed in the third board meeting. There is more time for people to come together. Once you're going in a certain direction, it's clear that's where the momentum is and people come together. By the time it's a third board meeting, it's big consensus. Everyone is on the same page. So it's very interesting for me to see this process by which it's sort of like a funnel where there's so many different opinions and over time they're narrowing it down on this is what we're going to do, this is what we're going to push it off to a future date or this is what we are not going to do at all. And it sort of crystallizes by the time they're in the third board meeting. I think, I don't know that three is the magic number, but it's the process by which you build consensus that was very interesting for me to see.

Yeah. How Much time is there between meetings.

I believe they might have like six meetings a year. So they meet when they have to meet and they could call a meeting. This is not like.

So if they had a time sensitive thing that they were trying to get to, they could.

They're small. That's the advantage of the being nimble, is that you can schedule a meeting in short order. They're all local. They have previously scheduled meetings. I think like six meetings and then they do two retreats.

Now, all of this, what you just described would be, I was thinking, as you were describing it, more difficult, the bigger the board, the more difficult it is to manage a process like the three step process.

I think it's important even in large organizations to have this. That is where you're building consensus over time. You're addressing different perspectives. And if the difference is so fundamental that it goes to the core values, then the person, somebody steps aside. So that part of it, I feel is pretty common. The flexibility with which they can call a board meeting is probably taking advantage of their size. But there's another perspective here. Covid has changed things for so many boards. I've seen boards that used to meet only once a quarter. Now they meet every month because people are not traveling as much. They're just getting on a zoom call. So there's more frequent board meetings and whatever time they were spending on traveling and the dinner the night before of the board meeting, all that's gone. It's a two hour meeting sometimes every month. So they're getting more work done.

And that might be part of what was in that Fortune survey that I mentioned at the very beginning of the podcast meeting have increased on average about 19%. So that makes perfect sense. This has been a great conversation. Super interesting. I've got just two more questions before we let you go. One is, you said that everybody's measured, everybody is evaluated after each meeting. I suppose if a board member is not holding up their end of the bargain, do you fire them? Like, what do you do there?

I think you need to have a conversation. They do have evaluation for every single board member. And if someone is not shaping up, then the head of the governance and nomination committee needs to have a conversation with this person. And it's not a good fit and we need to part ways. Not many organizations do that. But I think it's extremely important. If someone is not working out, you're both better off parting ways.

Yeah. To your point of mutual accountability. Right. Well, just one last question for you, Viji, and that would be if you want our listeners to remember one thing about the Capital Cepheid case? What would it be?

For me, the big takeaway from this was small companies can learn from large companies and large companies can learn from small companies. Here's a situation where Capital Safi is mimicking what large public organizations do, like having formal committees that you don't see in small boards, a lot of independent directors, a lot of formality, deliberately adopting rather than viewing that as bureaucracy or the cost of being public and over regulation. They're trying to embrace the best aspects of corporate governance and public companies. But I think large companies can also look at this and say, why are they doing it? They're using their governance to bolster the reputation. They're using their governance to attract investors. They're using their governance to attract customers. They're using the governance practices to raise their the caliber of the executives, their board members. They spend more than $120,000 a year. It's like 10% of their net income on education and training. So this is a remarkable organization. And I think large organizations can learn some lessons from someone as small as Capital Safi. Learning is a continuous process and improvement is a continuous process. It probably pays to improve your governance.

Really well said. Thank you Viji for joining me.

Thank you, Brian. My pleasure.

That was Harvard Business School Professor V.G. narayanan in conversation with Brian Kenny on Cold Call. We'll be back next Wednesday with another hand picked conversation about business strategy from the Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues and follow our show on Apple Podcasts, Spotify or wherever you get your podcasts. While you're there, be sure to leave us a review. We're a production of the Harvard Business Review. If you want more articles, case studies, books and videos like this, find it all@hbr.org this episode was produced by Ann Sani and me, Hannah Bates. Ian Fox is our editor. Special thanks to Maureen Hoke, Audie Ignatius, Karen Player, Ramsey Kabaz, Nicole Smith, Anne Bartholomew and you, our listener. See you next.