Time For Board Scorecards
A preponderant issue has emerged in the wake of new SEBI panel recommendations when many directors raised the question: "Should the boards now focus more on compliance than strategy?" I borrow a leaf from Sherlock Holmes: It is elementary, Watson! When in doubt, always go back to the basics.
The integral role of an engaging and effective board is to guide the organisation in shaping and executing a winning strategy. It needs to broadly oversee five distinct areas to make the enterprise it serves successful: Approve and govern the corporate strategy, guide major financial decisions, help in selecting, evaluating and monitoring the CEO and building succession plans, provide guidance to the CEO, and finally, ensure compliance.
Much before SEBI moved to set up corporate governance standards, the Sarbanes-Oxley Act, and the NYSE and NASDAQ listing standards had been driving reforms in governance. That such reforms got triggered by the failures of giant companies like Enron, WorldCom and Tyco is another matter, and perhaps mirrors in the SEBI move too from the rumblings in Tata and Infosys boards. All these regulations are directed at such issues as the independence of directors, their responsibility, composition of audit committees, disclosures, etc but the critical role of board is none of these. The regulation is necessary for protecting the interests of investors but it runs a higher risk of boards focussing too much of their time on compliance and form rather than their crucial role of monitoring, guiding and evaluating the company's strategy and its executive team.
Media and investors will question boards when bankruptcy, or poor strategy leading to sell-off happens as in the recent cases of Blackberry, Nokia, Sears and Radio Shack, to name a few. Shouldn't the board be responsible for the failure of strategy? Many don't think so is the biggest problem facing companies.
What typically happens in most boards is this: The CEO, along with his trusted few, will make a presentation of charts and lots of research data to the board and table a rather bulky strategy document containing appendices and lengthy spreadsheets of business plan. Typically this will be a one-way presentation covering past performance, old strategy and why the change for future. Polite, feel-good discussions will follow and everyone knows the board has to either say aye or nay to the proposed strategy, given their inability to draw up a fresh strategy and acquire fresh data to dispute what is being presented. CEOs always find ways to get boards to agree to what they want.
The question of utilising board's limited time on strategy vs. compliance is irrelevant. Board needs to do its must-do jobs. Compliance becomes a subset. Can a regulator introduce a framework for depth of thinking and time involvement of boards on strategic discussions? Can it insist on boards and executive teams to get aligned and work together with increased transparency? Can the regulator and boards agree on a common platform that will enable meticulous execution of the five must-do jobs?
Studies conducted across a wide range of listed companies by various institutions including the Harvard Business School show that boards fall far short of fulfilling their five responsibilities. It appears that the pressure to increase the number of independent directors is one unexpected reason for this shortcoming.
Independent directors rarely have excess time on their hands and have less domain knowledge of the industry. They serve to protect the interest of investors, but their lack of strategic knowledge is a major hindrance in guiding the company right. Since it is unlikely that they can increase their time commitments to acquire more domain knowledge, it is imperative that any regulation should strive to increase the effective use of their time. This is achievable by providing them streamlined information in advance of board meetings.
From my experience of having worked with board members, the best way to align boards with the strategy, and get them to deliver their responsibilities, is to use a coalescence of strategy maps, corporate scorecard, board scorecard and executive scorecards. This will enable board members to have more relevant information for their decisions about the firm's future directions, and its reporting, disclosure and other policies. Board meetings will be centred on the enterprise strategy, the fiduciary aspects, its value proposition and risk factors. The executive scorecards reflect the board's processes for selection, evaluation and succession plans. The board scorecard will navigate board decisions on its composition, process, deliberations and board evaluation.
Effective use of time in an efficient manner has always been the result when the above is executed right. The skill is in getting the strategy map of the enterprise right and this acts as the story for the board to review and govern. Once inducted into this framework, board members will find it easier to delve into the quarterly reviews and fulfill their strategic oversight responsibility.
It will enable measurement of strategic value addition, execution of board roles and of committees, and highlight the strategic information needs. We typically use the scorecards to keep the discussions strategy focused and the board can achieve remarkable progress in a half-day span every quarter. Goal setting, initiative rationalisation, milestones setting, resource allocation, scenario mapping, and CEO scorecard will all reflect the enterprise strategy.
Such a collaborative approach will be highly productive and align the board with the executive team. Both parties derive a strong sense of commitment, and process orientation. Board members who are satisfied with their enterprise's approach to strategy management will be twice as likely to govern better and complete their five must-do responsibilities than those not satisfied.
Indian regulatory body should usher in the above remarkable change in board governance - never seen previously anywhere in the world - by directing focus to delivering winning results and not just compliance. And the impact will be long lasting and sustainable.
Current and aspiring board members will do well to remember the Art of War: "Strategy without tactics is the slowest route to victory; Tactics without strategy is the noise before defeat."
(With inputs from Dr Robert Kaplan, Founder of the Balanced Scorecard Framework)
