Strategic Oversight by Boards: Who’s minding the store?

chris

A woman lost control of her BMW and careened off the Florida Turnpike around 5 a.m. one morning. The car landed in the middle of a canal in the pitch dark. The woman had only a few minutes before the car’s electrical accessories would begin to fail, and not much more time before the car would sink.

Frantically, she dialed 911 on her cell phone. Emergency operators shouted at her to tell them her location. She couldn’t, because she didn’t know where she was. Yet, rather than focus on getting her out of the car (“Ma’am, can you swim? Can you get your windows down and climb out? How far are you from shore? Activate your emergency flashers and alarm so we can see and hear you. Do you see any alligators?”), they persisted in trying to determine her location. The car sank and the woman drowned – with her rear window completely rolled down.

This story serves as a metaphor for the way many corporate board directors seem to be viewing their responsibilities these days. They are focusing exclusively – even obsessively – on knowing a firm’s “location,” or financial status, rather than identifying the changes taking place in either an organization’s external environment or its internal competencies – and then responding in a timely fashion.

Why do boards act this way? I’ve observed, and served on, several boards over the years, and that experience tells me there are a number of curious reasons for this state of affairs. The most frequently cited excuse is that, remarkably, directors often do not consider a corporation’s strategy as part of their mandate (“That’s the CEO’s job!” many quip.), and therefore allow themselves to remain uninformed about its quality and implementation; second, too many directors lack competence and/or agreement about the strategy concept itself.

Yet, the formulation and execution of an organization’s strategy is at the heart of ensuring every entity’s long-term survival and competitiveness. Without a clearly articulated strategy, an organization won’t have the sense of purpose and direction it needs to forge strongly ahead. And it goes without saying that if all members in an organization do not know and understand what the strategy is, they will lack the sense of mission needed to implement it in a concerted, cohesive manner. The result? Chaos and confusion. So, when things go awry, corporate directors who have failed to formulate, evaluate and revise their organization’s strategy cannot in good conscience put all the blame on the CEO.

The fact that strategy gets so little attention from boards (take a look at your last four meeting agendas for proof of this) is actually not that surprising, in large part because there’s often a lack of understanding and interpretation of the term itself, never mind its components. Here is an example: A report by one “blue ribbon commission” on the role of the board in corporate strategy was found to be woefully deficient in its attempt to define its key topic. The report’s explanations were so confusing that any board member would have trouble determining whether strategy is concerned with mission, vision, goals, objectives, business definition and selection, tactics, or some combination of these. To the extent that this confusion exists in the boardrooms of our nation, it’s no wonder so little time is devoted to discussion of strategy.

Adding to the definition chaos is the fact that the independent directors appointed to boards typically come from a variety of organizations and backgrounds. Consequently, while they may use the same words, they often attach many different meanings to these terms. Rarely do they take the time to come to a consensus on how certain terms should be used. As a result, the board communication process is hampered. I have also observed that in the interest of keeping meetings moving along smoothly and peacefully, board members too often avoid debating the strategy terms that might create dissension, therefore meetings continue to focus on non-strategic trivia.

“Buddy Boards”

There’s another reason, however, why boards virtually ignore the issue of strategy. CEOs simply do not want their boards involved in such discussions. This would certainly explain why many CEOs prefer “buddy boards,” in which they can be assured that nobody is going to ask difficult or embarrassing questions. Indeed, many CEOs view boards that get involved in setting the organization’s strategy as an interference in their managerial responsibilities – not to mention their sense of personal power (“Nobody is going to tell me what to do!”). Former Volvo CEO Pehr Gyllenhammar is a case in point. He created such a hostile environment for any board member who dared to express views opposing his that most dissenters eventually resigned. The company ended up paying the price, though. Unchecked by anyone with a different perspective, the CEO launched Volvo onto a losing streak of unrelated diversification moves.

CEOs who want to distract their boards from discussing the tough strategic issues also like to cram the agenda with items designed to dull the mind (copious slides, graphs and charts), dazzle the senses (“And now, Fred is going to give us a virtual reality presentation of the new corporate headquarters. Everybody got their 3-D glasses on?”) or induce commitment and loyalty – all within a strict three- to four-hour time limit. After all, it’s much more fun to contemplate at which luxury resort the board is going to hold its next meeting – “Make sure it’s the one with the fancy lobster sandwiches!” chimed one director I know – than focus on torturous, but essential, details of finding the right strategic direction.

Board Junkies

It’s time for boards to stop allowing their CEOs to use them this way. That’s not an easy prospect; it requires board members to have the internal fortitude and personal ethics to refuse to be bullied or bribed into submission. After all, board pay and perks can make Temptation Island seem like child’s play. A corporate director I know told me he’d once held 26 board appointments simultaneously – at a time when he was CEO of one of North America’s largest industrial companies (and while he was negotiating a major merger). With average board pay around $80,000 per year per appointment, plus stipends for meetings and committees, it is not hard to figure out such board junkies’ motivation. It’s no wonder that, considering the time this CEO must have devoted to sitting on so many boards, the former industry giant ended up being overshadowed by its rivals.

Formulating strategy means determining what businesses an organization should be involved in and what methods it should use to attract and retain customers and employees. This responsibility is far too important to be left solely to the most talented of CEOs. Astute CEOs know this and use their boards as a fresh set of eyes in plotting their organization’s future. They know and accept the common sense wisdom that every organization can benefit from multiple perspectives. Such a CEO, though, must have faith in the competence of his or her board.

Constructive Engagement

Probably the most significant impediment to director effectiveness in the area of corporate strategy, however, is the absence of simple measures and reporting mechanisms relating to the achievement of strategy. You can’t manage what you don’t measure, and directors today are simply uninformed about the status of their organization’s strategy, its mission, and its values – other than through the financial statements. But to correct this situation means developing new measures and metrics, then incorporating them into the organization’s information system. This can be expensive and time consuming.

So what’s the alternative – to simply bury our heads in the sand and pretend bad things won’t happen as long as the current financial statements “look alright”? Of course not. Surely it’s better to anticipate environmental and resource changes before the proverbial wolf shows up at the door. Why, then, do boards not insist on strategy measures for their organization? It could be out of concern over what measures and metrics are appropriate. But waiting for measurement perfection is not a solution. As long as CEOs view their board’s participation in corporate strategy as one of constructive engagement, there is nothing to fear, and they can jointly explore measures that best suit their boards, adjusting them along the way as circumstances require. After all, it’s better to be 50% correct than 100% wrong. And when the measures are used for internal purposes only, there is less risk of misinterpretation by the general and investing public.

Educate Directors

I contend, however, that there’s a more powerful reason why boards put little importance on measuring strategy in nonfinancial terms: ignorance. The cold, hard truth is that many directors are uninformed about the need to measure and monitor strategy in a proactive and progressive way. Indeed, my years of advising organizations on how to implement strategy have taught me that most companies and boards simply fall apart when it comes to measuring anything other than cash flow, revenue, costs and profits. This is not because they lack intelligence; rather, they lack the critical knowledge necessary to guide their organizations into the new economy of the 21st century.

That means many of the Caribbean’s major and emerging corporations may end up being led by directors whose knowledge of their organization’s strategy is questionable. Interestingly, few of the Caribbean’s current cadre of corporate directors seem willing to acknowledge this.
What can be done? First and foremost, the education of Caribbean directors – especially when it comes to providing strategic oversight – should be a prerequisite to board appointments and to their continuing appointments. Also, the Regulators of publicly listed Caribbean companies should work to ensure that director education becomes a statutory requirement for all directors within the next five years. After all, investors would like to know that their organizations are being “supervised” not just by individuals with successful track records in business, but also by men and women who have the professional qualifications – and perhaps even the certification – necessary to provide sound board leadership.
So here’s the big, uncomfortable question for Caribbean directors: to what extent does your board have the competence it needs to astutely assess and give effective oversight to your organization’s strategy as well as the wherewithal to engage with and advise the CEO if – and how- the strategy needs changing? If you think that there is room for improvement in the way your board carries out this important governance oversight function, you might want to consider sending them to one of the corporate governance training programs available in the region – like the exclusive three day “Chartered Director Program” that has been offered by The Caribbean Governance Training Institute since January 2014. After all, it’s not education which is expensive, but rather ignorance.

About the Author:

bart

Dr. Chris Bart, FCPA is a recognized governance authority, the Founder of The Directors College of Canada and Co-Founder of the Caribbean Governance Training Institute, both of which currently offer the Chartered Director Program that leads to the internationally recognized “C. Dir.” designation. For more information, please visit CGTI’s website: http://www.caribbeangovernancetraininginstitute.com/ or phone Lisa at 758 451 2500

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