BOARDS MUST UP STRAT­EGY PLAY

As com­pany strate­gies are evolv­ing fast in sync with a fast- paced econ­omy, new- age boards need to eval­u­ate these for ef­fec­tive­ness and gov­er­nance is­sues.

Business Today - - THE HUB - By M. Muneer and Ralph Ward Il­lus­tra­tion by Raj Verma

As com­pany strate­gies are evolv­ing fast in sync with a fast- paced econ­omy, new- age boards need to eval­u­ate these for ef­fec­tive­ness and gov­er­nance is­sues

BOARD MEM­BERS of In­dian en­ter­prises of­ten ask us how they can fo­cus more on cor­po­rate strate­gies in­stead of merely com­ply­ing with newer rec­om­men­da­tions of reg­u­la­tory bod­ies. This is par­tic­u­larly sig­nif­i­cant as most of the boards do not have a process in place to over­see such strate­gies and stay aligned with these to help com­pa­nies achieve their goals. Shift­ing a board’s role to aid­ing and gov­ern­ing strat­egy from its cur­rent vague re­spon­si­bil­i­ties de­mands some do­ing. But mak­ing strat­egy gov­er­nance part of board com­pe­tency is pos­si­ble if the ex­er­cise is done step by step.

If there is a well- de­fined strat­egy, the board should know its salient fea­tures. Quite a few com­pa­nies have poli­cies which, at best, cover only spe­cific ar­eas while many have no strat­egy state­ment to their credit. Even with a solid strat­egy, di­rec­tors them­selves may be the prob­lem. Man­age­ment con­sult­ing firm McKin­sey has car­ried out sur­veys that show fewer than 25 per cent di­rec­tors know what a com­pany’s strat­egy is and around 50 per cent can­not name the top four-five strate­gic ini­tia­tives go­ing on at any given time. Very of­ten, not much work is done to de­velop such a strat­egy or reach a con­sen­sus on the same. In­stead, the CEO and his team pro­ceed with

free-float­ing, one-off de­ci­sions that may (or may not) work.

How over­see­ing strat­egy is ‘ housed’ within the board also plays a sig­nif­i­cant role. A typ­i­cal ap­proach is to make the strat­egy re­view a whole-board re­spon­si­bil­ity. The best prac­tice is to hold an an­nual board re­treat tar­get­ing strat­egy re­view, with up­dates on key met­rics at sev­eral board meet­ings across the year. We find that a bian­nual strate­gic test­ing and adap­ta­tion re­view is ideal for driv­ing board align­ment, es­pe­cially in busi­nesses where tech dis­rup­tion is high, although some ex­perts be­lieve this might work bet­ter with quar­terly ses­sions.

Other struc­tural ap­proaches to board strat­egy re­view in­clude adding the ex­er­cise to the au­dit com­mit­tee port­fo­lio or even form­ing a ded­i­cated strat­egy com­mit­tee. It will have many pos­i­tives. A com­mit­tee as­sures that a board item will be some­body’s busi­ness, and al­lows com­mit­tees to spe­cialise. But the down­side is that the en­tire board will have to ap­prove the strat­egy, re­sult­ing in a time-con­sum­ing pro­ce­dure. A broader con­sen­sus is al­ways bet­ter when it comes to strate­gic is­sues.

Cor­po­rate strat­egy is more than a state­ment of gen­eral goals; oth­er­wise, you could draft a mis­sion state­ment and go with it. The board will be re­quired to set solid met­rics of progress and re­sults, and these need cus­tom craft­ing for each com­pany. Sales per store, ac­qui­si­tions, cus­tomer value, net pro­moter score, em­ployee turnover, con­ver­sion rate, and qual­ity – the po­ten­tial mea­sures of strat­egy are end­less although all must be placed in con­text. For a low-cost air­line, a cru­cial piece of com­pany strat­egy could be hedg­ing fuel prices, but for a full-ser­vice car­rier, it could be a pol­icy to re­duce cus­tomer churn rate.

While a reg­u­lar re­view of these strate­gic mea­sures is es­sen­tial, eval­u­at­ing their ef­fec­tive­ness also mat­ters. The shelf life of a strat­egy has di­min­ished in­cred­i­bly over the past five years. IT com­pa­nies have an­nual plans. And a lead­ing petroleum com­pany from West Asia, which used to have five-year plans, has moved to a two-year sys­tem.

What should be the board’s role in shap­ing a com­pany’s strat­egy? There are two gen­eral ap­proaches. The board and the man­age­ment can get to­gether to de­velop a strat­egy. Or the man­age­ment can craft a plan and then go to the board for its ad­vice and en­dorse­ment. But it is cru­cial to get the board up as an ac­tive part­ner in mon­i­tor­ing strat­egy. Ex­am­ples of boards fail­ing to un­der­stand the strat­egy part are amaz­ingly many. In the clas­sic case of En­ron, even the famed man­age­ment thinker Gary Hamel went wrong. As men­tioned be­fore, not many di­rec­tors un­der­stand strat­egy in the con­text of the busi­ness and the man­age­ment is of­ten play­ing them. Un­able to com­pre­hend how the man­age­ment as­sem­bled the house of cards and too ret­i­cent to ad­mit it, the En­ron board was in no po­si­tion to pre­vent the dis­as­ter. And the same must have been the case with other dis­as­ters we have seen, be it King­fisher, Reli­gare, For­tis, Wool­worths, Arthur An­der­sen, Bor­ders, Block­buster, WorldCom, Lehman Brothers, Ko­dak, Educomp or Bhushan Steel.

How It Works

De­vel­op­ing and re­view­ing cor­po­rate strat­egy, mea­sur­ing its ef­fec­tive­ness and hav­ing di­rec­tors over­see the en­tire process are es­sen­tial for strate­gic suc­cess. How­ever, align­ing boards with man­age­ment strate­gies and get­ting board mem­bers to ful­fil their re­spon­si­bil­i­ties would re­quire a col­lab­o­ra­tive ap­proach that com­bines en­ter­prise strat­egy map and score­card, board score­card and ex­ec­u­tive scorecards.

The cor­po­rate of­fice de­fines strate­gic guide­lines and the board – rep­re­sent­ing the share­hold­ers – re­views, ap­proves and mon­i­tors the same. The board will have a greater un­der­stand­ing of or­gan­i­sa­tional goals if it looks at en­ter­prise and strate­gic busi­ness unit scorecards as the cen­tral source of in­for­ma­tion. Next comes the board’s score­card, which lists its ob­jec­tives for share­hold­ers, in­vestors and the com­mu­nity, and the crit­i­cal pro­cesses used to iden­tify the in­for­ma­tion, skills and cul­ture re­quired to drive those ob­jec­tives. This mech­a­nism will en­able board mem­bers to gather rel­e­vant in­for­ma­tion for de­ci­sion-mak­ing when it comes to board re­port­ing, dis­clo­sure, fu­ture di­rec­tion and other poli­cies. Con­se­quently, board meet­ings will fo­cus more on en­ter­prise strat­egy, fidu­ciary as­pects, value propo­si­tion and risk fac­tors. In brief, the board score­card will cover the board’s de­ci­sions re­gard­ing its com­po­si­tion, pro­cesses, de­lib­er­a­tions and eval­u­a­tion. Ad­di­tion­ally, there will be ex­ec­u­tive scorecards re­flect­ing the board’s meth­ods for se­lec­tion, eval­u­a­tion and suc­ces­sion plans.

In this new frame­work, get­ting the strat­egy map right is cru­cial as the same will be con­tin­u­ously re­viewed and gov­erned by the board and all short-term fixes will merge with long-term as­pects. Once en­abled, the mech­a­nism will help mea­sure the value ad­di­tion done by the board and sub-com­mit­tees, and also bring out in­for­ma­tion gaps. More­over, due to the col­lab­o­ra­tive ap­proach, both par­ties will have a mu­tual com­mit­ment and sim­i­lar process ori­en­ta­tion. All these will be good for com­pa­nies as a board in sync with the ex­ec­u­tive team’s strate­gic ini­tia­tives is twice more likely to ful­fil its key du­ties than those work­ing in iso­la­tion.

Align­ing boards with man­age­ment strate­gies and get­ting board mem­bers to ful­fil their re­spon­si­bil­i­ties would re­quire a col­lab­o­ra­tive ap­proach

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