Contemporary art from Flowers Galleries

The Strategic Power of Corporate Governance

Mention the term ‘corporate governance’ and many business commentators will assume that you are looking at such issues as the size and structure of the company board, roles and responsibilities of board committees and internal controls. In other words, the focus tends to be on robust procedures and frameworks. The whole tenor of the debate is compliance-oriented – corporate governance can often be seen as the routine or mundane part of board members’ responsibilities that gets in the way of the more exciting debates on strategy. Indeed, many researchers are spending time trying to establish whether good corporate governance plays any part in improved company performance. By Gillian Lees of CIMA.

But take a closer look at the UK Combined Code on Corporate Governance and you might gain a very different impression. An often overlooked aspect of the code is the very first principle, which states that the board is 'collectively responsible for the success of the company'. The emphasis of the supporting principles is on the board’s role to provide entrepreneurial leadership - though within a framework of effective controls. The board needs to set the strategic direction and the non-executive directors need to constructively challenge and help develop proposals on strategy. So, viewed from that perspective, corporate governance is not so mundane after all.

However, the practical reality is that this strategic view of corporate governance has been eclipsed in recent years and it is the compliance view that prevails. This was reinforced by the corporate scandals in the early years of the century such as Enron, WorldCom and Parmalat – which in turn led to beefing up corporate governance regimes across the world, most notably in the US with the Sarbanes-Oxley Act of 2002.

From corporate to enterprise governance
Concern that company attention was being dominated by compliance at the expense of strategy and performance led the International Federation of Accountants (IFAC), with the help of the Chartered Institute of Management Accountants (CIMA), to launch a project to explore the concept of enterprise governance. This is a framework which shows that organisations need to balance the two dimensions of corporate governance – or conformance - and performance to ensure long-term sustainable success.

Most crucially, the 27 case studies undertaken as part of the project showed that while good corporate governance is necessary to avoid failure, it is not sufficient to ensure success. Hence the need for organisations to ensure that they spend enough time on strategic performance. In essence, the enterprise governance framework restores strategy and performance to their rightful places at the heart of the company board’s responsibilities.

The next challenge was to develop mechanisms for boards to turn this aspiration into reality. CIMA’s subsequent work showed that while board oversight mechanisms were in place to ensure good corporate governance (e.g. audit and remuneration committees), there were no comparable mechanisms to ensure that strategy received the same attention. We identified this as the strategic oversight gap.

It became clear that boards were finding it a challenge to engage effectively in strategy because of crowded agendas, information overload and an absence of effective board processes. This is a particular problem for non-executive directors who may find it difficult to gain a deep understanding of the organisation and hold a constructive debate with their executive colleagues.

We felt that organisations needed a robust process to help boards engage in strategy – and so, we developed the CIMA Strategic ScorecardTM.

For each dimension of the scorecard, the board is presented with summarised high-level information in the form of tables with relevant headings for each dimension. These headings prompt management to provide an adequate description of the activity being undertaken, including when the last relevant information was put to the board and when new information will be presented in the future.

The board can then ask challenging questions and depending on the answers, the board can decide whether it is satisfied, whether action needs to be taken, whether it needs to explore a specific issue in more depth and whether further discussion is required in a future board meeting.

The real value of the scorecard lies in the way that it brings all the key information together. By giving the board the ‘big picture’, directors can offer constructive, informed input; in return, they receive assurance in relation to the organisation’s strategic position and progress. In effect, the scorecard provides an integrated and dynamic framework that focuses on the major strategic issues facing the organisation and ensures that the strategy is discussed at board level on a regular basis.

Although the scorecard is primarily aimed at board level for use as an agenda item at board meetings, we have found that it offers considerable benefits to the organisation’s management. This is because the scorecard provides a useful tool for the chief executive in engaging the management team in the strategic process. The discipline of having to prepare and update the scorecard helps management to keep its focus on the key strategic issues and to refine its proposals prior to exposure to the board. In essence, the scorecard helps the chief executive to interact effectively both with the board and the management team.

Our experience so far has shown that the process of implementing and maintaining a scorecard is not unduly onerous when it ties in with an organisation’s existing planning schedules. Once a scorecard is up and running, it requires little resource to maintain it and boards should start to see benefits in terms of better use of their time.

Strategic position
This dimension focuses on information that is required to assess the organisation’s current and likely future position based on external factors such as economic and market developments together with internal issues such as competences and resources. The purpose of this dimension is to:

• Ensure that the board and executive management share a common understanding of the relevant facts on the strategic position.
• Provide assurance to the board that management is reviewing its strategic position appropriately. In particular, the board will wish to know that management is considering the right information at the right time.
• Provide the board with a summary of the analysis undertaken so that the board can review it, discuss its implications and challenge it in a constructive manner. This then helps management to refine its thinking on the strategic position.

Strategic options
Having set the scene with relevant background and information, the focus of the scorecard shifts towards decision-making. Strategic options can be defined as those options that have the greatest potential for creating or destroying stakeholder value. This dimension builds on the strategic position by starting to scope out the options that are available to the organisation.
The purpose of this dimension is to:

• Provide assurance to the board that the management team is identifying, developing and analysing a comprehensive range of strategic options available to the organisation on a continuous basis.
• Provide the board with a summary of the options so that it can discuss them constructively and decide which should be developed further into a formal business plan for a separate and more detailed board debate. In essence, what the board is doing is scoping out the options in broad terms. The purpose of the scorecard is to set out the landscape rather than consider each option in detail.

Strategic implementation
At this point, the emphasis of the scorecard is to identify key milestones for the board and to monitor implementation of the agreed strategy. Decisions on appropriate action may be required if things are not proceeding as planned. Note that the strategic implementation dimension of the scorecard should be very high-level. It is meant to focus on a small number of key projects that are crucial to delivery of the strategy.

The board should not get too immersed in the detail of strategic implementation. Nevertheless, it is useful for directors to have some feel for how management executes strategy, including some of the tools and techniques used. One such tool is the well-known balanced scorecard, which can supplement the strategic implementation dimension of the CIMA Strategic ScorecardTM. This then provides a clear cycle from the strategic position through to options and then to implementation.

Strategic risks
This dimension underpins the others by focusing specifically on the major strategic risks that pose the greatest threat to the achievement of the organisation’s strategy as well as key issues such as the organisation’s risk appetite.

Strategic risks can be defined as those risks that would threaten or enhance the achievement of the organisation’s strategy and even the ability of the organisation to survive. Compared to other risks such as operational risks, strategic risks can have major impacts. They are typically less predictable and can be interconnected. They include integration of mergers and acquisitions, loss of reputation and misaligned products.

Boards need to spend adequate time on strategic risk and ensure that risk management is fully embedded in the overall strategy. Best practice is intelligent risk-taking with formalised risk management.

Current and future developments
CIMA has adopted the scorecard itself to assist its governing Council in the oversight of strategy, and this has been very successful in ensuring greater focus on key issues.

CIMA is also in the process of conducting in-depth trials with other organisations. What we have observed to date is that the scorecard provides a valuable tool for structuring board discussions on strategy. As we are keen to test the concept further, CIMA would be very pleased to hear from organisations which have also adopted the scorecard and/or would be interested in undertaking a formal trial. It is important that compliance issues do not absorb all their time and energy. The CIMA Strategic ScorecardTM can provide a valuable tool in helping boards to engage in strategy effectively.

Gillian Lees is a Technical Specialist at CIMA. Contact: Katie.Scott[at]cimaglobal.com

You can read more about the IFAC/CIMA project in a joint, Enterprise Governance – getting the balance right, which can be downloaded from www.cimaglobal.com/enterprisegovernance. And more about the scorecard is available fromCIMA’s recent executive report The CIMA Strategic ScorecardTM – boards engaging in strategy. This is available for download from www.cimaglobal.com/strategicscorecard

 

The articles published here in the Thinking CEO are internet updates of the latest management knowledge and practice, which have been commissioned by Sovereign Publications for their bi-annual magazine, CEO Today, and will appear later in the first 2007 issue of this publication. To contact Sovereign and CEO Today, go to:

http://www.sovereign-publications.com/ceo-art.htm

 


Find related articles

Companies : CIMA
Managers : Gillian Lees
The Thinking CEO : Structuring The Business

Custom Search

RSS

Syndicate content

Most popular

Latest content

User login