RETURN ON GOVERNANCE, EXPLAINED – AND HOW TO GET THE MOST OUT OF YOUR BOARD OF DIRECTORS

Winter 2018 Issue

Critical components of the Board’s oversight include:

• Audit function – ensuring there is an absence of malfeasance, and that proper control procedures are in place to prevent corruption, safety and security loss, plus promote health advancement and injury prevention. The Board likely already has a Finance, Audit, and Risk Committee that meets regularly with external auditors and internal executives responsible for financial procedures, health and safety mechanisms that go beyond minimal compliance and actively prevent accidents and injury, and procedures to protect against lawsuits, bribery allegations, and environmental damage, etc.

• Corporate Social Responsibility – initiatives to ensure positive corporate reputation and broad community support for the organization.

• Government, Public and Stakeholder Relations – to ensure positive regulatory environment for operations.

• Financial and Operational Management Reporting – to show the organization is on-track, that debt and deficit levels or profitability targets or asset investments or operational risks are within expected and acceptable levels, with evidence provided by management and examined by the Board.

• Enterprise Risk Management program – that identifies comprehensive operational, strategic, asset and capital projects risks and develops mitigation strategies and action plans.

• Human Resources – ensuring that staff, and any organized bodies such as unions, see management and the organization as fair employers and reliable partners in their health, retirement and career advancement.

• Reputation and Brand – ensuring that the organization is scandal-free, lawsuit-free, trusted, engendering broad support for its Mission / Vision / Values.

Governance responsibility in this oversight and protection area generally falls to several Board Committees such as Finance-Audit-Risk Committee, HR-Compensation-Safety Committee, and External Relations (Government-Community-Stakeholder) Committee. Much of this oversight and protection work requires reporting from management against criteria, standards and policy guidelines established by the Board. While this is important work and does require skilled and knowledgeable Board members to ask the right questions, to be able to read and understand reports and data tables, graphics, complexity-modelling, etc.; this governance work uses only a small level of the talent, experience, and potential value of Board members. Oversight and Protection work positions Boards dangerously close to operations and the potential to wander into conversations, and perhaps even providing direction to staff on doing the day-to-day work should be avoided.  

Return on Governance can be significantly increased by building on this work, with contribution in the next two areas.

Strategic Insight, Prudent Prioritization and Future Path Choices

Strategy is usually a partnership outcome, involving both the CEO / Senior Management and the Board working together. While it can sometimes be driven by the Board, it is usually a priority of the CEO: organizing market research, gathering trend data from across the organization, identifying new product / service / market opportunities, and very importantly, inspiring innovation in products, programs, and services. Meaningfully engaging the Board in strategy can add significant benefit to the organization.

Consider the following areas for ROG contribution by a Board:

• As the organization focuses on strategic thinking, decisions around how to position itself for future value creation becomes a key consideration. What the organization undertakes or not, emphasizes or de-emphasizes can bring profitability to successful areas – or grief and expenditure quicksand to others.

• In assessing market opportunity or potential value creation, an organization can’t usually pursue all avenues it might identify – so Board and Management agree to take some risks. It may never be known whether the best decision was made but a bad decision is usually identifiable fairly soon.

• Helping management identify non-traditional vs traditional product / service opportunities, competitors, underserved market segments, and understanding potential alliances or partnerships that may leverage the organization’s assets. Board members can also help in validating or challenging assumptions, such as implementation capacity or capability reasonable-ness, and help with business model re-thinking, analysis or creation based upon its collective experience and expertise in other industry settings and other markets.

• Assisting in finding or accessing money, talent, infrastructure, etc. needed for the strategy, plus opening doors into new markets / segments or addressing regulatory frameworks that may be barriers to the plan.

The engagement of a Board in strategy discussions can have significant payoff, and / or reduce risks / potentials for mistakes. The dollar value of this kind of governance work is potentially large as well, yet often time-delayed in seeing the total impact. Most Boards should create separate tracking mechanisms to see the net value impact and record such decision-making, prioritization, and access initiatives – then follow-up perhaps annually during the plan’s implementation.

Governance work at the strategic level often takes considerable time and dialogue. It might require special task-forces (maybe joint Board-Management), outreach and travel to leaders in other sectors or geographies, some research, reading, and organized dialogue with customers / non-customers, members or stakeholders. So, governance work doesn’t always neatly fit into specific committee Terms of Reference. But it does mean organization, time, and then gatherings for shared insight, shared findings, or shared feedback.

Strategic governance activities are arguably some of the most satisfying, creative, and engaging work that the Board can do – and that management can participate in and tap into – while providing significant Return on Governance to the organization.

Future Opportunities, Issues and Environment Sense-making

In the world of governance, this is what we call ‘getting the Board out ahead of Management’. This is not intended as derogatory or competitive; but is how the Board leads, versus reacting to Management. This is also where the organization can unleash its Board’s potential, and use all the talent, experience, networks, wisdom, insight, collaborative creativity, and innovation of the collective individuals to render significant Return on Governance. 

By now the astute reader will have noticed that these categories of governance work follow the work of Richard Chait and his Governance as Leadership concepts. He would call this section, Generative Governance work, which demands that Board members work in the future context:

• To explore out 5+ years into the future of the organization;

• Think about the business environment evolution and disjunctions that lie ahead;

• Consider local / regional / global demographic- and psychographic-driven issues;

• Investigate technology impacts or new innovations, created products / programs / services, and;

• Examine the value / belief / priority shifts of customers / clients.

This is both exploratory and perspective exchange work, organized around perhaps some Board research or invited speaker / presenter to the board. The idea is to make sense of the future-scape with respect to your organization.

For example, what impact will self-driving vehicles, commercial drones, or artificial intelligence applications have on the organization: its inventory management, safety and security, staffing / business models, insurance needs, product development / innovation, etc.

The Board starts by engaging in discussion with management about major issues, trends, technologies, etc. that are on the horizon for the organization. Next, the Board must decide how to research or obtain knowledge. Then, the Board should create time and space to have dialogue around: So what does this mean to our organization?

Board dialogue in this futures context is done to frame issues for further research or exploration, if warranted. Exchange of perspective, experience, and personal network intelligence gathering, or ears to the ground feedback helps identify, validate or invalidate, and then assess potential for inclusion in future strategic considerations. This helps keep organizations relevant to future state-of-the-art shifts, mind-set changes, or political / regulatory / policy revisions.

The Board can be self-directed in this work, and should avoid delegating the work-up and / or the information-gathering processes to management – or again it sets the Board back to being reactive to Management. Techniques such as Scenario thinking, or Open Space dialogue-hosting may be of benefit in such explorations.

The conclusion of governance work might lead to new policy development, shaping strategic or priority consideration, or even further exploration and research by a task force. But the most important ROG value comes from the sense-making dialogue and exploration itself: the leveraging of the wisdom and experience of the talent assembled, along with the CEO and senior management.

The tangible dollar value ROG? This comes from:

• Identifying service or market opportunities ahead of competitors.

• Finding new efficiencies and technological innovation impact in products / programs / services while its value is high to customers / clients.

• Being aware of new attitudes or value shifts of stakeholders towards the organization.

Yes, the tangible ROG is long-developing and perhaps months or years away from quantification. Yet the gratification to Board members and the feeling of making a difference for the organization is more immediate and motivational in itself.

Becoming a Board that really makes an impact and provides solid, tangible “return” to the organization, may well mean re-organizing the Board Committees, require some different approaches to the Annual Calendar of Board meetings and topic flow, and quite likely require a change-up to the Agenda of your Board meetings. Doing so, however, can really unleash the potential of your Board talent.

A follow-up to this article that focuses on some additional steps that can be taken to boost ROG, like re-organizing board committees, a different approach to the annual calendar of board meetings, etc., will be published in the coming months.