Mapping Your Board’s Effectiveness

To be effective, board members must understand their company’s strategy. Professor Robert S. Kaplan offers methods for using the Balanced Scorecard and strategy maps to increase board power. From Strategy & Innovation.

by Robert S. Kaplan

http://hbswk.hbs.edu/item.jhtml?id=4341&t=corporate_governance&nl=y

In the aftermath of such highly public and grossly damaging business debacles as Enron, Tyco, and WorldCom, much attention and plenty of criticism have been directed at those companies’ corporate boards. Traditionally, board responsibilities have been to oversee the company’s overall strategy, hire and monitor the CEO, scrutinize the performance of the company’s leadership team, oversee financial reporting and disclosure, and ensure compliance with laws and regulations.

The recent failures triggered regulatory and legislative responses, including the Sarbanes-Oxley Act and new Securities and Exchange Commission-approved NYSE and Nasdaq governance listing standards. The risk now is that boards will become overly focused on regulatory compliance and not perform their broader and more managerial responsibilities adequately.

Can companies—especially those that value innovation as a key corporate strategy—create value by becoming known for better governance and greater transparency to external providers? Can they lower their cost of capital and perhaps get a valuation premium based on the reputation and performance of their governance processes? And is there a way that companies can get "more bang for their buck" from their board members’ time?

The answer to all three questions is yes—if what a company expects of its board members is redefined and if the meeting process is redesigned so that the board’s time is primarily spent on helping the CEO design and align the corporation’s business strategy.

Mapping board performance

Currently, prior to a typical board meeting, members receive reams of paper that are difficult to wade through and make sense of. Once the meeting is in progress, board members typically spend much of their time sitting passively and nodding, asking an occasional question or offering an occasional comment to show that they are doing their due diligence.
Extending the Balanced Scorecard and strategy map framework to board members will enable them to perform more effectively and efficiently.

To engage board members’ expertise much more around the strategic direction that the company is taking would require giving different types of information to board members and having different discussions in board meetings, but the effort to revamp the meeting process and agenda would be well worth the trouble.

With only limited time available to review the information before the meetings and to perform their monitoring and governance functions, board members must receive the information that is most relevant to their governance responsibilities and that will enable them to more effectively participate in board meeting discussions. They should receive strategic, forward-looking information, rather than information that just summarizes the past, such as quarterly and annual financial statements. While boards still need to review past performance, that information should not take up 90 percent to 95 percent of a board meeting agenda as it so often does today. What’s more, company executives should make fewer, shorter, and more targeted presentations to board members and spend more time engaging them in interactive discussions.

For the board to monitor strategy, it first must understand and approve the proposed strategy. Subsequently, it needs information on how well the strategy is being implemented and what results the strategy is delivering. Directors cannot infer from quarterly financial statements whether the company has selected a sensible customer value proposition, is focused on the critical processes to meet customer and shareholder expectations, and is investing well in its people and information resources.

To help companies ensure that the board receives the right information about company strategy and performance, as well as feedback about the board’s own performance, we have integrated the Balanced Scorecard performance management system into corporate governance processes.

The Balanced Scorecard strategy map http://hbswk.hbs.edu/item_sidebar.jhtml?id=4341 portrays, on a single page, a company’s strategy. It includes the financial outcomes expected; performance with targeted customers and the organization’s differentiating value proposition; the critical internal processes that will create and deliver the value proposition; and whether the organization has the right people and systems in place and the right culture for its strategy to be successful.

Extending the Balanced Scorecard and strategy map framework to board members will enable them to perform more effectively and efficiently. First, the board should use the corporate strategy map and Balanced Scorecard, which together describe the company’s strategy, as prime information sources. Second, it should produce a board scorecard to make clear board responsibilities and accountabilities. This provides a mechanism for the board to set objectives and subsequently review its performance. The Balanced Scorecard strategy map provides a framework to illustrate how strategy links intangible assets and value-creating processes to customer and financial outcomes. The financial perspective portion of the map describes the tangible outcomes of the strategy in traditional financial terms, such as ROI, shareholder value, profitability, revenue growth, and cost per unit. These financial outcomes can be achieved only if targeted customers are satisfied. The customer value proposition in the customer perspective section describes how to generate sales and loyalty from targeted customers.

The financial and customer perspectives illustrate the desired outcomes from the strategy. How does the organization create these desired outcomes? The internal perspective identifies the critical few processes in clusters, such as operations management, customer management, innovation, and regulatory and social processes, that are expected to have the greatest impact on the strategy.

The learning and growth perspective identifies the intangible assets that are most important to the strategy. The objectives in this perspective identify which jobs (the human capital), which systems (the information capital), and what kind of climate (the organization capital) are required to support the value-creating internal processes. These assets must be bundled together and aligned to the critical internal processes. Consistent alignment of capabilities and internal processes with the customer value proposition is the core of any strategy execution.

Keeping the board strategically involved

Take the experience of First Commonwealth Financial, which operates in central and southwestern Pennsylvania. The map it developed for its new strategy (First Commonwealth Financial strategy map http://hbswk.hbs.edu/item_sidebar.jhtml?id=4341 ) called for the company to become more client-focused by offering its customers a tailored mix of financial solutions. While it was cascading the scorecard down to its operating units, the company also started to train its board in the Balanced Scorecard so that the strategy map and associated Balanced Scorecard of measures, targets, and initiatives could serve as the primary document for board reporting and deliberations. This enabled the board to approve the new strategy and remain continually engaged in the discussion of issues and actions required to support it.

Next, First Commonwealth helped the board develop its own scorecard (First Commonwealth Financial’s board strategy map http://hbswk.hbs.edu/item_sidebar.jhtml?id=4341 ). A board scorecard articulates clear objectives for the company’s shareholders and stakeholders; identifies the critical processes the board and its committees must perform to meet these external objectives; and highlights the board’s composition and skills, the information packages, and the meeting dynamics that enable the board to perform its critical processes effectively and efficiently. The board scorecard allows a company and its board to monitor themselves against predetermined objectives and targeted measures. Among the questions asked to measure board effectiveness: Are the meetings engaging and interactive? Rather than being passive and merely reactive, are board members actively getting involved in the discussions, challenging managers when necessary, and raising questions? Do board members have access to strategic information?

Developing a reputation for an effective board, one that actively monitors and guides strategy, one that ensures that corporate financial and nonfinancial communication to investors highlights key value and risk drivers, and one that holds senior executives accountable for successful strategy formulation and implementation will give investors more confidence that the company is well positioned for future success. Such confidence in an effective governance process should enable a company to enjoy a higher valuation and earnings multiple because investors will see the future earnings stream as more sustainable and less risky.

Reprinted with permission from "Is Your Board Really Delivering Value?" Strategy & Innovation, March-April 2004.

See the latest issue of Strategy & Innovation http://harvardbusinessonline.hbsp.harvard.edu/b01/en/newsletters/news-sandi_home.jhtml .

Robert S. Kaplan is a professor at Harvard Business School and chairman of the Balanced Scorecard Collaborative.

Copyright © 2004 President and Fellows of Harvard College