Let’s face it. Many companies globally exceed their performance targets and many boards perform their duties with high levels of competence. For example, in recent times, it is notable that many major banks have consistently exceeded their targets.
The momentum seems to be strong and investor confidence is growing. But there is a problem. These types of results may be short lived and could be the start of another rollercoaster. These same banks at one time cleaned their balance sheets by posting huge write offs. Most of them were not spared the spotlight falling on their wealth draining tactics. The memories are still fresh. Those who have played the investing game before may be coming back into the arena but they are doing so cautiously.
The point I want to discuss here is who should decide on future corporate performance targets? Should it be the CEO with the board’s approval? Or should it be the board that decides on the targets based on past performance, new products, risk factors and other issues? After all, the board is the ultimate body accountable.
My past experience as a coach has shown me that many boards look only at short term goals. And, as their coach, I would often join in these short term discussions never taking the time to look up and see beyond the horizon. In many cases there were valid reasons such as adverse cash flows threatening to impact their very existence.
However, what was rarely taken into consideration was the importance of having ‘real board’ meetings. Instead the entire company’s executive team kept hammering away at a myriad of short term targets which we kept missing.
Avoiding missing the mark
Subsequently, I learnt that there was a better, simple, yet powerful way that the boards of these corporations could have leveraged their companies’ success using a framework and system based approach. The Policy Governance® model, developed by Dr John Carver, is available to all as a way to resolve the difficulties created by an exclusively short-term approach.
The key difference between traditional governance practices and Policy Governance is that, in using Policy Governance, boards think of themselves as one step below owners rather than one step above management. If the board thinks of itself as accountable to share-holders rather than share-flippers then this concept in itself helps to provide the long-term perspective that I believe is needed for better corporate performance.
You can read a full description of the Policy Governance model as applicable to corporations in Corporate Boards That Create Value: Governing Company Performance from the Boardroom by John Carver with Caroline Oliver, published by Jossey-Bass in 2002. However, the following are just a few points I want to highlight in relation to the advantages I see this approach providing for corporations:
1) Having clarity in defining Ends
Perhaps the key fundamental point which traditionally organised boards miss is that they don’t have clearly defined outcomes that describe where they want to ultimately be. Yes, they have goals, forecasts and a whole laundry list of activities supporting future years but these are actually disconnected from their true purpose described in terms of the people whose lives they believe they exist to benefit, how those lives should be benefitted and what the relative worth of those benefits is.
Setting and monitoring a simple rich and relevant board policy proscribing the true Ends unfolds a stronger line of connection to core purpose. A much better investment of board time than the time consuming performance of complex variance analyses on data regarding activities whose relationship to core purpose is wholly unclear. Take for example the due diligence exercises in which consultants like me are often engaged. The points of discussions tend to revolved around past results and future forecasts which may look important, but often serve merely to distract from the lack of clear purpose. In hindsight, I see now, that, if my clients had had clearly defined Ends policies, the strategy linkage element which includes the financial health of this company would have clearly surfaced.
2) Raising Standards
Boards globally have meaningful discussions on important issues such as the financial health, risk, and governance. But how many board members see, evaluate, and build upon their own progression (collectively and individually) as well as that of their chief executive? With the Policy Governance model, policies are developed by the board and regularly reviewed and updated as the board believes necessary. Thus the board is always able to raise its standards for itself and its organization.
3) Eliminating complexity
If you see a string with multiple knots, you realise that it becomes difficult to entangle these and it takes time. These knots are basically the hindrance to a smooth straight string. Many companies carry strings with such knots. They are everywhere. Boards end up so engrossed in trying to disentangle one knot at a time, that they forget the smooth straight string. Too many complexities drag a company further down the ladder instead of going up the ladder. Under the Policy Governance banner, there are a few policies which are meaningful and simple to follow. Mission statements that fail to distinguish between matters of ends (ultimate purpose) and means (everything else) are a thing of the past. I believe this untangling of Ends from everything else to be the starting point for unpicking a whole range of other knots that bedevil organizational effectiveness.
4) The story teller
During typical board meetings, I notice a lot of stories being told. What I mean is that responsibility for the discussion is not being owned by the board as a whole. Instead the blame game is being played, or the passing the buck story is being told, and meetings are deteriorating into endless unwanted discussions. Agendas are not followed but end up as good pieces of paper to do other things on. The main purpose of such meetings often seems to be to see who will dominate. The point is that discipline must be maintained when executing board level duties. Overall accountability must be owned by the boards. This can be achieved by having a set of governance process policies that draw on principles of the board’s collective accountability to owners and define parameters for the board’s behaviour. A material deviation from these parameters can then be acted upon by the Chair using the board’s collective authority rather than his or her personal authority.
5) Transparency for Investors
In a for-profit, corporate performance includes a combination of people, resources and processes (systems). Some publicly listed corporations have statements that tell investors what is expected to happen in the future and why the company believes it will meet expected targets but most companies don’t. Yet all investors want simple, to the point information that tells them, say, what return on investment the company is aiming for in 5 years which can be reviewed in comparison with what is happening in the short term, so that an evidential linkage exists. Using an Ends policy, a board can develop this communication in as little as a few sentences. And, going further, the board can also choose to demonstrate its level of prudence and ethics and governance integrity by sharing its means policies.
Even though boards may be meeting or exceeding targets in the present markets, there may be new complexities entering the global markets. Companies are poised to benefit if their board has a simple set of policies exactly pinpointing where they are heading. Without a rich meaningful set of policies which can be reasonably interpreted, boards stand to keep missing the corporate performance mark with more painful experiences. I, therefore, believe that using this model-based approach can bring out the best in boards, the best in practices, the optimum performance targets and ultimately, a better economy.