Mapping Your Board’s Effectiveness – Kaplan

Robert S. Kaplan is a Baker Foundation Professor at Harvard Business School.  The following is an excerpt from a piece prepared in 2004 and answers a question about the process in developing an effective, proactive and relevant board.  While the process points specifically to a for profit corporation and the duty/expectations of the board, the message is exactly the same for non-profit boards.

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.

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.

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.