CORPORATE GOVERNANCE
STRATEGY ISN’T EVERYTHING
Dr. Muneer Muhamed weighs the importance of strategy versus compliance
A preponderant issue that’s emerged in the wake of the new Securities Exchange Act proposed by the Securities and Exchange Commission (SEC) of Sri Lanka is whether corporate boards should focus more on compliance than strategy.
The integral role of an engaging and effective board is to guide an organisation, in shaping and executing a winning strategy. Broadly, the board oversees five distinct areas to ensure that an enterprise achieves success: approving and governing corporate strategy; guiding major financial decisions; helping in selecting, evaluating and monitoring the CEO, and making succession plans; providing guidance to the CEO; and ensuring compliance.
Long before the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka), the SEC and the Colombo Stock Exchange (CSE) decided to establish corporate governance standards, the Sarbanes-Oxley Act, and NYSE and NASDAQ listing standards, drove governance reforms.
They were triggered by the failure of giants such as Enron, WorldCom and Tyco. This is mirrored by the SEC’s move in the wake of the downfall of Vanik, PC House and the like.
All these regulations address issues such as the independence of directors, their responsibilities, the composition of audit committees and disclosures. But the critical role of a board doesn’t involve any of the above. While regulation is needed to protect investor interests, there is a risk of boards spending too much time on compliance and form rather than their crucial role of monitoring, guiding and evaluating a company’s strategy, as well as its executive team. Shouldn’t the board be responsible for a failed strategy?
The question of utilising a board’s limited time on strategy compared to compliance is irrelevant. A board needs to focus on the ‘must-do’ tasks. Compliance becomes a subset.
Can a regulator introduce a framework for the depth of thinking and time involvement of boards on strategic discussions? And can it insist that boards and executive teams align, and work together with greater transparency?
Studies conducted across a wide range of listed companies by various institutions reveal that boards fall short of fulfilling their five responsibilities. The pressure to increase the number of independent directors is an unexpected cause of this shortcoming.
Independent directors rarely have excess time and enjoy less domain expertise. They serve to protect the interests of investors but their lack of strategic knowledge is a major hindrance in guiding a company.
As they’re unlikely to commit to gaining further domain expertise, it is imperative that any regulation should strive to increase the effective use of their time. This can be achieved by offering them streamlined information in advance of board meetings.
Using a combination of strategy maps, corporate scorecards, board scorecards and executive scorecards is the best way to align a board of directors with strategy, and ensure that they deliver on their responsibilities.
This will enable board members to have more relevant information when it comes to decisions regarding the corporation’s future direction, reporting, disclosure and other policies. Board meetings will centre on enterprise strategy, fiduciary aspects, the value proposition and risk factors.
Executive scorecards reflect a board’s processes for selection, evaluation and succession plans. A board scorecard navigates decisions relating to its composition, processes, deliberations and evaluation.
Effective and efficient use of time has always been the result when the above is executed properly. It takes skill to ensure that the strategy map of an enterprise is right, and this acts as the story for the board of directors to review and govern. Once inducted into this framework, board members find it easier to delve into quarterly reviews and fulfil their strategic oversight responsibility.
It enables the measurement of strategic value addition, and execution of the roles of the board and committees; and it highlights strategic information needs.
Scorecards are typically used to keep the discussion strategy focussed and the board can achieve remarkable progress in half a day every quarter. Goal setting, initiative rationalisation, milestone setting, resource allocation, scenario mapping and CEO scorecards all reflect the enterprise strategy.
Such a collaborative approach would be productive and align the board with the executive team. Both parties derive a strong sense of commitment and process orientation. Board members who are satisfied with their enterprise’s approach to strategy management will be twice as likely to govern better and complete their five must-do responsibilities as those who aren’t satisfied.
Sri Lanka’s regulatory body should usher in the above remarkable change in board governance, which hasn’t been seen anywhere in the world, by directing the focus on delivering results over and above mere compliance.
The impact of such a move will be long-lasting and sustainable.
Governance is a thorny issue in Southeast Asia in general, if not globally. Regulators can only do so much. Unless the promoters want to build great enterprises, they will always be happy with quick money and consenting board members. Ethical issues also come up when board members are selected. Regulators can plan a scorecard idea as part of compliance and can have some metrics in place other than compliance. That might be of real help to the shareholders.
A board should have the right, high-level KPI dashboard to monitor strategy execution and KPIs for compulsory compliances, considering the consequences of legal and financial implications. Good article from Dr. Muneer with valuable insights.
The independent board members on most boards are not at all independent. They are either relatives or friends of the promoters who are left there to nod their heads and not create problems for the promoters. Else, they are returned senior executives who need some form of timepass and money.
Both sets are useless for the enterprise. They will not be able to add any value to the success of the company. They will only be looking at regulatory compliance. And strategy? What’s that? Isn’t it about being on the board forever?
Dr. Muneer, the crispness and visibility that all the mechanisms you have listed here brings to the Board are remarkable. While corporate governance is a factor, which today is a debatable topic, the corporate law factor needs to be kept in perspective as well.👍
Excellent article. This truly requires hours of dedication from all budding directors. Very useful. We need many more to upgrade our knowledge and skills.