Reflecting on a number of decisions handed down by the courts and Fair Work Commission in 2017 provides useful insights into the duties and rights of directors.
Corporations and executives are judged by the outcomes they deliver with the typical metrics: financial performance, customer engagement commonly measured by Bain & Co’s Net Promoter Score (NPS), employee engagement, strategic milestones and industry critical metrics like fatalities and injuries.
Outcome metrics are important. However, alone, they can trap organisations in a cycle of short-termism. Evidence shows that encouraging short-term behaviour fails to drive long-term success and can even compromise long-term benefits.
The real world examples speak for themselves. Take ‘Organisation A’ whose productivity program degraded over years to the point that 30-40% of their annual productivity target would be secured in the last two months of the year using technically permitted one-off items. Or ‘Organisation B’ who in a scramble to improve their NPS called one million customers to thank them for their loyalty – just prior to the final NPS survey. In its first year the organisation exceeded their target but that very success promoted a culture of attempting unsustainable initiatives at the expense of structural improvements.
In both cases, executive bonuses were tied to these short-term outcome metrics. If boards and executives are ready to drive long term success – especially in an environment of disruption, corporate targets must embrace long-term driver metrics.
Introducing the “Corporate Handicap”
Defined simply, the Corporate Handicap is the difference between a corporation’s current capability and the leading practice on the key dimensions that drive competitive advantage.
Rather than being an outcome measure, the Corporate Handicap is a ‘health measure’ – an indicator of future success.
Software developers will recognise its similarity to the widely applied Technical Handicap or Technical Debt. It reflects the hidden cost of choosing an expedient solution over a more holistic one that would take longer to implement. Just like financial debt, Technical Debt accumulates “interest” making it harder and more expensive for organisations later on. Software companies take it so seriously that companies like LinkedIn and Atlassian have paused product development to focus on reducing the Technical Handicap in their underlying software platforms.
These lessons apply beyond the software industry. Telecommunications companies, for example, have several layers of systems like operational support systems to enable the flow of “information packets” and business support systems for pricing and billing. As new communications technologies have been introduced (e.g. ADSL, 3G, 4G), Telcos chose to introduce new “system stacks” rather than migrate the older systems – for expediency and to avoid expending costs at the time. Now, many Telcos have hundreds of systems with many thousands of band-aid links between them.
At the height of the outsourcing and offshoring boom, many companies rushed to migrate their clunky processes to capitalise on the short-term labour arbitrage benefit and trading off against the benefits of streamlining processes first. Years later, these clunky processes – now cemented in outsourced contracts – are a millstone, diminishing the ability to be have agile customer-centric processes and delaying the adoption of digital technology such as Robotics Process Automation – which together with cognitive-based technologies can remove the need for labour in most forms of processing.
What drives competitive advantage determines the Corporate Handicap, which can therefore be disaggregated into component measures. If being agile is a key competitive advantage, then an Agility Handicap would be one metric that would be developed and tracked – in this case incorporating aspects such as speed of decision-making, having agile work practices, and so forth. Alternatively, an Innovation Handicap could incorporate agility elements as well as hallmarks of an innovative company like design maturity, appropriate innovation funding mechanisms and an innovative culture.
What should executives and Boards do?
Corporate Handicap is not a universal measure, being company and industry specific; and is new. Corporations will need to agree what attributes are required for long term success, agree how they will be scored and weighted, and agree their current Corporate Handicap.
Once boards settle on their current Corporate Handicap, new targets can be incorporated into executive performance metrics (linked to the incentive structure), and coupled with the appropriate reporting mechanisms.
Finally, boards should consider how to govern the Corporate Handicap.
Governing it as an enterprise risk via the risk function alone is unlikely to sufficiently improve the “handicap levels”. Risk functions can manage narrowly focused risks well e.g. health and safety risk, cybersecurity risk; but typically lacks the capability to focus on broad-based business challenges.
For the strategic and competitive insight that can lead to strategic change, involving the strategy function and having an independent strategic arbiter may be a better idea.
Mithran Doraisamy is a strategy, performance improvement and transformation specialist.
He was a Founding Partner of EY’s consulting practice in Australia and led the Customer & Transformation practices. More recently, he was a senior executive at Telstra.
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