This month’s highlights from the Australian Institute of Company Directors’ Centre for Governance Excellence and Innovation – a resource centre for key governance issues.
How strategic is your board?
The role of corporate boards in strategy development, as distinct from strategy approval, can vary widely from organisation to organisation and over time as circumstances change. Recent articles have considered what factors influence the strategic role that boards play in particular organisations. Professors Didier Cossin and Estelle Metayer considered the issue in a recent article in the MIT Sloan Management Review titled How strategic is your board? They recommended that boards assess their optimal strategic function through the following steps:
(a) Define what your company means by strategy. There are at least five ways of looking at strategy – as: (i) planning (ii) a redrawing of competitive boundaries (iii) a focused response to a key challenge (iv) the development of core competencies (v) optimising the value created for stakeholders.
(b) Determine what role the board should play in light of its strategic priorities. Boards typically play up to three roles: (i) a supervisor (ii) co-creator of strategy (iii) support to management.
(c) Consider how the context in which the company works should inform the board’s strategic leadership stance. The authors typically found four context types: (i) simple (ii) complicated (iii) complex (iv) chaotic.
The authors commented that most contexts demand the board follow a particular strategy. For example, in a simple context boards should generally take a supervisory role that focuses on execution and optimisation. Conversely, in a complex context (which is ambiguous and unpredictable) boards should support and supervise strategy and sometimes co-create it. The authors observed that boards should be ready to shift their strategic goals. Strategy should never be static, instead strategy development must be “ongoing, deliberate, and purposeful”.
Taken from MIT Sloan Management Review, September 2014
Investor perspectives: shaping boards today and into the future
It is important for boards to understand investor perspectives, including their expectations of corporate directors and whether their expectations are being met. PricewaterhouseCoopers last year released the results of a US survey titled Investor perspectives: How investors are shaping boards today… and into the future.
The survey showed that investors were generally happy with the way boards assess strategy (90 per cent satisfaction rate), oversee risk (84 per cent satisfaction rate), and maintain board expertise (84 per cent satisfaction rate). This is a good result, particularly given that strategy assessment and risk oversight are two of the most important board responsibilities.
Yet investors believed that there remain areas for improvement. The survey showed that 61 per cent of responding investors were dissatisfied with how boards assess director performance, while 48 per cent were unhappy with current shareholder engagement practices.
The survey also showed investors to be dissatisfied with certain information being provided to them, including in relation to cyber risks (55 per cent), climate change risks (58 per cent), and key performance indicators about risk-management objectives (45 per cent). Further, 40 per cent of surveyed investors did not believe that boards understand emerging risks that can impact their company.
An issue that continues to surface is the possibility of limiting the number of boards on which directors may sit. The survey showed that 94 per cent of respondent investors believed that boards should revisit this issue.
Q&A with Belinda Hutchinson
The University of Sydney chancellor shares her views on board composition and emerging challenges.
Belinda Hutchinson AM FAICD is chancellor of the University of Sydney; a director of AGL Energy, Australian Philanthropic Services, NSW State Library Foundation; and a member of the Federal Government Financial Services advisory council, the Salvation Army Eastern Territory advisory board and the Australian Treasury advisory council.
Belinda was previously chairman of QBE Insurance Group and a director of Telstra Corporation, Coles Myer, Crane Group, Energy Australia, TAB and Sydney Water.
What do you think distinguishes a “great” board from a “good” board?
Hutchinson: It is about getting the right mix of skills and experience, and the right balance between collegiate spirit and constructive debate. It is about having the performance of the board and organisation front of mind in everything that the board is doing.
It is about having a culture of continual improvement, including regular board reviews, which are honest and transparent, and where the board follows through on agreed outcomes.
What levers have you seen boards use effectively to drive organisational performance?
Hutchinson: The board can drive organisational performance by working with management to develop a strategy focused on sustainable value creation and then ensuring that the strategy is executed effectively. From a human resources perspective, it is important for the board to ensure that the organisation has the capacity to implement strategic goals.It is also important that performance metrics and executive remuneration are aligned with strategic goals.
Another lever to drive organisational performance is risk management. The board can facilitate innovation by encouraging certain types of risk-taking, while curtailing others.
What do you think are some of the more challenging aspects of being a board chairman?
Hutchinson: The role of the chairman is particularly challenging when there is conflict on the board. In that context it is up to the chairman to ensure that relations between board members and management are respectful, and to encourage contributions from all board members and constructive debate.
Challenging circumstances for an organisation also generally involve a heightened role for the chairman, e.g. during a hostile takeover, where there is intense media criticism of an organisation, where there is an underperforming chief executive officer that needs to be removed, or where the external environment has deteriorated rapidly as during the global financial crisis.
What are some of the emerging challenges that boards are likely to face over the next decade?
Hutchinson: The pace of technological change presents a real challenge for boards and organisations as they strive to keep up with changing technologies, and understand the implications of changes for the organisation.
With increasing information flows and a lack of clarity around what constitutes good information, there’s a lot of “noise” – it can be difficult for the board to determine what it needs to know.
Boards should understand the power of social media and organisations should adopt strategies to communicate effectively with stakeholders via this media.
Additionally, the risks to organisations are changing with technological advancements. In relation to cyber-security, for example, directors and boards need to consider the way they transfer and store information. They also need to be aware of how they connect and communicate with one another or within their organisations.
Further, the role of the board is evolving as community expectations of boards grow. Shareholder groups are also increasingly seeking to engage directly with boards on a regular basis.
The Centre for Governance Excellence and Innovation is a resource centre that champions new thinking with the aim of driving organisational performance.
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