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Conventional business strategies may not be adequate for the hyper-dynamic environment that is unfolding today. In this new landscape, boards need to reexamine their role and approaches, especially with respect to risk, strategy and culture.

 

Companies are facing disruption at an unprecedented rate. Quite a few have found themselves woefully unprepared for what lies ahead.

Risks and risk governance have thus become hot topics in the boardroom. Directors are being challenged to reassess their board’s mandate. Questions over the board’s core governance processes, and the fit between directors’ skillsets and evolving business landscape need to be addressed.

Risk in the context of strategy

Yet, amidst all this uncertainty, the board in strategy-setting needs to have a tacit understanding of what truly are the risks that threaten the future of the business. Just as risks should not be viewed in silos, risk management should not be isolated from strategy.

Risk governance at the board level has to help the company be agile and forward-looking. Hence, the board has a responsibility not only to mitigate risks, but to also identify the ones that are worth taking. Put in context, an effective driver is not one who is stuck staring down the rear-view mirror, but one who is focused on the road ahead while occasionally checking what’s behind and around.

We often speak about good governance being a balance of performance and conformance. In truth, many discussions around risk management practices focus excessively on risk prevention and avoidance. The irony is that once this becomes the sole basis of how a board makes its decisions, it is, in fact, introducing yet another risk in and of itself. A board that is predominantly obsessed with risk control is less effective in navigating a future where bold, strategic risks need to be taken.

In their book Boards that Dare: How to Future-Proof Today’s Corporate Boards, authors Marc Stigter and Cary Cooper argue that the main starting point of the board should be about “realising future value within a certain time frame, within a certain risk appetite – in that particular order”.

Oftentimes, at the board level, many risk and strategy processes tend to be divorced from one another. Usually, the risk committee is focused on enterprise risk management, while strategy typically comes under the purview of a separate executive/strategy committee.

Presumably, everything gets reconciled at the main board in the end. Still, it would make more sense for these two committees to be more deliberate in sharing relevant, specific information with each other. Members from the strategy committee should regularly be invited to sit in on the risk committee’s sessions, and vice versa.

In bringing together strategy and risk functions, the board should have a risk governance framework that includes identifying business and strategic risks. These risks should be factored in during the deliberation and formulation of the organisation’s business strategies. Strategic risk indicators should also be captured as part of the performance indicators that have been set.

Overseeing without overstepping

From dealing with “black swans” to “grey rhinos”, from highly unlikely to highly probable incidences, what has become evident is that the growing list of issues appearing on boards’ radars is becoming increasingly complex and varied.

The challenge when it comes to strategy is that the line between board and management tends to be blurred. A delineation between board and management’s responsibilities remains more art than science, however.

The common understanding is that boards need to have a “hands off and noses in” approach  to preserve their independence. But who is ultimately responsible for setting strategy, especially in unprecedented times like this?

The board cannot be the sole custodian of strategy, but neither can management go at it alone and relegate the board to “rubberstamping” duties. How involved, then, should directors be throughout the strategy process?

There are voices advocating a more hands-on approach, moving away from the review-andapprove practice many directors are accustomed to. The argument for this is that given the uncertainty faced, the traditional cadence of board meetings today is inadequate, and an increased degree of board engagement is thus required. Where this becomes controversial is when boards start to wade into the realm of execution and implementation.

The sweet spot is likely somewhere in-between. The board should rely on the domain expertise of management, while leveraging its own diversity of knowledge and experience to refine the strategy and provide guidance. Regardless, whether in crisis or business-as-usual, how the board operates should always reflect the particular needs of an organisation rather than simply applying theoretical best practice. (See box, “Common Practices of a Proactive Board”).

Common Practices of a Proactive Board

  • Build relationships with employees beyond the CEO. When Russell Reynolds surveyed some 370 large public company directors from a dozen countries in 2016, the data showed that highly effective boards are 41 per cent more likely than other boards to actively cultivate relationships not just with the CEO, but with the broader executive team.
  • Develop a strategic sensing capability. This means getting out of the boardroom (both figuratively and literally) to actively seek and unlock deeper insights into the business. Boards should be flexible in temporarily co-opting members or advisers who can help explain future trends. Such knowledge and insights can help challenge core assumptions to existing strategies and possibly uncover new ways to differentiate oneself from amongst the competition.
  • Set aside more time. The reality is that we cannot expect board members to effectively monitor, scrutinise and contribute to strategy if they are only able to commit 10 to 12 days a year. McKinsey’s 2016 survey of 772 global companies revealed that well-performing boards prescribe a commitment of up to 25 days of engagement for non-executive directors.
  • Leverage the board performance reviews. While not a requirement in many markets, companies should consider putting deeper thought into the board’s annual review. In addition to obtaining management’s perspective, a forward-looking board will seek to align itself with the company’s long-term strategies. It is also a practical way to introduce relevant diversity to the board as part of its succession planning process.

Culture eats strategy

Relative to other components of strategy – such as customers, financials, key performance indicators – culture is harder to fully define and understand, let alone measure. However, there is a significant amount of research that indicates improving an organisation’s corporate culture increases its value, whether by direct impact on operations, influence on the potential success of transformation programmes, integration of acquired companies, or financial performance.

More investors now believe that a positive culture drives long-term value, while a negative one poses a financial risk. As such, shareholders and regulators are demanding improvements in board oversight of corporate culture and insisting that boards articulate how they promulgate the appropriate values and principles throughout their organisation.

When it comes to the board’s role, there are responsibilities covered by the nominating and governance, audit, and compensation committees that involve and impact culture. Therefore, there must be consistency in the messaging (both explicit and implicit) that results from their decisions and actions. The bottom line is that the full board has oversight responsibilities for the organisation’s culture, and actions by staff in the field or at the frontlines must reflect the tone at the top. See box, “Tips for Board Oversight of Culture”).

At first sight, risk management, independence and culture appear to be very disparate aspects of a board’s responsibilities and have little to do with strategy. The reality is they are very much interconnected. High-performing boards recognise the interplay across these areas and the value in getting all of them right.

Tips for Board Oversight of Culture

  • Assess what culture looks like beyond the boardroom by reviewing external data derived from social media and coordinated site visits. Site visits should include informal opportunities for interaction with management and employees at that location.
  • Designate appropriate board committees to seek the views of board advisers who come into close contact with management and employees such as outside counsel, independent audit firms, and other consultants for their insights on the corporate culture.
  • Ensure alignment on all key programmes in the company to reflect the desired culture, including strategy and risk management, ethics and compliance, internal audit plans, performance evaluation, succession planning and compensation. The board’s compensation committee will also need to make sure its approach to remuneration is designed to reward desired culture and behaviours.

This article first appeared in the Q3 2021 issue of the SID Directors Bulletin published by the Singapore Institute of Directors.

 


The article was first published here.

Photo by Jonas Jacobsson on Unsplash.

 

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