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WATSON Views

The Board’s Role in Strategy

August 27, 2020

Posted in: WATSON Views

“The best strategies are born from management’s analysis and creativity, coupled with the board’s incisive questioning and probing. The board should see the CEO and the top team present the strategy in their own words, then probe it, question it, and offer opinions on it. In-depth interactions with management strengthen the strategy and ensure that it is realistic. As the strategy is reshaped and improved, management and the board reach a common understanding of it. In the end, directors will wholeheartedly support it.”

Ram Charan, Aligning Boards and Management on Strategy

 

One of the defining characteristics of a strong board is alignment on purpose, long-term vision, and strategy. This alignment must permeate throughout the organization so the board and management are fully aligned on why the organization exists (purpose and vision), where the organization is going (strategy), and how it will get there (tactics). The board’s role is to approve and oversee strategy, in partnership with management. Management’s role is to develop the strategic plan, reflecting on guidance and expectations set by the board, and execute on strategy and tactics.

While there are commonly accepted ways the board feeds into strategy, the depth of the board’s role in strategic planning depends on a number of factors, including board and management experience and capacity, contextual issues, external factors, and the overall impact on the organization. In seeking to maintain an appropriate line, boards must analyze their context and strategic horizon to determine the expected level of board involvement and communicate their intended level of involvement to management. For example, if the organization is about to embark on the development of a transformational strategic plan, the board should lean in more significantly given the overall impact on the organization, or if management is inexperienced in developing strategy, the board should plan to be more engaged than what might otherwise be the case.

High-functioning boards and management teams partner on strategy in the following ways:

The Board’s Role in Crafting Strategy

  • Contribute knowledge, insights, and ideas
  • Challenge management’s assertions around strategy and risk, and the data behind such assertions
  • Engage in debate and ask penetrating questions; push and test the thinking
  • Seek to understand the rationale
  • Satisfy themselves that management has thought through all the issues, options, risks, and implications
  • Approve management’s recommendations or send them back to conduct more research and analysis

Management’s Role in Crafting Strategy

  • Engage the board in broad framing, input, and exploration long before making recommendations
  • Define and provide consistent reporting of key performance indicators (KPIs) and other qualitative and quantitative measures to inform the strategy development process
  • Frame the issues, provide frameworks
  • Lay out and lead exploratory discussions of pros/cons, options, criteria, rationale, key risks
  • Tap into the board’s ideas and knowledge and probe to understand them
  • Bring vision and passion, and make recommendations in line with the board’s direction
  • Develop and present a sound, well-structured strategic plan to the board for approval

 

The Board’s Role in Overseeing Strategy

  • Ensure management is making progress on strategy execution as planned through regular reporting, dashboards, KPIs, etc.
  • Ask questions and provide input on matters brought forward by management

Management’s Role in Executing Strategy

  • Ensure there is a plan for tactical execution of strategy, with clear accountability and ownership
  • Develop a reporting framework that shows progress towards strategic priorities, major shifts, and other important considerations for the board
  • Report on progress towards strategic objectives at board meetings and seek board input on major shifts or challenges

 

High-functioning boards and management teams also take the time to structure and articulate a clear strategic planning process to outline how the board will be engaged at each stage of strategy development. A well-structured strategic planning process includes the following elements:

  • A dedicated strategic planning session (usually every three to five years) in which the board and management team align on the organization’s vision, mission, and values, reflect upon the organization’s opportunities and risks, and discuss the go-forward strategy and risk appetite
  • Dedicated board and management sessions (following the strategic planning session) to discuss and establish business plans, related budgets, resources, risk mitigation strategies, and key performance indicators needed to execute on the strategy
  • Periodic reviews (typically at regular board meetings) on progress towards implementing the strategic plan, emerging issues, and management of related risks
  • Dedicated strategy sessions (usually annual) to review and refresh aspects of the strategic plan and risk appetite

The board’s annual calendar should be thoughtfully designed to consider the timing of these sessions in light of the board’s annual fiscal cycle. A well-designed, collaborative process enhances the effectiveness of each party’s role and contributions, ultimately increasing the long-term value of the organization.

How effectively is your board contributing to your organization’s strategy?

 

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Board Oversight of Culture

August 13, 2020

Posted in: WATSON Views

Whenever people are together, they create a culture for how they interact, whether deliberately or unconsciously. Culture can be subtle or very obvious, but it can be difficult to describe – a simple definition is “the way we do things around here”. Culture is never neutral. In the ideal case, it supports an organization in delivering its objectives and amplifies the efforts of its people (e.g., a “Default Open” culture at Reddit, which supports transparency, open feedback, and thus, learning[1]). In the worst case, culture makes work difficult, creates risks, and damages organizations (e.g., in the case of WeWork, where harassment and discrimination claims surfaced just before the company wanted to go public, leading to a massive loss in value and 2,400 job cuts[2]). The tremendous impact of culture makes it an important item for board oversight.

Culture can manifest in the workplace in varying ways:

  • In person versus remote work (or a balance of the two)
  • The layout of workstations – open concept or lots of offices
  • Preferred communication channels – video conferences, group meetings, in person, or email
  • Attitudes about asking questions – acceptance of asking leaders questions; what happens if someone asks a “stupid” question
  • The way values or policies are interpreted – are organizational values just wall ornaments or taken as fundamental moral guidance; is it acceptable to violate a policy; does a policy really apply to everybody, including senior leaders

When we talk about culture, we are referring to an organization’s collective values, beliefs, norms, and practices, that in turn influence how people behave. Structures, processes, and policies can set more explicit parameters around organizational culture and how people can and should act. This is where board oversight can make a difference.

Culture is alive and evolves, with or without any intervention by the board or management. Organizations can take an active role in shaping culture to strengthen their talent, structures, and processes. Throughout this continuous evolution, the board needs to build an understanding of the culture and monitor it in order to provide direction where it sees risks and opportunities.

Effective boards deeply care about culture, as it can create existential risk for an organization, as well as great opportunities. Many boards focus on the risk lens only as this can have an immense impact if left unchecked. Culture risks can be hidden and may not always be immediately obvious – the board needs to pay attention to more subtle indicators of an unhealthy culture. Examples include:

  • A culture of downplaying or tolerating harassment
  • Creating a “toxic work environment” where people feel belittled and unsafe
  • A nonchalant attitude towards health and safety

There is a significant opportunity for boards in supporting and continuously improving a positive culture, as this can strengthen the organization and ultimately enable it to better deliver its mandate. The benefits of a strong culture include:

  • Competitive advantage when attracting and retaining talent
  • Employees are more engaged, leading to higher organizational effectiveness
  • Mutual support in the workplace can reduce stress, mental and physical illness, and injuries
  • Diverse and inclusive organizations achieve better results[3]

So how do you oversee something as abstract, yet foundational, as culture?

1. Set an Example

Culture starts at the very top and only a board that truly lives the values of the organization can positively impact culture. This needs to be an authentic effort as people very quickly recognize if a board is just going through the motions. This can send the message to the organization that it is acceptable to pay only lip service to cultural values.

Boards can actively live a positive culture by:

    • Promoting diversity by actively recruiting diverse candidates to the board
    • Practicing inclusion by listening to and considering different perspectives and thinking styles
    • Considering emotional intelligence when selecting directors and hiring the CEO
    • Communicating deliberately, transparently, and authentically as a board when interacting with management, employees, stakeholders, and the public

 

2. Take a look

The intangible nature of culture can make it elusive and hard to describe, while still being intuitive to perceive. Directors can observe culture firsthand by:

    • Walking in the workplace – is everybody quietly working with heads down; are people standing together talking; is anyone acknowledging the director walking by
    • Interacting with staff (e.g., when staff attend board meetings or during events)
    • Asking management for reporting and insights based on their analysis of anonymous websites like Glassdoor or Indeed
    • Having employee focus groups present to committees to profile significant initiatives (e.g., a presentation on an important diversity initiative to the human resources committee)

Taking an interest in what employees say and do can allow the board to extrapolate key culture issues.

 

3. Be intentional

A strong culture doesn’t happen by chance and a great culture can be extremely challenging to get right and sustain. Boards need to be intentional about culture in order to impact it. The board can start by communicating the importance of culture, putting it on the board agenda, and making it part of the organizational strategy. Ensure that there is awareness, as well as structures and resources to support culture in the organization (e.g., diversity and inclusion guidelines, leaders who model behaviour, change management capacity to promote cultural change, etc.). Strong organizations ensure that their people can support the deliberate evolution of a positive culture on all levels.

 

4. Drive accountability

While culture is difficult to monitor in its nuances, there are a number of ways organizations have started to track their cultures. Dashboards with multiple metrics can provide an indication of current culture and its variables (e.g., employee engagement values, exit interview information, turnover of high performers and potentials, etc.). This can help track culture initiatives and their results. Consider reviewing dashboard metrics periodically to determine if they provide insightful information and make adjustments as necessary.

A culture dashboard can allow the board to set targets and hold management accountable for targets as part of their performance. Ensure that culture performance impacts a significant portion of flexible compensation, if such exists.

Another important standard for accountability is a Code of Conduct. Codes of Conduct set out the organization’s expectations for the behaviour of directors and employees. Clearly communicating expectations in a Code of Conduct that every person in the organization has to review and sign can hold people accountable in a consistent way.

 

5. Develop a whistleblower policy

Whistleblowers can help organizations uncover important cultural issues and address them early. Ensure that there is a carefully crafted whistleblower policy and that the organization takes whistleblowers seriously. This means the organization must act consistently, no matter what concern a whistleblower raises. The board must also ensure the organization has rigorous policies and procedures to protect whistleblowers. People are naturally curious and can be very creative in trying to determine the identity of a whistleblower. This can cause lasting harm to both the individual and the organization. Boards must remain vigilant and ensure the organization not only has robust policies, but that it practices them as well.

 

6. Conduct a culture audit

A good way to get started on culture oversight is a culture audit. This can be fairly comprehensive or relatively simple, depending on the size and nature of the organization. An audit may include information that would be part of a culture dashboard (e.g., pay equity metrics, number of women in leadership roles, etc.). You can gather additional information by having an external auditor survey or interview employees and synthesize feedback to preserve anonymity. When making an investment in a culture audit, it is important for an organization to absorb the audit report carefully to avoid losing important nuances. It can also be helpful to focus on strengths that the audit reveals, as this could be a crucial competitive advantage.

There is a growing appreciation that an organization’s culture is important, and that the board has a vital role in monitoring and shaping it. Building a strong culture can take time and require effort, continuous adjustment, and modelling. The investment is well worth it. Culture is an important asset to an organization. Positive culture can significantly increase the value of an organization and help it deliver its mandate. Reversely, poor culture can significantly decrease the value of an organization and lead to its ultimate failure. Boards have an important role to play in living and guiding culture. Is your board up for the challenge?

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Succession Beyond the CEO

July 30, 2020

Posted in: WATSON Views

The current state of the world has put CEO succession in sharp focus (more on that here). At the same time, it is also exposing a shift in how the board oversees succession of the senior team. The pandemic is accelerating a shift already in motion with the broadening role of the human resources committee (HRC), resulting in a more intentional approach to how the board oversees succession beyond the CEO.

What used to be called the compensation committee, focused largely on the performance, succession, and yes, compensation of the CEO, is now commonly referred to as the HRC and is expanding to oversee broad human capital matters throughout the organization. With a close lens on the CEO, a wider view of the senior team, and a high-level view across the organization, the HRC and board play a critical role in overseeing the health of the organization in terms of people, leadership, and culture.

While it might sound like a board creeping into operational matters, the reality is boards are recognizing that as more of their organization’s assets, value, and risks reside with people, they need to better understand the organization’s opportunities and risks in terms of human capital. Boards that manage this balance well respect the CEO’s space to lead and also recognize that they have a responsibility to focus on what is material in this area; their CEOs value the board’s thoughtful insight and oversight and benefit from having more minds engaged in this complex and nuanced space.

Hey WATSON, what is the HRC responsible for these days?

Every organization is different, but an HRC’s purview may include:

  • Oversight of the CEO lifecycle, from onboarding, development planning, and performance evaluation, to forward-looking succession planning – the CEO is the board’s only employee and the HRC supports the board in ensuring the right CEO is in place and that they are supported with rich development opportunities and feedback
  • Consultation on material changes to the size and level of the senior team (e.g., additions or restructuring of the senior team) – this relates to financial materiality, risk, and organizational effectiveness
  • Input into performance reviews (and potentially any important actions arising from them) for executives with a close tie to the board or its committees (e.g., a CFO who works closely with a finance and audit committee) – this has a direct impact on board functioning
  • Confidence, through some direct involvement and oversight, that succession risks and opportunities are known and managed for mission critical roles, including executives under the CEO – this relates to risk and strategic opportunity and can have a direct impact on CEO succession
  • Insight into the health of the top team – observation and awareness of the strength of the talent at the top, the CEO’s effectiveness in leading their team, and how effectively the team partners together – this relates to risk, succession, culture, and ethics
  • Human capital oversight – insight into whether the organization has the structures, talent, leadership, and culture to succeed (reviewing strategies, plans, and dashboards/reports) – this relates to risk, strategy, and operational effectiveness

Have a governance or talent question?

Ask WATSON.

When it comes to succession, the board and HRC are typically accountable for CEO succession, involving the CEO as a collaborator. They generally have insight and input into succession plans for the CEO’s direct reports to ensure they have confidence and awareness. Beyond the senior team, they are provided information to have confidence that the organization can attract, retain, and build the talent it needs. If there are a few critical specialized roles in the organization, they may ask for richer insight there.

How the board engages in succession planning conversations beyond the CEO requires a delicate balance, respecting the CEO’s space to lead while ensuring the board, through the HRC, is exercising its oversight responsibility. Often the CEO will lead the work, with the clear understanding that the HRC expects to be consulted, expects regular visibility into plans, and should be able to question, influence and, if necessary, direct action. The HRC provides oversight by providing input up front, engaging as a thought partner to the CEO throughout the process, reviewing the outcomes, and working with the CEO to develop a cycle and process to refresh the plans. Often the HRC engages an advisor to partner with the committee and the CEO. Much of the advisor’s time would be spent with the CEO (and sometimes the CHRO), but their accountability is to the HRC. In the normal course of business, the work of succession planning beyond the CEO might entail the following:


Understanding the roles

  • Identifying critical roles, including executives and any other mission critical roles (for example, a critical lead technical role that doesn’t report to the CEO but is seen as high profile and difficult to replace – a lead product designer, an inventor, a regional leader, etc.)
  • Mapping the shared characteristics of great leaders within the organization
  • Layering on the specific characteristics required for each of the identified roles
  • Developing a clear profile of the skills, behaviours, essential experiences, traits, etc. required for success in each identified role

Understanding the talent

  • Casting a wide net within the organization to understand who the potential successors may be – not only within the same part of the organization, and not necessarily “ready now”
  • Assessing that talent in some way
  • Mapping scenarios and options to understand who might grow into each role and what learning and development gaps might need to be addressed
  • Planning around communication, development, timelines, etc., with careful thought given to the bigger picture

Bringing it together

  • A summary of each critical role – what it takes, who the potential successors are, what needs to be done on what timeline, major risks, etc.
  • A summary by candidate – what roles they might grow into, what they need to do to get there, and what their development plans are
  • An overall map of the strategy, risks, and plans – scenarios, organizational structure options, group development plans, etc.

This may feel like a lot, even without the shadow of a global pandemic. As boards and HRCs deepen their role in how they oversee succession beyond the CEO, we recommend starting small and iterating from there. Start with a rough high-level approach and workshop it with an advisor. External advisors or internal strategic HR leaders can help support and guide this work (CEOs often lack the time, expertise, and/or objectivity to do it alone). Prioritize the biggest gaps, risks, and opportunities and start there, broadening focus over time as you learn and develop a framework and process.

In this moment when succession risks may be in sharp focus, consider how best to target the board and HRC’s work on the immediate opportunities and challenges. What happens if something happens to the CEO? What is the risk of multiple executives, including the CEO’s emergency successors, falling ill? Are there any executives close to retirement that may not be willing to weather the storm? Will necessary financial cuts put the retention of key leaders at risk?

When you are more reliant than ever on great leadership, people risks and vulnerability heighten. As we emerge from crisis mode into recovery and forward planning, boards, through their HRCs, need to have confidence that the organization is managing material risks related to people, and has the structure, talent, leadership, and culture in place to position the organization for success. More than ever, this includes having a clear picture and high confidence that not only do you have successors for the CEO, you have bench strength below that.

 

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How Effective is Your Board’s Approach to Stakeholder Capitalism?

July 16, 2020

Posted in: WATSON Views

World Economic Forum, Davos Manifesto 2020: “The purpose of a company is to engage all its stakeholders in shared and sustained value creation. In creating such value, a company serves not only its shareholders, but all its stakeholders – employees, customers, suppliers, local communities, and society at large.”

 

For some time now, there has been a greater call on all types of organizations to provide long-term, sustainable solutions to broad social issues. Recognizing the far-reaching impacts of corporate decision-making, organizations are increasingly being called upon to define their broader societal purpose and to integrate this purpose into their core business activities. In defining and living their social purpose, organizations are getting sharper in how they understand and engage with all of their stakeholders. Enter the era of Stakeholder Capitalism.

Stakeholder Capitalism focuses on ensuring organizational decision-making considers and balances the interests, risks, and opportunities of all parties affected by an organization’s operations, beyond its shareholders or members, to maximize long-term, sustainable growth. While the stakeholder capitalism concept has been evolving for some time, the current global pandemic and anti-racism protests have swiftly accelerated this conversation. At its core, stakeholder capitalism, or inclusive capitalism, is about building long-term trust with all affected stakeholders to create sustainable organizational success. Without a clear purpose and approach, it can be challenging to build this trust in a meaningful way.

Boards have an important strategic role to play in shaping and stewarding their organization’s broader social purpose and building trust with a multitude of stakeholders in the process. Recent global events have intensified the board’s role in this area and forced directors to consider what this means for their organizations. While historically boards have tended to approach this area from a disclosure and compliance perspective, boards are now beginning to focus on social purpose as a strategic imperative.

How can a board play a meaningful role in shifting their organization to a more inclusive, stakeholder-driven approach? For many boards, it can be challenging to know where to start. As a board, it’s important to understand where your organization is at, where it needs to get to, and what gaps need to be addressed to bridge the difference.

Start by understanding where your organization is at. What practices and structures do you have in place already? How well do they align with an inclusive, stakeholder-focused approach?

The following survey will help you assess your current state:

Where is your board at? Are your governance structures and practices helping you to achieve an effective and inclusive stakeholder-driven approach? Consider which areas need further development, what your board needs to move forward, and what support you need to get there. Then start thinking about where you want to be as an organization.

Moving beyond your current state can be a challenging process. It takes time, understanding, well-structured discussion, and guidance. We are here to help. We can support your board in identifying gaps, aligning the board on tangible actions, and developing a practical roadmap forward. We’ll help you navigate the complexity and get to greater impact – for your organization and the stakeholders you serve.

 

 

Have a governance question?

Let us know. We are here to help.

letwatsonhelpyou@watsoninc.ca 

 

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