Boards have other duties and legal responsibilities but these are the three key elements of governance to master – and also the three areas where boards find the greatest challenges.
Working with boards over the last 25 years, we’ve identified common experiences and behaviours influencing board effectiveness. Transitioning to a non-executive directorship can be challenging for executives. They may have good experience of defining a strategy from a functional perspective, such as operations or marketing, but as non-executive directors they need to learn how to challenge and evaluate strategies, without having direct control. This is a tough learning curve. Executives are used to having unfettered access to their people and information. As non-executives they don’t enjoy this access so must rely on conversations in the boardroom to shape their judgements.
The board’s first task is to ensure clarity about the purpose of the enterprise. Superficially many businesses see their purpose as to make profit. However, there is usually a more fundamental and enduring purpose, embodied by the founders or values and expectations that have built over time. Frequently a board asking “What has this idea/investment/new product/merger got to do with our purpose?” is a trigger for an insightful conversation. Without alignment between the board (representing shareholders and other stakeholders) and the executive, about purpose, conflict is inevitable.
When evaluating a strategy proposed by the executive team, the board must strike a delicate balance in constructively challenging a CEO and their team. Directors have a responsibility to practice independence of thought. However human nature conspires against this! We all exhibit behavioural biases that impede effective board decision processes. The first of these is a tendency towards optimism. This means that the executive team are more likely to present a positive view of their strategy, the assumptions on which it is based and its expected outcomes. The second is over-confidence, which leads to a presentation that underplays the range of possible outcomes or the probability of adverse consequences.
Two further biases are at work within the board itself. The confirmation bias works to selectively filter information such that we give greater weight to that which supports our existing viewpoint. Secondly, the conformity bias makes it difficult to be the “odd-man out” in asking a difficult question or challenging the “group” viewpoint.
One of the most glaring examples of these biases at work was the CEO and board of the Royal Bank of Scotland, when acquiring ABN Amro. The risks and potential adverse outcomes were never effectively discussed at board level. The board conversation became fixed on how to do the deal, not whether the deal should be done. The subsequent disastrous results, which could have been anticipated and which some foresaw, were not subject to board consideration at all.
So an effective board process for evaluating strategy, recognises and anticipates the inevitable biases in the information being presented and how the board individually and collectively can be led astray. It also facilitates a non-confrontational dialogue – avoiding a “back me or sack me” position by the CEO.
Some of the most powerful techniques involve focussing questions on the critical assumptions, for example asking “What would have to be true for this assumption to be valid?” Another fruitful approach is to explore the options that the proposed strategy creates and also what options it closes down. To explore strategic risk, a powerful exercise is a “pre-mortem” which invites the board members to imagine that the strategy has failed and ask why. These are just a few of the ways to have an effective strategy evaluation process.
Of the three key elements of governance – setting direction and strategy, governing strategic risk and monitoring strategic performance – getting the first stage right is critical. A defined purpose, direction and strategy will enhance the way risk is governed and performance monitored at board level.
Neil Britten is a Chartered Director and co-founder of Britten Coyne Partners, supporting excellent board performance.
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