Friday, February 28, 2014

A Measurable Board

Modern Boards set key tones in building a fact-based business culture.

The corporate board as one of the most critical high-level governance bodies plays a crucial role in business advising, monitoring, and setting key tones in corporate culture, does modern board also need to be good at numbers, what are KPIs should be communicated at Board level? How to build a ‘measurable’ Board?

The one common denominator of all organizations is an objective to achieve and hopefully maximize stakeholder value. However, who those stakeholders are, and how they view value, is unique to each organization. KPIs should not come from some boilerplate list. They must derive from the needs of the organization, which will be influenced by the industry within which they operate, the stakeholders they serve, and the path that leadership has mapped out in delivering value. The emphasis on particular KPIs will, therefore, vary in relation to the risk and complexity of the industry, the lifecycle of the corporation, geographical concentration of operation, shareholder structure, financial strength of the corporation as well as the background and the composition of the board.

Corporate governance plays its full role when all the "stakeholders" are satisfied -customers, employees, suppliers, shareholders and the community at large: The business KPIs can be taken into general categories, such as business/stakeholder, operational industry. While developing and implementing the KPIs, businesses always wanted a roll-up model around (a) Finance (Top line to Bottom line across all segmented verticals) (b) Customer (Customer satisfaction, loyalty) (c) Operations (Strategies focused largely on HR, Productive processes, and effective service delivery Information / Project Management/GRC etc.) Within each of these areas of accountability, there should be a considered set of KPIs that are identified as business orientated and outcome focused (d) Strategic scorecards covering capability building, performance-based culture, organizational integration and leadership development.

The Board exercises the supervisory power: In its supervisory role on behalf of the sovereign power, the Board of Directors delegates the operational management of the company to the executive power on the one hand, but needs to define clear milestones or KPIs to control behavior of the progress made by the executive power on the other hand.
-The “executive” power is responsible for the implementation of the strategy: The proper functioning of the operating organization and the achievement of financial targets. The executive power is entrusted to managers who share responsibility as an executive management team.
- The “supervisory” power: validates, organizes and controls the proper implementation of the strategy by the executive power. This power safeguards the evolution and sustainability of the company, preserves the company for possible deviation or risk and informs the shareholders on a regular basis on those subjects.
-The “sovereign” power: Votes a motion of confidence in the supervisory power and legitimizes the proposals and conclusions of the supervisory power related to the start-up or continuation of operations. Generally, the shareholders of the company exercise this third power. 

The KPIs to reflect strategic shareholder values include: (1) Return on Equity (ROE), (2) Return on Investment (ROI), (3) Return on Assets (ROA), (4) Earnings Before Interest, Taxes, and Depreciation (EBITD), (5) Annual Growth in Revenue, and (6) Annual growth in Earnings Per Share (EPS). (7) The rate of Functional / Enterprise Fragility/ Resilience (how the strategic and Operational KPIs perform when Political/Geopolitical Risks, Reputation Risks, Market Risks, Security Risks, Legal Risks and Environment Risks occur)

Board-controlled KPIs must deal with the progress made versus the approved long-term strategy and shorter-term budgets: From the Board governance responsibility point of view, the progress must also be measured in terms of financial, social, stakeholders, risk and compliance, and industry relevant yardsticks. Effective and transparent corporate governance creates the environment in which the driving forces of a company are being stimulated to work together in a harmonious way. Therefore, it is essential that each of the forces fully performs its own role, but also adheres strictly to this role, without interference in the responsibilities of the other forces.

Boards as a whole do need to both have an overview and do a credible drill down, the modern boardroom should exercise supervisory power via a well set of ‘hard’ numbers and comprehensive understanding of businesses, with the ultimate goal to achieve the high-performance business result.


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