A corporate board’s traditional role has been that of looking at, advising and consenting on a company’s strategic focus and growth. Sub-groups (committees) of the traditional board are usually charged with oversight on compensation, audits, compliance, etc., and are comprised of board members with experience and knowledge of those areas. Rarely, if ever, do these types of boards bother themselves with operating issues, especially those of day-to-day activities.
Relatively recent spectacular corporate failures related to financial issues, governance or both (Enron, HP, WorldCom, et al), have caused boards to become more focused and almost solely concerned with compliance, like Sarbanes Oxley, and other legal issues. At the same time, low priority (or none at all) is placed on strategic focus and growth. This approach has become so pervasive that many boards are losing key members in resignations or choosing not to stand for re-election. HP recently lost two key board members (Tom Perkins and George Keyworth), both of whom cited this very issue as one of their reasons for resigning.
Any number of tools and techniques, both IT-based and process-based, are employed by organizations to ensure legal compliance and correct financial reporting. This information is then passed along to the board. However, almost all of the information has been filtered through the lenses of the very people who are causing most of the noted failures – CEOs, CFOs, and COOs. To amplify this filtering process, over the past few decades, there has been much hue and cry over boards being “stacked” by the C-suite to act as a rubber stamp for senior management decisions. It’s no wonder many boards have been blindsided.
If we step back and look at the essential information required by boards, we see that they need knowledge to make well informed decisions for both operational and strategic directions. But traditional business intelligence systems and their customer transaction and operations based data analysis will not, by themselves, provide the whole picture. Boards also require insights, knowledge and early warning signals to detect future drivers of the business to support strategic, growth-related decisions.
Almost all of the signals that would have provided early warnings to board members on any of the recent noted “failures” were there to be seen, and those not available to the public (although most were) could have been known by board members (see Enron early warning signals, below). Signals and insights that inform strategic direction and focus are also there, if you know where to look, what to listen for, and have the tools and processes to actively do so.
Early warning signals are not captured by traditional business intelligence tools – they don’t exist in transactional or operational data. These signals and insights exist on “the other side of the board room”, out in the company itself and the larger business environment. And where exactly are these signals, information and intelligence?
Well, they are carried in the minds and interactions of people – employees, suppliers, analysts and others in the business environment. And as such they are less tangible than customer and operations based data, difficult to access and therefore often ignored – often at the peril of the board, senior management and the organization.
To keep on top of today’s ever changing business environment, companies’ spending on consultants, researchers and analysts, studies and reports is increasing. Yet in the search for new information and ideas they may be overlooking what’s under their very noses. The other side of the board room is often ignored when bringing data and information to the table. In addition to operational data, companies need to tap into real-time, targeted, strategic human-based knowledge and information. No consultant or expert knows as much as employees know about their company and its environment.
Perhaps companies need to reconsider where their truly strategic information resides. It is widely known that unforeseen industry shifts can damage a company’s positioning and economic stability. Boards know they need to be aware of coming trends and shifts in the industry yet many companies continue to face damaging surprises and misses. Could it be that being surprised is part of their strategy? Not likely. But all too often execution of strategy uses no early warning tools to steer it back on target after it goes awry.
Within every large organization, there are hundreds, if not thousands of industry touch points made by externally focused employees. The wealth of information and knowledge that’s gathered through these points of contact is rich with strategic opportunity. When captured and brought to the Board Room table, the signals exist for companies to capitalize on emerging opportunities and avoid looming threats.
There is a strong case to be made that boards need to acquire and actively engage with systems and tools designed to prevent the insular, filtered (and unfortunately all too often self-serving) information flow they receive from senior management.
There are BI tools and techniques boards can use for compliance and governance, and there are tools and techniques for tapping into real-time, targeted, strategic human-based knowledge and information that is critical for the board’s role. Tools that facilitate a more nuanced process for strategic decision making, using existing BI data sets, combined with individual human-based and public knowledge provide a more robust view of the business environment and bring both sides of the board room to the table. Processes that combine the power of opportunity rich human intelligence, public source information and operational business data will provide boards with the means to gain the foresight necessary to quickly and effectively identify and act on opportunities and threats.
So, how can boards make sure that they can access this wealth of unique knowledge and information? To access and leverage the other side of the board room, boards can’t be passive and accept whatever is fed to them. They must be active in soliciting, eliciting and analyzing this knowledge and information in the context of board focus and considerations.
Two basic requirements for this active role is creating and nurturing networks inside and outside the organization, and using technology as enabling support.
Networks used by a board have to be created with a high degree of cognitive diversity – different ways of thinking and perspective coupled with a broad experience base. Enabling and supporting processes and technology must be configured to allow for the gathering of information within the unique contextual needs of the board. General all purpose tools just won’t do, as they usually cannot provide the required contextual and relational “buckets” critical for the board. This is especially so when considering the information flows from the other side of the board room and the set of decisions a board has to make and advise on.
Once a board has created their networks (inside and out) and has enabling technology in place, there are some general contextual frameworks any board needs to consider when actively gathering and eliciting information and intelligence to allow them to:
· Recognize imminent industry changes earlier,
· Be aware of longer term changes in the local and global business environments,
· Identify new indicators of change and “wildcards”,
· Gather and maintain risk profiling information,
· Continuously monitor and evaluate pertinent strategic information, competitor threats and opportunities,
· Effectively reduce effort and time in tracking and retrieving required information,
· Make more focused and well defined requests from senior management, and
· Advise and consent on the company’s strategic direction.
There will be times when actively pursuing, questioning and listening to the other side of the board room will put the board into direct competition with certain internal functions of senior management, and this cannot be and should not be avoided in meeting the responsibility to shareholders. However, in today’s corporate environment, this may be the only way to provide the board with effective decision support and ensure the board’s ability to properly function in achieving its goals and objectives.
Enron early warnings:
· In 1999 A German company (Veba) pieces together a picture of Enron’s finances so troubling that it helped persuade the company to call off on-going talks about a merger of the two companies. Board members would have known of these talks. Company due diligence team members and PriceWaterhouseCoopers, using public sources such as trade publications and securities filings, developed this picture.
· In 1999 Enron lobbied for legislation, passed in 2000, which exempted much of its energy trading business from oversight. That legislation passed through the Senate Banking Committee, which was chaired by Phil Gramm, a big recipient of Enron funds; his wife, Wendy, sat on Enron’s board at the time. Enron also lobbied for “mark to market accounting”.
· In 1999-2001, throughout this period, Enron insiders were selling hundreds of millions (billions?) of dollars of the company’s stock. The Vice Chairman (who committed suicide) himself sold a reportedly estimated $253 million of the stock.
· The strange set of partnerships used by Enron to sweep debt off their balance sheet and to rig revenue figures was talked about, and was publicly known as early as 2000.
· On March 5, 2001, Fortune prints the article “Is Enron Overpriced?” by Bethany McLean.
· A more subtle, but telling issue was raised on January 30, 2002, when the LA Times reported that Enron’s activities and conduct in the energy market during 2000. It seems there were clear indicators that Enron may have used its market clout to artificially inflate long term electricity prices on the West Coast, perhaps by as much as 30%.
NOTE: For one example of a type of software tool that can be used by boards and other senior management to sense and make sense of the other side of the board room, take a look at Coemergence's ACIS. There are many other tools (such as blogs and wikis) that could also be used to great effectiveness.
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