Board oversight is founded on a strong understanding of the strategies being implemented by the company.
Sound trite? If you think so, then we have to ask "Why do boards keep failing to provide effective oversight?"
Failure can many times be traced to the fact that the board did not understand what it was supposed to be monitoring. In other words, it did not understand strategy.
Let's look at the recent case of board oversight failure at the Sony Centre for the Performing Arts, a nonprofit subsidiary of the City of Toronto. The newspaper story is here .
The board will likely be dismissed by Toronto city council in early June because a city audit found the $28.5 million renovation project of the facility has now ballooned to more $40 million. The audit also found a lack of proper board oversight.
Let’s look at what the board members should have been doing.
Focus of Board Oversight: Strategy
In our experience, many directors are unsure what the term "strategy" means. We can't blame them! There are celebrity academics saying things like "I can't tell you what strategy is. I can only tell you what it isn't". The most popular notions of strategy define it as being about value propositions or creating competitive advantage or some other equally vague concept.
No wonder boards can get confused about what they are supposed to be monitoring!
We counsel board members to think of strategy as being a choice of action. Those choices are always made by reference to factors that cannot be controlled. Our research shows there are 8 strategies, or choices, common to all for-profits and nonprofits.
Our research is based on Henri Fayol’s identification of 6 of the 8 strategies in his book, General and Industrial Management, the first ever written on the modern discipline of strategy. The other 2 were identified by Peter Drucker in his famous The Practice of Management some fifty years later.
A board cannot deliver proper governance and oversight in the absence of a strong understanding of each these 8 core strategies. So let's look more closely at each of them.
The 8 Strategies Every Board Member Needs to Understand
Here’s what board members need to know as a minimum about each of the 8 strategies.
The Business Definition strategy provides a succinct description of the business of the corporation. In short, it answers Peter Drucker's famous question: "What is our business?"
For nonprofits, Business Definition is called typically called “Mandate”. But the intent of the strategy is the same; to describe what the incorporators of the nonprofit intended it to do.
In the Sony Centre situation, the directors apparently knew nothing about an agreement between their nonprofit corporation and the City of Toronto, being the sole shareholder. That agreement apparently sets out the expectations of the shareholder for the Sony Centre.
The lesson here is that Board members should be asking if they have been provided with all material relevant to their understanding of the Mandate strategy of the company.
Directors can also find a description of the company's business (i.e., the business definition / mandate strategy) in the notes to its audited financial statements. Seeing as board members have the liability associated with approving those financial statements, there should be agreement by the board on that description, which is usually written by the company's auditors or legal counsel.
We actually think many boards spend too much time on financial management, to the detriment of providing appropriate oversight effort to the other 7 strategies. In the Sony Centre case, this seems to not be the case. The board was apparently unaware of the cost overruns being incurred by the major renovation project.
The Organization management strategy is concerned with how the people resources needs of the corporation are sourced, allocated and managed. The 8 strategies are the basis of all organization design. Directors should be questioning whether the appropriate degree of resources and expertise have been allocated to each of the 8 strategies.
In the Sony Centre case, apparently the CEO of the company was the project manager for the failed project, notwithstanding there is nothing in his resume that indicates any experience or expertise with managing large capital projects. The board would have been better served by engaging a professional project management firm. That firm should have reported to a special committee of the board monthly, given the importance of the project to the future of the company.
This strategy is also known as “manufacturing” or “production” strategy, depending on the nature of the business of the corporation. The strategy is concerned with delivering on the promise of value made by the marketing or communications strategy.
In the case of the Sony Centre, the service being delivered was the operation of a performing arts centre. Presumably, the failed renovation project was intended to enhance the Service Delivery strategy; however, as project management was not a strategy that the board or management had any competence to undertake, the project was doomed to failure from the start.
Marketing/Sales / Communications is the strategy that makes the promise that value will be delivered. The Marketing/Sales strategy is usually known as just the Communications strategy in nonprofit companies because many nonprofits do not undertake marketing or sales.
In the case of the Sony Centre, the company should have been doing both. Simply put, marketing addresses the “4Ps”, product/service features, pricing, promotion, and placement (being how the services/products are offered to the market). The Sales strategy is all about “closing the deal”. Communications is about understanding and developing a relationship with key stakeholders.
While the Sony Centre may have been executing a marketing/sales strategy (i.e., the marketing and sale of tickets for its proposed performances), it had lost sight of the need to keep a line of communications open with its shareholder, the City of Toronto.
Too many directors think risk is something managed by placing insurance. The reality is there is much more to manage than that. The Sony Centre directors missed the risk that the shareholder could come in at any time and perform an audit. As a result, the board was not prepared when that happened. The board also mismanaged the risks inherent in undertaking large capital projects.
The R&D/technology strategy is concerned with the creation and/or use of intellectual capital. Too many boards think this strategy is confined to information systems. The question boards should be asking is what is our R&D / technology strategy and how is it managed?
For the Sony Centre, the failed project was not undertaken for growth reasons. It was undertaken to address the fact that it had lost its two principal anchor acts, an opera company and a ballet company. The renovations were intended to position the facility to be able to host a broader range of performing arts, which in turn would attract continuing patron support. The question for boards to ask is what is our growth strategy and how is it managed?
Take the Test. Score your understanding each of the 8 strategies
Now that you have been briefed on the 8 strategies, you should ask yourself "How well do I understand each of the 8 in my company?" Try our strategy wheel. Strategy understanding is scored from 0, at the centre of the wheel (not well) to 10 (very well).
For more on strategy, see: The Alpha Strategies: Understanding Strategy, Risk, and Values in Any Organization.