A key responsibility of the Board is providing direction and defining the central idea of the enterprise. In this regard, it plays a significant role, working with Management in articulating the corporate strategy. It thus has responsibility for monitoring the execution and implementation of Strategy by Executive Management and will have to periodically undertake an evaluation to determine that strategic initiatives remain aligned.
The National Association of Corporate Directors (NACD), USA recently launched a series of toolkits on Adaptive Governance During COVID-19. One of the toolkits provides useful tips to the Board on identifying and reviewing warning signs of potential misalignment between long- and short-term strategies. From the directors’ perspective, the degree of alignment between ongoing operations and long-term objectives may not always be easy to see.
The following according to the NACD are warning signs that may indicate that the Board needs to pay closer attention when reports and presentations to the Board tend to focus heavily on historical issues and metrics, or on topics that have a short-term time frame. Expectedly, given the reporting responsibilities imposed by regulators and the need to bring the Board up to speed with company operations, there is typically a lot of focus on historical and operational issues. To the extent that these are not synchronised with current and future scenarios, it is a sure sign that Management is focused on short term strategy.
Discussions about business and market trends, emerging risks and opportunities, and other future-oriented topics should routinely be included in Management reporting to the Board at its quarterly meetings. Where these occur infrequently or only in response to a specific request, the Board needs to refocus the attention of Management to the long-term view of the business.
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The Board is always seeking ways of aligning the interest of Management with those of shareholders and one of the ways it does it is by emplacing long-term equity plans and other long-term incentives. If on the other hand executive compensation is primarily in the form of cash salary and bonuses, the focus will tend towards meeting short term objectives. Similarly, where incentive plans (including annual bonus plans) at most levels of Management are tied strongly to short-term goals and metrics, with few or no long-term objectives included, a misalignment clearly exists.
Another sure sign of misalignment is when non-financial Key Performance Indicators (KPIs) that should contribute to long-term growth – product quality, customer satisfaction, employee engagement, and culture alignment – are given little or no weight in performance assessments. There is a tendency to focus only on the financial KPIs which clearly sends a message that short-term objectives trump the long term view of corporate performance.
Where the Board has established a pattern of replacing the CEO and other Senior Executives following short spells of perceived poor performance, it is reflective of the Board’s failure to set long term objectives for Management. Similarly, where investment declines year-on-year and is consistently low relative to peer organisations in such areas as R&D, employee development, safety, and other aspects of nonfinancial value creation.
Again, where shareholder representatives on the Board and in Executive Management repeatedly push for dividend payout without adequate consideration of returns relative to longer-term investment alternatives, it is a sure sign that there is no alignment between short and long term corporate strategy.
Other signs include performance swings or significant variance in performance relative to industry peers—either positive or negative—that cannot be explained; Management becomes defensive about views on company strategy and performance when challenged by the Board, analysts, investors, or other outside parties; the Company attracts attention from analysts who contend that the company is underperforming relative to its potential. Such claims could indicate either a lack of alignment between short- and long-term objectives or poor communication with external stakeholders.
A robust and unbiased assessment of the foregoing will enable the Board to determine to what extent the Company’s short and long term strategies are aligned and begin to take definite steps to achieve alignment in the interest of sustainability and stakeholder value.
Adeyemi is the Managing Director, DCSL Corporate Services Limited. Kindly forward comments and reactions to [email protected]
