This is the third in a series of articles related to what board directors need to know and do (see What Directors Need to Know and Seeing Your Organization as Others Do for prior articles). In some ways, challenges faced by organizations and their boards feel like the movie Groundhog Day: The story keeps repeating itself until the main character (or in the case of boards, their directors) changes his approach to life (or engagement approach for directors). The throughline in this article is: what do board directors need to do to properly discharge their duty.
The velocity of change in operating conditions has accelerated during the Roaring 2020s. Customers and their expectations are evolving. Employees’ expectations and the arena of talent management are advancing and frequently redefined. Risk drivers and mitigants are proliferating, often, asymmetrically. In aggregate, these dynamics inform directors about what they need to do.
Knowing the rules (applicable laws, regulations) under which a business operates is essential, but only one element of full engagement by directors. In my strategy work with boards, I’ve observed three levels of engagement – Baseline, Elevated, and Target – that can help directors thoroughly define and effectively navigate their duties.
Baseline Level Engagement reflects the fundamental information and knowledge a director needs to guide their actions. Baseline engagement includes:
- Knowledge about the business’s regulatory environment and associated responsibilities
- Risk drivers and mitigants
- Operating policies and compliance requirements
- The company’s business model
- Current SWOT assessment and how conditions have changed over the past 6 – 12 months
- Macro environment impacts on the business today, and how trends may play into the future
- Economic performance of the company
Baseline engagement is primarily driven by information directors receive from management in the form of standard reporting, regulatory and policy updates, financial reports, and the like.
Elevated Engagement requires greater proactivity by directors to achieve a more complete view of the company and its operating environment. In part, it means going beyond reports to person-to-person intelligence sourcing through dialog outside of board meetings. This level includes building rapport with company leaders outside the C-suite to expand directors’ understanding of major processes and vulnerabilities. Areas for deeper understanding include:
- Key people directors should know beyond the C-suite (emerging talent, key leaders, critical roles)
- Customer base characteristics such as concentrations (revenue, geographic, sales advisor), turnover and attrition, sources and channels for new business
- Essential partners and characteristics, like dependencies and third-party risk factors
- Major processes and core operating platforms, vulnerabilities, and business continuity details
- Competitors, changing market share, and emerging alternatives to the company’s offering
It is at this level of engagement that directors contextualize their understanding of risks the company faces, how well management is attuned to these risk factors and strategies to assure effective navigation of the operating environment. With this level of engagement, directors can gauge whether management is making intentional strategy decisions that impact its risk profile, or if risk creep is unintended and needs to be more aggressively addressed.
Target Zone Awareness enables directors to garner insights into management’s expanse of thinking from current to unfolding reality, enabling the board’s strategic oversight responsibility. This is the directors’ opportunity to override the natural human bias toward subjectivity by broadening the lens through which they observe the company. Here, directors work with management to identify cues and clues suggesting shifts in the company’s relevance with its stakeholders and in operating risk.
Target Zone Awareness comes from collaborative (board, management) exploration of:
- Emerging systemic risk, faced by all businesses, interpreted for this specific company
- Emerging unsystemic, unique to this company
- Leading indications that relevance elements may be at risk (e.g. changes in employee engagement, changes in customer engagement, increasing complaints, unfavorable online traffic (social media, online reviews, blogs), and slowing accounts receivable turnover)
- Lagging indicators (e.g. decreasing employee productivity, increasing regrettable turnover, uptick in customer attrition, decreasing repeat customer activities, or fewer new customers)
- Early people, partner, process, or technology indicators of emerging risk, concerns, or questions
To be clear, these three levels of engagement inform what directors need to know and do in their board capacity. What directors must not do is cross the line and become the business operators. Through a deeper understanding of how to engage from Baseline, Elevated, and Target Zone Awareness, directors can become more attuned to areas of risk exposure they may not be aware of via management reporting and consent agenda information. Further, these levels of director engagement help avoid an “us and them” relationship between the board and management. An effective relationship avoids duality and recognizes two related bodies – one operating, the other governing – with a common purpose: long-term success of the company.
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