Over the past thirty years, we have used our practical experience as the basis for a lot of research and writing on strategy, execution, performance measurement, risk management and change leadership. Some of the highlights are described below; if you would like a copy of any of these documents, just click on the title and we'll email it to you.
(This article appears in the Fourth Quarter, 2013 issue of Directors & Boards magazine). Most of the board strategy review meetings we have participated in over the past thirty years could best be described as “awkward.” On one side of the long, polished table sits the management team, which has worked hard to devise the strategy being presented and frequently has a desire to present a confident, united front to the board. On the other side sit the directors, aware of their fiduciary duty to properly vet the proposed strategy, yet also wary of coming on too hard and appearing to usurp the role of the management team. The colorful description of such meetings as resembling “two porcupines mating” is often not far off the mark.
This situation is further compounded by the number of issues today that make demands on the limited time available on board agendas. Too often, growing pressure on directors’ time results in strategy reviews that leave them feeling frustrated, particularly in light of the difficulty of exercising their duty of care in an environment that is more complex and uncertain than ever before.
Given these challenges, it is critical that board strategy reviews are carried out as effectively and efficiently as possible.
Having sat on both sides of that table during my career, we have prepared this short, practical guide for directors who are faced with the challenge of evaluating a proposed strategy. We divide our suggestions into two parts: First, how to assess the strategy pre-reading package a director should receive before a board strategy review meeting. Second, systematic techniques a board can use during its meeting with a company’s management team to test and improve a proposed strategy.
In a world where connectivity, complexity, and the pace and unpredictability of change are greater than ever before, the pressure on corporate management teams to meet their performance targets is intense and unrelenting, leaving little time for other concerns. In this environment, a board’s duty to effectively govern the risks to a company’s strategy and survival has never been more important. To grasp the nature of this challenge, it is helpful to consider the potential pitfalls in governing three different types of risks: The relatively few that can be described using the tools of probability, the much larger group that represent true uncertainties, and those “unknown unknowns” that exist in the realm of ignorance.
Future Failures that Lurk in Your Risk Register
Risk registers, risk matrices, and risk heat maps are frequently used by management teams as a key tool to communicate the status of different risks facing a company to its board of directors. Unfortunately, these tools are deeply flawed, and can easily create a false sense of security, and a blindness to existential threats.
How Boards Can Improve Strategic Risk Governance
This is a short overview of the key sources of strategic risk governance failure, and simple but effective steps boards can take to address them.
This white paper is about a very important (but too seldom discussed) enterprise risk management issue that we frequently encounter, particularly at non-financial services companies: Just how can a director or executive practically apply the concept of organizational “risk appetite” that figures so prominently in many well known ERM frameworks?
We begin by addressing some basic linguistic and intellectual confusion that underlies this issue, the most important of which is the distinction between risk and uncertainty noted by Knight, Keynes and other writers. After discussing the different sources of uncertainty (variability, lack of knowledge, and the nature of complex adaptive systems), we review the ways we deal with it, as individuals and in groups. Broadly speaking, the net result of these processes is that a corporate director is quite likely to face situations in which the actual degree of uncertainty has been significantly underestimated. Finally, we review what a director can do to accurately assess the extent of uncertainty that is inherent in a strategy, to evaluate the actions taken by an organization to manage it, and to determine if this degree of uncertainty is acceptable to a board, investors, and other stakeholders, given the circumstances facing a company.
When Tom was younger, he spent a lot of time and energy on finding ways for his teams to win, without realizing that this was not the same thing as ensuring we didn’t lose. Experience finally taught him that the latter is actually the greatest challenge facing most companies. According to the U.S. Small Business Administration, only thirty three percent of firms survive as independent entities for ten years or more.
Not losing buys the time that companies almost always need to adapt in order to deliver the big wins they hope to achieve for their investors and employees. Not losing is the essential purpose of the mix of activities, including identifying and assessing risks and uncertainties, providing warning of adverse changes, mitigating and transferring potential losses, and strengthening organizational resilience and adaptability, that in recent years has come to be known as “enterprise risk management” or “ERM”. Tom has worked on these issues across a range of industries for more than thirty years – first as a banker, then as a consultant, an investment analyst, and most recently as a corporate CFO, CRO, and CEO. Based on that experience, in this paper he offers some practical insights into the real drivers of success in a discipline that is not only more challenging than most people realize, but also much more valuable.
Tom wrote this special report for an investment research publication. Directors and investors must both learn to distinguish between risk – (randomness which can be made understandable through the use of probability or statistics) and uncertainty (randomness which can only be made understandable through the construction of an inevitably flawed mental model). We must be conscious of the powerful emotional and potential behavior impact of spikes in our perceived uncertainty. We must recognize that powerful forces, both within ourselves and within the networks of which we are a part, are guaranteed to generate these uncertainty spikes.
The good news is that there are some early warning indicators we can use to detect – albeit weakly – signals of future spikes in uncertainty. That said, we must also recognize the limitations of these forecasting techniques, and acknowledge that agility – e.g., a willingness to adjust our asset allocation weights in light of surprising developments and valuation changes – rather than prediction is our best hope for protecting our portfolios when uncertainty jumps. There are also habits of mind – such as seeking disconfirming evidence, combining forecasts, and focusing on robustness as well as efficiency – that can help to insulate us from the worst emotional effects of uncertainty spikes.