Conformance vs performance

By: |
April 22, 2015 12:03 AM

Strategic thinking at the board level may require getting the state to think strategically as well

In an ideal world, the board of a public sector enterprise plays the central role in governance. The board carries the ultimate responsibility for a PSU’s performance. It makes decisions that determine performance, and acts as the intermediary between the government and the PSU.

But the reality is somewhat different. In many PSUs, performance takes the backseat as board members focus largely on conformance. Directors are usually keen to ensure that their decisions are in conformity with the rules and compliance with government directives.

Unwittingly, the MoU system, where the government sets quantitative performance targets for central pubic sector enterprises each year, has encouraged public enterprises to be more compliant than competitive entities.

An OECD working paper titled ‘Enhancing the role of the boards of directors of state-owned enterprises’, based on interviews with chairs and board members in many countries, says the focus on conformance stems from a view that the board’s role is to prevent corporate excesses and political embarrassment from any misuse of funds.

Focusing excessively on conformance can give boards and owners a false sense that they are fulfilling their fiduciary functions. Of course, attention to compliance and control is often warranted. The renewed attention to risks and risk management in the wake of the 2008 financial crisis shows how important such issues can be. However, concern for a sound control environment is not the same thing as having a conformance mentality. The focus of the board should be on establishing a sound control environment, rather than a line-by-line compliance checking with budgets or ministerial instructions.

Adding value

Many board chairs, the paper says, see one of their greatest challenges as getting the board to add value. The first step may be for the board to recognise that it is responsible for more than just compliance. Another may be for the board to go beyond the next step, which is performance monitoring. Even competent boards that are keenly aware of performance issues, may not be adept at adding value.

The characteristics of a value-adding board, the paper says, are: (i) responsiveness to the management’s need for direction; (ii) bringing skills and perspectives that the management may be lacking; (iii) encouraging the development and examination of a range of options; (iv) being objective; (v) encouraging and listening to in-house expertise; (vi) looking forward to the future, and taking the long-term view; and (viii) thinking strategically.

Ultimately, adding value means developing more and better interaction with the management, and working in partnership with the executive.

Thinking strategically

One way boards can add value is to think strategically. OECD best practice guidance suggests that boards discuss and ultimately approve strategies proposed by the management and then monitor their implementation. However, in practice, management views get ignored. In many enterprises, strategy development is usually an iterative process in which the PSU and the government jointly develop the strategy.

In other cases, high level outcomes or expectations are defined by government, and a strategy is developed by the board and management to achieve these outcomes. In practice, strategic thinking and strategic decision making are an enormous challenge.

Strategic decision making is often confused with routine, operational decisions simply because it occurs at the level of the board. A challenge for  PSU boards is to move away from the temptation of day-to-day decisions toward a more strategic view. This is fundamental to adding value at the highest level, and efficiently using the board’s talent and time.

Complicating the challenge is that business strategy is not necessarily intuitive. Board members with technical backgrounds, who are highly task oriented, or who prefer quick and consequential decision making may have little patience for reflective processes. Furthermore, there are different approaches to strategy development, and the literature is both voluminous and complex.

Another implementation challenge is that strategic thinking at the board level may require getting the state to think strategically as well. The tone of board discussions is set by the governments, and technocrats charged with PSU oversight tend to focus on issues of detail. This being said, there are also examples of the state taking the lead in encouraging boards to be more strategic. In either case, a shift in the focus of the board towards more strategic thinking needs to be accompanied by a similar shift in thinking in the public administration.

Another implementation challenge is that the management may be reticent to allow the board to get overly involved in what has traditionally been their domain of expertise. These fears merit consideration since it is precisely executive insight that is needed to develop good strategy, says the paper. The board needs to understand that it is a key contributor, but not the main driver of strategy.

Involving the board in the strategy requires a clear definition of the roles of management, the state and the board on their contribution to the strategy process.

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