Boards and Strategy Execution
This article is a reprint (with some further edits) of an article published in late 2017 by the ACCID – Catalan Association of Accounting and Management.
Execution: the role of the board.
There was a time when the strategic plan was an extensive and detailed document connecting the dots between a current state and a long-term view. Nowadays, strategy comes no longer in the form of a master plan; the best examples are short documents where courses of action are agreed upon, and then, on this map, paths that can be changed are drawn. We live no longer times of conservative structures of government because disruptions that can suddenly leave an intellectual plan in ridicule. However, the idea that strategy and execution can be separated with a line dividing the functions of the Board and Management persists in the imagination of some Boardrooms. For Roger Martin (2010), who studied this phenomenon in depth, such separation would be analogous to separating the brain from the muscle. In these times of liquid modernity, as our era is defined by Bauman (Bauman, 2013), even if a CEO tries to explain the roadmap in detail and attains the approval of the Board, all those involved will lose focus in their daily routines, while changes in context will force them to introduce frequent alternatives.
This paper presents some of the most frequent problems that organisations face in order to create, through Corporate Governance, the necessary context for plans to be executed. We challenge the idea that the responsibility for execution of plans is exclusively a duty of the management team, the premise being that those responsible for government of the organization must not merely approve the strategy but must monitor the conditions and give support to the CEO and the team to ensure that the strategy can be put to good use.
In this analysis, some real cases and hundreds of notes (taken in pocket notebooks) have been summarised. Many years ago, I read a book by Adolfo Bioy Casares (2000) called De Jardines Ajenos (From Alien Gardens), in which the author presented his collection of phrases, fragments, and written notes found on tables in bars, public toilets, seats and benches, and other places where people come and go. There is something wonderful in oral history: the voices of the street are deep in content. Sometimes, more rigorous research forces us to avoid it, marginalising its wealth. Thus, without scientific rigour, but with literary passion, I collected these notes over the last ten years. All were taken from business contexts: workshops, factories, multinationals, service companies, technology companies, consultants, and directors and advisors of companies. Fortunately, several publications contained in more orthodox frameworks seem to confirm some of the aspects summarised here.
The central hypothesis of this text is that, due to the behaviours stimulating the Board of Directors, in general people in organisations do not know, or do not understand, the vision of the company in which they work. Consequently, it is difficult for people to make contributions to the strategy if they are not told what to do.
Of course, this investigation of other people's gardens is a call for a more in-depth investigation, but some of the reasons are so simple that it is not difficult to understand that in practice strategic execution is a field that is little exploited and offers enormous transformative potential.
As part of an experiment, we consulted a whole team of managers and advisors about the clarity of their strategy. The exercise consisted of several simple statements about the understanding of the vision, the individual interpretation of the employees, the clarity of the objectives, the simplicity of the action plans, and other issues on which they should give a grading of each marked one to ten. The results indicated an execution capacity of less than 60%, based on a simple average of people’s own opinions. However, in the discussion workshops, results implied for some managers a “pass mark” or an "improvement opportunity" for others. However, what we had found in reality was an indication that only 60% of plans, according to their own estimates, would be implemented. Paradoxically, an executive, also a Board member, was asked about his own expectations to meeting his budget, the answer was a 100% with certainty as if the 60% rate was an unrelated thing. This disconnection between the mechanisms of prediction and the desire for things to happen (the difference between 60% and 100%) is the origin of big business disappointments. No one would ever countenance missing budgetary targets by 40%. If you are curious at this point, I shall add the obvious outcome: the executive did not meet his budget, although he was able to give a lengthy, detailed, justification for this failure.
A structure for analysis
This article describes a structured analysis and implementation approach for strategic execution. We begin by identifying the aspects that block execution ("why the execution fails") and the behaviours that influence these aspects ("the character of the organisation"). Then, we analyse behaviours and habits that distinguish efficient execution ("how it works when it works"), to finally identify an implementation process based on the lessons learned ("the deployment of a strategic execution process"). These models and conclusions seek to provide Corporate Governance with an alternative vision to the traditional view that the Boards of Directors must function as detached from the process of execution.
Why execution fails
Years ago, a mentor I had used to say: If the worker failed, the blame is on the boss for either not teaching him/her or not firing him/her in time. If the boss failed, then it was the boss of that boss’s fault, because he/she did not teach or dismiss former in time, and so on up to the president of the Board. Undoubtedly, the boss is always to blame. However, in many companies, the culture leads to a dynamic in which the fault always apportioned down the structure. The quick and easy remedy is the search for the scapegoat. Let's call this the teenager company.
In the teenager enterprise, there is an immature structure that reflects a Board that does not assume its guiding function. However, although the main reason why execution fails is the human dimension of work, sometimes we focus all our attention on the financial aspects. To verify this, is it enough to merely ask: what the Board of Directors requires most of the time? If the answer is Financial KPIs, what type of signal are we giving to management about what really matters?
Most of the time, the teen company talks about finance. However, financial analysis is an analysis of what has already happened, the equivalent to driving by looking in the rear-view mirror. In other words, managing strategy implies working in the opposite direction of how of value creation happens. Graphically, the virtuous phenomenon of strategic execution would be as indicated in Figure 1
Fig 1. Strategic execution logic
Conversely, the teenager company Works as in fig 2.
Fig 2. Execution in the teenager company.
In the teenager company, everything starts with a spreadsheet projecting what is going to happen, accompanied by a dashboard establishing indicators and objectives for everything that needs to be done. A few months after that, what has happened is compared to what was planned to culminate at year end with obvious explanations about why things have not happened. Thus, very often, the Board becomes a commentator on the reality, instead of being a protagonist of it.
The excessive use of financial analysis is, for the purposes of execution, a mechanism of procrastination, that is, a resource to avoid making decisions or face difficult conversations, which wear us out causing stress and acting against us in an environment in which nobody challenges the status quo.
In more than two hundred interviews I have asked top executives, what causes you frustration? What is that thing that happens at work that ruins your day? The most frequent answer, about 70%, is “that things are not done and that I have to decide alone”. The solitude of CEOs often begins in their relationship with the Board. In general, the Management team is under considerable pressure from the Board to achieve the expected financial results. Strangely enough CEOs and managers often have trouble going to the Board to ask for advice, as it is often seen as a sign of weakness.
The character of companies
Three or four decades ago, parents were used to assertiveness to make children do something. Perhaps many of us grew in these contexts. It was a form of negative feedback in which the child, in fear of punishment, adapted his or her behaviour. This mechanism generates a submissive individual, with little capacity for decision making, low adaptability and limited resources for problem-solving. These behaviours almost perfectly define the Baby Boomers and Generation X.
Companies are not so different from the character of their members, in fact, they have been considered social constructs by some authors (Crozier & Friedberg, 1977), a concept which I endorse. Thus, the aggressive character of Baby Boomers as bosses shaped companies which do not know what to do, and as part of the phenomenon, the Gen Xers experienced an inability to learn and get accustomed with making decisions, a trait becoming particularly evident at the time to assume leadership positions.
In our analogy, over time, different ways of reinforcing the safety of a child were found, generally based on the possibility of deciding. Given the choice of ‘do you prefer red or blue?’ a child will make her own decision, reinforcing confidence and appropriating the decision. This provokes a psychological satisfaction that makes for a much more effective reaction than when told: ‘take the blue because I tell you and I am your father’ (or come to the dark side Luke, as I am your father, something proven as ineffective). Of course, the father or the mother, consider blue or red as two equally valid options, but in this simplified context, a third option is no longer possible. In this way two phenomena co-occur: there is autonomy, but at the same time the child feels contained and safe, a combination that reinforces self-esteem. If you are trained in Behavioural Science, call it Cognitive Dissonance Reduction, or Motivated reason.
At this point, I shall make a point. I do not give a monkey to the exaggeration of Behavioural Science we are living. In my humble but slightly informed opinion, giving Richard Thaler a Nobel Prize was not exactly a great idea. I would prefer Nassim Taleb and his ruthless and stoic pragmatism.
The analogy with children, while trivial and simplified in the extreme, does illustrate our essence, and brings us to the intergenerational discussion on the table. The companies that today innovate and grow at exponentially were founded by people with post-Generation X thinking and are populated by Millennials, educated in higher ground of self-esteem. The Boards of these companies seek diversity as ethos and have right intergenerational balance. When I hear the voices in the street complaining about the Millennials, I see a belief system that does not see what is happening around it (put like this: I do admire Millennials, I feel bloody envy about them!).
In short: Our social behaviour requires careful understanding of the contradictions in individual behaviour if we want to be executives and innovators (simultaneously). Hold on, we are not considering character manipulation, but the construction of a framework of security and self-esteem through which our collaborators become accustomed to making decisions and thinking differently. It is a causal ambiguity, we set out a frame, but we are generous enough so that the other gains autonomy in a context in which they can succeed.
The development and growth to maturity of both the collective character and company culture is the responsibility of its Corporate Government. If you want different behaviours, you must start with the governance body itself. Otherwise, the culture will render the render the strategy a useless debate.
How it works, when it works
In the company that has overcome adolescence, let's call it adult, people are the best they can be. It is not a matter of high performance or extraordinary skills. What matters is that, if I can give 10, I will give 10, and if I can give 5, I will give 5 steadily. We may call this concept bandwidth, like internet connection speed. At maximum bandwidth, we are taking full advantage of the potential.
"We could appoint a better CEO, but we cannot pay," said a director representing an investment fund. That is commenting on reality. The contributions of the directors cannot be counterfactual. The question should be, do we have the best CEO that we can afford? If not, why is the current CEO below his maximum potential level of contribution? In his statement, that director is telling us what he -unconsciously- intends to do: continue with the current CEO until he fails. In this real case, the CEO in question lasted one more year. Time and money wasted should be attributed to the Board of Directors complicit in the destruction of value, and not, at least not in full, to the failed CEO.
As a second aspect, the skills and abilities of companies are those required for the business environment in which they compete. This is a serious issue in many companies, as they grow older, particularly in current times of disruption. People can be found in positions where, even performing at their maximum potential, cannot meet the required level. This is even more complex in an organisation in which the CEO or the management team are part of the founding generation, showing the importance of having independent directors from the very beginning.
There is also a third element making the equation ever more complex, connected to the evolutionary stages of organisations. All companies throughout their lives must face similar processes of internal transformation. If they surpass them, they reach a higher state; if they do not, they will break or perhaps grind to a halt staying where they are. Greiner (1972) summarises this sequence in a diagram - figure 3.
Fig. 3. The stages of maturity in a company (Greiner, 1972).
The three fundamental pillars we noted: bandwidth, context-appropriate skills, and maturity are crucial elements for effective implementation.
In formulae, it would be (I love math notation, this is a simple one)
Execution potential = (bandwidth) x (context appropriate skills) x (maturity)
Aligning factors to make it work
To explore the execution potential in practice, there are simple but powerful aspects that can help the Board, let's navigate them below.
In a company that performs well, its leaders at different levels know where they are going, or at least when confused, they do not transmit anxiety. The leader who knows where he is going is friendly but no less assertive when needed.
The level of dependence on third parties is low. In addition to financial dependence, we must also analyse the dependence on contracts with third parties and the dependence on certain relationships or social connections. Relationships, customers, the environment, intellectual wealth are the new forms of capital. The adult company has control over its most important capitals.
The roadmap is clear and shared. The strategy is visible, tangible, and people feel passionate about it. In such a company you can ask an employee, in a remote subsidiary, what the vision of the company is and the reply will be substantially consistent. There is knowledge of the objectives and a clear idea of how what is done contributes to a higher order objective, the mission and vision of the whole entity.
Rendering of accounts is systematic, objective, and brief. When there are effective mechanisms of accountability, they are noted because they are concrete and visual. Meetings are brief; the indicators are seamless, and dialogue is kind but straight. These are simple clues that things are going well. These characteristics are observed in the non-verbal language in managers meetings. It is not strange that the members of the Board are unaware of these dynamics; However, if this aspect is so critical for the execution of the strategy, why are there so few Board members who spend any time getting to know these mechanisms - and the people involved - in person?
My notes tell of a consultant who always said to his clients, "there are two types of organisations, those generating good results and those that explain why they did not". Accountability does not seem natural to us as species. That is why it is a habit that must become internalised in each, beginning with those tasked with the governance of the organisation, who must be accountable.
Those who do things poorly must go; while those who generate value are left in peace. Managers have responsibility for putting people in their excellence spot where their contribution is maximised; this must never be delegated. When execution is delayed by what someone who does not want, does not understand or cannot do, the best thing for all concerned is for this individual to be elsewhere and so optimise their talent, albeit inside or outside the company. When a CEO complains about his staff to the Board, he should reflect that he has not assumed his most important role: aligning human capital with operations. On the other hand, if a Board does not support a CEO's decision to dispense with certain people, it sends ambiguous signals about the administration of power.
Ego must be left at the front door. The belief that making mistakes is a weakness is deadly to organisations. When we analyse the capacity for execution, listening carefully to what is said is critical. A company that executes well does not tolerate egocentric leaders and is highly self-critical at all levels. Here a crucial role of the Board is to provide aplomb and direction. That is why the ego should also be left at the boardroom door (every door counts when it comes to sending away the egos).
The analysis of these aspects seems simple, but it takes time. One form of intervention is to form a representative panel of leaders at different levels of the organisation and interview them in depth. Facilitation by a consultant can help to shorten timings. Since any diagnosis is followed by a transformation process, we might consider it can take from one to three years. A longer transformation cycle has a higher risk that a new generation accustomed to the old culture will enter the top-management and the process could fall into a vicious circle.
The deployment of a strategy execution process
Once the diagnosis is over, it is time for treatment. By virtue of the complexity of the phenomenon, a single course of action cannot be prescribed. First, we must deepen the analysis of the organisation's ability to solve problems. On the basis of positive experiences, confidence necessary to drive the change can be developed. Positive experiences are what allow us to 'know what to do' and, therefore, allow us to act. As Professor Nick Chater (2017) says, 'if we do not know what we have to do, we tend to do nothing'.
It is essential that conclusions that emerge from the following steps have the consensus of the BoD, that is to say, that Board and Directors share the vision of how, where and by which paths to follow.
1. Identify problems which the organisation has solved. Difficulty in identifying problems is a sign that the organisation has a low capacity for learning.
On the problems identified, analyse how the problem went from problem to solution. Verify if the company has been able to identify state A (the original state) objectively and understand how it went from A to B (the current state), what finally worked and which tests were failed. Here we should try to understand what behaviours acted as procrastination, since, the higher the habit of postponement, the lower the capacity for execution. Only a company that is encouraged to experiment will be able to execute its strategy (in every sense, only a life with a dose of experimentation is worth living isn’t it? So why condemning organisations to live in boredom?).
2. Investigate which changes of beliefs had to be assumed as part of the solution. The ability to break down beliefs is key to the speed of execution. We must investigate how many had to stop doing what they were doing so that the problem was solved. In our species, the strength of habits is a very restrictive force; the ability to abandon habits and develop new ones is directly related to the ability to perform.
3. Identify if the problems that were solved were bottlenecks. As changes require pushing people from their comfort zone, this imbalance must be made at sites that will imply a tangible improvement. In other words, if the upturn was brilliant, but in the wrong place, the execution capacity could have been damaged. For a surgeon, it is analogous to having operated the wrong knee, the treatment may have been successful, but the patient will not feel any better. (Incredibly, this real event appeared in my notes from the time I worked for a prosthesis manufacturer).
Checkpoint: Pay attention to what they tell you, because of human nature we tend to tell success stories about aspects that are not only irrelevant but have directed resources towards the wrong place. In fact, we can remember things that never happened.
4. Last but not least, try to identify how people render accounts by observing the dynamics. Some organisations abuse PowerPoint, others are prisoners of Excel. Nothing replaces a one-page memo with objective information about what went well, what went wrong and what needs to be done. The goals have to be something to live with, not unmanageable numbers (Bossidy & Charan, 2001). Also, note frequency. If the rendering of accounts is not frequent effectiveness is lost. As for operational teams (manufacturing/services, sales, administration, functional areas and staff), execution must be weekly. Execution is a discipline that requires agility; a week is the most realistic unit of measurement. It is common to see a reluctance to devote time to hear people rendering accounts by top management as much as by the Board. Walking through the operational sites to understand them, to know the people and thus to be able to give a valid opinion is easily told but hardly practised. Execution implies that it is not unworthy of anyone to go through company operations and talk to people. This is not limited to the CEO; the advisors should also aim to spend much more time living business day to day to be able to provide a long-term vision with both feet on the ground.
A semantic-numeric assessment as provided in Figure 4 will help us see the ability to generate positive experiences. Over time, we can also repeat the exercise and see if the organization has improved its capabilities. You can try an average or draw lines to appraise the five dimensions. What is really important is if the organisation can evolve, learn, and adapt.
Depending on the result of the analysis above, we will be in a position to define an execution agenda. The deployment process, which should be another element of governance of the organisation, consists of the following steps, which will also be the basis of the accountability of the CEO to the Board:
1. Express the strategy regarding a vision and mission (or a purpose statement in case you are 'trendy'), but also regarding two or three key objectives that can be met in a year and a half or two years. This will help to understand what the strategy is about. Kaplan and Norton (2008) call these strategic initiatives. Also, the CEO must select a Strategy Officer, who facilitates the process and also reports on their progress and provides ideas so that execution is a process in itself. Thus, the BoD should avoid confinement in the boardroom and dialogue with the Strategy Officer to have a vision of execution of the strategy. The common control bodies, such as supervisory committees, do not necessarily have this realistic vision of operations.
2. Identify the gaps. Bossidy and Charan (2001) propose cascading graphics to be able to divide the objective into crucial aspects. Identify leaders, teams and goals for these critical aspects. These can be included in the strategic initiatives.
3. Involve those responsible and their teams. They should describe the initiatives in detail. If they do not (they probably did not do this in the first place), you can help them with different alternatives, but it is vital that in the end, they are the ones that choose. Elaborate an accountability mechanism and appropriate the process. Here, the previous method of understanding how problems were solved in the past will help us assess the expectations we may have. Don't focus too much on how you feel about what they did; we need to allow them to get used with the idea of 'tinkering'.
4. Make sure people are accountable for what they committed themselves to. Do not wait for the quarterly report. Every week make sure you are talking about commitments and how they were tackled. Talk with the team in charge, and make sure all the teams going down the org chart are making commitments week by week to reach their goals and give an account of progress made.
Identify the beliefs that limit change and propose gradual elimination of the same. Adapt the speed of change, but do not let the impatience of the wayward reinstate beliefs from our strategic adolescence. Beliefs are active elements that create parallel realities, syllogisms that frequently go unquestioned. Beliefs are the main obstacle to execution, and we all have them. Franz Kafka highlighted the relationship between beliefs and impatience:
"All human errors are the result of impatience, premature interruption of an orderly process, artificial obstacles raised around an artificial reality" (Kafka, 1998).
Beliefs are false explanations of reality, biased by posthumous interpretations. You must listen in detail to what is said in the meetings to find the beliefs in the depths of the collective unconscious, and you have to train yourself to detect and deactivate them. For example, there is a phrase that repeats itself again and again in my notes: "I said that this was not going to work, but I still did what the majority approved". Almost always this phrase appears from those who systematically boycott new ideas.
5. Organise formal sessions so that results can be presented. Ensure that the agenda of these events focus on conciseness and balanced views of the good, the bad and what could not be done due to external factors. Self-criticism in public is the most powerful of the elements of change. Moderate these events to deactivate those who only criticise because they will take a destructive role. Also deactivate with firm hand those who monopolise the dialogue, because in general, they will seek to talk about themselves.
Then finally, do not forget to celebrate when things go well, at the end of the day we all seek to be happy about something. Recognise effort, but also recognise the result so you can align the mechanisms of recognition with the expected behaviours.
Final comments and conclusions
When it comes to executing the strategy, whether in the process of merger, integration or a change of direction to seize an opportunity or to emerge from a crisis, we are leaving comfort behind to begin an uncertain path. Comfort does not imply that we are well, often only means that we are used to it.
As a consequence, executing also requires that all of us on the trip understand that we must leave something behind. We will not analyse psychological grief (Freud, 1957) since it would be a falsification of science. However, we must recognise that there are stages in the change and that this transition can go through different moods. Oral history speaks for itself:
Voices of denial:
· This is not going to work, because we've tried it many times already.
· In our sector, after all, we are among the best.
· We have to do this with the resources we have
Voices of anger:
· We have put this in the hands of the incapable, in the end, we always must do things the same.
· It is the third year that we have lost market share; we must fire the entire commercial department.
Voices of depression:
· It is probable that we will never become like them.
· I do not think that with what we have we can go much further.
These examples, far from trying to explain strategic execution through psychology, try to show us that the strategy and its execution have a dimension closer to the human than we think. Those who facilitate the process should be prepared to see that there are people who are leaving beliefs behind and that this can generate discomfort so that a measure of distress is a sign of change. The paradigm of change implies thawing, changing, and refreezing (Schein, 2010). To break something that is rigid implies a fracture, to change something that is liquid implies to contain and give the expected form to generate new structures, habits and routines.
This work leaves us two conclusions. The first is that the Board has a crucial role in the execution: it must mediate between the shareholders and the CEO so that the CEO and the management team allow themselves to assume the risks involved in the change. The position of the Boards of Directors often causes a CEO with the potential to manage the transformation to become a conservative official. Managers have to feel that they are not alone and that the Board gives their support, to ensure the behaviours that require efficient execution.
The second is linked to the times in which we live. We are witnessing a time of continuous disruption, but we must not deceive ourselves: the technological facade of our era is a consequence of a real disruption, caused by an unprecedented social change in which what has changed is the way in which people they want (and can) live and work, where creativity has developed new technologies in all areas of knowledge, in a world where discipline is not worth more than passion, and the energy that requires a transformation is never enough, so you have to use it in the most efficient way available. In this context, it is imperative that the structures we know for execution of a strategy also evolve with the times. This includes reviewing the composition of the Boards of Directors to incorporate the new competencies required.
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