How Boards Should and Can Use Measurement for Governanceby Stacey Barr
One of the most challenging areas to establish good measurement practice is where it’s most needed – in the board room.
A board of directors, no matter whether it serves a commercial, non-profit or public organisation, has a significant role in the design, monitoring and execution of the organisation’s strategy. The Australian Institute of Company Directors explains that:
“The board is responsible for the overall governance, management and strategic direction of the organisation and for delivering accountable corporate performance in accordance with the organisation’s goals and objectives.”
Much is written on how essential KPIs, performance measures or metrics are for achieving organisational strategy and purpose. But there is far more literature about how to measure the performance of a board than there is about how boards should use performance measures.
Boards of directors are notorious for poor use of measurement.
Briana, one of my clients, was a CEO of a non-profit organisation, and she was the epitome of an evidence-based leader. Through her passion to help the organisation make the biggest difference it could with the limited resources non-profits usually have, she invested in high-level performance measurement skills for herself and her executive team.
Briana and her team collaborated to create an insightful set of KPIs for the organisation, directly aligned to its strategy and ready for
implementation. They were excited about measures for the first time. But when Briana took those measures to her board, to engage them and invite their input, they shot them down.
Boards are often criticised for not using measurement properly for governance. ASIC’s Corporate Governance Taskforce published a report on director and officer oversight of non-financial risk, with this unfortunate finding:
“…there was no strong, corresponding trend of directors actively seeking out adequate data or reporting that measured or informed them of their overall exposure to non-financial risks.”
How can this be the case in today’s world, with such strong messages in the business literature about the importance of measuring performance?
Governance isn’t possible without the proper use of proper measurement.
The people who are directors on boards are no different, it turns out, to anyone else who struggles with measuring performance. They too have the wrong idea about what measurement is and little idea about how to do it well. And they feel threatened by it.
But if boards don’t use proper measures, in proper ways, how can they fulfill their responsibilities for overall organisational performance and compliance? The following subset of responsibilities of boards critically rely on good measures or KPIs:
- Monitoring the achievement of strategic objectives
- Monitoring operational and financial results
- Ensuring organisational performance continues to improve
- Monitoring of organisational risks
- Ensuring the organisation’s financial and non-financial reporting systems work well
And if boards don’t use proper measures, in proper ways, is there any hope for the rest of the organisation in using proper measures, in proper ways?
There are 5 ways to start to improve how boards use performance measures.
The decisions and actions of a board have great power over the performance of an organisation. And as
Spiderman’s Uncle Ben said, with great power comes great responsibility. Directors who sit on boards cannot take governance lightly, and so they cannot take measurement that informs governance lightly.
Developing measurement mastery takes time for anyone, but there are five ways boards can quickly begin to make measurement a more meaningful part of their role:
#1 Directors should invest in performance measurement skills, not delegate them.
Time and again I’ve seen directors and executives delegate the design of strategic measures to the strategy team or business analysts. And it always ends the same way: the resulting measures are argued and rejected by those same directors and executives. This sabotage will continue while ever organisational leaders hold onto outdated ideas about performance measurement. Every user of performance measures needs training in how to design and use performance measures.
#2 Directors should join executives in the design of strategic performance measures, not be ‘consulted’ or asked to ‘sign-off’ measures.
The only way for a board to feel ownership of strategic measures of the organsiation is when they believe in those measures. And the only way for anyone to believe in a set of measures is to be part of their creation. Contributing knowledge, challenging ideas and checking understanding are all essential in the growth of buy-in and ownership.
#3 Directors should focus on a measures’ change over time, not a measure’s value at a specific point in time.
Even more than the senior executive team, a board of directors is responsible for the sustainability of the organisation over time. Not for day to day operations. So their attention and time needs to go to how strategic measures are moving through time, toward to their targets. And this requires that they focus on trends over time and statistically valid signals of change, not individual data points.
#4 Directors should focus on strategic measures primarily, and only operational measures that are lead indicators of strategic measures.
Micro-management often happens in the absence of good strategic information. If the only measures available are the easy-to-measure operational ones, that’s what gets attention. But that pulls what should be high-level strategic thinking down into the weeds. Operational measures will include lead indicators of strategic measures, but they only matter when the strategic measure signals the wrong kind of change (or absence of a planned change).
#5 Directors should role model the use of measurement for improvement, not judgment.
What happens at the top of any organisation severely constrains what can happen throughout the organisation. Because boards are responsible for the ongoing improvement of organisational performance, it’s imperative that their behaviours broadcast the message to everyone else that measurement is about learning and
continuous improvement. If they judge, blame, and make excuses, then everyone else in the organisation will do that too.
Who can trigger these changes in how boards use measurement?
We probably can’t wait for the directors themselves to realise better use of measurement is possible and important. A system like this often changes from the outside, and it can come from any direction:
- the CEO can raise it directly with the board, discussing the value of evidence-based leadership
- institutes supporting company directors and boards can provide more clarity and guidance on the importance and use of measurement in governance
- strategy and performance professionals can share ideas about the limitations of current measures, examples of better measures, and performance reports that are designed to answer the right questions
It’s easy to assume we have no influence over a board if we are not a member of it. But influence is exactly what boards need when it comes to how they should use measurement for governance.
One of the most challenging areas to establish good measurement practice is where it’s most needed – in the board room. How can we influence this?
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