Are you in compliance?

Don't miss out! Sign up today for our weekly newsletters and stay abreast of important GRC-related information and news.

Get updates on Compliance Week offerings, including new features, databases, research, and other resources, along with announcements of upcoming Webcasts, conferences, seminars, CPE/CLE opportunities and more.

Published every Thursday, Compliance Week Europe offers a condensed summary of risk, audit, and compliance news either originating in Europe, or of special interest to European compliance professionals. This newsletter will follow developments by the European Commission, as well as those of national governments across the region, or any U.S.-based news that might have consequence across the Atlantic. Frequency: weekly; Thursday a.m.

A fresh edition of Compliance Week delivered via e-mail and online every Tuesday morning, relentlessly focused on the disclosure, reporting and compliance requirements of our 25,000+ paying subscribers.

Published every Friday, Compliance Weekend was launched at the behest of subscribers, and offers a quick Plain English review of the week's key developments. We hope you enjoy this supplement to Compliance Week's Tuesday edition.

Grasping At The “Holy Grail” Of Governance

Richard M. Steinberg | March 21, 2006

The title of this piece puts on the pressure to produce a truly meaningful column. Hopefully after reading it, you and your fellow readers will conclude that “Holy Grail” is not too much of an overstatement.

Clearly, boards of directors, managements and shareholders agree on one thing: the primary goal of a corporation is to add shareholder value. However measured—be it profit, economic value added, stock price relative to time or other benchmarks, or return based on any of a number of denominators—adding value is the primary goal. Yes, acting with integrity and high ethical values and going beyond compliance with applicable laws and regulations is extremely important; indeed, it supports the objective of adding value. Some believe that helping to satisfy the needs of other stakeholders also is an important purpose of the corporate entity. But let’s focus here on the primary corporate goal: adding shareholder value.

In working with boards of directors, senior managements and institutional investors over many years, it’s become evident that while the notion of adding shareholder value is universally accepted and embraced, how companies seek to do so varies widely.

It’s All About Alignment

Please forgive the overused word “alignment,” but that’s what this Holy Grail really is all about. Put simply, it’s about consistency of purpose and relationship and mutual supportiveness of strategy, implementation plan, organization, resources, performance metrics, and compensation. In concept the idea is straightforward. In execution, it’s highly challenging.

  • Strategy. It all begins with a well-developed strategy based on a clear vision and relevant and reliable information on markets, products, economics, current and potential competitors, and present and needed capabilities, among others. An effective strategy, tied to the company’s mission and supported by the board and management, is the foundation. By the way, note that we’re not saying “the right strategy,” because clearly there can be any of a number of strategic approaches a company may follow that can translate into successfully adding value. But an effective strategy for attaining the company’s highest level goals is crucial, and the starting point for all that follows.
  • Implementation. How many times have we seen a company with a really great strategy fall on its face in implementation? Too often what’s lacking is a truly effective implementation plan consistent with and supportive of the new strategy. There needs to be a plan that translates how the strategy will be executed, risk-based and on a reasonably high level, but with sufficient specificity to provide clear direction to the next tiers of managers in the organization. Those managers, in turn, need to be sure their operating plans are aligned with the strategic implementation plan.
  • Organization. Organizations must be sufficiently flexible, even dynamic, to shift or be revamped as needed to carry out the implementation and operating plans effectively. Unfortunately, too often we see an organization design continuing in place that was originally established to support a now out-dated strategy. There might have been a few “tweaks,” but not the meaningful changes necessary to bring about the needed alignment. (Forgive me, but this word will keep cropping up.)
  • Resources. Hard assets, intellectual capital, information systems and human resources all need to support the strategy and its plan for implementation. Here, too, experience shows that often insufficient change occurs in a company’s human and other resources to allow successful strategy implementation. In some instances we’ve seen a clear understanding of the need for change, but execution lagging to such an extent that events overtake the ability to succeed.
  • Performance Metrics. Measures used by corporate managements to determine success naturally vary widely, appropriately so. But measurement systems often are not modified sufficiently or revamped as needed to match a new strategy and implementation plan and revised organization and resource deployment. While new metrics (whether they be key performance indicators, benchmarks or other measures) may be put forth with new initiatives—such as market share, profitability or return associated with new products, new ventures or entry into new markets—traditional measures for other core activities tend to remain beyond their relevance.
  • Compensation. Measures to compensate the chief executive and other senior managers may be carried forward year to year, perhaps based on contractual or otherwise long-ago agreed-to arrangements. As an astute reader, you know what’s coming. Yes, too often the motivations and rewards are not sufficiently aligned with the new strategy and plan.

So what we often see is a great strategy, developed with good data and analysis and fully vetted with the board. In the best cases, alternative strategies considered by management are discussed, with discussion of pros and cons and explanation of why they were discarded and why the chosen strategy makes sense. But then we find even where a sound strategy and plan for its implementation do exist, the other factors outlined above simply are not properly aligned.

Who Benefits From Effective Alignment

You may be thinking, “OK, this discussion of alignment certainly makes sense, but why call it the Holy Grail? For two principal reasons: First, it’s very difficult to achieve truly effective alignment; of those companies that have seriously sought this Holy Grail, relatively few have succeeded. Second, its achievement can bring extraordinary value to the company, its people and shareholders.

Let’s look at the benefits.

  • Senior Management. The CEO and other senior managers have the organization and resources positioned to enable and support successful strategy implementation. The entire C-suite is on board with the plan, with the senior executives all pulling in the same direction. And these managers know how they will be held accountable, and just how they will be measured, with incentives and rewards consistent with the strategy and plan.
  • Other Managers. Managers at all levels know what senior management expects and how their objectives relate to the overall corporate goals. Managers are organized and have the resources needed to promote successful strategy implementation. With proper alignment, they have clear benchmarks and measures, and are motivated to work together to achieve them.
  • Board Of Directors. The board is comfortable not only with the strategy, but also with knowing that the company is truly positioned for successful implementation. The board knows that not only is senior management committed to the strategy and plan for its implementation, but also that buy-in is happening throughout the manager ranks. Relevant measures are in place, with managers motivated to meeting established goals. And with compensation so aligned, the compensation committee and board have comfort that pay for performance finally is achieved. There can be good balance of rewards for short- and long-term performance, with a mix of past performance and forward-looking measures, all aligned with the agreed-upon direction. Additionally, complementing relevant and effective evaluation measures for the chief executive, the board is more knowledgeable of other senior managers’ performance relative to aligned metrics, providing important information for any future need for succession.
  • Shareholders. With appropriate transparency—meaningful disclosure but without giving away “trade secrets” that would unnecessarily aid competitors—shareholders have good knowledge of what the company seeks to achieve and how it intends to get there. As with the board, shareholders have greater comfort that true pay for performance exists. Already some investors who called for movement away from “plain vanilla” stock options as primary CEO motivation, on the basis of excessive paydays from broad market movements, now say that providing too much full (though restricted) stock causes managements to become too risk averse. Proper alignment of compensation with strategy provides measures and appropriate rewards consistent with desired short and long term performance.

The Secret Map

No doubt we all want to see the ancient parchment map showing the way to this Holy Grail, with a big “X” marked to show its location. Like most things worth attaining, however, it’s not that simple. The path to getting there is as different for one company as its business, strategy, organization and resources are from others.

Here’s a head start: As noted, it all begins with an effective strategy. But to some extent it’s an iterative process, because the strategy cannot ignore the current business and its organization, processes and people. Strategy, however, should not be wedded to the current state. To the extent that a revised strategy is not supported with what now exists, there is that much more need for change to attain the necessary alignment.

Beyond that, there must be a commitment and cooperation among top management, other managers at many levels, and the board. Making it happen takes a good deal of hard work, with sound conceptual thinking, leadership and attention to detail.

So in my mind, there’s good reason to term this alignment “Holy Grail.” Finding it takes significant effort and isn’t easy—but once found, the benefits are outstanding.

This column solely reflects the views of its author, and should not be regarded as legal advice. It is for general information and discussion only, and is not a full analysis of the matters presented.

What did you think of this column? If you'd like to react or respond, we urge you to write a letter to the editor.