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Best Practice Corporate Board Governance


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Presentation developed for a high profile Middle East industrial group

Published in: Business, Economy & Finance
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Best Practice Corporate Board Governance

  1. 1. Building A World Class Board Board Of Directors Workshop
  2. 2. Building A World Class Board Effective Boards In The Era Of Corporate Governance ? The Balanced Scorecard And Boards Understanding Board Dynamics Continuous Improvement Of Board Effectiveness Time Management Roles, Responsibilities Skills And Competencies The Business Case For Better Boards Influencing Others Leading From The Top – Shaping Culture
  3. 3. 1950s - The Era of Excessive Managerial Power 1960s and 1970s -- The Age of Conglomerates 1980s - The Rise of Insider Trading 1990s -- CEO Pay: Nowhere to Go but Up 2000s -- The Age of Scandal The Evolution of Corporate Governance A look at the ongoing attempt to fix a possibly unsolvable problem: The conflict between who runs and who owns companies
  4. 4. Investors Will Pay for Good Governance Investors say they highly value corporate governance. And they put their money where their mouths are. In both OECD and emerging market countries, well-governed companies attract premium valuations. A study of S&P 500 firms by Deutsche Bank showed that companies with strong or improving corporate governance outperformed those with poor or deteriorating governance practices by about 19% over a two-year In a 2002 McKinsey survey,6 institutional investors said they would pay premiums to own well-governed companies. Premiums averaged: 1. 30% in Eastern Europe and Africa 2. 22% in Asia and Latin America
  5. 5. Good Governance Helps Operations, Too Investors won't just think your company will perform better for being well-governed —it's likely that it will perform better. A study of the 100 largest emerging market companies by Credit Lyonnais Securities Asia (CLSA)7 in 2001 showed that companies with the best corporate governance in each of a large number of emerging market countries had eight percentage points higher measures of EVA (economic value added) than firms in their country average. A Harvard/Wharton team also found that firms with better governance have faster sales growth and were more profitable than their peers. An ABN/AMRO study showed that Brazilian firms with above-average corporate governance had ROEs that were 45% higher and net margins that were 76% higher than those with below-average governance practices.
  6. 6. Enforceability of legal rights Quality of economic management Level of corruption Independence of judiciary and quality of legal system Quality of accounting standards Effectiveness of regulatory system Predictability and level of taxation in system Administrative efficiency of government Effectiveness of banking sector Scale and liquidity of local investment market Investing in emerging markets: What matters most? 94 90 71 71 71 68 63 48 48 71
  7. 7. Realistic reforms: Where companies can start Greater transparency or disclosure Adoption of internationally recognized legal standards Enhanced shareholder rights More effective board practices Listing on major international stock exchange Most Important Least Important 1 2 3 4 5 51 31 30 45 55
  8. 12. Director Independence Stricter Standards Emerging…
  9. 13. Number Of Independent Directors Stricter Standards Emerging…
  10. 14. Selection of Presiding Directors for Executive Sessions Stricter Standards Emerging…
  11. 15. Executive Sessions (without management present)
  12. 16. Board Meetings Number increasing each year
  13. 17. Audit Committee Meetings Number increasing each year
  14. 18. Audit Committee Financial Experts
  15. 19. Nominations/Governance Committee Meetings Number increasing each year
  16. 20. Service On Multiple Audit Committees Number increasing each year
  17. 22. BE BS BM BP = + + DE DI DC DB = + + A Model For Thinking About Board Performance Director Effectiveness Director Independence Director Competence Director Behaviour Board Effectiveness Board Structure Board Membership Board Process
  18. 23. Building A World Class Board ? Understanding Board Dynamics Time Management Influencing Others
  19. 24. “ Board building is an ongoing activity, a process of continuous improvement…According to our survey, conducting and acting on annual self assessments are among the top activities most likely to improve board performance overall.” David Nadler Ref: Harvard Business Review, May 2004, p2
  20. 25. Two models, a world apart Control model of corporate governance found in Asia, Latin America, and much of Continental Europe Market model of corporate governance prevalent in United States and United Kingdom Many boards fall into one of two camps: - interventionist - passive UNCLEAR DIVISIONS OF RESPONSIBILITIES BETWEEN BOARD AND MANAGEMENT SHORTAGES OF MANAGEMENT TALENT POOR PRIORITISATION AMONG TASKS TOO MUCH TIME ON: - investments, financing, operations NOT ENOUGH TIME ON: - strategy, CEO succession, leadership development Dispersed ownership Non-executive majority boards Broadly aligned incentives High disclosure High degree shareholder equality Active takeover market Active private equity market including IPOs) Sophisticated institutional investment ‘ Insider’ boards Incentives aligned with core shareholders Limited disclosure Inadequate minority protection Limited takeover market Underdeveloped new-issue market Reliance on family, bank, and public finance Concentrated ownership Shareholder Environment Independence & Performance Transparency & Accountability Capital Market Liquidity
  21. 26. Functions at discretion of CEO. Offers limited activity and participation. Has limited accountability Ratifies management preferences. Certifies to shareholders that CEO is doing what board expects; management is capable of taking corrective action when needed. Emphasizes outside/independent directors; meets independently without the CEO. Stays informed of current performance; designates external board members to evaluate CEO, Establishes an orderly succession process. Partners with CEO to provide insight, advice, and support to CEO and management team on key decisions and implementation. Also recognizes ultimate responsiblity to oversee CEO and company performance; dual role of guiding supporting as well as judging the CEO. Board meetings are characterized by useful, two-way discussions of key issues and decisions. Time is spent and emphasis is put on defining roles and behaviors required of board members; Typical mode during a crisis situation. Board becomes intensely involved in discussions of key decisions facing the organization and in decision making. Frequent and intense board meetings, which are often called on short notice. Board makes key decisions; management implements. Not uncommon in early start-ups where board members are selected to fill gaps in management experience. Where Are We On The Scale? Where And How Can We Add Best Value? Passive Board Certifying Board Engaged Board Intervening Board Operating Board
  22. 27. EXERCISE Mapping The Boards Focus And Degree Of Engagement
  23. 28. Has the board met its performance objectives? Performance evaluation of the board What has been the board’s contribution to the testing and development of strategy? What has been the board’s contribution to robust and effective risk management? Is the composition of the board and its committees appropriate? Does it have the right mix of knowledge and skills to maximise performance in the light of future strategy? Are the board’s relationships inside and outside the boardroom working effectively? Are the right matters being reserved for the board? How well does the board communicate with the management team, employees and others? Is the board up to date with the latest developments in the regulatory environment and the market? Does each committee have the right composition? How do they interact with the main board? Do they fulfil their role?
  24. 29. How well prepared and informed are the non-executive directors for board meetings? Is their meeting attendance satisfactory? Performance evaluation of the individual directors Do they demonstrate a willingness to devote time and effort to understand the company and its business? Do they have a readiness to participate in events outside of the boardroom such as site visits? What has been the quality and value of their contributions at board meetings? How effectively have they tested the information and assumptions with which they are provided? How resolute are they in maintaining their own views and resisting pressure from others? How effectively and proactively have they followed up on any areas of concern? How actively and successfully do they refresh their knowledge and skills? Are they up to date with market and regulatory developments? Are they able to present their views convincingly yet diplomatically? Do they listen and take on board the views of others?
  25. 30. <ul><li>Behavioural characteristics </li></ul><ul><li>of a good director </li></ul><ul><li>Asks the difficult questions </li></ul><ul><li>Works well with others </li></ul><ul><li>Has industry awareness </li></ul><ul><li>Provides valuable input </li></ul><ul><li>Is available when needed </li></ul><ul><li>Is alert and inquisitive </li></ul><ul><li>Has business knowledge </li></ul><ul><li>Contributes to committee work </li></ul><ul><li>Attends meetings </li></ul><ul><li>Speaks out appropriately at board meetings </li></ul><ul><li>Prepares for meetings </li></ul><ul><li>Makes long-range planning contribution </li></ul><ul><li>Provides overall contribution </li></ul>
  27. 33. Behaviour • Group dynamics important • Individual behavior important for making board effective Director types • 5 functional director “types” • 5 dysfunctional director “types” • You need independent, competent directors who behave in certain ways • Effective boards: 5 balanced behavior types Dysfunctional boards • “ Controller” CEO or shareholder (or both) • “ Conductor” vs. “Caretaker” chair • Non-performing directors (“Cheerleaders,” “Conformists,” etc.) • “ Critic” vs. “Challenger” Understanding Board Dynamics Controller Challenger Critic Conductor Caretaker Consensus Builder Conformist Change Agent Cheerleader Counsellor Non-persuasive Persuasive DISSENT CONSENSUS INDIVIDUAL TEAM
  28. 34. Controller Challenger Critic Conductor Caretaker Consensus Builder Conformist Change Agent Cheerleader Counsellor Non-persuasive Persuasive DISSENT CONSENSUS INDIVIDUAL TEAM Understanding Board Dynamics – Five Effective Behaviours
  29. 35. Moving Governance Forward IMPLEMENT MAINTAIN INITIATE REACT/MONITOR • monitor / coach CEO; • external negotiation; • crisis management; • succession planning; • personal contact ( e.g. , director as representative) • replace CEO; • rapid cost cutting growth; • hyper-competitive rivalry ( e.g. , takeover) • provide counter - strategy to controlling shareholder; • turbulent change; • monopolistic environment; • regulated change; • friendly merger of equals; • strategic alliances; • mature industry; • cooperative strategies • multi-national, global strategy; • unrelated diversification; • product differen. /related diversif.; • complex restructuring; • divestments; • acquisitions; • unfriendly merger Controller Challenger Critic Conductor Caretaker Consensus Builder Conformist Change Agent Cheerleader Counsellor Non-persuasive Persuasive DISSENT CONSENSUS INDIVIDUAL TEAM
  30. 36. Building A World Class Board Effective Boards In The Era Of Corporate Governance ? Time Management Influencing Others
  31. 37. The basic principles of effective corporate governance are threefold: Good Governance
  32. 38. The basic principles of effective corporate governance are threefold: A re the board telling us what is going on? Is the board taking responsibility? Is the board doing the right thing? • Safeguard integrity in financial reporting • Make timely and balanced disclosure • Respect the rights of shareholders • Promote ethical and responsible decision making • Lay solid foundations for management and oversight • Structure the board to add value • Encourage enhanced performance • Recognised and manage risk • Remunerate fairly and responsibly • Recognise the legitimate interests of stakeholders Creating an environment to take risk Clarifying the role of board and management Meeting information needs of investment communities Shared Values Transparency Accountability Strategy Good Governance Style Corporate Control
  33. 39. Has the company formalised and documented the functions reserved to the board and those delegated to management? Is a majority of the board independent? Is the chairperson an independent director? Has the board ensured that the role of chairperson and CEO are not exercised by the same individual? Has the board has established a nomination committee? Does the company have an audit committee with all of the following characteristics: only non-executive directors; majority of independent directors; independent chairperson (who is not chairperson of the board); and at least three members? Has the board established a code of conduct to guide directors, CEO, CFO and key executives as to the practices necessary to maintain confidence in the company’s integrity and the responsibility and accountability of individuals for reporting and investigating reports of unethical practices? Does the company have a policy concerning trading in company securities by directors, officers and employees? The audit committee has a formal operating charter?
  34. 40. The company has a communications strategy to promote effective communication with shareholders and encourage effective participation at general meetings and the policy is publicly available? The board or appropriate board committee has established policies on risk oversight and management? The company’s risk management and internal compliance and control system is operating efficiently and effectively in all material respects? The company has requested the external auditor to attend the annual general meeting and be available to answer shareholder questions about the audit? The company has a formal, documented process for performance evaluation of the board, its committees and individual directors, and key executives? Company policy clearly distinguishes between the structure of non-executive directors’ remuneration and that of executives? Equity-based executive remuneration is made in accordance with thresholds set in plans approved by shareholders? The board has a remuneration committee?
  35. 41. An effective corporate governance framework <ul><li>Board charter </li></ul><ul><li>Director selection and appointment process </li></ul><ul><li>NED independence and objectivity </li></ul><ul><li>Remuneration </li></ul><ul><li>Formal letters of appointment to directors </li></ul><ul><li>Directors’ Code of Conduct </li></ul><ul><li>Separation of Chairman and CEO </li></ul><ul><li>Skills/selection criteria and term of Chairman </li></ul><ul><li>Skills/selection criteria and terms of directors </li></ul><ul><li>Appropriate size </li></ul>Board structure, composition and membership Boardroom conduct, relationships and performance Regulatory disclosures and shareholder communications Robust risk management and compliance processes Corporate social responsibilities Strategy, planning and monitoring Effective and appropriate committee structures Relationship with management
  36. 42. Board Charter A board charter would typically address: - the responsibilities of the board <ul><li>- the board’s relationship with management including delegations of authority and communications between directors and staff board committees, including the board’s power to establish committees, those in place at a given point in time, the process for appointing directors to committees and any relevant administrative requirements </li></ul><ul><li>- the role of the chairman and the procedures should the chairman be absent from a meeting of the board the conduct of board meetings including the timing, frequency, style and approach to meetings, and details of quorum and voting requirements other operational matters including: </li></ul><ul><ul><li>- the content, preparation and distribution of minutes </li></ul></ul><ul><ul><li>- the role of the company secretary </li></ul></ul><ul><ul><li>- circulation of papers </li></ul></ul><ul><ul><li>- attendance expectations </li></ul></ul><ul><ul><li>- when directors can seek independent advice, or have </li></ul></ul><ul><ul><li>access to outside advisors </li></ul></ul><ul><ul><li>- membership issues including: </li></ul></ul><ul><ul><ul><li>- the independence of directors </li></ul></ul></ul><ul><ul><ul><li>- retirement of directors </li></ul></ul></ul><ul><ul><ul><li>- performance appraisal processes </li></ul></ul></ul><ul><ul><ul><li>- the size of the board </li></ul></ul></ul><ul><ul><ul><li>- qualifications and experience . </li></ul></ul></ul>
  37. 43. An effective corporate governance framework <ul><li>Agreed and understood roles and </li></ul><ul><li>responsibilities </li></ul><ul><li>Composition and organisation </li></ul><ul><li>Induction and training </li></ul><ul><li>Access to and relationship with independent advisors </li></ul><ul><li>Management/board relationship </li></ul><ul><li>Performance evaluation </li></ul><ul><li>Board agenda, reporting, papers and </li></ul><ul><li>minutes </li></ul><ul><li>Frequency, conduct, management and </li></ul><ul><li>outcomes of meetings </li></ul><ul><li>Confidentiality of discussions </li></ul><ul><li>Competent company secretary </li></ul>Boardroom conduct, relationships and performance
  38. 44. An effective corporate governance framework <ul><li>Communication with shareholders and </li></ul><ul><li>stakeholders </li></ul><ul><li>Annual report disclosures </li></ul><ul><li>Clear operational instructions and </li></ul><ul><li>guidance: </li></ul><ul><ul><li>Delegations of authority </li></ul></ul><ul><ul><li>Conflicts of interest </li></ul></ul><ul><ul><li>Policies and procedures </li></ul></ul><ul><ul><li>Definitions of role and responsibilities </li></ul></ul><ul><ul><li>Clearly defined and well managed </li></ul></ul><ul><ul><li>relationships with stakeholders and </li></ul></ul><ul><ul><li>regulators </li></ul></ul><ul><ul><li>Continuous disclosure obligations </li></ul></ul><ul><ul><li>and company announcements </li></ul></ul>Regulatory disclosures and shareholder communications
  39. 45. An effective corporate governance framework <ul><li>Policy/framework </li></ul><ul><li>Board commitment, oversight and review </li></ul><ul><li>Accountability </li></ul><ul><li>Risk processes: </li></ul><ul><ul><ul><li>Risk identification </li></ul></ul></ul><ul><ul><ul><li>Risk assessment/ measurement </li></ul></ul></ul><ul><ul><ul><li>Risk response </li></ul></ul></ul><ul><li>Robust appropriate internal control and statutory and regulatory compliance frameworks </li></ul><ul><li>Communication and training </li></ul><ul><li>Monitoring, reporting and certifications </li></ul><ul><ul><ul><li>CEO/CFO statements: </li></ul></ul></ul><ul><ul><ul><li>Financial reports present true and </li></ul></ul></ul><ul><ul><ul><li>fair view </li></ul></ul></ul><ul><ul><ul><li>Effective and efficient risk management </li></ul></ul></ul><ul><ul><ul><li>and control </li></ul></ul></ul><ul><li>External auditor </li></ul><ul><li>Internal audit </li></ul>Robust risk management and compliance processes
  40. 46. -Leadership/management not able to drive company forward -Inadequate succession planning -Loss of key players -Poor employee motivation -Internal communication weaknesses -Not responding to market trends/ failure to innovate -Missed opportunities – internet developments, global markets - Weak brands -Over-reliance on a few customers -Poor level of customer satisfaction –quality/timeliness -Failure to enact high standards of ethics across business -Obtaining contracts unethically -Stakeholder concerns on products/business probity -Failure to protect intellectual property -Health, safety, environmental issues -Litigation risk -Breach of competition, corporate, employee or taxation laws -Over-dependence on suppliers/ outsourcers -Failure to manage cost/quality of outsourced service suppliers -Supply chain problems – human rights, child labour -Joint ventures, strategic alliances not working -Failure to protect intellectual property -Health, safety, environmental issues -Litigation risk -Breach of competition, corporate, employee or taxation laws -Unfocused strategy -Strategy not aligned with capabilities -Complacency arising from past success -Unsuccessful acquisition/abortive bid -Failure to manage major change initiative -Reputational risk -Loss of investors’ confidence -Political/general economic risk STRATEGIC PEOPLE MARKETPLACE FINANCIAL ETHICAL SUPPLIERS, OUTSOURCERS, ALLIANCES LEGAL, COMPLIANCE Risk Indicators <ul><li>Risk management pitfalls </li></ul><ul><li>-Box-ticking rather than business-led approach. </li></ul><ul><li>-Failure to prioritise key risks. </li></ul><ul><li>-Too narrow a focus on financial risks. </li></ul><ul><li>-Not enough attention paid to changes in the internal or external environment. Board discussing risk but not integrating it into their own decision-making. </li></ul><ul><ul><li>-Failure to embed risk management in organisational culture and processes. </li></ul></ul>
  41. 48. An effective corporate governance framework <ul><li>Code of Conduct /Code of Ethics: </li></ul><ul><li>Commitment to shareholders </li></ul><ul><li>Ethical standards </li></ul><ul><li>Expectation of employees </li></ul><ul><li>Privacy </li></ul><ul><li>Compliance </li></ul><ul><li>Conflicts of interest </li></ul><ul><li>Improper payments/ receipts </li></ul><ul><li>Political contributions </li></ul><ul><li>Integrity of advertising </li></ul><ul><li>Employee relations </li></ul><ul><li>Health and safety </li></ul><ul><li>Social and environmental obligations </li></ul><ul><li>Trading policy </li></ul><ul><li>Whistleblowing </li></ul>Corporate social responsibilities
  42. 49. An effective corporate governance framework <ul><li>Vision and mission </li></ul><ul><li>Strategic /corporate plan </li></ul><ul><li>Business plans </li></ul><ul><li>Annual budgets </li></ul><ul><li>Monitoring and evaluation </li></ul><ul><li>Management performance monitoring </li></ul><ul><li>and assessment </li></ul><ul><li>Management succession planning </li></ul><ul><li>Component strategies e.g. technology, </li></ul><ul><li>CAPEX </li></ul>Strategy, planning and monitoring
  43. 50. CEMEX Board / Executive Team Strategy Development And Execution Process
  44. 51. An effective corporate governance framework <ul><li>Charter and clarity in roles and </li></ul><ul><li>responsibilities </li></ul><ul><li>Structure </li></ul><ul><li>Skills / selection criteria and terms of </li></ul><ul><li>chairman and members </li></ul><ul><li>Independence and objectivity </li></ul><ul><li>Frequency of meetings </li></ul><ul><li>Induction and training </li></ul><ul><li>Relationships with third parties / access </li></ul><ul><li>to external advice </li></ul><ul><li>Annual performance review </li></ul><ul><li>Relationship with and reporting to the board </li></ul>Effective and appropriate committee structures
  45. 52. An effective corporate governance framework <ul><li>Clarity of roles and responsibilities </li></ul><ul><li>Value adding </li></ul><ul><li>Open and honest </li></ul><ul><li>Consultative </li></ul><ul><li>Accessible </li></ul><ul><li>Accountable </li></ul><ul><li>Appropriate performance based </li></ul><ul><li>remuneration </li></ul><ul><li>Objective performance measures </li></ul>Relationship with management
  46. 54. Building A World Class Board ? Time Management Roles, Responsibilities Skills And Competencies Influencing Others
  47. 56. Board composition. The quality of the board's contributions will depend on the quality of its members. Directors should be financially and psychologically independent; have specific knowledge about the company's technologies, markets, competitors, and processes; and possess a general wisdom and perspective based on accumulated business experience. Engagement of the executive team. Strategic thinking and decision-making is a team endeavor, which involves the open exchanges of ideas between the executive team and the board. The CEO as a process leader . The CEO needs to be experienced and receptive to different ideas, regardless of whether he or she leads the process or uses an outside facilitator. Board culture The board needs to have a set of norms and expectations that supports constructive contention and the importance of different points of view. A CEO can use the strategy process as acatalyst to move the board's culture in this direction. Corporate strategy tasks and roles ? Strategic Decision Making Strategic Execution Strategic Thinking Strategic Planning - Review the process and progress of implementation of key initiatives vis-à-vis established milestones and objectives -Ensure resources and leadership for execution are in place -Monitor progress of execution -Make changes in either the execution or the plan, depending on outcomes Role Of The Board Role Of Senior Management - Provide input for management decision-making -Provide ultimate review and approval on major decisions (resource allocation, initiatives, portfolio changes, etc.) -Make critical decisions -Develop proposals to the board for critical directional decisions and major resource allocation -Engage with the board in its review of decisions Role Of The Board Role Of Senior Management -Review core strategic plans presented by management -Ensure understanding of the plans and their potential risks and consequences -Comment and make suggestions on plans, as appropriate -Approve plans -Develop plans, working with staff support and operating management -Review plans to ensure consistency with corporate objectives and strategy -Present plans to the board for review Role Of The Board Role Of Senior Management -Be an active participant in the strategic thinking process -Bring an outside perspective and accumulated wisdom -Test the consistency management’s thinking -Collaborate with management -Initiate the process of strategic thinking -Set the agenda––posing the questions and issues -Provide rich and meaningful information -Actively participate with the board in the discussions -Summarize the output of board and management work Role Of The Board Role Of Senior Management Requirements for effective board engagement
  48. 57. Better boards carry out their role by focusing on seven key issues: • the purpose of the organisation why it exists and what it wants to be • its strategy how it proposes to achieve success • performance measurement implementation and monitoring of the company’s financial and non-financial indicators, and assessing the board’s own performance and that of the executive team • added value generated by constructively questioning and challenging the thinking of the executive management team and ensuring that appropriate controls are in place and operate effectively • the company’s values what it stands for and will not stand for • its key relationships who and what it depends on for success accountability and communication the processes of dialogue and reporting
  50. 59. The Effective Board -Clear strategy aligned to capabilities -Vigorous implementation of strategy -Key performance drivers monitored -Effective risk management -Sharp focus on views of key stakeholders -Regular evaluation of board performance The Talking Shop -All opinions given equal weight -All options considered -No effective decision-making/ implementation process -Lack of direction from the chairman -Lack of focus on critical issues -No evaluation of previous decisions The Number Crunchers -Short-term needs of investors considered -Prudent decision-making -Focus on financial impact -Lack of blue-sky thinking -Lack of diversity of board members -Impact of social and environmental issues largely ignored -Risk averse The Dreamers -Strong focus on future -Long-term strategies -Consider social and environmental implications -Insufficient focus on current concerns -Fail to identify and/or manage key risks -Unrealistically optimistic The Adrenalin Groupies -Clear decisions taken -Decisions implemented -Lurch from crisis to crisis -Focus on short-term only -Lack of strategic direction -Internal focus -Tendency to micro-manage
  51. 60. The Semi-Detached -Strong focus on external environment -Intellectually challenging -Out of touch with the company -Little attempt to implement decisions -Poor monitoring of decision-making -If out of touch with external environment, board becomes totally detached The Rubber Stamp -Makes clear decisions -Listens to in-house expertise -Ensures decisions are implemented -Does not consider alternatives -Dominated by executives -Relies on fed information -Focuses on supporting evidence -Does not listen to criticism -Role of non-executive directors limited
  53. 62. What is the board’s role? PERFORMANCE <ul><li>Ensuring the organisation’s long term viability and enhancing the financial position </li></ul><ul><li>Formulating and overseeing implementation of corporate </li></ul><ul><li>strategy </li></ul><ul><li>Approving the business plan, budget and corporate policies </li></ul><ul><li>Agreeing key performance indicators (KPIs) </li></ul><ul><li>Monitoring/assessing performance of the organisation, the board itself, management and major projects </li></ul><ul><li>Overseeing the risk management framework and monitoring business risks </li></ul><ul><li>Monitoring developments in the industry and the operating environment </li></ul><ul><li>Oversight of the organisation, including its control and </li></ul><ul><li>accountability systems </li></ul><ul><li>Approving and monitoring the progress of major capital </li></ul><ul><li>expenditure, capital management and acquisitions and divestitures </li></ul>
  54. 63. What is the board’s role? COMPLIANCE/ LEGAL OBLIGATIONS <ul><li>Understanding and protecting the organisation’s financial </li></ul><ul><li>position </li></ul><ul><li>Requiring and monitoring legal and regulatory compliance </li></ul><ul><li>including compliance with accounting standards, unfair </li></ul><ul><li>trading legislations, occupational health and safety and </li></ul><ul><li>environmental standards </li></ul><ul><li>Approving annual financial reports, annual reports and </li></ul><ul><li>other public documents/sensitive reports </li></ul><ul><li>Ensuring an effective system of internal controls exists and is operating as expected </li></ul>
  55. 64. What is the board’s role? OVERALL OPERATIONS <ul><li>Establishing the organisation’s vision, mission, values and ethical standards </li></ul><ul><li>Delegating an appropriate level of authority to Management </li></ul><ul><li>Demonstrating leadership </li></ul><ul><li>Assuming responsibility for the relationship with CEO including his appointment, succession, performance </li></ul><ul><li>assessment, remuneration and dismissal </li></ul><ul><li>Overseeing aspects of the employment of the management team including remuneration, </li></ul><ul><li>performance and succession planning </li></ul><ul><li>Recommending auditors and new directors to shareholders </li></ul><ul><li>Ensuring effective communication with shareholders and other stakeholders </li></ul><ul><li>Crisis management </li></ul><ul><li>Appointment of the CFO and company secretary </li></ul>
  56. 65. What qualities should I demonstrate if I am going to be an effective director? <ul><li>Individual directors should have: </li></ul><ul><li>The highest standards of personal integrity </li></ul><ul><li>Excellent judgment and an ability to make informed decisions within time constraints </li></ul><ul><li>Professional credibility </li></ul><ul><li>The capacity to think strategically and to demonstrate vision </li></ul><ul><li>Sound communication skills </li></ul><ul><li>Sound inter-personal skills </li></ul><ul><li>Team orientation </li></ul><ul><li>Knowledge of the organisation and industry. </li></ul>
  57. 66. How do we determine the skills and professional experience we need on our board? <ul><li>Typically a board may have a mix of directors with skills in: </li></ul><ul><li>law </li></ul><ul><li>finance, including accounting expertise </li></ul><ul><li>marketing </li></ul><ul><li>operations relevant to the organisation’s activities </li></ul><ul><li>including, where important, international experience </li></ul><ul><li>key industries in which the organisation operates </li></ul><ul><li>corporate governance </li></ul><ul><li>human resources </li></ul><ul><li>risk management </li></ul><ul><li>mergers and acquisitions, if relevant </li></ul><ul><li>specific matters, relevant to the company. </li></ul>
  58. 67. Key Governance Committees – Best Practices
  59. 68. Chairman Board Of Directors President Finance HR & Administration Corporate Planning & OD Corporate Business Development Marketing & Sales Group Operations Support Services Executive Committee Audit Committee Governance, Compensation & Social Responsibility Comm. Internal Audit Corporate Governance & Compliance Concrete & Building Materials Cement Other BUs Ready Mix Blocks Gypsum Other Rabegh Plant Lebounah Plant Jordan Cement Other Company Company Company Company Arabia Cement Governance Structure
  60. 70. Ten ways for a CEO to improve corporate governance 1. Schedule regular meetings of the non-executive board members from which you and the other executives are excluded. Non-executives are there to exercise “constructive dissatisfaction” $ 2. Explain fully how discretion has been exercised in compiling the earnings and profit figures. These are not as cut and dried as many would imagine. Assets such as brands are intangible and with financial practices such as leasing common, a lot of subtle judgments must be made about what goes on or off the balance sheet. Don’t hide these, but use disclosure to win trust. 3. Initiate a risk-appetite review among non-executives. At the root of most company failures are ill-judged management decisions on risk. Non-executives need not be risk experts. But it is paramount that they understand what the company’s appetite for risk is—and accept, or reject, any radical shifts.
  61. 71. 8. Find a place for the grey and cautious employee alongside the youthful and visionary one. 4. Check that non-executive directors are independent. Weed out members of the controlling family or former employees who still have links to people in the company. Also raise awareness of “ soft” conflicts. Are there payments or privileges such as consultancy contracts, payments to 5. Audit non-executives’ performance and that of the board. The attendance record of non-executives needs to be discussed and an appraisal made of the range of specialist skills. The board should discuss annually how well it has performed. 6. Broaden and deepen disclosure on corporate websites and in annual reports. Websites should have a corporate governance section containing information such as procedures for getting a motion into a proxy ballot. The level of detail should ideally include the attendance record of non-executives 7. Lead by example, reining in a company culture that excuses cheating. Don’t indulge in sharp practice yourself—others will take this as a green light for them to follow suit. If the company culture has been compromised, or if you are in an industry where loose practices on booking revenues and expenditure are sometimes tolerated, take a few high-profile decisions that signal change.
  62. 72. 9. Make compensation committees independent. 10. Don’t avoid risk. No doubt corporate governance would be a lot simpler if companies were totally risk averse. But in the words of Helmut Maucher, honorary chairman of Nestlé, “You have to accept risks. Those who avoid them are taking the biggest risk of all.”
  63. 73. In selecting boards, consider the expertise and knowledge of each director so that the board as a whole has the ability to understand the overall industry, provide corporate governance, contribute to the design and management of the organization and grasp the business of the organization. Make sure the board has the proper balance of members. Control the size of the board. Make sure to have a sufficient number of independent directors. Expect board members to invest time in their board duties over and above meeting attendance. Provide learning opportunities that focus on the competitive, technological, organizational and financial challenges the company faces. Counsel the board on developing group process and decision-making skills. Establish broad measures of corporate performance. Twenty “Best Practices ” To Improve Board Performance
  64. 74. Schedule periodic reviews of the development plans for the corporation’s top tier of executives. Provide independent board members the opportunity to meet without company executives present. Create a process for outside directors to call special meetings of the board and to place issues on the board’s regular agenda. Formally evaluate CEO performance each year. Be sure that independent directors control both the compensation and the corporate governance committees (or whatever committee selects and evaluates directors). Tie the compensation of board members to changes in shareholder value. Set board member compensation based on what directors of other comparable corporations receive. Evaluate each board member’s performance annually. Regularly review the performance of the board as a whole. Provide board members with critical information in advance of meetings so that board time can be used efficiently.
  65. 75. Successful board meetings Some areas to consider: The board agenda should strike a balance between long-term strategic and shorter term performance issues. All directors should have the opportunity to put items on the agenda. Agenda topics should be supported by concise, informative papers with key points highlighted. Alternative courses of action should be proposed where relevant and the risks associated with proposed decisions should be noted and discussed. Ensure that papers are distributed in good time. Hold regular meetings including strategy away days. High attendance at meetings should be expected and achieved. Directors should come to meetings well prepared. The chairman should focus discussion around the principal issues in each agenda paper. All board members should feel able to contribute at meetings and do so. Major decisions should only be taken after a full discussion at board meetings.
  66. 76. Reasons for challenging the independence of a director -Has been an employee of the group within the last five years -Has had a material business relationship with the company within the last three years -Received/receives additional remuneration apart from director’s fee; is in company – share option or performance-related pay scheme; or a member of the company’s pension scheme -Has close family ties with any of the directors, senior employees or advisers -Holds cross-directorships/has significant links with other directors -Represents a significant shareholder -Has served on the board for more than nine years
  67. 78. Building A World Class Board Time Management ? Influencing Others Leading From The Top – Shaping Culture
  68. 79. Great companies preserve a cherished core ideology while simultaneously stimulating progress and change in everything that is not part of the core ideology. Stimulate Progress Operating Practices Specific goals and strategies Core Values Core Purpose A well-conceived vision consists of two major components CORE IDEOLOGY ENVISAGED FUTURE “ what we stand for and why we exist” that does not change Preserve The Core “ what we aspire to become, to achieve, to create” that will require significant change and progress to attain Core values are the organization's essential and enduring principles— a small set of timeless guiding principles that require no external justification Core purpose is the organization’s fundamental reason for being. An effective purpose reflects the importance people attach to the company’s work—it taps their idealistic motivations—and gets at the deeper reasons for an organization’s existence beyond just making money. BHAG (pronounced bee-hag , shorthand for “Big Hairy Audacious Goal”) is a 10-to-30-year objective—like a big mountain to climb—that serves as a unifying focal point of effort, galvanizing people and creating team spirit. It is crisp, compelling and easy to understand Vivid description is a vibrant, engaging, and specific description of what it will be like to achieve the BHAG. Think of it as translating the vision from words into pictures, of creating an image that people can carry around in their heads. Envisioned Future 10-30 year big goals Vivid Descriptions Core Values Core Purpose Core Ideology
  69. 80. BHAG Core Purpose Core Values: Enduring tenets—guiding principles—to adhere to no matter what mountain you climb. These never change. Core Purpose: The underlying “why” you climb mountains at all Strategy Strategy: The route you intend to take and the general methods you intend to use to reach the top of that specific mountain. BHAG : The specific mountain you are currently trying to climb. Base Camps Base Camps : Intermediate objectives to the top of the mountain. If you have a ten- to thirty-year BHAG, these would be three- to five-year intermediate goals on the way up the mountain. Think of the following hierarchy to demystify vision, strategy, and tactics: Tactics Core Values STARBUCKS COFFEE COMPANY, 1996 Core Values Passion for what we do Integrity in how we do it Pride in winning Respect for our partners Entrepreneurial spirit Core Purpose To provide an uplifting experience that enriches people’s daily lives. BHAG To build a great, enduring company with one of the most recognized and respected brands in the world, known for inspiring and nurturing the human spirit. Strategy Build the brand one cup at a time, based on three key ingredients: the quality of the coffee, our own retail stores, and selective brand extensions. Build a powerful economic engine fueled by customer loyalty to the brand. Five-Year Base Camp 2000 stores by the year 2000 SONY VISION Early 1950’s CORE IDEOLOGY ENVISIONED FUTURE Core Values 25-Year BHAG Elevation of the Japanese national culture and status. Being a pioneer—not following others, but doing the impossible. Respect and encouragement of individual ability and creativity. Become the company most known for changing the worldwide image of Japanese products as being of poor quality. Core Purpose Vivid Descriptions To experience the sheer joy of innovation and the application of technology for the benefit and pleasure of the general public. We will create products that become pervasive around the world. … We will be the first Japanese company to go into the American market and distribute directly. … We will succeed with innovations like the transistor radio that American companies have failed at. … Fifty years from now, our brand name will be as well known as any on Earth. … and will signify innovation and quality that rivals the most innovative companies anywhere. … “Made in Japan” will mean something fine, not shoddy.
  70. 81. “ If you do not like the culture you have, as a board there is not a heck of a lot you can do about it other than to get the right CEO in place.” Jay W. Lorsch HARVARD BUSINESS SCHOOL
  71. 82. It’s not enough to say that the goal is a board that is active, engaged, and functioning as a high-performance team. The processes employed by board leaders have to model the culture they hope to create. You can’t mandate a culture of engagement. You can’t have two or three senior directors go off on their own and set the ground rules for broad participation. You can’t order members to think and act independently. In short, the culture the board wants to create has to be reflected by, and consistent with, the processes it uses to achieve that goal. Board building is about more than what work the board chooses to do; just as importantly, it’s about how the board chooses to do that work. David Nadler – leading Board Effectiveness Expert
  72. 83. &quot;The talents of our people are greatly underestimated and their skills are underutilized. Our biggest task is to fundamentally redefine the relationship with our employees. The objective is to build a place where people have the freedom to be creative, where they feel a real sense of accomplishment - a place that brings out the best in everybody.“ &quot;If you are not thinking all the time about making every person more valuable you don't have a chance. What's the alternative? Wasted minds? Uninvolved people? A labor force that's angry or bored? That doesn't make sense!&quot; Jack Welch General Electric
  73. 84. Jack Welch On Leadership… Establishing Challenge & Vision: • promoting ambition & creating challenging vision of future. Enrollment & Energy: • delivering on commitments - operating out of declaration & results rather than explanation, circumstance & rationalization. • transforming complacency, resignation & denial into challenge & creativity Integration: • filter, absorbing & reducing ambiguity • providing coherence & consistency Operationalization & line of sight: • translating ideas into action • aligning measurements & rewards • modelling behavior
  74. 85. Values and Rewards: Developing A Players Met Unmet Behavior on Values Performance Targets • 'A' Players: • Energy • Energizing • Edge • Execution Non-players &quot;Not meeting performance targets damages short-run competitiveness. Not adhering to the value damages long-run competitiveness.&quot; Consistent Inconsistent
  75. 86. The Challenge of Change You need a big, simple, understandable overarching message: • #1 or #2: Fix, sell or close. Boundarylessness • &quot;every idea must be something you could put across easily at a cocktail party &quot; Simplicity applies to measurements too: three most important things: • customer satisfaction - key to growing global market share & the only source of job security • employee satisfaction - key to quality, pride and creativity • cash flow - the pulse of the company. Value of stretch: setting the bar higher than people think they can go • as good or better than the best in the world • don't punish those who fall short - if they achieve significant improvement, reward them. The only way to get more productivity is to get people more involved and excited about their jobs • the best way to differentiate a company is to raise as much intellectual and creative capital from our workforce as we possibly can - that's a lot tougher than raising financial capital. Trust is enormously important in a corporation • people won't give their best unless they feel they have been treated fairly • the only way to create trust is by laying out your values and walking the talk
  76. 87. The Challenge of Change Take bold, radical, quantum moves: incremental change can be resisted • change has no constituency, people like the status quo. • pulling off a band aid one hair at a time hurts a lot more than a sudden yank. • incremental nudging and coaxing in a world that is moving in nanoseconds is too timid: timidity causes mistakes. &quot; You've got to be hard to be soft • need to demonstrate the ability to make hard, tough decisions • soft values like candor, fairness, reality don't work in a fat organization • first you need to do the hard structural work: &quot;Take out the layers. Pull up the weeds. Scrape off the rust.&quot; Take unnecessary work out. Every organization needs values, and lean organizations need them even more • stripping away the support systems of staff and layers can leave people open to stresses that may overwhelm them. • values enable people to guide themselves through fundamental changes in habits and expectations.
  77. 88. Vision, Values & Behavior at GE Vision • #1 or #2: Fix, close or sell. A Boundaryless Company Values (behavioral practices) • Reality, Candor, Lean & Agile, Hard Head & Soft Heart • Self confidence, Simplicity, Speed • Best in everything we do Supportive Organizational Processes & Practices • Work-Out, Empowerment, Stretch Targets, Best Practice, boundarylessness
  78. 89. Boundarylessness…. Boundaries exist horizontally between functions, product lines and locations; vertically between ranks in the hierarchy and externally with customers, suppliers and venture partners • Boundarylessness involves cooperation across all the artificial barriers that can separate people with a common interest • Boundarylessness requires an open, trusting sharing of ideas. A willingness to listen, debate and then take the best ideas and get on with it. • Boundaryless managers embody speed, simplicity and self confidence: serve customers with devotion; act with integrity; serve as active agents of increasing change.
  79. 90. Operationalizing Vision: GE's Bull's Eye Drill Thoughts and Emotions Action: • roles, tasks and behaviours Consider each element of your vision, numbers and words. Imagine we are at a future party celebrating the achievement of your vision: • What are we doing more of? • What are we doing less of? • What have we started doing? • What have we stopped doing? Look for concrete actions & behavior, avoid getting stuck in thoughts, feeling & emotions Vision And Goals Successful implementation requires that everyone - from top management to receptionist, security guard and gardener - needs a 'line of site' from their behavior to the vision
  80. 91. Being a Boundaryless Organization Alliances with Customers & Suppliers Customer & Supplier Projects Project Benchmarking Cash Cows & Growth Engines <ul><li>Rotational assignments </li></ul><ul><li>Co-location of businesses </li></ul><ul><li>Cross-business Task </li></ul><ul><li>Forces </li></ul><ul><li>Cross-Divisional Training </li></ul><ul><li>'No Hoarding' Culture & sharing collective talent </li></ul>Best Practice Conferences Outside Walls (external boundaries) Inside Walls (boundaries between businesses) Floors & Ceilings (boundaries between layers of hierarchy) Stock Options Broadbanding & Job Enlargement <ul><li>Multi-level Task Forces </li></ul><ul><li>De-layering </li></ul><ul><li>Internal Promotion </li></ul><ul><li>Shared Values </li></ul>Work-Out Programme 360 Assessments Boundary Money & Resources People Knowledge
  81. 92. Implementing Empowerment: Work-Out • Work-Out Objectives Build trust: • discovering that you can speak out candidly without jeopardizing your career • Empower employees: - people closest to a task know it best; - tap workers knowledge & emotional energy; - give them power & responsibility (permission and obligation). • Eliminate unnecessary work: - take work out of system - higher productivity & less stress. • Engage whole organization: - redefining itself as 'boundaryless'. Obstacles to Empowerment • Managers love empowerment in theory, but the command-and – control model is what they trust and know best. • Employees are often ambivalent about empowerment - it is great as long as they are not held personally accountable. • Executives fail to understand how bewildering and threatening it can be for people to take internal commitment seriously – especially those who have lived their entire lives by the rules of contractual compliance... Before empowerment is possible external commitment must be unlearned and Internal commitment must be learned. • External commitment is all that it takes for performance in most routine jobs. As a first precaution managers should distinguish between jobs that require internal commitment and those that do not. • Openness, honesty and trust are the foundations of empowerment, yet many change agents are unwilling to acknowledge the inner contradictions of empowerment and that itself is a breach of openness, honesty and trust. • Individuals can be expert performers and report low morale, yet it is performance and not morale that is paramount. Senior management (cross functional) Cross functional managers and staff
  82. 93. Under Our (Team/Dept) Control Under Business or Divisional Control Under Corporate Control Under Customer/ Supplier Control Reports Approvals Meetings Measures Policies Practices Other Could it be: 1. Eliminated? 2. Downsized? 3.. Done less often 4. Simplified or done in less time? 5. Done with/by fewer people? 6. Automated? 7. Delegated? 8. Other? > 3 People? Have I ever reversed one? Pay-roll cost of? GE's Work-Out and the RAMMP Exercise Focusing Creativity on Performance Improvement
  83. 94. Actions, Behavior, Practices to Support Vision/ Goal/ Objectives. &quot;What do we need to do to become an Integrated' or 'Boundaryless' Company?&quot; Part of the business: Purchasing/R & D/ Manufacturing... or E & P, Refining, Distribution, Marketing...etc. Managing Cross Functional Projects Staff Assignment Rotation Multi-skilling Benchmarking & Transferring Best Practice Workout Implementation Joint Venture Management Developing Customer Partnerships Self Assessment Rating 1 = No current activity; 2 = On-going effort; 3 = Competent; 4 = Believed best practice. Assigned Rating 5 = Confirmed Best Practice Boundarylessness: Establishing and Transferring Best Practice
  84. 95. Excessive Hand-Offs/ Delays Poor Customer Service/ Delay Bottlenecks Rework Unnecessary paper forms Lack of Standardisation Processing Delay/Poor Customer Service Lack of Information/ Comm’cation Unnecessary steps Key Gap Improvement Ideas Automate Combine Transform Redesign Eliminate Simplify Standardize Use information technology to replace manual tasks, speed responsiveness, improve efficiency Merge forms, reports, processes, tasks whenever possible Change the ways the work is performed Revise organizations, jobs, forms, processes, tasks to fit needs Get rid of all duplications of effort, redundant forms and reports, and activities that provide no value added benefit Streamline all aspects of the system: forms, flows, procedures, system screens, reports Establish common rules for system usage, forms, procedures, terminology, coded values
  85. 96. Building A World Class Board Time Management Influencing Others ? The Balanced Scorecard And Boards
  86. 97. Using The Balanced Scorecard To Improve Board Effectiveness
  87. 98. What Do Top Organizations Do that Most Don’t? Align Strategy Role Of Executives Assess Multiple horizons Tolerance – Implement a strategy focus and talk about it constantly – Define manager’s job as: — 50% gathering performance information, — 50% performance management – Assess management performance on required activities versus results – Don’t expect success by end of next quarter – Allow for failure in order to provide secure environment for learning – Link and align measures from top to bottom — implement key performance measures (KPMs) — require detailed, activity-based business plans — require process maps and measures — use multiple sources of performance data Performance Measurement
  88. 99. Corporate Scorecard The corporate scorecard is an early warning system of strengths or weaknesses in the organisation! In most cases, the corporate scorecard is composed of both lagging and leading key performance measures <ul><li>WHAT DOES SUCCESS LOOK LIKE? </li></ul><ul><li>Important things get done </li></ul><ul><ul><li>And non-essential projects are challenged </li></ul></ul><ul><ul><li>(clarity, prioritisation) </li></ul></ul><ul><li>Integration and alignment </li></ul><ul><ul><li>Consistency across functions </li></ul></ul><ul><ul><li>Clear line of sight from individual to country objectives </li></ul></ul><ul><li>Organisational focus on execution </li></ul><ul><ul><li>Anchored to strategy </li></ul></ul><ul><ul><li>Strategy review used as a regular management tool </li></ul></ul>Mission Strategy Corporate Scorecard Gap Analysis Business Plan Process Activity Measures Performance Profile Compensation Feedback
  89. 100. Translates an organization’s strategy into a set of key performance measures that provide framework for a strategic management system Retains emphasis on achieving financial objectives Measures organizational performance across five balanced perspectives: — Financial — Customer — Organization, — Operations, and — Growth and Innovation Should make cause-and-effect relationships among business objectives (and measures) in various perspectives explicit so they can be managed and validated The chain of cause and effect should pervade all perspectives of company Establishes and communicates strategy and directives Allocates resources Defines departmental, team, and individual goals and directions; and Provides feedback <ul><li>Linking Impact of the Corporate Scorecard </li></ul><ul><li>Linkage to financials </li></ul><ul><li>Every key performance measure should be an element in the chain of a cause-and- effect </li></ul><ul><li>relationship that communicates business unit’s strategy to organization </li></ul><ul><li>Key Performance measures should be unique to a particular company </li></ul><ul><li>Corporate Scorecards are composed of: </li></ul><ul><li>— Strategic goals </li></ul><ul><li>— Key Lagging measures </li></ul><ul><li>— Key Leading measures </li></ul>
  90. 101. Four Barriers to Strategy Execution The Vision Barrier Only 5% of the workforce understand the strategy The Resource Barrier 60% of organisations do not link budgets to strategy The People Barrier Only 25% of managers have incentives linked to overall strategy The Management Barrier 85% of executive teams spend less than one hour per month discussing strategy 9 of 10 companies fail to execute strategy
  91. 102. Vision (where) Values (how) Strategy (what) Financial Customer Internal People & Culture Mission (why) Mission (why) Mission (why) Mission (why)
  92. 103. The Generic Balanced Scorecard What are the Critical Success Factors? What are the Critical Measurements? VALUE Hard Measurement Soft Measurement Hard Measurement Soft Measurement Customer Perspective Objectives Measures Innovation/Learning Perspective Objectives Measures Internal Business Process Perspective Objectives Measures Financial Perspective Objectives Measures How do we look to our capital providers? What must we excel at? How do customers see us? How do we continue to improve and create value? Output Performance Effectiveness “ Doing the right things” Input Performance Efficiency “ Doing things right” Output Performance Effectiveness “ Doing the right things” Input Performance Efficiency “ Doing things right”
  93. 104. Architecture of a “Classic” Strategy Map Financial Perspective Customer Perspective Internal Perspective Long-Term Shareholder Value Productivity Strategy Growth Strategy Increase Customer Value Improve Cost Structure Improve Asset Utilisation New Revenue Sources Learning & Growth Perspective Human Capital Information Capital Organisation Capital Culture Leadership Teamwork Alignment Supply Production Distribution Service Risk Management Selection Acquisition Retention Growth Opportunity ID R&D Pipeline Design/Develop Partnerships/JV Ramp-Up Environment Safety & Health Employer Community Operations Management Processes Customer Management Processes Innovation Processes Regulatory & Social Processes Customer Value Proposition Price Quality Availability Selection Functionality Service Partnership Brand Product / Service Attributes Relationship Image
  94. 106. The regular review and analysis of key drivers of performance creates the focus and discipline that drives sustainable results Measures: Are we driving performance? Initiatives: are we executing well? Is our strategy working? Objectives Measurements Targets Initiatives Milestones 2006 Balanced Scorecard Collaborative, a Palladium company 
  95. 107. CEMEX Board / Executive Team Strategy Development And Execution Process
  96. 108. Focus BSC Review Meeting Time on Strategic Issues and Learning Review Strategic Issues (30%) Discuss Implications (30%) Review Past Performance (40%) PRESENT (Event-Driven Learning) THE QUARTERLY REVIEW MEETING <ul><li>Provide input to strategic issues currently being worked on </li></ul><ul><li>Dialogue about performance </li></ul><ul><ul><li>explain anomalies </li></ul></ul><ul><ul><li>suggest solutions </li></ul></ul><ul><ul><li>identify issues </li></ul></ul><ul><ul><li>communicate </li></ul></ul><ul><li>Identify strategic issues for discussion at next group meeting </li></ul><ul><li>Review performance data (available online) </li></ul>Review Strategic Issues (60%) Discuss implications (30%) Review Performance (10%) FUTURE (Continuous Learning) BETWEEN THE MEETINGS THE QUARTERLY STRATEGIC REVIEW MEETING
  97. 109. Arabia Cement Board Effectiveness Wall Charts And Handouts
  98. 110. THE GAP 1= No engagement 2= Low engagement 3= Moderate engagement 4= High engagement 5= Exclusive engagement Strategy 1. Strategic direction 2. Strategic plans 3. Strategy implementation Higher number denotes area to work on Current Engagement Desired Engagement EXAMPLE Which Board Tasks At Arabia Cement Are More Important? 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 3 4 1
  99. 111. Strategy 1. Strategic direction 2. Strategic plans 3. Strategy implementation Strategic transactions 4. Major investments 5. Portfolio change Operations 6. Research and development 7. Manufacturing 8. Marketing and sales 9. Information technology Human resources and organization 10. Leadership development 11. Non-CEO executive compensation 12. Human capital 13. Organization 14. Corporate culture Financial management 15. Financial strategy 16. Capital structure 17. Liquidity management 18. Dividend policy 19. Financial reporting Risk management 20. Enterprise risk management 21. Ethical performance and compliance 22. Audit 1= No engagement 2= Low engagement 3= Moderate engagement 4= High engagement 5= Exclusive engagement THE GAP Current Engagement Desired Engagement 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5
  100. 112. CEO effectiveness 27. CEO performance appraisal 28. CEO compensation 29. CEO succession Corporate governance 30. Board effectiveness 31. Director selection 32. Director assessment THE GAP 1= No engagement 2= Low engagement 3= Moderate engagement 4= High engagement 5= Exclusive engagement Current Engagement Desired Engagement 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5
  103. 119. BETTER BOARDS ARE LIKELY TO SCORE HIGHLY ON THE FOLLOWING CHARACTERISTICS: • A culture of integrity and respect – to build on each other’s strengths, recognising and dealing with intrinsic weaknesses, conflicts of interest, or personality problems • A collegiate atmosphere with high-level debate , freedom to ask the right questions and warn of potential risks – plus a waiting list of good directors to join the board • The right composition , reflecting a balance between decision-making skills, expertise and experience; supported by a sound succession strategy, induction and integration of non-executive directors, plus continuous training and development for all directors, including the chairman • Constructive and effective relationships between the chairman, CEO, key fund managers, and other stakeholders • A highly competent chairman who understands both the business issues and the directors’ needs; who is able to support or challenge the CEO as appropriate, or to make unpopular strategic decisions when necessary; who understands and fully utilises director’s particular talents, expertise and experience, facilitating optimal participation • A highly professional company secretary’s office , with good quality information delivered on time and in the right amount • Regular internal and external board reviews • Balance between conformance and wealth creation , ensured by the chairman • External observers invited to give feedback on blind spots and weaknesses • A board development programme is designed and implemented.
  104. 120. Board Effectiveness Model • Bring deep wisdom and broad perspective to the table, providing the CEO with useful advice and acting as a sounding board and source of support. • Help influence critical outside constituencies. • Create a solid front to the outside world during crises. • Assist in effectively managing succession. • By doing all of the above, safeguard shareholder interests. • Meddling and micromanagement that distract executives, consume inordinate chunks of their time, and interfere with the orderly operation of the company • Power struggles at the top of the company • Damage to the CEO’s credibility outside the company • Inappropriate limits on the CEO’s compensation • Interference with orderly executive succession • Hasty dismissal of the CEO as an expedient solution to more complex problems Ideal Trap - what does engagement look like for a particular board in a given situation, and what are the options?
  105. 122. Behaviour • Group dynamics important • Individual behavior important for making board effective Director types • 5 functional director “types” • 5 dysfunctional director “types” • You need independent, competent directors who behave in certain ways • Effective boards: 5 balanced behavior types Dysfunctional boards • “ Controller” CEO or shareholder (or both) • “ Conductor” vs. “Caretaker” chair • Non-performing directors (“Cheerleaders,” “Conformists,” etc.) • “ Critic” vs. “Challenger” Understanding Board Dynamics Controller Challenger Critic Conductor Caretaker Consensus Builder Conformist Change Agent Cheerleader Counsellor Non-persuasive Persuasive DISSENT CONSENSUS INDIVIDUAL TEAM
  106. 123. Controller Challenger Critic Conductor Caretaker Consensus Builder Conformist Change Agent Cheerleader Counsellor Non-persuasive Persuasive DISSENT CONSENSUS INDIVIDUAL TEAM Understanding Board Dynamics – Five Effective Behaviours
  107. 124. The Strategic Context IMPLEMENT MAINTAIN INITIATE REACT/MONITOR • monitor / coach CEO; • external negotiation; • crisis management; • succession planning; • personal contact ( e.g. , director as representative) • replace CEO; • rapid cost cutting growth; • hyper-competitive rivalry ( e.g. , takeover) • provide counter - strategy to controlling shareholder; • turbulent change; • monopolistic environment; • regulated change; • friendly merger of equals; • strategic alliances; • mature industry; • cooperative strategies • multi-national, global strategy; • unrelated diversification; • product differen. /related diversif.; • complex restructuring; • divestments; • acquisitions; • unfriendly merger Controller Challenger Critic Conductor Caretaker Consensus Builder Conformist Change Agent Cheerleader Counsellor Non-persuasive Persuasive DISSENT CONSENSUS INDIVIDUAL TEAM
  108. 125. <ul><li>• Conductor vs . Caretaker-Chairs, i.e. , it’s </li></ul><ul><li>the selection not the separation </li></ul><ul><li>• “ How do you fire a non-performing chair?” </li></ul><ul><ul><li>• Position Description, Assessment and </li></ul></ul><ul><ul><li>Compensation </li></ul></ul><ul><li>• Question: Can a Caretaker-Chair </li></ul><ul><li>become a Conductor-Chair, i.e. , are good </li></ul><ul><li>leaders bought or made? </li></ul>The Perfect Board: A Top 10 List 1. Strong Board Leadership 2. Effective Directors • “ Trophy” vs. effective directors • Strategic, precise balanced competencies • Competency and behavioral grid • Objective, transparent independent nomination process • What to do with non-performers? 3. Superior Decision- Making Process • Executive sessions (4) • Relations to outside advisors • Boards are groups: dynamics, ego, groupthink, behavior considerations • Information (5), agenda, use of committees • Again, board leadership, chairing meetings 4. Proper Chair and Board Succession Planning • Chair selection/succession and non-performance; • Most board tenure policies flawed • Link tenure to performance • Link performance to assessments • Counseling under- and nonperforming directors off of the board 5. Guidelines, Charters, Position Descriptions and Assessments • It can be done; start slow • “ Who will see the data and how will [they] be managed?” • Director, Committee, Self, Peer • Constructive, enabling, integrating • Feedback and remediation 6. Continuing Education • Substance • Knowledge of the business • Financial literacy • Executive compensation • Technology • Compliance and ethics oversight • Process • Overcoming ego • Time • CEO, budget and seamlessness • Silence and decision-making failure
  109. 126. 7. Disclosure and Compliance • Regulatory compliance vs. inside the boardroom: total board effectiveness • Investors should go beyond structure & independence • Significant shareholder issues: disclosure • Reputational advantages 8. Director Compensation • Diligence, time, risk • Link to performance 9. Power of Dominant Shareholders • 13 of 39 boards studied • Serious issue on some boards: Hollinger example • Power and behaviour of “Controller” • Disclosure and role of outside directors <ul><li>10. Ethical Oversight by the Board </li></ul><ul><li>Boards not asking the right questions </li></ul><ul><li>Codes of Conduct, conflicts, controls, </li></ul><ul><li>Elements of corporate ethics program </li></ul><ul><li>Risk management </li></ul><ul><li>“ Integrity” of CEO and relationship to Board </li></ul><ul><li>Reputation, liability and insurance </li></ul>
  110. 129. Chairman Board Of Directors President Finance HR & Administration Corporate Planning & OD Corporate Business Development Marketing & Sales Group Operations Support Services Executive Committee Audit Committee Governance, Compensation & Social Responsibility Comm. Internal Audit Corporate Governance & Compliance Concrete & Building Materials Cement Other BUs Ready Mix Blocks Gypsum Other Rabegh Plant Lebounah Plant Jordan Cement Other Company Company Company Company Arabia Cement Governance Structure
  111. 130. The Causal Relationships in the Board’s Balanced Scorecard
  112. 131. STAKEHOLDERS INTERNAL PROCESSES FINANCIAL Successful risk and crisis identification and management Effective performance evaluation systems (CEO, board, directors,corporate) Effective review of corporate strategic plans, structures, and major investments Effective functioning of the board <ul><li># of risk audits performed and results </li></ul><ul><li># of crises and evaluation of response </li></ul><ul><li>% of performance linked to nonfinancial performance (social, environmental) </li></ul><ul><li># of board members owning stock </li></ul><ul><li>Goals and objectives clearly defined for CEO, board, etc. </li></ul><ul><li># of actions taken based on performance evaluation </li></ul><ul><li># of visits to company sites by individual directors </li></ul><ul><li>% of projects accepted by board that met or exceeded projected ROI </li></ul><ul><li>Evaluation of list of information provided to board to assess projects ( financial and non financial) </li></ul><ul><li># of hours spent on long-term strategic issues </li></ul><ul><li>Overall attendance at meetings </li></ul><ul><li>% of meetings without CEO (executive sessions) </li></ul><ul><li>% of meeting time allocated to opposing points of view </li></ul><ul><li># of days in advance that material is sent </li></ul><ul><li>Average duration of meetings </li></ul><ul><li>Nomination of lead directors </li></ul>Strong succession for CEO and senior management Improving composition of board Improving skills and knowledge <ul><li>Existence of a position description for CEO </li></ul><ul><li>Interim CEO identified </li></ul><ul><li>% of directors “financially literate” </li></ul><ul><li>Diversity of board </li></ul><ul><li>% of independent members </li></ul><ul><li>Existence of training programs </li></ul><ul><li>Quality of programs as evaluated by new directors </li></ul>Long-term financial success Short-term financial success Long-term success of approved major organizational changes <ul><li>EVA </li></ul><ul><li>ROI </li></ul><ul><li>Stock price </li></ul><ul><li>Earnings (overall and per business units) </li></ul><ul><li>Cash flow </li></ul><ul><li>Success of change (profit in excess of plan) </li></ul>High level of ethical behavior and legal compliance High level of corporate governance and accountability Successful identification and management of various stakeholders’ needs <ul><li># of ethical/legal violations </li></ul><ul><li>Level of compliance with governance guidelines </li></ul><ul><li># of voluntary disclosures </li></ul><ul><li>Evaluation of quality of external disclosures by stakeholders (survey) </li></ul><ul><li>or by experts </li></ul><ul><li># of meetings with stakeholders </li></ul><ul><li># of complaints (employees, community, customers) </li></ul><ul><li>Existence of communication channels with board </li></ul><ul><li>Stakeholders’ satisfaction survey </li></ul>LEARNING AND GROWTH Examples of Metrics for the Board Balanced Scorecard