Shaping agenda & decision-making lines
Shareholders typically define the structural framework for a company to protect and grow their equity. The board of directors and the management have to bring the structures to life. Their collaboration benefits from a joint expectation of and from respect for the different roles, in particular when it comes to decision-making.
A functioning collaboration is crucial to avoid deficits (provoking risks of ‘governance arbitrage’) caused by misalignment, misinformation or misjudgement and biases.
Useem (2006) proposes a ‘board decision-making primer’ divided in processes, cultural norm and principles: Processes comprise the annual calendar that specifies the subjects for review, committee charters for, e.g. the audit and the compensation committee, and a protocol regarding decisions to be brought to the board of directors. Cultural norm refers to the involvement of the board in questions with material impact on a company, be it with respect to financials, strategy or core values. As decisions often occur in a grey area, principles, like subdividing large strategic decisions into smaller, sequential ones or reviewing (alternative) options, and in particular sustaining an on-going dialogue between the CEO and the nonexecutive chair, pave the ground. The ‘equity governance’ approach deepens – as core elements of such governance procedures – establishing a controlling routine, crafting a portfolio of initiatives (PoI), reaching an alignment of perspectives and providing an escalation hierarchy.
The controlling routine (the ‘housekeeping’ function) should be based on the common practice of monthly reporting, consisting of the CEO report (including board minutes), the legal & regulatory (compliance) report, the CFO report, and the key governance indicators (key metrics & KPIs) report. Furthermore, the controlling routine should comprise in the context of regular meetings of the management with the board of directors sequentially (i) annual review, (ii) innovation, (iii) strategy, (iv) planning & budgeting, and (v) resource management as sequent themes.
Any investment case has to be operationalized via the planning & budgeting process by a business plan. The business plan, after acquisitions often referred to as a ‘blueprint’, needs to reflect a balanced portfolio of initiatives with respect to reward/risk, available resources and time horizons – and with regard to investing at scale (for the latter, cf. Catlin et al. (2015), referring to digital initiatives and IT architecture). Research regarding ‘dynamic resource allocation’ indicates higher returns when capital, talent and management attention flow more readily, i.e. unbiased and not ‘as usual’, to the business opportunities where they will deliver the most value (Atsmon (2016), Hall et al. (2015)). Correspondingly the divestiture of a noncore or underperforming business has to release funds and attention. Enhancing strategic coherence allows for clearer managerial interventions, which ultimately means shifting of resources (Catlin et al. (2015), Atsmon (2016)). Viewing corporate strategy rather as a ‘portfolio of initiatives’ aiming for favourable outcomes for the entire enterprise, i.e. more granular than as a ‘portfolio of businesses’, allows for even more targeted intervention (Lowell (2002)).
Execution benefits from an explicit upfront alignment of perspectives of the key actors with respect to aspirations, strategy and measures – the portfolio of initiatives – and targets, in particular when it comes to pivotal decisions and potential areas of conflict (Baestlein (2014)). Whereas such conflicts mostly arise from different levels of information or diverging interests, they even may comprise ethical and moral dilemmas – involving a deliberation between rationality and emotion – such as whether the end justifies the means or where disruption causes exclusion (cf. Pfeffer (2015), Maskin & Winter (2016)). Areas of conflict show up as spreads of divergent opinions and typically bear the risk to cause more organizational disturbances and frictions than, for example, even greater change requirements resulting from jointly agreed chances or weaknesses and threats. The challenge is to make such spreads visible. Consensus workshops using secret voting (applied to a staggered agree/disagree or a quantitative scale) via ‘remote control’ as a starting point can help to foster individual honesty, openness and straightforwardness while establishing a factual basis. Typically this results in more self-awareness, open-mindedness for change and a constructive, joint and vigorous solution search. What holds true for the entire organization is of superior importance for the common understanding of the senior leadership, i.e. the management and the board of directors. Their relationship needs to be a collaborative ‘two-way street’ with impromptu discussions to keeping directors informed and involving them early enough in upcoming significant decisions (Huyett & Zemmel (2015)).
To “counter distortions and related principal-agent problems”, financial incentives as part of compensation programs can play an important role in the alignment process (Lovallo & Sibony (2006)), typically via bonuses, equity participation programs and/or stock options. Effective incentive schemes should only pay out when aspirational performance targets are achieved plus should be sufficiently sensitive to company performance risks (Schofield (2014)). Besides, the right mechanism balances between competition and cooperation, i.e. individual and joint interests (Maskin & Winter (2016)).
A prerequisite to ensure effective and efficient decision-making and even more importantly to create ‘project ownership’ for the key initiatives, is taking decisions to the appropriate levels. In terms of organizational structure, this means that leadership spans and expert competencies need to be designed carefully. Even more important for the process organization is an action-oriented escalation hierarchy with defined quality gates, i.e. quantitative and qualitative hurdles along key evaluation/decision criteria (George et al. (2001)). Such hurdles may be also applied to the release of approved resources according to performance progress. An escalation hierarchy teaches people an ‘at cause’ behaviour, so they learn where and when they can and have to assume accountability and when they should or must bring decisions upwards, which will be even more important with increased democratizing of information. Furthermore, a systematic escalation process uses functional expertise more focused and allows for more thorough and interactive reviews. This kind of organizational leverage often is underdeveloped. Useem’s (2006) already mentioned cultural norm follows a similar logic, namely to draw the line of decision-making between management and board of directors where it comes to questions with material impact on an enterprise’s financials (reward and risk), strategy or core values.
Governing equity to achieve the full potential of a business is a lot about systematic organizational performance at the decisive moments – a question of jointly shared aspirations, thorough preparation and alertness, the readiness for change, and mutual trust. Culturally embedded governance procedures are an essential prerequisite.
Besides the governance procedures, there are further preconditions contributing to an effective interaction of the acting bodies: the ‘equity governance’ approach places emphasis on  role modelling (the board of directors function), as it has the most credible convincingness,  determining the mindset with ‘smart data’ and the human edge, to take into account the rapid development of information and communication technology, and  developing a ‘performance code’ as company specific governance imperative by providing the mutual language (‘semantics information’) along the three areas decision-making, organizational execution and financial management.
Frankfurt, 14 February 2017
 Therefore, for example, the Regierungskommission Deutscher Corporate Governance Kodex (2015) recommends that the board of directors shall issue ‘Terms of Reference’ for further clarification of the areas of responsibility.
 A tension typically results from time requirement for a director to involve meaningful versus management’s concerns about micromanagement (Huyett & Zemmel (2015)).
 “A blueprint is a strategic operating plan that lays out in pragmatic detail how an organization will successfully complete its initiatives and thereby achieve full potential” while preventing that a company “divides its resources among too many initiatives” (Gadiesh & MacArthur (2008)).
 Bryan (2002) points out that using the passage of time to build distinctive expertise (‘familiarity’) through a staged (investment) approach of prototyping to test acceptance, piloting to enable midcourse corrections and scaling ’just-in-time’, allows for making the ‘big bet’ more based on a clear way forward than on leaps of faith – and thus to explore more opportunities. And this is not even a contradiction to carving out freedom for rapid prototyping and making decisions by experiment, as such innovation processes are typically also of iterative nature (cf. Scott Cook, interviewed by Chui (2015)), cf. Twohill (2015)). Hall et al. (2015) emphasize, that “the better a company is at encouraging seeding, the more important … nurturing to ensure the success of new initiatives and pruning to eliminate flowers that won’t ever bloom” become.
 Dynamic resource allocation requires being disciplined to comply with the own investment rules and return standards with any major (add-on) investment and being realistic about the synergies to be realized through integration. Simple rules of thumb, like demanding profit increases as a result of new product launches or allowing cost increases only in areas with ‘double digit’ growth, help to reflect a company’s mindset and culture. The consistency and transparency that this brings, removes politics and avoids dilution of the overall yield.
 The CFO should govern an “aggregated and dynamic view of all projects as a single portfolio” (Chandarana et al. (2015), referring to capital expenditures). Assuming that the members of the board of directors qualify by different expertise, they may engage in specific projects in order to facilitate the decision-making (Huyett & Zemmel (2015)).
 “A leader’s failure to recognize and shift mind-sets can stall the change efforts of an entire organization” (Barsh & Lavoie (2014)). Transparent evidence of the facts, involvement and removing real or perceived injustices are crucial preconditions to create buy in. Therefore, in the context of leadership transitions, Chandran et al. (2015) highlight the importance of creating a shared vision on business priorities and alignment of the organization around the strategic direction alongside with mobilizing a team performing with trust and efficiency.
 Consensus workshops have proven effective to build teams pursuing the same interests and targets and with mutual responsibility and a joint commitment. Going forward, HR analytics, i.e. generating data-driven and machine-learning algorithm-based, organization-specific insights, e.g. regarding previously unobserved behavioural patterns, may complement the ways of creating consensus and commitment (cf. Fecheyr-Lippens et al. (2015)).
 In institutional buy-outs, so-called ‘Management Equity Programs (MEPs)’ aim to combine getting full insight into a business and its risks with retention and performance incentive, and exit orientation (Himmelreich & Rose (2013)).
 The more change is required (e.g. in a turnaround), the more it is important to tie incentives specifically to what people should do (rather than to overall results), which is ideally fully within their control and thus to also motivate to flag any problems early in the implementation (Yakola (2014), Dye & Sibony (2007)). Unfortunately, still “too often [top-management pay] is structured to reward a leader simply for having made it to the top, not for what he or she does once there … [and moreover,] … few compensation schemes carry consequences for failure …” (Barton (2011)).
 For example, in the relatively high-risk engineering and construction industry, as top-level parameters for quality gates could be considered in the acquisition phase profitability, risk, repetitive growth potential, and go and get likelihood of a project, and in the execution phase quality, costs and time schedule (Mündel (2003)).
 Cf., e.g. Gadiesh & MacArthur (2008), who demand “to push accountability down to its most effective level”.
 For example, according to Birshan et al. (2014), most corporations typically regard the investment committee “as much too senior to get so involved, and all assumptions are usually agreed upon long beforehand”.
 Charles T. Munger (quoted by Larcker & Tyn (2015)) believes in a responsible culture of deserved trust and accountability, which relies on fewer procedures and controls, to be more efficient than compliance-based systems: “The highest form … is a seamless web of deserved trust – not much procedure, just totally reliable people correctly trusting one another.”