Interview with Prof. Robert Kaplan(4)
Xing Zong: A question of mapping of the board's effectiveness. Now in China, most companies have their own board. But the board meeting is usually low efficient: members received stacks of files that are difficult to wade through, they sit passively and throwing out an occasional question to show they are doing their due diligence. Prof. Kaplan, what is your suggestion on engaging more of members' expertise?
Kaplan: An active and engaged board is an essential part of shaping and executing a successful strategy. Boards contribute to organizational performance when they fulfill the following five major responsibilities:
First, ensure processes are in place for maintaining the integrity of the company, including: Integrity of financial statements; Integrity of compliance with law and ethics; Integrity of relationships with customers and suppliers; and Integrity of relationships with other stakeholders.
A new application is to develop a strategy map and Balanced Scorecard for the board itself. The US Sarbanes-Oxley Act requires that boards do an annual assessment of their performance. What better tool for such a performance evaluation than an explicit statement of the board’s strategic objectives? A Board Balanced Scorecard provides the following benefits: defines the strategic contributions of the Board; provides a tool to manage the composition and performance of the Board and its committees; clarifies the strategic information required by the Board.
The Board strategy map typically uses financial objectives identical to those articulated in the enterprise strategy map since, ultimately, the board’s success for shareholders is measured by its ability to guide the management team towards superior financial performance.
Rather than use the traditional customer perspective, however, the Board scorecard introduces a stakeholder perspective, reflecting the board’s responsibilities to investors, regulators, and communities. The board’s responsibilities to these stakeholders include: approve, plan and monitor enterprise performance; strengthen and evaluate executive performance, and ensure enterprise compliance with regulations, laws, and community standards and that adequate systems of internal control are in place.
These are the critical responsibilities that boards carry out to mitigate the problem of managers acting in their self-interest rather than in the interests of their shareholders. The board is the single most important component in the entire system of capital market governance. It must ensure that managers are providing shareholders and regulators with valid financial and non-financial information, and that managers are using shareholder’s capital to advance the long-term interests of those shareholders. These board responsibilities are central to effective functioning of capital markets. Unless investors can be assured that boards are carrying out these responsibilities objectively and independently, they will be reluctant to entrust their capital to enterprise managers.
Xing Zong: Your book "strategy maps: converting intangible assets into tangible outcomes". What kind of message do you like to convey to our readers? Generally speaking, what are the intangible assets and how can they be converted into tangible outcomes?
Kaplan: All organizations today create value from their intangible assets: employee knowledge, capabilities and motivation; data bases and information systems; responsive, high-quality processes; customer relationships and brands; innovation capabilities; and culture. The trend away from a product driven economy based on tangible assets to a knowledge and service economy based on intangible assets has been going on for decades. The average company’s tangible assets - the net book value of assets less liabilities - represent less than 25% of its market value. Intangible assets – those not measured by a company’s financial system - account for more than 75% of a company’s value.
We have identified three targeted approaches for aligning intangible assets to strategy: one, strategic job families that align human capital to a company’s strategic processes; the second, the strategic IT portfolio consisting of the infrastructure and strategic IT applications that complement the human capital for promoting outstanding performance in the strategic processes; third, an organization change agenda that integrates and aligns organization capital for continued learning and improvement in the strategic processes. Culture, leadership, alignment and teamwork reinforce human and information capital capabilities for delivering outstanding performance.
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