Company leadership is constantly in the news, but often for all the wrong reasons.
Whether it’s Thames Water sinking under £16bn of debt, or supermarkets accused of profiteering from ‘rip-off’ fuel prices during a cost-of-living crisis, you can bet that, somewhere behind the scenes, there’s a board in disarray and disagreement over the best way forward.
It all comes down to what our research has come to term ‘fracture-points’ – or the points in the structure of an organisation where a deep divide serves to distort the delivery of strategy.
A full appreciation and understanding of these fracture points is critical for the board and C-suite, as failing to address them will lead to continued damage to the organisation and—ultimately—to its demise.
If this sounds a tad dramatic, just look at the corporate landscape, which is littered with recent warnings, ranging from crypto exchange FTX through to AIG, Worldcom, Enron and Barings Bank.
What are the warning signs and best practices that can help boards to identify, address and potentially halt fractures before they inevitability gain traction, so you can keep strategy delivery on track?
Our latest Kakabadse team investigation has highlighted two significant fracture points that undermine governance, and the delivery and execution of strategy:
Fracture Point 1 – the chair and CEO
This takes place at the interface between the board and C-suite, otherwise recognised as the meeting forum for governance and strategy.
The relationship between chair and CEO is a vital element behind whether Fracture Point 1 expands or not. Our research shows up to 70% of these pairings involve the two skirting around each other and avoiding difficult subjects while they shadowbox their way forward.
Tensions between this couple are rarely resolved. Instead, they are ‘handled’ and can be minimised if the organisation’s oversight procedures are effective.
The prominent questions raised by this fracture point include:
• What is the remit and purpose of the board in relation to the management?
• Who owns the strategy: the board or the C-suite?
• What is the quality of information being given to the board by the management and how does the board normally react if they are dissatisfied?
• What involvement does the board have in its oversight of the organisation, and does the management resist any ‘intrusion’ by the board?
• What quality of relationship do the chair and CEO have, and how do the two define and approach their roles and key duties?
Addressing Fracture Point 1 allows for an improved relationship between the board and C-suite.
Amicable dialogue allows for more engaged governance, which positively impacts the organisation and keeps strategy delivery on track. However, for matters to become appreciably better, it’s crucial to pay attention to Fracture Point 2:
Where strategy creation and delivery collide
Fracture Point 2 surfaces the quality—or otherwise—of strategic understanding and engagement between the C-suite and the general management.
It exists at the tension point where strategy creation and delivery come into contact, and raises the following questions:
• Is the C-suite sensitive to local conditions concerning the reality of competitive advantage?
• Does the C-suite enforce central corporate strategy if and when divisions or subsidiaries repeatedly say “This strategy, in part or whole, just doesn’t work here”?
• How does the C-suite respond to the general manager who seemingly challenges the central strategy: are they someone to sack, or a colleague with invaluable insights?
Our research and experience suggest, sadly, that the general manager is normally sacked, which is a terrible shame as their comment raises the possibility of gaining invaluable feedback.
A managing director, from the German subsidiary of a global household goods company we interviewed, commented:
“I keep saying there is nothing wrong with the strategy in principle; it’s just not suited for Germany! If I ask to make even minor changes that will suit the business here the response is ‘You are not a team player!’”
Another general manager, in charge of Europe, the Middle East and Africa at a global services firm, also explained:
“How many times did I have to say that the services portfolio we put in front of clients is turning them away—they don’t want the new service? Package it differently and we win them back. But from headquarters, ‘Just do what we tell you!’”
This manager, like so many others, was ultimately fired. Eventually, the group CEO of the services firm was also fired. The newly appointed CEO, with the approval of the board, listened to the general managers and repositioned the portfolio. Business rapidly improved.
Uninvited but not unwelcome
The board of a globally dominant parcel delivery service company rethought their approach to Fracture Point 2.
Each board member had to commit to four international site visits a year, with no notice being given. They would each arrive at a subsidiary or divisional head office and demand whatever information or meetings with staff and management they needed.
Whatever the misgivings of the C-suite, our Kakabadse team visited the significant hub office in Singapore and found out more about the disruptive impact and intrusive effect of board members turning up uncoordinated and unannounced.
The general manager in Singapore commented:
“Whatever the disruption, I am delighted. For the first time my views go to the board unedited and what it takes to do business in Singapore is openly discussed. We are now doing quality business and are making more money and delivering better service than ever before.”
A board that’s focused on Fracture Point 1—the relationship between the C-suite and board—is not enough when it comes to effective execution of strategy. It’s evident that the real damage to an organisation happens through neglect of Fracture Point 2, or by taking punitive action towards general managers at this stage.
Responding negatively to managers’ different interpretations of competitive advantage at the local level can degrade the entire organisation, and so it’s crucial to ensure the C-suite owns the strategy while the board owns the organisation’s culture.
Where management is divided, the board can only intervene by becoming good stewards. It is incumbent on the chair to specifically locate the strategy fracture point and then, with the support of the board, sensitively facilitate a meaningful dialogue between the top and general managers and get strategy delivery on track.
Those leaders who were already sensitive to stewardship have adapted their skills to continuously keep in touch with managers and staff to stay up to date with the challenges being faced.
The evidence we continue to gather from high performing companies shows that outstanding boards utilise stewardship to work through long-running and seemingly immovable tensions to address both fracture points.
This is critical to the organisation’s sustainable function. Access to fracture points allows for deeply pertinent insights to be brought into the boardroom and fully shared with the management, who are then able to implement these decisions.
Smart boards are conscious of this and act accordingly. New organisational ecosystems are calling for boards and management to further encourage innovative conversations and work towards greater levels of resilience.
Boards need to be proactive in this area and the chair—not the CEO—is still the fulcrum of trust where the definition of duties and new board and management responsibilities are determined.
Shifts in governance require a move away from compliance and towards the stewardship of divergent interests. Our studies continue to show that in high performing companies, 20% of strategy effort is focused on designing new ways forward, while the remaining 80% lie in the execution of strategy.
This underlines the value of addressing fracture points at the earliest possible stage.