Boards Must Learn the 20% Rule

Posted Thursday, April 28th, 2011. Filed Under Corporate - Tips/Tools Blog

I wanted to share with you an article from National Post, Tuesday, April 19, 2011.

One of the issues that face Boards is how to prioritize issues; which ones to discuss first. In this article it starts with an anlogy that puts it all into perspective. “When a patient (the organization) comes into an emergency room with two gunshot wounds to the chest, the team of physicians (the board) needs to spend all of its time on the gunshot wound and not discussing a tiny cut on the patient’s toe. Talking about the toe cuts when someone has gunshot wounds to the chest leads to bad problems: the patient dies”.

A simple, yet powerful analogy.

How do you determine what is the “gunshot” portion and what is the “toe cut”?

Here is what the authors of the article, Shaun Francis and John Kelleher, recommend:

1. The “happening now” trap – A product launch is happening in two weeks; a major supplier is coming to visit next week – these types of issues frequently make it to the boardroom because they are happening now. The trouble is, what’s happening now is almost always unimportant as it relates to what a board needs to be discussing.

2. The “update” trap – CEOs and management teams love to provide updates and especially love to be comprehensive. There’s an update on strategy, finance, human resources, operations, information technology, manufacturing, quality control, sales, marketing and so on. Board members are quickly overwhelmed. Suddenly, the meeting is over and the board is thoroughly updated however none of the really important issues that needed to surface were discussed.

3. The “KPI” trap – Especially recently, many board meetings have become full of key performance indicators (KPI). “We measure everything” is he message and it seems to fall on a pleased audience of directors. The authors say, when metrics rule the board agenda the most important issues ( which tend by their nature to be longer term and more difficult to capture with short-term KPIs) will almost certainly be missed. They say NOT to determine it by the “day-to-day” management vs. “long-term” strategic issues. The authors say in their experience, the best way to ensure the board is discussing the right issues is to connect the board agenda directly to economics. They advise boards to use the 20% rule. The 20% rule suggests that directors craft their agendas conceptually on issues that could change the overall vaule of the organization by at least 20%.
Some questions:
What are the handful of major opportunities that could increase value by more than 20%?
What are the handful of major risks that could decrease the value by more than 20%?
Other than any required or customary resolutions, that is the agenda for the board meeting.

They go on to say, if the board cannot determine whether an item on its agenda fits the 20% rule they have also made a mistake. Not knowing whether an issue hits the 20% threshold is as bad as knowingly talking about small issues.

The best companies actually use this rule in writing their strategic plans. The plan is focused all around identifying big issues that could most swing the total market value. Using this approach is very powerful: The plan identifies the right issues, management is working on the right issues and the board is discussing the right issues.

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