Taking Steps Toward Cultivating a More Strategic and Aligned Board
July 12, 2023
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4 minute read – The world is becoming more complex by the minute. As this happens, many Boards are stepping back and asking themselves how their role should continue to evolve to best help the organization. Many Boards are expressing a desire, as well as realizing the necessity, to go to a more strategic level to continue to serve the organization in the appropriate role. One of the challenges and questions for Boards is where and how to start that process.
One way to get started is by working to align the risk tolerance of the Board and Management team in light of the organization’s strategy. The questions and discussions around risk are not always connected to the thinking and discussions around strategy. As a result, and quite unintentionally, the strategic direction and potential opportunities are viewed separately from risk. On top of this, there can be a lack of clarity on risk tolerance which creates misunderstandings and can result in strategic confusion and missed opportunities. An example of this is around credit risk:
- The Board and Executive team agree that the organization should expand its lending into lower credit tiers. The opportunity being discussed is to make more loans at higher yields and serve a broader range of customers. There is acknowledgment that there is more risk in the lower credit loans, but clarity around the Board’s and Executive team’s appetite for this risk is just not achieved.
- Down the road, credit losses begin to occur. The Board becomes concerned and starts asking questions about specific losses and the level of realized risk. The Executive team is confused by the concern, thinking there is agreement on the strategic direction.
This represents an ideal opportunity for Boards to be more strategic while gaining better clarity and alignment with Management. Let’s rewind:
- As the strategic decision is reached to expand lending into lower credit tiers, Board and Management have deep conversations around the expected risks and rewards of the strategy. Strategic Financial Planning can play a key role by showing a long-term view of this strategic path and the quantifiable positive and negative impacts. Some what-ifs help frame what it could look like if the risks are greater than expected or if the rewards do not fully materialize. This gives everyone a better idea of the range of changes that could be seen. The group might discuss trigger points for when the strategy would need to be adjusted.
- The Board asks questions until they feel comfortable with a range of impacts and timing. The major points of the discussions are documented.
- Down the road, credit losses begin to occur. The Board monitors the situation; they may ask for the documentation related to the decision. The Board views the realized risks in connection with the strategy along with its positive impacts and feels comfortable as long as the results are within expectations. The Board and Management celebrate success in having carried out the strategy.
This example illustrates a process for a new strategy, but existing strategies and risks should be discussed regularly, as well, because the environment is constantly changing. In keeping with the example, a recession will likely cause credit risk to increase, so a conversation on the changing situation will help keep Board and Management aligned.
As Boards endeavor to be more strategic, reaching clarity on risk tolerance and connecting it to strategy is a great place to begin. Viewing risks through the lens of the strategy can help elevate the conversation and put it into context. Management should supply relevant information and Boards should ask questions until they fully understand the reasons for and expected magnitude of impact, the speed of change, and the anticipated benefits to the organization so there are clearly documented points of reference when the risks are realized. Reaching this alignment helps the organization move forward strategically as it takes advantage of opportunities while managing risk.