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IFRS AND ISA
+ IFRS and Canadian GAAP
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+ Chronological resumes
+ Expense fraud on rise
+ Gen X, Gen Y
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By Jean-Sébastien Mercier
Illustration: Baiba Black
Failure to have a business plan that works across all sectors can be a serious risk, but one that good governance can offset
Why do some organizations draft their business strategy at the beginning of the year, only to realize at year-end that it has veered off in an unexpected direction? Strategic operationalizations, making a business strategy work across all operations, can be a challenge for companies given the risks involved.
Types of management To effectively communicate an organization’s business strategy and encourage employee buy-in, many governance models align employee compensation with strategic goals. This has often been used as an example in management literature. Yet the most serious frauds and financial scandals in recent decades were directly tied to methods of remuneration that pressed for employee performance to drive the achievement of specific goals. The end result was that instead of implementing the organization’s business strategy, managers focused on achieving qualitative results that would guarantee them more money in their pockets and advance their careers.
So what can be said about a management style that ties employee performance objectives to strategy implementation? Is it too risky? Are employees really encouraged to work toward achieving the strategy?
Part of the problem is a lack of control and followup on goals. Strategic goals are usually announced at the start of the year and seldom reviewed until the following year. Moreover, since the strategy and its implementation are adapted to respond to major changes affecting the company, management doesn’t know whether the strategy has paid off until the actual business results are compared against the anticipated results.
That’s why performance objectives are an important and recommended management tool. However, used on its own, this tool can become a double-edged sword. Other related management tools are also recommended for sound business strategy operationalization.
Breaking strategy into goals First, management has to break its strategy into various components, then assign responsibilities to the company’s different sectors. Each sector is entrusted with responsibilities that, in turn, must be broken down into employee objectives. Employees will then be aware of the goals underlying their evaluations. To motivate the workforce, compensation and advancement may often be linked to the achievement of these objectives.
Performance measurements Ideally, to help employees achieve goals, management should adopt effective performance measurements for evaluation purposes. In some cases, an inappropriate measurement may lead an employee to adopt behaviour A rather than the expected behaviour B. Human resources managers often hold focus groups with employees to determine which performance measurements are most likely to motivate them to pursue the organization’s goals. And who is in a better position to determine the potential impact of a measurement than the person who will have to apply it?
Followup Like overall performance, functional performance must be monitored throughout the year. But what about the goals communicated to employees? These are typically followed up at the end of the year. Yet a department will often change course but forget to amend its employee performance measurements and objectives accordingly, thus creating an inconsistency that can be demotivating. When departmental goals are changed, employee objectives should also be adjusted to make sure that everyone is in step with the business strategy.
Variances The performance evaluation process may reveal variances that require different sectors to take remedial action, which in turn could alter established objectives. And that’s the time to question performance measurements. First, it should be determined whether the variance could stem from a performance measurement that triggered a particular behaviour. Then employees’ performance and ability to achieve the objectives should be assessed. If some behaviour is unsatisfactory, corrective measures should be implemented without delay.
Other strategic operationalization tools The above process does have some flaws, however. For one, followup only occurs when objectives are not met. A regular monitoring procedure would be preferable so if problems crop up, followup and review processes would already be in motion to ensure a better outcome. The inefficiency and lack of rapid response associated with delayed followup can mean the difference between exceptional and acceptable performance.
To address potential deficiencies in matching strategy with performance evaluation, additional tools may be needed. These are designed to complement the process and reduce delay between adapting the strategy to changes impacting the organization and employee response. This is where corporate culture, i.e., a system dictating the procedure and diagnostic and interactive control systems, will help steer employees toward a clear goal.
Corporate culture Corporate culture is like a roadmap. It indicates the values and behaviours the company encourages, somewhat like a map indicates what roads to take. Statements of values are one way to transmit corporate culture, but communicating them only verbally or in writing isn’t enough.
Managers and employees have to put these values into everyday practice. Management/employee meetings should be held to discuss business decisions. During such meetings, management should explain why a particular option more effectively reflects the organization’s values and encourage employees to adopt the organization’s culture.
The impact of employee/management meetings is too often underestimated. They should be frequent, interactive and help achieve tangible results in employees’ eyes. Employees will then be better positioned to understand the corporate culture and incorporate it into their day-to-day work. A company without a corporate culture could run into serious problems.
Code of conduct A code of conduct defines actions that are un-acceptable within the company. The code should be periodically reviewed to limit the impact of changes on the company’s target markets. An ethics committee makes it possible to review contentious issues without losing sight of the organization’s strategic goals.
Take the example of a private company that delivers medical services and owes its success to its excellent customer service. Without an appropriate code of conduct, a company intent on meeting customers’ needs may offer services not yet approved by medical regulators. This approach could cost the company its operating licence, despite its motivation to provide better service. Had there been a code of conduct, the issue would not have arisen.
Diagnostic control system A diagnostic control system involves the follow-up of strategic goals as they have been adapted to the organization’s various departments and sectors. Rather than concentrating on meeting goals, a diagnostic control system assesses whether the achievement of goals has fulfilled the strategy. Often this step is implemented too late in the process, when everything has gone wrong. A scorecard is the tool of choice for diagnostic control monitoring.
For example, the key goal of a growth company whose strategy is to become the top seller in its sector may be to increase sales. To measure its success, it could count the number of new customers it acquires. A diagnostic control system not only addresses the achievement of goals in terms of new customers, but also how these customers affect the implementation of the strategy over the year. The measurement is therefore assessed against other goals management wants to achieve that are more aligned with the organization’s business strategy.
Interactive control system An interactive control system encompasses the key components of the strategy. Certain variables could have a considerable impact on the strategy’s success. These controls are more often discussed in meetings than summarized in a scorecard. It may be a question of monitoring fuel costs for a transportation company or the provincial budget for a hospital.
Controls often take the form of frequent followups and periodic analyses of market shifts that can impact the business strategy.
While diagnostic controls frequently address past events, interactive controls focus more on an organization’s future and the factors it needs to keep in its sights if the organization wants to maintain or gain a competitive edge in its industry.
Risk management Failure to operationalize its strategy is a risk for any company, but sound governance can offset this risk. Recommended tools are directed toward corporate governance and management of business risk, which must be managed across all company sectors.
The alignment of evaluation methods with business strategy may become a real threat if it isn’t accompanied by a code of conduct that is recognized and approved at all levels of the company, diagnostic controls itemized in a scorecard, and interactive controls to detect potential problems and threats. These management tools leave room for creativity while limiting the organization’s exposure to risk. When the environment presents difficulties or, conversely, compelling business opportunities, sound business risk management can strengthen strategic operationalization.
In short, the comprehensive use of risk management tools can motivate employees to work toward achieving an organization’s business strategy.
Jean-Sébastien Mercier, CMA, CPA, CIA, is a manager in risk management with RSM Richter Chamberland in Montreal
Technical editor: Yves Nadeau, CA, partner, audit and risk management, RSM Richter Chamberl