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Extending the Balanced Scorecard to
Governance: How Does it Compare to
Policy Governance®?
C. David Mustine
Reprinted from Acredula -- Summer 2007
In the early 1990’s, Robert S. Kaplan and David P.
Norton developed the Balanced Scorecard, which
was initially designed to solve a performance
measurement problem in organizations. As they
gained experience using the model, however, they
realized that it addressed a larger issue - strategy
implementation1.
Believed by its authors to improve governance,
the Balanced Scorecard has three key elements
and four perspectives. The key elements are the
measurement system, strategic management system,
and communication tool2. The first business
perspective is financial, which receives the most
attention. The other three perspectives, unrelated
to finance, are internal processes, learning and
growth, and customers. These non-financial perspectives
provide the “balance” to measurements
such as return on investment, earnings per share
and cost per employee3. Part of the popularity of
the Balanced Scorecard is attributed to creation
of a measurement dashboard that provides a quick
view of these four perspectives.
The Balanced Scorecard model emphasizes alignment
of the firm’s top-level strategy with objectives
and measurements in business units and departments
throughout the entire organization. Kaplan
and Norton propose the Balanced Scorecard as
an effective tool to communicate and manage the
implementation of such a strategy that provides a
framework for creating the necessary action steps
and monitoring for accountability. This is accomplished
in the Balanced Scorecard by incorporating
targets and measurements for multiple objectives
in each of the four perspectives4.
In a March-April 2006 article published by the
Harvard Business School, Kaplan and Norton
make a case for using the Balanced Scorecard to
align the board of directors with the top executives
in an organization5. They describe the five major
responsibilities for the board as ensuring integrity
and compliance; approving and monitoring enterprise
strategy; approving major financial decisions;
selecting and evaluating executives; and counseling
and supporting the CEO. When comparing these
responsibilities to those found in John Carver’s
Policy Governance model, some similarities and
some stark differences are evident6.
There is agreement between Balanced Scorecard
and Policy Governance on the requirement that
the board must ensure integrity and compliance.
In Policy Governance, integrity is accomplished
through policies. A Policy Governance board
achieves compliance through insisting on, reviewing
and monitoring reports for each and every Ends
and Executive Limitations policy
created by the board7.
The remaining board responsibilities,
as described by Kaplan and
Norton, differ significantly from
Policy Governance. Kaplan and
Norton state that boards should
approve enterprise strategy. In
Policy Governance, strategy is
a management tool and does not
require board approval. Kaplan
and Norton also argue that the
board should approve major financial
decisions such as annual
operating and capital budgets. In
Policy Governance, these plans
do not require board approval8.
Carefully designed executive limitation
policies in the areas of financial planning and
budgeting, asset protection and financial condition
set the boundaries within which the organization
must operate. Operating and capital budgets are
management tools.
Kaplan and Norton also identify selecting and
evaluating executives as a board responsibility.
The only executive selected by the board in Policy
Governance is the CEO. This reinforces a critical
principle in Policy Governance - the single point
of accountability between the organization and
the board is through the CEO. If the board hires
executives that report to the CEO, then the board
steps down from its governing role and begins
managing.
In Policy Governance, the board never counsels
the CEO, as suggested by the authors of Balanced
Scorecard. Carver calls advice by the full board
“suspect” because it creates a lack of clarity with
the CEO9. Policy Governance challenges board
members to govern, not advise.
According to its authors, the Balanced Scorecard
should play a central role in governance
“by providing board members with the financial
and non-financial information essential for their
performance oversight and responsibilities10.” A
powerful aspect of Carver’s Policy Governance
model is its comprehensive nature. Ends policies
answer the vital questions “what good shall we
accomplish, for which people or needs, at what
cost11?” In the long-range perspective of Ends, there
is balance between resource allocation (what cost)
and customer focus (what good, for which people).
Within Executive Limitations, there is balance
because policies address a comprehensive range
of issues including financial, customer, employees
and internal processes.
The Balanced Scorecard is an effective management
tool that helps achieve alignment between
enterprise strategy, business unit, and individual
performance, but when applied to governance, it
will likely result in the board acting as managers,
not governors. Policy Governance provides
a balanced perspective that aligns and integrates
enterprise strategy throughout the organization
- without pulling the board into decisions that are
more effectively made by management.
David Mustine can be contacted at Mustine
Consulting. Mr. Mustine was trained by
John and Miriam Carver at the Policy Governance
Academy.
Footnotes
