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 implementation.1
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 tool.2 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 employee.3 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 perspectives.4
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 organization.5 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 evident.6
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 board.7
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.8 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 approval. 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 CEO.9 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 responsibilities.”10 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 cost?”11 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.