WHEN IT COMES TO Sarbanes-Oxley and auditcommittees, directors are keenly aware of their responsibility tounderstand their corporations’ fiscal reporting and accountabilityissues. Yet these same directors will tell you they are whollyunprepared to speak intelligently about competitive threats oropportunities facing these same companies—except in the mostsuperficial or selftaught manner.
This summarizes what I heard repeatedly in aninformal survey of 14 highly experienced directors of mostly Fortune1000 corporations during conversations concerning the directors’competitive knowledge. More than three-fourths have served on boardsfor more than four years, and their answers reflect experiences withmultiple boards—probably 35 or more companies.
The directors say they are largely unaware ofinternal corporate resources, receive little or no communication fromwithin the corporations they serve and aren’t prepped by theircompanies before entering board meetings. You might say there is anintelligence blood-brain barrier within major corporations, blockingthe flow of competitive knowledge from reaching the board.
One board member confirmed that “Sarbanes-Oxley isonly about the numbers, not about the customers or about a competitor.”According to this director, Sarbanes-Oxley may have actually dampenedmanagement’s inclination to share competitive data and issues thatboards need to have in order to direct their corporations. In hiswords, “In the last few years, boards have not become moreproductive—they’ve become more careful.” A recent article in the Harvard Business Review supports this position, stating unequivocally that most boards are in the dark about their companies’ strategies.
Board members I interviewed had no problem quickly supplying their laundry list of intelligence shortfalls:
Executives may have ready access to competitive and market intelligence; not so directors.
Although companies often have competitive intelligence departments orcompetitive assessment groups, board members generally have noknowledge that they even exist.
Board members are handicapped or limited by almost exclusively usingtheir own networks and self-read knowledge of the competition, ratherthan being prepared by the company with its own assessments.
Directors frequently know about short-term threats or opportunities butlack insight on long-term intelligence that could affect a company’sfuture.
Why do directors suffer behind this intelligencebloodbrain barrier in the first place? It should not even exist.Generally, good, timely intelligence fails to reach directors eitherbecause it may be information someone does not want the director tohear or for simple lack of attention to the problem. Do not imaginethat this intelligence blockage is due to technological impediments orlack of money.
The solutions to the problem are relatively simpleand can be best explained in terms of five realities of competitiveintelligence:
1. Knowledge comes in many forms. Directorsrequire the right kind of data, not overworked, overproduced data. Forexample, a client of ours in the textile business some years ago wasconcerned about a rumor that a knockoff product was soon to bemanufactured in Indonesia. When we asked our analyst where theseknockoffs would be produced, he sent us a picture of a goat grazing ina field. That allayed our client’s fear—and contradicted news reportsthat the plant would open within months.
The picture told us otherwise, since the animalapparently was grazing where the plant was supposed to be.
Certainly,we had other questions for the analyst, but the photo—simple as it was—conveyed critical intelligence. No PowerPoint slides and no Excelspreadsheets were necessary. Sometimes, this may be all a directorneeds to answer a question or to spur other, smart questions.
2. People have blind spots. When Guinness,the Irish beer brewer, saw its sales suddenly dip in Africa, a marketin which it had seen nearly continuous growth for decades, it wasconcerned. It turned out that management at Guinness (along with theother brewers) had not seen the threat posed by another product: cellphones. Young consumers with discretionary spending were beginning tosee phones as a sexier product than beer.
Board members, just like their executivecounterparts, need to constantly challenge their company’s assumptions.They can do so with a series of information filters. Too often boardmembers are blinded by valuations that are purely driven by the numbersand ignore outside factors. The AOL-Time Warner merger in 2000 was acase in point. Originally valued at $165 billion, the deal seemed toensure blockbuster success. Reality soon overcame hype, but the boardmembers and executives who brought the deal to fruition had apparentlybeen blinded by optimism.
3. War games can outsmart the competition.Brainstorming— unstructured bunting around of data across the boardroomtable—may raise awareness of critical issues but rarely moves theagenda ahead. Directors, like their executive counterparts, need to useintelligence strategically, forcing themselves to examine the options acompany realistically has arrayed before it.
When Larry Ellison decided to pounce on PeopleSoftas soon as it made an offer to buy competing software house J.D.Edwards, he did so after running a series of war games with his staff.These so-called games forced his organization to confront the realityof a consolidating software marketplace— one that would threatenOracle’s future if it was not in the lead position. Ellison was one ofmany corporate leaders who have used war games to force decisions bycompressing future options, despite the inertia that may exist within aboard or within executive ranks.
4. On the Internet, things may not be what they seem.Do not assume that just because the board is made up of some verybusiness-savvy individuals that they fully appreciate the quirkiness ofthe Net. Here is a simple example to illustrate this point: Scientistsat pharmaceutical giant Novartis became alarmed that one of itscompounds, with potential for treating depression, was the subject ofresearch articles suddenly appearing on a rival’s site. Novartis hadspent many millions developing this potential product and feared thatthe competitor was about to steal its march.
But another scientist, whose job it was to monitorearly-stage competitive projects, concluded that the competitor wasactually declaring defeat—announcing that it was giving up ondeveloping this compound. The scientist came to this conclusion basedon his assessment that the reason Novartis’ competitor had suddenlyallowed its scientists to publish the article was simply to let themmaintain their professional stature. The Internet can be tricky. Boardmembers cannot walk into meetings after conducting amateur Internetsearches— any more than they can rely on their own “little black book”of contacts to explain a situation or a product.
5. Intelligence must be planned for. Boardsneed their own monitoring services. They require simple mechanismswhereby they can ask questions and exercise their fiduciaryresponsibilities to safeguard the company for investors. Perhaps theboard needs an intelligence committee as much as it does an auditcommittee.
Outside directors are smart, industry-hardenedexecutives, but they need help understanding the competition andcompetitive threats (or opportunities). To deny board members criticalintelligence assessments and data is to handicap good decision- makingby ensuring the blood-brain intelligence barrier remains in place.