05 Jul 2006Working Paper Summaries

Improving Corporate Governance with the Balanced Scorecard

by Robert S. Kaplan and Michael E. Nagel

The authors review the key roles of corporate boards and recommend a Balanced Scorecard approach to help boards work smarter, not harder. Kaplan and Nagel recommend a three-part Balanced Scorecard program: Part 1: An Enterprise Scorecard that includes enterprise-wide strategic objectives, performance measures, targets, and initiatives; Part 2: A Board Scorecard that defines and clarifies the strategic contributions and requirements of the board, and provides a tool to manage the board's performance; Part 3: Executive Scorecards, which define strategic contributions of top management and are used to select, evaluate, and reward senior executives. Key concepts include:

Reforms such as Sarbanes-Oxley have increased the amount of work that boards need to do. A Balanced Scorecard approach can help boards use their limited time effectively.
An enterprise strategy map and enterprise Balanced Scorecard should be the primary documents distributed to the board in advance of meetings.

Author Abstract

The paper identifies and briefly discusses the following primary responsibilities of a corporate board of directors:

Approve and monitor the enterprise's strategy
Approve major financial decisions
Select the chief executive officer, evaluate the CEO and senior executive team, ensure executive succession plans
Provide counsel and support to the CEO
Ensure compliance

The paper argues that board members, burdened by limited time and limited information, can participate in a more effective and efficient governance process by implementing a three-part Balanced Scorecard program. The program starts with an enterprise scorecard enabling the board to become more informed about the enterprise's strategy so that it can perform better its five primary responsibilities. The board can also create a Board Scorecard, which defines its primary outcomes, board processes, and skills, information, and meeting dynamics for more effective governance. Finally, executive scorecards enable the Board to evaluate the performance of each senior executive and his or her succession plans.