Strategy, tactics and action. It sounds a bit like a battle. That’s not that strange, because the word “strategy” has its origins in ancient Greek war terminology. Nowadays all companies have a strategy. Following on their mission and objectives, they determine in which direction they want the company to go. Once the strategy has been set, it is implemented using various tactical plans. Together those plans constitute the business plan. The difference between strategy and tactics can be made clear using a simple mnemonic. Strategy is “above the shoulders” and tactics are “below the shoulders”. It’s using your head (strategy) versus using your arms and legs (tactics).
When it comes to the division of roles between supervisory board members and directors it’s not always clear who is responsible for the strategy. There’s usually no misunderstanding about the fact that the directors are responsible for its implementation. Some people believe that the management is solely responsible for the implementation and that the supervisory board members are responsible for the strategy itself. That’s an incorrect notion. This incorrect notion sometimes even exists at the highest (supervisory) level. In the Instructions for financial institutions of the Central Bank of Curacao and St. Maarten (CBCS), for instance. Section IV.1.b of the “Corporate Governance Guidance Notes for the Supervisory Board of Supervised Financial Institutions” of the CBCS literally states that strategic planning takes place at the level of the supervisory board. According to these Guidance Notes, the business plans for the short term are prepared by the management and approved by the supervisory board. Thus, according to the CBCS, the supervisory board designs the strategy and the management is responsible for the tactics. The supervisory board is the head and the management the arms and legs. In my opinion, the division of roles outlined by the CBCS is incorrect. I suspect that when creating these “Guidance Notes” they have leaned too strongly on the regulations and literature from the United States.
In Anglo-American systems it is indeed normal for the supervisory board, or better: the “full board”, to determine the strategy. This strategy is then implemented by the executive directors. This is a procedure that is typical of so-called “one tier” management systems. In European, Caribbean and South American management systems, we generally work with a “two tier” management model. In that case, the supervisory board and the management each have a distinct role. The role of the supervisory board is primarily of a supervisory nature. This also applies to the strategy. The supervisory board doesn’t determine the strategy, but supervises its creation and thereafter its implementation (the tactics). This is also clearly stated in the Dutch Corporate Governance Code (as amended in 2016). It is used, amongst other things, by De Nederlandsche Bank to assess financial institutions with regard to their governance structure. Article 1.1.1 of the Dutch Code stipulates that the management develops the strategy for creating value in the long term. The management is accountable to the supervisory board in this respect and will involve the supervisory board in the formulation of the strategy in a timely manner. Pursuant to article 1.1.3, the supervisory board supervises the manner in which the management implements the strategy for value creation in the long term.
The division of roles and the systematics are therefore clear. The management formulates the strategy, thereby involving the supervisory board, and the supervisory board approves the ultimately proposed strategy and monitors its implementation. This is part of the Rhineland model of governance, which also applies to all of our Caribbean financial institutions: the management manages, the supervisory board supervises. I see no reason why our own Central Bank wouldn’t use the same governance structure for its supervision of the corporate governance of financial institutions. That seems to me to be a wrong strategy of the Central Bank. Or should I say: wrong tactics?
This blogpost is also available in Papiamentu. Click here to download a pdf version.
Do you have a question about corporate governance yourself? Please e-mail it to email@example.com and perhaps your question will be discussed in the next blogpost.
When it comes to the division of roles between supervisory board members and directors it’s not always clear who is responsible for the strategy.