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of First Commonwealth Financial Corporation, HBS No. 104-042. It provide
s
analysis and questions that are
intended to present alternative approaches to deepening students comprehension of business issues and energizin
g
classroom discussion. HBS cases are developed solely as the basis for class discussion. Cases are not intended to
serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.
5-204-171
JUNE 17, 2004
First Commonwealth Financial Corporation
Teaching Note
Pedagogical Objective
the Boards shareholder and stakeholder outcome objectives, as well as the internal processes it
must perform to deliver these objectives and the skills, information, and climate required for
effective board oversight and discussions. In the third stage, each member of the senior
executive team prepares executive scorecards that can be used by the Board for evaluation,
compensation, and succession planning.
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Reading
If participants have not previously been exposed to the Balanced Scorecard, useful references are:
Kaplan, R.S., and D.P. Norton, Having Trouble with Your Strategy? Then Map It, Harvard
Business Review (SeptemberOctober 2000): 167176, HBR 00509.
Kaplan, R.S., and D.P. Norton, Strategy Maps, Strategic Finance (March 2004).
Suggested Assignment Questions
1. Will the BSC program at First Commonwealth provide Board members with the
information they need to fulfill their governance responsibilities? Does a board really need
2. How should the process start? What are the pre-conditions for launching a Board BSC
program?
3. What cultural challenges arise in implementing the program with the Board?
4. How useful are the board and executive scorecards developed by FCFC?
5. How effective was the new scorecard program in stimulating strategic discussions at the July
2003 board meeting? Do you agree with Dave Dahlmanns comment (bottom of page 6)
6. How can enterprise, board and executive scorecards help First Commonwealth with external
constituencies, such as shareholders, analysts, regulators, and potential acquisition targets?
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Class Discussion
The first assignment question (above) engages the class in an active discussion and debate on
the roles and responsibilities of a company Board of Directors, and what information a Board
needs to perform its responsibilities. Asking whether everyone agrees with the objectives and
challenges itemized in Exhibits 7 and 8 can launch the discussion. The primary tension can be
on reconciling the roles between the CEO/senior executive team and the Board of Directors.
The CEO has primary responsibility for formulating and implementing strategy, and ensuring
that the organization has adequate financial capital, human capital, and technology resources for
successful strategy implementation. The CEO, with the assistance of the CFO, has a statutory
requirement to report to the shareholders and the board about the companys financial
performance.
The position taken in the case is that the Board should not be involved in formulating the
strategy or managing its detailed execution. But it does have a responsibility to ensure that the
company has a strategy likely to deliver long-term shareholder value, to monitor and guide the
The Board also must determine that the CEO is capable of leading the company, choose a
replacement when it deems the CEOs performance inadequate, or choose a successor when the
CEO retires or resigns from the position. The Board must determine the compensation plan for
the senior executives, including the CEO, evaluate the performance and award compensation
based on the approved plan, and ensure that adequate succession plans exist for all key
executives.
Finally, the Board should provide general counsel and advice to the CEO and to support the
companys success when possible. It is a delicate balancing act to be supportive of the CEO and
also skeptical of proposed policies and initiatives until convinced they are in the best interest of
shareholders. Good boards manage the tension well to be skeptically independent while also
collegial and supportive.
General Electric CEO Jeff Immelt has posted his governance principles for GE at <http://ge.com/
en/spotlight/commitment/governance/governance_principles.htm>. Immelt states:
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e. ensuring processes are in place for maintaining the integrity of the companythe integrity
of the financial statements, the integrity of compliance with law and ethics, the integrity of
relationships with customers and suppliers, and the integrity of relationships with other
stakeholders.
The GE principles seem quite compatible with those proposed by FCFC. This discussion should
take 510 minutes and the instructor should reinforce it by putting the high-level board
responsibilities (from Exhibit 7) on the Board so that they are visible for the remainder of the
class.
The class can then turn to whether the Board needs to see a Balanced Scorecard to perform its
functions. The compliance role can likely be done without a BSC by just reviewing and
approving the companys periodic financial statements. But even for compliance, the audit
committee needs to understand the key value and risk drivers of the organization, and that these
Whats Involved in Developing a Balanced Scorecard Program for the Board of Directors?
Discussion can now turn to Question 2, lets assume that an organization wants to use the
Balanced Scorecard as its primary information input to the Board (Note Trimarchis quote in the
case, There is not some other system out there; the Balanced Scorecard is what we will use to
run the company.) how does it get started? The three-part Balanced Scorecard program,
diagrammed in Exhibit 6, provides a good framework for students to see the big picture. The
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Exhibit 3 of the case displays the FCFC strategy map. Since the case is more focused on
governance than about building a strategy map and Balanced Scorecard, the instructor should
not spend too much time discussing the details of the strategy map. The strategy map clearly
Describes the enterprise strategy (the Balanced Scorecard measures and targets for the
strategy map will appear in separate and supporting documents)
A tool to manage the performance of the enterprise
A key information input to the Board
The executive team should bring the enterprise strategy map and Balanced Scorecard for board
review and approval. These documents represent the organizations strategy; the Board must
understand the strategy, and must judge that the strategy is capable of delivering long-term
shareholder value at acceptable levels of business, financial, and technological risk.
The instructor can raise the question, Will all CEOs be as enthusiastic as ODell and Trimarchi
in sharing an enterprise strategy map with the Board?
While seemingly a useful input for Board understanding and deliberations, an explicit strategy
map and Balanced Scorecard can be quite threatening to an insecure CEO. It makes the strategy
The instructor can now turn to the top vertex of the Governance triangle in Exhibit 6, the Board
Scorecard. As described in this exhibit, a Board Balanced Scorecard provides the following
benefits:
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Clarifies the strategic information required by the Board
A board scorecard can provide specific accountability for board members. It makes their
contributions and responsibilities clear. Note that about half the board members resigned at the
time the Board BSC was introduced. SarbanesOxley requires boards to do self-evaluations
each year. A board BSC provides a systematic methodology for the board to conduct such an
Are Executive Scorecards Valuable or Is This a Step Too Far and Too Costly?
Executive scorecards seem to be a central issue for governance functions. They provide a clear
basis of accountability between each senior executive and the board. As the board reviews
performance of each executive and participates in setting compensation, particularly incentive
compensation, an executive scorecard provides the linkage between executive contribution and
strategy implementation. While not fully developed at FCFC at the time of case-writing, one can
readily imagine that incentive compensation will soon be linked to performance on an
executives Balanced Scorecard.
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How Would You Assess the Quality of Discussions at the July 2003 Board Meeting?
Board members apparently remained in their previous mode of behavior. Management
(Thomchick and Trimarchi) took the lead in presenting the BSCs to the board. Little discussion
followed based on the specific results shown in the enterprise BSC. At this stage, we see a great
Does an Effective Governance Process Built Around the BSCs Provide FCFC with a
Competitive Advantage?
This topic should engender a good conversation among the students. Some may argue that the
BSC system is expensive to implement and operate and that FCFC will not get tangible rewards
from its investment in this governance system.
The pro side of the system can start with SarbanesOxley, which has imposed large costs on
companies to get their governance processes in compliance with the acts provisions. The clarity
More positively, FCFC sees the potential for its effective governance system to enhance its
strategy of opportunistic acquisitions of other community banks in its market area. Small banks
are struggling to get sufficient independent directors and financial expertise on their boards to
Jeff Immelt, CEO of General Electric, has commented on his motivation for installing leading-
edge governance systems at GE:
We want to . . . add our own vision for good governance. I want investors, big and
small, to know that they can trust us to govern our Company effectively. Then they can
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