First Commonwealth Financial Corporation

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 information beyond the results reported in a company’s monthly, quarterly and annual financial reports? To engage board member’s expertise much more around the strategic direction that the company is taking would require giving different types of information to board and having different discussions in board meetings, but the effort to revamp the meeting process and agenda would be well worth the trouble.

With only limited time available to review the information before the meetings and to perform their monitoring and governance functions, board members must receive the information that is most relevant to their governance responsibilities and that will enable them to more effectively participate in board meeting discussions. They should receive strategic, forward-looking information, rather than information that just summarizes the past, such as quarterly and annual financial statements. While boards still need to review past performance, that information should not take up 90 percent to 95 percent of a board meeting agenda as it so often does today. What’s more, company executives should make fewer, shorter, and more targeted presentation to board members and spend more time engaging them in interactive discussions.

For the board to monitor strategy, it first must understand and approve the proposed strategy. Subsequently, it needs information on how well the strategy is being implemented and what results the strategy is delivering. Directors cannot infer from quarterly financial statements whether the company has selected a sensible customer value proposition, is focused on the critical processes to meet customer and shareholder expectations, and is investing well in its people and information resources.

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To help companies ensure that the board receives the right information about company strategy and performance, as well as feedback about the board’s own performance, we have integrated the Balanced Scorecard performance management system into corporate governance processes. The Balanced Scorecard strategy map portrays, on a single page, a company’s strategy. It includes the financial outcomes expected; performance with targeted customers and the organization’s differentiating value proposition; the critical internal processes that will create and deliver the value proposition; and whether the organization has the right people and systems in place and the right culture for its strategy to be successful.

How should the process start? Vice Chairman David S. Dahlmann, previously the president and chief executive officer at Southwest National Corp. in nearby Greensburg, Pennsylvania, which First Commonwealth had acquired in 1998, suggested that Trimarchi use something called a balanced scorecard to manage the company's performance. Trimarchi read a couple of Harvard Business Review articles on the subject and decided that the highly focused, systematic one might even say methodical approach might be just the thing to revive First Commonwealth's financial performance.

What are the pre-conditions for launching a Board BSC program? The retail and commercial banking units had historically operated with local “product push” strategies. Each department promoted its own product, such as a deposit account, a loan product, a credit card, a financial planning solution, or an insurance product. Each operating company scorecard was different. The different scorecards could not be aggregated together into a corporate scorecard, except for the financial measures, which tended to be common across the operating companies.

What cultural challenges arise in implementing the program with the Board? Once Trimarchi decided to adopt the scorecard approach, First Commonwealth’s executive team laid out its strategic goals. For example, it wanted to bank to consistently perform in the top quartile of its peer group. The team also proposed to turn Firs Commonwealth into a “world-class” sales organization that could grow organically. And the team wanted all of the bank’s employees to understand the strategy and be fully committed to its implementation. This approach has already provided several important benefits to First Commonwealth’s board. First, it isolates those areas where it is important for the board to perform well, including a variety of governance issues. While the company was developing its directors’ scorecard, it was also complying with both the Sarbanes-Oxley Act and a new set of listing standards from the New York Stock Exchange, which imposed significant requirements on the audit, governance, and compensation committees. Singer, who is president of the Allegheny Valley Development Corp. and, unlike Dahlmann, does not have a banking background, says scorecard has made it easier for her to understand what’s really going on inside the company.

“I get much clearer access to operational issues and strategy than I would from a packet of financials,” she says. “It enhances your ability to understand and monitor.” Indeed, the board used to monitor the company almost solely through its financial reports, which are historical in nature. Directors would rarely talk about the bank’s strategy, which is forward-looking by definition. “This has really pulled the organization together around strategy,” says Dahlmann. Since adopting the scorecard approach in 2003, the company has changed a significant aspect of its business strategy. Instead of emphasizing volume and production for its own sake, First Commonwealth wants to focus on building customer relationships that are profitable over the long term and has made changes to the enterprise scorecard to reflect this strategic shift.

How useful are the board and executive scorecards developed by FCFC? First Commonwealth has since launched a new business strategy that focuses on building profitable customer relationships rather than just pushing product, and the board is using its own scorecard to monitor the company’s progress and also to evaluate its own performance. Because it took the bold step of reengineering its governing practices in such a revolutionary way, First Commonwealth has earned Bank Director magazine’s Corporate Governance Award for 2005.  How effective was the new scorecard program in stimulating strategic discussions at the July 2003 board meeting? Do you agree with Dave Dahlmann’s comment (bottom of page 6) about a potential need for coaching on how to have productive board discussions around enterprise and board scorecards? How can enterprise, board and executive scorecards help First Commonwealth with external constituencies, such as shareholders, analysts, regulators, and potential acquisition targets?

The benefits of deploying a common value proposition and scorecard across homogeneous units are apparent. First, the process is simple. Once the corporate project team has determined the Strategy Map and associated Balanced Scorecard of measures and targets, these can quickly deployed throughout the organization. No further analysis or work at local, decentralized levels is required. Second, the company can easily communicate the common message through speeches, newsletters, Web sites, and postings on bulletin boards. Every employee in every location receives the same, consistent message.

Third, the common measures foster a spirit of internal competition. They facilitate internal benchmarking and best-practice sharing. With every unit following the same strategy and using the same metrics to measure the success of the strategy, the company can identify the leaders and the laggards in any particular measure and then share the information from the best to raise the performance of everyone else.

A board’s Balanced Scorecard program starts with approving the organization’s Strategy Map of linked strategic objectives and the associated enterprise Balanced Scorecard of performance measures, targets, and initiatives. This enterprise scorecard, of course, would have been created primarily for its traditional role of helping the CEO communicate and implement the corporate strategy throughout the organization. FCFC, which adopted the Balanced Scorecard to implement a new strategy focused on lifetime customer relationships. The Strategy Map clearly portrays the high-level financial objectives of revenue growth and productivity enhancements; the customer objectives of lifetime relationships and excellent service delivery; the critical internal processes of leveraging client information and selling bundled financial products and services tailored to individual customer need; and the learning and growth objectives of motivating and training employees in the new strategy and new way of selling. The Strategy Map has an accompanying Balanced Scorecard of measures, targets, and initiatives.

CEOs can use the enterprise scorecard for interactive discussions with their board about strategic direction and performance in strategy execution. Used in this way, the Balanced Scorecard plays a central role in governance by providing board members with essential financial and nonfinancial information to support their responsibilities for overseeing performance. Initially, the executive team brings its enterprise Strategy Map and Balanced Scorecard to the board for review and approval. Ideally, the review should done before these documents have been finalized, so that board members can contribute to discussions about strategic direction and positioning. The Strategy Map and BSC are the single most succinct and clear representations of the organization’s strategy. They enable the board to understand the strategy, and they provide the basis for the board’s evaluation of whether the strategy is capable of delivering long-term shareholder value at acceptable levels of business, financial, and technological risk. Once approved by the board, the enterprise Strategy Map and BSC, with supporting documents of the scorecards of the primary business and support units, become the primary documents distributed to the board in advance of meetings. For example, at FCFC, the first page of the board package is a color coded Strategy Map indicating those strategic objectives that are performing ahead of plan, at plan, and those are falling significantly short of plan.

These results become the agenda for board meetings, as the CEO engages directors in an interactive discussion about the company’s recent experiences in implementing the strategy. Through a process of continual reforecasting, board member are kept informed of management’s expectations for future performance of key financial measures and the company’s key value drivers. Members of the audit committee become familiar with the risk factors underlying the company’s operations and strategy, and this awareness helps to guide their decisions on financial reporting and disclosure. The second component of a board BSC program consists of executive scorecards that the full board and the compensation committee can use to select, evaluate, and reward senior executives. Executive compensation has been identified as an area where board performance has been most inadequate. Many observers of board processes now believe that board compensation committees fail to set executive compensation at levels appropriate to their responsibilities and performance. In the case of FCFC, exhibit 3 shows the highlighted Strategy Map objectives for the CEO of the bank, and shows the associated executive scorecard with representative measures and targets for the bank CEO.

Take the experience of First Commonwealth Financial, which operates in central and southwestern Pennsylvania. The map it developed for its new strategy (First Commonwealth Financial strategy map) called for the company to become more client-focused by offering its customers a tailored mix of financial solutions. While it was cascading the scorecard down to its operating units, the company also started to train its board in the Balanced Scorecard so that the strategy map and associated Balanced Scorecard of measures, targets, and initiatives could serve as the primary document for board reporting and deliberations. This enabled the board to approve the new strategy and remain continually engaged in the discussion of issues and actions required to support it. Next, First Commonwealth helped the board develop its own scorecard (First Commonwealth Financial's board strategy map).

A board scorecard articulates clear objectives for the company's shareholders and stakeholders; identifies the critical processes the board and its committees must perform to meet these external objectives; and highlights the board's composition and skills, the information packages, and the meeting dynamics that enable the board to perform its critical processes effectively and efficiently. The board scorecard allows a company and its board to monitor themselves against predetermined objectives and targeted measures. Among the questions asked to measure board effectiveness: Are the meetings engaging and interactive? Rather than being passive and merely reactive, are board members actively getting involved in the discussions, challenging managers when necessary, and raising questions? Do board members have access to strategic information? Developing a reputation for an effective board, one that actively monitors and guides strategy, one that ensures that corporate financial and nonfinancial communication to investors highlights key value and risk drivers, and one that holds senior executives accountable for successful strategy formulation and implementation will give investors more confidence that the company is well positioned for future success. Such confidence in an effective governance process should enable a company to enjoy a higher valuation and earnings multiple because investors will see the future earnings stream as more sustainable and less risky.

• The Balanced Scorecard strategy map
• First Commonwealth Financial strategy map
• First Commonwealth Financial's board strategy map

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