Boardroom diligence: Role in capital program success

Boards are taking on more responsibility for capital allocation and project oversight

The role of the board in overseeing capital projects has taken on a new urgency. This comes in the wake of high-profile troubled projects, which have devastated corporate performance and stock price.

Our research shows that forward-thinking boards are taking on ever-increasing responsibility throughout the project lifecycle—from concept to commissioning and operations—to forestall project issues. They are also actively overseeing their companies’ capital allocation strategy as part of their mandate to protect and expand shareholder value. 

Active board oversight makes a difference

The disparate fates of the two companies described in "A tale of two businesses" illustrates the impact of troubled capital projects—as well as the importance of active board oversight—on share price.

Five ways the board of directors can facilitate capital project success

Get involved early

As a preliminary step before directors greenlight a large capital expenditure, explorative discussions can determine if the project aligns with: overall strategic business goals, timelines, potential returns, possible risk scenarios, and impact on other organizational initiatives. Early consultation is particularly valuable if board members have the right combination of talent—in finance, real estate, engineering, construction and market analysis—to accurately assess the viability of a project.

Observe firsthand

While it might sound obvious, few board members actually visit project sites during construction phases. Increasingly, however, boards believe this is an essential aspect of their oversight responsibilities—and are urging management to provide knowledgeable guides who can provide in-depth answers as well as offer candid assessments of a project’s progress.

Adopt project-tracking programs

More and more companies are establishing multifaceted technology-enabled project-tracking programs that uncover problems requiring board-level attention. Whatever tracking methodology is used, a wide array of metrics that run against each capital project can give the board the fullest picture possible. Besides obvious indicators like cost, cash flow, schedule, and returns on investment, directors are beginning to ask for less customary but potentially illuminating project milestones as well.

Hire external advisors

For most boards, the hardest aspect of capital project oversight is gauging the progress of construction. Various layers of contractors and subcontractors in any large development effort can be challenging for company management to penetrate, let alone explain to the board, along with the attendant ramifications. Given this type of natural tension between management and governance, some boards have begun to turn to third parties to fill the potential knowledge gap on the construction side of the project.

Rethink compensation incentives

To prioritize efficient use of capital, some companies involved in numerous construction projects are placing the responsibility for oversight of all of these campaigns on a single top executive—for example, the Chief Operating Officer, who is a familiar face at job sites and can smooth out problems before they threaten the success of a project. Smart boards supervising this type of management structure have begun to investigate new compensation incentives. The rationale: Bonuses based on revenue or earnings per share are not directly relevant to these executives; instead, they should be judged based on the success of the capital projects themselves and not only the indirect benefits from these projects.

“Boards need reliable metrics to be effective in their oversight responsibilities. When reporting to the board, management must ensure chain of custody from ‘(drill) bit to boardroom’ to maintain the integrity of the data.”

Tony Caletka, Global Capital Projects & Infrastructure Energy Leader

Contact us

Daryl Walcroft
Principal, US Capital Projects & Infrastructure Leader
Tel: +1 (415) 498 6512
Email

Peter D. Raymond
Global Advisory Leader, Capital Projects & Infrastructure
Tel: +1 (703) 918 1580
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Anthony Caletka
Principal, Global Capital Projects & Infrastructure Energy Leader
Tel: +1 (713) 356 5871
Email

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