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Strategy and the Board

Ken Favaro

Ken Favaro is a contributing editor of strategy+business and the lead principal of act2, which provides independent counsel to executive leaders, teams, and boards.

 

Some governance experts argue that when it comes to a company’s strategy, the buck stops with the CEO. They say the board’s most important purpose is to choose the CEO, evaluate his or her performance, and make a change if and when necessary. Their view is that inserting the board into the company’s strategy just muddies the CEO’s accountability.

But most CEOs see value in having their boards actively involved in strategy, and most directors want to spend more time on their companies’ strategies, too. This makes perfect sense. Often by design, boards are usually stacked with people who have experience, contacts, knowledge, and perspective that can be tremendously helpful to guiding a company’s strategy.

Moreover, a board can, should, and usually does have a strong role in implementing a company’s strategy by, for example, reviewing and approving its implementation plans, signing off on large capital expenditures it calls for, and making connections through their networks to support it.

Yet I often encounter CEOs who are quietly disappointed with the value their boards add — and directors who discreetly tell me they are unhappy with how they are engaged. These disconnects can result from many sources: dysfunctional differences or groupthink uniformity, a shortage of information or too much of it, dominant or deferential personalities, excessively regimented or overly loose meetings, and the list goes on. The bigger problem, though, is that most boards and CEOs engage in ways that are counter to how great strategies actually happen.

Take the typical planning process. It ends each year with a formal request of the board to approve next year’s budget and bless the company’s longer-term plan. The board is pummeled with detailed forecasts of the company’s financials. Left implicit are the choices that differentiate where and how a company competes: what business the company is in, how it adds value to its businesses, who its target customers are, its value propositions, and its winning capabilities. These choices comprise the company’s strategy and give life to its strategic plan. It may be a planning process, but it’s hardly strategic — and it leaves boards hard-pressed to contribute much to their companies’ strategies.

Perhaps realizing that the usual planning process is not enough for effectively engaging directors in strategy, most companies have adopted the practice of having board “off-sites.” These are typically an all-day (or even two-day) event that’s meant to engage directors once a year in deep discussion about the company’s strategy. They tend to occur between annual planning cycles, well after the previous one ended and just before the next one kicks off. There is usually a roll call of presentations from each of the company’s businesses, geographies, or functions. There’s a discussion of goals, market developments, competition, and performance. Often there’s some dialog around possible market expansion (“adjacencies”) and M&A. And, sometimes, there are interesting outside speakers, entertaining videos, and other bells and whistles to spice things up a bit.

Most boards and CEOs engage in ways that are counter to how great strategies actually happen.

Directors appreciate these summits because they provide deeper information on the company’s businesses, broader exposure to its leaders, fascinating things to talk about, and a chance to bond with one another and management. But for board directors to be meaningfully engaged in a company’s strategy and able to add value to it, they must be part of deciding what strategic issues and opportunities need to be addressed now (versus those that can wait until later), how they are framed, what alternative responses should be considered, how alternatives should be evaluated, how well they have been evaluated, and ultimately what alternative (or combination of alternatives) should be chosen. These decisions are how great strategies are made, and although theoretically feasible, in practice it’s impossible to do full justice to all of that during a board off-site (or in the board meeting that typically concludes the annual planning process). Especially when there are other important things that must be on the agenda.

Board directors can add big value to a company’s strategy, but they need something other than the annual off-site and planning process. In a future post, I’ll discuss what that is — and how it not only dramatically improves a company’s strategy, but also its execution.

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Strategy and the Board