Driving growth and setting strategy: the role of board of directors in strategic planning
June 2015 | EXPERT BRIEFING | BOARDROOM INTELLIGENCE
A pivotal and core responsibility of the board of directors is to provide leadership in the development and execution of a strategic plan; its importance mirrors hiring the CEO. This responsibility involves oversight of strategy including approving and capitalising the plan, followed by monitoring its progress and results and adjusting as appropriate. Historically, boards focused on strategy once annually, often at a one-to-two day off-site retreat. This is evolving into a discussion on strategy at each board meeting to ensure that appropriate progress is being made and that new competition or technology is being assessed in a fast-moving world.
How much of your board meeting is spent reviewing past performance, measuring metrics and discussing risk and compliance – all very important topics – versus discussing strategy and identifying growth opportunities? The key is balance; not doing one while sacrificing the other but doing both at an appropriate level and depth. The specific ratio is situational varying with the company and its needs and must be determined by the board and management.
In a highly regulated industry, some boards spend up to 90 percent of meetings looking backward on performance, compliance and risk management. What would the results be if we emulated a (private company) colleague who seeks to spend 90 percent of the meeting looking forward? Imagine spending the bulk of the board’s time and intelligence focusing on strategy: growing the business, anticipating and working with disruptive technology (as opposed to reacting after being negatively impacted by it), understanding the competitive landscape and identifying contacts to form strategic alliances or expand into emerging markets.
There are several factors which can hinder a successful partnership between the board and management on strategic planning, a few of which are listed below:
Board composition and competencies. When relatively few directors have comprehensive understanding of underlying industry dynamics, economics or competitive positioning, it hinders their ability to provide meaningful input. A lack of technology fluency makes it challenging to understand how new developments are impacting the company, much less anticipate the impact of emerging innovations. All of these dynamics can fundamentally impact financial metrics: revenue, profits, ROIC (Return on Invested Capital) and share value.
Lack of clarity of role of individual directors and board. This can result in slow or no decisions and unnecessary conflicts.
Ambiguous or ineffective strategic planning process and dialogue. The strategic planning process is evolving from a formulistic approach to a year-round iterative process. The lack of a well-defined and executed process can lead to unproductive discussions or inappropriate decisions.
Lack of alignment and agreement on company strategy. This disconnect can hamper the ability to prioritise both issues and strategies, thus limiting effectiveness and financial performance, both of company results and stock performance.
Dysfunctional or limited team dynamics either within the board or between the board and management. Many different scenarios contribute to these dynamics: a dominating company founder who stifles discussion and prevents change, star directors who have multiple commitments to other companies and are less able to make contributions, lack of necessary data to have a meaningful dialogue and make informed decisions.
Strategic planning process
Traditionally, the board would meet for an off-site two day strategic review once a year. This one-time event is not optimal in a fast-paced world impacted by frequent changes. The process today is iterative and better served by boards addressing strategy at multiple meetings, perhaps every meeting, i.e., 4-8 times per year. At the very least, there should be a review of current status and discussion on appropriate revisions.
Another approach is to have a year-long agenda of strategy topics with a different focus at each meeting. Potential topics include: marketplace dynamics, discontinuity, opportunities; competitive environment and emerging strategic options; current and emerging customer needs (met and unmet), customer loyalty, new customers; new technology and disruptive innovation – challenges and opportunities that could impact strategy today and tomorrow; strategic investments required – financial, human, technology, equipment; business development initiatives to support strategy – M&A, alliances, joint-ventures, divestitures; and bringing it all together – annual retreat to discuss and set strategy.
The key for boards is to foster a dialogue that extends managements thinking versus accepting (or challenging) a predefined plan. One CEO worked for more than a year to improve the process, moving it from discussions full of challenge and scepticism to collaboration and contribution.
Here are some of the best practices to improve the strategic planning process: (i) explain the ‘how’, i.e., the strategic process, including how the process was developed and how it has changed before getting into the details of the ‘what’ (the plan); (ii) include information on markets, customers, distribution channels along with financial data and technology updates; (iii) tap into individual director expertise, whether as part of the meeting or offline, to extend understanding and foster agreement; (iv) have regular communication between the CEO and the board to keep the board of directors up to date on strategy and execution; (v) offer strategic options for the board to discuss versus outlining one plan for the board to approve (or reject); and (vi) brief the board on leadership and organisational resources required to implement strategies, including investments that need to be made, where staffing, compensation or training gaps exist, and whether the company culture supports the strategy.
Last, yet not least, watch for warning signs that the strategy is not working and needs revision or a major rethink. Also be realistic on assessing whether all company functions or groups can fulfil their part of the plan. Can manufacturing build what engineering designs? Can IT integrate all groups so products can be delivered on time and on budget? Can the current sales force sell bleeding edge technology?
The impact of the overall board of directors or individual directors on a company’s performance and prospects can be immense. Specific examples include when a board chair facilitated the spin-off of a division into a standalone unit, sacrificing short-term personal gains for the long-term viability of the division and the corporate entity.
Strategic boards are rated at level four (of four levels) on a continuum of good to great boards by Harvard Business Review (A More Effective Board of Directors, 5 November 2012). The first level, Foundational, provides basic compliance oversight whereas a strategic board provides “prescient forward-looking insights to form a company’s foundational strategy, is fully actualized and high performing”. Such board members take “appropriate risk to make significant contributions and lasting impact on enterprise value”.
To provide this level of value, the board must have diversity of expertise, skills and experience that provides comprehensive knowledge of the underlying industry, global experience, technology fluency and governance skills. Individual directors need to commit resources to make meaningful contributions with the ability to collaborate effectively with fellow directors. Then, the board of directors can work with management to provide meaningful leadership on strategy, leveraging the experience and expertise of individual members and fulfilling their joint responsibility of enhancing financial performance and creating higher shareholder value.
Margaret Pederson is an independent board member of Viad, TextureMedia Inc and Xamax Industries and is on the Advisory Board of Women Corporate Directors. She can be contacted on +1 (203) 594 7796 or by email: firstname.lastname@example.org.
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