When Good Ideas Clash—Strategy for a More Engaged Board
Political change. Worldwide health epidemics. Terrorism. Volatile energy pricing. Record stock index highs. These are just some of the risks and opportunities facing corporate boards today. But by this time next year, these factors will be old news, displaced by another set of pressing headlines. Meanwhile, many good ideas will emerge on how to manage the challenges that such headlines describe—and sometimes those ideas will clash.
As fiduciaries, corporate directors can play a key role in the development of strategy. Beyond merely contributing knowledge, these leaders want to actively participate in shaping their organizations’ future. Many boards, however, still follow the traditional path, delegating development of strategy to senior management and confining themselves to the accepted review-approve-monitor function.
But today’s business environment requires redrawing the boundaries of this classic process to create a much more dynamic dialogue that involves the clash and synthesis of good ideas at the earliest stage of strategy development. In response to this new reality, boards must take on a new role.
Board and Management Collaboration
Establishing this new function will require a cultural shift. The NACD Blue Ribbon Commission Report on Strategy Development recommends early involvement and ongoing dialogue between the board leader and the CEO. As a first step, the board leader (chair or lead director) should have a conversation with the CEO about how to expand directors’ engagement.
The leader should make it clear that the board seeks greater involvement not because of any concerns about CEO performance but as a response to the changing competitive environment. The board and CEO can then develop a process together that will allow the C-suite to draw on the board’s collective knowledge while ensuring that management retains primary responsibility for strategy development.
Overcoming Barriers to Progress
When changing how they participate in strategy, directors need to be aware of potential barriers to candid discussion between the board and management as they assess the company’s future. Here is a list of such barriers, followed by ways to overcome them.
Barrier: Short-term focus. In recent years, the pressure for companies to deliver short-term shareholder returns has significantly intensified. Investors may advocate for increased dividend payouts or stock repurchases, potentially draining capital that might otherwise be used for against longer-term objectives.
Solution: Long-term focus. Directors can ask if the company’s capital allocation aligns with strategic priorities. During the budget-setting process, directors can ensure consideration of the long-term strategy and link the budget to strategic goals. Metrics must also be designed to overcome a short-term bias. Forward-looking board meetings must be supported by dashboards or metrics to track key performance variables that provide insight into the company’s future trajectory. Reports on corporate financial performance, while necessary, are ultimately lagging indicators. The strategic plan should result in agreement by the board and management on appropriate metrics to monitor progress. Management should give the board reports on leading indicators specifically identified in the strategy process as critical to the implementation plan.
Barrier: Infrequent/over-scheduled strategy sessions. It is a common practice for boards to hold an annual session, frequently off-site, to focus on corporate strategy. These meetings can sometimes become counterproductive. For example, the agenda may be packed with presentations from senior management and reviews of current business lines that are not focused on forward-looking issues.
Solution: Frequent dialogue. Monitoring must be coupled with frequent and focused strategy discussions during the year to gauge whether assumptions are still holding or need to be revised due to new information.
Barrier: Inadequate board composition. A board without the necessary “spirit of inquiry,” in which they constructively and objectively engage, question, and dig into the current strategy and alternatives.
Without this inquisitive nature, directors may accept signs of underperformance when they should question such indicators.
Solution: Enlightened composition. To support full board engagement in strategy discussions, the nominating and governance committee should consider directors’ strategy-related qualifications, both when evaluating current directors and when considering new board candidates.
Barrier: Insufficient agendas. One of the most significant barriers to directors’ engagement is simply a lack of time. The range of areas requiring board oversight has significantly expanded, but the length of board meetings has increased only incrementally. As a result, agendas often prioritize compliance-related topics and presentations from management. This leaves little time for directors to discuss forward-looking issues, such as long-term strategy or emerging competitive threats, or to brainstorm alternative tactics.
Boards must evaluate their time and allocate appropriately for open-ended discussions about corporate strategy.
Solution: Planned agendas. As part of the new dialogue, boards must evaluate how they spend their time and allocate appropriately for open-ended discussions about corporate strategy. The full board can be viewed as a strategy committee of the whole and should consider reserving time on the agenda of every board meeting to discuss elements of company strategy. In addition, boards can consider holding, at a minimum, executive sessions at the beginning and end of every board meeting. During one of these sessions, the chair can speak frankly with directors about the day, expectations, issues, or questions on which directors should focus—including those specifically related to future strategy.
Barrier: Information asymmetry. Often management knows far more about company risks and opportunities than the board does. Traditionally, boards have relied on information from management to fulfill their duties relative to strategy development (with the exception of major transactions, when outside advisors play key roles). Out of necessity, the information received by boards is significantly streamlined in comparison with the volume and detail available to management on a daily basis. In the current environment, the risk of this asymmetry in the quality and timeliness of information can prove to be great. Management will naturally provide supporting data for its chosen strategy, but the board will need to acquire more information on the alternatives.
Solution: Widening perspective. Boards can be kept informed of industry and company progress so that underlying assumptions can be consistently reviewed and challenged at board meetings. Continuing education at the board level can be specifically targeted to address the company’s competition, risk factors, and other strategic elements. Externally, boards may request briefings from third-party experts on issues ranging from cybersecurity to global economic trends to country-specific issues. In addition to meeting with shareholders and other stakeholders, boards may choose to invite analysts and portfolio managers to meet with them.
Barrier: Turf issues. Having served as champions of the existing plan, the CEO and senior management team may not be as responsive as necessary to warning signs that the corporate strategy needs to be reevaluated. They may defend the current plan in response to questions or criticism and be dismissive of slow-growing emerging threats or external shifts. This in turn may raise concern among company executives that the board is potentially crossing the line from oversight to management.
Solution: Teamwork. It is important for the board to assure management that it need not present a perfect strategy from the start. Establishing a board culture that encourages management to present multiple strategies and to be forthcoming with the right—not necessarily the most—information about them will put directors in a position to offer ideas and ask probing questions.
Barrier: Unpleasant consequences of change. When performance is good, it can prove difficult for directors and management to disrupt the status quo in order to make the necessary changes and divert resources toward building competencies for a future strategy. Adopting a new strategic course may entail unpleasant consequences for the company, including dismissing executives, missing earnings targets, laying off employees, closing operations, and the sale of legacy businesses. Faced with this potential fallout, the board and management may be slow to take on a new direction.
Solution: Strategic courage. Directors need to engage management in a regular strategic dialogue. Critical questions to consider include: What are the competitive advantages that we intend to rely on in the future? Are our discretionary resources (e.g., capital, managerial talent) better deployed elsewhere? What businesses are we in that we shouldn’t be? Do we have other, more attractive alternatives? By asking these questions together, boards and management can make the difficult yet necessary decisions that affect employment and lines of business.
By understanding and overcoming barriers to constructive dialogue, boards can move from the clash of good ideas to consensus on successful strategies.
Board Engagement in Strategy Development—Companies of Note
Board engagement with strategy typically happens behind the scenes. In some cases, however, it is written into the board’s own governance guidelines. Here are just a few notable examples from the governance guidelines posted on company websites.
Meeting Agendas and Materials. Board meeting and background materials sent to directors in advance of meetings focus on our key strategic, leadership and performance issues.
- Each year, the Board has formal reviews and discussions of our annual and longer-term strategic business plans and management development and succession plans, including an assessment of senior executives and their potential as successor to the Chief Executive Officer. The Board has adopted procedures to elect a Chief Executive Officer successor in the event of the Chief Executive Officer’s sudden departure.
- Focused discussions of individual businesses and key issues are held throughout the year, and extended off-site sessions are held periodically for in-depth reviews of key strategic matters. The Board also regularly reviews our performance compared to our competitive peer companies.
Source: General Mills Inc., Corporate Governance Guidelines
Shareholders elect the Board to oversee management and to assure that shareholder long-term interests are served. Through oversight, review, and counsel, the Board establishes and promotes Microsoft’s business and organizational objectives. The Board oversees business affairs and integrity, works with management to determine the Company’s mission and long-term strategy, performs the annual Chief Executive Officer evaluation, oversees CEO succession planning, and oversees internal control over financial reporting and external audit.
Source: Microsoft Corporation, Corporate Governance Guidelines
Role of Directors
The business of the Company is managed under the direction of the Board. Normally it is management’s job to formalize, propose and implement strategic choices, and the Board’s role to approve strategic direction and evaluate strategic results. However, as a practical matter, the Board and management will be better able to carry out their respective responsibilities if there is an ongoing dialogue among the Chief Executive Officer, other members of top management and Board members. To facilitate such discussions, the Board conducts an annual review of the Company’s long-term strategic plans and principal issues. Periodically during the year, the Board receives strategy updates from members of senior management of the Company.
Source: Xerox Corporation, Xerox Corporate Governance Guidelines