What should your board’s role be in developing and overseeing the implementation of strategy in your organisation? Tony Featherstone searches for answers.
How involved should boards be in organisation strategy? That is arguably the most important, and difficult, question in modern governance and a critical topic for company directors who believe the strategy pendulum has swung too far towards management.
A deeper strategic focus does not mean boards should create strategy, dive into planning minutia or obsessively monitor short-term implementation. But it does mean the view that boards recruit a CEO, approve his or her strategy and get out of the way is dangerously old-fashioned.
A debate on the board’s role in strategy is long overdue. High-performing boards say they consistently define, shape and influence strategy. Yet academic research and consultant surveys suggest many boards want better engagement in strategy.
Macquarie Group non-executive chairman Kevin McCann AM FAICD says boards, generally, are becoming much more proactive in influencing company strategy. “It is the next evolution for boards.”
Brambles (Twitter @brambleslimited) and BlueScope Steel (Twitter @Bluescope_Steel) non-executive chairman, Graham Kraehe AO, FAICD, adds: “The first guiding principle of good corporate governance is the board has a key role in approving the organisation’s vision and strategy. Boards simply are not upholding their duty if they are not involved in strategy.”
In addition, Kraehe notes: “Institutional investors are starting to pay more attention to the board’s role in strategy and are asking questions about whether board composition is appropriately aligned to organisation strategy. The role of boards in strategy is a very important issue.”
For years, boards have been held accountable for the downside in their organisations. There has been intense focus on compliance, risk management and governance procedures, possibly at the expense of consistent, value-adding strategic discussions in some boardrooms.
Now, boards are increasingly being held accountable for their organisation’s upside.
Sophisticated shareholders want to know: Does the board set clear strategic parameters and determine the organisation’s risk appetite? Does it create the right conditions for strategic thinking to flourish at executive level? And, is strategy enhanced by conversations with the board?
Other important questions include: Do the directors probe and test the assumptions behind the strategy, looking for fatal flaws or signs of overconfidence in executives who deliver it? Is the board an effective strategic influencer? And, is there sufficient alignment between culture, talent, incentives and strategy?
Moreover, does the board sufficiently govern the implementation and measurement of strategy? And, how well does it communicate long-term strategy to shareholders, from the chairman to institutional investors, to the board’s explanation of strategy in the annual report, and to retail shareholders at the AGM?
McCann, a former chairman of Origin Energy and one of Australia’s leading company directors, says technology’s potential to destroy, reshape or create business models in a blink is forcing boards to focus more than ever on strategic threats and opportunities.
“Many Australian companies have been slow to understand the impact of the digital economy on their industry,” McCann says.
“Depending on the organisation, boards must ensure they are capable of having deep discussions on the effect of digitisation in a global market, and have directors on their board who understand innovation-led strategy and the interplay between technology and business models.”
Put another way, it is the “radical adjacencies” that are exercising the minds of Australia’s top boards. That is, the left-field risks and opportunities as technology
redefines industry boundaries, creates new or unlikely competitors, empowers insurgent companies to attack industry incumbents like never before, and enables organisations to reinvent themselves in global markets.
In this context, greater board focus is as much about protecting the organisation as it is about growing it. Those who see risk management and strategy as separate topics, or see strategy as an area of higher focus once compliance is embedded in the organisation, miss the point.
Ultimately, strategy is a prime task of the board. Everything else that goes with governance – executive pay, board diversity, corporate social responsibility and so on – is about ensuring the organisation has the right settings for long-term sustainable growth.
But there is no uniform approach by boards to strategy. It varies by organisation size, with directors of small organisations and not-for-profit enterprises typically more engaged in the development of strategy, rather than only its oversight. In larger organisations, boards will review, test and challenge strategy, and assumptions behind it.
McCann says Macquarie Group has always had strategy developed by its business units. The divisions, and groups within them, determine strategy in a highly innovative, nimble and entrepreneurial culture.
“Working with management, the Macquarie board looks at how those strategies fit together, and the goals and values that start at the top and flow through our organisation. Some observers might see these as soft issues, but the workforce Macquarie has, and the freedom to operate, are within the boundaries led by the board. These include risk appetite, regulatory compliance and available liquidity.”
McCann says it is important that directors ask challenging questions about strategy at each board meeting. “For example, they could tell the chairman they are concerned about the effect of technology on the company, or ask whether there is the right talent and succession planning to take the organisation forward, or ask if it is sufficiently prepared for structural change in its industry.”
He adds: “I firmly believe strategy is a collaborative process, between management and the board, with constant refinement.”
Macquarie’s board clearly has the right balance between strategy and compliance. But others struggle to find sufficient time for strategy discussion, or fail to understand the board’s different roles in the strategic process.
For some, strategy becomes an agenda item towards the end of a compliance-focused board meeting, or an annual two-day off-site meeting that is formulaic and unproductive.
A 2013 McKinsey paper, Tapping the Strategic Potential of Boards, found 44 per cent of directors said their boards simply reviewed and approved management-proposed strategies. Two out of three directors surveyed said they would like to spend any extra time on strategy.
Worryingly, just over half of directors surveyed said they had a good understanding of dynamics in their organisation’s industry, and only 58 per cent claimed a good understanding of the current strategy. Almost a third of 1,597 directors surveyed in 2011 said they had limited understanding of the risks their organisations faced, and about a quarter had poor understanding of the company’s value drivers.
McKinsey said: “Corporate boards today are under pressure to take more responsibility for developing strategy, and most directors want to be more involved in the strategic planning process. Yet according to our latest survey, directors report that their boards have not increased the time spent on company strategy since our previous survey in 2008.”
These findings are at odds with the views of directors who spend considerable time understanding industry dynamics, the firm’s strategy, business model and key value drivers. But there is little doubt that providing a robust contribution to strategy challenges many directors.
McKinsey identified two key obstacles: inadequate knowledge of the business and its industry; and limited time to commit to board duties.
Simply, directors who join boards from outside the industry, have several other board roles and attend six to eight board meetings each year, find it hard to take deep dives into strategy and emerge with meaningful insight, without huge extra effort.
The shrinking tenure of CEOs, and higher industry and market volatility, compound the strategic challenge for boards.
Dr Peter Cebon, a senior research fellow at the University of Melbourne (Twitter @unimelb) and author of Measured Success: Innovation Management in Australia, is finalising an important academic paper on the board’s role in strategy. Boards, he says, can have several different roles in the strategic process.
“My sense is that boards of ASX-listed companies understand the importance of strategic governance, but many do not know how to approach it correctly.”
Cebon’s interest in strategic governance came through his research on corporate innovation.
He wanted to test linkages between governance and innovation-led strategy, and create a framework to better understand the board’s position in this process.
He identified four clear roles. The first, strategy creation, involves boards taking a hands-on approach to business planning.
This role is more typical in start-up enterprises or smaller listed companies and not-for-profits, which have fewer resources and require greater board input on strategy.
“However, the idea that the board rolls up its sleeves and creates the strategy is not something I would encourage in all cases,” says Cebon. “If management has all the skills and resources it needs, it is not a high-value activity for boards in the long run, and it gets problematic in terms of role definition. In the end, management has to own the strategy.”
The second role in Cebon’s framework is strategic governance. Here, the board determines which strategic questions the organisation will address; the timeframe to address them; whether they are the right questions; and the process for answering them. In effect, this creates a strategic canvas for the organisation to guide the executive team and provide a roadmap for the board.
The third role is strategy creation facilitation. Boards mentor management through the strategy process, providing additional expertise to overcome any weaknesses, suggesting ideas where appropriate or introducing contacts through their network.
“This is about the board’s collective knowledge being used to help the executive team create a better strategy,” says Cebon.
“It is also where boards are probing and testing the assumptions behind the strategy, and assessing if management is blind to any weaknesses, or overcompensating for them.”
The final role is strategy implementation governance. Boards assess if the executive team has the right tools to implement the strategy, such as corporate culture and succession planning, the right people to deliver the strategy, and whether the strategy is being successfully implemented.
The focus on alignment is critical: bad culture kills good strategy every time.
An emerging board role not in Cebon’s framework is strategy communication. Although it is management’s job to communicate shorter-term strategic goals and results, listed-company boards, led by the chairman, have a bigger role these days to articulate long-term strategy to long-term investors, such as industry super funds and retail shareholders.
The Australian Securities and Investments Commission’s guidance note last year on preparing the operating and financial review in the director’s report in the annual report, reinforced the need for boards to articulate their organisation’s strategy, business model and value drivers in plain English, and to explain short-term financial performance in the context of long-term strategy.
John Barrington FAICD (Twitter @JohnwBarrington), managing director of prominent Perth-based corporate adviser Barrington Consulting Group, says practical board issues can also hamper input on strategy.
Boards should spend at least 30 to 50 per cent of their time on strategy and devise key intersections where they contribute on strategy, across the annual board meeting cycle and strategy off-site days, he says.
“All too often, management dumps all these great strategic plans on the board during a two-day off-site, but there is insufficient time for a full discussion of complex strategic issues, and directors leave the off-site feeling not enough was achieved, or will not be followed up in detail,” Barrington says.
Boards should use strategy off-site meetings to identify the key strategic issues keeping management up at night, and which ones to address, he says.
“Those issues should then inform the development of strategy. They will also shape the board’s annual meeting calendar, with a key strategic issue discussed in depth at each meeting.”
He suggests boards focus on a handful of strategic issues rather than cover too many. The Argenti System of Strategic Planning, made famous by Wesfarmers, recommends no more than six strategic issues be identified.
Barrington says: “A director can then be asked to lead an issue, on his or her own or part of a smaller group, do deeper research, and report back to the board for their input. That’s a much better approach that skimming across a large number of seemingly strategic matters and getting nowhere.”
Directors should resist the temptation to make fast decisions on strategic issues at off-site days or even in board meetings, says Barrington.
“A former CEO once objected that he was not going to sit through a two-day off-site, without clear decisions made at the end. But if you operate at a truly strategic level, strategy is a reduction process.
“It is not about operations or what the company will do in year one or two, but how your organisation will close the gap between its forecasts and targets.”
Barrington says boards should look at least five years ahead with strategy. “Obviously, it is different for every organisation, but looking only three years ahead gets boards focusing too much on short-term operational issues. I understand executive teams not wanting to look too far ahead, given the need for short-term performance and rapidly changing industry dynamics, but it’s important that the board challenges management to adopt short, medium and long-term thinking.”
Kraehe says boards should not be too rigid on strategy development.
“In my experience, strategy tends to originate from different sources. Some will come from management. Some might come from the board and some from discussions between management and the board.
“The important outcome is that good strategy is formed and agreed on.”
Kraehe says board composition must be aligned with long-term strategy.
“You need a range of skills around the board table and people who bring different perspectives to strategy. With Brambles, we have directors with North American, European and Asian experience, international retailing and logistics experience, and others with strong legal or financial expertise. The board thought long and hard about the skills and geographic composition it needed to best support Brambles’ long-term strategy.”
Kraehe notes that strategy is addressed at every Brambles board meeting.
“We constantly ask whether the company could work certain assets harder, whether we are taking appropriate risks in emerging markets, or if we should focus more on China, for example. These are big-picture questions that help boards collaboratively work with management to constantly test, refine and strengthen strategy.”
Kraehe says strategy is also a vital part of BlueScope boardroom discussions.
“A business unit, for example, might report on its safety performance, financial performance, the management of risk, and strategy implementation. The board is assessing the organisation’s performance, and how it fits with long-term strategy.
“Directors are also trying to identify trends in the business landscape that could be positive or negative forces for change, and ensure BlueScope has the right strategy to encompass those changes and mitigate any risks.”
Kraehe emphasises that good boards see strategy as a living, breathing process; not a static document that is agreed on and executed to the letter. “You don’t have a two-day off-site and come away with a strategy that everybody agrees on for the next three years. Strategy constantly evolves.”
Dr Eileen Doyle FAICD (Twitter @DrEileenDoyle), chairman of the Hunter Valley Research Foundation, deputy chairman of CSIRO (Twitter @CSIROnews), and a non-executive director of Bradken, Boral, The GPT Group (Twitter @TheGPTGroup) and the Newcastle Port Corporation, says a board’s role in strategy changes as the organisation grows.
“In new ventures, the roles of directors, management and key investors can be blurred,” she says.
“That is appropriate because the organisation usually does not have a lot of resources, so it’s a case of whoever has the expertise needed at the time pitches in to help them get the idea going.”
Doyle, a Conjoint Professor at the University of Newcastle’s Graduate School of Business (Twitter @Uni_Newcastle), has long experience investing in and advising start-up companies.
She says fast-growth ventures should incorporate more traditional governance structures as soon as possible.
“It is very important for directors to step back as the organisation grows and ensure the right structures are in place to facilitate that growth.
“The board will still play an active, value-adding role in strategy, but it should be less hands-on than when the venture was in its formative stages, and there should be clearer distinction between the roles of management and the board.”
Doyle believes that how boards manage the strategic conversation affects the relationship between directors and management.
“The better that conversation is managed, the more stable the mode of operation between the board and executive team. Well-managed conversations mean management and directors can openly question strategy, without becoming defensive.”
She says directors must be extremely well-informed about the industries their organisation operates in.
“You will never properly contribute to strategy if you don’t understand the industry landscape, trends and competitors,” she says.
An ability to relate short-term performance to strategy is equally important, says Doyle.
“Directors must know how the latest results fit into the long-term strategy. They need that perspective to understand if the short-term performance is appropriate, in terms of where the company wants to go.”
Newcrest Mining chairman Peter Hay FAICD says “textbook” thinking about board input on strategy does not always match reality.
“So much depends on the CEO, his or her perspective on strategy and that person’s ability to engage the board on this issue.”
Hay is also a non-executive director of Australia and New Zealand Banking Group, GUD Holdings and Myer Holdings.
He says: “In the real world, the board usually asks the CEO to conduct a strategic review from time to time, to ensure the organisation stays ahead of its competitors.
“If your CEO has not been through that process, and has been handed a strategy by the board, he or she may feel no ownership of it.”
Hay says when recruiting a CEO, boards must ensure broad alignment in views on strategy.
“That does not mean the CEO has to agree with every aspect of the existing strategy or can’t improve it. But it is no good hiring a CEO to run a retailer who, unbeknown to the board, believes the organisation’s future is in manufacturing, when the board clearly believes it is in retailing.”
Hay believes a good CEO will bring boards along on strategy.
“The best CEOs I’ve seen ensure the board gets good, timely information to help form a view on strategy, and encourage board input.
“They want directors to ask tough questions, and they see the board as a useful resource to draw on, to help strengthen the strategy.
“When it works, you have a transparent approach to strategy formulation, planning and execution, and everybody knows where the organisation needs to get to.
“You have management creating strategy and boards helping shape it, to produce a better outcome for stakeholders.”
That is the dream situation for most organisations. But getting there requires boards asking the right questions about strategic purpose, planning and process. And perhaps questioning themselves: How involved should our board be in the organisation’s strategy, and what is our plan to get there?
Tips for boards on strategy
1. Understand the link between organisation size and strategy
A fast-growth emerging technology venture, for example, might still be engaged in customer discovery and searching for its business model and strategy. The board might need a hands-on role in strategy creation and implementation, and strategy could resemble more a hypothesis than a concrete plan. In a large organisation, such as a bank, strategy typically is well-defined and more stable, and there is clearer distinction between the role of board and management in its formation.
2. Align board composition with strategy
Are directors sufficiently versed in complex organisation strategy? Do their collective skills and experience align with strategy, and is the board capable of joining the dots within and across industries and markets to identify emerging strategic risks and opportunities?
3. Help directors
Those who govern an organisation in an unfamiliar industry must rapidly build their sector knowledge. The board should ensure it receives appropriate, timely information from the executive team on industry conditions, and does its own environmental scanning to look beyond information supplied by management. Nothing beats directors being well read on general business and industry issues, but ensure material that challenges your views – rather than only reinforces them – is included in your regular information set. Also, attend key industry events where possible.
4. Develop a process of strategic engagement
Boards that seek deeper engagement in organisation strategy should design a clear process to enable better collaboration between executive teams and management on this issue. For example, the board might develop an annual two-day strategy off-site meeting, a strategy discussion session before every second board meeting, a timetable of strategy presentations from key executives, and so on.
5. Set boundaries between board and management
There is an obvious temptation for directors, especially those who were recently full-time executives, to dive too deeply into management and blur lines between the board and executive team. Understand that the role of boards, at least in larger organisations, is not to create strategy from the bottom up, but to test, shape and influence it through robust discussions with the executive team.
6. Set broad strategic parameters
Good boards have a clear understanding of the organisation’s risk appetite and the types of returns investors seek. They deeply understand the mission, vision and values, which in theory should influence strategy creation and implementation. The aim is to give the executive team an intended destination in a certain timeframe, and help them devise the best route to get there, without getting in the way.
7. Isolate and probe assumptions
A key risk is focusing on the headline strategy and overlooking underlying assumptions, or taking information behind the strategy at face value. Can the CEO defend the assumptions and what happens if they are wrong? How reliable is the information underpinning the assumptions? What factors could cause key assumptions to be stronger or weaker than the base-case scenario? Good directors challenge assumptions constructively, and good CEOs welcome the reality check.
8. Go big and go long
Once strategy is agreed, the board should focus on a manageable number of big-picture threats and opportunities, and have a sufficiently long enough horizon. For example, a strategic priority might be how the organisation will capitalise on strong forecast growth in Asian middle-class consumers in the coming decade. Or how an ageing population will affect demand for housing construction. Test that these are the right questions, and whether they need to change from time to time.
9. Delegate and dive deep
The board might allocate a key strategic issue to a director or form a taskforce, seek executive input on the trend, or external advice, and discuss the information during or before a board meeting. This process helps boards and executive teams better engage in short-term and long-term thinking, and constant refinement of the big picture keeps strategy fresh and evolving.
10. Align everything
The board has a critical role in ensuring the organisation is capable of delivering the agreed strategy. Does it have the right culture, people, systems and incentives to execute the strategy? Is there a culture of innovation? Is the organisation sufficiently nimble to change strategy quickly if needed? How well is strategy understood throughout the organisation? Can strategy be explained simply so that its core thrust can be comprehended by anybody?
11. Develop strong processes for strategic milestones
Does the board have a clear process for approving capital allocation for critical projects? How does it decide if a merger or acquisition is a suitable investment? What are the board’s comfort levels on key balance-sheet metrics and is there a process to approve more debt or equity capital being raised? High-performing boards think through these issues well in advance and have clear processes to help guide difficult decisions in fast-moving, pressured situations.
Some boards believe the best communication of strategy is performance. That is, if earnings are growing and the share price rising, strategy must be working. A better approach is the board clearly explaining long-term strategy to key stakeholders, with management explaining shorter-term performance, operational and strategic issues. Enlightened boards might even consider publishing a policy on the process of strategic governance to help stakeholders understand the board’s role in strategy and whether it is fulfilling it.
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