Board & Strategy
Does Your Board Really Add Value to Strategy?
- Meaning of strategy – Strategy has many possible meanings so each board must decide what it means to them. This will, of course, impact the executive team’s view of what the board’s contribution to strategy should be.
- Role of the board – A board can play many roles vis-à-vis its oversight powers on strategy. These can range from the traditionally strong supervisory role, to acting just as support for management towards external stakeholders as well as internally, to taking on a meaningful co-creation role by giving an external perspective through their more open view of the world that helps overcome blind spots among executives. Each of these roles impacts differently how a board might participate in the strategy debate.
- Context of the firm – The board’s involvement in strategy will also depend on the context or environment the company works in. In a simple context, the board may well support the executives’ decisions in their strategic plan while remaining distant and largely hands-off. In a chaotic context, however, a board may need to have a strong hands-on approach to strategy development
These three variables make determining a board’s responsibilities for strategy a complex decision. How should the board navigate through these three dimensions? In our view, the best way to understand and clarify your board’s role is to create a “map” by analyzing the three dimensions in detail and plotting the results. The following sections explain in detail how we recommend you manage this process.
- Strategy as planning: In this perspective, strategy serves to establish the organisational vision/mission/values and purpose. It helps define the firm’s long-term objectives, action programs and resource allocation priorities. This is what most of us know as the traditional approach to strategy. It is defined by a structured, step-by-step process that Jack Welch of GE championed in the 1980s to implement total quality management and improve productivity, efficiency and profit. This definition gave birth to the notion of “strategic planning,” which has become a cherished practice in most corporations, though it is heavily criticized by management thought leaders such as Henry Mintzberg in his book The Rise and Fall of Strategic Planning.
- Strategy as redefining one’s competitive domain: Here, strategy is used to address one’s industry boundaries, the key players, where the company stands and how the industry might be transforming. In the past few years, for example, Nestlé has redefined its strategic arena from food to “wellness,” completely expanding beyond the boundaries of its industry and opening the door to growth in many diverse new directions. Samsung in Korea similarly redefined its industry from electronics to “lifeware,” producing a wide spectrum of stylishly designed digital products including cell phones, televisions and cameras that rival Apple, Sony and Motorola. Fujifilm survived and thrived during the transition from film to the digital world while Kodak did not because it took numerous steps to alter the strategic vision of its competitive domain. For instance, Fujifilm jumped out its industry by using its knowledge of chemicals to diversify into a new line of antioxidant cosmetics as well as making optical films for LCD flat-panel televisions.
- Strategy as a focused response in order to overcome a key challenge: In this view, well illustrated by Richard Rumelt in his book Good Strategy, Bad Strategy, strategy consists of diagnosing the nature of the key challenges, developing an overall approach to overcome the obstacles and designing a set of coordinated actions to accomplish the defined approach. The challenge may come from the risks and opportunities in the economic and business environment (e.g., rising oil prices), or it may arise from the competitive landscape (e.g., a new business model from a competitor). It can even stem from internal issues such as an organisational structure that does not allow full value creation. Identifying, assessing, managing and structuring the risks and opportunities that result from a key challenge will lead to a focused approach and coordinated actions that are the heart of this definition of strategy. Corporations traditionally exposed to large risks, such as natural resource or commodity players, are used to running their businesses with a strong eye on risks and opportunities. They are well aware of the breakeven commodity prices and the dynamics of capital expenditures following market upswings and downswings, and their strategies are primarily linked to addressing these external risks and opportunities. For example, under the leadership of Peter Voser, Shell committed to the largest capital expenditures program in the industry while restructuring the company, which implicitly raised the breakeven oil price for Shell. The CEO thus diagnosed a challenge (limited access to oil resources), designed a guiding policy (focusing the organisation on large capital expenditures, requiring gains in efficiency) and organized a coordinated set of actions (cost restructuring, reorganisation, cash flow management) to support that policy
- Strategy as identifying and reinforcing core competencies: In this case, strategy is a vehicle for achieving long-term sustainable competitive advantage and profitability. IBM’s Research Division, for example, successfully reinvented itself time and time again, basing each shift on reconfiguring its core strategy to find and transform research ideas into businesses with new products for the marketplace. Between the 1940s and 1970s, the research division relied mostly on corporate funding to produce long-term research. In the 1970s and 1980s, it emphasized collaborative teams and shorter-term projects funded by the business units. By the 90s, the research division was looking to its customers and their research divisions to jointly develop innovative new projects. More recently, it has been imitating a venture-capital model to fund promising new ventures
- Strategy as optimizing the value contribution to stakeholders: Here strategy consists of defining, monitoring and optimizing how the company maximizes benefits for its customers and other stakeholders. An example of this is the number of banks that have moved towards customer centricity following the 2008 financial crisis. In Canada, for example, TD Bank went all out in its efforts to court customers, especially those working full-time, even offering early morning and Sunday hours to increase points of touch with customers on their schedules. Such efforts are innovative strategic moves in the fairly static and traditional industry of banking.
Given these different meanings, boards need to begin by clarifying which of the five possible interpretations of strategy they want to focus on, and if several matter, which one dominates. This is by no means a static decision: One view of strategy may be more essential to the success of the organisation in the medium term but need to evolve over the long term. Boards may need to examine different time periods (5 versus 25 years) in their consideration of strategy. Having this discussion with management is invaluable—and a great way to stop the traditional “death by PowerPoint” presentation at board meetings. Many disagreements within boards, and between boards and executives, can be avoided by examining and identifying the board’s role in terms of how it defines its strategic function. For instance, a board that sees its primary focus as adding value to customers, can help clarify this strategic objective for executives. Or a board that sees its mission as helping avoid large risks in difficult times can elucidate this dimension using the experiences of its board members.
Boards can begin to assess their optimal strategic function by grading the five options according to which ones matter most to them versus where they see their executive teams focusing. Our experience shows this might be done by asking each board member to assign points to each of the five definitions of strategy, then tallying the results to uncover the differences of view and determine which one(s) rank highest among all board members. Such a process provides an opportunity to air different perspectives and build a coordinated view among the board.
- Supervision – In a supervisory role, a board spends its time monitoring corporate performance and executive team behaviour. The board is there to ensure performance of the organisation and its executives in selecting a course of action nd implementing it. This supervision includes everything – strategy development, design and implementation. But this role requires the board to have specific supervisory skills including a systematic view, attention to details, and an understanding of consistency and control, all of which can be adapted to supervising not only results but also strategy. The board must engage in a process of probing and sensing using appropriate metrics, hard and soft, while paying attention to risks, strategic inconsistencies and flaws that could threaten the business. Developing these supervisory skills is thus a prerequisite for board supervision of strategy. However, such skills are not necessarily valued as much in the West as in other cultures such as China, where large corporations are tightly supervised by governmental organisations that continuously monitor organisational and individual performance. Xu Shanda, independent director of ICBC, the large Chinese bank, quotes his past supervisory experience with tax authorities at the ministry level as an asset to the bank that differs from typical board members skills in the West.
- Co-creation – A board may be a direct contributor to company performance by co-creating the strategy of the firm. Industry experience beyond the company, managerial experience beyond the industry as well as contacts with many stakeholders (governments, customers, society, employees) often give board members an advantage compared to the company’s executives when it comes to understanding trends and the complexity of today’s business world. A co-creative role can help open the mind of executives towards unseen realities and allows boards to steer the strategy debate beyond any blindspots they may have. Blindspots typically arise because of executive myopia due to corporate, historic or strategic biases. Processes such as an executive strategy retreat with the board or a highly structured yearly strategy meeting can yield an opportunity, implicitly or explicitly, for co-creation. Starting out with supervisory questions (e.g., What are your principal moves to achieve your strategic objectives? What are your fall back options?) and pursuing support issues (e.g. getting alignment between board and management, enforcing corporate commitment to the strategy) can lead to reflection, which, in turn, can inspire some level of co-creation. Successful co-creation will typically leverage both the internal information held among the management team and the external information and experience gathered from the board to produce a long-term perspective with more options and flexibility than typically comes from managerial views alone. Co-creation will thus engage the definition of strategy itself.
- Support – In this role, the board acts largely as a support for management, bringing it credibility and authority (or, in some cases, removing their support, leading to management renewal). Although distant from management, the board adds value by garnering support for the company both within and outside the firm. Distance gives it objectivity and authority; its stamp of approval brings credibility and weight to major strategic shifts as well as subtle ones. The board also helps management in realms the latter cannot easily reach: governments, social movements, stakeholders, and so on. In times of crisis, a supportive board can be the key to success. A good example of the failure of a board to provide adequate support is the BP board after the Macondo field blowout crisis in 2010. Given that BP had a prior catastrophe in 2005 in Texas, which killed 15 workers, some doubt that BP’s board did all that it should have done to monitor the company’s safety management procedures and its overall safety culture. Many also viewed the CEO as quite isolated during the difficult times and questioned whether a deeper involvement of the board and its chairman would not have helped BP better manage the situation. While BP’s board removed Tony Hayward as CEO, it is possible that much its own failings were equally at fault in the catastrophe. While a board more focused on a supervisory role may have been fine during the simpler times of normal BP operations, a quicker switch to strong support might have enhanced BP’s reputation and long-term success during the chaotic aftermath of the explosion.
In the same way that boards can rank and map their definitions of strategy across the five different options, they can do the same for weighting and mapping the roles they seek to play – supervisory, co-creative or supportive – or a combination of these. This will provide greater clarity about their involvement in the strategy debate so that they can truly add value. For example, a board cannot decide to act just in a supportive role unless it is convinced of the quality of corporate choices, behaviours and performance the leadership team produces. On the other hand, a board may not have the necessary skills to take on a supervisory role and so it might prefer to work towards a more co-creative one, cooperating with management on strategy. What counts is that the board understands its role and how that determination impacts its involvement in strategy. Once clarity is reached, the board can better address how it will support strategy and organize its communication and contacts with internal and external stakeholders.
- A simple context consists of repeating patterns with clear cause and effect. This context allows for fact-based management. Supervising the organisation’s established processes, the use of best practices and optimizing communication for clarity are central to board work in this context.
- A complicated context makes expert diagnosis more important. Having experts on the board with diverse views and extensive industry experience helps capture normally unknown information and facts that could threaten the health of the company. In a complicated context, a board should also start paying attention to blindspots of its executives (such as a false sense of confidence) and obtain alternative views.
- A complex context is full of ambiguities and unpredictability that go far beyond a complicated context. Here, the board should not spend its time second guessing the CEO, but rather it should seek out its own sources of information so it can make up its own mind about strategic decisions. It also should minimize the extent to which it delegates reflection and action, as these should remain as much as possible within the board. Frequent interaction with the executive team and external sources of information is essential to capture market shifts quickly.
- A chaotic context is full of turbulence and shifts that are even hard to identify. Outcomes are highly uncertain and even experts cannot assess them well. This creates tensions and conflicting points of view. It multiplies the number of significant decisions to take, and it especially requires sane reassurance within the organisation. The board’s role often becomes highly visible. Opportunities and risks abound, so a strong board can make a decisive difference while a divided, weaker board can threaten the life of the organisation.
Domination Role of Board In Different Contexts
Table 2 below illustrates how the dominating role of the board (co-creation, support, supervision) evolves depending on the context.
Taking Context into the Mapping Process
The mapping process that boards do for the meaning of strategy and the potential roles to be played should take into account the context in which the board members believe the organisation operates. They should ask themselves if that context is stable – or might it change at some time in the future. In today’s fast-moving world, context can quickly shift from simple to complicated and from complicated to complex – or even all the way to chaotic.
The Impact of Context on Strategic Views and Roles of the Board
The Board’s Ultimate Significance
Today’s chief executives are over-stretched and confronted with an incredible rise in complexity from society, governments, alternative business models, global changes, new risks and opportunities, and shifts in economic conditions. Even the very best executives cannot be expected to respond consistently well to all these challenges, especially when the environment turns chaotic.
Boards are now essential to strategic success. Unfortunately, most boards are failing to add strategic value. The recent economic crisis has increasingly strengthened boards’ fiduciary role, sometimes at the expense of the strategic value they can add.
What is needed now more than ever are strong boards comprised of high-quality individuals who are focused and dedicated. They must have access to accurate and well-designed information, be able to establish meaningful structures and processes and implement board dynamics that foster effective debates that result in good decisions and actions. But even high-quality boards of this type can fail if they do not address the spectrum of responsibilities they have on strategy. Following the mapping process we have proposed can greatly help boards improve their strategic performance and transform themselves into a life-saving, competition-beating, opportunity-enhancing asset for their organisation.