The role of the board of directors in strategic planning
'If you don't know where you are going, any road will take you there."
This quote from the song "Any Road" by George Harrison is a pretty good way to sum up a company's path when it doesn't have a well-developed and well-thought-out strategic plan.
A strategic plan is a road map, the primary purpose of which is to move a company from its present position to a point where the owners and CEO want to take it. The plan typically sets goals and charts a course over a period of several years and is reviewable at intervals established at the outset. A good strategic plan can also become an important tool enabling management to effectively communicate goals and action plans to the entire organization.
While the most important role of a CEO and the C-suite leadership team is to create and successfully execute the strategic plan, equally important is the board's role in overseeing the company's strategy and its development. There is a wide range of views about the preferred extent of a board's role. A simple gauge of proper allocation of responsibility might be to ask — "If a Board is handling the load of developing strategy, what is the CEO, the person most familiar with the company on a day-to-day basis, up to?" On the other hand, if the board plays no helpful role, perhaps it's time to find new board members.
At first glance, it sounds like a trivial observation that boards should be highly involved in corporate strategy. Directors themselves recognize the need: Collectively, they rate long-term strategic planning as the top issue demanding their attention. Shareholders and management are increasingly relying upon their boards to take a more hands-on approach in setting company strategy, as today's leaders face many new challenges:
- Corporate strategy is becoming more critical to a company's well-being. A combination of macroeconomic factors, including a downward trend in aggregate global long-term growth and the disruptive effect of increasing technologically driven change, make it abundantly clear that simply extending historically effective strategies won't suffice. The demise of Sears provides a striking example;
- External political forces, such as complex trade disputes and more pressing social expectations in areas like diversity, play a large part in strategy;
- Immediate and frequently competing board commitments can crowd out longer-term efforts such as strategy. A board's legal priorities force more focus upon audit, compensation and governance issues. Heightened regulatory challenges, including the Sarbanes-Oxley Act, require a constant eye on compliance. And new risks continue to appear, such as cybersecurity, data privacy and harassment; and
- The accelerating pace of change requires companies to continually review and re-evaluate their underlying strategic assumptions.
Role of Board of Directors in Strategic Planning
The very nature of a board's relationship to its company and the modern corporate environment itself dictate the factors that define a board's role in strategic planning:
- Long-term focus. As mentioned above, a CEO, by necessity, lives in a day-to-day world, and shareholder pressure often ties the next big goal to the end of a quarter. Boards, on the other hand, exist apart from the daily challenges of the company. The board has the luxury to look to the future and mitigate some of the negative impacts of short-term thinking. It is from this vantage point that strategy is perhaps best contemplated.
- Board (and broad) connections. Research demonstrates that companies highlight external noncompetitive economic and political forces frequently in their annual reports. Board members typically have a wide range of connections and contacts in a number of other political, business and industry settings, which can provide a window to important insights. Again, countering the necessary single focus of the C-suite, boards can and should leverage this connectedness to recognize and respond to emerging threats or opportunities.
- Expanded knowledge. We are witnessing a revolution in the opportunities companies now have to quickly expand or cross over industry boundaries. High-technology companies such as Amazon, Apple and Google illustrate how dramatically new business models and technologies allow companies to explore and exploit new sectors and rapidly expand their customer bases. Detailed, sector-specific knowledge only carries a company so far. Board members can bring cutting-edge knowledge about new technologies and competitive opportunities to bear on company strategy and fill gaps in management's skills or knowledge.
- Regular and specific pushback. A board's natural governance role translates into strategy oversight. Rapidity of change and more complex challenges place a premium on effective oversight. Boards thus find themselves uniquely situated to test management's strategic effectiveness in a variety of ways, including regularly challenging key underlying assumptions and ensuring the effective execution of the strategy.
How then can a board enhance its effectiveness in its role as a strategic partner with management? What are some key best practices that reflect the proper role of the board of directors in strategic planning?
- Educate management about the strategic process. A board can assist management in understanding and selecting the proper process to develop a strategic plan. For example, a good starting point might be a SWOT analysis to better understand the company's strengths, weaknesses, opportunities and threats;
- Assure that any strategic plan address all of the resources that will be necessary to effectively implement the strategy. For example, identify where additional investment will be required for added personnel and training;
- Create strategic options for the board to initially discuss with management. Introducing options for discussion compels board participation and utilizes individual board member skill and expertise. As a by-product of maximizing the use of respective strengths, resulting discussions will foster understanding and long-term agreement;
- Establish channels for regular communication between the CEO and the board in order to continually keep the board current on the state of strategic plan development and its execution; and
- Identify at the outset and continually be on the alert for red flags and warning signs that indicate the strategy is not returning anticipated results and may need revision.
The most efficient way to enhance board effectiveness is be utilizing board portal technology that can facilitate collaboration and secure communication, as well as empower boards to make better strategic decisions.
In order to effectively engage in its role in strategic planning, the board must have a diversity of expertise and experience that brings a strong knowledge of not only the underlying industry but the external economic, technological and other factors that will impact the company in the future. The board of directors needs to continually examine itself to assure that it provides management with the type of meaningful strategy planning leadership that enhances financial performance and builds shareholder value.