The chairs of some boards like to take a very hands-on approach in developing the business strategy for a company, whilst others see it as a task for the CEO and their team. Is there a best practices model for board involvement in the strategy process?
Active Knowledge Question:
When was the last time you had an active discussion about the role and responsibility of the board in developing the business strategy for your company?
The buck, so to speak, for the business strategy of the company ultimately rests with the board of directors. If really bad decisions are made, then the CEO is likely to fall on their sword, but shareholders are also likely to look to the board to take responsibility.
Board involvement varies between companies, and, I believe, is led by the chairperson. Some boards are active in developing strategy and some are more hands-off. Whatever level of engagement they may choose, they are, at the end of the day, tasked with approving the business strategy that the company is pursuing and the budget that supports it. It is ultimately their responsibility to approve the business strategy.
It, therefore, becomes critical that every board and CEO has a very clear understanding of who is doing what, what level of participation is required and expected, and the output that the strategy process is intended to deliver.
Only this level of frank discussion can deliver the best outcomes for all concerned. I say ‘frank discussion’ as often there is a reluctance to discuss this issue. The management team may really just want to develop the strategy by themselves and not involve the board. On the other side, some board members may feel obliged to participate or have a true passion to develop the strategy the business sorely needs.
It is a discussion better had, than not,and, in guiding that discussion, there are best practices that should be listened to.
You Can No Longer Just Formulate Strategy
Many of you may not recognise the name Kenneth Andrews, but he is the academic who in 1971 developed the framework of strategy formulation and implementation through his works, The Concept of Corporate Strategy. This framework has been instrumental in setting the manner in which strategy has since been created and then delivered, that is, formulated and implemented.
A quick explanation of the premise behind the framework is that Andrews believed that the ‘typical’ general manager would most likely be a person who just follows industry norms and paradigms. Accordingly, he thought they would not be innovative or aggressive in developing a business’s strategy. Therefore, there was a need to separate strategy formulation out as a distinct activity.
I do not believe that Andrews saw nor intended the extent to which this separation would come into practice over the years, but it has in many instances been responsible for failed or undelivered strategy. Formulation and implementation go hand-in-hand and cannot be seen as two distinct tasks.
You cannot formulate strategy in isolation and then pass it over to someone else to implement – it will fail.
The critical relevance of this point to the board’s participation in creating business strategy is that, if the board if is to participate, it must be hands-on and look not only to the strategy but how it may or can be delivered. This is the distinction between the what, how and why of strategy.
The Emergence And Structure Of Strategy And The Role Of Customer Value
Three other relevant ‘realities’ that must be considered when developing the process for the participation of the board in the creation of strategy are:
- A formulated or deliberate strategy is often not realised in the way first thought. As the journey of delivering a strategy proceeds, there are often unrealised outcomes that open up a new and better strategy. An emergent strategy, if you like. The implication being that you may formulate a strategy, but you are going to have to accept and give permission to the team delivering it to evolve it in the live marketplace.
- What I would describe as ‘old thinking’, (but thinking that is still prominent in many companies) is that you formulate strategy and then develop an organisational structure to deliver on that strategy. The reality is, however, that a strategy is worthless if it is not capable of being delivered. Therefore, ‘structure’ always limits and restricts strategy– it should be structure before strategy, always. Again, the implication being that whoever is involved in developing strategy must have a current and coal-face understanding of the capability of the company.
- Today, businesses compete around customer value and delivering greater value than anyone else. An intimacy with need, what changes are impacting it, and how greater value may be created and delivered are, therefore, critical to out-compete others in the marketplace. It is through this understanding that new markets and opportunities are crafted.
The impact of these realities is that strategy often comes from the ground up in companies and leadership are simply too removed from the coal-face to be able to create real strategy – if you think of strategy as the insights that open new markets and opportunities.
Today, a critical element of strategy is seeding companies with the traits that will allow them to become competitively fit.
The Value That Boards Can Deliver In Strategy
So what does all of the above mean for the contribution senior leadership and board members can make in crafting winning strategies? There are, I believe, two key points.
1. Strategy starts with capability.
The first point is that strategy starts with capability, which lies in the competitive engine of the business. Senior leadership and the board must look carefully to that engine and all its elements in developing the business strategy for the company.
If you have any doubt about this aspect of strategy, then you need only reflect upon those companies who have taken hits in the market due to issues of culture and motive, for which the board is now seen as being fully responsible for.
There is also a progression that companies move through in thinking strategically, understanding real growth, and then being able to out-compete others in their market. Boards, when participating in or assessing strategy, must be very conscious of where the company is on this journey as it determines their ability to grow the business.
2. Board independence.
The second point, and this is one solely for the board, is that of independence. The board’s greatest value, in my view, is that of independent assessment. The ability to know the business but to be also able to step away from the business and bring experience and technical expertise in judging the merits of the business strategy that is being presented.
The senior management team will have been heavily involved in the hands-on development of the strategy and, therefore, will have lost some independent perspective. The board, however, may not have been so involved and, therefore, can more readily find the flaws, weaknesses and challenges that need to be overcome.
This is the compelling reason why the board must be careful not to be drawn in too closely– or actually develop – the business strategy. Otherwise, they potentially place themselves in the position of evaluating a strategy they have, in fact, developed.
Ensuring that strategy is delivered is critical and the board’s ability to independently assess and oversee this aspect is an important role. But again, it requires independence from the creation of strategy.
An experienced board’s contribution to the development and delivery of business strategy can be invaluable. But to achieve this benefit, its role in strategy must be clearly established at the onset.
An entirely new level of performance.
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All the best in the success of your business,