In the past year, public companies and their boards have experienced a freeze in credit markets, the cratering of the stock market and asset values, and a precipitous drop in consumer spending. While the depth and severity of this economic tsunami may be unusual, history has shown it won’t be the last crisis. Before the current difficulties, there was the Asian financial crisis of 1997, the failure of Long-term Capital Management in the late 1990s, the Latin America debt crisis of the 1980s, and the oil shocks of 1973 and 2008.
In order to effectively react to a crisis, boards and management need to be able to respond quickly to changing circumstances, while avoiding hasty (and perhaps ill-advised) decision-making. Boards can act with foresight and business acumen only if and when they are continuously involved in the development of long-term strategy.
According to a report of the National Association of Corporate Directors’ Blue Ribbon Commission, a board must be constructively engaged with management in “establishing an overall destination, and making provisions for frequent mid-course correction. Strategy involves perpetual redefinition—internally for strengths and weaknesses, and externally for opportunities and threats, focusing intently on competition. It measures and re-measures the gap between aspiration and capability, makes plans to bridge that divide, and ultimately audits the accomplishment of those plans.”
A board deeply involved in developing strategy with management will have a deeper and more nuanced understanding of the company’s business and its strategic environment. “Their expanded knowledge [will] better prepare them to contribute to future strategic discussions and decisions,” including evaluating responses to rapidly changing conditions, writes David A. Nadler, vice chairman of Marsh & McLennan Cos. in the journal Strategy & Leadership. When a crisis hits, a board engaged in corporate strategy will be better able to stay focused on long-term prospects amid the tumult. The board will be sufficiently familiar with the company’s resources and competitors to effectively evaluate responses to the crisis on both a short-term and a long-term basis or to rethink the strategy entirely.
Of course, it is not enough to merely involve the board in the development of corporate strategy. Developing corporate strategy is a dynamic and complex endeavor, as companies face changing business conditions and assess whether current strategies are producing the intended results. Large public companies will typically have a senior officer in charge of corporate strategy, supported by a staff and consultants drawing on multiple disciplines and specialized expertise. Lacking these resources in most cases, independent directors face significant challenges if they are to contribute to strategy development. While management focuses on strategy every day, the boards of many companies are limited to providing input into this complex process during quarterly or annual sessions. Officers may evaluate outcomes and adjust aspects of strategy on a real-time basis; directors typically wait until their next meeting, when they may receive an update from management. While the board may bear responsibility for the oversight of strategy, the resources required to make ongoing, substantive contributions are often inadequate or unavailable.
While daunting, it is not impossible for board leaders to successfully engage their board colleagues in the ongoing development, refinement and, if necessary, redefinition of corporate strategy. In the process, they will develop a more deliberative approach to strategic thinking, which not only can prepare them for future crises, but also will provide them with a better overall understanding of the business, which can add value in calmer times.
“These mind-numbing presentations [by management] have to go. They need to be replaced by animated, relevant, focused, easy-to-comprehend presentations that zero in on the issues that the directors need to know.”
- Paul Brountas, author
A recent meeting of the Lead Director Network brought together lead directors, presiding directors, and non-executive chairs from major companies, including Caterpillar, Coca-Cola, Delta Air Lines, Eli Lilly, General Mills, Home Depot, Microsoft, and Morgan Stanley. Members suggested six steps that board leaders can take to enhance and improve their board’s contributions to corporate strategy.
1. Ensure that the board is receiving adequate information. For the board to have effective input into decisions about corporate strategy, directors must have comprehensive information, especially about assumptions underlying the strategy, alternatives that may have been considered, and risks that may jeopardize the success of a strategy. A recent study concluded that most of the information received by boards from management concern financial data and measures, not relevant strategic information. Board members said they receive only a moderate amount of information related to strategic information such as external environment assessments, internal resource analyses, business entry and exit data, and risk analyses.
Lead directors should take steps to ensure that meaningful strategic information is being provided to the board. As one member of the Lead Director Network noted, “I have to ensure that the right flow of information is getting to the board to help directors understand why management is taking a particular course.” This is particularly important for new board members or a board just beginning to enhance their participation in corporate strategy. The ramp-up time may be significant as the board digests all the information, but learning about the company and its strategic environment will enable the board and the management team to be responsive and enhance value in times of hardship or calm.
2. Provide for continuous board involvement. Lead directors should work to involve their boards in corporate strategy in an ongoing way, shifting from a model of periodic management reporting to a model in which management and the board collaborate in developing and monitoring corporate strategy. Paul Brountas, author of the book Boardroom Excellence, notes in an article in Strategy & Leadership, “Strategy work is an iterative process, not a big-bang event. Yet, often [companies] treat it as though it were a one-time event by scheduling the board’s strategy meeting or making strategy the key agenda item at the annual board retreat. Absent a rich context, directors are hard pressed to contribute effectively.”
Lead directors should include a “strategy update” in agendas for regular board meetings, provide the board with relevant background information prior to meetings, and build a robust dialogue between the board and the CEO regarding strategy at the meeting. A one-sided advocacy presentation on strategy by management, with no board interaction, won’t suffice. Noted Brountas, “These mind-numbing presentations [by management] have to go. They need to be replaced by animated, relevant, focused, easy-to comprehend presentations that zero in on the issues that the directors need to know to perform their oversight function effectively and assist management in achieving the objectives and strategies jointly established by the board and management.”
3. Improve the quality of board discussions about corporate strategy. As one Lead Director Network member noted, “We have to guard against getting too tactical. I have to go to other directors and say, ‘No, we’re high level, and management is responsible for the tactical things.’” Another member agreed: “As lead director, you have to understand when a particular issue goes from a micro to a macro level.” Lead directors should engage the board in challenging management, when appropriate, on strategic issues. Directors are sometimes reluctant to openly debate management and a lead director may need to encourage board members to speak up on important issues.
Lead directors should engage the board in challenging management, when appropriate, on strategic issues. Directors are sometimes reluctant to openly debate management.
4. Use executive sessions for discussions of corporate strategy. As chairs for executive sessions of independent directors, lead directors should ensure that these sessions include candid discussion of strategic choices, constructive feedback for management, and a consensus on decisions about corporate strategy. If the board has not reached consensus on a particular issue, it will have difficulty helping shape management’s thinking about the issue. Said one Lead Director Network member, “The dialogue continues until you reach an agreement. You may have to make it clear to management that they haven’t made their case yet, and they need to come back to the board with a better business case.”
5. Provide guidance and feedback to the CEO. The lead director of the board serves as a liaison between the board and the CEO. Lead directors may help the CEO prepare for a board discussion of strategy by previewing questions and concerns. They can follow up from board meetings and executive sessions by communicating to the CEO the sentiments and reactions of the directors.
According to a recent survey conducted by NACD, CEOs ranked board participation in strategic planning as the second-highest priority for their boards, but the surveyed CEOs gave their directors only the 11th-highest score in rating their effectiveness in this endeavor. One Lead Director Network member offered a potential explanation: “As a CEO, you have some board members who are focused on strategic questions. You can also have other board members who don’t add as much value. Sometimes, a few board members color how [the CEO] views the whole board.” A lead director can help focus the CEO’s interaction with the board in a constructive, positive manner, and elevate the CEO’s evaluation of the effectiveness of the board’s engagement. By keeping the discussions sufficiently macro-level and focused, and communicating clearly with management, the lead director can develop an effective, collaborative relationship about corporate strategy, rather than a combative one.
6. Ensure that the composition of the board facilitates contributions to strategy. While not every director must be a “strategic thinker,” having the right combination of skills and backgrounds will allow the board to have effective input into corporate strategy. A recent commentary in The McKinsey Quarterly advises that on a board of a dozen directors, “a litmus test of strategic energy is the presence of at least three or four members who have deep industry expertise in the core business and market conditions the company faces . . . [Boards] should now ensure that their ranks include directors with the industry knowledge crucial to the primary business of their companies. Once that expertise is in place, other board members can be screened for deep functional or geographic experience.”
By implementing the steps above, lead directors can ensure their boards will collaborate more effectively with management in developing and adjusting corporate strategy. Once a board is substantively involved in an ongoing manner, it can help keep the company focused on long-term growth, during both the calm waters of economic prosperity and the choppy seas of a downturn.
For more on strategy, go to www.directorship.com/strategy.
Michael Egan (megan@kslaw.com) is a partner and Eric Kurtz (ekurtz@kslaw.com) is an associate in the corporate practice group at King & Spalding LLP. As part of its focus on corporate governance, King & Spalding, with Tapestry Networks, created the Lead Director Network, a group of lead directors, presiding directors, and non-executive chairs from many leading American companies that meets to discuss how to improve the performance of their corporations and earn the trust of their shareholders through more effective board leadership.