Strategy a Tough Climb? Hire a Sherpa

The disconnect is huge. On one hand, regulators, industry leadership groups, and expert advisory groups, such as the National Association of Corporate Directors and Institutional Shareholder Services, declare that setting strategy is one of the three most important responsibilities of boards of directors. On the other hand, the vast majority of boards have neither the time nor the processes—and many do not have the skills—to effectively review management’s strategy, much less take a proactive role in setting it.

To bridge the gap, boards could use a Sherpa, or guide. Sherpas, a local ethnic group in Nepal, serve as porters and guides to mountaineering expeditions in the Himalayas, including those to Mount Everest. They are experts in the rough terrain and at dealing with the difficult altitudes. They assist to a point, but know when to step back and let climbers reach their own destinations. The term is apt because board members will need to climb the strategy mountain themselves, using their own training and acquired skills, but they could use some help navigating the landscape.

The need starts with an obvious but often overlooked point: Despite the recent emphasis on the board’s role in policing financial integrity, far more shareholder wealth is lost each year through bad strategies than through corporate malfeasance. For every Enron or Health-South, there are dozens of companies like Kmart, Polaroid, and Sunbeam. Every bad company strategy has been approved —explicitly or tacitly through lack of oversight—by the boards in question. Are these boards uniquely poor in their ability or diligence? Probably not.

Our personal experiences have led us to believe that most boards do not provide a strong enough check and balance to management when it comes to strategy. We have sat in hundreds of board meetings, watching as boards allowed management to control the discussion, or got bogged down in numerical details, or spent the time “challenging” management on the very aspects of the strategy that management clearly knew far better than the boards did. But those same discussions usually missed the most important policy issues and choices implicit in the proposals before them.

Time and time again, we have watched CEOs prepare for the most fundamental and legitimate challenges to their proposals, only to find later that board members failed to raise a single difficult question.

If so much is at stake in strategy oversight, and current board strategy-review procedures generally fall short on effectiveness, then perhaps a significant upgrade is warranted. Questions need to be raised about the skills of the directors, the amount of time directors devote, and the processes they use.

Potential Improvements

The first inclination might be to upgrade the strategy skills of the board members themselves. Many board members have little or no background or training in the discipline of strategy. Even retired senior executives should not assume they understand the principles of strategy for industries far different than those in which they have direct experience.

That suggests schooling, a long process that would require members to devote more time in addition to their direct board duties. The average MBA course on strategy involves 40 or more hours in class and the same in preparation. Alternately, a board could bring in fresh blood with true strategy expertise. But the average board turnover rate is about 11 percent, suggesting that changing even two members would take four years, if strategy expertise were to be the primary criterion for every second appointment.

A second potential improvement would be to increase the amount of board time devoted to strategic subjects. A 2005 survey of more than 1,000 corporate directors by McKinsey & Co. showed that fully 76 percent thought their board should spend at least 25 percent more time on strategy (second only to the desire for more time on talent). The problem is that more than half the directors also thought that their board should spend 25 percent or more additional time on six other subjects! Clearly, board time is at a premium, allowing only marginal changes in time allocations.

Thus, to make meaningful improvements in a reasonable period, boards must rely on process improvements they can make with existing members, and within prevailing time constraints. They must improve the quality of board discussions by ensuring that their debates do not simply mirror ones their management teams have already held. This means better identifying those issues and perspectives that management may have overlooked, and identifying those choices where management could be expected to have a natural bias.