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.
The board cannot add much value in debating whether a particular expense should grow at 8 or 10 percent. It’s likely that management knows the details better than the board, and has already debated that issue internally. Management is much less likely, however, to step back and objectively ask whether the company is gradually slipping in its competitiveness, or whether shareholders would make the same choice as management about reinvesting profits in the business. Executives are too vested in the hard work of everyday improvements to want to see that, despite their efforts, the company is not keeping up with competition or that the company is not worthy of reinvestment. Boards must have a process that emphasizes different perspectives, not just “challenges,” and they must focus their efforts on those aspects of strategy where different perspectives are most valuable.
This will not happen automatically. Management makes the strategy and budget presentations, implicitly dictating what issues the board will or will not see. Management is armed with more facts than the board, thus giving it an advantage in any detailed debate. Further, management controls the time available for debate by the length of its prepared remarks.
Strategy Go-Between
The discussion will improve only if someone can take the time to examine and understand management’s proposals in advance, check the operational details (so the full board does not have to), and isolate the policy issues.
That person must then lay out other realistic alternatives that management has not brought forward (because we all know that without an alternative, the board has no choice but to approve the only course of action available—i.e. management’s proposal—perhaps with some minor tweaks). Finally, that person must create a structure for a discussion that focuses on those policy issues. That person is the Sherpa. His or her staff work can ensure that the resulting discussion will be vastly different than if the board had simply reacted to management’s presentation.
Taking the Lead
But isn’t this a role for the lead independent director (LID)? Shouldn’t he or she orchestrate the board’s deliberations? Yes, but the LID needs help. He or she may not have the necessary time, skills, or industry expertise. The LID has major roles to play in other areas, including board appointments, the CEO’s review, and committee assignments, and may have been appointed due to skills in those areas, and not in strategy. So, the Sherpa can serve as the LID’s expert staff. The concept of expert staffs for board members is not new. Boards have analogous assistance in their other two key roles: auditors who assist in financial governance, and compensation consultants who advise on executive assessment and pay.
The Sherpa would play major roles twice during the year, and a minor role the rest of the time. The first comes at the board strategy retreat. Here, the Sherpa would explore what key unspoken assumptions underlie management’s strategy, contrast management’s proposed strategy with alternatives, and opine strictly on whether the proposed strategy fits generally accepted models of competitive success.
The second role would come in the discussion of the annual budget, when the Sherpa would focus on whether the proposed budget supports the requirements of the approved strategy. The Sherpa should also help the board in its reviews of the company’s performance by continually focusing its attention on key board-level questions:
- Did the company spend its resources as planned?
- Did its efforts produce the expected results, and if not, why?
- Given these answers and the environment, should the board approve the continuation of the present plan?
Independent of the CEO
What makes a good Sherpa? The Sherpa must be an expert in the theory and practice of strategy, and in strategic processes. The Sherpa must be independent of management and comfortable with the potential for prolonged strained relationships with them. Sherpas should not be former employees and must recuse themselves from any commercial relationship with the company other than to the board. (As a consequence, large consulting firms are not well suited to this role. Their instincts are always to form co-operative relationships with management. Conversely, should one institutional consultant serve the board while another serves management, their potential antagonism could distract from the real issues at hand.)
Finally, the Sherpa must understand that his or her role is to point out policy issues, unspoken assumptions, etc., but not to advocate an answer. The guide is there to point the way, not to select the destination. He or she must remain neutral. Finally, Sherpas must be comfortable knowing they must be replaced every three to four years, as a good Sherpa will naturally become a focus for any frustrations management feels with its board.
As the representatives of the shareholders, boards have more at stake in strategy than in any other duty. But they lack the time and often the skills to play this role effectively. Further, the current process makes it harder, not easier, for boards to have a view that is independent of management. The right Sherpa can help a board dramatically improve both its independence and its effectiveness.
Kevin P. Coyne is founder of Kevin Coyne Partners. Edward J. Coyne, Sr. is an assistant professor at Samford University’s School of Business in Birmingham, Ala.