Board members always wish that they could spend more time on strategy and less time on compliance—a sentiment that’s confirmed each year by PwC’s Annual Corporate Directors Survey. Indeed, in each of the last five years, “strategy” has been the number one response to the survey question: “What would you like to spend more time on in the boardroom?”
Before we examine the various factors impacting today’s strategy discussions, let’s take a quick look at the mandated duties of a corporate director with respect to strategy.
Judge William Allen, when he was Chancellor of the Delaware Court of Chancery, provided some context to the director’s duty regarding strategy with a famous speech to Northwestern Law students in 1992:
“Outside directors should function as active monitors of corporate management, not just in crisis, but continually; they should have an active role in the formulation of long-term strategic, financial and organizational goals of the corporation, and should approve plans to achieve those goals; they should as well engage in the periodic review of short- and long-term performance according to the plan and be prepared to press for correction when in their judgment there is a need.”
Indeed, “validating company direction” and “approving management’s strategic plan and budget” are commonly accepted strategic initiatives overseen by boards. However, after that, the director’s duties (with respect to their role in strategy) get somewhat cloudy. Board members’ legal Duty of Loyalty or Duty of Care don’t specifically address strategy—except when the Delaware courts assist by outlining their opinions (e.g., approving direction and strategic plans). In fact, every board is unique in determining how much or how often the board plays a role in formulating strategy.
There are many factors—whether related to industry, company structure or board dynamics—that impact the board’s role in overseeing and/or formulating strategy. Let’s look at just a few:
When you begin to consider the composition of the board, capital market performance, new regulations, etc., you can see how widely the board’s role in strategy must differ across companies. Regardless of your industry, company classification or board dynamics, let’s look at what boards should and/or may consider doing to define their role in company strategy discussions:
The Board Should … be constantly evaluating management’s assumptions and strategies as conditions change throughout the year.
The Board Should … question whether compensation is supporting strategy and promoting the desired behavior.
The Board Should … ask the CEO how they can be a contributing resource and provide valuable experience from their careers or board service with other companies.
The Board Should … ensure that the strategies support long-term shareholder value growth.
The Board May Consider … if the formation of an additional board committee to address strategy, risk or another critical company area would be beneficial.
The Board May Consider … engaging outside industry experts, industry analysts or investment bankers to see how the markets are reacting to visible or communicated strategies.
The Board May Consider … conducting risk “stress tests” on strategies where board members can gain insights into worst case scenarios and avoid “bet-the-company” pitfalls that affect value and reputation.
At the end of the day, the best companies will have (1) CEOs who have effectively communicated how the board can be of the greatest strategic value and (2) boards that aren’t afraid to challenge existing strategies and their assumptions. While the board’s role may vary by company, these two “ingredients” will always be foundational for success.
TK Kerstetter is the CEO of Boardroom Resources LLC and is a second generation pioneer of governance thought leadership and board education. He can be reached at tkkerstetter@boardroomresources.com.