Boards and Strategy
A recurring theme in our evaluations concerns the Board's engagement with strategy. It is also
identified as a priority issue for boards to address in the Annual Reports of many listed companies.
Why is this?
It is important to understand that in facilitating a board evaluation as an external provider our focus
is on how that board engages in decision making on strategic issues rather than on the substantive
issues themselves. Matters around the composition of the Board in terms of geographic or skills
based representation will certainly impact on this. But the manner in which a Board meets its
responsibilities concerning the design and formation of strategy provides good insight into the
effectiveness of the interface between the executives and non executives on a board and it is the
quality of that interface which is a critical ingredient in any high performing board. In this paper,
therefore, we look at how boards can best manage this aspect of that interface.
After many years of battling their way to the top, chief executives want the opportunity to put into
effect their ambitions and plans for the advancement of their company. They have been given and
they welcome that responsibility. They are typically very ambitious and self confident. They are
immersed in the detail and passionate to lead change. They are personally accountable to all the
shareholders, their management team, the employees and the world at large. They are the ones
who are interviewed by the media. Success or failure is attributed to them in a very public way. They
want to retain control.
Non executives want to and have a responsibility to contribute. They bring with them a breadth and
wealth of experience and while they do not have access to all of the detail, individually and
collectively they can offer valuable insight into the strategic direction of the company and the
strategy itself. Chief executives know this and, for the most part, welcome it.
Why then is the involvement of a board in strategy an issue with which boards struggle? Since the
financial crisis of 2008 boards and non-executives have been exhorted to be more engaged and
exercise ever closer oversight particularly in areas of financial and strategic risk. The takeover of ABN
Amro by RBS is the classic example of how a board got it wrong. Non executives are now looking to
identify the optimum level of involvement and the best way of achieving it.
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The lessons identified by Sir David Walker in his review of governance in financial institutions
following the financial crisis are now being applied across all business sectors, but the first thing to
realise is that there can be no 'one size fits all' solution. Different industries have different cultures
and companies operate in different business climates and face their own separate strategic
challenges. There are therefore a wide variety of opinions and solutions as to what should be the
right level of involvement of non-executives in strategy. Indeed, if you speak to a number of
directors you will hear differences of opinion as to what is meant by strategy whether it be about
defining the strategic objective itself or on how to achieve it?
Furthermore as the challenges which a company faces are constantly changing in a fast moving
macro-economic and geo-political climate, strategy formation and development is an iterative
process and a subject for discussion which arises in different contexts throughout the course of a
year; the designated annual 'strategy session' is not the 'be all and end all'. The role of the non
executives on a board needs to adapt to the context.
Given these variables and in order to optimise the interface with the executive and, thereby, the
board's effectiveness overall we believe it is essential to achieve clarity and consensus within a
board (a) as to the role of the non executive in the design and formation of strategy (Roles) and (b)
as to the nature and purpose of any session in which strategy is discussed (Process). Lack of clarity
about these tends to give rise to anxieties, undermines trust and adversely impacts on performance.
Roles
Every company is different. The challenges they face are different. Every chief executive has their
own personality, strengths and weaknesses. Every board comprises individuals from different
backgrounds and with separate experiences. There can be no standard delineation of roles. Of
course broad definitions such as offered by the Code give a steer and it would be unhelpful to expect
too precise a definition. As to roles therefore there has to be flexibility in approach and a discrete
solution for every board.
Good teamwork requires trust and trust is built on transparency and managing expectations.
Executives expect and recognise the Board's responsibility to oversee the performance of the
company, its execution of a strategy and the management of risk. They expect to be probed and
challenged. Non-executives well understand this aspect of their responsibility but they also want to
contribute in a positive way to the development of the company particularly when it comes to
strategy. This tends to be contrary to the expectations of the executives and gives rise to a fear that
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the Board is wanting to involve itself inappropriately with the running of the business. Interestingly
we have found that those executives who sit as non executives on other boards are much more
sensitised to the positive contributions a Board can make. We believe therefore time spent in
helping executives understand the full range of what the non executives can offer and developing
relationships without trespassing into the executive arena is well invested.
What is also needed however is an environment within which a board can have a frank discussion
periodically with the executives as to what is the role of the non executive on that board as regards
strategy and in what ways collectively they can most constructively contribute. This is a discussion
which in our experience rarely occurs and should.
Achieving clarity and consensus on roles therefore demands an appreciation of the expectations of
others, an open mind and an opportunity for a good discussion.
Process
Good decision making needs an orderly process. The formation of strategy is no different. As we
have observed, the development of strategy is an iterative and continuing process and harnessing
the input of the Board requires different types of engagement between the executives and the non
executives. Strategy sessions may be about brain storming future risks and opportunities and such
sessions will be about facilitating free thinking and collaboration to ensure that each director’s
perspectives are understood and explored. The sessions may be more about analysing
management's proposals, at which executives can expect to be probed and tested on their thinking
by the non executives but with a collective expectation of there being further developments and
refinements. Finally there will be a decision making session at which management final
recommendations will be subject to challenge and final approval.
Each stage of the strategy process whether it be brainstorming, analysis or decision making, requires
of its participants a different mindset and it is critical that all contributors to any particular session
on strategy have that common understanding and expectation as what is involved. If that is achieved
attitudes and behaviours will be positively impacted and the quality of the dialogue around that that
board table will improve and more likely give rise to a good outcome. Any misunderstandings,
however, give rise to confusion and frustration and we frequently hear of strategy sessions which fail
to achieve the desired outcome. They may be perceived as too much of a 'show and tell' or 'this is
not a strategy but a business plan'. Participants become demoralised when they fail to do so.
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Managing expectations as to the purpose of any particular strategy session is the combined
responsibility of the chairman and the chief executive. Each of the participants must attend that
session with a clear idea as to what it is about, the desired outcome and how they are expected to
participate. Similarly each member of the management team involved must know and understand
what they can expect by way of involvement from the non executive element whether it be,
constructive analysis, challenging questions or conceptual agility.
Conclusion
The way in which a Board handles strategy is a true measure of the effectiveness of the interaction
between the executives and non executives on a board. Trust is the corner-stone of an effective
team. Understanding and respect for the boundaries within which each member of that team
operates engenders trust. To achieve that level of understanding and respect requires open and
frank dialogue as to how it is going to work. You can have all the written definitions you like but
without genuine consensus it is unlikely to work optimally. This does not arise instinctively and
needs management. We would therefore encourage boards to have a dedicated session periodically
and probably best in an informal environment just to talk about roles and how they best work for
that board at that time.
Contact details
Alison Gill: Mobile: + 44 (0) 7770 668776 or [email protected]
James Bagge Mobile: +44 (0) 7753 832497 or [email protected]
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