The annual strategy review isn’t enough
As 2014 winds down, corporate directors will soon sit down in their boardrooms, as they do every year about this time, to focus on what is perhaps their most important function and primary responsibility: establishing and evaluating their companies’ overall strategic direction.
The traditional strategic planning process usually occurs something like this: the board of directors and executive management collectively agree on the process to establish an overall strategy. Management then develops a strategy based on that input, and the board monitors the execution of that strategy over time. Once a strategy is established, the involvement of the board is typically limited to the annual review, and rarely do directors take part in tactical oversight or ongoing strategic adjustments during the year.
That process needs to change as markets and business paradigms are decidedly more volatile in recent years, with fast-changing situations and unexpected challenges more the norm than the exception. Today, corporate strategies must continually evolve when faced with globalization, ever-changing regulations, new technologies demographic shifts, economic uncertainties and new competition.
The National Association of Corporate Directors (NACD) recently issued a well-timed Blue Ribbon Commission Report (BRC Report), Strategy Development, which addresses the reasons why a board of directors should reassess its approach, role and responsibility in strategy development, and strongly recommends earlier and more continuous board engagement in the process. The report brings forward a framework for board committees and directors to support continual strategy development oversight, execution, course correction and monitoring.
The BRC Report concludes that directors, for the most part, can no longer afford to be hands-off on strategy for extended periods. The passing of time increases the chance of missed opportunities to influence and adjust strategy, and raises the failure rate of directors to effectively weigh options and risks. But to do this right, it’s like walking a tightrope: too much hands-on involvement can cross the line from oversight to management, which then lessens the board’s ability to hold management accountable for the strategy. In almost all cases, the BRC Report recommends that a board rethink its periodic involvement in today’s fast-paced, complex and uncertain marketplace. A company’s very survival or the success of a new initiative can depend on that, and there is often no time to wait for an annual review and discussion. Each company must develop a new approach based on a disciplined, continuous process.
This 27-page BRC Report contains excellent research and narratives; however, its following “Ten Recommendations for Strategy Engagement” are particularly instructive on how a board of directors can quickly refocus its strategy dialogue and enhance its engagement with management:
- Expect change and understand how it may affect the company’s current strategic course, potentially undermining the fundamental assumptions on which the strategy rests.
- Engage with management on strategy issues on an ongoing basis, including early involvement to improve strategy development, adjustment and monitoring.
- Evaluate strategy options and underlying assumptions in good times, as well as in times of change or crisis.
- Divide the strategy into elements that are tied to performance drivers and critical assumptions, and revisit those different elements throughout the year.
- Communicate to the CEO and management the expectation that strategies are brought to the board in the early stages to allow for open discussion and engagement.
- Establish an effective and collaborative relationship between the board and CEO via the chair or lead director.
- Consider director experience and expertise in relation to the strategic role of the board as part of nomination and re-nomination decisions.
- Develop consensus with management on the forward-looking metrics specific to the company that will be early indicators of the success or failure of a chosen strategy.
- Hold executive sessions—at a minimum—at the beginning and end of each board meeting to allow independent directors to freely discuss strategy.
- Establish a relationship with key investors when performance is good—this can ease conversations that may arise during more challenging times.
“The key challenge in the boardroom is that directors must pay more attention more often to both external and internal forces and changes, and continuously contribute to strategic development and initiatives – but do this without becoming managers themselves,” said Mary Beth Vitale, Chair of NACD-Colorado Chapter and Nominating/Governance Chair for CoBiz Financial. Mary Beth, added “In our NACD Board Advisory Services’ presentations, we stress to boards and their committees that strategy updates should be discussed at each meeting. The challenge for each company will be developing new processes to accomplish this, which will lead to more disciplined monitoring requirements, and finding appropriate ways to measure performance continuously versus the traditional annual review. Most corporations can no longer afford to wait for this moment only once a year.”
Perhaps most critical in this evolution toward continuous strategic attention by the board will be the personal initiative required of every director. Instead of reading the occasional “trend” story in The Wall Street Journal or think-piece in the Harvard Business Review, or hearing bits and pieces of news that eventually add up to strategic shifts and changing market conditions, directors need to seize the day, every day, by keeping up to speed with the right information. Each company can help their board in this endeavor by outlining and guiding them on what publications, blogs and other information sources they should use to stay on top of industry trends, news and milestones.
Everyone should now assume with certainty that a competitive advantage won’t last forever. Directors and C-level executives have the responsibility to watch the news and trends that can inform strategic review and allow adjustment before the competition shifts into higher gear, takes over market share or establishes a new advantage that was either never anticipated, or simply not identified and countered fast enough. Boards of directors can no longer wait a year to assess change, review the old strategy and adjust to it – they need to expect change, understand how it affects the company’s current strategy, and be willing to disrupt old assumptions and choose a new course in real time.