With the global crisis in corporate governance still only mildly abated, there have been renewed calls for Boards to become more active participants in their corporations’ affairs and in particular the “direction setting” or “strategy” function. After all, the purpose of governance is to enhance executive decision making and thus improve organizational performance. Since strategy is one of the most important activities that a CEO and his/her executive team can perform, it would seem only fitting that this is an area in which the Board should be quite involved. Accordingly, the notion of a Board’s responsibility for a corporation’s strategy appears to be no longer debatable.
At the same time, however, a Board’s involvement in strategy must continue to honor the well-respected tradition that Directors, generally, are not elected to micro-manage the corporation, but rather for oversight, insight and foresight.
So what do Directors now think about their expanded “strategic role” and what changes do they think need to be made in order for the Board to fulfill its fiduciary responsibilities with respect to good strategic governance?
I recently surveyed and interviewed a large group of serving Directors from a variety of organizations (publicly listed, private, not-for-profit, pension funds governmental agencies etc.) and asked them the following question: What are the major issues facing Boards and Directors today as they attempt to constructively engage with their managements in setting the strategic direction of their organizations? Here are their top five areas of concern.
The degree of formal Board input. Having more formal, structured involvement with management in the strategic planning process was the number one issue that Directors identified in terms of improving their engagement with management. This is particularly interesting since Directors have in some jurisdictions been given – through regulation – new powers to be more actively involved in the strategic planning process, including approval of the strategic plan. But while the role of Directors with respect to strategy has changed, how they actually are supposed to engage or participate with management in this area has not been either prescribed or readily apparent.
The Directors comments suggested that there were a number of factors affecting the quality with which the Board and management interact when it comes to strategy. For instance, many Directors complained that senior managers (especially the CEO) appeared to resent the new powers of the Board into what was traditionally the latter’s exclusive domain. As a result, CEOs appeared to be trying to keep their Board’s involvement to minimalist levels. Other Directors griped about how senior managers often simply failed to appreciate the role that the Board could play in terms of bringing an unbiased and outside perspective to the organization’s strategy. “They like to say ‘trust me’ a lot or that we ‘don’t understand’ because we don’t fight in the trenches every day like they do” one Director said. And then there were those Directors who suggested that their fellow Board members were either entrenched in past practices or simply unsure of the correct level of involvement. Accordingly, they opted for taking a laissez faire, hands-off or “rubber-stamp” approach with the CEO.
Most Directors, however, argued strongly for greater inclusion in the planning process. They felt that by making their involvement more formal – say as part of the Board’s “charter” or terms of reference – it might help to reduce the tension, friction or confusion which some CEOs or Directors have regarding the Board’s proper engagement in this vital area. Many also commented on how it would be good to specify the exact nature of engagement in terms of “who does what, specifically” in order to remove some of the fears that CEOs have regarding a Board becoming too involved or micro managing – as well as to remind “laid-back Directors” about the need for their engagement.
Setting standards for Board understanding of strategy. The term “strategy” is an abstract concept with no universal or common definition. As a result, most Directors have different interpretations of the word (and what constitutes a “strategic decision”) based upon either their previous MBA training or corporate strategic planning experiences. This does not make for good communication or facilitate understanding between the Board and management – or even among the Directors themselves. It was probably for these reasons that the Directors I spoke with cited “setting standards for Board education and the understanding of strategy and strategic decisions” as their number 2 issue.
“We need to make sure that we are all focusing on the truly strategic stuff” was a comment oft repeated among the Directors I interviewed. Directors expressed unhappiness about how often they felt that they were “getting dragged into tactical issues” by either management or their fellow Directors. They cited the reason for this as there being no common understanding of what they, as Directors, were supposed to be concentrating upon. Or, as one Director put it: “We need to figure out which issues are strategic decisions and which ones are not.” Many also commented that without some clarification and mutual agreement on this, a lot of Board time was being wasted on matters that properly belonged to management.
Every Board therefore needs to agree on and clearly articulate, at least for their particular organization, the “framework” they are using for communicating, describing, understanding and analyzing their firm’s strategy versus the “tactical operational stuff”. The benefits of all Boards doing this are immeasurable. It would facilitate a strategy’s understanding by all members of the Board. It would keep Directors out of the weeds. And it would make clear for Directors serving on multiple Boards the unique way in which each of their organizations was approaching strategy. It would also make a lot easier the comparison of strategies between different organizations by outside analysts.
Improvements in Board operation. As the third ranked strategic issue, Directors appeared to emphasize three aspects of Board operations in particular. The first was the number of meetings devoted to discussion of the strategy. These were meetings over and above the one or two sessions (often a special retreat) in which the strategic plan was formally presented, considered and approved. Those commenting on this issue felt that not enough regular Board time was being given to this important Board responsibility and most argued that some discussion of the strategy, including both its progress and obstacles, should form part of the agenda of every Board meeting.
A second major consideration regarding the Board’s operations focused on the use of committees. Apparently, a number of Directors were part of Boards in which responsibility for reviewing the strategic plan with management – and recommending its approval to the Board – was being delegated to either an executive or strategic planning committee. The Directors felt that since strategy was such a significant Board responsibility, it should not be delegated to a committee the way other responsibilities are. In contrast to the audit committee, for example, where the authority to review financial statements is typically assigned to those Board members who are financially literate or expert, it was argued that all Directors must be able to make some sort of contribution to the strategy. And as one Director also pointed out: “If the Board is supposed to help set strategic direction, it’s critical that every Board member participate in its development and understand the implications of the choices being made. The last thing you want to hear some Director say six months after the strategy has been approved is: ‘I never would have done that’!” Accordingly, Boards should see their role in strategy as something which is not delegateable.
The third item surrounding Board operations and strategy involved the recruitment and selection of Directors. Quite a few Directors stated that for some of their fellow Board members, they could not understand why the persons were still serving as Directors; that the ones in question appeared to have outlived their usefulness. They claimed that since all Directors are responsible for strategy, the primary consideration in their selection naturally should be each Director’s ability to make a contribution to it in some way. The tool for facilitating this, of course, is a Directors’ skill matrix. The matrix sets out the competencies and experiences which are required in the Board in order to help management deal with the organization’s changing/future strategy. Individual Directors’ abilities are then plotted against the items listed in the matrix. A major benefit from using this approach is that, as the strategy changes, it serves as a useful point of ‘non-humiliating departure’ for those Directors whose skills were once highly valued (for the previous strategy) but no longer of relevance to the future one.
Better interaction with senior management. It was fascinating to discover how, for some Directors, the manner and tone with which their Boards interacted with management was a significant concern. This current issue, however, was not about the amount or type of Board involvement with management but instead the method and style that Directors used to actually speak to management. “I hate it when the Board gets into debates with the CEO” one Director exclaimed. “It quickly becomes a win/lose situation and each side feels the need either to defend a stated position or back up a member of the team depending upon which side you are on.” Clearly when this happens, the end-game strategy for both sides is to determine who is right rather that what is right and, most important, to declare a winner.
And, of course, a big concern was the sometimes lack of civility with which Directors treated management.
In order to deal with these various situations, most Directors claimed that the role of the chair becomes critical. He or she must take precautions to ensure that debates and rudeness do not occur and that the focus remains on management’s recommendations (and the explanations for making them) rather than know-it-all Board members. Interestingly, good chairs accomplish this by making sure that the principal method with which Directors engage management is through probing and questioning as opposed to pre-emptive declarative statements (the latter of which is often difficult for a forceful Director to retreat from).
Use of a facilitator at strategic retreats. Bringing management and the Board together for one or more strategic retreats was seen as an integral part of a good strategic planning process. However, as a number of Directors pointed out, not all retreats go smoothly or exactly as planned. Managers will overwhelm Board members with information and presentations. Egocentric Directors sometimes shanghai the meeting. And the agenda is either not strictly followed or simply not completed. Accordingly, the hiring of a highly skilled and independent strategic facilitator was offered by many Directors as one important way of holding the meeting and its participants accountable for its completion.
After the selection of the CEO, the Board’s engagement with management in helping to set the strategic direction of the organization remains its primary and most important function. Indeed, Directors’ responsibility for strategy is even mandated by regulators in some jurisdictions. However, enshrining a Board’s activity in strategic planning is no guarantee that high quality engagement with management will occur. Directors therefore should see the current list of issues as potential areas of risk, be vigilant in identifying them in their own organizations and work diligently to try and deal with them.
But here’s the big, uncomfortable question for Caribbean directors: to what extent does your board have the competence it needs to astutely assess and give effective oversight to your organization’s strategy as well as the wherewithal to constructively engage with and advise the CEO if – and how- the strategy needs changing? If you think that there is room for improvement in the way your board carries out this important governance oversight function, you might want to consider sending them to one of the corporate governance training programs available in the region – like the exclusive three day “Chartered Director Program” that has been offered by The Caribbean Governance Training Institute since January 2014. After all, it’s not education which is expensive, but rather ignorance.
Dr. Chris Bart, FCPA is a recognized governance authority, the Founder of The Directors College of Canada and Co-Founder of the Caribbean Governance Training Institute, both of which currently offer the Chartered Director Program that leads to the internationally recognized “C. Dir.” designation. For more information, please visit CGTI’s website: http://www.caribbeangovernancetraininginstitute.com/ or phone Lisa at 758 451 2500