Rethink strategy. Briefly, that sums up the message in NACD’s new Blue Ribbon Commission Report on Strategy Development released today at the 2014 Board Leadership Conference. It is well known that the operating marketplace is fast-paced, volatile, and more dynamic than ever before. Companies must be able to react to disruptive forces quickly and correctly–the inability to do so is a real risk to an organization’s health and longevity. And yet, the role of the board in strategy has not evolved to meet the accelerated pace of business. Many boards still oversee strategy development with a “review and concur” approach: management creates a fully formed strategy that is presented to the board for approval with little discussion, and reviewed on an often annual basis.
How, then, can boards become more engaged in the strategy development process without crossing the line into management’s purview? To answer this question, earlier this year NACD convened a group of leading directors, strategy experts, and investors. At the second panel of the day, commission co-chair Raymond Gilmartin, former chairman, president, and CEO of Merck, commissioner Barbara Hackman Franklin, director of Aetna, and Bill McCracken, former chairman and CEO of CA, discussed with Wall Street Journal’s Management News Editor Joann Lublin the key recommendations from the report. These include:
Move to a higher level of engagement in the strategy formulation process. Gilmartin noted that moving past the “review and concur” model is important in light of unpredictability, uncertainty, and the unthinkable. “As directors, we are responsible for the creation of shareholder value, and also the long-term survival of the firm,” noted Gilmartin. “Failure in strategy is the reason why firms fail.”
Engage early with management, and continually. As strategy is formulated and reformulated, Franklin observed that boards need to engage on the underlying assumptions, strategic alternatives that are being considered, the risks involved, and how you manage success or not. And after there is concurrence with the board and management, at every board meeting there should be an update. “In effect, the strategy discussions are going on all year,” summarized Franklin.
Prepare for the future. In addition to becoming more engaged in strategy, McCracken stressed the importance of preparing for the future. Board agendas should be created to discuss the environment, competitors, and opportunities for innovation. “Often, activist investors are coming after [boards] for a lack of bold innovation on the behalf of directors.”
Putting It Into Practice
Panelists also discussed how they have incorporated the report’s recommendations at their respective boards. These areas include:
Director Knowledge and Education
Optimal engagement in strategy development necessitates that directors have the knowledge and context to understand the information presented by management, which requires continual education. From his experience on the board of General Mills, Gilmartin encouraged directors to visit plants and operations to gain context and the ability to interpret reports. Boards need to have a framework to interpret current events, and a common language so that they can discuss it with management.
Gilmartin stressed that boards “really must understandwhat the capabilities are and what skills are needed to effectively oversee this strategy.” While the board of General Mills does not use individual director evaluations to assess director effectiveness, Gilmartin believes that because of the interactiveness of the board “director evaluation occurs in every meeting with how they participate.”
Director Time Commitment
Board agendas are packed with little time for discussion–how can directors be encouraged to make the time for more engagement in strategy development? “A board that makes strategy a priority will spend the time on it–this doesn’t require persuasion,” observed Franklin. From her experience, the shift to becoming more engaged in strategy didn’t happen overnight at Aetna. Now the process begins with several meetings on underlying assumptions to the strategy that leads to a full day session on the plan. Once we get to the [full day] meeting we all own it–not just management. After selecting a strategy, the Aetna board receives an update on the plan at every meeting and a deep dive on one element of the strategy.
Panelists noted that as the board moves to a more engaged role in strategy development, management may feel defensive or territorial. Having served as both the non-executive chair and then CEO of CA, McCracken has experienced this situation from both viewpoints. As non-executive chair, McCracken observed: “I set up things for the board to engage more in strategy once I became CEO.” To move CA from a mainframe company to the cloud, McCracken created a task force of directors who knew the industry best and experts from management–encouraging the board to become more engaged. “Then when I was CEO,” McCracken recalled, “the then-elected chair asked me ‘what do you think of this activist board’? I said: I created it–I’ll have to live with it.”
The Report of the NACD Blue Ribbon Commission on Strategy Development can be found at the NACD Library.
The 2013-2014 NACD Public Company Governance Survey found that strategic planning and oversight ranked as the number one issue for directors. While risk oversight came in at number 3, Paula Cholmondeley—who serves on the boards of Terex and Dentsply International Inc.—finds it curious that risk doesn’t follow strategy as the number 2 priority because these issues are part and parcel of each other.
During a May 6 panel discussion at the C-Suite to Board Seat program at the Four Seasons Hotel in Washington, D.C., Cholmondeley and fellow panelist Greg Pratt offered their perspectives on the board’s role in overseeing strategy and risk. Cholmondeley emphasized that strategic thinking is where directors add the most value to a company. Furthermore, boardroom discussions surrounding strategy should be viewed on an ongoing basis—not as a single event. Chairman of Carpenter Technology Group and director of Tredegar Corp., Pratt went on to compare strategy to a GPS system: A tool that tells you where you are, where you want to go, and the possible ways to reach that destination. According to Pratt, directors have a responsibility to use strategic discussions and planning to decide which route is best for the business.
THREE KEY TAKEAWAYS FOR OVERSEEING STRATEGY
1. Educate yourself—and others. This is especially important for directors serving on boards in industries in which they do not have prior experience. Reading industry publications, attending relevant conferences, and getting exposure to as many sources of industry information possible can help directors enrich board discussions. Similarly, directors should ensure that the strategic goals are well-known throughout the company. This could include requesting that the CEO meet with staff so that goals are communicated to the lower levels of the company.
2. Set reasonable benchmarks. Directors should consider the critical assumptions underpinning the strategic plan. For example, how much progress is the company expected to make in the course of a month? Evaluate whether those benchmarks are reasonable for your company by consulting regional or national industry sources as well as third-party sources.
3. Monitor the course and evolve the strategy. The board should consistently review corporate performance with respect to the strategy, and alter course when necessary. Boardroom culture should support open discussions with the c-suite—and management should feel free to report to the board areas where the strategy may or may not be working. As a company reacts to different economic environments, the board needs to be able to evaluate which initiatives worked, which initiative work over a period of time because they are key to your business.
1. Get the committees involved. While ultimate responsibility for governing risk lies at the board level, the board can look to committees for support. In publically-traded companies, the audit committee has traditionally assumed the responsibility of risk oversight. A growing trend, however, is to delegate specific risks to various standing committees. The board can also create new committees that manage the emerging facets of risk, such as keeping the board abreast of new sources of competition.
2. Work with management to assess risk. Open communication between management and the board is critical, especially because the C-suite is likely to be the first to see that a strategy is not working. Directors should learn how risk discussions take place within the various departments and business lines, and establish multiple avenues through which directors can work with management.
3. Be aware of the risks around the corner. The board should constantly review potential non-traditional sources of competition, for example, Amazon’s move to enter the dental distribution market. Likewise, a company should work to make itself obsolete—best itself at its own game before the competition—and then create a strategy that will again put the company on the cutting edge of its industry.
NACD will continue to discuss these issues throughout 2014. Our Directorship 2020 events explore the disruptive forces that create new challenges in the boardroom and our forthcoming 2014 Blue Ribbon Commission Report will address the board’s role in recalibrating strategy. The topic will also be discussed at the next C-Suite to Board Seat in Beverly Hills, CA.
As information technology (IT) continues to evolve, so do the oversight responsibilities of corporate directors. From big data analytics to social media to cybersecurity, technology creates opportunities for companies to innovate, to create operational efficiencies, and to develop a competitive advantage.
These potential rewards can bring significant risks, however. Directors have the task of ensuring technology is integrated into both company strategy and enterprise risk management—and to do so they must first gain a deeper understanding of how technology is impacting their businesses.
The series includes insights from leading technology experts and top executives from AT&T, Citigroup, Dunkin’ Brands, Kaiser Permanente, and Oracle, among others, and focuses on critical IT areas for directors, such as:
how emerging technologies are altering the business landscape;
critical questions boards should be asking about technology;
the role of the CIO;
balancing IT risks and opportunities;
To complement the video series, NACD has additional resources, including white papers, articles, webinars, full transcripts of each video, and a discussion guide for directors who would like to take a deeper dive and bring these topics into their own boardrooms.
To watch The Intersection of Technology, Strategy, and Risk video series and access the supplemental resources, visit NACDonline.org/IT.