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 understand what 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.