Confusion abounds around the role of the board in private companies’ strategy work. Here are seven practices to ensure your board adds maximum value when your company sets and executes strategy.
Hold the leadership team accountable for effective strategy. If board members define the strategy, they have essentially demoted the CEO to the role of COO. Enterprise strategy is the management team’s role, but directors must raise issues they want the strategy to address. They should ensure the analysis of strengths, weaknesses, opportunities and threats leads to an insightful diagnosis of the company’s current and emerging situation. The board should comment on options that management presents. It should also ensure suitable measures are in place so it can determine if execution is producing the desired effect. And boards must make sure the budget aligns with the strategy.
In complex, rapidly changing environments, boards can work closely with management to ideate directions under different future scenarios. But boards must always keep the C-suite on the hook for designing, executing and measuring strategy.
Understand what good strategy is and is not and refrain from approving weak strategies. Ultimately, the board must vote to accept (or reject) management’s proposed strategy. So, board directors must know what an effective strategy is and is not. A compelling vision falls far short, absent a cohesive game plan for its realization. Strategy is not a set of unconnected goals; nor is it a set of product plans around the same old business concept. Financial goals are not a strategy.
At the enterprise level, the strategy should capture the core decisions about what business the enterprise is in, how it will outperform its competition and why it will grow profitably. This high-level view of strategy should be the focus of the board.
Renowned business school professor Richard Rumelt, in Good Strategy, Bad Strategy: The Difference and Why It Matters, argues that strategy is a problem-solving exercise. A successful enterprise strategy therefore has three elements.
First, it identifies a core question or compelling challenge the organization faces that will dramatically alter its future. Think of Netflix (founded in 1997) as the digital world grew from 2000 to 2010. The company grew by displacing Blockbuster but faced this question: What are the implications of the digital world for our direct-mail DVD rental business? Blockbuster’s board failed by ignoring that vital question and allowing management to define its business as a retail video store.
Second, a great strategy creates a guiding policy for all future actions that address the question or issue. For Netflix, the guiding action was to become a streaming company, which it did successfully in 2007.
Finally, an effective strategy delivers a cohesive set of synergistic actions that build organizational strength and differentiation. Here, Netflix had to succeed in the face of Amazon and Apple, who each had larger customer bases and could easily bundle movies with their other offerings. Netflix’s essential action was to create content, not just stream it. It started in 2015 and remains a successful company, recently adding live-event streaming. Its original unsustainable mail business recently ended.
A great strategy should capture all three of these elements on one page.
Discuss strategy at each board meeting. Boards should think, discuss and act with a longer time horizon and broader perspective than management. Each board meeting should discuss some aspect of strategy.
At each meeting, ask leadership to provide reports on the execution of the current strategy and have them provide data on whether the execution is having the desired effect on leading and lagging indicators of success. In addition, a list of risks and opportunities related to the strategy should be developed and reviewed at each meeting. Success favors the prepared management team and board.
Hold educational sessions and discuss topics that will affect markets and future strategy. For example, all boards should be discussing the new AI methods. What are its risks? What are its opportunities? How is management planning to adopt or develop new AI tools based on generative models, models that create content (text, video, images) for their users? What data governance model will best protect the company?
The board should also ensure that the organization is building core strengths that will allow it to execute its strategy more effectively. For example, years ago, a company that sold structural precast, prestressed building components to commercial construction general contractors and design-build firms faced growing commodity-like competition. The industry was consolidating, creating large competitors with economies of scale advantages. The board approved a new strategy to become a design-build firm, leveraging its technology so the company could offer lower costs, less schedule risk and faster completion. To make sure that strategy would be successful, the board needed to ensure that the company focused on creating a culture of collaboration between construction, engineering, architecture and sales, something not typical in project-based design-build transactional relationships. That new culture also enabled all the trades (plumbing, electrical, HVAC) to do installations on the production floor versus conducting all work on the building site, creating additional competitive advantages. The financial gains have been substantial and, just as important, the firm moved from bid work to primarily negotiated work.
Another focus of strategy discussions could be evaluating whether critical elements of the company’s strategy are factually based versus resting on assumptions. Ask challenging questions, probe deeply and learn about industry views from individuals not on the board or leadership team. Put yourself in competitors’ shoes to imagine their board meeting discussions. Listen for inconsistencies in the company’s actions. This work is emotionally challenging as it often requires speaking truth to power. But good boards do just that. Compliant boards check a box of necessary activity but add little value.
Ensure every function understands the strategy and has aligned its efforts to strategy execution. Distrust builds in a leadership team when the strategy is undefined, unclear or not working. Each leader does what they think is right, moves that often block the ability of other leaders to accomplish what they believe is right. Leaders form hidden assumptions about each other’s behaviors and then act in ways that further undermine trust.
Boards can review plans of different divisions and functions to ensure a shared understanding of the organization’s enterprise strategy. All too often, CEOs assume this understanding exists when it does not. Boards can be very helpful in getting the CEO to look beyond desires to actualities.
Broaden board membership beyond your industry. Leaders steeped in one industry sector often stick with its paradigms, assuming industry norms for “how to compete” are facts versus current practices. But dramatic disruptions often come from outside an industry, such as when Apple entered phones and cameras. Add creative thinkers to your board who will challenge assumptions behind the company’s strategy and surface fresh opportunities. Many boards focus on the diversity of demographics. A variety of backgrounds warrants as much attention. Make sure your board has one or more strong strategists in its ranks. A group of former CEOs and C-suite executives is impressive but may need more creative strategy skills.
As an individual board member, refrain from assuming you know the answer. Strategy at its best is a collaborative process in which no one starts with the “right” answer. Be open to other ideas. Ask questions that probe shared learning versus debating why the suggestions of others are wrong. At times, you may need to be a devil’s advocate and at other times employ the “yes and” philosophy of improvisation. As a director, aim to ensure discussions are deep, broad, shared, generative and focused. Assuming you alone know the answer hinders achieving this worthy goal.
Be prepared to act when management’s strategy is not working. Individuals who rise through the ranks of an organization have leadership skills but may need more vital strategic-thinking skills. Larger (often public) organizations address this gap by creating a director of strategy position or hiring a well-known strategy consulting firm. But small and mid-size privately owned companies may be unable to do so. Now, the board’s role becomes essential.
First, board members must build a generally shared understanding of market forces and why the current strategy is weak. Achieve this understanding by asking the management tough questions to which it may not have answers. Ask the team to come back at the next board meeting with solutions. Inviting experts in the industry to present at the board meeting can help raise management’s understanding of the inadequacies of the current strategy.
The board must replace the CEO if the change in strategy is not forthcoming. Please do not make the mistake of having the board set a new strategy and then asking the management team to implement it. Without ownership, execution will falter.
Kay Plantes, Ph.D., is a member of the advisory board of Automation NTH and Finfrock Industries. She served for nine years as director and chair of the finance committee of Joint Commission Resources. An economist, she is founder and principal of Plantes Company.