Tapping the Strategic Potential of Corporate Boards
Too many boards just review and approve strategy. Three questions can help them—and executives—begin to do better.
February 2013 | by David Delaney
It’s late afternoon in the boardroom, and the head of a major construction company is in the hot seat. A director with a background in the industry is questioning an assumption underlying the executive’s return-on-invested-capital (ROIC) forecast: that the industry’s ratio of leased (versus owned) equipment will remain relatively constant. The business leader appears confident about the assumption of stability, which has implications for both the competitive environment and for financial results. But the director isn’t convinced: “In my experience, the ratio changes continuously with the economic cycle,” he says, “and I’d feel a whole lot better about these estimates if you had some facts to prove that this has changed.”
An uneasy silence settles over the room: the board member’s point appears quite relevant but requires a familiarity with the industry’s behavior and economics, and the rest of the board doesn’t have it. Finally, the chairman intervenes: “The question John is raising is critical and not just for our construction business but for our entire strategy. We’re not going to resolve this today, but let’s make sure it’s covered thoroughly during our strategy off-site. And Paul,” says the chairman to the CEO, “let’s have some good staff work in place to inform the discussion.”
If the preceding exchange sounds familiar, it should: in the wake of the financial crisis, we find that uncomfortable conversations such as this one. This conversation is drawn from real events, though we have changed the names of those involved. are increasingly common in boardrooms around the world as corporate directors and executives come to grips with a changed environment. Ensuring that a company has a great strategy is among a board’s most important functions and the ultimate measure of its stewardship. Yet even as new governance responsibilities and faster competitive shifts require much more—and much better—board engagement on strategy, a great number of boards remain hamstrung by familiar challenges.
Hostile Takeovers and Unsolicited Bids
For starters, there’s the problem of time: most boards have about six to eight meetings a year and are often hard pressed to get beyond compliance-related topics to secure the breathing space needed for developing strategy. When we recently surveyed board members to learn where they’d most like to spend additional time, two out of three picked strategy. A related finding was that 44 percent of directors said their boards simply reviewed and approved management’s proposed strategies.
Why such limited engagement? One likely reason is an expertise gap: only 10 percent of the directors we surveyed felt that they fully understood the industry dynamics in which their companies operated. As a result, only 21 percent of them claimed to have a complete understanding of the current strategy.
What’s more, there’s often a mismatch between the time horizons of board members (longer) and of top executives (shorter), and that lack of alignment can diminish a board’s ability to engage in well-informed give-and-take about strategic trade-offs. “The chairman of my company has effectively been given a decade,” says the CEO of a steelmaker in Asia, “and I have three years—tops—to make my mark. If I come up with a strategy that looks beyond the current cycle, I can never deliver the results expected from me. Yet I am supposed to work with him to create long-term shareholder value. How am I supposed to make this work?” It’s a fair question, particularly since recent research shows that major strategic moves involving active capital reallocation deliver higher shareholder returns than more passive approaches over the long haul, but lower returns over time frames of less than three years.
Compounding these challenges is the increased economic volatility prompting many companies to rethink their strategic rhythm, so that it becomes less calendar driven and formulaic and more a journey involving frequent and regular dialogue among a broader group of executives. To remain relevant, boards must join management on this journey, and management in turn must bring the board along—all while ensuring that strategic co-creation doesn’t become confusion or, worse, shadow management.