News and Views
August 27, 2020
Posted in: WATSON Views
“The best strategies are born from management’s analysis and creativity, coupled with the board’s incisive questioning and probing. The board should see the CEO and the top team present the strategy in their own words, then probe it, question it, and offer opinions on it. In-depth interactions with management strengthen the strategy and ensure that it is realistic. As the strategy is reshaped and improved, management and the board reach a common understanding of it. In the end, directors will wholeheartedly support it.”
Ram Charan, Aligning Boards and Management on Strategy
One of the defining characteristics of a strong board is alignment on purpose, long-term vision, and strategy. This alignment must permeate throughout the organization so the board and management are fully aligned on why the organization exists (purpose and vision), where the organization is going (strategy), and how it will get there (tactics). The board’s role is to approve and oversee strategy, in partnership with management. Management’s role is to develop the strategic plan, reflecting on guidance and expectations set by the board, and execute on strategy and tactics.
While there are commonly accepted ways the board feeds into strategy, the depth of the board’s role in strategic planning depends on a number of factors, including board and management experience and capacity, contextual issues, external factors, and the overall impact on the organization. In seeking to maintain an appropriate line, boards must analyze their context and strategic horizon to determine the expected level of board involvement and communicate their intended level of involvement to management. For example, if the organization is about to embark on the development of a transformational strategic plan, the board should lean in more significantly given the overall impact on the organization, or if management is inexperienced in developing strategy, the board should plan to be more engaged than what might otherwise be the case.
High-functioning boards and management teams partner on strategy in the following ways:
The Board’s Role in Crafting Strategy
- Contribute knowledge, insights, and ideas
- Challenge management’s assertions around strategy and risk, and the data behind such assertions
- Engage in debate and ask penetrating questions; push and test the thinking
- Seek to understand the rationale
- Satisfy themselves that management has thought through all the issues, options, risks, and implications
- Approve management’s recommendations or send them back to conduct more research and analysis
Management’s Role in Crafting Strategy
- Engage the board in broad framing, input, and exploration long before making recommendations
- Define and provide consistent reporting of key performance indicators (KPIs) and other qualitative and quantitative measures to inform the strategy development process
- Frame the issues, provide frameworks
- Lay out and lead exploratory discussions of pros/cons, options, criteria, rationale, key risks
- Tap into the board’s ideas and knowledge and probe to understand them
- Bring vision and passion, and make recommendations in line with the board’s direction
- Develop and present a sound, well-structured strategic plan to the board for approval
The Board’s Role in Overseeing Strategy
- Ensure management is making progress on strategy execution as planned through regular reporting, dashboards, KPIs, etc.
- Ask questions and provide input on matters brought forward by management
Management’s Role in Executing Strategy
- Ensure there is a plan for tactical execution of strategy, with clear accountability and ownership
- Develop a reporting framework that shows progress towards strategic priorities, major shifts, and other important considerations for the board
- Report on progress towards strategic objectives at board meetings and seek board input on major shifts or challenges
High-functioning boards and management teams also take the time to structure and articulate a clear strategic planning process to outline how the board will be engaged at each stage of strategy development. A well-structured strategic planning process includes the following elements:
- A dedicated strategic planning session (usually every three to five years) in which the board and management team align on the organization’s vision, mission, and values, reflect upon the organization’s opportunities and risks, and discuss the go-forward strategy and risk appetite
- Dedicated board and management sessions (following the strategic planning session) to discuss and establish business plans, related budgets, resources, risk mitigation strategies, and key performance indicators needed to execute on the strategy
- Periodic reviews (typically at regular board meetings) on progress towards implementing the strategic plan, emerging issues, and management of related risks
- Dedicated strategy sessions (usually annual) to review and refresh aspects of the strategic plan and risk appetite
The board’s annual calendar should be thoughtfully designed to consider the timing of these sessions in light of the board’s annual fiscal cycle. A well-designed, collaborative process enhances the effectiveness of each party’s role and contributions, ultimately increasing the long-term value of the organization.
How effectively is your board contributing to your organization’s strategy?