A call to action for better board governance of strategy

"Where was the Board of Directors?"

That is one of the questions I am asked most frequently.  And it's a good one.  Readers, and audiences, wonder how a well-educated and experienced Board could allow a company – like Blockbuster, Hostess, Radio Shack, Sears, Circuit City and Blackberry, to name a few – to fall into bankruptcy, or a situation where the future looks dismal, perhaps impossible.

Isn't the Board accountable for company strategy, performance and the decisions made by the CEO?  Perhaps, but they often haven't acted like it.

Powerless Past

Historically Boards of Directors reviewed a company strategy once per year, and it was far from a discussion.  The CEO, perhaps along with his/her top few executives, would present a multi-page document, attaching ample appendices including elaborate spreadsheets and charts.  This would be a one-way presentation to the Board, overviewing recent performance, past strategy and management's view of the future strategy.

There might have been polite discussion, but the Board only had one available action, either approve the strategy, or reject it. Given that Boards had no ability to create their own strategy, and rarely much data to contradict the mountain of statistics presented by management, the vote was a given – out came the "rubber stamp" of approval. All orchestrated by an "Imperial CEO" who rarely wanted discussion, or anything other than quick approval.

A Call For Change

Facing mounting investor concerns about strategic guidance and the Board's role, the increasing involvement of activist investors willing to replace Board members, and the long arm of enhanced regulation the National Association of Corporate Directors (NACD) created a Blue Ribbon Commission to review the Board's role in setting corporate strategy.  Co-Chaired by Ray Gilmartin(former Chair and CEO of Becton Dickinson and Merck, Board member of Microsoft and General Mills, HBS '68) and Maggie Wilderotter (Chair and CEO of Frontier Communications, Board member Procter & Gamble and Xerox) and containing 21 diverse business leaders, this commission just published "The NACD Blue Ribbon Commission Report on Strategy Development."

This report makes 10 specific recommendations regarding Board involvement in corporate strategy, which in total represent a substantial change in how often, and how deeply, Boards discuss and alter strategy in conjunction with management.  The report calls for greater accountability by the Board, increased transparency from management and the requirement for better strategy development.

A New, More Controversial Involvement by Boards of Directors

In an interview, Dr. Raetha King, Chair of NACD (former Board member Exxon Mobil, Wells Fargo, HB Fuller, Lenox Group and General Mills Foundation) said "it is time for Boards to change their approach regarding strategy formulation toward 'shape and monitor.'  Boards must move from a passive role to a more active role.  The Board must be fully engaged, at all times, with strategy."

When asked what has prompted this significant recommendation, Dr. King went on to say "This report was deeply influenced by the external disruptions which are happening to companies on a regular basis in today's dynamic markets.  Boards are too often blindsided by external events, as is management.  The solution is a fundamental change in the strategy process to engage the Board earlier, and more often.  To have Boards participate in the strategy process, and not merely approve a finished product.  The Board must become a strategic asset for the CEO and his executive team by engaging all members, and their cognitive diversity, for insight and direction."

Recognizing and Managing Disruption

Co-chair Ray Gilmartin has been a professor at the Harvard Business School, and a colleague of fellow professor and famed innovation guru Dr. Clayton Christensen.  He has observed how disruptive innovations have affected many companies, and has asked Dr. Christensen to provide Boards with advice on how to avoid becoming stuck in the "Innovator's Dilemma." Mr. Gilmartin offered "The NACD's Blue Ribbon Commission report on strategy is intended to help corporate directors and their boards prepare for the unpredictable, even the unthinkable.  More specifically, the report is intended to evolve director's strategy development role from the typical 'review and concur' to a higher level of year-round engagement in the strategy development process."

This is a remarkable change in Board involvement, well beyond anything previously recommended by any association or other body which works with corporate Boards.  And the impact should be widely felt, as NACD has 14,000 members, all belonging to Boards.  By recommending that Boards re-allocate their time to spend more on strategy discussion, and less on historical results and reviews of well-known practices, this commission is pushing for a sea change in the strategy process.

Changed Role for the CEO, and the Board

Co-chair Maggie Wilderotter has the view not only of an outside director, but as someone currently holding both CEO and Chair positions in a company.  She completely concurred with her commission colleagues.  In our interview she commented "Historically, strategy was not dynamic.  Now it must be, due to so many marketplace changes happening so quickly.  It is critical that the CEO utilize the Board to re-assess strategy at each Board meeting so as to better prepare for changes and avoid incurring any additional marketplace risk."

She continued "The new best practice, today, is for management to draft the strategy, but not finalize it.  Options must be posited and discussed.  Yes, the CEO must own the strategy, and the strategy development process. And part of that process is to drive discussion with not only internal management but external leaders on the Board.  It is critical companies track more trends from outside the company, add more external inputs to the data, and be increasingly aware of how the external world impacts the company.  Good execution today involves connecting internal metrics to external markets."

This will involve quite a bit of change in Board dynamics.  Many CEOs, as mentioned above, may not be prepared for such a radical shift in the strategy development process.  To address this Ms. Wilderotter recommends "Board members must pressure the Chairman and/or Lead Director for updates on strategy before documents are made final, and before final decisions are made.  Members must resist accepting final documents, and insist on receiving interim information.  Members must constantly push for management to supply not only internal information, but external data on trends, competitors, customers and all factors that could impact future performance.  There must be a proactive conversation on the new expectations directors have about management engaging them in the strategy development process. And Board members must insist on Executive Sessions, apart from management, to discuss strategy amongst themselves and develop feedback for the CEO."

The report pulls no punches in its strong recommendations for changing the Board's involvement in strategy.  And the degree to which the report, and its authors, identify the importance of disruptive change on company performance today is eye opening.  The report's first recommendation sets the tone for significant change:

"Expect change and understand how it may affect the company's current strategic course, potentially undermining the fundamental assumptions on which the strategy rests."

Is this the end of the "Imperial CEO?" Readers know I have long called for greater transparency and more Board involvement in challenging CEOs where the strategy does not align with market realities.  This report seeks the same thing.  Boards can no longer allow the failure of management, or overly rely on a dictatorial CEO, on something as important as corporate strategy. They owe too much to the investors, employees, suppliers and communities in which their organizations operate.

As readers of my book and this blog know, this has long been my mantra.  Like Dr. Christensen, I too encourage leaders to open their eyes to the extent which disruption affects their organizations in my columns, my keynote speeches and workshops.  No longer is excellent execution enough.  In a world where technologies, regulations, customers, products and competitors change so quickly strategy must be reviewed and updated constantly.  And this report, from a noteworthy organization and blue ribbon panel, is a clear call for Boards to sink their teeth deeper into strategy.

All Board members, and people who want to be on Boards, should seek out a copy of this report, read it and share it with executives and Board members across your networks.  These are recommendations which can have a profound impact on future performance in our rapidly changing world.

(Adam Hartung is the managing director at Spark Partners. He blogs here.)

To become a guest contributor with VCCircle, write to shrija@vccircle.com.