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When it comes to corporate strategy, CEOs and their boards of directors don't always see eye to eye.
A survey conducted by the Washington-based National Association of Corporate Directors (NACD) revealed that CEOs rank strategic planning as number two in importance to their companies, yet only number 11 in terms of board effectiveness.
In response, and in an effort to improve CEO-board relations and stem a tide of abrupt CEO departures, the NACD formed a Blue Ribbon Commission on the Role of the Board in Corporate Strategy, cochaired by HBS professor emeritus Robert B. Stobaugh.
The result of their work is a comprehensive report that provides guidance for directors as they participate in the strategy arena — advising, assessing, and monitoring strategy; ensuring the execution and modification of strategy; and evaluating their own effectiveness in these activities.
In addition to numerous recommendations, the report includes a self-assessment tool, suggested readings, and 11 case studies on how the CEOs and boards of various companies have handled strategic planning, some well and some not so well.
"We did a complete package that would help boards move forward on this front," Stobaugh told HBS Working Knowledge.
In this conversation with HBS Working Knowledge Staff Writer Martha Lagace, Stobaugh discusses some ways that CEOs and boards can move forward together.
How much time do you think a CEO should be given to show what he or she can do?
There are many different situations, but let me talk about two extreme cases.
One is, the company's in dire straits and instant action has to be taken or the company's going bankrupt. There, the CEO has got to come up with a plan almost immediately. By the end of a month, the CEO ought to have already begun plans to turn a company around, because this company's bleeding to death. There's no time to do a long-range plan.
On the other hand, if the company is going along pretty well, then you could give the CEO a year to come up with recommended changes in strategy to make it better. At the end of six months or so, the CEO and board ought to be working together to develop some kind of strategy, using the knowledge that the board already has and the CEO's new knowledge of what he or she has learned about the company. At the end of the year, they ought to have a strategy that would indicate their future direction.
There are many circumstances. Let me mention another one. That's when an outgoing CEO stays on the board as chairman in that year of transition. It might be harder for the new CEO to come up with much in the way of strategic change during that first year. That's one reason why I'm in favor of a CEO not staying on after he or she is no longer CEO.
How is it possible to reconcile the need for long-term strategic planning — which is discussed in your report — with the need for strong quarterly results?
In our report, we say you ought to [take the long view], but we recommend something that a lot of companies have not been doing which I think would help short-term results. And that is: Once you agree on a strategy, don't just put the strategy on the shelf.
Make sure it's implemented. Make sure you monitor it and keep it on the board agenda so that at every board meeting you look at the strategic results compared to benchmarks that you've already agreed to.
If you're not meeting those benchmarks, don't wait a year to find out. Find out right away, and take corrective action. Ask yourself: "Why aren't we making the benchmarks? Was our plan just flawed because it wasn't very good? If we made a wrong assumption, what was it? Did a competitor react in a way we didn't understand?"
Many boards have given lip service and done excellent work on producing a strategy. We offer a very good list of elements that will probably improve companies, but it's an improvement at the margin because [boards themselves should be] making up the elements they want in the plan.
Speaking of monitoring, what kinds of problems might upper management have in working more closely with a board of directors?
Our major emphasis is that the company will be a lot better off, management will be better off, and the stockholders will be better off, if there's constructive engagement between the board and management.
By working together as partners, management will be able to use more of the board's knowledge, contacts, and expertise than they would otherwise. One of the purposes of a board of directors is to provide the kind of experience and views that management may not have themselves.
One thing that's very difficult for management to do is to have the objectivity that directors do, because management is engaged in the nuts and bolts of putting something together. At the end of the process, you're probably less objective than somebody who comes in from time and time and talks with you about it.
I think management really has to be the one to put the strategy together, but they ought to be in close contact with directors as part of that process; and we make the point that [both sides] ought to explicitly agree on the process.
Right now, often there's an implicit agreement about what's going to be done, but boards and management should say at the beginning, "Well, here's a process we're going to agree on, and this will be the board's role, and this will be management's role."
Now some of them are not interested in getting the board involved: They're afraid of the open-ended part, that the board will come in and try and take over the company, which would indeed be a big mistake.
Why do dot-coms tend to have the most fully engaged boards?
The way dot-com companies are financed is often through venture capitalists or private investors. These people are the ones who are putting up the money for it, and they're the ones sitting on the board. They're so fully engaged because they have sums of money involved that are extremely important to them.
We recommend that directors be paid an important part of their fees in stock, and be required to hold a certain amount of the company stock. That helps ensure that directors are going to be attentive.
Directors have so many things to do and a lot are members of other boards, and they try to do a good job on all of them. But if there's a question of "Here I have a half-million dollars' worth of stock and here I don't have any...." Some people may deny that, but I believe a lot of people think it.
Are there aspects of the culture of traditional companies that tend to make boards less involved in strategic planning?
Yes. Boards of directors in the past [have been referred to as] ornaments on a Christmas tree. Starting from the 1960s, coming forward, boards of directors have become more and more involved. The 1970s were important because there began to be more outside director control of companies. The New York Stock Exchange, for example, said that the audit committee had to be composed completely of outside directors.
In the 1980s, directors were mainly involved in crisis management. If there was a hostile takeover, or if a CEO was really performing miserably and you had to change CEOs, directors would get really involved.
In the last half-a-dozen years, they've become more involved on a wider set of fronts.
This is the first time that I know of a study — and certainly the first time that we of the National Association of Corporate Directors have come up with a study — that says, "You ought to be involved in strategy. It ought to be constructive, and here is a way we think you can do it."
Going back to dot-coms, the fact that boards of dot-coms are heavily involved in strategy doesn't mean that they couldn't learn from reading our report, because some of them aren't involved in strategy very well.
I talked with a CEO of a dot-com the other day, and he said that in the next job he had, he was going to make sure the venture capitalists understood that they could not come in and try to run the company. He felt that his company could have done better if the venture capitalists and he had had that clear understanding at the beginning.
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Case C The Sages: Key Directors of Major Information Technology Company Serve as Sounding Boards (Anonymous Company) Individual directors can make a critical difference to a company's success — even if the company is a Fortune 100 firm. This is certainly true with one major global technology company, which has a 10-member board composed of qualified outside directors who meet almost monthly. A majority of the directors have technical and/or managerial expertise with large, global, complex companies undergoing continuous change. The board holds 10 board meetings each year. Eight of these meetings are from 9:00 a.m. to noon and two meetings are for two days. Board committees are executive, audit, compensation, and governance. The CEO is the chief strategist who "owns" the responsibility and the overall agenda for strategy development. The agenda goes from the CEO to the senior vice president of strategy (SVP-Strategy) to the board in a process that the SVP-Strategy describes as "fluid, open, and honest." Informal and Formal Processes The company has an informal and formal process that involves the CEO, senior management, and directors in formulating strategy and developing a plan. Both processes take place on a continuing basis throughout the year, with directors and management proposing modifications, changes and other significant adjustments to strategy. The SVP-Strategy and the CEO hold small group meetings with board members throughout the year. It is in these sessions where board members are actively engaged in the development and ongoing adjustments in corporate strategy. For example, the SVP-Strategy meets regularly (every three months) on an individual basis with three board members who are noted strategic thinkers. These key directors serve as "sounding boards" on ideas and issues arising from discussions between the CEO and the SVP-Strategy. With one board member, the SVP-Strategy's conversations focus on broad strategic issues; with another, it is on performance measures, scoring, and benchmarking; and with the third, the conversations center around technology and expert resource pools. These conversations help management get the feel of the board on strategic issues and, in turn, these board members lend their expertise and advice to management. Where there is disagreement between the ideas of management and these board members (called "danger zones"), there are opportunities to deal with these disagreements in an informal manner — in one-on-one conversations, rather than in a board meeting. Also, on an informal basis, small groups of board members and top management visit U.S. offices several times each year. During these meetings there is informal dialogue on corporate strategy between board members and management. On a more formal basis, plan development takes place continuously throughout the year with updates at most board meetings. Adjustments in the company's strategy and plan are made as needed. In the summer, management meets to allocate resources. The company's corporate strategy, however, is driven by the CEO working closely and informally with the SVP-Strategy and key board members. During the "formal" board meetings (9:00 a.m. to noon) and the two-day sessions, the board serves in strictly an oversight and monitoring role, rather than a developmental role. Any contributions to development come from the key directors with the most relevant expertise in planning and in the company's industry. |