Feeding a board's 'appetite for strategy': how to get a board more engaged in strategy development? Three critical success factors come up consistently.

• Author: Nightingale, Jack
• Position: STRATEGY

MUCH OF THE GOVERNANCE FOCUS in the first half-decade of the 21st century has been on compliance and the board's fiduciary responsibility to protect shareholders from financial fraud. More quietly, boards have continued to demonstrate commitment to their role in company strategy.

This commitment is based on members' recognition that they need to satisfy themselves that the company is pursuing sound strategies that will build value for shareholders over time. Boards and management teams are continually looking for more effective means of engaging directors in evaluating and approving company strategy.

Numerof & Associates Inc. recently investigated the current state of board involvement in strategy development. We conducted structured, confidential interviews with senior executives from approximately 20 major companies across a broad range of industries. Almost all of these individuals served in the role of chairman, and several also had experience as nonexecutive directors for other companies.

What emerges from these interviews is a remarkably consistent perspective on the proper role of the board in company strategy, what it takes to engage the board effectively, and the demands placed on directors and management by such engagement. The investigation has also uncovered some important lessons for boards to consider as they determine how best to fulfill this critical responsibility.

Today it is generally understood that--along with governance and talent management--company strategy is a core responsibility of the board. That has not always been the case. In 1984, DIRECTORS & BOARDS published one of the first articles advocating that boards become more active participants in strategy formation for their companies (see sidebar, "The Case for Planning Committees"). More than cursory engagement in strategy was the exception, reflecting a more limited definition of board responsibility and greater deference to management that was prevalent at that time.

Such an attitude would be difficult to find today. Boards have an appetite for strategy, and management has come to value the board's contribution.

More than just advisory

The nature of the board's strategy role varies somewhat from company to company, but the general outlines are consistent and clear. Strategy development typically starts with management, and the board serves as a sounding board to test and refine the strategy. However, the board's role is not just advisory. Strategy is about decision-making. Boards may be heavily reliant on management to provide information and structure the discussions, but they are also actively involved in pressure-testing and ultimately approving their companies' strategies.

There are also times when nonexecutive directors can initiate strategy development--when they recognize major business opportunities or threats that management has not yet come to appreciate. Some highly successful executives we interviewed could point to critical changes in direction at their companies that resulted directly from a board member's suggestions. Typically, such interventions have the greatest impact when they take the form of quiet, sometimes persistent suggestions to management to consider a new line of thinking. The essential source of influence in these cases is not the power vested in the director's position but rather the trust and respect the director has earned based on experience.

There is always some tension inherent in the relationship between boards and management over the boundaries between strategy and execution. On the one hand, outside directors need an understanding of company operations to evaluate strategy, but management tends to resist when the discussions move into tactics, since these directors don't have sufficient information to make good decisions. As one former CEO put it, the board should keep its "noses in and fingers out" of the company. In other words, the board should have access to any information it desires in pursuit of its fiduciary responsibilities but should not cross the line by meddling in the management of the company, except in extraordinary situations. If the board is unhappy about implementation, the focus should be on fixing the management team. As a practical matter, CEOs generally report no difficulties with their boards on this issue, since the boundaries are understood and respected.

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