The board's broader role in strategy: with more risks out there than ever imagined, and risks that have bigger impact than they had in the past, greater board involvement in strategy may be the best hope for staving off a disaster.

• Author: Mittelstaedt, Jr., Robert E.
• Position: STRATEGY - Cover Story

ONE OF THE PERENNIAL governance questions of the last decade has been, "What is the board's role in strategy?" Ten years ago in a governance seminar I was running at Wharton, Irving Shapiro, then recently retired as chairman of DuPont, said (only partly for effect), "The board has only one role: hire and fire the CEO--otherwise they should stay out of the way."

What a difference a decade makes! Most chief executives today involve their boards heavily in strategy. The board participates in an annual strategic retreat and discusses appropriate metrics for tracking progress and assessing the external environment. Directors also are frequently asked to review updates to the company strategy. Most CEOs welcome this involvement and the resulting discussions and advice.

All directors and chief executives I talk to (and there have been many in more than 30 governance courses I have run for directors over the last decade) agree that the board should not develop the strategy but should contribute to understanding the context for its development, evaluate management's suggested strategies, and monitor progress and impact. Strategy development is clearly management's responsibility, because the management team is closer to the market, the environment, and company capabilities than the directors are.

But there is danger lurking in the boardroom unless the definition of the board's role in strategy is broad. I believe the board has (at least) four major strategy roles:

* Short term: Ensure that the capabilities needed to execute the chosen strategy are world-class and provide differentiation and advantage.

* Medium term: Continue to reevaluate the strategy in light of competitive actions and changes in the external environment.

* Longer term: Periodically develop a "start from scratch" view of the world in a five-year time frame. What would the business look like if you were able to start it from scratch five years from now? If you don't do this, a competitor you don't even know today might.

* Always: Broaden your view of strategic risk to those things that have come to be lightning rods for destruction of shareholder value.

1. Assessing capabilities

   A decade ago, leading strategy thinkers were talking about capabilities as strategic drivers. We saw more emphasis on IT, customer service, supply chain, lean manufacturing, rapid product development, and other mechanisms to change the rules of the game. Many companies have learned to use a broad range of capabilities to advantage, but there are others that have been slow to change or develop new capabilities. This difference is especially true in consolidating industries with a sudden break point, when winners and losers emerge suddenly from a fog. The airline industry and the shift to digital photography are two current examples.

   As industries become more competitive, the real issue is that much more of what we once considered operational has become strategic. But operations is a differentiator only when we are so much like our competitors that we cannot find other ways to compete. Operational excellence is absolutely necessary as a capability, but if it is the only strategy it may be a sign that you have run out of ideas for the future.

2. Reevaluating the strategy

   The annual strategy retreat worked well when we developed five-year plans, but competitive time frames are short and getting shorter. As a result, we have lapsed into two-...