You're more than the 'hall monitor': how directors contribute to strategy development determines the real value they add to a company. But governing strategy means asking tough questions and putting the proper 'scaffolding' in place.

• Author: Kipp, Mike
• Position: STRATEGY

IT IS HARD TO HAVE a conversation about governance without getting the impression that the board is the "hall monitor" in the affairs of an organization. The business press, the analysts, and the critics seem single-mindedly focused on oversight--driven by SOX, related-party transactions, options backdating, and executive compensation, among other concerns. Heads nod with exaggerated solemnity as someone says, "You have to be ready to ask the tough questions." It's as if managers were errant children in need of adult supervision. (And, indeed, some are.)

But here's a tough question for directors themselves: How does the board add value? More specifically, what is the board's role in developing and governing strategy?

This is far from an academic concern. A recent McKinsey study surfaced the discomforting finding that "less than 25% of directors know their company's strategy" and "less than half are knowledgeable about the 4 or 5 key initiatives underway at any given time." No wonder CEOs often see their boards as too conservative and too uninformed to contribute to strategy beyond receiving good intentions and good news.

So, as directors we're good with Section 404. Are we done? No. Compliance is "table stakes"--only a precondition to placing the kinds of "bets" that add value over time.

Series of ongoing choices

One of the board's key responsibilities is to guide strategy, policy, and core ideology. This goes beyond simply knowing the "game plan" to actively and appropriately participating in robust dialogue around aspirations and direction. Directors who truly add value also know that strategy goes beyond the collective enthusiasm to "grow the business." They see it as a series of ongoing choices about customers, competitors, and competencies--a "pattern of response to market needs, consciously selected in light of probable shifts in the environment, relative competencies of the firm, and the contingent moves of intelligent competitors" (definition of strategy from The Intelligent Enterprise, James Brian Quinn, Free Press, New York, 1997).

Clearly, the CEO is the chief strategist for the company. Boards shouldn't kid themselves on this. Strategy development, though, is the product of a conversation between leadership and the board, starting with the CEO and proceeding as a kind of "volley." As with all good conversations, it is fueled by good information and good questions.

Leadership's opening salvo always raises governance choices that will ultimately guide...