CGVE/U2 Topic 6 Changing Roles of Corporate Boards with changing times
The role of the board changes as the company grows and the management team becomes more diverse, with a wide range of experts who can contribute to strategy in different ways.
A company passes through several stages in its life cycle. In the first stage ‘Start-up’ strategy is developed and implemented by the founder and a close team. At this stage it is not often clear who is doing what. The team will switch from their shareholder role, to their executive role and then their board role quickly whenever the need arises. Usually, whichever role the founder plays most can be said to be the place in the organisation where the strategy is developed.
As the company enters the second stage ‘Growth’ more people join and the roles start to be defined with greater clarity. Skilled or qualified staff start to offer their inputs to strategy and the board needs to be explicit about the sharing of the roles to ensure that efforts are coordinated so that people feel engaged. Failure to separate and define roles will lead to dissent and disorder. Failure to share opportunities to contribute will disenfranchise management. The board need to be especially vigilant that the founder does not continue to dominate the process although they may still design the process so that the founder has the final say.
Eventually growth will start to slow down. This is a stage at which a company needs to focus efforts on internal effectiveness, systems and processes. It is also a stage during which the strategy development, in good companies, is formally delegated to the now strong and experienced management team and the board moves into the more traditional role of understanding, testing and endorsing strategy. Much will depend on the decision of the founder to remain as an executive (usually CEO) or to move to a non executive role (often Chairman but not necessarily always so).
If the transition is an abrupt or unexpected slowing of growth and represents a deviation from agreed plans it is not uncommon for a board, at this stage, to step in and remove the CEO or undertake other actions to restructure management so as to gain better visibility of the path ahead. If the transition is smooth, expected and well prepared for then the role of the board is not as overt.
At this point the company needs to decide if there are additional activities they wish to undertake that would effectively renew the organisation and continue the growth or if they are happy to transition to a less volatile mature operating state as the company becomes ‘Sustainable’ or ‘Mature’. This is the stage of life of most large blue chip organisations. They undertake enough new developments to maintain their sustainability but never so many that they revert to the risky volatile growth phase. Outcomes are expected to conform to plans and the board spends as much or more time monitoring strategy implementation as they do developing strategy.
Finally the organisation will enter the stages of decline and, if this is not arrested by reinvention, decay. A good board will be alert for indications that decline is imminent and will ensure that management are challenged with the task of developing new strategies for growth to counteract the tendency of the organisation to drift into these stages. Companies in decline are often paradoxically very profitable as investment in new lines of business and growth projects slows whilst tried and tested products are efficiently produced and sold.
Many family businesses enjoy this phase as a means of creating funding for the retirement of the founder. Other businesses work hard to transcend the tendency towards decline and decay. The board may, again, need to become more active (and possibly even forceful) to ensure that management focus their efforts appropriately depending on the owners’ desires for the organisation.
Some not-for-profit businesses look forward to these stages as they will indicate that the mission has been achieved; when a cure is found for cancer most cancer-related charities will focus on transitional arrangements to assist current sufferers, on providing information about the cure and on closing down in an honourable manner. A few will move into other disease related work whilst most will seek to exit the marketplace. For commercial companies the imperative will be to either create new business streams or to return capital to the shareholders whilst meeting obligations to stakeholders. The board must step into their role as the ultimate endorsers of strategy during these phases.
- Board meetings feature a range of ideas and viewpoints. Directors themselves should represent a diversity of perspectives to improve the group’s collective decision-making. Gender and ethnic diversity certainly help in this regard, but they are not enough: Additional sources of heterogeneity — such as age, industry or educational specialties, and international experience — also increase the potential range of innovative ideas.
Diversity may be an obvious goal, but is often elusive in practice. A recent study indicates that directors with similar backgrounds (male, financial experience, served on other boards) remain overrepresented today, with negative impacts on firm performance.⁶ This does not mean that companies should try to “check every box” of representation, which risks a bloated and ineffective board. However, they should ensure that a variety of viewpoints and backgrounds are always represented.
Board meetings should regularly involve external experts, adding fresh perspectives that can be tailored to the most pressing issues. To ensure that outside voices are integrated into the strategic process, directors should also be chosen for their ability to engage in productive debate — for example, being receptive to new views, challenging others’ ideas in a constructive manner, and being motivated to engage in strategy deeply and collectively.
- The board challenges management adeptly — and management is receptive to challenge. No matter how capable the executive team is, an external perspective can always help ensure the strategy is more robust. However, board members may have difficulty asking the tough questions — perhaps because they do not know what or how to probe, due to information asymmetry; or perhaps because they do not want to appear disruptive. (This is a long-standing problem: As Warren Buffett wrote thirty years ago, “At board meetings, criticism of the CEO’s performance is often viewed as the social equivalent of belching.”⁷) And some CEOs are less receptive to challenges, perceiving tough questions as hostile.
To avoid these pitfalls, directors must act as “loyal critics,” mastering the art of challenging management while preserving trust. This starts by building a working relationship outside of formal meetings, so directors know what issues to focus on and the CEO is prepared to engage productively in the process. Then, the board should ask challenging questions — ones that make critical hidden details explicit by foregrounding strategic assumptions and essential features of the broader context. Examples of probing questions include:
- What are plausible scenarios for the future of our industry?
- Will our strategy be robust to changes in the macro environment?
- What are the sensitivities of key assumptions?
- How do you ensure adequate implementation of the strategy?
- Do we have the right talent to execute it, for now and the future?
- What are the potential downside risks and mitigation plans?
The board and management should iterate until these questions are answered with sufficient clarity and precision. To ensure every decision receives thorough scrutiny, directors might institute a rule of “compulsory dissent”: No strategy may be endorsed until at least one robust counterproposal has been explicitly offered and considered.
- Directors monitor execution of the strategy. Execution cannot be separated from strategy — they are intertwined. Just as the approach to strategy should be modulated according to the environment, so too should the approach to execution. The board can play a vital role in ensuring that strategy is implemented throughout the organization, but it can be difficult in practice: According to a National Association of Corporate Directors survey, 67% of directors say it is important to improve their monitoring of strategy execution.
Effectively monitoring strategy execution is not as simple as watching a dashboard of results. The board should make sure that management is evaluated on both financial and non-financial dimensions, with a clear prioritization of metrics in line with the firm’s overall goals. This avoids the pitfalls of an excessively long list of measurements, in which a few good ones can be highlighted while others are explained away or overlooked.
Additionally, directors should meet with management frequently to test that the original assumptions behind the strategy still hold. Follow-up meetings should involve not only the CEO but other layers of management, ensuring that strategy is being implemented throughout the entire organization. These can be complemented by employee surveys to understand the execution in even more detail. For example, during a large transformation, the board might identify where in the organization employees do not understand the strategy, do not see progress in the change effort, or do not believe they have sufficient resources to implement it.
- Boards dedicate more time to strategy and keep discussions focused. Given directors’ other responsibilities and the infrequent nature of board meetings, it is challenging for them to stay up to date on key trends and continuously validate the firm’s strategic direction. Though directors say they want to spend more time on strategy, the reality is that instead they are increasing their time spent on other topics, such as governance and risk.
To ensure sufficient focus on strategic topics, boards should schedule dedicated time to discuss strategy in the agenda of every board meeting — not only on an annual cycle. Furthermore, a robust knowledge system can give directors the information they need: Frequent updates should keep directors apprised of changes in the environment and resulting impacts on firm strategy. Extensive communication before and after board meetings can streamline the sessions themselves, freeing up time for strategic discussion. And directors should have access to a repository of on-demand materials to increase their inside knowledge of the company.
Time and information alone are not sufficient, however: Even when time has been carved out for strategy, the discussion often devolves quickly to more familiar territory, such as granular details or the firm’s current operations. For example, if the board intends to discuss marketing strategy, it may soon find itself focusing on sales strategies instead, and eventually questioning the firm’s practices in managing a sales force. These discussions may yield useful suggestions, but by ignoring the bigger picture, they represent a missed opportunity for the board to add even more value. The best board chairs can keep discussion focused on key strategic issues — a very difficult task, but one that is crucial.
A changing business environment calls for an enhanced role of directors in relation to strategy. Strategy is becoming more challenging yet more important, increasing the value of boards that can actively partner with management and guide the company’s future direction. By practicing “self-activism” — challenging assumptions, offering counterarguments, and closely monitoring execution — boards can help develop a strategy to succeed in the modern age.