Strategy Development

For the last decade, directors have consistently selected strategic planning and oversight as the leading issue for board focus in the coming year. Countless reports and case studies lend guidance to directors on their role in working with C-suite executives on the development of a winning strategy. This report marks the second National Association of Corporate Directors (NACD) Blue Ribbon Commission focused on the topic of corporate strategy. Convened in 2000, the first commission addressed the board’s role in strategy from a pre-Sarbanes-Oxley perspective—a time when the expectations of the board of directors were significantly fewer.

We reissued the Blue Ribbon Commission report in 2006 to reflect the new environment created in the wake of the Sarbanes-Oxley Act, which focused on internal controls and fraud prevention. In both the 2000 and 2006 reports, the co-chairs highlighted a key recommendation that was later reinforced in NACD’s Key Agreed Principles:

Boards should be constructively engaged with management to ensure the appropriate development, execution, monitoring, and modification of their companies’ strategies. The nature and extent of the board’s engagement will depend on the particular circumstances of the company and the industry or industries in which it is operating.

The recommendation remains fundamental: be involved throughout the strategic process to ensure corporate success. The question that the board must continually grapple with is how much involvement? The answer will change from company to company, and within a company, from time to time. If directors are too hands-off they may fail to fully understand the options and risks the company faces, and they may miss the opportunity to influence strategy in positive ways. Too far to the other side of the spectrum, directors risk crossing the line from oversight into management, which can undermine the board’s ability to hold management accountable for the strategy.

Defining Strategy

In academic literature, strategy is described in many different ways and with varying degrees of complexity. The brief definition that derived from commission discussions is that strategy is the means to create economic value by gaining competitive advantage through a unique value proposition. Corporate strategy is based on a set of assumptions about the external environment and is a course of action selected after analyzing the alternatives. At the time of the last report, board activity in corporate strategy could be summarized as periodic involvement in a cooperative process, consisting of: 

• The board and management jointly establishing the process the company will use to develop its strategy.

• Beginning with a full and open discussion, management taking the resulting agreed-upon assumptions to develop a strategy that is then presented to the board for approval.

• The board then monitoring the execution of the approved strategy, ensuring that modifications are made as necessary.

The Current Environment

This periodic involvement needs to be rethought in our fast-paced and increasingly complex marketplace. Successful corporate strategy must continually adapt to ever-accelerating change in an increasingly uncertain operating environment that is being reshaped by new competitors, emerging technologies, globalization, regulation, demographic trends, and economic and geopolitical volatility. Disruptive market forces are broader and occur more frequently than ever before. While some of these forces (e.g., natural disasters or geopolitical events) can occur overnight, many present in a more subtle manner, slowly gaining momentum until the incumbent companies are unable to respond. In this environment, there is a real and substantial risk that a company will fail to adjust strategy as necessary for survival in a timely manner.

Addressing these forces and responding strategically requires a new level of board engagement; directors can no longer wait for annual discussions with management on strategy or for issues to surface on a quarterly basis. In earlier reports, we called for a level of board engagement on strategy that was more than a “ratifying” role. Now, we recommend that directors recognize that board engagement on strategy is a continual process, and issues related to strategy should be the central focus of board activity year round. It is important to note that the new expectations of boards have not changed within the realm of what is required of directors—from either a state or federal law perspective. The key challenge remains: how can the board continually engage in the strategic process without crossing the line into management?

About the Report

This report draws on the experiences and insights of our Blue Ribbon Commission members and research from NACD, as well as the thoughtful work and writings of others in the business, strategy, and governance arenas. In the report, we explore:

• Why boards should reassess how they approach their role in strategy, including the limitations of the board’s traditional role in today’s increasingly dynamic business and risk environment.

• A framework for board engagement in the company’s strategic activities and processes, and for changing the strategic rhythm of the board.

• What is needed from the board to support continual oversight of strategy development, execution, course correction, and related information and control (monitoring) systems.

Practical guidance throughout the report includes the following:

• Questions to evaluate capabilities, resources, and processes —the factors critical for a strategy’s success.

• Potential barriers to changing the boardroom dialogue on strategy, and ways directors can use core tools and processes—such as board agendas and executive sessions—to support a more collaborative approach to strategy development.

• Key practices for enhancing the role of the lead director, a role the commission views as critical to ensuring optimal board engagement in the strategy formulation process.

• A discussion guide to use with management on rethinking the board’s involvement in strategy dialogue.

• An illustrative process flow map detailing an approach to building ongoing strategy discussions into board meetings across the year.

• Examples of performance metrics, including leading indicators that can support the board’s assessment of current strategy and future alternatives.

The report also contains ten specific recommendations for directors to consider as they rethink the board’s role in strategy engagement, including:

• Expect change and understand how it may affect the company’s current strategic course, potentially undermining the fundamental assumptions on which the strategy rests.

• Engage with management on strategy issues on an ongoing basis, including early involvement to improve strategy development, adjustment, and monitoring.

• Evaluate strategy options and underlying assumptions in good times, as well as in times of change or crisis.

Taking the steps to become more continually and therefore proactively involved in strategy formulation will be a significant undertaking. Changing the rhythm of the strategy-setting process requires stewardship and committed leaders at both the board and management level. It is the hope of this commission that with these recommendations, boards will be better equipped and positioned to address with management the challenges that continual accelerating change in the business environment poses for the development and adjustment of corporate strategy.