The Board’s Role in Corporate Strategy

Corporate strategy is a difficult undertaking for directors, even in the best of times. While management draws on significant resources to develop and refine corporate strategy, directors have fewer opportunities to contribute to the endeavor. It is not surprising then that while CEOs suggest that participating in corporate strategy is the second most important activity that their boards undertake, they give their boards only the 11th highest grade for their performance in this realm. “What’s the board’s role in strategy development?: Engaging the board in corporate strategy”, David A. Nadler, Strategy & Leadership, Vol. 32 No. 5, 2004. The difficulty of developing corporate strategy, as well as the stakes involved, increase significantly in times of economic crisis such as we are facing today.

Against this background and facing the current economic crisis, the Lead Director Network, a group of lead directors, presiding directors and non-executive chairmen from many of America’s leading companies created by King & Spalding and Tapestry Networks, met on November 3, 2008 to discuss the role of the board in corporate strategy. Following this meeting, King & Spalding and Tapestry Networks have published the ViewPoints report, to present highlights of the discussion that occurred at the meeting and to stimulate further consideration of this important subject. The following provides highlights from the meeting, as described in this ViewPoints report.

Greater Involvement of Boards in Corporate Strategy. Members of the Lead Director Network observed that boards have become significantly more involved in corporate strategy in recent years. This increased involvement might be attributable to boards being more proactive, generally, since the corporate scandals in the early part of this decade, the rise of activist investors, and directors’ own efforts to become more engaged in corporate strategy, particularly when their companies are undergoing rapid changes or facing turbulent events.

The Shift from Episodic to Ongoing Involvement. One of the manifestations of boards’ increased involvement in corporate strategy has been a shift from periodic involvement in corporate strategy to ongoing, real-time engagement. Increasingly, boards are involved in corporate strategy in a continuous way, with a shift from a model of management reporting on its strategy from time to time, to a model in which management and the board collaborate in developing and monitoring corporate strategy.

Lessons from the Current Financial Crisis. Members of the Lead Director Network noted that the recent turmoil in the markets has had a dramatic impact on the strategies of their corporations and the role of directors in guiding those strategies. For many companies, any strategy in place before August 2008 is likely to have been overcome by intervening events. Many companies are reassessing and adapting their strategies on a day-by-day basis, with directors providing inputs at frequent meetings and numerous informal briefings.

Steps for Board Leaders to Improve Board Contributions to Strategy. Members of the Lead Director Network suggested that lead directors can help their boards make better contributions to corporate strategy by taking the following steps:

• Improve the quality of Board communications: Lead directors can improve the quality of board discussions of corporate strategy by keeping board discussions at the “right level” (neither too tactical nor too high-level), effectively communicating the board’s views to management and challenging management on strategic issues, as appropriate.

• Ensure that the Board is receiving adequate information: Lead directors must be certain that the board receives the information that it needs to have effective inputs into strategy decisions, especially about assumptions underlying the strategy, alternative strategies that may have been considered and risks that may jeopardize the success of a strategy.

• Use executive sessions effectively: Executive sessions of the independent directors should for candid discussion of strategic choices, to collect feedback for management and to bring the directors to consensus on decisions about strategy.

• Provide guidance and feedback to the CEO: Lead directors may help the CEO prepare for board discussions of strategy by previewing questions and concerns that may arise. They should follow up on meetings by communicating the sentiments and reactions of the independent directors to the CEO, even challenging the CEO’s preferred strategy.

• Consider the composition of the Board: Lead directors should monitor the composition of the board, so that directors will have the right combination of skills to have effective inputs into corporate strategy.

Conclusion. Members of the Lead Director Network expect that the current crisis will accelerate the trend of directors becoming even more involved in their company’s strategic decision-making. Though the current crisis presents challenges for the American business community, board members believe that increased collaboration between management and the board will improve the process of developing and implementing corporate strategy.

Additional information regarding the LDN may be found on the websites of Tapestry Networks and King & Spalding.

A copy of the Lead Director Network ViewPoints report is available here.