Wednesday, April 2, 2008

Strategic Planning Analogy #169: Get on Board

I once worked with a company that was concerned about how knowledgeable its outside board members were about the industry we were in. Well, as it turns out, unless an article on the industry happened to turn up someplace like the front page of Wall Street Journal, they wouldn’t see it.

As a result, we got all of the board members subscriptions to the various industry trade magazines. The good news was that the magazine subscriptions were free. The bad news is that I’m not sure if the board members read the magazines.

Almost all of the strategy pundits say that if you want effective long range planning in your organization, you need top management support—all the way up to the board of directors. (Of course, to do almost anything well, it helps to have top management support, as we saw in the blog “Top Management Commitment.”)

It’s hard to get top management or board members actively involved in long range planning if they know very little about the industry dynamics. As seen in the story, not all board members have a full grasp of the industry in which a company competes. Until the problem of insufficient knowledge is taken care of, the problem of good strategic thinking cannot be taken care of.

The principle here is context. Good planning does not take place in a vacuum. Strategic planning is designed to optimize within a context—the marketplace in which you compete. If you don’t understand the context, how can you know if the strategy is the best for your organization (or if it will even work)?

Context includes knowing such things as the competitive landscape, the consumer mindset, the regulatory environment, technology innovations, and other such issues. Many of these issues are specific to the particular industry one is in. Knowing about these issues in one industry may not apply to another.

It’s admirable that board members desire to get more involved in long range strategy. But if the board members are unaware of the total context in your industry, their “help” may not be very helpful. In fact, it might be harmful.

The McKinsey organization recently issued the results of a survey on this subject. In February of 2008, they interviewed 596 corporate directors from around the world. One of the findings of this study was an interest by board members in long range strategy. Even though strategy work was one of the items which boards spent most of their time on (about 24% of their board time), 50% wanted to increase the time spent on strategy work. Talent management was the only other category where a larger number of board members said they would prefer to spend more time than those saying they wanted to spend less time. Hence, the desire to do long range strategy is there.

Although the desire was fairly universal, the effectiveness was not. Only 43% of the respondents to the McKinsey survey felt their board was highly influential in creating corporate value. When comparing the highly influential board member responses to the little influence members, McKinsey saw the following differences:

1) The board members on influential boards are more likely to have expertise in sector and functional knowledge, performance management, and talent management.

2) The board members on influential boards are more likely to spend time with management in substantive debates about strategy. On low influence boards, they do little more than comment on strategies already fully developed by the organization.

3) The board members on influential boards have significant or unlimited access to executives beyond the most senior level. On low influence boards, about the only executives they talk to are the executives who are also on the board.

4) The board members on influential boards have much greater access to leading industry indicators and internal company data.

In other words, effective board members need to understand the context in which the company operates. They get that context through internal expertise, spending time interacting with a broad spectrum of company executives, and by having access to lots of relevant data. Without that context, it is difficult for them to have any influence.

In our last blog (“Blind Confidence"), we saw that when executives do not anchor their strategic goals in practical reality, they become hollow and not very effective. The same principle applies to boards. They also need context in order to be effective.

How much context are you giving your board? Are you giving them sufficient time with all of your executives? Is their time spent with executives interactive, or are they just being given “dog and pony” shows? How much information are you sharing with them about your company, your industry, your customers?

Effective strategies are built around optimizing performance within the marketplace. Unless you understand the context of the company and that marketplace, you cannot create effective strategy. Board members need that context in order to effectively do their job.

Now you might be thinking that you do not necessarily want an effective and influential board. You may be thinking that the more influential the board is, the less influential you are. You may think that keeping the board in the dark is not necessarily bad. After all, it is hard for them to argue against you if they have no point of reference to argue from.

However, consider this: If the board has little actual or emotional ties to the strategy development, then they will place all of the responsibility on you. Later, if there are any hiccups or missteps along the way, you will receive all of the blame. They will be more likely to demand a quick change in the strategic course (which may be the wrong move), and more likely to want to replace the senior “C Level” management (who are blamed for the bad strategy).

By contrast, if the board members are actively involved in the strategic process, then they are more emotionally tied to the strategy. They will be more likely to support it and fight for it during the tough times. Also, since the strategy is developed by a larger circle of people, it is harder to just blame the CEO if things go sour. If the board is actively involved in the strategy formation, then for them to admit the strategy is bad is to admit that perhaps the board is partly to blame. Getting the board "on board" can be a good thing.

And hey, if you give them enough context, perhaps they can help give you a far superior strategy than if you worked without their expertise. Wouldn’t that be nice?

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