JOHANNESBURG – Exercising strategic oversight is a key board responsibility, but chances are your board is missing some important elements of the process.
Strategy is one of those business buzzwords everybody likes to roll off his tongue, but setting an effective strategy is a highly complex matter. Boards are responsible for setting strategic direction and for overseeing its effective implementation.
But all too often boards can fail to appreciate just how to go about discharging this responsibility effectively.
Principle 4 of the King IV Report on Corporate Governance for South Africa states: “The governing body should appreciate that the organisation’s core purpose, its risks and opportunities, strategy, business model, performance and sustainable development are all inseparable elements of the value creation process.”
The recommended practices outline the specifics of the board’s responsibilities and the actions it should take but, given the fact that an organisation’s success hinges on its strategy, it’s worth delving a little deeper to understand all the issues more fully.
We should never forget that getting the strategy wrong will ultimately spell disaster. Strategy malfunctions include sticking with what is currently working, dismissing new competitors too quickly, and over-analysing everything.
So what are some of the aspects boards should consider?
An important consideration is board composition. It is critical that the board has the diversity of outlook and experience needed in an increasingly complex and ambiguous world.
Well-meaning diversity exercises are intended to achieve this, but all too often they degenerate into racial and gender formulae that do not deliver the multiplicity of views that are desperately needed.
Many boards lack members with a deep understanding of technology – a grave drawback considering technology’s ability to spawn new competitors and even redefine whole industries.
Additionally, as companies move towards more digital business models, their risk of cyber attacks rises dramatically. Cyber risk needs to be integral to any strategy discussion in today’s business environment.
Then there is the question of ensuring there is a mix of directors with short- and long-term outlooks to complement each other. PwC says in “The board’s role in strategy: getting the process right” that directors find balancing short- and long-term focus to be the biggest challenge when it comes to strategy oversight – getting it right depends on having the right people.
And, finally, boards need contrarian and fearless voices that will challenge both group think on the board and management’s comfortable assumptions. All of these factors need to be incorporated in the board’s succession planning process.
Board agendas are full, time is short: is the board spending enough time talking about strategy? Most directors would say not. Beware the annual strategy indaba or lekgotla that takes the board away to focus on strategy – such events can be valuable, to be sure, but strategy creation can never be an event.
In a fast-paced world, it must be revisited continually.
Nor must it be seen in isolation: boards must consciously introduce strategy – both current and likely future strategy – into all their discussions.
Part of the board’s ability to keep on reassessing its strategy is the way in which it measures progress. Directors must ensure there are ways to establish exactly how well the strategy and the implementation thereof are doing in reaching its goals.
It goes without saying that these checkpoints must also serve as opportunities to reconsider a strategy and its underlying assumptions, and change.
Another critical factor is executive compensation – always a hot topic. Executive performance targets must be aligned with strategy goals. It is a complex topic but getting this right will also go a long way to defusing acrimony relating to perceived excessive executive salaries and bonuses.
Finally, boards should give thought to how they communicate their strategy to all stakeholders. Communication efforts have traditionally focused on investors, but it is increasingly important that other stakeholders – customers, employees and regulators – also understand where the company is headed and what its long-term value-creation plan is.
Every strategy exposes a company to risk. And the achievement of strategy can be impacted by risks. It is thus important that directors understand what those risks are, and the opportunities they might bring. We will be looking at risk next month.
Parmi Natesan and Dr Prieur du Plessis are respectively chief executive elect and chairperson of the Institute of Directors (IoDSA). The views expressed here are their own.