Strategy and the Board of Directors. (Strategic Management)

By Frigo, Mark L. | Strategic Finance, June 2003 | Go to article overview

Strategy and the Board of Directors. (Strategic Management)


Frigo, Mark L., Strategic Finance


How well do directors truly understand the strategy of a business? I'll share my thoughts based on experiences at recent executive workshops and coaching sessions with CEOs, CFOs, and directors on developing a structure for understanding and prioritizing key elements of strategy that boards of directors must know.

Directors have basic responsibilities to c ate shareholder value, monitor the performance of a company, and safe guard its long-term viability. As part of their duties, they review corporate strategic plans. The challenge for them is to quickly and effectively grasp the key issues and see how a myriad of strategic activities and initiatives fit together.

Each director should be expected to have this knowledge. Jay A. Conger, professor of organizational behavior at the London Business School, and Edward Lawler, III, director of USC's Center for Effective Organizations, describe what should be expected from every effective director in terms of knowledge of the business by posing the following question: "Does the director have an adequate understanding of the company's strategies, industries, markets, competitors, financials operating issues, regulatory concerns, technology, and general trends?" ("Individual Director Evaluations: The Next Step in Boardroom Effectiveness," Ivey Business Journal, May-June 2002).

Return Driven Strategy provides a framework for quickly evaluating corporate strategy and strategic plans with a critical eye.

Return Driven Strategy: A Framework for Directors

Previous columns have discussed this framework (Frigo and Litman, "What Is Return Driven Strategy?" Strategic Finance, February 2002). In summary, Return Driven Strategy is the set of guidelines for designing, developing, and evaluating business strategy aimed at maximum, long-term wealth creation. These guidelines are displayed as a hierarchical set of strategic activities built on three major foundations of great business strategies.

Hierarchy of Activities and the Board's Attention

Prioritizing attention to initiatives is critical in an effective board's evaluation of a company's strategy because discussion of strategy can often get caught up in the details of particular strategic initiatives without fully considering how the activities will lead the company to superior financial returns. It is difficult to quickly evaluate the significance of particular activities and present a holistic context to all of the various strategic initiatives.

One approach I have used with executives in developing a board presentation is to compile a list of questions any effective director should be anxious to ask:

* Does the company demonstrate an ethical commitment to maximizing financial value?

* What unmet customer needs are being targeted by the business's strategy?

* Are these customers in market segments that are growing (or in markets that are stagnant or declining)?

* What Genuine Assets does the firm leverage? In other words, why should we, and not another larger or better equipped competitor, be doing this?

* Are other strategic initiatives aligned toward these top three overriding questions? For example, how does a new partnership help answer these three questions more convincingly? What about a new branding initiative?

* Are significant forces of change (population and demographic, economic and regulatory, etc.) being adequately considered for potential threats and opportunities?

Begin at the Beginning: Business Ethics and Long-Term Value Creation

The subject of business ethics is a central point that is pressuring boards today. Return Driven Strategy is built on research and application at companies that have demonstrated the highest levels of financial performance. It shouldn't be surprising that the first tenet of great business strategy is "Commit to Ethically Maximize Financial Value. …

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