Magazine article New Zealand Management

TENURE: Has Your Board Hit Its Use-By Date?

Magazine article New Zealand Management

TENURE: Has Your Board Hit Its Use-By Date?

Article excerpt

Byline: Iain McCormick

The demands by stakeholders for boards to ensure that effective business strategy is implemented are growing rapidly. Boards of directors must maximise their effectiveness in strategy development and implementation and so ensure they are not in danger of outlasting their use-by dates.

The recent controversy over Hanover Finance has placed those directors in the brightest of spotlights. In December 2008 hundreds of investors expressed their displeasure at the board of the failed finance company. Emotion levels were high with one investor suggesting investors may not live long enough to see the results of the proposed rescue plan.

The Herald recently reported that Prime Minister John Key had expressed his displeasure at the price hikes by Genesis Energy and called on the company to reconsider these.

These examples illustrate the critically important role of any board in contributing to effective business strategy that is in line with the reasonable expectations of shareholders.

The way in which boards contribute to strategy development is highly varied. Some boards work with management to jointly develop strategic direction, other boards review and challenge the strategy that management has developed, while some merely rubber-stamp managementCOs strategy.

Brauer and Schmidt, two European researchers, in their 2008 article in Corporate Strategy suggest a distinction can be made between two broad schools of thought on board involvement in strategy: the CyactiveCO and the CypassiveCO school. The CyactiveCO school means that board members act as independent thinkers who actively shape the strategic development of their organisations. While the CypassiveCO school views the role of a board as to review and challenge strategy.

Studies of corporate governance in the 1970s and 1980s suggested that many boards at that time had little involvement in strategy. In the 1971 book Directors: myth and reality, Myles Mace suggested that many boards of directors did not establish objectives, strategies and policies, did not ask discerning questions and did not select the CEO. A frightening situation.

This situation may not be quite as strange as it may seem with management writers such as Henry Mintzberg suggesting planned strategies, the types that are developed in planning retreats, may become irrelevant when new unforeseen opportunities emerge in the life of the organisation. This emergent strategy therefore consists of the sum of the important management decisions made over time. It may be totally different to output of the planned strategy the board was involved in.

While in practice effective business strategy is almost always an unpredictable mix of planned and emergent strategy, this in no way justifies a passive approach by the board. Not only is strategy development a requirement of effective board leadership but it is typically hungered for by the CEO.

My own experience from many board reviews in New Zealand and internationally is that most CEOs see the board as having a critical role in strategy but the reality of the boardCOs input into strategy sessions is often disappointing to the CEO. This hunch of mine is confirmed by David Nader in a paper entitled C[pounds sterling]WhatCOs the boardCOs role in strategy development?: Engaging the board in corporate strategyC[yen], in Strategy & Leadership, 2004. Nader suggests that while CEOs believe that participating in corporate strategy is the second most important activity that their boards undertake; CEOs rate boards as poor and give them only 11th highest ranking for their performance in this area.

If the boardCOs role in strategy is important in more normal times, it is vital in the current global economic climate.

Andrew Tuch, co-editor, Harvard Law School corporate governance blog, suggests the following to help the board maintain its utility in these troubled times:

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