Up until the early-2000‘s, corporate boards might have rubber-stamped their approval of the CEOs strategic plan without the need for much involvement in its formulation. They were largely content with rewarding profitability or handing out consequences for losses - all based on the rear-view mirror perspective of financial performance. In the United States, that changed with the arrival of the Sarbanes-Oxley Act of 2002, which required board members to pay far more attention than before to the goings on within their organizations. At that point, the stakes were raised in regard to board responsibly for managing the CEOs job performance, overseeing financial reporting and supervising risk management. Their legal liability to shareholders increased significantly. Board involvement in strategy has continued to change even more dramatically over the past five years, perhaps forever changing the board / management working relationship.
From “Bored” Involvement To Board Involvement: Changing Norms
Before Sarbanes-Oxley (SOX), board members cared more about the performance of the company - indicated by the financials - and less about the accuracy of the reports and how numbers were obtained. Of course, that has changed.
In 2008, as the Great Recession began, credit dried up and sales slumped for companies around the globe. The risks and complexities of the business world grew as the economy worsened and strategy mistakes that might have been overcome in the past began to magnify and severely damage or ruin companies - even those that had been financially strong and solid performers before this major inflection point occurred. The norms for board of director involvement in strategy began to change again about that time. Corporate boards began commanding a view from from behind the wheel - with the head lights on bright.
Corporate boards have always varied in their direct involvement in the formation of strategy and planning process, but it became apparent that a hindsight view was not good enough to avoid catastrophes from occurring. That would require more involvement up front - in strategic planning. Where the strategy involved acquisitions and mergers to accomplish growth, boards have historically been very involved along with major shareholders. In today’s environment, even when the strategy is built around more basic blocking and tackling maneuvers than a complex one involving M&A transactions, seeking council and input from the organization’s directors is wise and becoming more systematic.
Corporate boards now want to be made comfortable about the planning process itself, insuring that risks are properly addressed in a standardized fashion via a robust strategic planning methodology.
The Importance of A Great “Board / Management” Working Relationship
CEOs and their management teams often take the approach of tackling strategic planning internally, to the exclusion of board involvement. The strategic plan is updated or, in some cases, a new strategy is born - and only then is the finished planning product is related to the board at the next Director’s meeting. This approach can backfire.
Corporate boards no longer are demonstrating default buy-in of their CEOs strategies, especially when they did not have a role in its development. Indeed, the trend is shifting to one of tighter management and board collaboration when it comes to strategy development and strategic planning process design. Board members are increasingly seeking a more hands-on approach to setting strategy with the CEO, offering their broad and deep expertise to shore-up gaps in experience that might exist within the management team. Working in isolation (e.i. CEO and management develop strategy and planning without board involvement) often creates rework.
Boards and management should be working closely together to set in place strategies that provide good working parameters for the CEO. The Chief Executive should be empowered to navigate successfully in the execution of the organization’s strategy, yet be encouraged, or required in some cases, to seek board approval on changes to strategy are being contemplated. With the stalled economic growth we are currently experiencing, another evolutionary step may soon be coming in regard to board involvement in strategy. Get read to see a checkmark added in the “Plan” column for the “Board” role in the Evolution of the Board Role graphic.
This article originally appeared on the Method Frameworks website.