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Boards and strategy: taking in the long view

23/6/2017

1 Comment

 
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During the last month, I have had the privilege of working with four different boards and management groups, helping them wrestle with why the company they govern exists (its purpose, or reason for being) ahead of formulating strategy to pursue the agreed purpose. All four engagements have been invigorating, revealing many insights and much passion (and debate!) within the assembled groups. 
However, three troubling signs became apparent amidst the boards' commitment to the cause. These signs, which are not uncommon, have the potential to stymie the quality of the resultant strategy and management's ability to implement the approved strategy. The following comments highlight the issues:
  • A propensity for detail: Most of the discussions quickly devolved to specific examples and detailed aspects of the company's products, customers and staff: the perception being that more detail is helpful for effective implementation and to mitigate risk. This is not uncommon: strong leaders like solving problems. However, humans tend of overestimate their ability to predict the future, and boards and managers are no exception. Further, implementation is a task for management, to be actioned after purpose is determined, strategy formulated and resources appropriated. Also, a strong focus on detailed elements has the unwanted effect of taking the gaze away from the big picture, the wider context within which the company operates, and in so doing introducing new risk not mitigating it. Left unchecked, the resultant strategy is more characteristic of a detailed list of activities than a high-level, contextually relevant overview of how resources will be deployed to achieve the agreed purpose.
  • Confusion over the board–management nexus: The usage of the term governance over the last 15–20 years has become widespread (in both appropriate and inappropriate contexts). Usage has reached the point that 'governance' has become a panacea for all manner of corporate ills including poor company performance. The board–management relationship has become clouded, with the two parties claiming or denying tasks, often based on a poor understanding of what governance actually is. If the board and management are to work well together, a well-defined of division of labour is required, to allocate to tasks explicitly to the board, to management, or to both.
  • Shortening the horizon, to reduce the odds of failure: This sign is closely related to the first one. If those responsible for formulating strategy are not looking well into the future, identifying emerging trends and possible responses, they are doing themselves and their company a gross disservice. Audacious goals and Roger L. Martin's words are ringing in my ears: "True strategy is about placing bets and making hard choices. The objective is not to eliminate risk but to increase the odds of success." 
The temptation to embrace detail, confuse the roles of the board and management and shorten the view remain very real challenges for companies around the world. If boards are to fulfil their responsibilities well, a clear sense of purpose supported by a coherent strategy is vital—regardless of the company's size, sector or span of operations.
The great news is that increasing numbers of boards are starting to realise that material benefits are available if they contribute directly to both the process of determining purpose and formulating strategy. However, boards have some way to go before the value they have the potential of adding is actually realised, if the evidence of the past month is any indication.
1 Comment
Paul Barnett link
23/6/2017 20:12:17

These observations ring true with what I am hearing, reading and seeing all too often. More worrying is that many board members admit that the boards they sit on don't have an adequate understanding of the way the firms they serve create value, or of the dynamics of the industries in which the firm operates. The percentages that do think they are covered in both respects are only 22% and 16% respectively). This tells me that 84% don't really have a strategy.

Knowing how you create value today, particularly customer value, has to be top of mind and an issue around which there is full clarity. The board should also have a very good idea how it will create value in future in order to remain relevant. Ask the vast majority of directors how the firm creates value today and they cannot tell you, and about the future they have even less idea.

Peter Drucker said, the purpose of a business is to "earn a customer". He is also supposed to have said, "and keep a customer", and to this I would add, "and grow a customer". Any other purpose is secondary. So, the job of strategy is quite clear and simple. But directors are loosing sight of it for the reasons Peter mentions, and because of the concerns with short-term results and compliance.

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