What is the role of the Board of Directors in defining (and monitoring the implementation of) strategy?
The members of a Board of Directors must constantly deal with two imperatives: to ensure the supervision of the company and to devote themselves to the development of its strategy.
At first glance, the observation that the Board should be strongly involved in the company’s strategy is not debatable.
Directors themselves recognise the need for this. Indeed, this is often one of the points that emerges from the annual self-assessment made by the Board on its functioning: the time devoted to the definition of the strategy should occupy a more important, and even preponderant, place in the agenda of the meetings.
What do the regulations say? The Board approves and decides in writing, after having heard the authorised management and the persons in charge of the internal control functions, the business strategy (also called business model) in accordance with the long-term financial interests of the company, its solvency, its liquidity situation, its risk appetite including environmental, social and governance risks.
Most companies perform this regulatory task and demonstrate without too much difficulty that the Board has properly defined and approved the strategy.
Is this enough? The regulators emphasise the need to define a detailed strategy, with figures, based on realistic assumptions. However, it is clear that meeting this level of requirement is a real challenge for a company’s management. Indeed, there are many uncertainties today: macro-economic instability and market volatility, inflationary pressure on personnel and energy costs, regulatory costs that are sometimes difficult to evaluate from one year to the next, and finally, major challenges in terms of technological choices and human resource management, new modes of work relations and talent retention.
The constant state of crisis we have been experiencing for the past few years and the accelerating pace of change are forcing companies to continually reconsider and reassess their underlying strategic assumptions. This is a daunting challenge, even for a competent management team, but not necessarily from large strategic consulting firms.
In this context, it is interesting to note that the role of the Board, because of the frequency of its meetings and the relative distance of its members from the company’s activities, could easily end with the definition and approval of the strategy and its annual review.
It is also striking that the literature says little about the strategic role of the board in monitoring strategy implementation, while much has been said about the role of the board in defining strategy.
While the expectations of the board in terms of internal control are extremely precise, standardised and regularly evaluated – observations made during on-site visits by regulators help – the requirements are less precisely defined in terms of monitoring the implementation of a strategy.
How often should it be monitored? What level of granularity in the information reported by management? What performance indicators? What reaction and sanction requirements should be imposed when results deviate from the strategy validated by the Board?
The risk of non-execution of the strategy is a major risk, impacting not only the shareholders, but also all the other stakeholders of the company: employees, customers and suppliers.
How can the Board improve its mission as a strategic partner of management? What are the practices that reflect the fundamental role of the Board in monitoring strategy execution? The Board has several ways to facilitate and monitor the implementation of the Board-approved strategy:
Conceptual Clarity and Sustainability
First of all, the Board must ensure that the concept of strategy is clear to all company’s stakeholders, notably by avoiding confusion between strategy and strategy implementation, sometimes also called “strategic plan” or “strategic initiatives”.
The “Strategy” consists of making choices about where you want to go, the environment in which you are evolving and how you will perform. Strategy must be aligned with the company’s vision and be consistent with its values.
The “implementation” of a strategy includes all the decisions and activities necessary to make the strategic choices a reality. If the company has the skills, technology, target clients, competitive positioning and services it wants, its strategy can be implemented.
While a strategy can never be fully implemented, because all the assumptions made in defining it are constantly changing, the Board ensures that the gaps between where the company is and what the strategy calls for remain acceptable. It is important for the Board to act as a safeguard by avoiding any confusion between the strategy and its implementation.
Monitoring allocation of resources
In addition, the Board plays a fundamental role, notably through its specialised HR Committee, in monitoring the allocation of Human Resources in order to achieve key objectives. For example, an ambitious asset gathering strategy cannot be achieved without a targeted recruitment approach, not only in commercial functions, but also in support functions to accompany growth and control risk.
This role is extended to the review of the allocation of other resources: capital resources, liquidity, operational platforms, etc.
The specialised Risk Committee may request the assistance of an external consultant if, for example, a strategic initiative in the IT/Digital field requires expertise in information security that the company does not have.
Board after board, its members may be led to review the areas where additional investments are really needed. And this while avoiding the pitfalls of internal politics and turf battles.
While the management team is subject to the pressures of daily life and is sometimes caught up in operational issues, the Board is there to reiterate that a strategy, although reviewed annually, has its fundamentals. The members, and in particular the independent non-executive members, can remind us that the future of the company is played out over the long term. This is all the more the case in the case of family shareholdings which will provide stability in the strategic orientations.
It is not uncommon for certain strategic initiatives not to bear fruit. This will not necessarily result in a fundamental rethink of the strategy.
Thinking long-term also means thinking about updating the individual and collective skills of the management team and the Board, through targeted and regular training that will serve specific points in the implementation of the strategy. The Board can encourage and promote training initiatives proposed by management.
The relevance of monitoring tools and indicators
This long-term supervision of implementation also means that the Board must have the stable and systematic tools necessary for its work. The speed of change and the increasing complexity of the challenges require regular and specific monitoring, particularly through the review of the underlying assumptions and performance indicators for each of the initiatives in the strategic plan, and the review of warning signs that the strategy is not producing the expected results.
Depending on the choice of these indicators and their granularity, on the one hand, there is a risk that the Board will overstep its role in monitoring implementation, and on the other hand, at the other extreme that the Board will substitute itself for management.
It might therefore be appropriate for the Board to determine, at the same time as it defines the strategy, the tools and indicators needed to monitor it.
In conclusion, while there is a consensus on the Board’s responsibility for defining strategy, the way in which the Boards should carry out their role of monitoring the implementation of strategy remains to be clarified. This area of Board intervention would probably benefit from being better standardised, clarified and documented in order to provide management and the Board with additional comfort and alignment in the sole interest of the company.
Professional associations promoting the exchange of best practices will certainly play an important role in this direction.
Member of the Management Committee of Banque Havilland S.A.
(source: AGEFI Luxembourg (French version))