Boards can lift a layer of mystery

  • Date:01 Apr 2014
  • Type:Company Director Magazine
While loath to increase the board’s reporting burden, Tony Featherstone believes that stakeholders should know more about its framework for strategic governance.

Strategy governance will become an even bigger issue in the next few years as stakeholders hold boards more accountable for the upside in companies. Yet the board’s role in strategy is often mysterious to investors, poorly communicated and in need of a rethink.

The problem is not board input on strategy. Company Director last month reported how high-performing boards spend considerable time shaping, influencing and monitoring strategy. The real problem is that too much of this good work stays behind closed doors.

Stakeholders have little insight into board policies and processes on strategic governance – only outcomes. There is usually information on high-level strategy and comment on organisation performance each year, but scant information on the processes of approving and monitoring strategy.

That is a pity. A S&P/ASX 100 company chairman told me about his board’s deliberate approach to strategy governance. It starts with composing a board that has skills aligned with organisation strategy and recognition that strategy is a key part of the board’s time allocation. After an annual two-day strategy offsite with executives, this board identifies a handful of key long-term issues. Directors and executives form a small working group around an issue, the annual board meeting agenda incorporates the issues and one is discussed in depth before each meeting. Directors are also encouraged to attend key industry events to build their strategic insight.

Stakeholders never hear about the structured, measured approach that this board, and many like it, use for strategy governance.

Surely they have a right to know about the processes used to oversee strategy and safeguard their interests?

Nobody expects boards to outline their strategic governance processes in detail, comment on commercially sensitive information or expose directors to potential litigation from forward-looking statements. Boards can, however, outline a broad framework for strategic governance.

For example, a board might publish a short policy on its approach to strategy governance. The policy explains the board’s annual strategy offsite, its process to investigate key issues, the allocation of board meeting time to strategic discussions and so on.

The board then briefly reports on whether it met key targets in its strategic governance policy each year, answering questions like these: Was the annual strategy offsite held? How many working-group meetings were held on strategic issues? How much time was generally allocated to strategic discussion at board meetings? And, how many industry events did directors attend?

Critics will argue this is yet more reporting, box-ticking and compliance – the very things that rob boards of time for strategic discussion. And, that it is meaningless to develop a policy and reporting framework for such a nebulous topic as strategy. Moreover, what would the information add?

For one thing, it would tell stakeholders that the board has a clear policy that guides strategic governance and that it measures its performance each year. As a shareholder, I would take comfort knowing this.

Moreover, a simple strategic governance policy and reporting framework – no more than a short document and brief update in the annual report – would better explain the role of boards in this area and provide a benchmark across companies.

It could also help boards that feel too bogged in compliance and want to sharpen their focus on organisation strategy.

Compare this approach to the current situation. Boards always say they are engaged in organisation strategy, yet few outline what that engagement looks like. Even if they did, shareholders cannot be sure how the board is performing on its strategic governance duties each year.

Another chairman told me the only way to assess the board’s role in strategy is through organisation performance: when profits are rising (or stakeholders are being better served, in the case of not-for-profits) the board is doing a good job on strategy governance, and vice versa.

That view is flawed on several levels.

The relationship between strategy and current organisation performance can be tenuous. Profits might be rising or falling because of strategic initiatives adopted a few years ago, or because of changed market conditions or simply good luck.

What happens when performance deteriorates suddenly? Investors will, rightly, want answers about the board’s role in strategy. Lip-service will no longer be sufficient in a governance climate where stakeholders want to know the processes that boards use to oversee organisation strategy.

Yes, boards will still approve flawed strategies from time to time, and miss critical trends on risks and opportunities. The real threat, however, is that boards are shown to have had insufficient process, or a confused view of their role in strategic governance.

I am always loath to suggest extra policies or reporting as a panacea to governance shortcomings or to expect boards to explain more of their inner workings.

But the board’s role in strategy, from a stakeholder’s perspective, is too important to be shrouded in mystery.