Too many cooks spoil the broth

First published in Business Times on 25 September 2014

 

To play its role in guiding company operations effectively, the board must strike the right balance with management on strategy

BY

MAK YUEN TEEN

– Copyright for illustration belongs to Mak Yuen Teen and Chris Bennett. Used with permission by BT

THE role of the board in ensuring that a company has the appropriate strategies in place to deliver long-term value is often a matter of great confusion. This is not helped by generic advice offered by some “governance experts” and some corporate governance literature advocating that boards should be more “involved” in strategy and making vague references to the board’s role in developing or setting strategies.

 

I was taken aback recently by a suggestion that boards should shift their focus towards strategy, and essentially leave compliance and control matters to a compliance committee and professional advisers. This seems a bit like suggesting that a driver should control the steering wheel and accelerator – and leave operating the brakes to someone else.

 

The Code of Corporate Governance (2012) identifies six areas of importance in the board’s role: providing entrepreneurial leadership; risk governance; monitoring management performance; identifying key stakeholders and recognising their ability to affect the company’s reputation; setting values and standards of the company, and ensuring expectations of shareholders and other stakeholders are met; and ensuring balanced strategic formulations by taking into account sustainability issues.

 

It is important for the board to strike the right balance in its focus. Needless to say, it is important for the board to be involved in strategy – but how specifically should it be involved? Clearly, it should not be so involved that it takes charge of developing the strategies, except in cases where the board is essentially also the management of the company, as in a start-up enterprise.

 

Not only does the board usually not have enough in-depth knowledge of the company and business to be able to develop strategies, doing so will mean that it cannot effectively hold management accountable for executing these strategies. It will also lose its independence and objectivity in other aspects of the strategy development and implementation process.

 

It is therefore important to have an appropriate balance and separation between the roles of the board and management in strategy. I have found it useful to break down the strategic development and implementation process into four parts:

 

• developing strategies;
• reviewing and approving strategies;
• implementing strategies; and
• monitoring the implementation of strategies.

 

Developing strategies

 

Management should lead the development of strategies. Developing effective strategies requires a deep understanding of the company and business – something which only management personnel who are involved in the daily management of the business are likely to have.

 

The board of directors (other than the management who sit on the board) is unlikely to have sufficient knowledge, expertise and time to do this. Further, if the board is too involved in developing strategies, its vested interest in the strategies may lead it to become too reluctant to change these strategies when they do not work. It would also be unfair to hold management responsible for successful execution of these strategies when they play little role in formulating them.

 

There is a well-known case study of a major consulting firm being hired by a big airline company to help with its strategy formulation, and the consulting firm recommended a significant shift in strategy. The company later recruited the country head of the consulting firm to join its board, who then used his dominant influence to defend the strategy. The company pursued the new strategy until it was run into the ground. Apart from providing a lesson in harmful over-reliance on consultants, this case highlights the dangers of a board having too strong a vested interest in a particular strategy.

 

In another case, shared by an executive MBA participant, a company discarded the strategy proposed by management and decided to adopt the alternative strategy proposed by one of its more persuasive independent directors. The strategy failed.

 

Reviewing strategies

 

After management has developed the proposed strategies, the board should be actively engaged in reviewing and, if it feels that it is appropriate, approving these strategies.

 

Here, there is sometimes the opposite problem to over-involvement in strategy. The board may become over-reliant on management without asking the right questions. I have sometimes heard directors, especially specialist directors such as accountants and lawyers, say that “we are here to contribute our specialist knowledge and we will leave strategy to the executive directors”. The problem is that there is then no meaningful debate and review of strategies.

 

Hence, it is very helpful to have someone among the non-executive directors, particularly the independent directors, who has a deep understanding of the industry, especially with recent working experience in the industry. A few years ago, I told the company secretary of a bank that it was fortunate to be able to appoint as an independent director a former CEO of another bank after her retirement (after the necessary cooling-off period following her retirement, of course), given this person’s deep knowledge about the business, not to mention other qualities she possessed that made her such an excellent director candidate.

 

It is important for so-called specialist independent directors to become knowledgeable about the business, in order to be able to make meaningful contributions to strategy.

 

What would the review of strategies entail? Such a review should include the board being satisfied that the company has a robust strategic planning process underpinning strategy development. In a not-for-profit that I used to chair, I sat down with the CEO to understand the process that was followed to come up with the strategic plan. I sought to understand who was involved, so that the strategies would have considered the operational, financial, human capital and other aspects required for successful implementation. The process was then presented to the board.

 

The board should ask questions about the risks associated with the strategies and plans for mitigating and managing these risks. Many companies would claim that they have implemented risk management but this may not be integrated into their strategic planning process. Some years ago, I was involved in a very in-depth governance review of a listed SME. One of the things we looked at was whether the company’s entrance into several new markets as part of its growth strategy was accompanied by a consideration of risks.

 

The board needs to ensure that management has not only considered the potential “upsides” but also the “downsides”. One of the key traits of many CEOs is that they are inherently optimistic people (unless they have just lost their job). The board needs to ensure that optimism does not lead to blind spots.

 

The board should also ensure that there are indicators and milestones in place for assessing progress in implementing the strategies. And of course, as the Code recommends, the board should be satisfied that the “necessary financial and human resources are in place for the company to meet its objectives”.

 

Implementing strategies

 

After the strategies are reviewed, finessed and approved, it is management’s responsibility to implement these strategies. Implementation, of course, also involves developing shorter-term goals and action plans and budgets that are linked to the strategies. The board, with the assistance of relevant subcommittees, can then review and approve these goals, action plans and budgets.

 

The board has an important role to play in monitoring the implementation of strategies. It would be wonderful if life were so simple that everything went according to plan – but it never does.

 

Therefore, the board needs to make sure that management provides periodic updates on progress, including difficulties faced; and, if necessary, propose modifications to the strategies that have been approved. An annual board retreat with senior management would be a good way to review the implementation of strategies.

 

Adapting to circumstances

 

To summarise, the key drivers of the four stages of developing strategies, reviewing and approving strategies, implementing strategies and monitoring the implementation of strategies should be management, board, management and board, respectively.

 

However, such advice is not dogma as circumstances faced by a company may require a somewhat different approach. I have already mentioned earlier that in a start-up, the roles of the board and management often cannot be clearly segregated. Further, if a company has a new or inexperienced CEO, the board may need to become more involved in aspects of strategy that are normally the responsibility of management.

 

Where an organisation is in a crisis situation or has been hit by a scandal, the board will often have to become more “hands on”. A good example is the scandal faced by the old National Kidney Foundation (NKF) in 2005. With a new interim CEO in place and the need to rebuild public confidence, it was inevitable that the new board would be much more involved not only in strategy, but in many other facets of the organisation as well. The key is, of course, to get back to the right balance when the time is appropriate.

 

One of my favourite lines is one said by Clint Eastwood in his Dirty Harry movies: “A good man always knows his limitations.” Similarly, a good board should know its limitations and its proper role when it comes to strategy.

 

The writer is an associate professor at the NUS Business School, where he teaches corporate governance and ethics