Contrary to popular belief, a Board of Directors, Trustees, or whatever title fits the corporate culture are not only for publicly traded companies. Simply referred to as the Board by most, it can be defined broadly as “…a group of individuals either elected or appointed to provide organizational leadership and oversight.”
Following the Enron scandal of the early 2000s and the 08/09 financial crisis, laws, rules and regulations were put in place for certain industries requiring Boards take an active risk oversight role.
Prior to this, it was common for Boards to be passive observers of the company’s operations. If strategy was mentioned at all, it would only be for a few minutes. But in the interceding 10-20 years since these rules were enacted, it’s increasingly become an expectation for corporate governance policies to include clear provisions for selecting board members and assigning roles and responsibilities.
While much progress has been made, many companies are still working to improve their Board’s oversight of risk…
But as I repeat often, especially in the last year, company management cannot simply avoid and minimize risks while expecting the company to thrive. Measured risks in pursuit of objectives must be taken to succeed in today’s world.
Much of my commentary has been introducing and expanding on this idea. And while we’ve discussed the proper situations for escalating risks to the Board, today’s article is more about expanding their involvement in strategic planning.
This point was recently the subject of a panel discussion titled Aligning your Board with Corporate Strategy at the National Association of Mutual Insurance Companies’ (NAMIC) 2022 Management Conference (registration required). Moderator and CEO of the Harford Mutual Insurance Company, Steven Linkous, states at the onset of the session:
Successful organizations have been able to leverage the knowledge and counsel of their Boards to their strategic advantage instead of viewing them as a necessary evil.”
Unfortunately, many company Boards fail to provide this level of oversight and partnership with the executive team. They remain focused on the past and spend the majority of their time focusing on operational matters.
When it comes to Board oversight of strategy, it is virtually nonexistent in many companies.
There’s no question that Boards need to be more engaged in strategic planning and do more than just hear how well the company is doing once a quarter or year.
To be clear, this doesn’t mean they should sit-in on planning sessions (they can but don’t need to), but it makes sense to be in close coordination and communication when determining goals for the next 1, 3, or 5 years. Doing so is the critical element to ensure the Board and management are in full alignment on the company’s strategy.
The challenge is getting to this place of close coordination and communication between management and board.
Members of many Boards are very entrenched and used to doing things a certain way, so like developing robust risk processes, this will likely take a bit of trial and error.
Similar to a previous article on the dangers of best practices, panelist Kevin Kinross adamantly cautions participants to the dangers of leaning on so-called “best practices.” While it is okay to review and integrate recommendations where they make sense, he highly discourages copying what others are doing, a point I strongly agree with.
With that said, the following five general steps are a great starting point for shifting the Board from a limited, rear-facing view of risks to one that is engaged with and challenges management’s assumptions of where the company should go over the next 1, 3, or 5 years.
The following are a combination of items gleaned from the session and my suggestions not mentioned in the session.
Establish clear governance rules
Like ERM, there must be a solid foundation to successfully transition a Board to a more active strategic role. Clear boundaries around the Board’s role of oversight vs. the company’s day-to-day operations need to be established. Specific language around the roles and responsibilities of individual board roles should be included as well.
One piece of this step is setting limits on how long someone can serve. Many stagnant Board are that way because many of the members have been on it for multiple decades in some cases. I recommend staggered terms for board members, so one member changes each year. This ensures continuity of information but allows fresh minds and perspectives to be included.
Along with this, I strongly advise developing a detailed process for relieving someone of their board duties should they not fulfill their responsibilities.
Any committees of the Board should be clearly established in the governance documents as well.
In some industries like insurance and financial services, regulators are taking a close look at a Board’s governing documents and rules for further assurances the company is in compliance with applicable laws, rules, and regulations as well as “good business practices.” Good governance is no longer the exception but rather the rule.
Build/recruit board members who can take you where the company wants to go.
When it comes to the Board, who management ends up engaging with is far more important than how they engage or interact with those people.
For the Board to play a valuable role in the company’s strategic planning, the structure should mirror where the company wants to go. Not only should a good candidate have relevant work experience (not necessarily in the same industry), they also need to possess the ability to challenge management’s assumptions about the strategic plan and big decisions. This dynamic gives strong assurances the company is setting the right goals. In writing for the National Association of Corporate Directors, Dr. Adam Gordon accurately concludes:
In such an environment, a Board that merely nods through management plans is not doing its job. The job is to push back so that company future steps are up to the challenge of relentless industry change.”
It’s also not the job of executives or risk and strategy personnel to appoint the Board, but they should be willing and able to communicate with the Board or a relevant nominating committee about ideal skills and background.
As far as a Board chairman, it’s best to have someone with a strong yet collaborative personality to lead the group. Be careful that the Board consists of mostly independent Board members, not management, since the roles are completely different. This, along with Board members from failed companies, will be heavily scrutinized by regulators if applicable. Company management can act as an advisor to the Board where appropriate.
During the panel discussion, former Ohio Insurance Director Jillian Froment compared the search for the ideal Board member to finding a star employee. I describe it as challenging but rewarding.
Develop a robust onboarding process and provide ongoing education.
New Board members will spend their first six months to a year learning the ropes.
When a new Board member is appointed, they need to become familiar with the company and the role they’re being asked to assume. Like the recruiting process, this will work similar to how a star employee is brought on board.
Two areas where this onboarding process is especially critical is for any members from outside your industry and those who have previously served in executive roles. Without this education, it can be easy for a former executive to get pulled into day-to-day operations, which is what they’re not there to do. And those new board members from other industries need to learn specific terminology, acronyms, and nuances of the company; otherwise, the oversight and value they can provide will be hampered.
In addition to ongoing education on the company, its mission and industry, members need to also be brought up to speed on any Board committees, even ones they don’t belong to, including roles and responsibilities.
Here’s my suggestion – create an onboarding Board packet with company history, background, management and organizational information, strategy, historical challenges, current issues, historical and current budget, and summaries of the board and board committee meetings. An experienced executive should be designated as that new board member’s company contact to answer questions, make introductions, etc. Think of it like a buddy system from school.
Streamline meeting agendas so there’s sufficient time to discuss strategy.
One of the major shortcomings of Board meetings is that they tend to be focused on what has already happened. It’s really easy to see how things can go astray when focusing solely on operational and financial matters. This example agenda from a large property insurer in Florida illustrates how strategy (i.e. the future) is pushed to the back burner.
To streamline a Board meeting agenda, Steven Linkous explains how his company quit sharing quarterly reports to the Board at the meeting as this would consume at least an hour’s time. Sending materials ahead of time and fielding any questions outside of the meeting opened up much more time to discuss strategy, planning, and other future-looking topics.
I can speak from experience that doing so helps avoid a sense of being caught off guard, something which always facilitates a smooth and valuable meeting.
Utilize technology to get more from meetings.
Another problem many companies encounter with Board meetings is the preparation work. As stated in the previous section, many companies provide materials at the Board meeting. Members would only have a short amount of time to read them and, therefore, did not have enough time to analyze the material and develop challenging questions for management.
Meetings are for making decisions and complex discussions, not sharing documents.
One suggestion for handling material sharing in an efficient way is to utilize a portal or other technology tool to collaboratively create and distribute agendas and supporting materials in advance, so members can read them ahead of time. There are many software options available to specifically support board meetings, including agenda creation, taking minutes, document sharing, scheduling, and voting.
These steps are a great start, but I want to reiterate that changes like this will take time. It’s possible a Board member may end up not being a good fit or it’s determined different skills and expertise are required as things move forward. But part of this transition is ensuring that proper expectations by both management and the Board are established.
In the long run, the effort will be worth it.
With roaring inflation, a looming recession, continued supply chain disruptions, and countless other challenges, companies need to bring everything to bear to ensure their future success. Having a Board that is actively engaged with charting this course and properly aligned with management is a big step in this direction.
How engaged is your company’s Board with setting corporate strategy?
This subject deserves careful consideration in light of long-term challenges plaguing companies regardless of industry. Please don’t hesitate to share your thoughts in a comment below or join the conversation on LinkedIn.
To send comments privately, you may email firstname.lastname@example.org.
And if your Board is struggling to shift from a rear-facing, failure prevention mindset to one focused on strategy and the company’s future success, feel free to reach out to me through email or my online calendar to begin discussing your company and ways to address this long-term challenge.