A director's role in strategy.

There is no clear consensus on how a board should involve itself in strategy formulation.

Here is a framework for fulfilling that responsibility.

It has never been easy being an excellent director, and it has gotten even tougher. Director's responsibilities have substantially ratcheted up in the last decade due to shareholder activism, increased litigiousness, and the compression of competitive cycles. The pressure is now on boards to be involved to a degree much less common only a decade ago.

Being genuinely involved, however, puts more demands on directors. One solution is massive increases in director compensation with concomitant increases in director time commitment, but American business is not yet willing to go down this path. More than ever, aggressive prioritization is essential to being an effective director.

Leaving aside the more prosaic tasks required by its fiduciary role, the top priorities of a board are:

The CEO. Getting the right CEO, and developing for him or her a good compensation program with a correct definition of goals and succession planning, is fundamental. Without an effective and correctly motivated CEO, the threat to shareholder value is enormous.

Current Operations. The directors must anticipate and address any developments that threaten the financial stability of the company. These could include legal actions, cash flow challenges, and key customer problems. Further, the directors have the responsibility of continued high-level reviews of key areas such as performance versus forecast and the sufficiency of planned investments in meeting the requirements of the current business direction.

Strategy. If the two priorities above are covered, then the board needs to turn its attention to strategy, as strategy is management's long-term approach to enhancing shareholder value.

Currently, there is no clear consensus on exactly how a board should fulfill its strategy responsibility. Further, this is a delicate area because, if the lines are not properly drawn, the board can overstep its responsibility and unduly interfere with the efficient management of the company.

The starting point for defining the correct strategy role for the board is acknowledging that it is management's role to develop the strategy, but that oversight and approval of the strategy is consistent with the board's statutory responsibility. With this framework in mind, how should the board's role be structured?

The best role for the board in the strategy process consists of four elements:

1. Establish the Standards. Clearly setting forth the high-level attributes of a great strategy.

2. Counsel. Acting as a sounding board to the CEO and others during their efforts to develop the strategy.

3. Approve. Reviewing the strategy to see that it meets the criteria established in the standards stage and approving it or suggesting changes.

4. Monitor. Formally monitoring the approved strategy, as it is refined and implemented.

Each of these elements is discussed more fully below.

1. Establish the Standards

Establishing the standards for the type of strategy the board expects is at the heart of the board's role. The clarity of this framework will assure that the board is meeting its challenge to maximize shareholder value and will limit future conflict with management.

To correctly articulate these standards, the board must understand that there are three very distinct nodes to a really effective strategy process:

* Strategic Direction: The creative insight that is the germ of the strategy;

* Embodiment Programs: Specific focused programs that embody key elements of the strategic direction; and

* Strategic Planning: The development of a formal planning document that ties the strategy to the businesses' structure.

The board must set standards that are very different for each one of these nodes. Failure to recognize these differences can result in confusion and possibly damage the company.

Strategic Direction. Strategic direction is the core around which a great strategy process is developed. If this core is faulty, then all the other aspects of the strategy process are useless.

Growth in shareholder value comes from a continued market expectation of strong growth in profits. Superior profit performance comes from establishing and maintaining a position of power in significant markets. Strategy is how the company plans to accomplish that. Accordingly, the following are the characteristics the board should look for in a sound strategic direction.

* Has a route to power been clearly delineated?

- Competitive power: in what way can we be superior to our competitors (direct and functional) that can contribute to customer value?

- Structural power: in what ways can we maintain a position of strength with respect to suppliers and/or customers so that they are unable to bargain away from us all the value being created?

* Is the position of power sustainable?

- What is the basis of sustainability?

- What assures the persistence of that basis over time?

- Has the changing nature of power as a business evolves been addressed?

* Has the conventional wisdom of the industry been challenged to the fullest extent possible and has a wide set of options been considered?

* Does the strategic direction rest on a firm understanding of the fundamentals of the business?

* Are the markets addressed of sufficient size?

* Is the strategy executable?

During this phase of the board's involvement, the directors can assist management and stimulate thinking by listing key questions that strategy should answer and information on fundamentals that is required.

Significant advances in strategic direction are the result of a deep insight that flows from the crucible of immersion in the fundamentals of the business. Even the most involved directors rarely have this deep immersion, so such an insight usually comes from inside the company. The directors can encourage this type of thinking, they can insist on it, but they can rarely provide it themselves.

Embodiment Programs. A strategic direction is not automatically translated into action. On the contrary, because most strategy involves significant change, strategies usually face significant inertia and misunderstanding. Further, many aspects of a strategy only become fleshed out as action proceeds it is impossible for a strategic direction to be fully articulated.

The most effective approach for insuring implementation of the strategic direction is to develop focused programs that embody key characteristics of the strategy. More diffuse efforts are much more likely to fail. The board then should look for these qualities in such embodiment programs:

* Do the programs selected capture many of the core features of the strategic direction?

* Are the programs clearly defined?

- Specific goals - Milestones/measurement - Responsibilities - Timelines

* Have careful provisions been made for the complex and difficult pass-off from strategic direction to the embodiment program?

* Is there an approach for continued connection to strategy (closed loop)?

Strategic Plan. The final step in a strategy process is the development of a strategic plan. Its purpose is to refine and communicate an already formed strategic direction and to formalize objectives for various parts of the corporation, thus helping to operationalize the strategy.

There is a great deal of literature on strategic plans, so it is unnecessary to explain them exhaustively. In summary a strategic plan should include the following elements:

* Full articulation of the strategic direction.

* Good coverage of the major fundamentals:

- High-level financials including key ratios (ROI, etc.) - Overall market characteristics - Customer value drivers - Competitors' intents and capabilities - Business definition - Core competencies - Value chain economics and power considerations

* Strategic objective development that reflects the intents of the strategic direction.

* Clear responsibilities and timelines with milestones for the objectives.

It is easy to ask for a lot with a plan, but careful process choices have to be made so that planning does not become overly bureaucratic and an inhibition to creativity and action. Further, the board must be very careful not to insist on a strategic plan before a strategic direction is agreed on or to encourage the substitution of a strategic plan for a strategic direction.

2. Counsel

Being an involved director does not mean that command and control approaches are always best. In the case of strategy, a CEO and other senior managers can benefit from the informal counsel of directors with strategy experience.

To fulfill this role, a director needs to inquire if the CEO or any of the senior managers (with the CEO approval) would like to get together occasionally to discuss some of the options that are being considered. This opportunity to informally field ideas with a peer can be very constructive for the CEO and other senior managers. The atmosphere of cooperative advancement can allow them more latitude than the formality of a board meeting and consequently can be far more creative.

3. Approve

Having set the above standards for a strategy, the board must develop a formal procedure for reviewing and approving the strategic direction, embodiment programs, and the strategic plan. A timetable for each of these has to be set. The board may decide to establish a strategy committee to take on the brunt of this work, with the full board reviewing and approving more summary versions.

This review and approval process can be very useful for a CEO because it forces the board to commit to the strategy. This provides a firm foundation for future actions - a lot of second guessing can be eliminated.

4. Monitor

Having approved the strategy, the board needs to agree to a set of metrics and a timetable. Great care must be exercised in metric selection. Many financially oriented metrics are too lagged to give the board sufficient early warning of problems in implementation. The best type of measure that does not suffer from this problem will depend on the specifics of the strategy. For example, if success depended on rapidly deploying a new technology in a specific market, then the metric would be sales in that market that reflects this new approach.

Having agreed on the metrics, the board should commit to formal reviews of the implementation of the strategy by these metrics according to a specified timetable. Further, the board will want to consider tying CEO compensation to key deliverables of the strategy.

A note of caution needs to be sounded. Great strategy evolves - it is never fully articulated in its initial formulation. The monitoring process must allow for this and must also not make monitoring so frequent or so complex that it ties management's hands.

Common Perspective

In carrying through the steps above, it should be kept in mind that directors are likely to have different views about strategy. Consequently, it is important at an early stage in the process to agree on a strategy framework. The resulting common perspective and vocabulary will make the board strategy process much more efficient and significantly less fractious. In picking such a common framework, the board should not succumb to the latest fad but rather choose an approach that is likely to be more enduring.

The board should also assess whether there are adequate resources to develop the strategy. They should look at the strategy experience of individual directors and senior management. Often it is useful to engage an outside resource to assist the process.

Boards are the guardian of shareholder value. The strategy of a company is the path management has chosen to protect and increase this value and hence is of considerable interest to directors. The board must carefully delineate a process that satisfies this interest and yet is not stifling. The four-step framework above fulfills these twin needs.

The author wishes to thank several individuals who have reviewed this article: Robert Wilson, who has held many senior operating positions, including CEO of Memorex, and has sat on numerous boards, including Chrysler, Rockwell, and Western Digital; Kevin Murphy, who has been CEO of Purolator Courier, and has had numerous board appointments, including Pinkerton and Health Systems International; Robert Saldich, the recently retired CEO and board member of Raychem; and finally Andy Roake, the Vice President of Corporate Strategy at Raychem. Their enormous experience and intellectual clarity have enriched this article, although the author takes full responsibility for the content.

Hamilton W. Helmer is the Managing Partner of Helmer & Associates, headquartered in Los Altos, Cal. The firm specializes in open architecture approaches to business and corporate strategy. He is also a Director of American Science and Engineering Inc.