Governing strategy - a guide for directors

In a rapidly evolving business landscape, the role of the board of directors in shaping and overseeing organizational strategy has never been more critical. However, the path to effective strategic planning and execution is fraught with complexities, risks, and frequent missteps. This guide dives into the ten most crucial questions that board members should be asking.

Quick take:

• Appreciate the key factors ins a strategic plan and consider novel ways to think long term
• Learn how risk management, compliance, and internal audit functions can become your partners in strategic oversight
• Understand why strategic creep can be the silent killer and the perils of fast-growth businesses
• Get ideas on what to review in assessing success in executing the strategy

See companion article on Governing organizational transformation.

10 questions for boards

Strategy development and approval

#1: What are the objectives of our strategic plan?

Understanding why the organization needs a particular strategy is fundamental to its successful implementation.

• Alignment with corporate goals: Does the strategy serve our purpose, long-term objectives and mission?
• Competitive advantage: What unique benefits are we aiming to achieve—market leadership, innovation, or cost-efficiency?
• Performance metrics: What key performance indicators (KPIs) will be used to measure success?

#2: How is our strategy aligned with current market dynamics?

Market alignment guarantees that your strategy is relevant and actionable.

• Market research: Have we adequately assessed market trends, customer preferences, and competitor moves?
• Opportunities and threats: What external factors could impact the strategy?
• Performance metrics: What market share or customer engagement metrics will indicate success?

#3: Is digital transformation integrated into our strategy?

In today's digital age, ignoring technology could be disastrous.

• Technological alignment: How does the strategy incorporate digital trends like AI, IoT, and data analytics? See Governing artificial intelligence.
• Investment in innovation: Is there budget allocation for technological advancement?
• Performance metrics: How will we measure the ROI of our digital investments?

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Novel ways to develop a long-term strategy

Backcasting is a strategic planning approach that involves envisioning a desirable future state and then working backwards to identify the critical steps and milestones needed to achieve that future. Instead of starting with today's situation and extrapolating forward, the organization starts with a vision of where it wants to be at a specified future date, such as 10 to 15 years from now. Steps in backcasting include:

• Visioning the future: Begin with an aspirational visioning exercise, imagining the ideal future state of the organization in 10 to 15 years.
• Setting key milestones: Identify major milestones that will signify progress toward that future vision.
• Determining requirements: Evaluate what needs to be in place at each milestone. This can include technologies, resources, capabilities, and market conditions.
• Pathway creation: Establish the strategic pathways that will connect each milestone to the current state of the organization.
• Gap analysis: Analyze the difference between the current state and the first milestone, identifying immediate action steps.
• Implementation plan: Create a tactical plan that outlines the resources, timelines, and responsibilities for each action step.

Questions directors can ask management:

• What does our desired future state look like, and how is it different from where we are today?
• What are the major milestones that will signify our progress toward this future?
• Are milestones and their corresponding timelines realistic and achievable?
• What major challenges can we anticipate, and how do we plan to address them?
• What are the immediate action steps, and how do they align with our short-term objectives and risk appetite?

Long-term scenario planning is an alternative approach to traditional strategic planning that uses storytelling and imagination to explore multiple plausible future environments in which an organization might operate. Novel approaches include:

• Trend disruption analysis: Instead of just identifying prevailing trends, explore what would happen if those trends were suddenly disrupted.
• What-if simulations: Utilize data-driven simulations to evaluate the potential outcomes of various scenarios.
• Cross-industry learning: Look at trends, disruptions, and strategies in other industries to inspire fresh perspectives.
• Use of science fiction: Leverage science fiction thinking to explore far-fetched but possible futures that challenge current assumptions.
• Ethnographic future studies: Combine field studies, interviews, and cultural analysis to explore how societal changes could impact the organization.
• Game theory: Use mathematical models to predict outcomes of various scenarios involving interactive decision-makers.

Questions directors can ask management:

• How are we incorporating long-term scenario planning into our overall strategic plan?
• What are the most unpredictable elements that could significantly impact our industry, and how are we preparing for them?
• Have we considered disruptive trends and technologies in our scenario planning?
• How are we integrating lessons from other industries or external environments to enrich our scenarios?
• What metrics and KPIs can we use to evaluate the effectiveness of our scenario planning efforts?

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#4: What is the trade-off between risk and reward in our strategy, and are executive incentives aligned?

Weighing the potential risks and returns is critical for balanced decision-making.

• Risk management: How does the proposed strategy align with our board-approved risk appetite? How is risk quantified and mitigated in our strategic plan? See Governing risk.
• Compliance: Are legal and regulatory constraints considered?
• Performance metrics: What metrics will measure risk and reward effectively? Are the KPIs and key risk indicators (KRIs) embedded in executives’ goals, performance reviews and compensation?

#5: How will stakeholders react to our strategy?

Alignment with stakeholder expectations can make or break a strategy.

• Stakeholder identification: Have we identified all the stakeholders relevant to our strategy?
• Communication plan: How will we communicate the strategy to stakeholders?
• Performance metrics: What stakeholder satisfaction metrics will be monitored?

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10 common mistakes in strategic plans

1. Vague objectives: Failing to specify what the organization hopes to achieve.

2. Ignoring risk appetite: Not aligning strategic objectives with the organization's risk tolerance.

3. Lack of market analysis: Overlooking current market trends and future predictions.

4. Neglecting stakeholder input: Excluding key stakeholders, like employees and customers, from the planning process.

5. Overemphasis on short-term goals: Ignoring long-term goals for quick wins.

6. Underestimating competition: Ignorance or complacency about the competitive landscape.

7. Resource misallocation: Not properly distributing resources where they are needed the most.

8. Insufficient metrics: Failure to implement effective KPIs and KRIs.

9. Lack of transparency: Failing to communicate the strategy across the organization.

10. Static plans: Neglecting to revisit and revise the strategy over time.

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Overseeing strategic execution

#6: How frequently are we reviewing strategy execution?

Timely reviews allow for course corrections that can save a faltering strategy.

• Review calendar: Is there a fixed schedule for strategy review meetings? Is the board committee overseeing risk reviewing KRIs linked to the strategy?
• Adaptability: How quickly can we adapt to internal or external changes?
• Performance metrics: Are review outcomes measured and tracked?

#7: Are the KPIs and KRIs actionable and aligned?

Misaligned metrics can mislead more than inform.

• KPI and KRI selection: Are our KPIs directly tied to strategic objectives? Doe the KRIs linked to the approved risk appetite, risk thresholds and limits, and early warning indicators?
• Relevance and timeliness: Are the KPIs and KRIs reviewed and updated regularly
• Performance metrics: Are the KPIs and KRIs themselves measured for effectiveness? Are the metrics propels evaluated in the context of executives’ performance and compensation?

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The role of risk management, compliance and internal audit in strategy

In the ever-changing business landscape, the stakes for strategic planning and execution have never been higher. Risk management, compliance, and internal audit functions serve as critical enablers in shaping and executing a company's strategy. They provide the board of directors with valuable insights that can make the difference between strategic success and failure. Board members should actively interact with these functions for a comprehensive understanding of the strategy's inherent risks, as well as the controls that are in place to manage them. Here are several key areas that directors should explore:

• Governance structure for strategy: The board needs to inquire about the governance mechanisms surrounding the strategy. Governance should cover everything from ethical considerations to the checks and balances needed to deliver strategic alignment and execution. Understanding who is responsible for strategic governance and how it is conducted offers a bird’s-eye view of the organizational control environment.
• Ethical frameworks and policies: The board must determine that the company’s strategy aligns with its mission, values, ethical standards and policies. This could range from issues of sustainability to those of employee well-being and social responsibility. A well-defined ethical framework that guides strategic planning and execution should be in line with the company’s values and regularly evaluated for its efficacy.
• Risk assessment and mitigation: Risk management's role is particularly critical in identifying potential internal and external risks that could jeopardize the strategy. This includes financial risks, operational risks, and the risks from external market dynamics. The board should engage risk management to understand how these risks are quantified, and what mitigation measures are in place.
• Regulatory and compliance checks: With increasing global regulations, compliance plays a significant role in any strategic decision-making process. The board should consult the compliance function to assesss that the strategy does not inadvertently violate any laws, rules, or regulations, thereby exposing the company to legal risks.
• Internal audit’s role in strategic assurance: Lastly, internal audit provides a third line of defense by offering an independent assessment of both the planning process and the execution of the strategy. Internal audit can validate the reliability of the performance metrics used to measure the strategy's success and help in identifying any gaps in the control mechanisms.

#6: How are we tracking and preventing strategic creep, and spending sufficient time on businesses that are fast-growing or high-performing?

Strategic creep is the silent killer of many well-crafted plans, while insufficient oversight of fast-growing or routinely high-performing businesses (or products) often comes back to back the organization.

• Monitoring mechanisms: What controls are in place to identify deviations from strategy? What metrics evaluate high-performing or fast-growing businesses to peers?
• Corrective actions: How quickly can the organization pivot if creep is detected? How do we make sure controls and risk stay pace with fast growth?
• Performance metrics: What indicators will warn us about strategic creep? How can we assess the real risks of fast growth?

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Oversight of strategic creep and fast-growing businesses

“Strategic creep” is the gradual, often unnoticed, deviation from a company’s original strategic plan. What may seem like minor changes or tactical adjustments in response to market conditions can accumulate over time, shifting the company away from its foundational mission and objectives. While adaptability is generally a strength, these shifts can go unexamined and unapproved by the board, leading to a fragmented strategy that neither aligns with the organization's core values nor meets its long-term goals.

Questions directors should ask about strategic creep:

• Do we have a mechanism to track strategic changes over time? Monitoring shifts from the original strategy is vital to prevent undesired changes.
• How frequently do we review the alignment between activities and strategy? Regular reviews will highlight any drift and allow timely corrections.
• Are these tactical shifts indeed aligned with our overarching strategy? This question will help separate justifiable tactical moves from distractions and misalignments.
• Do we have a robust procedure for escalating and approving any strategic shifts? A formal process validates that strategic shifts are intentional and beneficial.
• What is the communication strategy for strategy changes both internally and externally? Transparency is crucial in any strategic change to get all stakeholders sufficiently aligned.

In the exhilaration that accompanies fast growth or high performance, there's a natural temptation to overlook or under-scrutinize these areas. The assumption often is that if something is growing rapidly or performing exceptionally well, it must be aligned with the company's strategic objectives. This assumption can be a grave mistake. Rapid growth can consume resources, distort the company’s risk profile, and even lead to strategic creep, as initiatives scale in directions that were never strategically intended.

Questions directors should ask about fast-growing or high-performing businesses:

• Are fast-growing business segments and products reviewed with the same rigor as other areas? It’s essential to apply the same strategic scrutiny regardless of performance.
• How are we ensuring that growth is sustainable and aligned with our strategic objectives? Fast growth is only beneficial if it is sustainable and strategically aligned.
• What are the resource implications of this fast growth? It's crucial to understand if growth in one area might be starving other parts of the business.
• What is driving high and sustained out-performance with peers? Sustained out-performance is challenging in any business, so is it important to know if the drivers are substantive or illusory.
• Is rapid growth changing our risk profile? Understanding the new types of risks that come with rapid growth can help in timely risk mitigation.
• Are we nurturing the organizational culture and values in our fast-growing areas? Rapid growth should not dilute the company’s culture, which is often a cornerstone of long-term success.

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#8: How is our strategy integrated into the company culture?

Cultural alignment is crucial for strategy to become a lived experience for employees.

• Cultural assessment: Have we gauged the existing culture’s fit with the proposed strategy?
• Employee engagement: Are employees involved in strategy execution?
• Performance metrics: How do employee satisfaction surveys and turnover rates align with our strategic goals?

#10: How do we measure the overall ROI of our strategy?

The ultimate success of a strategy is measured in its return on investment.

Financial metrics: What financial indicators will be used to assess ROI?

Internal audit: How will the internal audit function validate these financial metrics?

Performance metrics: Is there a balance scorecard approach to measure non-financial performance as well?

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Reporting on management's success in executing strategy

The evaluation of management's success in executing an approved strategy is crucial for both internal improvement and external accountability. The report should be comprehensive, encompassing KPIs, risk management, and how external changes have impacted strategy implementation.

KPIs

• Financial metrics: Evaluate revenue, profit margins, ROI, and other financial KPIs against predetermined goals. Are the financial objectives being met or exceeded?
• Operational efficiency: Assess operational metrics such as process improvement, time-to-market, and cost-efficiency. How well are these aligning with strategic goals?
• Market presence: Measure market share, customer retention and acquisition rates, and other market-related KPIs. Is the organization successfully expanding its reach or penetration?

Risk management

• Identified vs. actual risks: Compare the risks anticipated during the planning phase against the risks actually encountered. How well did management anticipate and mitigate these risks?
• Risk response effectiveness: Evaluate the efficacy of risk management strategies employed. Were any risks poorly managed, and what was the impact?

External changes

• Market dynamics: Document how changes in the market landscape, such as new competitors or regulatory shifts, have affected strategy execution.
• Technological changes: Assess the impact of technological advancements or disruptions on the strategy. Did the management adapt quickly enough?
• Socio-political factors: Consider global events, regulatory changes, or societal shifts that could have impacted the strategic plan. How well has management adapted the strategy in response?

Questions directors should ask about strategy reporting:

• How closely have actual results aligned with strategic objectives?
• Were there unanticipated risks, and how effectively were they managed? How informative are the KRIs we are evaluating the risk profile impact of executing the strategy?
• Have external changes required a strategy realignment, and how well has this been executed?

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In conclusion

Navigating strategy development and oversight requires not just foresight, but also rigorous questioning, adaptability, and vigilance against risks and misalignments. Boards must continually engage with internal audit, risk management, and compliance functions to assess strategic plans are sound, ethical, and aligned with the company's risk appetite. It's not enough to set a course; it must be constantly refined and rigorously monitored. Failing to do so invites not just strategic creep, but the potential misalignment of resources, dilution of company culture, and risks that go unmanaged. In the world of business, standing still is moving backward, and the best way to move forward is to constantly ask the right questions.

The views in this article are mine. The insights reflect an engaging and sparring discussion between me (as governance and risk expert, and accomplished author) and Open-Source AI ChatGPT (as know-it-all and so-so author). Copyright: Mark Watson