The Role of the Board of Directors in Strategy Formulation (& Execution)

During one of my lectures in Digital Business, my students posed an interesting question the other night, “What is the role of the Board of Directors in Strategy formulation and subsequent strategy execution/implementation?”. This has got me researching this question further and penning this short article. Let’s take a look….

The board's key purpose "is to ensure the company's prosperity by collectively directing the company's affairs, while meeting the appropriate interests of its shareholders and relevant stakeholders"(Standards for the Board, IoD). However, further guidance like the King Code on Corporate Governance and Companies Act.

This brings us to an important concept of Corporate Governance. Corporate Governance can be loosely defined as the system by which companies are directed and controlled. In essence, it is about what the board of a company does and how it sets the values of the company, and it is to be distinguished from the day-to-day operational management of the company by full-time executives. The overall governance of the organisation sits with the Board of Directors, who are appointed by the shareholders for a fixed term. The board is also responsible for setting the organisation’s strategic aims, providing the require leadership to put these strategic aims into effect, supervise the management of the organisation, play an oversight role over the organisation and report to the shareholder on their stewardship. The board is ultimately responsible for strategic planning.

A key requirement above all is that the board of directors should have the highest levels of integrity and objectivity and place the organisation’s purpose and needs before their own.

In the UK for listed companies corporate governance, it is part of the legal system as the UK Corporate Governance Code applies to accounting periods beginning on or after 29 June 2010 and, as a result of the new Listing Regime introduced in April 2010, applies to all companies with a Premium Listing of equity shares regardless of whether they are incorporated in the UK or elsewhere (www.icaew.com/).

In South Africa, great strides have been undertaken on taking corporate governance more seriously. Through the efforts of the King Commission, we have seen the development of the King Code of Corporate Governance. The latest version, King IV, has made significant changes and additions over King III. The King IV Code's principles and practices are linked to desired outcomes, therefore articulating the benefits of good corporate governance. The Code differentiates between principles and practices. Principles are achieved by mindful consideration and application of the recommended practices. The King reports are not legally binding. ... Much has been made of King IV's switch to an “apply and explain” philosophy as opposed to King III's “apply or explain”.

A key requirement with strategy is that any strategic plan should align with the organisation’s vision. The organisation’s vision describes its desired future position. This alignment is critical as it ensures that the strategy is in synch with the organisation’s vision. Strategy is about the future hence the alignment to the vision. These two topics should be items on the board agenda at least a few times a year. In preparation to have a board discussion about strategy, board directors should collect and analyse data related to the industry’s environment, the nature of the competition, and the business models (i.e., should be included in the Board pack).

The board of director’s role in the strategic planning process entails identifying priorities, establishing goals and objectives, finding resources, and allocating funds to support the decisions that need to be made around strategic planning. The board is also responsible for monitoring the execution of the strategic plan. The board does not execute the strategy, this is the responsibility of the organisation’s top management.

The monitoring of the function of the board over the execution of the strategy includes the board overseeing the implementation of the strategic plan. As the plan progresses, the boards may need to reassess whether the allocated funds are adequate in light of changing market conditions and specific impacts on the business of the organisation.

The CEO & the Chairperson of the Board…

Both these roles are significant in any organisation, for profit or non-profit. The CEO is the top senior executive over management while the board chairperson is the head of the board of directors. The CEO is the top decision-maker for the company and the person who oversees the daily operations and logistics. All of the senior management executives report to the CEO. In line with good corporate governance practices, the chairperson of the Board of Directors is both independent and non-executive. This is to ensure that the Chairperson is not involved with the operational side of the business and is able to remain impartial and in a governance role.

The Board of Directors with the Chairperson leading, have the task of identifying, recruiting, and appointing the most qualified individual they can find to serve as the chief executive.

In a company with no overlap between the board of directors and the upper tier of management, the chairman of the board is considered a higher-ranking member of the company than the CEO. ... As the head of the board of directors, this gives the chairman a higher rank within the company than the CEO. It is important for the chief executive to be in complete alignment with the board on critical issues such as strategy and culture.

In summary, both the Board of Directors and the CEO have crucial if not critical roles to play in the development and subsequent execution (implementation) of the organisation’s strategy. There must be a complete alignment between the CEO and the Board of Directors on critical issues of the organisation including the strategy and culture. There is no room for hostility, secret or conflicting agendas and trust/respect must be maintained at all times between the Board of Directors and the CEO in the strategy development and execution to ensure that the organisation is able to growth and achieve its intended purpose.

Sources:

·    IOD (Institute of Directors)

·    IODSA ((Institute of Directors-South Africa)

·    SAICA

·    PWC.com

·    KPMG.com

·    ICAEW