McKinsey Quarterly article on unlocking the strategic potential of board of directors

McKinsey Quarterly recently published an interesting article highlighting the challenges boards of directors face guiding company strategy, often merely reviewing and approving strategy instead of participating in its formulation. In the second part of the article, the authors then proceed to formulate three questions that can help unlock the strategic potential of the board.

Drawing on a survey of 1,597 corporate directors in June 2011, the McKinsey authors underline some of typical challenges today’s boards face.

  • Time shortage

Two thirds of the interviewed said they would like to spend more time on the company’s strategy, but this proves difficult since most boards have only about six to eight meetings a year. Predictably, these meetings are mostly dominated by compliance-related topics with little time available for developing strategy.

  • Expertise gap

The survey also pointed to one of the reasons why strategy discussions at the board level are not a common occurrence. Only 10 percent of the directors surveyed by McKinsey felt that they fully understood the industry dynamics in which their companies operated and only 21 percent of them stated that they had a complete understanding of the current strategy.

Time and room for strategy review at the board level is often left to an annual board-level strategy, which tend to be mechanistic in their repetitive nature. The McKinsey authors instead propose to “throw out the annual process and replace it with a much more intense but less frequent form of engagement—roughly every three years in this case—while still devoting some time at every board meeting to pressure-testing the strategy in light of its progress and changes in critical variables.”

Crucially, the article puts forward three key questions that an organization should attempt to answer in order to enhance the quality of board engagement on strategy.

1. Does the board understand the industry’s dynamics well enough?

Boards need time to not just review plans but to fully understand the structure and economics of the business the company creates. Ideally, time should be spent without management present at the meeting as well, so the board can get deliberate freely and get up to speed on critical issues. Such practice also helps to avoid simply accepting management bias and step away from ingrained patterns of thought.

2. Has there been enough board–management debate before a specific strategy is discussed?

Based on the better understanding of industry and company economics, the board should embark on an open and informed dialogue with senior management. The article points out that during such debates, management’s role is to introduce key pieces of content: a detailed review of competitors, key external trends likely to affect the business, and a view of the specific capabilities the company can use to differentiate itself.

3. Have the board and management discussed all strategic options?

In the view of the article, most discussions between board and management end after business, economics and competition are covered. After this type of discussion, management develops a plan, which is then merely presented for approval. To break with this standard practice, the McKinsey authors instead argue for management to formulate a set of strategic options, each thoroughly thought through to its logical end state. Board and management should then discuss and decide on these options.

To be sure, this is a time-consuming strategy, and requires management and the board to fully commit to interact and engage. In complex and challenging times, however, it seems like best practice for strategy development.