3.1 The Board of Directors’ Role in Strategy
On February 10, 2017, Paul Polman, Unilever CEO, received a letter from Alexandre Behring, chairman of Kraft Heinz. It expressed Kraft Heinz’s interest in launching an unsolicited bid for all Unilever shares, with the goal of merging both companies.
UnileverFootnote 1 had been spearheading a successful transformation process since 2009. Under Polman’s leadership, the company adopted the Unilever Sustainable Living Plan (USLP) in 2010; this initiative brought about a fundamental shift in Unilever’s approach to product development, raw-materials sourcing and their carbon footprint. With the explicit support of its board of directors, Unilever adopted very ambitious environmental, health, social and financial goals as part of its strategy, and they were consistently integrated into the firm’s business model. Unilever had become a business champion of the multi-stakeholder strategy, while offering shareholders above average financial returns and guiding the company for the long term.
Unilever faced several challenges in 2017, including pressure to improve its efficiency and financial performance, as well as deliver on its environmental and social commitments. These included new-product developments targeted at younger consumers and a firm pledge to monitor the environmental impact of its operations. The consideration of both financial and nonfinancial goals is a difficult balancing act for any company. Unilever’s ambitions were broad by aiming at delivering in both areas. Kraft Heinz’s attempted takeover came as a surprise, not only to Unilever’s management and board of directors, but to the business community in general. In view of Unilever’s solid performance and goal of driving positive social impact, what did the future hold for other firms embracing this dual approach?
The takeover proposal was a great opportunity for Kraft Heinz and its two main shareholders: 3G – the private equity group founded by some Brazilian investors and led by Jorge Paulo Lemann – and Warren Buffett. Buffett had already cooperated with 3G in other megadeals, including the acquisition of Heinz and its subsequent merger with Kraft. For Kraft Heinz, there was logic behind a deal with Unilever. The acquisition would allow it to diversify geographically outside the United States, reinforce its position in emerging markets where Unilever was strong and create larger scale economies in purchasing, manufacturing, advertising, operations and technology.
The differences between Kraft Heinz and Unilever were significant. Unilever focused on product innovation. Kraft Heinz was centered on cost cutting and efficiency. Unilever was a global company, with a large presence in emerging markets. Kraft Heinz was strong in the US market. Unilever was making substantial efforts to reach a zero carbon footprint and integrate sustainability into its business strategy. Kraft Heinz was not known for its concern about the environmental impact of its operations. Nevertheless, a good company can create value by turning these differences into opportunities through a merger.
Unilever and Kraft Heinz had dissimilar business models. Although both had been performing well from a financial standpoint, many questions remained about the viability of combining two companies with such different cultures and strategic orientations. Unilever’s long-term perspective and emphasis on product innovation, new-customer needs and social and environmental concerns, stood in sharp contrast with Kraft Heinz’s focus on operational efficiency.
Unilever’s board of directors, led by Martjin Dekkers, was in a tough position. Beyond their personal views, board members had the responsibility to accept or reject the Kraft Heinz offer based on its value for Unilever shareholders and other stakeholders. Unilever’s directors had to seriously consider their duty of care. They recognized that, if a potential suitor offered an attractive price, they would face enormous pressure from certain shareholders and the financial community. Unilever’s board was at a crossroads.
A week later, on February 17, the board opted not to hold conversations with Kraft Heinz and rejected its bid. It considered this decision to be in the best interests of Unilever shareholders and other stakeholders. In the judgment of Unilever’s board of directors, the merger with Kraft Heinz was not a good option. A board of directors capable of making this type of decision must be very knowledgeable of the firm’s strategy, value creation, corporate culture, talent attraction and retention strategies and customer engagement, as well as how its strategy is perceived by the financial community. Kraft Heinz and its main shareholders, 3G and Warren Buffett, accepted Unilever’s response and kindly communicated their decision to not proceed further with the takeover bid.
This event sheds light on the relevant role of the board of directors in setting the firm’s long-term orientation and corporate strategy. The CEO and senior managers’ role in strategy has a long tradition in strategic management. Unfortunately, the role of the board of directors in this domain has received far less attention. Codes of corporate governance and other governance regulations may refer to the board directors’ duties of care and loyalty, but their role in strategy is complex.
As underscored by digital transformation, decarbonization, trade wars, the recent pandemic and the new geo-political risks, companies need to reflect on their long-term development and strategy. This requires the board’s involvement in debating and shaping the organization’s strategy.
In this chapter, I discuss the role of the board of directors in the firm’s strategy and present a framework to help address business strategy beyond financial analysis. In Section 3.2, I present different approaches on how boards should deal with strategy. In Section 3.3, I develop a strategy road map for boards, to help them cocreate the company’s future by collaborating with the CEO and top management team. In Section 3.4, I offer guidelines on the strategy process – different from the concept of strategy itself – with a spotlight on how the board of directors can work with the CEO and senior managers on core strategic decisions. Finally, I present a typology of profiles of board of directors regarding their role in strategy.
3.2 The Board’s Role in Strategy: Different Approaches
Relevant investors today, including institutional investors, family offices and private equity firms, expect boards of directors – not only CEOs or CFOs – to debate and promote the firm’s strategy. They want to make sure that the board discusses and understands how the company creates value for the long term. Beyond legal duties or vague recommendations in corporate governance codes, investors expect board directors to become drivers of the company’s strategy.
This view of the board of directors is coherent with the responsibilities of top management as they have been understood in strategic management.Footnote 2 In the next sections, I briefly outline the contributions to the board’s role in the firm’s strategy in the fields of corporate law, corporate finance and strategic management.
3.2.1 Strategy and Corporate Law
In Western countries, most corporate law systems highlight boards’ main corporate governance functions, which stem from their legal duty to monitor the CEO and senior managers on behalf of shareholders. Shareholders as individuals do not get involved in the firm’s governance. They appoint a board of directors to oversee the company’s governance and monitor top managers’ decisions and performance. They want to ensure that top managers adopt decisions that reflect shareholders’ interests, but do not want to get involved in this role. There are some exceptions to this rule, such as in the cases of start-ups, venture capital firms, private equity firms and family owned businesses, where founders and investors have a major presence on the company’s board of directors.
In the corporate law tradition, the focus of the board’s functions is on monitoring top management and overseeing the firm’s performance. The Cadbury Code in the United Kingdom (Cadbury et al., Reference Cadbury1992) marked a departure from that approach. It signaled efforts to update the functions of boards of directors in coherence with the changing needs of companies and the specific value that good governance can create for the firm’s long-term success. There was a new emphasis on the board’s role in the firm’s long-term development, beyond monitoring the management team. It inspired reflections on the rights of both shareholders and stakeholders. The board’s collaboration with different stakeholders is critical for the firm’s long-term development.
The board’s function as the central governance institution and its mediating role between shareholders, top management and the rest of the organization (Blair and Stout, Reference Blair and Stout1999) underscores one of its chief roles in corporate governance. Some corporate law authors (Lipton, Reference Lipton2017; Bainbridge, Reference Bainbridge, Gordon and Ringe2018; Gilson and Gordon, Reference Gilson and Gordon2019; Fisch and Solomon, Reference Fisch, Hamdani and Solomon2020; Rock, Reference Rock2020) assume that boards should oversee the company’s strategy in one capacity or another. However, the board’s specific role in strategy and how this function is carried out is unclear. The board should lead the company with a long-term horizon and make decisions that promote its long-term value creation.Footnote 3
This notion is gaining steam as companies and their boards of directors and shareholders are being accused of “short termism”Footnote 4 in their decision-making. Despite the ongoing academic debate about whether public companies are overly focused on short-term objectives, there seems to be a consensus that companies should create value for the long term. This is the specific dimension of strategy. The United Kingdom’s unified Corporate Governance Code (2018) also took this approach. The debate on activist shareholders and the hypothesis that they create short-term value for investorsFootnote 5 also underscore the need for companies to adopt long-term horizons. The mediating role of boards in this specific context is highly relevant.
3.2.2 Strategy and Corporate Finance
Corporate finance is another academic area that examines the role of boards of directors in strategy. In this field, most authors stress a common problem in public corporations: the separation of ownership (shareholders) and management and control. A vast stream of research highlights different incentives that principals can design to ensure agents’ behavior maximizes the value of shareholder investments (see Jensen and Meckling, Reference Jensen and Meckling1976).
In the corporate finance tradition, the role of strategy is mostly focused on capital allocation, diversification and merger-and-acquisition decisions. It is subsumed into the overall function of boards in monitoring managerial decisions. It does not include any reference to the content or process of strategy or the firm’s business model.
The dominant view in corporate finance is that a board’s role in strategy and strategic decision-making should aim to maximize shareholder value (Ross, Reference Ross1973; Jensen and Meckling, Reference Jensen and Meckling1976). From a decision-making viewpoint, this perspective is clear, although, as some authors have noted (see, among others, Simon, Reference Simon1976, Reference Barney1991 and Hart and Zingales, Reference Hart and Zingales2017), maximizing shareholder value actually means may not be a good criterion. In a bounded rationality context (Simon, Reference Simon1991), it is difficult to assert that each decision will maximize shareholder value. Moreover, shareholders are diverse and reflect different time perspectives and expectations. As a result, each will assign a different meaning to value maximization.
The diverse time horizons of shareholders is very relevant, because in order to continue creating long-term shareholder value, the company needs to invest in people, technology and product development, which may decrease short-term cash flows and dividends. As occurs with other complex managerial themes, the real world of business is not only finance, although it plays a significant role in the firm’s governance. A case in point is a merger and acquisition, a realm where finance is highly relevant, but where execution, leadership and efficiently integrating people and cultures also play integral roles in the transaction’s success. Corporate finance requires a strategic management outlook to understand the role of the board in corporate strategy.
3.2.3 A Broader Strategy Role for Boards of Directors: Contributions from Strategic Management
Corporate law and corporate finance provide a useful but incomplete approach to the board’s role in strategy. They do not offer guidelines on how boards of directors should work effectively on strategy. The field of strategic management helps frame discussions on how a company creates sustainable value by considering its industry and how it defines an attractive customer value proposition, designs a business model and organizes its activities to serve customers in a unique way. A successful strategy requires crucial decisions that will help the company stand out in its industry. The strategic management field adds a diverse outlook to this debate. This includes contributions to better understand strategy, strategy dynamics, the interplay between resources and capabilities and sustainable competitive advantages and the specific role of top management teams in strategy.Footnote 6 These complementary perspectives describe the essence of strategy and its relevance to corporate governance.
A focus on shareholder value without the board’s solid grasp on how economic value can be created may not be useful. The European banking industry provides some very interesting experiences. Deutsche Bank, Germany’s largest bank and a leader in Europe, faced some of these strategic challenges following the financial crisis of 2008.
In the 1990s, Deutsche Bank had become the paradigm of a universal bank, competing both in the retail and investment banking industries. Over the past two decades, however, the bank invested primarily in people and assets to expand its investment banking business, efforts which were rendered practically irrelevant after the 2008 financial crisis and the shifting nature of banking activity. Deutsche Bank suffered a value deterioration of some assets, particularly those related to its investment banking and real estate businesses, with higher capital requirements and a substantial drop in profitability and equity value. It had a hard time adjusting to this unfamiliar landscape. Furthermore, the bank’s retail business unit in Germany was not competitive. The retail bank business in other countries was in better shape, but too small to significantly affect the bank’s overall performance.
Since 2010, Deutsche Bank’s board of directors and top management team had been trying to bolster its investment bank business and become a European powerhouse capable of competing against US banks. Changes in the top leadership position – with three CEOs between 2014 and 2018 – made this transformation process more complex. After a failed merger attempt with Commerzbank in April 2019, the bank focused on divesting from most of its investment bank business and improving capital allocation. In the meantime, the complexity of the bank’s challenges was a deterrent for some investors (Storbeck, Morris and Noonan, Reference Storbeck, Morris and Noonan2019).
Without a doubt, both the board and the top management team were trying to improve the bank’s efficiency and profitability and increase shareholder value. Nonetheless, these goals were ineffectual without a well-defined and smoothly executed strategy. For boards of directors, a deeper reflection on strategy and the policies to drive long-term economic value are indispensable. A coherent strategy helps guide companies’ long-term orientation and their potential for value creation, a core theme for boards of directors. This is why corporate strategy should serve as a central pillar in good corporate governance and a pivotal role of boards of directors. Boards of directors will be incapable of effectively monitoring the company’s top management without a clear understanding of the firm’s strategy, its resources and capabilities, and how the business model supports strategy.
Effectively dealing with strategy can be difficult for boards of directors for a variety of reasons. The first is that the board’s role in strategy has not been clearly recognized by either regulators or investors. Until recently, the role of boards in most listed companies was to give a stamp of approval to management proposals. Second, there might be confusion regarding the strategic roles of senior management and the board. Strategy formulation is a key function of the CEO, who should understand the business well and make efforts to advance it, but the board should discuss it and approve it. The third reason relates to the difficulty in articulating decisions given the board’s collegiality, the nature of its work and members’ part-time dedication. That said, these factors can be overcome by a competent board.
The board of directors should help the firm create long-term value. As a result, the board of directors should understand, discuss and approve how the CEO and senior management approach the firm’s strategy, business model and competitive advantages, and the sustainability of its value creation process. Since the board of directors is involved in the commitment of resources, strategic investments and other relevant management decisions, it should also take part in the reflection, discussion and approval of the firm’s strategy.
In the following sections, I examine the role of the board and the strategy-related functions it should perform. The CEO and senior managers, as the original architects of this work, should discuss strategy with the board and execute it once it has been approved. I also present a framework to help boards address strategy while respecting the primary role of the CEO.
3.3 A Framework for Boards of Directors and Their Role in Corporate Strategy
High-quality strategic reflection and a solid grasp of the firm’s business are essential capabilities for boards of directors to properly fulfill their responsibilities. An understanding of strategy and the firm’s principal strategic challenges are fundamental for boards of directors to reflect on long-term value creation (Palepu, Reference Palepu and Lorsch2012). In the absence of proper work on strategy and strategic decisions, board members’ fiduciary duties will not be met.
3.3.1 The Board of Directors and CEOs’ Collaboration on Strategy
This section outlines the experiences of the boards of two international companies regarding strategy and strategic decisions. The Cellnex experience offers the perspective of a spin-off from a larger company, Abertis, a global infrastructure management company, with relevant insights on boards of directors that should reflect on their company’s future growth. The Amadeus case reflects the challenges faced by one of the largest European software companies in developing its US market and the board’s concerns surrounding the acquisition. These cases also shed some light on the collaborative work between the board and the CEO on strategy.
3.3.1.1 Cellnex: A Growth Project
The 2015 launch of Cellnex,Footnote 7 a subsidiary of Abertis, the world’s largest highway infrastructure management company, and the strategic insights developed by its chairman, CEO and board, offer useful lessons on what boards should and should not do regarding business strategy.
In 2015, Abertis was a leading company in highway infrastructure management, with stable cash flows, good profitability and a reputation for good management. CEO Francisco Reynés had refocused the company around highways since 2010, selling business units that were less interrelated with its core business. One of the business units that Albertis had developed since 1999 was Abertis Telecom, which mainly provided the emission of TV and radio signals via communications towers throughout Spain. It also had a network of telecommunications towers acquired from the Spanish multinational Telefónica in 2012.
Francisco Reynés, and Tobías Martínez, Abertis Telecom’s CEO since 2000, were keen observers of the changes underway in the telecoms industry. They began discussing the potential of a new company centered on the management of telecommunications towers. As telecom operators became increasingly focused on content and attracting and retaining customers, they were placing less emphasis on infrastructure management. This shift occurred in the United States in the late 1990s and early 2000s, when large telecom operators sold off their infrastructure subsidiaries. In their place emerged new companies specialized in managing this type of infrastructure, such as Tower Co. and American Tower. Reynés, Martínez and their teams spearheaded a thorough strategy process to reflect on the industry’s evolution, customer needs, the firm’s unique capabilities and those of its competitors, and market opportunities it could exploit. In Europe, this industry was still in its early stages, with no significant independent players.
They also had to discuss strategy with Abertis board members and work closely with them to ensure everyone was fully aware of the challenges and different alternatives in order to make an informed decision. In September and October 2014, several board meetings were held to discuss the firm’s strategic guidelines and options to accelerate growth, design the IPO, define the type of shareholders the company would need and the role Albertis would play in it.
Cellnex was the name given to the new company. It went public in May 2015. The IPO was a tremendous success. Between May 2015 and December 2021, the share price was up by 350 percent, a testament to a well-defined strategy, excellent management, consistent delivery and fluid communication with shareholders, who truly valued the quality of the newly formed company’s governance and management and the clarity of its strategy and execution.
Certainly, Cellnex’s timing was opportune; the firm was able to effectually capture an emerging trend in the telecoms market. But it is worth noting that other European companies tried and failed to replicate its success. In discussions with Reynés, Martínez and board members, several dimensions of Cellnex’s performance stood out. The first was the high quality of its corporate governance and board of directors: their expertise, diversity, engagement and ability to communicate efficiently with the shareholders and to deliver on their commitments. This relationship is always relevant, but even more so when the company needs to increase its equity and combine it with debt to fund new investments, as was the case with Cellnex between 2015 and 2020.
The second dimension was the relationships among the board, CEO and top management of the firm, and the quality of their debates on strategy issues. There was constant interaction between board members and the CEO, who worked together to develop a well-defined strategic framework and discuss fundamental principles and issues, always with a long-term horizon.
The third attribute was the clarity and uniqueness of Cellnex’s strategy and its effectual implementation. The fourth dimension related to the professional qualities of the senior management team, led by the CEO, and their capacity to communicate with investors and deliver on their commitments. A clearly communicated strategy and consistent delivery generate a virtuous circle and serve as the strongest foundation of trust. This is the focus of Section 3.3.2, which delves into the building blocks of strategy discussions and strategic frameworks that boards of directors may find beneficial when working on strategy with the CEO.
3.3.1.2 Amadeus: Growth in the United States
Amadeus was the global leader in software for travel and hotel services in 2021. It was a well-respected, consistent company in terms of performance and delivery of software solutions for its customers.Footnote 8 Its experience serves as a good reference for boards and the practices they should cultivate to successfully collaborate with the CEO and management team. Amadeus was a spin-off of four European airlines – Air France, British Airways, Iberia and Lufthansa – which joined forces to create a software company to manage their reservation system. The company went public in 1991, was acquired by a private equity firm in 2005 and returned to public capital markets in 2010. Between 2010 and 2019, under the leadership of CEO Luis Maroto and nonexecutive board chairman José A. Tazón, the company recorded outstanding economic performance, product innovation, talent development, growth and shareholder returns. Amadeus had combined internal innovation-driven growth, internal venturing and selective acquisitions to expand its current business and enter new markets.
Maroto and his team worked closely with the board in four core areas. The first was to speed up growth in their current portfolio of services by expanding specific offerings and geographies. The second was to continue improving operational effectiveness to ensure profitable and sustainable growth. The third was to invest in internal ventures that could accelerate growth in new areas, developed internally or in partnership with external start-ups. The fourth area was selective acquisitions that would allow Amadeus to quickly enter new segments and markets.
The board’s deliberations of these transactions offer interesting insights on the collaborative work between the board and CEO, including the TravelClick acquisition in 2018 (Masclans and Canals, Reference Masclans and Canals2020). With the TravelClick deal, the board’s discussions reveal that their primary concerns included not only financial performance but other qualitative areas of performance. For Amadeus’ board of directors, the management team was wholly aware of the financial constraints and exercised prudence by offering a reasonable price for the target company. Their major concerns centered on the potential integration of TravelClick as the firm’s first large acquisition in a segment of the hotel software industry.
Amadeus was already present in the hotel segment through R&D, software development and commercial teams. The threat of organizational overlap with its operations was real, and the board wanted to ensure the top management team had a solid plan to effectively address it to retain key talent in the acquired company. People make the difference in any organization, but particularly in software companies.
The board of Amadeus, by shifting its focus to the acquisition’s implementation and the integration of both companies, not only signaled its concerns about the operation’s risks; it also helped the CEO and his management team refine their plans regarding the merging of both firms and devise strategies to preserve key TravelClick employees. The board understood well the strategic and financial logic of the operation. The financial plans elaborated by the CEO and his team were reasonable. In board meetings on strategy issues, financial dimensions often dominate the conversation. Remarkably, the Amadeus board’s concerns focused on other dimensions, too: people, culture, customer service and the assimilation of both organizations.
3.3.2 A Strategy Road Map for Boards of Directors
Strategy is the firm’s set of guiding policies and decisions to address the firm’s external and internal challenges, and coherently organize its resources and activities to meet its goals and achieve its purpose.
This definition is based on many previous scholarly contributions. In particular, it considers that strategy includes: a set of guiding policies and decisions (Chandler, 1962; Andrews, Reference Andrews1971); a diagnosis of the firm’s challenges (Porter, Reference Porter1980; Rumelt, Reference Rumelt2011); the identification of trade-offs and decisions on key activities (Porter, 1985, Reference Porter1996; Rumelt, Reference Rumelt2011; Montgomery, Reference Montgomery2012); the organization of resources, capabilities and activities to serve customers uniquely, innovate and create economic value sustainably (Barney, Reference Barney1991; Ghemawat, Reference Ghemawat1991; Porter, Reference Porter1996; Teece, Pisano and Shuen, Reference Teece, Pisano and Shuen1997; Ghemawat and Cassiman, Reference Ghemawat and Cassiman2007; Cassiman and Valentini, Reference Cassiman and Valentini2018); business model, business activities and fit (Porter, Reference Porter1996; Montgomery, Reference Montgomery2012; Amit and Zott, Reference Amit and Zott2021); and a purpose that explains why the firm is in business, its overriding ambition and the type of company it aspires to be (Bower, Reference Bower1970; Andrews, Reference Andrews1971; Montgomery, Reference Montgomery2012). The board of directors should govern strategy in collaboration with the CEO and senior management.
Strategy is a complex issue for boards of directors. Most research considers strategy to be the ultimate responsibility of the CEO and top management team. There is a need to broaden this focus to include the role of the board of directors. In many cases, board members have neither the time nor the expertise to work on the firm’s competitive positioning and industry dynamics. It is important for board members to understand these issues since they directly impact the firm’s long-term evolution. They should engage with senior management on these matters, without overstepping the role of management.
In this section, I present a strategy road map (see Figure 3.1) that boards of directors can use in their work on strategy with CEOs. It is based on relevant scholarly contributions to the field of strategy. I will review them in the following sections.
Figure 3.1 A strategy road map for boards of directors
3.3.2.1 Purpose
The first element of the strategy road map for boards of directors is the firm’s purpose (Mayer, 2018; Quinn and Thakor, Reference Quinn and Thakor2019). As explored in Chapter 2, purpose may entail different dimensions and perspectives, but one element is indispensable: Purpose should explain why a specific company exists and what specific customer needs it aims to address. For this reason, purpose is at the heart of the strategy road map.
Unilever’s purpose – “Making sustainable living commonplace” – has shaped its strategy, business model, product innovation, culture and hiring and development over the last decade. In particular, its focus on sustainability and healthy products served as a catalyst for product innovation and strengthened its brands and customer loyalty. Moreover, purpose has also driven Unilever’s standing as an employer of choice among young professionals.
The Cellnex management team expressed a sense of mission for the firm: to create a telecom infrastructure management company that would boost the effectiveness of telecom operators and better serve the connectivity needs of end consumers. There are many ways to express the purpose of a company and different perspectives to consider. Boards of directors and top management teams should make sure that their company has a purpose that explains why it is in business.
3.3.2.2 Understanding the Firm’s Global Context and Opportunities
As Porter (Reference Porter1980) pointed out, industry structure determines the potential for profitability in an industry, as well as how the industry’s economic value is distributed among different players (buyers, suppliers, customers or regulators). A competent board of directors should be aware of the firm’s customers, suppliers and current and potential competitors. Since each party may impact the firm’s economic performance in different ways, a holistic diagnosis of the industry is essential for any strategy discussion.
For the past four decades, corporate growth in Western countries has been closely tied to the process of international economic integration. Since the early 1980s, the globalization of markets offered an incredible growth opportunity for Western companies operating in emerging countries. Some firms successfully exploited this opportunity, while others failed in this endeavor. Boards of directors should also understand the potential fallout of decelerating globalization over the past few years, incited by trade wars and the COVID-19 pandemic, and its impact on specific industries and operations, since it may constrain corporate growth.
The same can be said of recent mega-trends: new geopolitical risk, digital disruption, the climate crisis, changing demographics, evolving consumer behaviors or new government regulations. Economic, financial, social and technology trends all have an impact on strategy and economic performance, especially in the long term. Boards of directors need to invest time to discuss these trends and assess their potential short- and long-term impact on the company and ensure that the senior management team works with some rigorous assumptions.
3.3.2.3 The Firm’s Goals, Aspiration, Strategy and Business Model
As defined in the previous section, strategy is the firm’s set of policies and decisions used to tackle its challenges and organize its activities to meet its goals and purpose. The board of directors should approve some corporate goals for the mid and long term, which are usually included in the firm’s strategic guidelines. The board should also include in these guidelines a sense of aspiration, not only in terms of ambitious quantitative goals, but also in terms of what type of company they want for the future.
The CEO and the board itself should have the notion of purpose in mind, as well as these goals and aspiration, when they work on strategy. As a set of guiding policies and decisions, strategy entails a careful identification of the firm’s challenges and trade-offs regarding how to serve customers, create value sustainably and achieve its goals.
Defining the firm’s strategy requires the board of directors and senior managers to frame critical choices and make specific decisions. These decisions impact how the firm plans to create value and its ability to capture that value. These decisions involve choices about the firm’s customer value proposition, its competitive positioning in the industry, its portfolio of activities and its geographical and business scope.
The implications of this view of strategy for boards of directors are diverse. Board members should understand the firm’s major guiding policies, how it tries to serve customers, how its activities are organized and interrelated, whether the firm’s positioning is unique and creates economic value and whether the firm has the resources and capabilities to sustain it.
Strategy is not only a rational process of establishing the means to reach explicit goals. It also involves a sense of aspiration connected to the firm’s purpose and an entrepreneurial spirit to undertake new initiatives. The Cellnex experience sheds some light on this. Its top managers were keen observers of the changes underway in the telecom industry and realized they could design a value proposition for their customers that was different and unique. If they acted with speed and agility, Cellnex could become one of the leading firms in its industry in Europe in terms of quality of service and scale. Fostering this entrepreneurial mindset was a natural outcome of their renewed sense of aspiration to collectively achieve something greater than the initial business unit that operated under the Abertis umbrella. This sense of aspiration instilled the board and top management team with newfound energy to translate the purpose into action in a very entrepreneurial way.
The Cellnex board and top management needed to make some critical choices. They pondered the strategic choices for the new company, which revolved around some core concerns. One critical choice was whether Cellnex would operate as an end-to-end service provider of telecommunications infrastructure management – including the management of the towers and other sites – or only as a tower owner that would lease space to telecom operators. The latter was the option chosen by their US competitors. But Cellnex’s top managers realized the company could offer a more sophisticated service that would better serve its customers. Its customers could reduce their needs for capital, investment and operational expenses by spinning off their towers of telecommunications.
These were frequent topics of discussions between senior managers and the board of directors. For Cellnex, achieving critical mass and arriving first were important because of the limited number of towers in the EU. Clarity and transparency, a candid approach debating the firm’s different options, true interest in finding the best pathway for the company’s long-term growth and the clear commitment of top managers were critical factors in convincing the board about the speed of growth, acquisitions and the equity and debt required to finance these operations.
The notion of business model has become a core element in the strategy debate. Strategy explains what the firm will do to meet its goals; the business model outlines how the company will operate to do so and create value (Zoot and Amit, Reference Villalonga and Amit2010; Casadesus-Masanell and Ricart, Reference Casadesus-Masanell and Ricart2011; Amit and Zott, 2020). The business model notion has some foundations in the earlier concepts of business activities and value chain (Andrews, Reference Andrews1971; Porter, 1985).
The election of the business model involves decisions on the firm’s policies – from purchasing to pricing and sales – as well as the assets it plans to control, the activities to perform and the capabilities it needs to develop. While there are different definitions of the business model, this should always include the firm’s customer value proposition, the activities to serve customers and its internal relations, the assets and capabilities it needs to operate and the management of these relationships and processes.Footnote 9 The customer value proposition is a critical choice that firms need to make and a core component of the business model. Once the value proposition for customers is clearly understood and perceived as valuable by customers, the company needs to ensure it can efficiently organize its related activities and operations, manage diverse internal and external relationships, sustainably offer its customer value proposition and create value for all parties through an effective implementation process.
The business model also elucidates how a company compares with its peers, not only in terms of product positioning, but across the entire value chain, including its degree of vertical integration. The business model is a relatively new concept but a common trait among long-standing, successful companies. Firms that are industry leaders, among them, Unilever, Nestlé, J. P. Morgan and Walmart, all developed very specific business models over the years that made their competitive positioning more sustainable. A strong business model is a source of numerous advantages, although may hinder the firm’s evolution in times of flux. As the recent experiences of General Electric, Ford and Xerox reveal, the business model that helped them succeed in the past is not the model that will help them grow in the future.
In the current context of digital disruption, the risk of obsolescence is even more pronounced. With the emergence and growing dominance of big tech-based platforms like Amazon, Google, Microsoft and Alibaba, among others, the relevance of business models is even stronger. What sets these tech-based companies apart from their traditional competitors is not only technology, but the creation of new business models that leverage technology in a unique way to connect with end consumers.
An engaged board should understand the firm’s business model and its connection with strategy, its core components and the elements required to be sustainable and serve customers in a unique way. By sharing their knowledge and capacity to debate and discuss business models, boards of directors add value to senior management teams and help them reflect and improve their own models.
3.3.2.4 People and Execution
Execution is a crucial pillar of the strategy road map. It includes specific policies to implement strategy and a comprehensive monitoring and assessment system (Andrews, Reference Andrews1971; Simons, Reference Simons2011). Strategy design is a rather analytical process, where logical dimensions supersede personal or emotional dimensions. In execution, the engagement of senior managers and the entire team is vital. A rational plan should be put in place, but the soft factors of engaging, motivating and uniting people around certain goals and objectives are truly important. For this reason, one of the board’s primary functions is to thoroughly assess the quality of the management team and its ability to engage employees to implement strategy.
The experiences of Cellnex, Unilever and Amadeus also reveal that top managers lead by example by connecting emotionally with employees and engaging them to positively contribute to strategy execution. Planning, inspiration and engagement are indispensable for success. Paul Polman worked hard with his team at Unilever to improve organizational effectiveness. He understood that purpose was central to this effort, but that Unilever had to deliver economic results as well.
The inspiration that arose from the firm’s purpose and values was critical for improving operational efficiency and boosting gross margins in lagging business units, which were slightly below the best-performing firms in their industries. Unilever derived 60 percent of its revenues from foods and beverages and 40 percent from personal care. Polman reorganized the company around four core business units in order to streamline the company and make it more functional: personal care, home care, foods and refreshment. He also moved away from regional structures and created eight major geographical areas.
The leaders of Unilever’s business units and geographies reported directly to Polman. With the reorganization, Polman introduced changes in the values of managers, making them more accountable and entrepreneurial, with a stronger growth orientation. He also renewed the leadership development process by promoting younger employees to key positions, including more women and managers based in emerging countries. He also changed the management performance assessment and rewards system. He pushed for innovations to develop the company’s leadership pipeline, including special educational and development programs for a large number of managers. These initiatives focused first and foremost on the leadership qualities the company would need in the future.
In order to speed up transformation, Unilever launched a new Connected 4 Growth (C4G) program in 2016. Its aim was to improve the organization and make it more agile, faster and more competitive, with an emphasis on four major areas: lowering costs through “Zero Based Budgeting”; simplifying structure and processes; stronger innovation by making products and brands more global and local; and engaging people. In particular, a core objective of C4G was to inspire Unilever employees to think and behave more like entrepreneurs and business owners, and give them greater leverage to experiment with new ideas and promote innovation.
In addressing strategy issues, the board should always remember that strategy implementation is above all a question of people working with people. The CEO and top management team have full responsibility for this function. The board should not replace the CEO in this crucial role, but should ask the CEO material questions to understand the management team’s approach, which could make the difference between success or failure. The board should not dictate the CEOs’ strategy execution, yet should collaborate with him or her to ensure that critical dimensions and risks are taken into account. Board members’ expertise, wisdom and prudence in these areas are truly relevant for the success of strategy execution.
3.3.2.5 Strategy and the Persistence of Performance
A central question regarding the firm’s strategy relates to how persistent the company’s business model and financial performance are. The board needs to understand the competitive dynamics at play in the firm’s industry and the sustainability of its positioning and financial performance. Multiple forces shape the dynamics of competition. Pricing is one of them. Yet the experience points out that the game-changers in any industry arise from strategic investments for new products or services, innovative business models or a combination thereof. Strategic investments with a degree of irreversibility define dramatic changes in industries (Ghemawat, Reference Ghemawat1991). The emergence of platforms that connect buyers and sellers of products and services, often without direct links to the assets being traded, perfectly illustrates the disruptive impact of some investments (Cusumano, Gower and Yoffie, Reference Cusumano, Gawer and Yoffie2019). Board members should be cognizant of the disruptive powers of new emerging companies and technologies.
Economic performance may deteriorate as a result of external or internal factors (Ghemawat, Reference Ghemawat1991). The external factors that negatively impact the dynamics of performance are: the threat of imitation and competitive dynamics – in terms of pricing, product quality or product variety – the threat of substitution by new entrants or incumbents that introduce disruptive new models, products or technology, and the holdup of cash flows by some suppliers or other partners. The internal factors that can decrease performance are related to operational inefficiencies or lower productivity.
A stress test on strategy should be carried out periodically and the board can play a very important role in it. The board of directors should ask the CEO and senior management team questions about the sustainability of the firm’s current strategy and position, the risks of disruption, substitution and imitation and the potential deterioration of performance because of organizational ineffectiveness. The board’s function in strategy is not limited to approving or supporting strategic decisions but to continuously and collaboratively engaging the management team to offer fresh perspectives, challenge assumptions and assess risks.
Mapping risks at the board level is also critical. The sustainability of a strategy may be jeopardized by operational, competitive, financial, strategic and external risks, as evidenced by recent trade wars and the global pandemic. Boards should consider and include them in their reflections on strategy.
3.3.2.6 Adaptation and Transformation
The firm’s performance and its sustainability are vital issues for boards of directors and CEOs. The many forces shaping the business world today – digitalization, consumer behavior shifts, and slowing globalization among others – point to the urgent need for change and adaptation. It does not matter how successful the firm has been in the past. The future will probably require different business models and capabilities to serve customers well. The selection and design of a new business model is a mainstay of strategy. The CEO and senior management team are responsible for its design and development yet the board of directors also plays a critical role.
Modifying the business model to adapt to new realities is always complex. As Govindarajan and Trimble (2011) discuss, firms need to manage the present, forget the past and create the future. Cognitive capabilities tend to emphasize the past and the present and downplay the future. But good governance and professional boards of directors need to work with the senior managers to forge their company’s future, as illustrated by the experiences of Amadeus, Cellnex and Unilever, among others.
An effective board of directors needs to articulate several important perspectives regarding the firm’s transformation, a topic explored in greater detail in Chapter 4. The first relates to anticipating and understanding why the current business model may not be sustainable in the near future. In this instance, the sooner the board convinces the CEO, the better. The second is to work with the CEO to develop a shared perspective on the core components of the new business model and specific steps to move from the old to the new, with the requisite performance indicators to effectively monitor the transition. The board needs to ensure the proposed change is coherent with the firm’s purpose. The third is the clarity of goals and actions to be taken. The fourth is managers’ accountability with the execution of the strategy and its associated action plans. The fifth is consistent and coherent communication with shareholders, which should run in parallel with that of the senior management team in transmitting the firm’s goals, strategy and decisions with employees, customers and other stakeholders.
The various building blocks of the strategy road map combine systematic observations of good boards of directors in action and theoretical notions from the field of strategy. This road map aims to help boards of directors become active decision makers in strategy issues, working in alliance with the CEO and top managers while leaving the company’s management in the hands of the CEO.
3.4 The Strategy Process: The Role of the Board of Directors and Board–CEO Collaboration
The role of the boards in strategy requires board members with high levels of competency and expertise, as well as a deep personal involvement and commitment to make it work. Unfortunately, these qualities are not enough for boards to effectively contribute to strategy. The board of directors should do its utmost to respect the functions entrusted to the CEO and senior management team in guiding the company’s strategy. In view of their close contact with customers, competitors and suppliers, senior managers are better positioned to observe trends, challenges, opportunities and threats. The board would infringe upon the domain of top management if it did not allow the CEO to effectively carry out this role.
At the same time, the board should support the management team in other ways. The board of directors should make sure its perspective aligns with the company’s reality; ensure top management can wisely and prudently define and execute the strategy; confirm that the assessment of the firm’s capabilities is reasonable; verify that the firm is taking into account industry shifts and external changes; and assure that its projections and forecasts do not reflect an overestimation bias.
Beyond its monitoring duties, the board of directors serves as an expert advisor to the senior management team. It should pose the right questions to the CEO. It should challenge the assumptions made by top managers. This role requires the knowledge and expertise to effectively assess the quality of the management team. The board should act as a good steward of the firm’s resources and capabilities. It should serve as an advisor to the CEO and senior managers, who find in the board not only supervisors but mentors willing to help them execute the company’s strategy.
The next two sections underscore the collaborative relationships between the boards, CEOs and senior management teams that I observed at Amadeus and Unilever. The summaries of the extensive interviews conducted over the years with the CEOs and top managers of these companies are available in Masclans and Canals (Reference Masclans and Canals2020) and Canals (Reference Canals2019), respectively.
3.4.1 The Collaboration between the Board and the CEO in the Strategy Process
The collaborative nature of the board of directors–CEO relationships at Unilever and Amadeus was particularly insightful. At Unilever, Paul Polman was convinced of the need to collaborate and work closely with the board on strategy and strategic issues. As he shared,
[t]he long-term development of the company depends very much on a good strategy and its execution, so directors should spend a lot of time working on this area, understand the different issues well and provide useful insights and advice. In addition, board directors need to understand the company’s overall objectives, its general direction, how well it is currently performing, and how it can win
Polman thought the CEO and the board of directors – not shareholders – should own the firm’s strategy. They should understand it well, routinely discuss it in depth, be convinced about it, unite their people around it and sell it to shareholders. According to Polman,
[s]ome CEOs have become too dependent on shareholders on deciding the firm’s strategy. You need to pay attention to them, but strategy is a basic function of the CEO, who needs to work with the board of directors. It is also important to remember that there is not one individual shareholder. Large companies have a diversity of shareholders, with different views and perspectives on strategy. Each may have different expectations and goals, not only about economic profitability. It is impossible to follow all their recommendations or to change strategy every time shareholders tell you to do so. You need to own your strategy and make sure that it is in sync with what reasonable investors who understand the company actually expect
During his first years as CEO, Polman spent considerable time with the board of directors to discuss Unilever’s strategy and the Unilever Sustainable Living Plan (USLP). He and his team developed a business model that captured the core dimensions with an impact on stakeholders – customers, employees, shareholders, suppliers and society – and grounded it on a commitment to perform well. This was his way of convincing investors that people and sustainability should be put at the heart of the business model. He also traveled extensively to educate investors about Unilever’s strategy, the Unilever Sustainable Living Plan and its intersection with customers, product innovation, sustainability and performance.
The boards of Amadeus and Unilever developed a series of procedures to address strategic issues (see Table 3.1). I present my own summary of these practices. The first is the board’s commitment to dedicate time in every single board meeting to analyze and discuss and offer feedback on strategy and the strategic proposals of top management, including important strategic decisions. Boards often allocate an inordinate amount of time to compliance and simple information issues, to the detriment of strategy and strategic decisions. The second is to periodically review the strategic issues that board members should understand and judiciously share their views with the CEO. The third is the regular review of the firm’s strategic plan. This is a very useful construct for framing deep conversations on strategy between the CEO and senior management team and board members. These conversations are vital to help board members genuinely understand the firm’s challenges and strategy. Board members also help the CEO and senior managers challenge their assumptions and improve their models and proposals.
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The fourth practice is to spotlight a horizontal issue – sustainability, globalization or technology, for instance – in every board meeting, even if the board is not yet ready to make any decision. Boards need to create a space for dialogue and reflection on these fundamental issues and their potential impact on the firm. In many cases, the board welcomes external experts to share their views on the chosen topic.
The fifth practice is providing the board with a holistic reporting system that comprises both financial and nonfinancial variables like the one Unilever developed for the Sustainable Living Plan. This is a critical facet of strategy. Just as in financial reporting, nonfinancial reporting should include key indicators – both qualitative and quantitative – that reflect the company’s situation along core dimensions: people, leadership development, customer satisfaction, environmental impact and R&D.
The sixth practice is an annual strategy retreat with the board and senior management team to explore new strategic challenges. This meeting offers the board additional time to better understand the firm’s strategy, as well as the level of execution of its diverse actions and policies. It could also be combined with visits to the firm’s subsidiaries, operations and customers in its core markets. These summits also give CEOs the opportunity to have lengthier conversations with board members to answer their questions and concerns, better understand their views and forge consensus on strategic decisions and future directions.
3.4.2 The Collaboration between the Board and the CEO in Strategic Decisions
As mentioned earlier, when the Amadeus board was debating whether to acquire TravelClick, its main concern related to the smooth integration of both firms, not the deal’s financial aspects. In this way, the board underlined its concerns about the operation’s risks and offered insights to hone the company’s integration strategy. The board’s emphasis on people, culture, customer service, organizational processes and team integration varies greatly from what typically occurs in board discussions on strategy decisions, when financial issues overshadow other facets.
The boards of Amadeus and Cellnex highlight interesting practices and reflections on the strategy process and the board’s role in it (see Table 3.2). The first is to help the CEO and top management team evaluate and prepare a comprehensive analysis of the major decisions and present them to the board for a deep discussion with board members. Preparing for board meetings with high-quality and comprehensive information is the first step toward ensuring a good debate at the board level.
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The second is to make sure that board members understand the nature of the decisions, their fit in the firm’s strategy and the expected economic, organizational, competitive and human impact under different scenarios. The CEO and his or her team should help the board understand the potential implications of key decisions beyond financial performance. In particular, the board should understand the effects of these decisions on the firm’s capacity to grow and develop in the long term.
The third is the need to keep the firm’s focus on customers when making major strategic decisions. Customer service is a clear source of competitive advantage for companies. It is too easy to compromise customer service via decisions that seem to improve efficiency but end up decreasing the customer experience. Good boards understand the firm’s customers and their reasons for buying its products or services.
The fourth is to focus the discussion on the human, behavioral and organizational dimensions of the decisions, including their impact on retention, integration and motivation of key people. This is a fundamental shift from a purely financial analysis to a more comprehensive review of major strategic decisions and their execution. Amadeus’ board, when acquiring a software company specialized in a customer niche different from its own, encouraged its CEO to devise a plan to effectively integrate and retain the team members of the acquired company in order to continue serving its clients.
The fifth aspect is to assess how a major strategic decision might affect the firm’s purpose, culture and values. This reflection may be grounded more on qualitative dimensions than quantitative predictions and cause doubt among board members. Despite the uncertainty, board members’ reflections on these dimensions and their careful consideration by senior management are strong indicators of their professionalism and commitment to the firm’s purpose and long-term development.
The sixth aspect is the need to understand the expectations and reflections of key shareholders in this process. In the end, the board’s behavior and attitudes show that board members took their responsibility of monitoring management and duty of care in their board functions very seriously, beyond financial performance and economic indicators. In this respect, the collaborative nature of the work between the board and CEO was essential to achieving this outcome and reveals a patently clear pathway on how boards of directors can boost their effectiveness in a highly uncertain world.
3.5 A Typology of Board of Directors’ Approaches to Strategy: Board–CEO Collaboration
This section examines a typology of boards of directors in addressing strategy according to two essential criteria: the role of the board of directors and the role of the CEO and top management team in deciding the firm’s strategy. The relative influence of each decision maker – the board of directors and the CEO – is also shaped by the level of collaboration between the board and the top management team. The relative influence of boards of directors and CEOs in shaping and determining the firm’s strategy is not only indicative of the balance of power between these decision bodies; it also has a clear impact on the quality of corporate governance. This section uses the cases of Amadeus, Cellnex, Deutsche Bank and Unilever to explore this dimension.
The strategic decisions faced by Unilever’s board in February 2017 in dealing with the Kraft Heinz bid shed light on the different degrees of involvement of boards in defining the firm’s strategy. Under the leadership of its chairman, the Unilever board of directors had been deeply and proactively involved in the firm’s strategic decisions over the years, as evidenced by their understanding and support of the Unilever Sustainable Living Plan. Although the plan originated from CEO Paul Polman and his management team, it was discussed, debated and approved by the board of directors.
The Amadeus and Cellnex experiences also point to the importance of the collaborative nature of work by the CEO and the board of directors in dealing with strategy issues. Through this collaboration, decision makers in both realms can work together to define and execute more innovative and successful strategies. The Deutsche Bank case points to the other end of the spectrum: powerful CEOs who controlled the strategy process for years and a board of directors – the supervisory board, according to German corporate law – unable to help define a credible strategy. This difficult collaboration between the bank’s top management and board of directors also added complexity to strategic change.
Boards of directors and CEOs need to work together and interact effectively in strategy and strategic decisions. They serve as the company’s highest governance decision makers. A solid understanding of their distinct roles is context specific, depending on the firm’s country, industry, ownership structure and strategic challenges. The board and the CEO should fully understand the nature of the firm’s challenges and realize that generic solutions to organize their collaboration do not exist. Each board needs to find its own solution.
This section presents a typology of boards of directors’ involvement in strategy (Table 3.3). The emerging types of boards reflect the diverse degrees of commitment and engagement of board members and CEOs in the strategic decision-making process. The profiles of boards regarding their role in corporate strategy may be summarized as passive boards, interactive boards, strategy-shaper boards and collaborative boards.Footnote 10
Table 3.3. A typology of boards of directors’ and CEOs’ involvement in strategy
| Strategy: CEO and Senior Management Engagement | |||
|---|---|---|---|
| Low | High | ||
| Strategy: Board of Directors’ Engagement | Low | Passive | Informative/Interactive |
| High | Shaper | Collaborative | |
3.5.1 Passive Boards
The first board profile regarding strategy is the passive board. This profile presents low board engagement in strategy and limited initiative by the management team to explore strategy in depth with board members. It is a profile adopted by many boards when approving strategic plans, one of simple compliance. In this profile, the CEO develops the strategic plan with top management and presents it to the board, which eventually approves it following some discussion. But neither the work of the CEO nor that of the board in this area suffices to offer a sense of long-term orientation. The Deutsche Bank board after the 2008 financial crisis exemplifies this type of board.
Many boards still operate as passive boards. Passive boards may fulfill their essential functions and comply with laws and regulation. They may meet basic compliance issues, such as giving their approval to strategic decisions or strategic plans. They ensure processes are followed in different areas. Nevertheless, these boards are not very active in helping the CEO and top managers think about the broader questions that could impact the firm and its future. Their long-term horizons regarding shareholders and other stakeholders tend to be narrower in focus, perhaps because the firm has a dominant shareholder who makes all major decisions or because its ownership is so dispersed that no single shareholder wields enough power to improve the quality of decision-making.
Boards of directors with this profile are not overly engaged in discussions and debates on important strategic issues. The explicit reflection on the firm’s long-term evolution is absent from board meetings. This is a critical weakness of this type of board, especially when companies face serious competitive challenges. Competent boards can play a vital role in exposing the top management team to new perspectives.
3.5.2 Informative/Interactive Boards
The second profile of boards regarding its involvement with strategy is the informative/interactive board. This type emerges in a context where the board is not particularly involved, and the top management team is more active and entrepreneurial about strategic initiatives. The board asks questions, suggests issues for the CEO to ponder and eventually approves the strategy.
This board profile emerged among companies that took governance seriously following the new corporate governance codes of the 1990s. In these boards, directors are doing a competent job but the atmosphere of board meetings and interaction between board members and the CEO do not foster deep engagement on strategic issues. This board profile occurs as well in companies where the CEO is also a key shareholder or closely aligned with one. In these cases, CEOs may consider themselves in complete alignment with shareholders and do not consider the board’s role to be irrelevant beyond its legal obligations or advice on concrete business areas.
The interactive board is one step further in terms of board involvement. It requires competent board members who ask relevant questions and offer additional insights into top management’s deliberations. In this case, either the board chairperson or the board’s tradition and culture demarcate the limits on board members’ involvement in strategy and the time delegated in board meetings to these discussions.
A good CEO can use an interactive board as a sounding board to gain new perspectives or deliberate long-term questions. The problem is that the board is not actively involved in reflections on strategy. In this profile, strategy is still essentially the responsibility of the top management and the board plays a limited role in forging the firm’s long-term orientation.
3.5.3 Strategy-Shaper Boards
The third board profile is the strategy-shaper board. This board requires board members with relevant business experience, a competent chairperson capable of managing active board members and a forum that allows every issue to be discussed in an open, challenging way. This board tries to reinforce its involvement in strategy through its work with the CEO, and, in some cases, supplants the CEO in this role. Top management may have the right level of professional competence, but in this case, boards are more powerful for historical reasons, the presence of large shareholders in the firm’s governance or the personalities of the chairperson and board members.
This is the case of companies whose dominant shareholders are private equity or venture capital firms (Garg and Eisenhardt, Reference Garg and Eisenhardt2017). Entrepreneurs are helped and supported by a few experienced investors, who get involved in the firm’s strategy. It is also the case of family owned firms when family members with deep company and industry knowledge relinquish their executive functions and adopt a significant supervisory and mentoring role as board members. Their experience and position as large shareholders may be particularly useful in a turnaround or transformation process. Finally, it is also the case of companies where one or several activist investors control part of the firm’s equity and become important drivers of the firm’s strategy by supporting the appointment of a new CEO or board members.
In some industries, business models should be designed, tested and implemented quickly. In this context, board directors’ experience in other industries – such as technology or capital markets – can be useful in forging strategic decisions and cultivating positive interaction with the top management team.
In these cases, the board takes a more active role, shapes the strategy and suggests specific strategic actions the CEO should follow to help the company excel in the long term. This profile requires deeply involved board members but runs the risk of senior managers playing a secondary role and an overdependence on the board for strategic decisions and orientation. The desired balance between the board of directors and the CEO may be broken here, and the board may overextend its reach if it does not sufficiently rely on the CEO and senior management team.
3.5.4 Collaborative Boards
The fourth profile is the board that actively collaborates with the CEO and senior management team on strategy issues. As in all good partnerships, both the board of directors and the CEO and top managers bring different capabilities and experiences to help develop the company in the long term. Each company needs to redefine this partnership over time, within the boundaries of the corporate legal system and company bylaws.
The collaborative profile involves intense and productive cooperation between the board and the top management team. This is the case observed in Unilever, Cellnex and Amadeus. There are several clear advantages of a collaborative partnership in strategy. The first is that it places the primary responsibility of strategy and strategic decisions on the CEO and top management team.
The second is that it also fosters positive cooperation between the board and top management, with the shared understanding that both bring complementary capabilities and experiences to the firm’s governance. If well managed, the depth and diversity of skills and capabilities are always opportunities, never obstacles.
The third is that the CEO and the senior management team have a partner – the board of directors – that is removed from the company’s daily operations to discuss and reflect upon the firm’s long-term strategy. If the board composition is diverse, with competent and committed board members, the outcome of these discussions will likely be even richer. The fourth is that its enables the board to better understand the company, its industry and its challenges. It also gives the board a deeper sense of ownership of the firm’s strategy. Board members – not just the chairperson and the CEO – are able to better understand strategic issues and articulate a stronger response amid an unexpected crisis, such as Kraft Heinz’s unsolicited takeover of Unilever. It is exceedingly difficult for board members to feel true ownership of the strategic decisions required in urgent situations, unless they are highly knowledgeable about the firm’s strategy.
This approach also considers the principles of subsidiarity and delegation, which are crucial in any organization. Based on this tenet, the functions and tasks assigned to an individual or intermediate unit should not be carried out by individuals or units in higher positions within the organization. It is a principle of both organizational effectiveness and respect for the initiative and freedom of everyone working in the organization. It also ensures that organizational decision-making rights are allocated to people who are closer to the problems and challenges, and consequently better informed on them.
When the board of directors and the CEO work in a collaborative partnership, with mutual respect for their distinct professional duties, they help generate a culture of trust inside the company that gradually permeates the entire organization. And a positive, integrative culture also helps foster creativity, innovation and employee engagement. A positive culture promotes employee integration and cross-functional collaboration is a source of strength for any organization.
Finally, the collaborative model for boards of directors has implications for shareholders. It expresses the board’s commitment to thoroughly understand the company, its business and its industry, as well as its people and core capabilities. It expresses the board of directors’ intent to work with the CEO and the top management team. It also shows its willingness to share financial indicators and other relevant issues with shareholders, as well as engage them in the firm’s purpose and aspirations. The model of the collaborative board better responds to the concerns of impact investors, who seek additional performance indicators and attributes in the companies they invest in beyond financial returns.
This model is particularly useful in times of organizational flux or industry transformation, when boards observe the approaching obsolescence of old paradigms and lack of clarity regarding new pathways of competition. A compelling strategy is necessary, both to provide managers and employees with a sense of direction, as well as to explain the company’s new course to shareholders.
The collaborative model also offers boards a positive and constructive way to dissuade activist shareholders from attacking the company with proposals that may create short-term gains but whose long-term benefits are uncertain. For companies, one of the most effective ways to avoid problems with activist shareholders is to ensure they have a highly active and competent board of directors that understands the business well and works closely with top managers to steer the company toward long-term value creation. According to many targeted companies, activist investors found an entry to influence their strategic orientation simply because the board of directors was remiss in this responsibility.
It is easy to blame activist shareholders for the failure of these companies. However, in all probability, these activists would have never acted if the companies and their boards had a clearly defined strategy for sustainable value creation. Companies’ mediocre economic performance and low share price reflected either lackluster strategies, deficient strategy execution or both. It is a firm’s lack of strategic direction, passive board of directors and inability to explain strategic decisions to investors that eventually draws the attention of activist shareholders.
3.6 Final Reflections
Good corporate governance requires boards to deal effectively with strategy and enhance the quality of strategy discussions through holistic frameworks. The complex nature of strategy, coupled with the need for collaboration between the board and the CEO, poses a challenge for companies. The corporate law tradition and its focus on the duty of care and oversight of top management offer some useful reflections. Strategy fits well within the context of the board directors’ duty of care, but offers few guidelines on its wider implications.
The corporate finance tradition offers evidence on the impact of major strategic decisions like corporate diversifications or M&As. The shareholder value maximization goal is a prevalent theoretical principle in finance but difficult to implement in the real world in view of top managers’ bounded rationality, the need to define time horizons and the premise that not all shareholders are equal; they reflect different preferences and expectations. Even if shareholder value maximization was considered a good indicator in concrete circumstances, it would still not replace the strategy and strategic reflection process, essential to defining the firm’s value proposition and ability to create sustainable long-term value.
With some exceptions, the strategic management tradition and complementary perspectives on business strategy fail to address strategy at the board level. Nonetheless, the research and practice of strategy offer useful perspectives on how boards of directors can approach strategy and strategic decisions and, more importantly, how a culture of collaboration can be nurtured between the board and the CEO and top management team.
In this chapter, I offer boards of directors a strategy road map to help them contend with strategy and strategic decisions. I also highlight dimensions of the strategy process for boards to consider. Several principles are useful in helping boards of directors work on strategy. The first is ensuring members have deep knowledge of the company’s strategic challenges. The second is the reflection and discussion of these issues among board directors, the CEO and other members of the senior management team. The third is the quality of the issues raised, the questions posed and the reflections shared in these sessions. The fourth is a spirit of true collaboration between the board and the CEO.
Business strategy involves both content and process. The board’s work on strategy requires professional competency in the deliberation and formulation of strategy. The board should also have knowledge of the strategy process, methodologies followed, involvement of senior managers and the sequence of events for execution. Robust strategies require effective implementation: The company needs a positive board culture and fluid collaboration between the board and CEO, who will execute the board-approved strategy and suggest adjustments if needed.
With an anchor in the strategic management tradition and clinical evidence of some companies that excelled through a combination of good governance, solid management and long-standing sustainable economic performance, I observed four basic profiles of boards of directors in dealing with strategy: the passive board, the informative/interactive board, the strategy-shaper board and the collaborative board. The categories are not clear-cut. In the real world, there are surely combinations of these four profiles.
Each board needs to adopt its own profile and define its role in strategy and strategy-making, as well as its relationship with the CEO and top management team. Today’s global uncertainty and disruption have exerted a profound effect on companies worldwide, spotlighting the importance of the board of directors in the firm’s strategy and long-term orientation.
