From Monitors to Thought Partners: The Board’s Role in Corporate Strategy

Saturday, January 3, 2015 - 11:01

The Editor interviews Raymond V. Gilmartin and Maggie Wilderotter. Mr. Gilmartin currently serves as a director on the boards of NACD and General Mills, and he was formerly the Chairman, President, and CEO of Merck & Co., as well as lead director for Microsoft and General Mills. Mrs. Wilderotter is Chairman and CEO of Frontier Communications Corporation and current Director, Xerox Corp., Procter & Gamble, CED and Catalyst.

Mrs. Wilderotter and Mr. Gilmartin recently served as co-chairs of NACD’s Blue Ribbon Commission focusing on the board's role in assuring that corporate strategies are responsive to market forces. More than 20 experienced directors and governance professionals developed guidance on how the board can better recognize potential disruptors, assess alternative approaches, and recalibrate the strategic plan. The commission's work resulted in NACD’s Blue Ribbon Commission on Strategy Development, and its findings are discussed below.

Editor: The board has always been responsible for oversight of strategy development. What differentiates the recommendations in this report?

Gilmartin: The primary difference lies in recommending a new and higher level of board engagement. This means moving away from the traditional “review and concur” process at annual strategy retreats, which involve detailed presentations about industry developments and the company’s strategies and goals. In my experience, the board’s role amounts to due diligence in assessing management’s understanding of the issues and the proposed strategy. There is some dialogue, but unless something extraordinary happens, the board will approve management’s recommendation.

For NACD’s Blue Ribbon Commission report, we sought to determine how the board should change its level of engagement when a deteriorating business situation requires a recalibration of corporate strategy. Of course by then, it’s often too late for the company to recover on a timely basis, either because the business environment changes or the relationship between the board and the CEO becomes contentious and inhibits constructive discussion about how to move forward.

This led to our first conclusion: start early and be proactive. Why wouldn’t the board’s deeper engagement in industry trends, fundamental assumptions and competitor strategies be a normal part of a company’s strategy development process, rather than being reserved for a year-end strategy retreat?

Editor: It may be helpful to define the term “strategy” as it was used in the report.

Wilderotter: We spent a fair amount of time defining strategy in terms of the options and alternatives available for the corporate strategy, not necessarily the operating strategy. For example, do you grow organically or through a combination of organic and M&A opportunities? Do you go for scale or scope? Are you an acquirer or a seller? Do you change direction on products based upon technology disruption, or do you update your business model based upon changing customer expectations? Corporate strategy relates more to the macro issues, with the operating strategy serving as a supporting annualized plan.

Gilmartin: What emerged from our discussions was a brief definition that we included in the Blue Ribbon Commission report: "Strategy is the means to create economic value by gaining competitive advantage through a unique value proposition."

Editor: What is the role of board composition in this process?

Gilmartin: We recommend including some board members with direct or related industry expertise and others with a broad understanding of the political or regulatory environment. The latter, for instance, certainly is relevant to a financial services company. Be aware, however, that annual meetings involve packed agendas. As a result, the expert opinions of one director may not gain traction simply because a subsequent speaker begins on the same topic but ends on another, thus diverting the agenda. So a related recommendation is to break down the process into separate elements, such as fundamental assumptions that may shift over time or industry trends that create an evolving competitive environment, all of which can be analyzed at smaller committee meetings and better inform corporate strategies. This recommendation accommodates the fact that things are constantly changing, and it allows for discussions that lead to the development of strategies and performance metrics that are responsive in real time, rather than deriving from a process that starts from scratch every year.

Editor: Please talk through some of the sources of change to which corporate strategies should be responsive.

Wilderotter: We live in a dynamic world. Nothing stays static, and there are a number of developments within a company that might not change its immediate welfare but could have major implications over time. Boards need an early warning about potential consequences. A good example is technological disruption. New technology requires time to be operationalized and distributed from a market perspective. Whether it takes six months or a couple of years, boards should be able to recognize the disruption, understand its long-term implications, embrace it proactively and make a plan for the business to move forward.

Another example is regulatory change. My company is highly regulated by the Federal Communications Commission (FCC), which constantly issues notices of proposed rulemakings and other materials. It’s my job to keep our board updated on developments that can have material effects on disclosures, how we go to market or develop and price products, and the nature of our customer relationships and partnerships.

Editor: How should developments like this be communicated within the enterprise?

Wilderotter: It’s not just about informing the board from a management perspective, though that is one valuable point of view. The board should also hear about the implications of change from independent, outside sources. For example, I invited the chairman of the FCC to do a fireside chat on regulation with our board so they could hear it directly from the source. I also brought in Mary Meeker, a top technology player in Silicon Valley’s venture capital space, to provide a two-hour overview for our board on the changing face of innovation on the Internet. Generally, you want to be able to give the board a comprehensive view of what changes could mean to the company.

Editor: Were these external resources happy to provide information and work in a collaborative way?

Wilderotter: Yes, though it depends on the relationships. As the CEO and chairman of our company, my job is to develop relationships with outside experts who can educate the board, and I try to arrange two meetings each year on key topics. Recently, the CEO and chairman of FireEye, Inc., a leading cybersecurity company, met with our board to discuss ways of helping businesses “protect and detect.”

Editor: How can an enterprise implement the Blue Ribbon Commission’s recommendations?

Gilmartin: The first step is to discuss explicitly whether you want change. A casual reading of the Blue Ribbon Commission report might interpret its message as a call to double existing efforts, but our findings actually propose much more radical change to board operations. In my experience, while the Blue Ribbon Commission’s recommendations make sense, directors may resist the idea of getting into the weeds of issues that are traditionally in management’s domain and, therefore, may prefer to continue embracing the traditional review and concur process. Obviously, I join Maggie and our fellow Blue Ribbon Commission members in advocating for a new level of engagement, and we’ve had some positive reaction from NACD members.

In practical terms, this requires reaching a consensus about how to proceed in the context of a relationship with the CEO that fosters healthy debate and leaves everyone comfortable with the outcome. Trust is critical because the process essentially requires management to present “unfinished” work, rather than delivering a fully conceived strategy that receives traditional board treatment.

Engaging the board’s full capabilities and expertise during the design phase has a few implications. First, some directors might consider it too messy when a proposed strategy is not completely buttoned up, which additionally places the CEO at risk of having his or her competency called into question. On the other side, the CEO has to trust that this process will lead to great input, which reinforces the importance of board composition.

Editor: Can you point to a case study that illustrates the plan in action?

Wilderotter: My own company is a good example. Frontier’s board has been actively involved in strategy development for seven years. We follow the best practices Ray mentioned and review a subset of our strategic plan at board meetings throughout the year. As a board member at Procter & Gamble and Xerox, I know both companies follow similar strategy reviews. 

An example of how active involvement in strategy has been positive for Frontier is the $2B acquisition of AT&T’s Connecticut wirelines completed in October 2014. When this opportunity came up, our board had recently re-affirmed our commitment to grow organically and through scale acquisitions that fit our criteria. We didn’t have to start from scratch to “decide” whether the acquisition was aligned with our strategy; we already knew it was. This enabled the board to focus on whether it was the “right” acquisition versus any acquisition at all. So we’re seeing increased adoption of this strategic shift in board dynamics with engagement that reaches well beyond the traditional monitoring and approval functions. 

Editor: How does NACD help promote this process for its members’ companies?

Wilderotter: NACD is a great source for information, either to validate a chosen direction for the board or to offer a fresh or unexpected point of view, and their Blue Ribbon Commissions are one method for delivering productive input. NACD gathers a diverse group of folks who sit on boards, are active shareholders, or even bring an academic perspective. Then they publish a thought paper, just as we’ve done on recalibrating strategy, which members can digest and decide if it makes sense for their companies.

NACD also puts together panels on Blue Ribbon Commission Reports at conferences and local roundtable events where directors can have deeper discussions on the topics with peers from other companies and exchange ideas about how to execute against this kind of a report.

Editor: What is needed from the board and management?

Gilmartin: The board should bring a spirit of inquiry, the desire to get involved and the willingness to pitch in. Fundamentally, the report’s recommendations require that boards drop the attitude that an executive summary is sufficient, and we suggest that management approach board composition with the specific goal of assembling the relevant expertise, perhaps recruiting an industry or strategy expert or even an academic.

Editor: Give us some final thoughts to close the discussion.

Gilmartin: I’m a new member of NACD’s board. I joined just prior to the opportunity to co-chair this Blue Ribbon Commission and have now participated in NACD's Master Class and its global conference. I remain enthusiastic about being a part of an organization that really understands board priorities and cutting-edge issues, such as cybersecurity and engagement with institutional investors. The Blue Ribbon Commission reports offer expert analysis and, above all, new approaches to enhance board effectiveness.

Wilderotter: As I mentioned earlier, we spent a lot of time on “words” for this Blue Ribbon Commission report. The concept of “constructive engagement” is a really good one because accomplishing the kind of shift we’re proposing of necessity means changing the relationship between a CEO and his or her board. I’d like to reinforce Ray’s comments and say that our message to CEOs is this: look, in the past, strategy had a ribbon and a bow on it when you brought it to a board. Adopting our recommendations means presenting strategic options that aren’t fully formed and being open to dialogue and interpretation, which implies relinquishing some control. It’s important that the board make clear “We believe that this does not reflect negatively on your leadership as CEO, but rather is a reflection of times that require boards to be more active in strategy development.” In essence, boards have an obligation to participate differently than before. 

For further information on NACD’s Blue Ribbon Commission on Strategy Development, please download the report at NACDonline.org/strategy.