Professional Documents
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20 Questions Directors Should Ask About Strategy
20 Questions Directors Should Ask About Strategy
Strategy
Second Edition
Author
Dr. Chris Bart, CA
Professor of Strategic Market Leadership (Strategy & Governance)
DeGroote School of Business
McMaster University
Project direction by
Gigi Dawe
Principal, Risk Management and Governance, CICA
20 Questions
Directors Should Ask about
Strategy
Second Edition
658.4012
C2006-901540-6
Copyright 2006
Canadian Institute of Chartered Accountants
277 Wellington Street West
Toronto, ON
M5V 3H2
Printed in Canada
Disponible en franais
Preface
How do directors live up to increasing demands for better governance
ever more aware of the increased personal risk associated with being a
personal issues and risks that directors need to understand and manage. It
its 20 Questions Directors Should Ask series in which this book is included.
focuses on assisting boards and their members to gain better insight into
questions.
The Board acknowledges and thanks the members of the Directors Advisory
Group for their invaluable advice, the author Dr. Chris Bart and the CICA
copies have been distributed of the first edition. Board members have used
including Frank Barr, Michel Doyon, Dr. Parveen Gupta, Fred Jaakson, Colin
Since publication of this book, there has been an increasing interest in the
Lipson, Mary Jane Loustel, and Keith Robson former members of the Risk
Management and Governance Board. Also, James Baillie and Purdy Crawford,
former members of the Directors Advisory Group and CICA staff members
that the RMGB has undertaken a review of the first edition of this book to
ensure it is still relevant and current. We are pleased to find the concepts
and processes continue to be applicable and believe the questions asked and
CICA Staff
a strategic plan which takes into account, among other things, the
opportunities and risks of the business
It is clear that the notion of the boards responsibility with respect to a
corporations strategic plan has become no longer debatable. Moreover,
the Toronto Stock Exchange (TSX) has recently announced that for listed
companies (and non-corporate TSX issuers, such as trusts and limited
partnerships), it now intends to expand the role of the board from its current
mandate of simply adopting a strategic planning process to include the
approval of the strategic plan itself.
But what do these new responsibilities entail? And how should directors
exercise them?
1Beyond
2
Compliance: Building a Governance Culture, Final Report, Joint Committee on Corporate Governance, Nov. 2001.
processes and controls are in place both to manage and monitor risks and to
provide for the smooth, effective and efficient functioning of the business.
With respect to insight, directors are there to add their experiences and
wisdom, not to second-guess management, but to supplement and enhance
executive decision-making. As for foresight, the directors are there to
provide a perspective on the future that helps management identify those
opportunities that are most worth pursing.
Notwithstanding these traditional functions, the role of the board of
directors continues to evolve. Directors today need to be much more
active participants in the high-level affairs of the organization. Further,
they must be constructively involved in the development and approval
of the organizations strategy. One way for this constructive involvement
to be operationalized is presented in Appendix 1. These new divisions of
responsibility require a corporate culture and climate of mutual respect
and trust between the board and senior management. The participation of
directors in strategy must be seen as cooperative rather than adversarial.
to know some
ofIt isthebetter
questions than all
of the answers.
James Thurber
While this question is easy to ask, it is often made difficult by the fact that
various and numerous definitions of strategy abound. As a result, directors
often come to organizations with different and competing versions of the
term. When combined with managements own definitions, there is often
much confusion and conflict as to what constitutes the proper description of
an organizations strategy.
4. What are the internal ethical and cultural priorities that attract
stakeholders to us? The Values Goals
5. What are the specific measures and targets that we will use to judge
our progress in achieving our macro-level vision, mission and values
goals? The Objectives
Peter Drucker
These detailed questions (i.e., 2-6) specify the salient components that
define an organizations complete strategy. As such, boards need to consider
them as a group when seeking to describe the strategy for their particular
organization.
Interestingly, questions 2-6 are sometimes summarized in the more general
While other definitions exist, this latter approach to strategy is one that is
easily understood by any board member or senior officer. It answers the
essential questions of strategy with which every board member should be
concerned:
query of what business are we in? But, experience today suggests that using
such an approach is now perhaps much too vague to gain the sort of insights
that directors are looking for. Nevertheless, whatever approach is taken, it
is vital that there be agreement both among the directors and between
the board and management concerning how they choose to define and
articulate their organizations strategy. This is required in order to establish
clearly which decisions are strategic versus those that are not.
In these latter circumstances, the board should focus its attention primarily
on the corporate strategy. The board should only become involved with
assessing and approving business strategies when they represent major
changes to the overall corporate direction such as, when a new business
is added/acquired or an existing business closed/sold. Nevertheless, it is
still advisable that directors be informed of and review the major business
strategies of the corporation on an ongoing basis so as to better understand
their impact on the whole organization.
The definition of strategy provided above is very robust and covers a variety
of circumstances. It can be used to describe the organizations strategy that is
currently in place or one that is being proposed for the future. It can also
be used to describe two terms which are often used interchangeably but which
sometimes have quite different meanings: business strategy and corporate
strategy. Generally speaking, the distinction between these two concepts
turns largely on the breadth of a companys scope or domain of operations.
One area that most boards should work diligently to avoid is the review,
assessment and approval of the organizations operating plan. This
does not mean to say that directors should refrain from specifying certain
guidelines (such as hurdle rates, threshold levels and/or policy limits), which
will shape and affect the development of the operating plan. Indeed, they
should provide such guidance where appropriate.
10
10. Does this organization have the right strategy and, if not,
what should it be?
While every organization has a strategy (which may be either explicit
or implicit), not every organization necessarily has a good one. Given
the boards responsibility for reviewing, assessing and approving the
organizations strategy, it is incumbent upon them to do their utmost in
trying to make the correct decision.
Joseph Schumpeter
It gives flesh and bones to the overall (i.e., corporate or business) strategy
and typically addresses all of the major functional areas such as marketing,
sales, manufacturing, engineering, R&D, finance and human resources.
Consequently, the main reason why boards generally should not get involved
with operating plans is fairly straightforward: this is what management is
hired and paid to do. Moreover, an organizations operating plan usually
requires the involvement of many functional experts and innumerable
decisions, which typically go well beyond the knowledge, competence
and time availability of most directors. And so, the responsibility for an
organizations operating plan is typically seen as an activity falling outside the
normal governance responsibilities of the board and its directors.
Simply put, strategic planning is the process, which helps establish the
strategy of the organization. It results in a formal, written document which
is referred to as the strategic plan. A good strategic plan sets forth the basis
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upon which the mission, vision, values, and objectives of the organization
were set and establishes why the organizations business arenas
(i.e.,product/market scope and domain) represent the optimal choices
for achieving those targets. It specifies the environmental and resource
assumptions underlying the strategic choices made and the major risks
associated with those choices. Finally, a finely tuned strategic plan lays out
the rationale for all the major organizational arrangements (i.e., structure,
staff, reward and controls) and the changes necessary to implement the
companys overall direction.
Finally, visions, which are explicit, clear and widely shared, have a powerful
and positive impact on internal stakeholder (i.e., employee) behaviours. The
more that individuals throughout an organization are committed to their
visions achievement, the more that this collective spirit serves to reinforce
desired behaviours and focus both individual and group efforts on desired
outcomes. Consequently, it is vital for directors to assure themselves that
their organizations vision is widely known, understood and accepted
throughout the enterprise.
Miyamoto Musashi
12
15. Does the strategy contain objectives which are well formulated
and well stated?
and commitment of that group to the organization and, even worse, goading
them into an attack. This can lead, under extreme conditions, to problems in
organizational survival.
Regarding this last point, detailed organizational objectives are best stated
for a time period of one to three years and revised at the end of each year as
new information becomes available.
13
To what extent (and in what way) are customer needs currently being
met by existing competitors?
To what extent are the organizations products and services significantly
differentiated from and offer a clear advantage over existing
competitors?
Does the organization have the resources, skills and capabilities required
to pursue the growth and profit potential in the business arenas that it
has targeted?
If lacking a competitive advantage or any specific resources, skills or
capabilities, how does the organization intend to acquire them if at all?
What are the major assumptions underlying the choice of each major
business arena?
What are the methods of entry to or exit from the major business arenas
selected (i.e., merger, acquisition, divestment, closure, sale, etc.)?
What alternative business postures (i.e., grow/invest, hold, harvest,
divest, no entry) were considered and rejected for each business arena
(both existing and new)?
When either (or both) of these conditions does not exist, an organization
is faced with the difficult challenge of determining if and how the situation
might be turned around and made more favourable or whether to seek
greener pastures.
Kenichi Ohmae
though, when it comes to execution, i.e., turning the strategy into a reality.
One of the major ways in which execution happens is through the
organizations operating plan. But, directors are generally discouraged from
becoming involved in this area and for good reason (See the discussion
related to Question 9).
14
The board should also be assured that the organization has put in place
a risk management system for measuring and monitoring known risks,
estimating their impact, mitigating their occurrence or effect (e.g., through
insurance, hedging, codes of conduct or assigned risk managers), and
identifying emerging dangers.
18. Have all the significant internal and external strategic risks been
identified, quantified and addressed in the plan?
In the course of developing a strategic plan, there is always uncertainty
around its ultimate attainment. And with uncertainty comes risk,
i.e.,possible events (with varying degrees of probability attached), which
if realized, will have an adverse effect on the organization and interfere
with its ability to either achieve its business opportunities or overcome
organizational weaknesses. The presence of risks can also significantly alter
Monitoring progress
changed. And astute boards will recognize and anticipate the potential
resistance that they may encounter from senior managers as they attempt to
become more involved participants in their organizations strategic decision
making.
Indeed, they have no choice. Boards must now participate in, assess and
approve the strategy. (Appendix 1 lays out one framework in which the
responsibilities for the organizations strategy and strategic planning are
divided between the Board and Senior Management.) But, it is in no ones
best interests if the relationship between the board and senior management
is adversarial especially when it comes to plotting the organizations
future direction.
20. Are the board and its directors constructively involved in the
organizations strategy?
To achieve a state of constructive involvement, one of the first steps that the
board needs to take is to openly and candidly discuss with the CEO (and
other members of senior management) the new governance responsibilities
required from the board in terms of the organizations strategy. Ultimately,
the board and management must come to some new understanding and
agreement as to:
who does what in terms of formulating, assessing and approving the
organizations strategy and strategic plan,
what areas constitute strategic, and therefore, board decisions,
what areas represent operational/tactical or management decisions.
Senior managers need to understand that the boards tasks with respect
to strategy are not being taken because of some lack of confidence in the
organizations leadership. Rather, they are part of the stewardship role
that the board is being asked to perform in order to avoid the two major
governance mistakes of the past, namely, the rubber stamping of major
management decisions (especially the organizations strategy) and the
boards micro managing of the organizations operations.
As boards have taken on their tasks and duties in this area, there has been a
shift in both the role and manner in which they interact with management
especially the CEO. Unfortunately, many senior executives have seen the
boards new strategic responsibilities as incursions into decision areas that
were once strictly within the domain of the executive suite. But, times have
16
17
18
Risk analysis
Major risks (internal and external);
Risk impact analysis e.g., sensitivity analysis;
Risk impact outcomes including best and worst cases;
Risk management/abatement tactics.
Assumptions
Qualitative;
Quantitative.
Additional references
Bart, C.K.
Accepting the Mission, CAmagazine, August, 1999, pp. 33-34.
A Tale of Two Employees, Corporate Missions Inc. Press, 2002.
Industrial Firms and the Power of Mission, Industrial Marketing
Management, Vol. 26, 1997, pp. 371-383.
Lasting Inspiration, CAmagazine, May, 2000, pp. 49-50.
Making Mission Statements Count, CAmagazine, March, 1999, pp. 37-47.
Mission Matters, CAmagazine, March, 1998, pp. 31-41.
Mission Possible, CAmagazine, September, 1997.
Sex, Lies and Mission Statements, Business Horizons, Nov.-Dec. 1997,
pp. 9-18.
The governance role of the board in strategy: An initial progress report,
International Journal of Governance and Business Ethics, v 1, n 2/3,
2004, 111-125.
Whos Running the Store?, CAmagazine, August 2001, pp. 22-27.
Bart, Christopher K. and Bontis, Nick. Distinguishing Between the Board
and Management in Company Mission: Implications for Corporate
Governance, Journal of Intellectual Capital, 4, 3, 2003.
Bart, C.K. and Deal, K. The Governance Role of the Board in Corporate
Strategy: A Comparison of Board Practices in For Profit and Not For
Profit Organizations, Journal of Governance and Business Ethics,
forthcoming, 2006.
Canadian Securities Administrators:
National Policy 58-201 Corporate Governance Guidelines
National Instrument 58-101 Disclosure of Corporate Governance
Practices
De Gues, Arie. The Living Company: Habits for Survival in a Turbulent
Business Environment, 1997.
Joint Committee on Corporate Governance. Report: Beyond Compliance:
Building a Governance Culture, 2001.
Mintzberg, Henry, Ahlstrand, Bruce, and Lampel, Joseph. Strategy Safari:
A Guided Tour Through the Wilds of Strategic Management, 1998.
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Notes
21
Notes
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20 Questions
Directors Should Ask about
Strategy
Second Edition
277 Wellington Street West
Toronto, ON Canada
M5V 3H2
Tel: 416-977-0748
1-800-268-3793
Fax: 416-204-3416
www.cica.ca
Contents
How to use this publication
Preface
Directors and strategy
Questions directors should ask about strategy
In the beginning understanding strategy