This week, we’ll continue our discussion of strategic oversight by exploring the Purpose, which is the actual formulation, evaluation, and approval of your strategy.
There is a lot of important information here and I’m condensing it drastically to fit in a newsletter. If you want more information on any of these topics, just let me know, and we can have a conversation about how this can help you grow your business.
Figure 130.1 Management’s Role
First, let’s review what strategy is. Here is a great definition of strategic success from Steve Reid, a highly successful big company leader and a valued advisory board member: “A company’s success is tied directly to the value it provides to its customers. Customers will always be the ultimate judge of whether a company will succeed or not. Therefore, it is critical to develop a deep understanding of your customer’s business and the value you provide. You can then create different solutions or products from your competitors and deliver a differential advantage that your customers value.
Regardless of the distinctive solutions or products offered, a foundation of operational excellence must be reinforced with best practices in the area of financial management, organizational structure, cost control and quality to assure long term success.
The fundamental principles of good strategy are Deep Customer Knowledge, Competitive Advantage driven by providing distinctive value (not simply being a low-cost supplier), and Operational Excellence.”
It’s the board’s role to oversee the plans, challenge the assumptions, add value and perspective from their broad experience and skills, and finally, to approve management’s plans. This involves art, science, tact, and skill.
Larry Hilworth, a successful entrepreneur, former banker, and valued advisory board member tests the assumptions. “When I evaluate a set of financial projections, the first place I look is to the assumptions. I test the assumptions because I want to see how realistic and conservative management is, and how they’re based in reality. The rest is just numbers.”
- Skepticism – a good board doesn’t just enforce policy and act like a traffic cop, they ask questions based on their broad experience to help management build a better plan and build a better business. I had an auditing professor once tell us to be prepared to answer a question with, “Yes, your honour, I was aware of the situation and the decision.” We want our decisions to pass the test of being in court or being on the front page of the newspaper.
- Would you be more skeptical knowing that someone else—the courts or the media—might be second guessing your decision process?
- Considering that we all have biases in our thoughts and preferences, what biases are driving management to pursue their current plan?
- Does the plan reflect our value to customers, create a competitive position, and demonstrate operational excellence, as per Steve Reid’s advice?
- Have you tested the assumptions, as per Larry Hilworth’s advice?
- Enhance – skepticism, asking questions, and thinking long-term will help you to enhance any plan. The board’s key is to have a positive working relationship with the CEO and senior management team so they see you as valuable advisors and not traffic cops. In privately-held companies controlled by a majority shareholder, it takes a strong board to be proactive, challenge, and improve on a driven entrepreneur’s plans. Yet we are all smarter together than alone. By proactively acknowledging and dealing with the challenges of group thinking and bias, and framing advice in the best interest of others, we can enhance plans that will create value for customers and wealth for shareholders.
- Approve – as a former hockey referee, some of my calls were instant reactions as there was no time to think, only react. Although boards are dealing with limited information compared to management and tight time frames, boards have time to think. Thinking time is made much more effective by developing and following processes. Early in my officiating career, I learned that you get respect for the calls you make, not the ones you let go. It’s the same for a board. They need to approve, or challenge appropriately, for the benefit of the organization. Again, it’s all about the process. The courts will punish you if you don’t follow a process, but they will not question your business judgement if you did follow a process. What’s your process to approve strategic initiatives?
The key of all good governance is for the board to have, and follow, a process to oversee business performance and ensure that it’s aligned with the overall purpose.
If you’d like help on enhancing the strategic oversight function of your board and executive team, give me a call.
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