Strategy Development – Time for a New Dynamic in the Boardroom

Unitary boards are the preferred approach for public interest entities, with executive and non-executive elements. This model is seen as offering advantages over the continental dual board approach, where supervisory and management responsibilities are separated. However, the unitary board has its problems, especially when it comes to strategy development.

The unitary board ecosystem gives the job of strategy development to the executive, with the main board reserving an ‘approving’ role. I have my own views on this (I am against a heavily siloed approach), and there is an emerging boardroom appetite to soften these boundaries wherever possible. But there is always a technical and ethical tension – are we right to soften the boundaries, and how far can we go without falling foul of investor expectations and governance codes?

This article gives a reasoned (and I hope compelling) set of arguments to give confidence for boards to take a more ‘team’ approach to strategy development.

Origins and hangovers

The unitary board gained meaningful traction in the 1970’s USA. It was scandal-led; the primary trigger being the failure of the Penn Central Railway. Theory and conventional thinking then began to evolve around the clear separation of powers into management and monitoring responsibilities. By combining these into a single board, the idea attempted to gain the benefits of the Germanic dual board approach, while not interfering too much with the Anglo-US concept of collective responsibility.

In the UK, while unitary boards were widespread, the model became codified following the 1992 Cadbury Report. As with the USA, the Cadbury Report was led by scandals and low confidence in UK corporate governance.

The world has changed and so has thinking about how to get the best out of the boardroom.

The central purpose of the model is therefore clear: it is primarily about control and prevention, not performance and innovation. Since 1992, the world has changed and so has thinking about how to get the best out of the boardroom. But we are still shackled by the hangover of past indiscretions in the way boards operate.

Beyond its core function of control and prevention, unitary boards serve several secondary purposes, each holding varying significance. These include safeguarding investors, enhancing the objectivity and quality of decision-making, rectifying power imbalances, and promoting accountability. The latter drives the separation of strategy between development and approval, and it is this aspect that I will challenge to build a case for change.

A compelling case for a team approach to strategy development

So, how can boards reframe their thinking? Here are some of the main arguments for rebalancing the control and prevent imperative with a new perform and innovate objective.

Deferring strategy development often yields unsatisfactory outcomes

The unitary board still has collective responsibility – legally and morally – for corporate success, and therefore strategy. Too much autonomy disenfranchises the board as a whole. Boards deferring to the executive on strategy development should not sit well with investors or the public.

Deferring strategy development to the executive has yielded variable to unsatisfactory outcomes. Scandals and failures continue to mar the corporate world, and the increasing complexity and uncertainty in business demand a more collegiate approach. Continuing the exclusive delegation of strategy development to the executive is likely to lead to more failures, not fewer.

Forced exits are signposts that something systemically is not working.

Backing-up this point is the rising trend of forced CEO exits. Globally, CEO turnover rates have worsened since 2018, last year standing at 11.2%. It is estimated that as many as half of these exits are forced. Forced exits are signposts that something systemically is not working. The worsening picture for CEOs signifies that deferring strategy development is part of that picture.

Replacing the CEO is unlikely to work

Firing the CEO cannot be seen as a good outcome for the organisation or the board. Studies by PwC indicate that CEO churn often fails to enhance organisational performance. The chance of improving performance by replacing a CEO stands at a mere 25%. In another 25% of cases, a new CEO makes the situation worse. It is clear that the reasons for an organisation’s underperformance often run much deeper than the CEO.

CEO exits are usually negotiated

CEO exits are usually triggered by a range of issues that persist until a point is reached where overall confidence is lost. There are more clear-cut situations, such as misconduct or governance failures, where a CEO’s position is untenable. However, most reasons are more subjective – boardroom disagreements, leadership or management weaknesses, market underperformance and investor pressure, and the unsatisfactory execution of strategy.

There is no point in losing the potential benefits of a more collegiate approach to strategy development by holding to a strict separation of responsibilities.

In these cases, how strategy was developed and who led it are miles away from the settlement discussions. Accordingly, there is no point in losing the potential benefits of a more collegiate approach to strategy development by holding to a strict separation of responsibilities in this area.

The role of the CEO is evolving

In more recent years, the role of CEO has evolved from that of an all-powerful guru to a collaborative team leader. This evolution questions the longstanding assumption that CEOs must always bear the brunt of accountability.

With accountability comes power

The flip side of holding the executive to account is power, allowing the executive to exert control over the process of strategy development and, ergo, the strategy itself. Boards often take a semi-structured approach to strategy development, staging periodic ‘tell and consult’ sessions as the strategic plan evolves. This has the benefit of keeping the independent directors engaged and on-board. However, because these sessions are often heavily orchestrated, the role and contribution of the independent directors is constrained.

The wider lens of the independent directors and the deep knowledge of the executive are equally important.

What is good in the view of the executive may not be the best for the organisation. While the executive is closest to an organisation’s markets, customers and business model, it often has a narrower view and a shorter horizon than independent directors. The wider lens of the independent directors and the deep knowledge of the executive are equally important.

Why a new relationship within the board is overdue

Having argued that the accountability objective of a unitary board has little practical benefit when it comes to strategy development, what is the alternative and what are boards missing?

The alternative is a revised relationship where there is a one-team mentality when it comes to strategy development. Accountability must also be renegotiated so that responsibility for strategy development is shared more widely with the board and the wider executive. If things go wrong, this rebalancing will itself promote more time for understanding the drivers of underperformance that often go much deeper within the organisation. If the CEO must be replaced, then PwC’s research suggests there will be a better chance that the organisation will make a successful selection.

Boards work best in a climate of trust, collaboration and innovation. The quality of any kind of collaboration is heavily affected by the intentions of the group. ‘Telling and consulting’ is unlikely to access the deeper mental resources available to the board and keeps control firmly with the executive.

Shifting the intentions will start the process of unlocking the board’s inherent capabilities – its wide lens and deep knowledge – to create outcomes that are greater than the sum of its parts.

There is a better way forward. Simply shifting the intentions will start the process of unlocking the board’s inherent capabilities – its wide lens and deep knowledge – to create outcomes that are greater than the sum of its parts.

We at demyst help boards develop this new relationship, with an operating framework that catalyses lateral thinking, creativity, innovation, trust, cohesion and togetherness.

Summary

Through this article, my intention has been to challenge the assumptions many directors hold about the unitary board. It outlines why some beliefs are no longer suitable for today’s challenges and calls for rebalancing and renegotiating the basis of boardroom relationships in the area of strategy development.

My argument for a new relationship and an updated boardroom operating model – especially in the domain of strategy development – will retain the benefits of the unitary board and resolve the technical and ethical tensions that many directors are often troubled by.

Neil Tsappis