Professional Development
Board or bored board
Understanding the Role of a Board of Directors
When it comes to public companies and certain private and nonprofit organizations, the board of directors plays a crucial role as a governing body. This group is responsible for making important decisions related to investments, mergers, strategic direction, dividend allocation (for publicly traded companies), executive hiring and firing, and setting compensation. To effectively carry out these responsibilities, board members must possess a strong knowledge base about the industry and the organization’s operations. However, research suggests that many board members lack a comprehensive understanding of these key areas. In fact, only 10 percent of directors feel they have a thorough grasp of industry and market dynamics, while just 20 percent believe they fully understand their company’s strategy.
The Importance of Strategic Thinking in Boardrooms
Board directors are typically chosen for their diverse perspectives, often coming from various sectors. While this diversity can be beneficial, it must be supplemented by a deep understanding of the company’s business and industry. If senior management continually needs to educate directors on basic business concepts during board meetings, changes are necessary. One approach to addressing this issue is to assess directors’ knowledge annually. Directors who fail to demonstrate a basic level of industry and company understanding should be replaced.
Furthermore, board members should be evaluated by their peers each year to gauge their overall contribution. One method involves having each director identify five colleagues they believe add significant value to the board. Directors who are not named by anyone should be considered for removal. As Richard Parsons, former chairman of Citigroup and CEO of Time Warner, notes, tolerating weak board members can have consequences for the entire board.
Enhancing Strategic Planning with the Board of Directors
Research indicates that the alignment of strategic direction between the board and the CEO significantly impacts the success or failure of CEO appointments. Therefore, effective communication of strategy to the board is crucial for C-suite leaders. Engaging directors in candid discussions, rather than relying on scripted presentations, can lead to more insightful conversations. David Pyott, CEO of Allergan, emphasizes the importance of ongoing strategic discussions with the board throughout the year, rather than treating strategy as a one-time event.
Conducting Off-Site Strategic Planning Meetings
One powerful way to facilitate interaction between the management team and the board is to hold biennial off-site meetings focused on the organization’s key challenges for the next three years. These sessions should feature thought-provoking questions to encourage deep reflection and discussion. An external facilitator can help ensure neutrality and facilitate open dialogue among all participants. While a board of directors can provide valuable insights and guidance, it is essential to choose members wisely to avoid wasting time and energy.
Ensuring that directors are strategically minded is crucial for their success. The Strategic Fitness System offers an executive development platform where leaders can hone their strategic thinking, planning, and decision-making skills on demand.
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