Should corporate boards be involved in the strategy of companies?
Researchers at the Department of Industrial Engineering and Management looked into what can happen when corporate boards stray beyond their traditional role of overseeing the company’s management, and starts to devise the strategic direction of the company. They found that in cases where the strategy doesn’t work, it can compromise accountability in the company.
Pardeep Maheshwaree, the researcher examining the question, compared companies that had boards that took part in the strategy planning with companies that did not. ‘The feeling at companies where boards get involved in strategy is that “hey, we have all these smart people here, why don’t we use them to help us?” and when it works, it can work well, but when it goes wrong, it usually goes badly wrong.’
Maheshwaree’s doctoral research focuses on how CEO succession works. When a company is struggling, the board fires the CEO and brings in a new one. The problem with the board getting involved in strategy is that if the company is struggling because of a strategy the board itself came up with – or developed jointly with the CEO– it’s difficult for the board to then fire the CEO. And even if the board replaces the CEO under such circumstances, it can very well be a scapegoat succession because it is unclear whether the flawed strategy was the board’s idea or that of the CEOs.
The problems stem from the fact that strategies sometimes fail to meet their expected goals, even with the best intentions. One recent example Maheshwaree raises is Nokia’s decision to buy Alcatel Lucent. Nokia’s goal was based on the idea that in the future era of 5G, network providers should be able to provide a holistic solution to customers. Although this was a plausible presumption at that time, recently analysts have suggested that reality might turn out to be other way around with customers more wary of relying on a single service provider.
‘Although corporate boards have lots of clever, accomplished people sitting on them, quite often the board members will not have the time and resources to fully understand and asses the best strategies for the company. What’s more, all the information and numbers that the board are using to make the strategy are coming direct from the management, so the board aren’t even in a strong position to be making these decisions.’ explained Maheshwaree.
This raises interesting questions on accountability of board of directors. In the case of Nokia, both chairperson of board and CEO are leaving the company. It will surely add more disruption in company's operation, but would that solve the problem? What about the other board members who stood for this strategy? ‘The point is that you cannot and perhaps should not be replacing board members for consequences of flawed strategy. Their essential tasks, many would argue, would be that of monitoring management rather than advising management. The monitoring function gets compromised if boards play active part in company's strategy.’ says Maheshwaree.
‘There is limited to no evidence supporting the argument that companies where board play active role in defining company's strategy perform better compared to companies where boards just actively monitor management and leave strategic choices to the management,’ Maheshwaree continues.
‘I think it is a time we start reflecting on what is the best way boards can add value given their limited time and information. One way would be for them to focus on a limited key issues like CEO succession and monitoring of corporate polices devised by the management. If they get just these two tasks right, I don’t see a need for a board to play an active role in company strategy which not only risks accountability at the top but might also come at the cost of other key board’s functions given their limited time’.
The recent Finnish Corporate Governance Codes 2020 specify one of board's key role to be that of "defining company's strategy and monitoring its implementation". The fundamental questions Maheshwaree, based on his research, is asking is 1) can boards effectively do that? 2) what would the CEO and top management team do then?
As a suggestion for improving corporate governance Maheshwaree says, ‘Perhaps, as a starting point, we should limit board’s role at the best to be that of advising management and that advise has to be self-regulated by boards in such a way that it remains a friendly activity rather than perceived as an order from board. If not, then we should be rather concerned with board chair succession in Finland rather than CEO succession’