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Great boards get engaged in the company’s strategy
by Professor Jordi Canals
In January 2018, BlackRock CEO Larry Fink wrote in his annual letter to CEOs about an urgent need for boards of directors: their engagement in developing a long-term strategy for their companies. This engagement is a signal that a company has the capability to create long-term value and that its board is committed to it. Vanguard CEO, William McNabb III, in his April 2018 letter to shareholders, also encouraged boards to become actively engaged in their firms' long-term strategy.
In an age dominated by short-termism, flash-trading and Twitter, it is remarkable that the CEOs of the world's largest asset managers, BlackRock and Vanguard, make such a clear statement about the need for boards to engage in their firms' long-term strategy. This is a clear break with the past for many companies. For years, even good boards spent little time discussing and challenging the CEO as well as top managers on the firm's strategy. The discussion only got deeper when some substantial decisions, such as mergers and acquisitions or a huge investment in new technology, pushed the board to consider risks in-depth.
Today, a growing number of investors -from family offices to pension funds- have an increasing interest on how companies are considering some major societal challenges, such as the environmental impact of their activities. This is not an easy task. Defining a value creation strategy for the long term in times of uncertainty is complex, and including in it new dimensions such as environmental risks becomes even more difficult.
Nevertheless, there are companies that are doing an outstanding job in defining their strategy and goals, and integrating those dimensions neatly into it. One of those companies is Unilever, as we describe in a recent IESE case. When CEO Paul Polman took over the firm in 2009, Unilever was in decline. He quickly realized the need to improve operational efficiency, get closer to customers and make Unilever's impact on the environment and the communities it served a central element of its strategy. He defined the Unilever Sustainable Living Plan that has become a reference on how to articulate a long-term strategy, which includes financial, environmental and social targets, as well as how to achieve them.
Some lessons emerge from Unilever and other successful, long-term oriented companies. The first is that the CEO and senior managers should stimulate a thoughtful and innovative dialogue with employees on how better to serve customers' needs. Putting customers in the first place, understanding their emerging needs and how the world around them is changing, and motivating employees to serve them well are key pillars in getting a long-term strategy right. The board of directors should get engaged in this process and be involved in this discussion early on, not simply to give its stamp of approval to a final text.
The second is the need to articulate major decisions and initiatives around that strategy, and define targets, steps and measures to monitor that the strategy's execution is working well. At the same time, there is no perfect strategy, and good board of directors should keep up an ongoing dialogue with the CEO and senior managers to fine tune the firm's strategy.
The third is that the CEO should share it with all employees, customers, shareholders and other stakeholders. Communication should be clear, everybody should understand what the company stands for, and how it is planning to achieve the goals that it announced. Communication is not strategy, but a strategy that is not shared by all stakeholders because of deficient communications is a strategy doomed to fail. Great companies are not only defined for having unique strategies, but also by the level of engagement of employees, customers, shareholders and other stakeholders in it.
Professor Jordi Canals
President
IESE Center for Corporate Governance
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