| |
The role of boards of directors in corporate strategy
by Professor Jordi Canals
From the 1950s through the 1990s, the role of corporate strategy seemed to fall to CEOs and their management teams. In this era of managerial capitalism, boards of directors served as advisory boards, offering counsel to powerful CEOs, who were in charge of making most top decisions.
This approach began to change in the late 1990s, when a new generation of boards of directors emerged, especially in the EU following the release of the Cadbury Report in the United Kingdom in 1992. This new model promoted a majority of external, independent board members and specific emphases on compliance, CEO monitoring and performance oversight. Under this model, board members’ main task was controlling the growing power of CEOs. It offered tangible benefits in some areas – today, compliance is a central task of the board – yet failed in others. A particular area of boards’ failure is corporate strategy.
The recent 2021 IESE-ECGI Corporate Governance Conference explored the role of boards of directors in shaping corporate strategy through a unique perspective by combining the findings of highly relevant academic research with the frontline insights of CEOs and board directors. In this way, the undisputable role of academia is complemented by CEO and board perspectives.
In presentations and discussions, a number of principles clearly emerged over the two-day event. The first is that the board should own corporate strategy and help the senior management team promote its progress and debate its main assumptions and outcomes. Boards should leave strategic thinking to the CEO but be prepared to deliberate it. This new perspective highlights board members’ important role in shaping strategy. The board’s role in owning, advancing and supporting corporate strategy is growing, sparked by institutional investors, which increasingly expect boards to assume a more active role in this domain, and activist investors demanding for dramatic strategic changes.
In the realm of corporate strategy, collaboration between the board of directors and the CEO and senior management team is essential. The board’s focus in monitoring management is incomplete. Agency theory shaped this view by assuming that a firm’s management team had a different agenda than shareholders. Governing and managing a company is a collaborative effort that boards and CEOs should do together, while respecting the specific duties and competencies of each role.
Companies need to adapt and transform in today’s context of disruption, marked by digital transformation, climate change, net-zero emissions, major geopolitical shifts and the resultant upheaval in global trade and investment. Boards and CEOs should make sure that their main shareholders and key stakeholders understand the imperative for change and support the transformation processes. While slow and painful, these processes are indispensable for the firm’s long-term survival. Against this backdrop, fluid communication between the board and shareholders on corporate strategy and transformation has become more vital than ever.
These notions were widely shared both by scholars and CEOs during the conference. They seem to express a newly emerging consensus on the role of boards of directors and strategy. This notion underscores the board’s role in supporting and developing the firm for the long term, and reflecting on what it should look like in the next five to ten years. One of the board’s central functions in corporate governance is working closely with the CEO on the firm’s strategic challenges.
Jordi Canals
President
IESE Center for Corporate Governance
|
| |
|
|
