Compare your board’s practices regarding setting strategic direction and overseeing its associated risks with this benchmark

How do your board practices compare with other private and public companies in setting strategic direction and overseeing the risks associated with that direction?

This is the seventh of eight postings of the results of the Society of Corporate Secretaries and Governance Professionals’ “2011 Board Practices Report” to be used as a benchmark to compare your board’s governance practices.

Strategy and Risk Oversight

Click here to view the results of the Society’s survey of the following questions regarding strategy and risk oversight.

One of the most important responsibilities of a board of any organization is assuring that the organization has an “understood” strategic direction that takes into account risks. In 2009, the faculty of Harvard Business School’s Corporate Governance Initiative interviewed 45 board members of financial institutions and similar complex organizations contributing to, or affected by, the credit crisis and subsequent recession. The results of the interviews are reflected in the paper, “Perspectives from the Boardroom – 2009,” written by Jay Lorsch of Harvard’s faculty.

According to the paper, the two contributing causes most frequently cited by the interviewed board members were:

  • The lack of guidance given to the boards and its members as to the role of the board and each of its members with respect to management of the organizations
  • The lack of understanding by the board of the business model and strategic direction of the organization

The paper uses the term “understanding” because it expresses what the directors seemed to be seeking.  The paper’s most definitive statement is a quote from one of the interviewed board members:

“My experience is that it’s of utmost importance that the board has a full understanding of the business model . . . entry barriers, competitors, technological changes and so on. A full understanding of the business model — which includes, of course, what are competitors doing, what are the trends in the market and so on.”

So, the Society’s 2011 Report may reflect greater involvement by the board in “understanding” the organization’s strategic direction so that it can consider risks in light of that direction and vice versa. 88 percent of directors of public companies and 81 percent of directors of private companies reported that their companies align risk management with the company’s strategy so that setting strategy takes into account risks, and managing risks takes into account strategy.

The survey reflects that boards rely upon management in setting the strategic direction with 92 percent of directors of public companies and 95 percent of director of private companies reporting that management develops and the board advises and approves the direction.

The survey reflects that boards assume more initiative in risk oversight than they may in setting strategic direction. Accordingly, the responsibility for risk oversight is spread among (i) the board as a whole (as reported by 57 percent of public-company directors and 48 percent of private-company directors) and (ii) more than one of the board’s committees (as reported by 48 percent of public-company directors and 19 percent of private-company directors). Of board committees, the audit committee remains the principal risk oversight committee (as reported by 48 percent of public-company directors and 57 percent of private-company directors).

The Society’s 2011 Report is available at the Deloitte Center for Corporate Governance website at http://www.corpgov.deloitte.com/site/us/ as the “2011 Board Practices Report” under the page “Board Governance.”

Our next and final posting in this series will focus on board involvement with CEO succession planning.