What is the role of the Board of Directors in the company’s strategy?

What is the role of the Board of Directors in the company’s strategy?

By Pedro Vázquez, professor at the IAE Business School, and Alejandro Carrera, director of the PWC Chair of Government in Organizations at the IAE Business School, Universidad Austral.

The achievement of the continuity of the organization will be more likely if there is an adequate plan that guides it towards the long term. Having a strategy is having a plan to achieve certain goals. That plan will surely need to consider the reality of the company. You will also need to imagine the most plausible scenarios for what the environment will be like in the future. Given that the Board of Directors is primarily responsible for the long-term vision and ensuring the continuity of the organization, its role in relation to the strategy is one of its five key functions (in addition to ensuring viable sustainability, governance, supervision and control, and management support).

Every organization must have an adequate, explicit, communicated strategy that guides its actions and leads it towards its objectives as well as towards the fulfillment of its mission. The Board of Directors must ensure that this happens, carrying out different tasks that are listed below.

Ensure there is an appropriate process guiding strategic formulation: The Board of Directors must ensure that the organization has at all times a formulated, explicit, communicated, led, and adequately implemented strategy. The questions then arise: to what extent should the Board of Directors be involved in the organization’s strategy? What should the Board of Directors do and what does senior management have to do? At one extreme, there are organizations whose strategy is designed and approved by the Board of Directors, to be later communicated to the executives who must implement it. At the other extreme, we also find situations where senior management designs the strategy and submits it to the Board of Directors for its sole approval. Although successful cases can be seen in both of the aforementioned extremes, our experience shows us that the best results are achieved when there is collaborative work between the Board of Directors and senior management in relation to the formulation of the strategy. Both the case of a Board of Directors that participates very actively in all stages of the process, involving the main executives in this task, and the case of a senior management that presents a highly developed plan to be later discussed and reviewed with the Board of Directors, are Examples of recommendable strategic formulation processes.

Define the key aspects of the strategic direction statement: There is a dimension of strategic formulation that configures the most permanent aspects of the organization and is known as the strategic orientation statement. It defines the mission of the organization. It also includes the specification of elements such as the purpose and values, the character of identity that is to be given to the company, the vision, the type of relationship that is to be established with the main stakeholders, and the general policies of the company. organization. The definition of strategic orientation can also advance in the definition of the core organizational competencies on which the company will base its actions. The strategic direction statement is closely related to the identity of the organization. It is something that is not usually reviewed or modified periodically and is a base that will have a great impact on the rest of the components of the organization’s strategy. For this reason, it is very important that the involvement of the Board of Directors be more important in this stage of the strategic formulation.

Validate and approve the strategic formulation: The Board must challenge and ultimately approve the strategic formulation presented by the executive team. In addition to the strategic orientation statement, the Board of Directors must approve the competitive strategy, which is the aspect of strategic formulation that aims to achieve a sustainable advantage over competitors in each business and in each context in which it has decided to act. The competitive strategy includes the analysis of the context, the external analysis, the internal analysis, and all those elements that allow the elaboration of an action plan with a sufficient level of detail that allows its correct interpretation and implementation. The participation of the Board of Directors in the competitive strategy can range from a very deep involvement in its preparation, to the review and approval of a proposal generated by the executive team.

Approve the annual budget: The strategy is operationalized through business plans and budgets. Making the strategy explicit in an adequate document and operationalizing the strategic plan in such a way that it can be implemented, and its progress measured, is extremely important. The budget is a tool that makes it easier for the different parts of the organization to coordinate to achieve certain aggregate and common objectives. The Board of Directors will be the one who approves, and later supervises, the annual budget of the organization and its eventual revisions.

Once there is an adequate process for strategic formulation, the development cycles and the monitoring scheme of its progress are determined. This allows scheduling the most important tasks related to the role of strategy in the annual plan of Board meetings. Sometimes some or all of the directors will need to participate in activities and workshops around strategy formulation. The Board meeting will finally be the setting where the strategy will be presented, reviewed and approved, providing the organization with an explicit and executable plan.

Source: Ambito

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