At the start of a recent board meeting, a colleague asked me, “What are we doing here?” Seeing that I was a bit puzzled, she followed up, “Are these agenda items really matters for the board?” She went on to explain that we should be focusing more on strategy than on “all this other stuff” that has taken over the board agenda.

The board’s primary focus should be on corporate policy, CEO succession, executive pay for performance, risk management and strategy assessment. While the first four necessitate occasional, in-depth board deliberations — given rapid developments in technologies, markets, competition and geopolitics — strategy assessment should be a regular agenda topic.
 
In 1972, I graduated from Harvard College and crossed the Charles River to enter an MBA/doctoral program at Harvard Business School. Professor Kenneth R. Andrews had just published his seminal work, The Concept of Corporate Strategy. For the last 50 years, Andrews’ framework has provided the underlying precepts of strategy formulation.  

Strategy formulation is difficult work. As Yogi Berra observed, “It’s tough to make predictions, especially about the future.” At the end of 2021, few foresaw all four major upheavals that afflict us today, namely the sudden spike in inflation, the worldwide economic downturn, the global consequences of Russia’s invasion of Ukraine and the persistent effects of COVID. The experts, including the Fed, think tank pundits, political leaders and corporate chieftains, all got it wrong.

Strategy formulation is the responsibility of management. Though often off-loaded to consultants, such as Bain, BCG and McKinsey, who lead teams of corporate executives to analyze data and develop SWOT analyses, strategy formulation is fundamentally the province of management. They should take ownership of it and seek the board’s review, assessment and approval. Management’s execution of the approved strategy then becomes the basis for incentive compensation.

The line between corporate oversight and management prerogative needs to be clear: The responsibility for strategy formulation resides with management; the responsibility for strategy assessment rests with the board, which should continually assess its viability. Directors should adhere to the maxims “noses in, fingers out” and “eyes forward.”

In response to public pressure and regulatory demands, ESG commitments and initiatives are increasingly being embedded into corporate strategy, sometimes as part of risk assessment. ESG undergirds stakeholder capitalism, which requires directors to address the needs and demands of a multitude of stakeholders. But directors should not forgo their primary focus on providing long-term financial return to the stockholders who elect them. Some directors, like many elites, have come to believe they have risen above the shareholders they’re supposed to represent and serve. 

The currently fashionable mantra of “doing well by doing good” may ultimately pan out in certain instances, but hope is not a strategy. The financial impact of ESG initiatives must be understood, quantified, monitored and rewarded. Too often, these initiatives are loosely defined, particularly the social objectives. Moreover, ESG objectives are usually incorporated into annual bonus plans rather than long-term incentives, where they would be better suited and where the performance/reward opportunity would be greater. A meaningful portion of management’s bonus opportunity should correspond to each ESG initiative’s measurable financial impact and ultimately to shareholder return.

As my board colleague recently reminded me, directors should remember what they are there to do. First and foremost, it is to ensure the company has a viable and sustainable long-term strategy. Boards need to make sure that management is continually refreshing, revising and reformulating strategies that will deliver financial rewards for shareholders. Strategy assessment is the board’s fundamental responsibility. 

Robert H. Rock is chairman of MLR Media.