Strategy and risk

Boards of directors have an important role in strategy. While management is responsible for setting, refining and executing the organization's strategy, the board's role is to provide oversight and guidance to the direction of the strategy and to weigh its inherent risks.

Part of the board's responsibility is to clearly set appropriate expectations for management and the organization's strategy. Boards should neither set the bar too low – not demanding a strategy and simply allowing management to develop initiatives in an ad hoc way without the context of overall strategic goals – nor set the bar too high – setting unrealistic expectations for the organization based on its starting point and resources. Instead, boards should demand that management develop an explicit strategy that reflects a set of choices and considers alternatives, clearly outlining their consequences, tradeoffs and risks. Boards should also demand that the strategy be coherent; its choices should make sense and reinforce each other; the choices of the markets the organization will enter should be ones that will enable it to achieve its goals and aspirations; its plans should enable the organization to succeed and connect with its current and future customers; and the required resources to carry out the strategy should be those the organization has or can access in the future.

Boards are also responsible for appropriately evaluating the organization's strategy and its inherent risks. The board cannot afford to receive management's proposals uncritically, accepting them without question or query. On the other hand, boards should not attempt to drive the strategic process, which would occur when directors move from constructively probing the strategy and its underlying assumptions and risks to actively defining the strategy and advocating its direction. If the board isn't satisfied with the strategy proposed by management, the board has a duty to require management to rethink and improve that strategy, but it isn't the board's responsibility to take over that role from management.

Boards and management need to interact productively when defining and refining strategy. There should be a cadence to the interactions between them; the aspects of strategy and the issues being addressed should develop over time, so that their sessions focus on different aspects of strategy and escalate in quality. In a productive relationship, the questions the board asks should be ones that are purposeful and legitimately probe and advance the strategy without grandstanding or attempting to "one up" management.

As the organization's primary steward of risk, the board is responsible for defining the risk appetite for the organization. The expectations the board sets around strategy, and its interactions with management, should be viewed in the context of the risks being borne by the organization and its stakeholders, and how those risks are managed and mitigated.

Boards need to weigh the organization's various portfolios, and the risks associated with them, and assess different scenarios that change those portfolios – for example, getting out of one business or into another – and their impact on the organization's basket of risks.

In a VUCA world – one that is volatile, uncertain, complex, and ambiguous – management and boards tend to systematically underestimate the risk of the status quo – the current direction and makeup of the organization – and overestimate the risk of doing something different. Just because the current activities and their risks are known does not mean they are less than the risks associated with doing something different.

While setting strategy may be a greater challenge than in the past, the risks of not setting a strategy are also greater today. Boards should connect regularly, visit the organization's business units, meet with management, and engage industry and subject matter experts so they can better understand, assess, and challenge the strategic choices made by management and the assumptions that underlie those choices.

Authoritative guidance
Thought leadership