Strategic Planning

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Strategic planning is a welcome relief from the difficult work of running a business. Planning is also demanding, but can be a very positive experience for the team. Management spends most of its time trying to make the numbers for this week, this month and this quarter. However, planning forces people to raise their heads and look up over the horizon of the current fiscal year end.

Strategic planning allows teams to dream of what they would like to do with the business if they had unlimited resources. Before the drudgery of budget season sets in, people get to talk about opportunities, competitors, and new products at a higher level than sales targets, missed deals and delivery schedules. The free-flowing conversation is not always comfortable for people who are more at ease when they in execution mode, but there is great value in being forced to look at the future and discuss where the company fits in the landscape.

Once management has decided where it is headed, reality sets it. The difficult questions of “What can we really build?” and “What can we afford?” start to be discussed. Older businesses with legacy products to support often believe they have less flexibility than younger companies. These established businesses also need to ask “What should we stop doing?” that would give them more resources to deploy elsewhere.

Many companies cannot achieve the financial goals they have set for themselves through organic growth of existing businesses and have a hole that needs to be filled. Often companies look outside for acquisitions to fill the revenue gap, but management should ask if the team could build the business internally, which will invariably cost less. This usually depends on the culture of the organization and the time the market will allow.

Management rarely asks itself “Can we manage what is coming?” True, companies have hiring plans but senior management does not always consider whether the current key leaders are the ones that should be in place in the next five years. Succession planning is different: it focuses on who can fill a spot when someone moves. The question that should be asked is “Who will take us to where we want to go?”

The better the strategic plan, the more flexibility the company has to face the challenges of the future. No plan is perfect, but if the company can place a number of product bets now, it is more likely to have some successes and not always be looking to buy revenue and innovation through acquisitions.

Advice to a new CEO

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Boards spend a lot of time on succession planning for a CEO change and whether the choice is an internal or external candidate, boards rarely give the new CEO any advice. Board members either expect the new CEO to know what to do or worry about insulting him or her. This is what the board really wants to say:

“The board is excited to have you as our CEO. We look forward to your leadership and the new perspective you will bring. However, we also had high expectations for your predecessor and that relationship did not turn out as planned. We thought we would give you some advice now to save us all the stress of going through another CEO search any time soon.

“Build a Relationship with Every Director: There is a natural human tendency to spend more time with people we like. However, the underlying premise of a board is that every vote is equal. Very few issues actually come to a board vote, but the ones that do are critically important to the CEO such as doing a major acquisition or a leadership change. In these situations the director that the CEO has ignored is just as powerful as the chair. CEOs that have good relationships with all board members can survive difficult times if he or she has a plan. Make sure your board relationships give you this flexibility.

“Communicate Early and Often: Communications with directors should not be limited to board meetings; there should be frequent conversations in between. Directors are generally business people who understand the difficulty of running a corporation but what they cannot tolerate is being surprised. Share problems and opportunities often so board discussions are a continuation of the dialogue, not a fire hose of information that is only turned on for meetings.

“Provide Bridges Between Meetings: Directors are not at the company daily so do not expect them to remember exactly what you told them about a topic discussed three months ago. Remind them what you said last time, what you have done since, and where you are doing next.

“Tell Us What We Can Do To Help: Board members are talented individuals who have reached great heights in their respective careers. They have joined the board because they want to add value. Use them as a sounding board, to help develop your management team, or to play devil’s advocate, but don’t let their talents go to waste. Companies pay millions of dollars for consultants when some of the best advice is a phone call away.

“Make Us Proud of You Every Day: Being a CEO is the best job in the country. You can leave a legacy through your children or donating to a charity but CEOs have a unique opportunity to change the world by leading companies and impacting the lives of the employees, their families, the customers and the communities in which they operate. If you cannot embrace this responsibility there are other people willing to take on this challenge.

“We all wish you luck, but more importantly we wish you success.”

Board Diversity Complicates Communications

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Boards recruit people for their diverse skill sets but the result is a group with widely different communications styles which can complicate board discussions. Management teams tend to have similar styles of communications because they have either worked together for a long time or been recruited to fit into the company culture. Board members, however, come from various industries and bring with them the approach they have used in their business careers. The result can be frustrating both in board-only conversations and between the board and management.

How can boards solve this problem? It is useful to acknowledge that board members bring their experiences with them and the person talking is questioning the idea, not someone else’s intelligence or integrity.

  • Board members with professional services and consulting backgrounds are used to throwing a problem on the table and looking at it from every angle before they make a decision. In this type of culture there are no bad questions and input from junior people is considered equally since they may bring a fresh perspective. An inquisitive board member with this background might inadvertently ask questions that insult management or another board member but it is just part of his or her way of analyzing the situation.
  • Board members from industry often bring the perspective of the customer, supplier or competitor and may be more similar to management in the way they analyze a problem. Their approach can be data driven and while their need for operational detail may be viewed as micromanaging, they just want more information before a making a decision.
  • Other individuals go into great detail on one particular issue that may seem out of proportion to its importance, but they may be an expert in the area and see risks that others do not yet understand.
  • Some people have a pedagogical style where they ask leading questions to direct the conversation rather than stating his or her opinion. This can appear as if the person is not willing to take a stand but may just be a style.

All of these differences can result in conversations that seem to lead nowhere and leave management without clear direction at the end of a meeting. It is incumbent on the board to ensure this does not happen and develop a process to harmonize their voices into one when decisions need to be made. The board chair has the responsibility to go around the table to get each director to summarize his or her major points, get a consensus from the group, agree on what materials the board needs to see from management and report back to the CEO in a style he understands. That way there will be clarity – until the next complicated conversation.

 

Audit or Compensation Committee?

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When asked to join a board, directors are often given a choice of the two committees that meet most often: audit or compensation. My recommendation is take the audit committee every time. Why? It’s a better way to learn the business and you can establish relationships before getting deep into politics.

  • The audit committee is the fastest way to get an appreciation of the business. Many subjects covered quickly at the board level are discussed in depth in the audit meeting.
  • The objectives of the management and the audit committee are the same: provide accurate financial statements with transparent disclosure. There may be differences of opinion from time to time but everyone moves in the same direction with tight deadlines that force decisions.
  • The audit committee has the advice of the outside auditors who not only opine on the company’s financials but provide context by discussing the practices of their other clients.
  • In presenting the financials to the audit committee the finance team has to justify its conclusions, providing the committee members with great insight into the thought process of management.
  • Finally, audit committee meetings are large and attended by a broad representation of the finance staff which allows the committee to hear from people who are the possible successors to senior financial management.

By contrast the compensation committee is very different in subject matter and style.

  • The committee and management sit on opposite sides of the table on compensation. Management wants to be paid well for its hard work and there are often vast differences between the committee and management on the numbers involved. While everyone tries to be professional, emotions can run high.
  • Compensation consultants advise the committee and provide data but do not need to sign off on compensation the way auditors sign off on financial statements. Since companies all want to be at the 50th percentile in pay, the analysis can drive compensation higher as companies in the lower quartiles try to catch up.
  • Compensation is a sensitive subject so meetings are small and involve only senior management in human resources, the CEO and sometimes the CFO. The committee must rely on management’s evaluation of others in setting compensation.
  • No one is ever completely satisfied with the result. No matter how good the intentions, committees are always looking for better ways to align performance with shareholder return and management wants to protect itself on the downside for results due to unforeseen events outside of its control.

The bottom line: the audit committee is more straightforward and as a new board member it is better to learn about the business first and get into compensation politics later.