Five Strategy Conversations Every Board Should Have

Five Strategy Conversations Every
Board Should Have
Bob Frisch
Managing Partner
The Strategic Offsites Group
Silicon Valley Chapter
National Association of Corporate Directors
Rock Center for Corporate Governance
Stanford Law School
January 17, 2013
v9

©2013 The Strategic Offsites Group®, Inc. All rights reserved. Proprietary and Confidential. 2
Directors Consider Strategy A Top Priority
Source: NACD Public Company Governance Survey 2012-2013 n=957
0%
2%
2%
2%
3%
3%
3%
4%
5%
5%
6%
10%
10%
14%
14%
15%
26%
30%
36%
42%
65%
0% 10% 20% 30% 40% 50% 60% 70%
Corporate social responsibility
Director compensation
Info. Management (ensuring directors receive right amount, type, format)
Disclosure (transparency of financial and other info.)
Crisis oversight
Director education and development
Board meeting processes (agenda, committees, etc.)
Board culture (openness, respect, action orientation, CEO relations)
CEO evaluation
Board leadership
Relations with shareholders
Board and director evaluation
CEO compensation
Board effectiveness
Financial oversight/internal controls
Director recruitment/succession
Executive talent management and leadership development
CEO succession
Risk oversight
Corporate performance and valuation
Strategic planning and oversight
*Respondents were asked to select three topics of highest priority

The Average Board Spends A Quarter of Its Time on Strategy
Source: McKinsey Global Survey 2008 n = 586
24% 24%
20%
17%
11%
0%
5%
10%
15%
20%
25%
30%
Strategy Execution Performance
management
Core governance
and compliance
Talent management
(i.e. development,
analysis, and prioritizing
of strategies that
maximize shareholder
value)
(i.e. prioritizing key
initiatives against
strategy, approval of
M&A transactions)
(i.e. development of
metrics, incentives,
monitoring, tracking of
performance)
(i.e. nominations,
compensation, audit,
disclosure, Sarbanes-
Oxley Act )
“Other”=4%

A Quarter to a Third of Board Members Report Having ‘Limited or no
Understanding’ of Critical Strategic Issues
Source: McKinsey Quarterly Survey 2006 n = 1,597
36%
21%
16% 14%
10%
50%
58% 58%
54% 55%
14%
22%
26%
32% 34%
0%
10%
20%
30%
40%
50%
60%
70%
Your company's
financial position
Your company's
current strategy
How value is
created in your
company
Risks your
company faces
Dynamics of your
company's
industries
Complete understanding Good understanding Limited or no understanding

The Most Common Response is to Spend More Time on Strategy
Source: PWC Annual Corporate Directors Survey 2012
75%
68%
57% 59%
54%
35%
30%
16%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Percent of directors indicating they would like to spend more ‘time and focus’ in the coming year
than in the past

SVNACD Members Also Report Wanting to Spend More Time on
Strategy
Source: SVNACD Survey 2013 n=66
How satisfied are you with the amount of time your board spends on discussing
strategy?
24%
45%
29%
0%
2%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
We don't spend
nearly enough time
discussing strategy.
We should spend a
bit more time on
strategy than we do
today.
We spend the right
amount of time
We should spend a
bit less time
We spend too much
time discussing
strategy.

This Morning is About Improving the Quality, not the Quantity, of
Strategic Conversations
How satisfied are you with the current quality of strategic conversations among members
of your board?
2%
12%
50%
30%
6%
0%
10%
20%
30%
40%
50%
60%
We do not discuss
strategy as a board.
We do not have the
kind of strategy
conversations that
we need to.
Our strategy
conversations could
use some
improvement.
I'm satisfied with the
strategy
conversations we
have today.
Our strategy
conversations
represent a best
practice among
boards.

©2013 The Strategic Offsites Group®, Inc. All rights reserved. Proprietary and Confidential.
Two Dimensions of Strategy Conversations: Among the
Board…
8

…And Between the Board and the Management Team
9

Directors are Less Satisfied With the Quality of Strategy Conversations
With Management Than Among Themselves
Q3. How satisfied are you with the current quality of strategic conversations between the board and the management team?
5%
26%
36%
27%
6%
0%
5%
10%
15%
20%
25%
30%
35%
40%
The board and the
management team
do not discuss
strategy together.
We discuss strategy
with management,
but we don't have
the kind of
conversations that
we should.
The strategy
conversations with
the management
team are adequate,
but could use some
improvement.
I'm satisfied with the
strategic dialogue
between the board
and the
management team.
The strategy
conversations
between our board
and the
management team
represent a best
practice.

Five Strategy Conversations Every Board Should Have
•  Are We Working at the Right Altitude? Are We Clear on The Board’s
Role vs. Management When it Comes to Strategy?
•  Are We Aligned Around An Aspiration?
•  Are We Aligned Around the Walls and Fences That Bound the
Business?
•  Are We Getting the Information We Need To Do Our Job?
•  Is The Board Involved in Setting The Strategic Agenda?
11

0%
9%
3%
8% 8% 8%
22%
14%
17%
12%
0%
9%
5%
9%
8%
6%
22%
18%
17%
6%
0%
5%
10%
15%
20%
25%
1
(Strongly
Disagree)
10
(Strongly
Agree)
My board's strategic conversations are focused and productive.
Strategic conversations between my board and the executive team are focused and productive.
12
These Five Conversations Help Set the Stage for Even More Focused
and Productive Board Strategy Conversations
2 3 54 7 86 9

ARE WE WORKING AT THE RIGHT ALTITUDE? ARE
WE CLEAR ON THE BOARD’S ROLE VS.
MANAGEMENT WHEN IT COMES TO STRATEGY?

Are We Working at the Right Altitude?
14

Are We Working at the Right Altitude?
15

3%
11%
12%
5%
12%
6%
8%
18% 18%
6%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
1
(Strongly
Disagree)
10
(Strongly
Agree)
16
SVNACD Members Report a Wide Variation in Board Altitude
My board debates and decides on strategy together with the executive team, rather than simply reviewing
plans developed by the executive team.
2 3 54 7 86 9

Different Boards Play Different Roles In the Strategy Process
Source: McKinsey Quarterly Survey 2006 n = 796
64%
52%
48%
37%
25%
6%
0%
10%
20%
30%
40%
50%
60%
70%
Approves final
strategy
Challenges
emerging
strategy
Monitors
performance
against strategy
Identifies key
strategic issues
Helps develop
strategy's
content
Not involved
Which of the following roles does the board of directors (or equivalent) play in your company’s formal
strategic-planning process?

Is Our Board Working at the Right Altitude? From the NACD
Point of View There’s no Single Right Answer…
18
“Boards should be constructively engaged with management to
ensure the appropriate development, execution, monitoring and
modification of their companies’ strategies.
The nature and extent of the board’s involvement in strategy will
depend on the particular circumstances of the company and the industry
or industries in which it is operating.”
Source: NACD Board - Letter to Congress recommending ten governance practices - May 3, 2002

… Except That Each Board Needs To Be Explicit About Their
Respective Roles
19
“Management and the board should jointly establish the process the
company will use to develop its strategy, including an understanding of
the respective roles of management and the board”
Source: The Role of the Board in Corporate Strategy - 2006 Report of the NACD Blue Ribbon Commission

At One Board Directors Had Very Different Views of Their Role
20
“Review” “Help to
supplement
management
expertise,
e.g.
marketing”
“Scrub and
vet”
“Help
management
generate
fresh
thinking”
How would you describe the board’s role in the strategy process vs. Andy and the
management team?
N = 7

At One Board We Worked With Directors Had Very Different
Views of Their Role
21
“Review” “Help to
supplement
management
expertise,
e.g.
marketing”
“Scrub and
vet”
“Help
management
generate
fresh
thinking”
How would you describe the board’s role in the strategy process vs. Andy and the
management team?
The problem isn’t that different boards do it differently. It’s when different
members of a single board have a different view of the board’s role, or
when the board’s view differs from management.

Coca Cola Enterprises Board Guidelines
22
“The Board will assess the Company’s business strategies, goals and
objectives annually, to determine their effect on long-term shareowner
value, and to discuss with management the results of that
assessment.”
Source: Coca Cola Enterprises Board Guidelines

Our Firm’s Experience Is That ‘Increasing Time’ Alone Won’t Solve
the Underlying Problems Caused by Lack of Role Clarity
Source: McKinsey Global Survey 2008
21%
8%
23%
39%
53%
40%
49%
43%
56%
49%
41%
45%
29%
49%
21%
12%
6%
14%
0%
10%
20%
30%
40%
50%
60%
Monitoring
performance
against strategy
Developing
short-term
strategy
Approving key
strategic
initiatives
Evaluating
options for
short-term and
long-term
strategies
Developing
long-term
strategy
Challenging
existing strategy
Increase Hold Steady Decrease

This McKinsey Framework We Saw Earlier is an Example of a Starting
Point for a Discussion About Roles
Source: McKinsey Quarterly Survey 2006 n = 796
64%
52%
48%
37%
25%
6%
0%
10%
20%
30%
40%
50%
60%
70%
Approves final
strategy
Challenges
emerging
strategy
Monitors
performance
against strategy
Identifies key
strategic issues
Helps develop
strategy's
content
Not involved
Which of the following roles does the board of directors (or equivalent) play in your
company’s formal strategic-planning process?

ARE WE ALIGNED AROUND AN ASPIRATION?

4
2
1 2 3 4 5
The Overall Level of Strategy Alignment Almost Always Bears At
Least Some Degree of Improvement
26
How well do the following groups understand Company X’s overall strategy:
2
1
5
1 2 3 4 5
1 1
2 2
1 2 3 4 5
2
3
2
1 2 3 4 5
The Board
SVP Level Executives and Above Wall Street Analysts
Andy and the Executive Committee
n=6 n=7
n=8n=6
Some newer Board
members rated
themselves lower than
the overall Board”
Not at all Completely

SVNACD Members Saw an Opportunity to Improve Their Boards’
Levels of Alignment
How would you assess the level of alignment regarding a view of the company in three to
five years…
5%
8%
20%
58%
11%
2%
17%
24%
52%
6%
0%
10%
20%
30%
40%
50%
60%
70%
Not at all aligned Somewhat aligned Completely aligned
...among your board?
...between members of the company's board and its executive team?

28
The Starting Point of Strategic Alignment is Having a
Common Aspiration
Sustained
Organizational
Success
1. Aspiration
“Our Board Members and
Management Team don’t have
a strong shared view of what
the corporation is trying to
accomplish or what we could
become.”
2. Strategy
“I’m dissatisfied with
our strategy’s ability to
achieve our aspiration.”
4. Organization &
Processes
“We may not have people or
processes structured
appropriately to implement
the strategy.”
3. Alignment
“It seems like the organization
doesn't’t understand the
strategy, doesn't’t support it,
or both.”
5. Resources
“The organization may not
have the resources, skills
or physical assets to
implement the strategy and
achieve the aspirations.”

Boards and Management Teams Typically Hold Too Broad
Views of How To Define Success
Qualitative:
•  Gone into new businesses
•  Grown good businesses
•  Become recognized as an industry leader
•  Moved from a product approach to a solutions approach
•  Met the needs of our customers seamlessly
•  Be identified as a major INDUSTRY firm
•  ‘Own’ MARKET A - become the dominant player in MARKET A
•  Have a coordinated Company Y strategy
•  Launched a successful NEW SEGMENT ENTRY
Quantitative:
•  Double MEASURE OF SCALE to $2.6 trillion
•  Enjoy a 20% unit cost advantage over competitors
•  Number of new customers
•  Market share vs. LARGEST COMPETITOR
•  Margin 17-18%
•  Retention
How do you think about success for Company Y? If we were meeting at the end of FY2017, and we were
looking back at another tremendous 5-year run for Company Y, what would have happened?

It’s Not That The Aspirations Are Wrong In Any Way - It’s That
There Were Multiple ‘Most Important’ Goals Among 7 Directors
Grow Sales (5)
•  “The only measure that matters to a retailer is revenue growth”
•  Consistent sales growth and comp store growth
•  “Generating organic growth = 3% comp store sales growth”
•  “Boost sales per square foot across the chain (not just existing stores)”
Grow Shareholder Value (4)
•  “As a director I work for shareholders – market value is the #1 measure”
•  “Total shareholder return in the top quartile of the industry group”
•  “Provide shareholder value relative to macro environment“
Grow Profitability (4)
•  “Get back to level of profitability of several years ago“
•  5 - 20% EPS growth
Grow Number of Stores (3)
•  Overall growth of stores
•  “Expand presence through a new concept or acquisition”
How do you think about success for Company X? If we were meeting at the end of 2013,
and you looked back at a successful 3-year period for the company, what would have been
accomplished? How would it be measured?
n=7 for the first, 6 for the second, 5 for the third success factor

ARE WE ALIGNED AROUND THE WALLS AND
FENCES THAT BOUND THE BUSINESS?

Walls and Fences - Defined
•  Walls are the boundaries around any business that are assumed to be
immovable – so much so that executive don’t even bother to approach
them
•  But by challenging these assumptions teams discover that the walls are
sometimes actually fences – boundaries that can in fact be moved,
opening up strategic space for the company to grow

Walls and Fences – Company Z
1.  Operate in the U.S.
2.  Communications company
3.  Subscription-based revenue models
4.  Controlling group of shareholders
5.  Conservative, Investment Grade rating
6.  We would never take any actions that would challenge our core ethical and
moral principles
7.  Expand by entering ‘near adjacent’ spaces – leverage what we know
8.  Buy and hold – would not buy a business and sell 4-5 years later
9.  Every deal justified on DCF – no ‘strategic’ investments
33
.

ARE WE GETTING THE INFORMATION WE NEED TO
DO OUR JOB?

There’s Generally Good Data Provided to Boards, But It Could Bear
Improvement
Source: NACD Public Company Governance Survey 2012-2013 n=957
59%
34%
7%
1%
34%
43%
20%
4%
29%
42%
25%
5%
0%
10%
20%
30%
40%
50%
60%
70%
Excellent Good Satisfactory Below acceptable levels
Corporate performance Strategy Risk management

Some Directors Report That Critical Elements of Data Are Missing
How well informed are you as a board member on the industry, competitive, market and strategic context of the company? Are
you provided with the background you need to have a rigorous discussion of strategy?
2%
20%
29%
44%
6%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Our board is not well
informed on the
strategic context of
the company.
We get some
information, but there
are critical elements
we as a board don't
know enough about.
The information we
are provided is
adequate, but could
be improved.
I'm satisfied that, as a
board member, I am
provided with the
information I need to
have a rigorous
strategic
conversation.
The information I am
provided with as a
board member
represents a best
practice.

Better Access is Provided to Financial and Operational Information than
Strategic or Industry Information
Source: McKinsey Global Survey 2008
85%
67%
61%
45%
12%
23%
20%
28%
3%
10%
19%
26%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Financial information
about company
Operational information
about company
Strategic information
relevant to company
(e.g. key performance
indicators linked to
company's strategy)
Leading indicators on
direction of industry,
sector, company
Good/optimal access Adequate access Insufficient/no access

The Board Should Inventory the Information Provided Over the
Past Year and Validate That It’s Adequate To Do Your Job
•  66% evaluate external benchmarks and data to independently corroborate
management’s assumptions/assertions
•  53% consider alternative strategies to those presented by management
•  66% of directors are happy with the customer satisfaction research management
provides
•  72% of directors are comfortable with information about employee values and
satisfaction
•  A number of boards do not receive any information about either customer or
employee satisfaction (20% and 16%, respectively)
•  21% of directors are dissatisfied with the information management provides on
competitors’ initiatives and strategy
Source: PwC’s Annual Corporate Directors Survey 2012

IS THE BOARD INVOLVED IN SETTING THE
STRATEGIC AGENDA?

Boards Generally Don’t Set The Agenda of Strategic Topics in a Given
Year
Who sets the agenda for the strategy-related topics the board discusses?
45%
21%
26%
6%
2%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
The CEO The board as a
whole in
consultation with
the CEO
The non-executive
chairman or lead
director in
consultation with
the CEO
The board as a
whole
The non-executive
chairman or lead
director

Prior to the Meeting To Set Strategy Topics Board Members
Completed an Interview and Subsequent Online Survey
41

Interview
Subset of
Board
Members
Collect Additional
Written Input from
Board Members
Aggregate and
Synthesize
Interview Results
and Written Input
Pre-meeting activities:
Key Outcomes:
•  18 potential board level strategy topics (beyond specific growth opportunities)
•  15 specific potential growth opportunities
•  11 walls and fences

We Determined Which Strategy Topics (Beyond Specific Growth
Opportunities) Will be Included on the Board’s 18-Month Agenda
42
The board kept 13 strategy topics from pre-offsite
data gathering with slight modifications…
1. White space opportunity analysis
3. How should we define growth (i.e, profitable growth, not just
growth)?
4. Can/how we improve operating margins in the XXX
business?
5. Can/how we reverse the revenue decline and maintain
profitability in the YYY business?
6. Why is our EBITDA multiple so low?
7. Will S-shares prove to be an effective acquisition tool as
planned?
8. Can/how we strengthen our position versus national
competitors in ZZZ?
9. What should we do about MARKET A and MARKET B?
10. How do make our business stronger (i.e. What if one or
more big players attack our core markets)?
14. What is the long term role of the YYY business in our
portfolio?
15. What is our management succession plan (especially at
DIVISION A)?
16. Should we acquire 100% of QQQ?
18. How should Board members shape the strategy?
…. added two topics…
19. How can we accelerate our study/execution of what we
decide to do?
20. How do we ensure the analysis is done in an objective
fashion?
…. and deferred discussion on five individual
topics. (2)
2. Analysis of growth opportunities within existing lines of
business
11. How can we ensure that we delight our customers?
12. What are our options for improving our position with
REGULATORY AUTHORITY and Congress?
13. What is required to ensure platform interoperability as
technology moves quickly?
17. Should we change our corporate definition from “AAA”
to “BBB”?
The board did a similar validation/
edit of the potential growth
opportunities

We Further Set Priorities For The Board Level Discussion Topics, and
Identified Areas Where Further Analysis is Required
Requires
further
analysis
Ready
to
discuss
Now Soon Later
43
Board-Level Discussion Topics
(Priority vs. Readiness)
Legend: Board Level Discussion Topics
1. White space opportunity analysis 9. Market A and Market B 20. Ensure analysis is objective
3. Definition of growth 10. Make core business stronger
4. Operating margins in the XXX business? 14. Long term role of YYY in portfolio
5. Profitability in YYY 15. Management succession plan
6. EBITDA multiple 16. Acquire 100% of QQQ?
7. S-Shares as an acquisition tool 18. Board members shape strategy
8. Strengthen position vs. national players in ZZZ 19. Accelerate study/execution of what we decide to do
3 15 18 19
4
8
9
1
5
14
6 7
10
16
NOTE: Client data has been altered, as has positioning in the matrix, for confidentiality purposes
20

For Some Top Priority Topics, The Board Identified Areas of Analysis
to Inform the Discussions
44
Analysis Required /
Other Notes
White space
opportunity
analysis
(1)
•  Analysis of existing markets:
- What are our top 15 markets? What is our market share?
- Why are we strong in our top markets?
- Who else competes in these markets? How do we compare?
•  Analysis of white spaces (Businesses operations in which we do not currently compete):
- Identify lines of business that would accelerate our ROC, revenue/EBITDA greater than on a
standalone basis
Analysis of the
XXX business
(4, 8, 9)
•  How/can we Improve operating margins in cXXX? What are our existing and potential
markets (e.g. 6 specific urban markets)? Can we grow and achieve acceptable returns?
•  How/can we strengthen our position versus national players in YYY?
•  What is the growth strategy for the XXX business? What is the role of MARKET A and
MARKET B?
- How much have we invested to date? What are the projected future investment requirements?
What are the related tax costs?
- What are the potential scenarios for (minimum) 5 year operating results?
- What are the costs of transfer (including impact on other parts of the Company)?
- What are our strategic options and associated economic projections (e.g., How strong would a
turnaround have to be in MARKET A or MARKET B to justify leaving our “recoverable” capital in
these markets)?
Topics to be
Considered Now

Five Strategy Conversations Every Board Should Have
•  Are We Working at the Right Altitude? Are We Clear on The Board’s
Role vs. Management’s When it Comes to Strategy?
•  Are We Aligned Around An Aspiration?
•  Are We Aligned Around the Walls and Fences That Bound the
Business?
•  Are We Getting the Information We Need To Do Our Job?
•  Is The Board Involved in Setting The Strategic Agenda?
45

•  A Boutique strategy consulting firm founded in 2002
o  We work around the globe with CEOs, senior executive teams and boards across
industries on their most important strategic issues and opportunities
•  We specialize in the design and facilitation of strategy processes and discussions to
help executive teams make better decisions and convert those decisions to
measureable actions
•  Through our thought leadership, SOG offers new ways of approaching strategy
processes and decision making
•  We do not work for direct competitors
•  We operate from a single office in Boston with a seven-person team
Strategic Offsites Group at a Glance
47

How We Serve Our Clients
•  Whether engaged for a single meeting or a multiyear change initiative, our role is to
help design and manage critical strategic discussions
•  The common denominator underlying our work is expertly facilitated and prepared
workshops and processes designed to achieve organizational, executive and board
alignment
•  Beginning with setting clear objectives, we help clients maintain a balance of process,
content, and conversation to ensure that strategies gain and hold momentum
•  We collect and synthesize relevant data that inform objectives and frameworks to drive
management teams to actionable outcomes
48

For More Information
49
Bob Frisch
Managing Partner
Strategic Offsites Group
Rfrisch@StrategicOffsites.com
www.StrategicOffsites.com
+1 617 266-8711
@OffsitesGuy

Bob Frisch, Managing Partner, Strategic Offsites Group
For the past 31 years, Bob has worked with executive teams on their most vital strategic and organizational
challenges, both as a consultant and a corporate executive. He is considered one of the world’s leading strategic
facilitators, having conducted executive offsites in fifteen countries with companies ranging from Fortune 10
multinationals to German mittelstand family businesses. Bob’s work has been featured in publications ranging from
the Wall Street Journal to the Johannesburg Business Report, and he is the author of three Harvard Business
Review articles: Off-Sites That Work, When Teams Can’t Decide and Who Really Makes The Big Decisions in Your
Company?. When Teams Can’t Decide was recently named one of HBR’s ‘10 Must Read Articles on Teams’.
Bob’s first book, Who’s In The Room? How Great Leaders Structure and Manage the Teams Around Them, was
published by Jossey-Bass/Wiley in January 2012 and is now in distribution in 12 countries. Bob is a frequent
keynote speaker has been a guest lecturer at Harvard, Yale, the University of Chicago, Northwestern, Stanford and
Brandeis.
Before founding Strategic Offsites, Bob was a Managing Partner of Accenture, where he helped create
the Organization and Change Strategy practice. Bob joined Accenture from Cap Gemini Sogeti, where he created
the firm’s global capability in corporate vision and growth and led the Strategy practice for the Americas.
He began his career at the Boston Consulting Group, where he helped found the Los Angeles office.
Bob’s executive roles began when he went to work for a client, running planning and business development for
The Dial Corporation. Bob went on to become the youngest Division President of this Fortune 500 company. A
decade later, he took another leave from consulting to head corporate strategy for Sears, Roebuck and Co.
Bob is a magna cum laude graduate of Tufts University and earned his MBA at the Yale School of Management.
Bob lives in Newton Centre, Massachusetts with his wife Iris and their four children.
Dangerous Company, a best-selling book on the consulting industry, says of Bob: "He has been there, small
company and big, strategy and operations. He has lived much of his professional life on the road or in the corridors
of power of huge institutions. In the game of business, he is equipped to be the perfect coach."
50

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