Five Strategy Conversations Every Board Should Have

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Bob Frisch's Presentation at the Rock Center for Corporate Governance at Stanford Law School - Sponsored by the Silicon Valley Chapter of the National Association of Corporate Directors (NACD) - January, 2013

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<ul><li> 1. Five Strategy Conversations EveryBoard Should HaveBob FrischManaging PartnerThe Strategic Offsites GroupSilicon Valley ChapterNational Association of Corporate DirectorsRock Center for Corporate GovernanceStanford Law SchoolJanuary 17, 2013v9</li></ul><p> 2. Directors Consider Strategy A Top PriorityStrategic planning and oversight 65% Corporate performance and valuation 42% Risk oversight 36%CEO succession30% Executive talent management and leadership development 26% Director recruitment/succession15% Financial oversight/internal controls 14%Board effectiveness 14% CEO compensation 10% Board and director evaluation 10% Relations with shareholders6%Board leadership5% CEO evaluation5%Board culture (openness, respect, action orientation, CEO relations)4% Board meeting processes (agenda, committees, etc.) 3%Director education and development3%Crisis oversight3%Disclosure (transparency of financial and other info.) 2%Info. Management (ensuring directors receive right amount, type, format) 2% Director compensation2%Corporate social responsibility0%0% 10%20% 30%40% 50% 60% 70% *Respondents were asked to select three topics of highest prioritySource: NACD Public Company Governance Survey 2012-2013 n=9572013 The Strategic Offsites Group, Inc. All rights reserved. Proprietary and Confidential.2 3. The Average Board Spends A Quarter of Its Time on Strategy30%25% 24% 24% 20%20% 17%15% 11%10%5%0%Strategy ExecutionPerformanceCore governance Talent managementmanagement and compliance (i.e. development,(i.e. prioritizing key analysis, and prioritizing initiatives against (i.e. development of (i.e. nominations,of strategies thatstrategy, approval of metrics, incentives, compensation, audit,maximize shareholder M&amp;A transactions) monitoring, tracking of disclosure, Sarbanes-value)performance) Oxley Act )Source: McKinsey Global Survey 2008 n = 586 Other=4%2013 The Strategic Offsites Group, Inc. All rights reserved. Proprietary and Confidential. 3 4. A Quarter to a Third of Board Members Report Having Limited or no Understanding of Critical Strategic Issues 70% 60% 58% 58%54%55%50% 50% 40%36%34%32% 30%26%21% 22% 20% 14% 16% 14% 10% 10%0%Your companys Your companys How value isRisks yourDynamics of your financial positioncurrent strategycreated in yourcompany faces companyscompanyindustriesComplete understandingGood understanding Limited or no understandingSource: McKinsey Quarterly Survey 2006 n = 1,597 2013 The Strategic Offsites Group, Inc. All rights reserved. Proprietary and Confidential.4 5. The Most Common Response is to Spend More Time on StrategyPercent of directors indicating they would like to spend more time and focus in the coming year than in the past 80%75%68% 70% 57% 59% 60%54% 50% 40%35% 30% 30% 20% 16% 10%0%Source: PWC Annual Corporate Directors Survey 20122013 The Strategic Offsites Group, Inc. All rights reserved. Proprietary and Confidential. 5 6. SVNACD Members Also Report Wanting to Spend More Time on StrategyHow satisfied are you with the amount of time your board spends on discussingstrategy? 50%45% 45% 40% 35% 30%29%24% 25% 20% 15% 10%5% 2% 0%0% We dont spend We should spend a We spend the right We should spend a We spend too much nearly enough time bit more time on amount of timebit less timetime discussing discussing strategy. strategy than we do discussing strategy. discussing strategy.strategy. today.Source: SVNACD Survey 2013 n=662013 The Strategic Offsites Group, Inc. All rights reserved. Proprietary and Confidential.6 7. 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 membersof your board?60%50%50%40%30%30%20% 12%10%6%2% 0% We do not discuss We do not have the Our strategyIm satisfied with theOur strategystrategy as a board.kind of strategyconversations could strategy conversations conversations thatuse some conversations we represent a bestwe need to.improvement.have today.practice amongboards.Source: SVNACD Survey 2013 n=662013 The Strategic Offsites Group, Inc. All rights reserved. Proprietary and Confidential. 7 8. Two Dimensions of Strategy Conversations: Among theBoard2013 The Strategic Offsites Group, Inc. All rights reserved. Proprietary and Confidential. 8 9. And Between the Board and the Management Team 2013 The Strategic Offsites Group, Inc. All rights reserved. Proprietary and Confidential. 9 10. Directors are Less Satisfied With the Quality of Strategy Conversations With Management Than Among ThemselvesQ3. How satisfied are you with the current quality of strategic conversations between the board and the management team?40%36%35%30%27% 26%25%20%15%10% 6% 5% 5% 0%The board and the We discuss strategyThe strategyIm satisfied with the The strategymanagement team with management, conversations with strategic dialogue conversationsdo not discuss but we dont havethe management between the board between our boardstrategy together. the kind ofteam are adequate,and the and the conversations that but could use some management team. management teamwe should.improvement.represent a bestpractice.Source: SVNACD Survey 2013 n=662013 The Strategic Offsites Group, Inc. All rights reserved. Proprietary and Confidential.10 11. Five Strategy Conversations Every Board Should Have Are We Working at the Right Altitude? Are We Clear on The Boards 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?2013 The Strategic Offsites Group, Inc. All rights reserved. Proprietary and Confidential. 11 12. These Five Conversations Help Set the Stage for Even More Focused and Productive Board Strategy Conversations25%22%22%20%18% 17%17%15% 14%12%10%9% 9% 9% 8%8% 8% 8%6%6%5% 5%3% 0% 0% 0%12345 6 78 910(Strongly (StronglyDisagree)Agree)My boards strategic conversations are focused and productive.Strategic conversations between my board and the executive team are focused and productive.Source: SVNACD Survey 2013 n=652013 The Strategic Offsites Group, Inc. All rights reserved. Proprietary and Confidential.12 13. ARE WE WORKING AT THE RIGHT ALTITUDE? AREWE CLEAR ON THE BOARDS ROLE VS.MANAGEMENT WHEN IT COMES TO STRATEGY? 14. Are We Working at the Right Altitude? 2013 The Strategic Offsites Group, Inc. All rights reserved. Proprietary and Confidential. 14 15. Are We Working at the Right Altitude? 2013 The Strategic Offsites Group, Inc. All rights reserved. Proprietary and Confidential. 15 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.20% 18%18%18%16%14%12%12%12% 11%10%8%8%6%6%6%5%4%3%2%0%12345 6 7 8910(Strongly (StronglyDisagree)Agree)Source: SVNACD Survey 2013 n=65 2013 The Strategic Offsites Group, Inc. All rights reserved. Proprietary and Confidential. 16 17. Different Boards Play Different Roles In the Strategy Process Which of the following roles does the board of directors (or equivalent) play in your companys formalstrategic-planning process? 70%64% 60%52% 50%48% 40% 37% 30% 25% 20% 10% 6%0% Approves final ChallengesMonitorsIdentifies key Helps develop Not involved strategyemerging performance strategic issues strategysstrategy against strategy contentSource: McKinsey Quarterly Survey 2006 n = 7962013 The Strategic Offsites Group, Inc. All rights reserved. Proprietary and Confidential.17 18. Is Our Board Working at the Right Altitude? From the NACDPoint of View Theres no Single Right AnswerBoards should be constructively engaged with management toensure the appropriate development, execution, monitoring andmodification of their companies strategies. The nature and extent of the boards involvement in strategy willdepend on the particular circumstances of the company and the industryor industries in which it is operating.Source: NACD Board - Letter to Congress recommending ten governance practices - May 3, 20022013 The Strategic Offsites Group, Inc. All rights reserved. Proprietary and Confidential. 18 19. Except That Each Board Needs To Be Explicit About TheirRespective RolesManagement and the board should jointly establish the process thecompany will use to develop its strategy, including an understanding of the respective roles of management and the boardSource: The Role of the Board in Corporate Strategy - 2006 Report of the NACD Blue Ribbon Commission 2013 The Strategic Offsites Group, Inc. All rights reserved. Proprietary and Confidential. 19 20. At One Board Directors Had Very Different Views of Their RoleHow would you describe the boards role in the strategy process vs. Andy and themanagement team?Review Scrub andHelp toHelpvet supplement management managementgenerateexpertise, fresh e.g.thinkingmarketingN=7 2013 The Strategic Offsites Group, Inc. All rights reserved. Proprietary and Confidential.20 21. At One Board We Worked With Directors Had Very DifferentViews of Their RoleHow would you describe the boards role in the strategy process vs. Andy and themanagement team?Review Scrub andHelp toHelpvet supplement management managementgenerateexpertise, fresh e.g.thinkingmarketingThe problem isnt that different boards do it differently. Its when different members of a single board have a different view of the boards role, or when the boards view differs from management. 2013 The Strategic Offsites Group, Inc. All rights reserved. Proprietary and Confidential.21 22. Coca Cola Enterprises Board GuidelinesThe Board will assess the Companys business strategies, goals andobjectives annually, to determine their effect on long-term shareownervalue, and to discuss with management the results of that assessment.Source: Coca Cola Enterprises Board Guidelines2013 The Strategic Offsites Group, Inc. All rights reserved. Proprietary and Confidential. 22 23. Our Firms Experience Is That Increasing Time Alone Wont Solve the Underlying Problems Caused by Lack of Role Clarity60%56% 53%49%49%49%50% 45%43% 41%40%39%40% 29%30% 23% 21%21%20% 14% 12%10%8%6% 0%Monitoring Developing Approving key Evaluating DevelopingChallenging performance short-termstrategicoptions for long-termexisting strategyagainst strategystrategyinitiatives short-term and strategylong-termstrategiesIncrease Hold SteadyDecreaseSource: McKinsey Global Survey 2008 2013 The Strategic Offsites Group, Inc. All rights reserved. Proprietary and Confidential.23 24. This McKinsey Framework We Saw Earlier is an Example of a Starting Point for a Discussion About Roles Which of the following roles does the board of directors (or equivalent) play in yourcompanys formal strategic-planning process? 70%64% 60%52% 50%48% 40% 37% 30% 25% 20% 10% 6%0%Approves finalChallengesMonitorsIdentifies key Helps develop Not involvedstrategy emerging performance strategic issues strategysstrategy against strategy contentSource: McKinsey Quarterly Survey 2006 n = 7962013 The Strategic Offsites Group, Inc. All rights reserved. Proprietary and Confidential.24 25. ARE WE ALIGNED AROUND AN ASPIRATION? 26. The Overall Level of Strategy Alignment Almost Always Bears AtLeast Some Degree of Improvement How well do the following groups understand Company Xs overall strategy:The BoardAndy and the Executive Committee45Some newer Boardmembers ratedthemselves lower thanthe overall Board2 2 1n=61 23 4 5 n=8 12 3 45Not at all CompletelyNot at allCompletelySVP Level Executives and Above Wall Street Analysts 322221 1n=61 23 4 5n=7 123 45 Not at allCompletelyNot at allCompletely2013 The Strategic Offsites Group, Inc. All rights reserved. Proprietary and Confidential.26 27. 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 to70%five years60% 58% 52%50%40%30%24% 20%20%17% 11%10%8% 6%5% 2% 0%Not at all aligned Somewhat aligned Completely aligned ...among your board? ...between members of the companys board and its executive team?Source: SVNACD Survey 2013 n=66 2013 The Strategic Offsites Group, Inc. All rights reserved. Proprietary and Confidential. 27 28. The Starting Point of Strategic Alignment is Having aCommon Aspiration 1. Aspiration Our Board Members and Management Team dont have a strong shared view of whatthe corporation is trying to accomplish or what we could become. 5. Resources2. StrategyThe organization may notIm dissatisfied withhave the resources, skillsour strategys ability toor physical assets toSustainedachieve our aspiration. implement the strategy andOrganizational achieve the aspirations.Success 4. Organization &amp;3. Alignment ProcessesIt seems like the organizationWe may not have people ordoesntt understand the processes structuredstrategy, doesntt support it, appropriately to implement or both. the strategy. 2013 The Strategic Offsites Group, Inc. All rights reserved. Proprietary and Confidential.28 29. Boards and Management Teams Typically Hold Too BroadViews of How To Define SuccessHow 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?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 ENTRYQuantitative: 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 2013 The Strategic Offsites Group, Inc. All rights reserved. Proprietary and Confidential. 29 30. Its Not That The Aspirations Are Wrong In Any Way - Its ThatThere Were Multiple Most Important Goals Among 7 Directors 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 beenaccomplished? How would it be measured?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 environmentGrow Profitability (4) Get back to level of profitability of several years ago 5 - 20% EPS growthGrow Number of Stores (3) Overall growth of stores Expand presence through a new co...</p>