Publication

"An efficient and responsible board of directors must participate in the conception of the strategy"

05 2017 September
Executive Education INCAE

The boards of directors are collegiate bodies that represent and protect the interests of the shareholders of companies, although in Latin America there are confusing and very diverse perceptions about their functions and importance.

While they perform some constructive and well-directed functions, they reflect a vision limited in scope and depth. In most of the companies observed, during the normal course of their operations, directors performed three traditional functions: reporting on environmental conditions, advising and advising the general manager, and evaluating the performance of the company.

We propose some functions related to corporate strategy, which are not currently performed, but which most of the directors, privately, recognize the importance and need to adopt them immediately.

In many directives, corporate objectives, strategies and policies are not established. These decisions are made de facto by the chief executive of the company. The typical manager hardly has the time and knowledge to participate in shaping business strategy. 

Generally, the board approves strategic decisions made in advance by management. Acceptance is often based on incomplete, partial information, and not on a careful analysis of the environment, the competition and the company itself. 

An efficient and accountable board must be involved in the conception of the strategy. You should also review it periodically to determine its validity and use it as a frame of reference for other important decisions.

The strategic planning process presupposes that the general management will make, one or more, presentations on the company's strategy and its different elements. In addition, directors must receive information pertinent to the environment, competitors, consumers, suppliers, substitute products, available resources, and relevant financial ratios. Once the presentations have been made and the information has been analyzed, exhaustive, frank and objective discussions about the possible strategy and its repercussions for the company should be encouraged. Thus, management would encourage and facilitate the participation of the board in the definition of strategic problems, the search for solutions and identification of correlative risks.

In relation to the formation of the strategy, the board of directors must evaluate and approve the following decisions:

• The businesses in which the company will participate.

• The objectives and goals of the company, especially those related to market shares, growth and profitability.

• The markets and market segments in which it will participate.

• The products and services with which it will compete in each segment.

• The geographic coverage of the operations, including both the location of the production facilities, as well as the breadth and density of the marketing system.

• The degree of diversification towards new businesses.

• The level of vertical integration that is planned for production operations and marketing activities.

• The level of risk, associated with the different strategic decisions.

In relation to strategy execution, the board of directors also has specific functions that must be shared with senior management. The role of the board is to evaluate and approve the following decisions:

• Annual operating and investment budgets.

• Strategic projects, especially those related to diversification or integration.

• Acquisitions of subsidiaries and mergers with other companies.

• Participation in joint investments.

• The construction of important buildings and facilities.

• Significant changes in the organizational structure of the company.

In companies in developed countries, the formation of strategic planning committees has been used with success. The committee is made up of a few directors, the CEO, and a few other key executives. By concentrating on strategic plans, selected managers have the opportunity to gain a deeper understanding of the subject. In this way, a more effective planning process is achieved.


Excerpt from the article "Boards of directors: directors and guardians of today's company", written by José Nicolás Marín and Eduardo Luis Montiel, Full Professors of INCAE. 

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