Business Horizons (2018) 61, 679—688

Available online at [Link]

ScienceDirect
[Link]/locate/bushor

Setting and vetting strategy: Bridging the

chasm between CEOs and boards
Norman T. Sheehan a,*, Richard C. Powers b

a
Edwards School of Business, University of Saskatchewan, Saskatoon SK S7N 5A7, Canada
b
Rotman School of Business, 105 St. George Street, Toronto ON M5S 3E6, Canada

KEYWORDS Abstract One of directors’ key fiduciary duties is to set the firm’s direction and
Strategy due diligence; then vet the strategy proposed by the CEO. Despite this, McKinsey reports that the
Corporate governance; majority of directors feel they do not understand their firm’s strategy, and even if
Organizational they do understand it, they do not feel they have the desired impact on their firm’s
strategy; strategy. This article argues that this shortfall stems from a failure to cross the chasm
Strategy meetings between CEOs and directors. We propose a framework to bridge this gap and assist
board members to better understand and vet their firm’s strategy.
# 2018 Kelley School of Business, Indiana University. Published by Elsevier Inc. All
rights reserved.

1. A challenge for the board often fail to vet their firms’ strategies effectively
and then proposes a set of steps for CEOs and board
One significant challenge for board members is to members to follow. The proposed strategy setting
vet their firms’ strategies adequately (National As- and vetting process involves boards critically re-
sociation of Corporate Directors, 2014). This chal- viewing the CEOs’ answers to three strategy ques-
lenge stems from the fact that directors lack either tions: (1) Where is the firm today? (2) Where does
meaningful opportunities to participate in the strat- the firm want to go? (3) How can the firm get there?
egy process or information to make a significant Using our proposed 5Ps framework to actively work
impact. This article reviews the reasons boards through these questions with CEOs ensures that
directors effectively perform due diligence on their
firms’ strategy. Helping directors’ bridge the pro-
cess and informational chasm improves the quality
* Corresponding author
E-mail addresses: sheehan@[Link] of their firms’ strategies (De Kluyver, 2013; Nadler,
(N.T. Sheehan), [Link]@[Link] 2004) and firm performance (Zhu, Wang, & Bart,
(R.C. Powers) 2016). In addition, increasing director engagement

[Link]
0007-6813/# 2018 Kelley School of Business, Indiana University. Published by Elsevier Inc. All rights reserved.
680 N.T. Sheehan, R.C. Powers

in the strategy process enhances director buy-in and from the executive team on the firm’s SWOT
their satisfaction as board members (Bhagat & (strengths, weaknesses, opportunities, and threats),
Kehoe, 2014; Nadler, 2004). While the proposed strategic alternatives, and implementation plan. Time
strategy setting and vetting steps involve additional is provided for questions from the board, but critically
effort from CEOs, it also benefits CEOs as increased questioning the strategy recommended by the CEO
directors’ buy-in and satisfaction also increases CEO may be viewed as a direct challenge to the CEO, so
tenures (Felton & Fritz, 2005; Kerr & Werther, many board members simply rubber stamp the strate-
2008). gy (Mankins, 2007; National Association of Corporate
Directors, 2014).
Boards also need to walk a fine line, as they are
2. Why boards fail to set and vet responsible for both reviewing the proposed strate-
strategy gy and monitoring the performance of the firm’s
strategy and its CEO (Kerr & Werther, 2008; National
Strategy is a set of interrelated choices that CEOs Association of Corporate Directors, 2014). If boards
make to serve the firm’s target customers profitably step over the line and force CEOs to adopt their
(Porter, 1996). A critical, value-creating responsi- preferred strategies, then it will be difficult for
bility of boards is setting their firm’s direction and boards to assess the performance of the CEO. If
then vetting the strategy proposed by the CEO board members are to fulfill their fiduciary duty,
to reach it (National Association of Corporate boards and CEOs need to cross the process chasm in
Directors, 2014). Although corporate directors need a manner that allows both parties to fulfill their
to be actively involved in the firm’s strategy process respective corporate governance responsibilities
to fulfill their role, McKinsey found that only 43% of in a collaborative, rather than adversarial, way
nonexecutive directors surveyed felt they had influ- (Bhagat et al., 2013; Charan, 2005; National
enced their corporation’s strategy (Barton, 2011), Association of Corporate Directors, 2014).
and 44% of directors reported that they “simply Another reason board members may do a poor job
reviewed and approved strategies” presented by vetting strategy is due to the significant information
the CEO (Bhagat, Hirt, & Kehoe, 2013, p. 17). These asymmetry between the firm’s executive team and
results suggest that many corporate board members the board (Beatty, 2012). Whereas most executives
are neglecting their duty of care with respect to spend 2,500—3,000 hours a year on the business,
setting and vetting strategy. the National Association of Corporate Directors
There are several reasons why boards are too (2016) reported that nonexecutive directors spend
passive when setting their firm’s direction and then an average of 245 hours on the business. Recently,
vetting its strategy, beginning with the fact that the security regulators and large institutional investors
typical corporate strategy formulation and approval have pushed corporations to increase the number of
process is not conducive to board input (Kerr & independent board members, who do not have
Werther, 2008; National Association of Corporate intimate knowledge about the firm, which further
Directors, 2014). While boards are responsible for exacerbates the information asymmetry problem
setting direction and vetting strategy, CEOs are (Bruni-Bossio & Sheehan, 2013). Given the signifi-
responsible for formulating strategy. Some CEOs cant differences in knowledge and time spent on the
are reluctant to allow board member input into business, directors may lack information to fulfill
the strategy process as they are unsure how to one of their most important duties as a board
constructively engage boards or fear that engaging member: performing due diligence on the strategy
the board may encourage directors to become more proposed by the CEO.
hands-on and micromanage the firm’s executive One common tactic to overcome the information
team (De Kluyver, 2013; Roy, 2011). Other CEOs chasm is to provide board members with a large
may believe that board members lack information amount of readings and data relating to the com-
to make a positive contribution to strategy and thus pany (Mankins, 2007). However, this presents an-
restrict opportunities for board input (Banta & other cognitive challenge for nonexecutive
Garrow, 2017; Kerr & Werther, 2008). Given this, directors as they must first read and absorb the
CEOs typically present the firm’s strategy not as information before being able to apply it and vet the
a draft for board review, but rather as a finished firm’s strategy effectively (Roy, 2011; Zhu et al.,
product for board approval (Kerr & Werther, 2008; 2016). Indeed, providing directors too much infor-
National Association of Corporate Directors, 2014). mation poses as much of a problem as providing
For their part, board members may hesitate to be them too little information (Nadler, 2004). Even if
actively involved in the strategy process. A typical the quantity of strategy information provided to
board strategy planning session involves presentations directors is appropriate, there is no guarantee that
Setting and vetting strategy: Bridging the chasm between CEOs and boards 681

the quality of the information is adequate for to boards and then outlines how the framework can
directors to vet their firm’s strategy (National be applied in the strategy setting and vetting
Association of Corporate Directors, 2016). process to bridge the information and process
Based on interviews and discussions with compa- chasm between CEOs and boards.
ny executives and board members, we propose a
way to cross the process and information chasm:
Implement a strategy setting and vetting process 3. Framework for directors to
that asks CEOs to provide directors with the infor-
mation and the opportunity to affect their firms’
understand strategy
strategies meaningfully. The benefits of our pro-
Directors report that business strategies are not
posed strategy setting and vetting framework are
always evident to them as McKinsey found that only
many: Allowing directors to contribute their exper-
34% of directors fully understood their firms’ strat-
tise leads to better strategies (De Kluyver, 2013;
egies (Barton & Wiseman, 2015). Grasping business
Nadler, 2004) and firm performance (Zhu et al.,
strategy involves understanding four interrelated
2016). Directors are more likely to support a strat-
elements that affect firm profitability: the custom-
egy that they have understood and actively vetted,
ers the firm is targeting, the value proposition the
a process which enhances director satisfaction
firm promises to those customers, and the processes
(Bhagat & Kehoe, 2014; Nadler, 2004); not surpris-
and people the firm will use to deliver the value
ingly, this also leads to longer CEO tenures (Felton &
proposition promised to those customers. These
Fritz, 2005; Kerr & Werther, 2008). Actively engag-
four elements impact profitability as the firm’s
ing the board in strategy also allows CEOs to seize
revenues are driven by how many target customers
opportunities as they arise. GE’s board quickly ap-
buy the firm’s offering, which in turn is driven by
proved the acquisition of Amersham and Vivendi
relative attractiveness of the firm’s value proposi-
Universal as the board had thoroughly discussed
tion the eyes of consumers (e.g., Martin, 2014). The
GE’s potential growth areas and strategic alterna-
firm’s costs then are driven by its ability to deliver
tives during a recent strategy planning session
the value proposition efficiently to its buyers.
(Charan, 2005).
Profitable strategies align the internal elements
Shareholder activism is rising and boards not
that are under firm control (e.g., the choice of
actively engaged in the strategy setting and vetting
the firm’s product, customers it targets, processes
process may be more vulnerable to attack (Barton &
to deliver the product, and its people) with
Wiseman, 2015). PricewaterhouseCoopers (2016)
elements in the firm’s external environment that
found that 80% of directors feel shareholder
are outside of its control (e.g., shifting consumer
activists are prompting boards to undertake a more
preferences, changing regulations, and rivals
comprehensive strategy vetting process. As a recent
undercutting the firm by delivering better quality
example from Pepsi demonstrates, actively engag-
or cheaper offerings).
ing the board in the strategy process helps shield
The first step to bridge the process and informa-
the firm from shareholder activists. Pepsi’s board
tion chasm is to break down the firm’s strategy into
fought off an attack from Nelson Peltz in 2013,
its key components. The framework we use, the 5Ps
stating that they felt that its CEO Indra Nooyi’s
of strategy, helps directors understand how the
strategy of performance with a purpose was a more
strategies proposed by the CEO internally and
viable long-term alternative than Peltz’s proposal
externally align each of the firm’s functional areas
to split Pepsi into two firms—a beverage firm and a
to create value profitably:
snack firm—and then merge Pepsi’s new snack firm
with Mondelez (George & Lorsch, 2014). Purpose
Product
Process
People
A final advantage of the strategy vetting process ¼ Performance
is that it may protect board members from potential
lawsuits from shareholders and other stakeholders. The 5Ps framework argues that firm performance is
The courts will protect board members who dem- a function of the internal alignment of the firm’s
onstrate they have exercised due care in vetting product/service sold, processes used to make the
strategies proposed by the CEO. However, the product/service, the people employed, and the
courts may be reluctant to protect board members firm’s purpose with external factors, such as con-
who fail to demonstrate they understood strategies sumer trends, technological change, rivals, regula-
proposed by the CEO or are unable to demonstrate tions, and macroeconomic conditions:
that they undertook a rigorous process to vet these
strategies. The remainder of the article proposes a  Purpose outlines the reason the firm exists and its
comprehensive framework for presenting strategies strategic direction. The firm’s strategic direction,
682 N.T. Sheehan, R.C. Powers

which typically is described in its vision, is guided to sell or improve its meat processing division. The
by the board’s long-term aspirations for the firm, proposed desired end state for Maple Leaf proc-
while the firm’s mission outlines why the firm essed meats division included developing a new
exists. antibiotic-free line of processed meats (Product),
selling off its bread and pasta divisions, closing the
 Product describes the value proposition the firm inefficient meat processing plants, refurbishing the
offers to its target customers and marketing plans others, and constructing a highly efficient meat
to reach those customers. It includes an evalua- processing plant (Process) that employed fewer,
tion of the firm’s value proposition relative to but higher skilled and better-paid workers (People).
rivals’ value propositions targeting the same cus- By the time it reached its desired end state in 2016,
tomers. It also includes a description of how the Maple Leaf Foods had zero debt, a 10% profit mar-
firm generates revenue (e.g., pricing model), its gin, and its stock price had appreciated significantly
sales channels, and describes the marketing plans (Performance).
and capabilities of the firm’s top rivals. It reviews The 5Ps framework owes an intellectual debt to
the impact of shifts in consumer preferences on another alliterative management tool, McKinsey’s
the firm’s value proposition. 7S framework. While both frameworks focus on
aligning a number of interrelated organizational
 Process describes the activities that the firm elements to achieve success, they are intended
undertakes to efficiently and reliably deliver for different uses. While working as McKinsey con-
the value proposition to its customers, such as sultants, Peters and Waterman developed the 7S
production, supply chain, process and product framework to help managers achieve organizational
innovation, and compliance activities. It outlines change following introduction of a new strategy
the current and future impact of technologies (Waterman, Peters, & Phillips, 1980). On the other
and regulations on the firm’s innovation and pro- hand, the 5Ps framework is intended to help board
duction activities. members set the firm’s direction and then vet
strategies proposed by the CEO. Differences in their
 People are the capabilities that employees need application mean that the frameworks include dif-
to complete the processes. It describes the de- ferent elements. For example, the 7S framework
sired culture, key employees, and includes a includes elements necessary to affect successful
review of the skills of the executive leadership strategic change, such as organizational structure
team. and administrative systems, while the 5Ps frame-
work includes elements necessary for board mem-
 Performance measures the firm’s ability to align bers to grasp and vet firm strategies, such as
its purpose, product, process, and people with product and performance.
trends in its external environment. Company
performance is typically tracked using measures
of revenue, profitability, ROI, cash flow, stock 4. Three questions for directors to vet
price, and indebtedness. It also includes a dis- strategy
cussion of macroeconomic factors that impact
firm performance. To understand the current strategy and perform due
diligence on the strategy proposed by the CEO,
The 5Ps framework can be applied to understand directors need to work through these questions with
the reasoning behind the $1.2 billion turnaround management:
plan developed by Maple Leaf Foods’ CEO and its
board. Maple Leaf processed meats division had a 1. Where is the firm today (i.e., what is its current
winning value proposition that included many lead- strategic position)?
ing brands of prepared meats (Product), but it also
had aging production facilities (Process), and an 2. Where does the firm want to go (i.e., what is its
inefficient, lower skilled workforce (People). future strategic direction and desired end
Protected from American competitors by a weak state)?
Canadian dollar, it had underinvested in its meat
processing facilities and employee development for 3. How can the firm get there (i.e., which strategy will
decades. As a result, by 2009 Maple Leaf Foods allow the firm to achieve its desired end state)?
was overleveraged, losing money, and its stock price
was languishing (Performance). Maple Leaf Foods’ Sections 4.1.—4.3. describe the information direc-
board faced a critical strategy decision of whether tors need from the CEO to answer each of the three
Setting and vetting strategy: Bridging the chasm between CEOs and boards 683

questions using the 5Ps framework. Note that this initiatives to improve employee competencies,
article assumes the company is a for-profit firm with and a discussion of firm culture and employee
only one offering. If the business strategy involves engagement.
selling multiple offerings to different sets of target
customers, then the information needs to be pro-  Performance reviews how successfully the firm
vided for each offering sold to a different set of managed to align the elements of its strategy to
target customers. the external environment. Firm performance
typically is described using key financial ratios
4.1. Where is the firm today? (e.g., ROI, share price, EPS, profitability,
cash flow, debt). A review of macroeconomic
The first set of information supplied by the CEO factors–—exchange rates, tax rates, commodity
should provide directors with a clear understanding prices, and any other factors that have signifi-
of the firm’s current strategy and how effective it is. cantly impacted the firm’s performance–—should
While management needs to perform an external be included here.
scan of the firm’s opportunities and threats and an
internal scan of its internal strengths and weak- As part of the review of current strategy, the board
nesses, these scans should not be presented as should ascertain if the firm is performing to the
standalone agenda items. Rather, it is more effec- board’s expectations. If the firm is underperform-
tive if the CEO provides the strategic analysis of the ing, there are two diagnostic tools that boards can
firm’s current environment in the context of the 5P use to determine potential causes: The 5Ps frame-
framework. work and strategic value curve analysis. If the firm is
underperforming (i.e., performance is less than
 Purpose discusses the firm’s progress toward desired in one or more of the financial metrics
achieving its stated strategic direction and the tracked by the board), then one or more of the
relevance of the firm’s current vision and mission other Ps (i.e., product, process, people, or purpose)
in its competitive environment. may be out of alignment with the others or with the
external environment. For example, could it be due
 Product outlines total market size, the firm’s to the product? Has the firm’s value proposition
market share, its customer value proposition, been trumped by rivals or has the target market’s
ranking of attributes of the firm’s value proposi- preferences shifted? Is the firm’s product okay, but
tion against the attributes of key rivals’ value the processes that deliver the promised value prop-
propositions, customer satisfaction, marketing osition are inefficient, causing costs to be too high?
plans, description of target customers (e.g., av- Could the firm’s processes be okay, but the firm has
erage length of customer relationship, average lost key employees and is unable to attract new
customer purchase, customer returns, etc.), and employees to deliver the value proposition?
sales channels. It also reviews the impact of If the board is unsure whether the firm’s poor
shifting consumer preferences on the firm’s value performance is a result of poor execution of a good
proposition. strategy or good execution of a poor strategy, then
the board can ask the CEO to present a strategic
 Process describes product cost per unit, efficien- value curve analysis (Sheehan & Bruni-Bossio,
cy, waste, quality, and cycle time, all bench- 2015). Value curves visually depict the attributes
marked against key rivals. It includes a review of the firm’s current value proposition (e.g., price,
of innovation success (e.g., sales from new prod- quality, service, location), with each attribute
ucts, the product development pipeline), tech- rated low to high.
nologies employed, and key suppliers. It See Figure 1 for an example of a strategic value
discusses the impact of emerging technologies curve analysis applied to an upscale golf and
and regulations on the firm’s innovation and pro- country club. The first step compares the club’s prom-
duction activities. The section should conclude ised value curve (value curve #1 in Figure 1) to the
with a discussion of what processes the company actual value delivered to the club’s members (value
performs well and those that require improve- curve #2 in Figure 1). If the club’s members perceive
ment. they are getting less value than what they were prom-
ised on one or more of the attributes of the club’s value
 People outlines the firm’s key employees, their proposition, then strategy execution is an issue that
capabilities, and discusses the bench strength needs to be addressed by the CEO. To see if the club’s
in key positions. It includes a review of execu- underperformance stems from a poor strategy, the
tive team’s skills, training and development board needs to compare the value curve promised to
684 N.T. Sheehan, R.C. Powers

Figure 1. Value curves for an upscale golf and country club and its strongest rival

members (value curve #2 in Figure 1) relative to the may define the time period needed to reach the
future value curve of the club’s strongest rivals (value desired end state in years, such as mining firms, while
curve #3 in Figure 1). If all or a portion of the club’s firms in fast-changing industries, such as computer
promised value curve lies below that of the future chip manufacturers, may define the time period
value curves of its strongest rivals, then the club’s required to reach the desired end state in months.
promised value proposition needs to be improved as Many firms have strategic objectives, such as
part of the new proposed strategy by the CEO. achieving a market share of 10% within 2 years,
The discussion of the firm’s current competitive and initiatives underway to achieve these objec-
position should conclude with a review of the five tives. While these strategic objectives and initia-
most important industry-level critical success fac- tives may inform the firm’s strategic direction and
tors (i.e., what do firms need to succeed at to be desired end state, these objectives and initiatives
profitable in the industry). For example, key success do not provide enough information for directors to
factors in the bottled water industry are (1) scale of properly vet the firm’s strategic direction and de-
production and (2) delivery. These two factors allow sired end state. The CEO needs to provide directors
for low cost and the ability to innovate (e.g., with information on each of the 5Ps so that the
vitamin-infused water), which allows for higher board is able to determine if the proposed desired
prices. In addition, strong relationships with end state is achievable and reasonably attainable
retailers assist in the competition for shelf space. within the agreed upon time period.
To generate a lively discussion, the board should
require management to evaluate and justify their  Purpose discusses whether the firm’s stated vi-
firm rankings for each critical success factor sion and mission should be updated to align with
relative to its key rivals (Caldwell & Smith, 2015). the firm’s future strategic direction and desired
This review should provide a foundation for the end state.
discussion of the firm’s desired end state and help
directors understand the areas in which the firm  Product estimates the total market size and the
needs to excel if it is to generate above-average firm’s market share if it achieves the desired end
performance in the future. state. It describes the firm’s future customer
value proposition, target customers, revenue
4.2. Where does the firm want to go? model, and the sales channels that will be em-
ployed to reach the desired end state. It includes
The best way to update the firm’s strategy is to first projections of rivals’ value propositions and the
define the firm’s strategic direction and desired end customers targeted by rivals as well as a discus-
state, and then generate strategic options to help the sion of forecasted shifts in consumer preferences
firm reach that end state (Caldwell & Smith, 2015; and any salient regulatory changes.
Rivkin, 2002). It is the board’s responsibility to outline
the firm’s strategic direction and desired end state  Process describes unit costs, production capabil-
before turning it over to the CEO to fill in the details ities, new systems, products to be introduced,
using the 5Ps framework. To that end, boards also need key technologies, and the supply chain needed to
to define the time period to reach the desired end reach the firm’s desired end state. This includes a
state, which will vary by industry. Some companies discussion of key technological and regulatory
Setting and vetting strategy: Bridging the chasm between CEOs and boards 685

changes that may affect the firm’s and/or rivals’ While CEOs prepare and present strategy alternatives
processes. to the board, it is important that CEOs not present a
fully baked strategy to the board. Rather, to ensure
 People reviews the key employees and capabili- that the board is fully engaged in the strategy pro-
ties required to reach the desired end state. It cess, CEOs should present their strategic alternatives
provides detailed information on the skills need- as drafts intended for board discussion.
ed within the executive leadership team, includ- Although it is common to see strategic alterna-
ing a discussion of executive bench strength and tives presented with brief descriptions, such as sell
training programs to improve their capabilities, a low-cost version of the firm’s product through
and the culture desired to reach the firm’s online sales channels, directors should insist that
desired end state. all strategic alternatives are presented using the
5Ps framework to ensure consistency and compara-
 Performance estimates the key financial ratios bility. Directors can only the vet the CEO’s strategic
(e.g., ROI, share price, EPS, profitability, alternatives if they can ascertain how well each
cash flow, and debt) that will be attained should alternative aligns with the internal dimensions of
the firm reach its desired end state. Forecasts performance, product, process, people, and pur-
of relevant macroeconomic data that may sig- pose with the external trends. The alternatives
nificantly influence the firm’s future perfor- presented should also outline the risks/rewards,
mance–—such as exchange rates, tax rates, resources needed, and executives responsible so
and commodity prices–—should also be included. it is easier for the board to follow up on their
implementation once approved (Sheehan, 2009).
Boards should ensure that the CEO’s detailed Alternatives presented by the CEO may focus on
description of the firm’s strategic direction and improving one or more of the firm’s 5Ps. For exam-
desired end state agrees with what the board out- ple, an alternative may enhance the firm’s product
lined and is comprehensive and aligned across all by targeting customers in different markets, or by
five Ps. The discussion should conclude with direc- enhancing the firm’s value proposition (see Figure 2
tors asking the executive team to identify the larg- for an example of how ACU, a C$6 billion credit
est obstacles and/or risks that may prevent the firm union, plans to use the 5Ps and the three strategy
from achieving the desired end state (Rumelt, questions to guide its strategy formulation process).
2011). Overcoming these major obstacles and/or To properly vet the alternatives proposed by CEOs,
risks should remain the focus as the board reviews boards should submit each strategic alternative to
the strategic alternatives proposed by the CEO that three tests (see also Hambrick & Fredrikson, 2005):
allow the firm to reach its desired end state.
Test 1: Is there external fit?
4.3. How can the firm get there?
 Has the new strategy identified an attractive set
CEOs are responsible for generating mutually exclu- of target customers and do these customers
sive and comprehensive strategic alternatives that see value in the proposed customer value
will allow the firm to reach the desired end state. proposition?

Figure 2. The relationship of the 5Ps framework and the three questions for the CEO and management team
686 N.T. Sheehan, R.C. Powers

 Will the proposed customer value proposition win (process) and acquire companies in related indus-
against rivals who are targeting the same set of tries (product; Canals, 2014). The board and CEO
customers? worked together to restructure the company, which
meant divesting its media interests (product),
 Does the new strategy address future threats or restructuring management (people), and enhancing
risks to the proposed customer value proposition its customer value proposition to increase market
(e.g., new rivals, substitutes, regulations, or new share (product). As the economy recovered and
technologies)? Telefonica’s fortunes improved, it expanded its core
offerings in new markets (product) by acquiring
Test 2: Is there internal fit between product, telecom firms in the U.K. and Germany.
process, people, and purpose?

 Are the people and processes aligned to deliver 5. The board’s strategy vetting
the firm's proposed customer value proposition process
efficiently?
Assuming the board has already provided the CEO
 Does the proposed strategy fit with the firm’s with a broad outline of the firm’s desired strategic
purpose? direction and end state, the strategy vetting
process should occur over a minimum of two board
Test 3: Is the strategy implementable? meetings to allow board members time for discus-
sion and reflection. In the first meeting (or set of
 Does the firm have the resources and capabilities meetings), the CEO should use the 5Ps framework to
to execute the new strategy? present detailed information on the firm’s current
status and its desired end state. As part of the
 Can the new strategy be implemented at an discussion of the current strategy and desired end
acceptable level of risk? state, the board should challenge management’s
assertions as executives may overestimate their
 Will key stakeholders support the new strategy? firm’s capabilities, or underestimate their firm’s
weaknesses or their rivals’ strengths (Collis &
 Is the current management team capable of Rukstad, 2008). Furthermore, since the firm’s exec-
implementing the new strategy? utives may suffer from commitment bias that makes
it difficult for the executive team to consider
The directors’ role when vetting the strategic alter- reversing the course of their current strategy, the
natives is to tap into their experience to probe, board should be prepared to play the role of devil’s
test, and critique each alternative as part a con- advocate. To ensure that the board hears contrary
structive dialog with the CEO. If the board decides opinions, the chair of a major Canadian bank, the
there are no alternatives proposed by the CEO that Canadian Imperial Bank of Commerce (CIBC), rou-
will allow the firm to reach its desired end state, the tinely brings sell-side analysts into the boardroom
board has three options: to challenge the executive team and board’s
strategic choices. Beatty (2017) recommended that
1. Ask the CEO to come back to the board with new boards go a step further and seek out activist
alternatives; shareholders to present their strategic analysis
and recommendations in person or in writing.
2. Revise the firm’s desired end state; or The second meeting (or set of meetings) features a
presentation and discussion of strategic alternatives
3. Review the suitability of the CEO and executive to reach the desired end state. The second meeting
team. should allow for a fulsome discussion of the risks/
rewards offered by each of the alternatives.
Using a strategy setting and vetting process allowed As a way of ensuring management has explored all
Telefonica’s board to play a value-adding role in its alternatives, the board should challenge any of
strategy setting and vetting process. A multination- management’s assumptions regarding competitors,
al telecom firm, Telefonica was privatized in capabilities, technology, and regulatory regimes.
1997 and is now is one of the world’s largest telecom Once the new strategy is vetted and approved by
providers. It was struggling in the wake of the the board, it is prudent for the board to have an in
dotcom crash of 2001 as it had taken on too much camera session to discuss whether the current
debt to increase network infrastructure capacity management team has the requisite capabilities to
Setting and vetting strategy: Bridging the chasm between CEOs and boards 687

implement the firm’s new strategy (see Figure 3 for an CEO to the board in the 5Ps format at least a week
example of a strategic planning timeline. Note that prior to the second strategy review meeting.
TBC in the diagram means the date of the third
meeting to discuss potential alternatives for the firm 4. Review the strategy’s progress to the desired
to reach its desired end state is to be confirmed). end state. Strategy is not a set and forget task
To ensure that they have not missed anything, for boards. Best practice is for the board to
the board may retain a strategy-consulting firm to regularly review and discuss the strategy’s prog-
review the CEO’s analysis of the firm’s current ress toward achieving the desired end state in
strategy and its desired end state. They may also camera and with the CEO at every board meeting
want to employ a consultant to review if the current (Siciliano, 2002; Townsend, 2007).
senior leadership team is capable of executing the
proposed strategy. It is also acceptable for the CEO 6. Final summary
to hire a strategy consultant to audit the firm’s
current strategy and desired end state as well as Directors’ ability to fulfill their duty of care with
help with analyses. However, if the CEO proposes respect to strategy hinges on having the right infor-
hiring consultants to formulate the firm’s new strat- mation and opportunities to contribute to their
egy, the board needs to review whether the CEO’s firm’s strategy. The strategy setting and vetting
strategy formulation capabilities are a good fit with process described in the article outlines the rules
the board’s long-term aspirations for the firm. of engagement between CEOs and boards. CEOs are
responsible for formulating strategy but to ensure
5.1. Timing of information to the board boards get the right information on strategy we ask
the CEO to present the firm’s strategy in a compa-
In considering the timing of information given to the rable, consistent, and comprehensive format that
board, the following should be taken into account: naturally lends itself to the board’s strategy vetting
process. Boards are responsible for setting the
1. Where is the firm today? This information on the firm’s strategic direction and then vetting its strat-
5Ps should be provided by the CEO in advance of egy. To ensure boards get the right opportunities to
the first meeting to allow directors to review and contribute to the firm’s strategy we clearly describe
reflect on the firm’s current strategic position. how and when the board should be involved in
setting and vetting the strategy.
2. Where does the firm want to go? Detailed infor- Boards have three key responsibilities: hindsight,
mation on the desired end state using the 5Ps oversight, and foresight (Beatty, 2012). Hindsight
framework should be provided by the CEO at involves ensuring the accurate reporting of financial
least a week in advance of the first meeting to information, while oversight involves monitoring
allow board members to review it. If the board management’s activities and ensuring compliance.
revises the firm’s strategic direction and desired Foresight involves managing risk, developing the
end state in discussions with the CEO, informa- firm’s talent pool, and ensuring the firm’s strategy
tion on the changes should be sent prior to the guarantees long-term firm viability. Of the three
second meeting along with information on the responsibilities, foresight has the greatest impact
strategic alternatives. on firm performance, but is the task boards typically
struggle to master. Our proposed strategy setting
3. How do we get there? The information on the and vetting process ensures the board has done its
strategic alternatives should be provided by the due diligence and thus fulfilled its responsibility.

Figure 3. Example of a strategic planning timeline

688 N.T. Sheehan, R.C. Powers

References Martin, R. (2014). The big lie of strategic planning. Harvard

Business Review, 92(1/2), 2—6.
Nadler, D. A. (2004). What’s the board’s role in strategy devel-
Banta, K., & Garrow, S. D. (2017, August 8). How CEOs can work opment? Engaging the board in corporate strategy. Strategy
with an active board. Harvard Business Review. Available at and Leadership, 32(5), 25—33.
[Link] National Association of Corporate Directors. (2014). NACD Blue
active-board Ribbon Commission report on strategy development: Execu-
Barton, D. (2011). Capitalism for the long term. Harvard Business tive summary. Available at [Link]
Review, 89(3), 84—91. Store/[Link]?ItemNumber=12161
Barton, D., & Wiseman, M. (2015). Where boards fall short. National Association of Corporate Directors. (2016). 2016—2017
Harvard Business Review, 93(1/2), 98—104. NACD public company governance survey: Executive summa-
Beatty, D. (2012). The role of the chair: Orchestrating the board. ry. Available at [Link]
Rotman Management Magazine, Spring, 49—53. [Link]?ItemNumber=37388
Beatty, D. (2017). Shareholder activism: This changes every- Porter, M. E. (1996). What is strategy? Harvard Business Review,
thing! Rotman Management Magazine, Winter, 7—12. 74(6), 61—78.
Bhagat, C., Hirt, M., & Kehoe, C. (2013). Tapping the strategic PricewaterhouseCoopers (2016, October). The swinging pendu-
potential of boards. McKinsey Quarterly, February, 16—23. lum: Board governance in the age of shareholder empower-
Bhagat, C., & Kehoe, C. (2014). High-performing boards: What’s ment. London, UK: PwC.
on their agenda? McKinsey Quarterly, April, 16—21. Rivkin, J. W. (2002). An alternative approach to making strategic
Bruni-Bossio, V., & Sheehan, N. T. (2013). Leveraging board choices (Case No. 9-702-433). Boston, MA: Harvard Business
expertise: Strategy mapping as teaching tool. Journal of School Publishing.
Business Strategy, 34(4), 3—10. Roy, M.-J. (2011). Board information: Meeting the evolving needs
Caldwell, J. E., & Smith, K. (2015). Overseeing strategy: A of corporate directors. Management Research Review, 34(7),
framework for directors. Toronto, Canada: CPA Canada. 773—789.
Canals, J. (2014). 6 items for the top of every board’s agenda. Rumelt, R. (2011). Good strategy, bad strategy. New York, NY:
IESE Insight, 21, 37—42. Crown Publishing.
Charan, R. (2005). Aligning boards and management on strategy. Sheehan, N. T. (2009). Making risk pay: The board’s role. Journal
Leader to Leader, 37, 35—40. of Business Strategy, 30(1), 33—39.
Collis, D. J., & Rukstad, M. G. (2008). Can you say what your Sheehan, N. T., & Bruni-Bossio, V. (2015). Strategic value curve
strategy is? Harvard Business Review, 86(4), 82—90. analysis: Diagnosing and improving customer value proposi-
De Kluyver, C. A. (2013). A primer on corporate governance (2nd tions. Business Horizons, 58(3), 317—324.
ed.). New York, NY: Business Expert Press. Siciliano, J. I. (2002). Governance and strategy implementation:
Felton, R. F., & Fritz, P. K. (2005). The view from the boardroom. Expanding the board’s involvement. Business Horizons, 45(6),
McKinsey Quarterly, March, 28—37. 33—38.
George, B., & Lorsch, J. W. (2014). How to outsmart activist Townsend, D. (2007). Engaging the board of directors on strategy.
investors. Harvard Business Review, 98(5), 88—95. Strategy and Leadership, 35(5), 24—28.
Hambrick, D. C., & Fredrikson, J. W. (2005). Are you sure you have a Waterman, R. H., Peters, T. J., & Phillips, J. R. (1980). Structure
strategy? Academy of Management Perspectives, 19(4), 51—62. is not organization. Business Horizons, 23(3), 14—26.
Kerr, J. L., & Werther, W. B. (2008). Engaging the board in Zhu, H., Wang, P., & Bart, C. (2016). Board processes, board
strategy. Organizational Dynamics, 37(2), 112—124. strategic involvement: and organizational performance in
Mankins, M. C. (2007). Strategy setters vs. strategy vetters. for-profit and non-profit organizations. Journal of Business
Directors and Boards, 31(2), 28—31. Ethics, 136, 311—328.