For the last few years, the most common word used in the boardroom has been “risk,” but some directors are wondering if they are paying enough attention to the word that usually dominates boardroom discussion: “strategy.”

Directors recognize that strategic oversight is at the top of their list of important responsibilities, right behind selecting the right chief executive.

There are almost as many variations on the strategic planning process as there are businesses, although there are plenty of commonalities too. Below, I highlight the key elements of what works well to fulfill a board's responsibility to oversee strategic development—including what leading boards are looking for from management—and what doesn't work.

Strategic planning doesn't come easy to many boards. In fact, a majority of directors admit to shortcomings in their board's attention to strategy. A survey conducted by the National Association of Corporate Directors in 2010 found that less than 20 percent of respondents rated their boards as highly effective at strategic planning and oversight, even though they rated it the most important issue to board governance.

In many boardrooms the senior management team introduces a strategic plan and discusses it with the directors, with the main goal of gaining concurrence. They often involve strategy consultants to provide expertise, base their plans on the well-known SWOT (strengths, weaknesses, opportunities, and threats) analysis, and support the plan with relevant information, such as analysis of markets, competitors, economic forces, risks, and related indicators. The strategic plan is honed during a one- or two-day offsite retreat, where refinements or substantive changes are made in some instances, and ultimately a strategy document is accepted as a blueprint for success.

There's nothing inherently wrong with this approach, which has the potential to move a company forward. We find the more effective boards, however, follow a more involved process that focuses on additional important considerations.

Critical Success Factors

Effective strategic planning ensures clear alignment of the strategy to the company's value drivers, business plan, and implementation plan to create shareholder value. Directors need to be confident that the agreed upon strategy will result in superior shareholder value creation. The strategy should ensure the company's long-term viability or identify a potentially critical need to pursue a business combination, partnership, or other transaction. The strategic plan also should clearly define how shareholder value creation will be measured.

These steps are easy to articulate, but they are difficult to execute. The likelihood of success is enhanced by an effective working partnership with management to develop and review the corporate strategy. This balance is best achieved when the board provides insight, knowledge, judgment, and analytical skill to the strategic planning process, recognizing that management ultimately owns the strategic and implementation plans, and must fully believe in them.

Due to that reality, the board should foster an environment where management has the appropriate support for in-depth consideration and assessment of all significant elements that aim to devise a strategy that has a high likelihood of success within risk, growth, and return objectives. To achieve that goal, the board must engage in substantive and constructive questioning and challenge assumptions.

Effective directors focus not only on the strategy presented but also on the development process. In addition to reviewing information provided by management, they also insist on getting whatever information they need that's not already there.

 The board should look closely at important elements that are sometimes overlooked, when they are deciding whether a proposed strategy makes sense for the company in the current economic and competitive environments. Effective directors focus not only on the strategy presented but also on the development process. In addition to reviewing information provided by management, they also insist on getting whatever information they need that's not already there. And they also look at critical assumptions inherent in the strategy; risk factors; major interdependencies; available resources; technology implications; and forces shaping the competitive landscape, including globalization, e-business, disruptive technologies and innovation, and convergence of industries.

Effective boards zero in on the changing rules of the competitive game and understand how the worldwide regulatory environment and financial markets can wreak havoc on strategy. They also probe management to learn what other strategies were considered and the rationale for why they were cast aside, as well as the advantages and disadvantages of those alternatives and the rationale for the accepted strategy.

Another critical element is for management and the board to reach consensus on whether change should be incremental, substantial, or transformational. Is change to be limited to operational alignment, or will it involve repositioning the company with a new market or product focus, or encompass truly breakthrough strategy, transcending current industry practice implying an entirely new business? If management is planning one thing and the board expecting another, there's bound to be trouble.

A strategy's likelihood of success is dependent on these factors that require board attention. And there's at least one more—developing a plan to ensure the strategy is implemented effectively.

Implementation and Measurement

Any strategic plan is only as good as its implementation.

Unfortunately, boards often give little attention to overseeing management's implementation plan. There are several instances where boards were entirely unaware of the implementation plan or had only a vague sense of how it was going.

Boards need to focus as much attention on the implementation plan as they do on the strategy itself. Directors should be asking critical questions related to the plan. Does the company have the resources—financial and human—necessary to carry out the strategy? Is the company positioned and organized to successfully implement the plan? To what extent are key managers involved in the strategy development, and are they fully committed to—and capable of—successful implementation?

Another success factor is ensuring that relevant measures have been developed to gauge progress along the way. Metrics, such as business-driver related key performance indicators or other relevant measures must be identified before implementation is begun. Management should then track those measures, and the board should determine whether course correction might be necessary. Such metrics should also form the basis for decisions on senior management motivation, performance assessments, and compensation. In addition to traditional financial measures, performance measures should focus on operating performance, enabling ready comparison of performance to plans and budgets, in relation to past periods, peers, competitors, and other established benchmarks. The key performance indicators should be forward looking, and encompass leading indicators to provide a view to where the company is headed.

Real-Time Adjustments

Another area sometimes overlooked is uncertainty and potential changes in the business environment. By now we should have learned that the business cycle still is with us, though now more pronounced and with longer stretches than ever. Yet most strategies today are rooted in the expectation the current phase of the cycle will continue well into the future.

Some companies now recognize the benefits of using variable strategic and implementation plans, with different courses of action geared to varying economic scenarios. But in reality, few companies' strategies are flexible enough. Since a strategy appropriate for a growth cycle is unlikely to work when the economy is retrenching, management must be able to quickly reconsider the strategy and revamp it as necessary. Management needs to reevaluate the competitive environment—to anticipate reactions to the downturn by customers, competitors, and key suppliers, and to consider the effect on demand, production, and service capabilities.

The board of directors must work with management to reassess assumptions underpinning the strategy and determine what directional change is needed. Experienced directors recognize they can offer particularly useful advice to the company's top executives, who may have served in their roles during only one phase of an economic cycle. Establishing the right atmosphere and working together can make all the difference in whether or not the strategic plan will drive corporate success.

For more information on the strategic planning process, please see my book, Governance, Risk Management and Compliance, recently published by John Wiley & Sons.