Board involvement in strategy and organisational performance

Abstract

In firms where oversight by a regulatory body within the industry exists and where new core competencies must be developed to offset aggressive competition, there is evidence that a larger role for board of director involvement in strategic activities occurs. Within this context, survey data from board members and CEOs reveal that in organisations where financial soundness scores are less favourable, the odds of the board being more involved in a formal strategic planning process increase. Regarding a strategy role that consists of the board collaborating with management in making new strategic decisions, it is less likely that the board will take on this role when the organisation's financial soundness scores are not at the optimal level. For many years, boards of directors have been encouraged in theory and in practice to take on an active strategy role. However, in much of the literature the nature and extent of board involvement in strategy is undifferentiated. Most empirical studies dealing with corporate governance issues focus on board composition and structure variables and do not examine the level of involvement from a decision making perspective. Capturing this particular perspective is not only of interest to researchers but also is of practical importance, as general management seeks to realise the board's full potential in the strategic arena. This paper reports on the involvement of boards in a five-step strategic planning process and also examines board participation relative to that of senior management in strategic decision-making and evaluation. The first section examines the limited empirical findings of board involvement in strategic activities and outlines three viewpoints on possible participation levels. The paper then describes an empirical study that shows board involvement varies in relation to the organisation's financial performance.