Well-intentioned boards and “promoters” of companies look for a variety of attributes in their directors. These include knowledge of the business and expertise in any of the key functions (such as finance and law) combined with a pleasant and optimistic nature. These may be useful or important attributes when dealing with the day-to-day matters that come up before boards: fund raising and restructuring, HR policies, selection of key managers, M&A, divestitures, etc.

Some promoters take on individuals because of their contacts in Delhi or with the regulators. Hence the demand for retired bureaucrats to fill directorship positions. Others look for experts in the industry so that they can get advice on the cheap. Functional experts are expected to second-guess the functional managers. The finance expert of the board is expected to look over the shoulder of the CFO so that the company is protected from the mistakes of the latter.

However, these are the regular functions of a board that happen meeting after meeting. But the principal function of a board is to approve, after evaluation, the draft strategy developed by the management.

What sets apart strategy from almost all the other matters that a board considers? The single major difference is that strategy sets out what the organisation will be like several years in the future. It determines the path that the company should take to become that organisation. Much of the strategy, as approved by boards, is pedestrian. It involves “more of the same”: we shall have a top-line CAGR of 11 per cent and a bottomline CAGR of 15 per cent, or such like.

Of course, this is not strategy; it is merely setting hopeful targets that require minimal thought by either the senior managers or the directors. In these situations, the board’s input is to support the “owner” or chairman in haggling; the MD will propose a CAGR of 8 per cent (aware that the board will haggle).

The board, equally aware that the MD has sandbagged his “strategic” target, will haggle for 12 per cent. In the best traditions of the fish market, the difference will be split after a bit of good-humoured to-and-fro, the target set at 10 per cent. This happens when the company is doing well and the owners do not want to rock the boat. Or, dangerously, when neither the management nor the board possesses what it takes to change direction, when that is needed.

Getting strategy right

What does it take? Before answering that, it must be pointed out that strategy is the most difficult area to get right. Strategy is setting the future destination. When setting the destination, it is important to understand the current capabilities of the organisation and the changed capabilities that may be developed by it to meet its objectives. That is the easy part because it is well within the control of the management.

The difficult part of setting course is to, first, identify a destination and, second, predict how the winds and the currents will behave. Because business is also a race with other boats, it also means guessing how they will react to the changes of wind and currents and what destinations they are aiming for.

Based on the destination chosen, there is then the next step: groping in the foggy future to determine what speed and direction you should set, what stores you should stock, what crew and captain you should hire, what instruments should you use. The analogy is not perfect, because the weather behaves with some degree of predictability, the business climate rarely behaves as predicted. There are too many factors involved — competitor behaviour, political and economic changes in the country and internationally, long term climate change and their impact on all stakeholders.

To penetrate the fog of the future, the most important attribute is wisdom. Many boards assume that knowledge of the business is enough to set strategy. Knowledge is facts and information leavened with experience of that subject. Often, the managerial team possesses far greater knowledge of a business than does the board of directors. In that case, how should a board evaluate strategy?

It should do so by looking at it through the lens of wisdom. How is wisdom different from knowledge. Wisdom is a combination of knowledge of a vast range of matters and experiences that leads to good judgment. It is possessed by people who have lived life observing and assimilating facts on a range of matters and who have processed those facts to be able to broadly discern what the future might be like.

This might involve having insight into the reasons for why matters in the past turned out the way they did and how those outcomes might or might not occur again in given situations.

Paying the price

Some years ago, several companies lost large sums when the Supreme Court cancelled their coal mining licences. This was because several of the successful licensees were found to have won them in unfair ways. As a result, even those companies which had won them on merit suffered due to the mass cancellations.

Wise boards in the latter companies might have cautioned managements to proceed slowly on further implementation of projects until the shadow of corruption was removed from the allocation process.

In the recent past there were many very aggressive bids driven by hubris, especially in the infrastructure sector. We now see those cases winding their way through the IBC processes; those boards lacked wisdom and were driven by the wish to grow regardless of risks. Boards that are oblivious to the changes in how society and their consumers will affect their goods or services are not being wise; will young people continue to remain against consumerism as they become older?

As the population of the world or target markets plateau, can growth of the top-line be the principal objective of strategy? Wise boards will wrestle with these challenges, not hone their haggling skills in preparation for a visit to the fish market.

Through The Billion Press. The writer is an independent director on the boards of Thermax and Exide Industries

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