Strategic planning committees on U.S. public company boards: Axiomatic or paradoxical?
Introduction
Because of the board's distance from daily operations, information asymmetries between the board and management, and the need for board independence, many scholars have traditionally proposed a limited role for the board in strategy development (Conger et al., 2001; Hendry and Kiel, 2004; Pugliese et al., 2009). In contrast, others have argued that boards have a legal responsibility for strategy (Coffee, 2005; Harrison, 1987) and should actively contribute to strategy development (Andrews, 1980; Carpenter and Westphal, 2001; Goodstein et al., 1994). Such arguments become especially important in determining whether strategic planning is handled by the whole board or whether it is largely entrusted to a board Strategic Planning Committee (SPC)1 constituted for this purpose. The objective of our study is to examine board strategic planning processes, including the reasons behind the formation of board SPCs, based on semi-structured interviews with 20 directors who werewe involved in board strategic planning processes.
Our motivation comes from the following considerations. First, while there has been a voluminous amount of prior work sustained from very early days on strategic planning activities of firms at the management level (Grant, 2003; Lorange, 1993; Mintzberg, 1993; Pearce et al., 1987; Veliyath, 1992; Veliyath and Shortell, 1993), ours appears to be the first study on strategic planning processes conducted by board-level SPCs. Second, we are able to engage with and integrate prior work that has characterized board functions in terms of resource dependence theory (Hillman and Dalziel, 2003; Hillman et al., 2008; Pfeffer, 1972). In doing so we are able to tease out examples of how boards are able to fulfill their functions of providing advice and counsel, as well as resource provision (op. cit.). Additionally, we intend to provide insights into how board SPCs enable boards to deal with the information processing demands imposed on them by changing circumstances (Egelhoff, 1991; Sanders and Carpenter, 1998; Smith et al., 1991; Tushman and Nadler, 1978).
Board-level SPCs have been viewed as an anomalous and duplicative practice for two reasons (Harrison, 1987; Wommack, 1979). First, there is potential for duplication of efforts between the board-level SPC and management-level strategic planning committees. Second, strategic planning is considered to be primarily a management function, with the board having only oversight responsibility. Moreover, unlike in the case of board AAudit, NNominating, and CCompensation committees which generally are mandated, there is no statutory requirement requiring the establishment of SPCs at the board level in U.S. public companies. Therefore, there have to be reasons beyond a mandate compelling some boards to form such an SPC.
We propose that boards of directors face expectations based on prescriptions in agency theory (i.e., monitoring, oversight and incentive alignment), resource dependence theory (i.e., providing and enhancing organizational access to external resources) and information processing theory (i.e., coping with and dealing with information overload). The tensions among these disparate requirements can cause contrasting and sometimes conflicting institutional logics to emerge.2 Once established, institutional logics become dominant and are difficult to change (Pahnke et al., 2015). Multiple institutional logics (such as those prevalent in agency theory, resource dependence theory and information processing theory) can be concurrently accommodated, albeit temporarily and for short periods of time, such as during institutional transitions (op. cit.). Boards struggle with the need to deal with the tensions created by these contrasting requirements and the necessity of contending with multiple institutional logics during times of organizational changes and/or greater environmental uncertainty. Challenges are caused by organizational resource constraints and human cognitive limitations. Organizational decision-makers are limited in their ability to focus on more than a few issues at a time (Hambrick and Mason, 1984; March and Simon, 1958; Simon, 1997).
This paper proposes a paradoxical approach to governance as a novel approach to dealing with contrasting institutional logics, and the board's decision to form a board-level SPC as a solution to dealing with these contrasting logics in certain settings. The board-level SPC is one probable response representing the board members' desires to handle the paradoxical challenges facing them in their interactions with management and in dealing with multiple conflicting organizational logics. Thus, in some contexts, the board SPC can arguably better respond to the organization's need for innovation, flexibility, and responsiveness than the traditional full-board process.
It is with a view to examining, understanding, and disentangling this quandary, that we investigated board strategic planning processes, with a primary focus on firms with board-level SPCs. In undertaking the study, we examined two types of boards, through conducting extensive interviews with directors serving on each type of board. The first group comprised 12 companies where the full board dealt with strategic planning issues (SPO firms). This group representeded the normative practice more commonly observed on many boards. By contrast, in the second group of 8 companies, there were separate, formally constituted SPCs at the board level (SPC firms). We believe that a comparison between these two groups of companies can provide interesting insights into the seemingly paradoxical reasons why certain boards opted to form board SPCs, as well as reveal the differences between SPC and SPO firms’ approaches to strategic planning oversight. Specifically, we examined the following primary research questions:
- 1.
How do SPC and SPO firms' strategy-related meeting processes differ?
- 2.
What are the roles and responsibilities of the SPC and the board in strategy formulation and implementation? Do they overlap?
- 3.
How do SPC and SPO firms' efforts to ensure the development of corporate strategy differ?
- 4.
How do SPCs monitor and modify strategy, and how do SPCs interface with the board?
- 5.
Why do companies form SPCs?
Overall, we seek to provide deeper insights into the board's strategic planning oversight process, with a particular focus on the novel setting of firms with board-level SPCs. We use established governance theories as the foundation of our research, considering them as we developed the interview questions and evaluated the findings. Further, we also considered key patterns that emerged in the SPC findings and offer propositions based on the findings within the unique SPC firm setting. Our approach is consistent with Bansal (2013), who encourages a “circular flow” of deductive and inductive reasoning, as well as a focus on unconventional cases (in our instance, SPC firms, which complement the baseline condition of SPO firms). Further, Graebner et al. (2012, 276) state, “… strategic organization is an eclectic domain that encompasses multiple theoretical approaches and levels of analysis, and that diversity can and should be reflected in the ways in which qualitative data are used.” They also note (p. 277) that “… many studies do not fit a single mold or school of qualitative research.” Finally, Graebner et al. (2012, 279) state, “… many process studies involve some component of theory-building. HoweverMoreo, qualitative methods may be appropriate for examining processes even in areas of relatively mature theory.” It is in the spirit of Bansal (2013) and Graebner et al. (2012) that we employ our qualitative data somewhat differently for the baseline SPO firms and the novel SPC firms.
Based on the 20 interviews, we found: (1) SPC and SPO firms' strategy-related meeting processes seemingly appeared to overlap and be fairly similar on the surface. However, upon closer examination, the underlying tensions and paradoxes were discernible in the different responses provided by the directors in SPC and SPO firms. (2) Relative to SPO firms, SPC firms were more likely to emphasize the importance of understanding and participating in management's process of developing strategy, were more focused on being advisory and supportive of management, and were more likely to view their process for overseeing strategy development as optimal. (3) Full boards typically took the lead on monitoring the implementation and progress of strategy even in SPC firms, which is in conformity with the expectations of traditional agency theory. (4) Companies also tended to form SPCs for reasons related to managing board-management information flows (and reducing information asymmetries, as per information processing theory), company-specific strategic changes, and efforts to enhance strategic planning through greater utilization of board-level expertise.
In addition, we found that (a) SPC firms were more likely to have formal written policies about the role of each party in strategic planning, a clearer demarcation of roles and responsibilities reflecting agency theory prognostications; (b) having an SPC provided board-level focus on strategic planning and could result in higher quality plans (consistent with the survey findings of Henke, 2007), while the SPO firms cited the advantages of leveraging the talents of all of the board's directors in providing strategic oversight; and, (c) SPC interviewees were more concerned with the SPC becoming too involved in strategy details, while SPO respondents were more concerned about the board being too uninvolved in strategy. Both of these concerns relate to the competing requirements between the agency theory requirements for board independence, objectivity and maintaining arms-length relationships with management (alluded to in the sentiments expressed by SPC respondents), and the resource dependence theory orientation of enabling greater board participation, cooperation, and engagement with management (evinced in the sentiments expressed by SPO respondents). In addition, they also tied in with the contrasting needs to find the right balance between oversight and delegation in the corporate governance process (Useem and Zelleke, 2006).
Overall, the SPC firms, with their smaller size and less experienced boards, appeared to see significant value in forming an SPC to formalize strategic planning, helping management through providing advice and counsel, and reducinging informational burdens on the board members. By contrast, the SPO firms, with their greater firm size and more experienced boards, sawaw value in having the full board oversee strategic planning, and they did not focus as much on helping management or addressing informational burdens. The SPC and SPO firms each responded to their situations and characteristics in ways that seemed to fit the organization's needs; we call for additional, large-sample studies on the differences between SPC and SPO firms.
Our study makes the following contributions. First, to our knowledge, this paper is the first interview-based process study on board SPCs. There is a paucity of work on U.S. board processes in general, and previous work on other board committees (Beasley et al., 2009; Clune et al., 2014, 2019; Hermanson et al., 2012; Veliyath et al., 2016) has urged for the conduct of more such board process studies. Our study serves to answer this call. Given that board SPCs are a more recent phenomenon than other committees, it is especially important to unravel the ‘black box’ of board SPC processes. Second, our study sheds some light on the debate regarding the role of the board in public companies' strategic planning (Coffee, 2005; Henke, 2007; Pugliese et al., 2009). We propose that given the realities of global competition and constant technological disruption, it behooves boards to recognize the effects of changed circumstances and move beyond solely agency theoretic assumptions towards embracing collaborative and collectivistic approaches. Our evidence supports the inference that board-level SPCs could be useful catalysts in certain settings in accomplishing such philosophical governance transitions.
The next section provides theoretical background, followed by presentation of our research method and findings. Finally, we provide the discussion and conclusion.
Section snippets
Agency theory
Under the agency perspective, the board and its constituent committees like the Audit Committee, Compensation Committee, Nominating and Governance Committee, (and more recently, the SPC) are charged with a fiduciary responsibility to ensure that decisions and actions taken by the firm's managers (i.e., the agents) are in accordance with and protect the interests of shareholders (i.e., the principals). In this capacity independent boards and their committees substantively monitor management and
Methods
The study was based on semi-structured interviews conducted with 20 U.S. public company board members. Twelve of these directors dealt with strategic planning on their respective full boards (SPO firms) in the absence of a board SPC, while 8 directors served on an SPCs (SPC firms). The interviewees were identified and contacted through professional contacts of the authors or by “cold calling” firms with an SPC.
Prior to the interviews, we developed a 13-page interview script for the SPO
The interviewees and their companies (Table 2)
Table 2 presents information on the interviewees and their companies. The interviewees were primarily older males, consistent with the typical profile of U.S. public company directors, although the SPO directors (mean age of 70.4 years) were somewhat older than the SPC directors (mean age of 57.8 years). The SPO directors also had more board experience (mean of 32.6 board-years) than the SPC directors (mean of 18 board-years). There was a similar relation for tenure with the focal board, with
Theoretical insights and patterns in the findings
Board-management interactions and relations have for long been mired in the traditional agency theoretic paradigm of protecting and preserving board independence and neutrality through maintaining arms-length interactions and minimizing social ties with management. Organizations draw their logics from the higher-order institutional frameworks within which they are embedded (Scott, 2001). The legitimacy of agency theory as an organizing logic is derived from its conformity with ‘the primacy of
CRediT authorship contribution statement
Dana R. Hermanson: Writing - original draft, Conceptualization, Validation, Formal analysis, Visualization, Project administration. James G. Tompkins: Conceptualization, Methodology, Validation, Investigation, Resources, Supervision, Funding acquisition. Rajaram Veliyath: Writing - original draft, Conceptualization, Validation, Investigation. Zhongxia (Shelly) Ye: Methodology, Formal analysis, Investigation, Data curation.
Acknowledgements
We thank Sotirios Paroutis (Associate Editor), two anonymous reviewers, and Kai Xu for helpful comments on the paper, and we thank the 20 interviewees for their time and insights.
Dana R. Hermanson is Dinos Eminent Scholar Chair of Private Enterprise, Professor of Accounting, and Director of Research in the Corporate Governance Center at Kennesaw State University. His work examines corporate governance, fraud, and auditing issues.
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Dana R. Hermanson is Dinos Eminent Scholar Chair of Private Enterprise, Professor of Accounting, and Director of Research in the Corporate Governance Center at Kennesaw State University. His work examines corporate governance, fraud, and auditing issues.
James G. Tompkins is a Professor of Finance at Kennesaw State University. He also serves as the Director for the Corporate Governance Center. He has published in both practitioner and academic journals in the area of corporate governance.
Rajaram Veliyath is a Professor of Strategic Management and International Business and Interim Director of the Michael A. Leven School of Management, Entrepreneurship and Hospitality at the Coles College of Business. His research interests include corporate governance practices, CEO and director compensation, and internationalization strategies of emerging market firms.
Zhongxia (Shelly) Ye is an Associate Professor of Accounting at the College of Business, The University of Texas at San Antonio. Her current research focuses on corporate governance, auditing, and internal controls.