The Board’s Focus on Strategy
The content of this post was adapted from the Talk, “The Board’s Focus on Strategy,” authored and narrated by Randy Miller.
Strategic planning begins with strategic thinking. Strategic thinking starts with identifying the key strategic options important to the system and envisioning the Fund status 5-7 years in the future. One of the key responsibilities of a retirement system Board of Trustees is setting the strategic and policy direction for the organization. It is of critical importance that the Board, as a collective body, does not become mired in daily activities but instead sets the overall strategic direction and monitors the system’s performance. To this end, the Board should consider: key strategic choices, how to be best involved in the strategic planning process, its role in monitoring progress, and how to allocate its time.
Choices, So Many Choices
To begin, a strategic plan is different than a business plan. Strategic plans are developed periodically, typically every three to five years, with progress reviewed annually, whereas business plans are updated annually and offer a more detailed, day-to-day view. Strategic choices for the Board are generally related to three categories: investment, benefits, and organization. In the investment area, a Board should identify their investment beliefs, determine how they will delegate authority, and periodically review their investment management model, for example. In the benefits area, the Board should consider actuarial assumptions and sustainability, benefits administration infrastructure, and member benefit service strategies. Finally, in the organization area, important considerations include succession planning, stakeholder relations, sourcing strategies, key advisor selection, and organizational resourcing.
The Three Phases of Strategic Planning
Each system should have a strategic plan that guides the organization and evaluates important strategic alternatives. The planning process is typically led by the Chief Executive, sometimes with assistance from outside experts, but the Board should be involved at key points. The first phase is centered around identifying strategic issues. The Chief Executive forms a strategic planning team; conducts an analysis of the organization’s strengths, weaknesses, threats, and opportunities (known as SWAT analysis); and, in consultation with the Board, determines the key strategic issues, scope of the plan, plan priorities, and the planning horizon. In the second phase, which informs and sets the course, options are identified, underlying assumptions are made explicit, pros and cons of each option are evaluated, and risks are assessed. At the end of phase two, the Board sets the strategic direction by choosing the best path and assigning responsibilities. The final phase is the development of the strategic plan, which should include quantifiable goals and objectives, key milestones, accountabilities, and anticipated spending needs over a multi-year timeframe.
Effective Board Engagement
Development of a strategic plan typically requires a number of months to complete, and the Board should be thoughtfully involved at key points and engaged throughout. While the staff drives the initial strategic analysis to inform the strategic plan, the Board should be engaged from the beginning of this process, starting with the “planning the plan” discussion. It is critical to gain input from the Board and to ensure that the Board is aligned with the planning process. A second discussion should inform the Board as to what the options are, the pros and cons of each option, and staff’s preliminary recommendations. In the third phase, the Board and staff should understand and achieve consensus on strategic goals and objectives, timeframes to achieve those goals, and allocation of resources to support implementation.
Review, Refresh, and Look Ahead
A leading practice is for the Board to review the strategic plan at least annually, and then refresh and rethink the strategic plan every three to five years. Each plan is based on certain assumptions. Senior executives and the Board should monitor these assumptions over time and assess if they remain valid, and if they do not, they should reexamine and update aspects of the plan or change the overall plan as necessary.
In addition, public retirement system boards have many critical strategic choices to make and policies to set that are not included directly in the strategic planning process, for example an asset-liability study. Moreover, some of these decisions may need revisiting at different intervals and may have their own cycles and processes. Consequently, an important tool for developing and maintaining a forward-thinking Board is to establish and follow a multi-year agenda and calendar for long-term strategic topics. The general strategic agenda should drive items on the Board committee agendas as well as identify areas for continuing education.
Efficient Use of the Board’s Time
The most effective boards are those that set direction and policy, prudently delegate, approve key decisions and plans, conduct the business of the Board, and oversee operations and verify results. To be successful, boards should take a step back and reflect on the appropriate use of their meeting time. Many of the day-to-day decisions and issues can be delegated to staff. Boards should spend their valuable time identifying key strategic options, plan for robust discussions, provide input through the strategic planning process, and understand any changes to underlying assumptions. Boards that follow these strategic thinking guidelines will develop a good balance between setting the course and monitoring results.
The full Talk and the supplemental materials are available as part of the Asset Management Series of the Board Smart governance e-learning system. Click here to review the full curriculum. For more information about Board Smart subscriptions, please visit www.boardsmart.com or contact info@boardsmart.com to schedule a demo.