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200 PART 2 • STRATEGY FORMULATION
that publicly issued documents are accurate representations of a firm’s status. It is becom-
ing widely recognized that a board of directors has legal responsibilities to stockholders
and society for all company activities, for corporate performance, and for ensuring that a
firm has an effective strategy. Failure to accept responsibility for auditing or evaluating a
firm’s strategy is considered a serious breach of a director’s duties. Stockholders, govern-
ment agencies, and customers are filing legal suits against directors for fraud, omissions,
inaccurate disclosures, lack of due diligence, and culpable ignorance about a firm’s opera-
tions with increasing frequency. Liability insurance for directors has become exceptionally
expensive and has caused numerous directors to resign.
The Sarbanes-Oxley Act resulted in scores of boardroom overhauls among publicly
traded companies. The jobs of chief executive and chairman are now held by separate per-
sons, and board audit committees must now have at least one financial expert as a member.
Board audit committees now meet 10 or more times per year, rather than 3 or 4 times as
they did prior to the act. The act put an end to the “country club” atmosphere of most
boards and has shifted power from CEOs to directors. Although aimed at public compa-
nies, the act has also had a similar impact on privately owned companies. 14
In Sweden, a new law has recently been passed requiring 25 percent female represen-
tation in boardrooms. The Norwegian government has passed a similar law that requires 40
percent of corporate director seats to go to women. In the United States, women currently
hold about 13 percent of board seats at S&P 500 firms and 10 percent at S&P 1,500 firms.
The Investor Responsibility Research Center in Washington, D.C. reports that minorities
hold just 8.8 percent of board seats of S&P 1,500 companies. Progressive firms realize that
women and minorities ask different questions and make different suggestions in board-
rooms than white men, which is helpful because women and minorities comprise much of
the consumer base everywhere.
A direct response of increased pressure on directors to stay informed and execute their
responsibilities is that audit committees are becoming commonplace. A board of directors
should conduct an annual strategy audit in much the same fashion that it reviews the
annual financial audit. In performing such an audit, a board could work jointly with oper-
ating management and/or seek outside counsel. Boards should play a role beyond that of
performing a strategic audit. They should provide greater input and advice in the strategy-
formulation process to ensure that strategists are providing for the long-term needs of the
firm. This is being done through the formation of three particular board committees: nom-
inating committees to propose candidates for the board and senior officers of the firm;
compensation committees to evaluate the performance of top executives and determine the
terms and conditions of their employment; and audit committees to give board-level atten-
tion to company accounting and financial policies and performance.

Conclusion
The essence of strategy formulation is an assessment of whether an organization is
doing the right things and how it can be more effective in what it does. Every organi-
zation should be wary of becoming a prisoner of its own strategy, because even the
best strategies become obsolete sooner or later. Regular reappraisal of strategy helps
management avoid complacency. Objectives and strategies should be consciously
developed and coordinated and should not merely evolve out of day-to-day operating
decisions.
An organization with no sense of direction and no coherent strategy precipitates its
own demise. When an organization does not know where it wants to go, it usually ends up
some place it does not want to be. Every organization needs to consciously establish and
communicate clear objectives and strategies.
Modern strategy-formulation tools and concepts are described in this chapter and inte-
grated into a practical three-stage framework. Tools such as the SWOT Matrix, SPACE
Matrix, BCG Matrix, IE Matrix, and QSPM can significantly enhance the quality of strate-