Strategy and Governance: Direction, Analysis, and Board Oversight
Strategy and Governance tests how organizations set direction, analyze their environment, and govern themselves ethically. Core 1 expects you to link external analysis to strategic choices and to evaluate board and committee structures against independence and risk oversight principles.
Strategy tools and their limits
- Mission states purpose; vision states desired future; values guide behavior. Do not use them interchangeably.
- PESTEL scans macro forces; Porter's five forces assesses industry attractiveness; SWOT summarizes internal strengths and weaknesses against external opportunities and threats.
- A SWOT list is not a strategy. Convert it into options, evaluate them against objectives and resources, then recommend.
- Governance: the board oversees strategy and risk, appoints and evaluates the CEO, and approves financial reporting. Independence requires no material relationship with the company.
- Ethical decisions: identify facts, stakeholders, duties, and consequences; then choose and justify the course of action.
Worked example: board independence
A seven-member board has three executives and four outside directors. One outside director's consulting firm earned $150,000 from the company last year. The audit committee has three members: that director and two outside directors with no other ties.
Reasoning: the board is majority independent (four of seven), but the paid consultant has a material relationship and is not independent. The audit committee must be composed entirely of independent directors, so the consultant cannot serve. The remaining two independent directors are too few for a three-person committee; the company should replace the consultant or add an independent director. This is a governance deficiency, not merely a disclosure issue. Family ties, cross-directorships, and former employment within a cooling-off period also impair independence.
Traps that cost marks
- Treating a code of conduct as sufficient evidence of ethical culture.
- Confusing risk appetite (how much risk is acceptable) with risk tolerance (acceptable variation).
- Ignoring stakeholder salience when recommending a strategy.
- Assuming any outside director is independent.
- Recommending a strategy without linking it to analysis or measurable outcomes.
- Forgetting that the board oversees, while management executes.