The word hacker carries many connotations, most of them negative. But is it possible that hacking can be a force for good? During his keynote speech at the 2015 NACD Global Board Leaders’ Summit, technologist, author, and self-described hacker Josh Klein offered a fast-paced dive into the misconceptions that directors and executives may be perpetuating without even recognizing their error.
“Disruptive trends in technology, culture, and business are converging,” Klein observed before exploring four areas in which this convergence is creating unprecedented opportunities.
Code. In 2006, the cost to develop a website was exorbitant by any standard. Today, thanks to the multitude of free web-development tools now on the market, the cost is next to nothing. In Klein’s words, “It’s getting cheaper and cheaper to validate your business concept.” This fact alone will grow the pool of competition exponentially, because anyone who knows enough code to use these tools and has a marketable business plan can start a company. Anyone from legitimate start-up entrepreneurs to criminal masterminds can code a site, which means that companies must anticipate and plan for competition of varying legality and ethical standing.
Culture. “Tech doesn’t spring from the ether,” Klein pointed out. “It emerges from the attitudes and desires of users.” Information can be shared and spread almost instantaneously, increasing the likelihood that a company will at some point receive undesirable attention. According to Klein, technology creates a meritocracy via democratic exposure of reputation. But instead of trying to hide negative feedback, companies should get ahead of the problem and own it as best they can. He cited AirBnB as one example of how digital technologies have created marketplace meritocracies. Responding to an incident in which an AirBnB guest caused significant damage to a host’s home, the company rolled out a million-dollar host guarantee policy. This move both acknowledged the problems with the company’s old business processes and affirmed its commitment to improving those systems and protecting AirBnB hosts.
Competition. With the rise in sources of competition, businesses that rest on their laurels and become complacent about their success are putting themselves in a dangerous position. Looking out over the audience, Klein underscored the obvious: “We’re all sitting here, and the innovation may be happening someplace else.”
Future Context. To many of us it seems that everyone is connected by the Internet, but only about one-third of the world’s population is online. Klein observed that the remaining two-thirds may be illiterate and may not have bank accounts; they do, however, participate in the black market, which is currently valued at $10 trillion and accounts for $1 in every $7 exchanged, making it the second largest market on the planet. Companies must anticipate how these demographic shifts will create new business demands and transform the face of e-commerce.
Klein ended by entreating his audience not to panic but instead to begin experimenting, learning, evolving, and to do this all as quickly as possible. “Do it now, because if you’re not, someone else is.”
Front and center for boards and senior management is the call to align the company’s day-to-day activities with long-term value creation, said Bill McCracken, co-chair of the NACD Blue Ribbon Commission (BRC) that produced the newly-released report on The Board and Long-Term Value Creation. McCracken, who is also a director of NACD and the MDU Resources Group, president of Executive Consulting Group, and the former CEO of CA Technologies, co-chaired the commission with Dr. Karen Horn, director of Eli Lilly & Co., Norfolk Southern Corp., and T. Rowe Price Mutual Funds, and vice chair of the NACD board.
What’s the first step for boards in creating long-term value? “Draw a clear line between the daily objectives and long-term strategy,” said McCracken. “Ask, ‘Have we done a good job articulating that? Do investors buy into the strategy? And does the company have the capabilities it needs to execute that strategy?’”
Dona D. Young—chair of the nominating and governance committee for Foot Locker Inc. and a director of Aegon N.V. and Save the Children—served as moderator for a panel that also included Margaret M. Foran, a director at Occidental Petroleum and the chief governance officer, vice president, and corporate secretary of Prudential Financial; and Brian L. Schorr, partner and chief legal officer of Trian Fund Management LP, director of the Bronx High School of Science Endowment Fund, and a trustee of the New York University School of Law. Young and Foran were both BRC Commissioners in 2015; Schorr was a member of the 2014 BRC, which focused on the board’s role in strategy development.
The panel discussion amplified four key findings from this report:
Make short-term goals the building blocks of long-term strategy.
“It’s clear that short-term is not at odds with long-term,” Young said. “How do we integrate that concept in our companies?”
Panelists agreed that directors should determine how to break down long-term goals into measureable short-term milestones at the quarterly, half-year, and annual marks. As Schorr noted, “performance can’t be back-loaded: if a company consistently misses those short-term marks year-after-year, shareholders will question the integrity of the long-term goal you’re moving toward.” Among the BRC report’s tools for directors are examples of long-term-oriented performance metrics in nine different categories.
Directors also need to test the organization’s alignment between short-term metrics and long-term strategy with actual performance. Start off with your premise—or the long-term goal your organization is moving toward—and conduct historical look-backs on a regular basis, Foran said. “Were we right about our predictions? Did we reward the right things?”
Independent inquiry is not optional.
In order to be effective at setting those long-term goals and their relevant short-term milestones, directors must be knowledgeable about both the company and industry.
“We have to do our own homework and not rely solely on management [for information],” Young said. “How do board members engage in independent inquiry without making management feel like we don’t trust them?”
Directors should be reading press releases and analyst reports—not only those issued by their own company but also those of peers and competitors within the industry—to get a sense of what the trends are, Foran said. Trade publications and conferences are other key sources of data.
Schorr described an approach he himself uses: “At Trian, we focus on the income statement. We look at indicators such as EPS growth and EBITDA margins—do we see underperformance relative to what we believe is the company’s potential? Balance-sheet activists look for signs of excess cash, lower leverage ratios, or dividend payout ratios that are out of balance. We ask why. There may be a perfectly good reason; it’s just not well-articulated by management.”
Conduct regular individual-director evaluations.
McCracken highlighted the report’s recommendation on the need for long-term succession planning. When considering your company’s board composition, ask whether you have the capabilities and talent that will be needed to guide the company toward future goals, he said.
“We do strenuous 360-degree evaluations with management,” McCracken noted. “Why can’t we hold ourselves, as board members, to the same standard?” And since board members are peers, it is helpful to have a third party conduct the assessments. Young shared an example from her own experience in which individual director evaluations were truly 360-degree, incorporating input from senior management: “It was tremendously enlightening, really eye-opening.”
Be prepared to engage with shareholders.
The importance of regularly scheduled meetings with shareholders cannot be overestimated. “Don’t just wait for a problem to arise,” Shorr advised, noting that information exchange is a two-way street. The board should also have ways to gather unfiltered information about shareholders’ priorities and concerns.
McCracken emphasized this point: “In today’s world, board members need to talk to shareholders. Regulation FD is a non-issue, a red herring, and directors can’t use it as an excuse.” The BRC report provides detailed guidance that directors can use to prepare for shareholder meetings.
The BRC Report on the Board and Long-Term Value Creation is a natural extension of last year’s BRC report, which recommended that directors get involved in strategy decisions early on and remain involved with them, Schorr said. Doing so can help push management toward goals that promote long-term value creation with links to interim performance milestones that are clear to shareholders. “It’s more than understanding and doing defensive analysis. It’s getting into the boardroom and doing a lot of the things activists are doing,” Schorr said.
Moderator Young summarized the report’s significance this way: “This report helps directors to take a systems approach to engaging with management on strategy and driving value creation.”
This timely publication is the NACD’s twenty-second BRC report and represents the thought leadership of more than 20 eminent directors and trailblazers in business and government. Distributed to attendees of the GBLS and available to NACD members at www.nacdonline.org/value, the report contains the following practical guidance for the directors and boards of public, private, and nonprofit organizations:
Ten recommendations on the board’s role in driving long-term value creation
Eleven red flags that indicate a lack of alignment between short-term goals and long-term strategy
Specific steps directors can take regarding CEO selection and evaluation, capital allocation, and other elements related to long-term value creation
Eight appendices that offer detailed insights and practical boardroom tools
The 2015 NACD Global Board Leaders’ Summit officially opened Sunday evening with the bang of drums and the bagpipes of the St. Andrew’s Society of Washington, D.C., a local Scottish heritage association. Their performance was followed by an interactive video experience that challenged the audience to question the borders of the screen. Each of these sensory experiences underlined the theme of the year, Beyond Borders: Leadership Evolved. The opening night keynote speakers–NACD Chair Dr. Reatha Clark King, and philosopher and author, Kwame Anthony Appiah–explored how directors should weather the evolution of the boardroom.
King is a fan of challenges. A seasoned director herself who values the good businesses can do in the world, King centered her message on all the work that boards have done to better the world around us—and the work left to do. “We have been successfully adjusting the trajectory of governance systems and have made improvements, but we still have much to do,” said King. “The board’s agenda gets longer. We offer no encouragement that the agenda will get shorter. Instead we prepare ourselves for the greater demand.”
One of the demands King identified was the need for directors to hold fervently to core beliefs. One among the many she cited was accountability: “I am a student of the word ‘accountability,’ and it looms large in my mind for directors to understand and embrace it.” King asked the audience to also embrace leadership in challenging times in spite of the many chances to falter. Among the recommended ways to lead with strength through governance challenges were the concepts of embracing broader perspectives, finding the courage to do what’s right, and to be brave enough to change if needed.
King’s suggestions for leadership to the audience of more than 1,200 were strengthened by Kwame Anthony Appiah’s discussion on honor. Appiah is author of The Honor Code, a best-selling book that examines four points in history where honor outweighed other forces to catalyze social change for the greater good. Appiah distilled his observations on honor into applications for the boardroom and professional practice as a whole.
At the core of his message was that honor will trump money, regulation, and even the coercion of law to guide a person’s moral compass and that only honor holds up in the face of the greatest ethical challenges that inevitably arise.