“We can’t afford the cost of harmony!” declared Bruce Dayton, former CEO of the Dayton Company. He was referring to the way Dayton’s family-only board made decisions through a time-consuming process to achieve consensus. He sensed that the accelerating pace of the retail business required a change in the company’s governance model. The year was 1950, and the five Dayton brothers had not yet grown the single department store—inherited from their father—into what would eventually grow to become Dayton Hudson Corporation and later the retail giant Target Corp. “There is a new phenomenon coming called the mall. At present we don’t have the distribution, financing, and real estate know-how to go there. But the longer we wait the harder it will be to get in. And if we don’t go, we will become five brothers owning a smaller and smaller business together.”
The Dayton brothers’ way out of that dilemma, which was courageous at the time, was to compensate for their lack of know-how and clear strategy by bringing in outside expertise onto their board, while making a personal commitment to become students and proponents of excellent corporate governance. They recruited independent directors who could help the company select real estate, raise capital, and set up a multi-store distribution system. They saw reshaping the board as a key first step in developing the strategy and capability needed to pursue an opportunity for exponential growth.
Bruce Dayton provided these insights in an interview with me a few years ago, and his story is included in the newest addition to the NACD Director’s Handbook Series, TheFamily Business Board, Volume 2: Governance for Agility and Growth, published this month (March 2016). Dayton was ahead of his time. His strategic use of the board is becoming more common among family-owned companies today, as evidenced in the 2015–2016 NACD Private Company Governance Survey: Family Business Boards. The survey showed many points of comparison between the boards of family businesses and public companies, and also revealed that family business boards have their own governance style oriented to the long term. The proliferation of family-business education programs and peer networks for directors of large family-controlled companies, including NACD’s upcoming Advanced Director Professionalism, is empowering more owners to create sophisticated, tailored governance structures that include independent director expertise while also cultivating the family’s continuing contribution to the value of the business.
Family business board development requires a champion and a plan.
The Dayton brothers’ story illustrates important steps on a path to more effective family business governance. Because there may be many obstacles (sometimes political and emotional) to be overcome in advancing the capability and composition of a family business board, the best leaders of board change are usually well-prepared insiders—who have both strong credibility within the company and high levels of trust among the owning family members. NACD’s new handbook is designed for these “board champions” who want to spark development and expand the capability of an existing board to help the business meet new challenges. The handbook suggests strategies for addressing common sources of resistance to board change in family business and describes the following fundamental steps of board-development planning:
Identify and communicate reasons to advance the board, such as new realities on the business horizon, that compel a strategic response.
Assess board capability and effectiveness gaps.
Bring on independent directors while building owner confidence.
Facilitate constructive contributions from both independent and family directors.
Because every family business is different, these basic steps should be customized and implemented in a manner that is acceptable to senior management and leading shareholders. These stakeholders must have confidence that the board changes are the best way to move the company forward. But before that confidence can be built, acts of courage are required. A “champion” has to raise the issue of board readiness and articulate compelling reasons for advancing the board, while charting a board development plan that brings others along.
The risks are higher when family relationships are at stake.
The Dayton brothers reshaped their board as a first step in achieving a series of advances: building the first indoor mall in the United States, becoming developers of mall anchor stores, and later, buying a competing public retail chain before selling their interest in that business to focus on a new quality discount store concept, Target.
For the Daytons, as for many family business owners, recruiting outside, independent directors required the support of informed and educated family members. In their case the speed of change in the business environment required action before an informed family consensus could be achieved. “We recognized that success might require that each of us would eventually have to give up our current management job to someone who could do it better, and even sacrifice our good salaries in the short term for the goal of higher profits and greater long-term returns,” said Dayton. “We knew that sacrifice might be hard for our [families] to understand, but board discussions boosted our confidence that profits would rise, and shared profit would eventually smooth any hard feelings.”
The brothers’ gutsy steps toward better governance not only produced a more powerful company, but also they established precedents that inspired generations of creative family contributions in entrepreneurial business, philanthropy, and public service. The potential to be a part of that kind of long-term generativity is a reason why many of the best independent directors want to work with great family business boards.
Allen Bettis is the author of NACD’s latest handbook for family business boards and is a leader of the NACD Minnesota Chapter. Allen will be facilitating a discussion with directors from the featured case study in the newly released handbook at Advanced Director Professionalism in June. If you are interested in attending, click here.
Each year I find myself declaring that the profession of directorship has become more challenging than it was in the previous year. I believe we’ve now reached the point where we should recognize this escalation as the status quo, not an annual anomaly. The Securities and Exchange Commission’s director qualification disclosure requirements, the advent of proxy access, and the increasingly public role of shareholder activists have contributed to a business environment in which directors’ qualifications and performance are continually scrutinized.
NACD’s mission is to help directors lead with confidence—and to foster stakeholders’ confidence in their directors’ ability to effectively serve their companies. I’d like to highlight three critical issues that we believe directors—of all company types—should focus on during the year ahead.
1. Director Awareness
The dramatic slowdown in China’s economy, plummeting oil prices, recent terrorist activities, and the rise of the digital economy have put a fine point on the need for directors to be aware of disruptors that may cause a drastic change in sea conditions for their organizations.
No one can be expected to anticipate every potential disruption. (Who could have seen Uber idling around the corner?) But foresight comes down to one deceptively simple practice: asking the right questions. Are board members exploring the possible impacts of a terrorist act on the company’s supply chain, investigating their organization’s vulnerability to a cyber attack, or considering new competitors that can bring products to market faster than ever before and with nominal investment? Throughout 2016 our NACD Directorship 2020 initiative will continue to focus on disruptive forces, putting a spotlight on the issues that may affect your companies in the years to come.
It goes without saying that activist investors have gotten our attention. A record-setting 355 activist campaigns were announced in 2015, including 33 against Fortune 500 companies. Last year was also a record year in terms of activist campaigns resulting in board seats—127 resulted in at least one board seat for the activist or the activist’s appointee. Our own annual survey of public-company directors found that 20 percent of respondents’ boards were approached by an activist investor in the past year. But nearlyhalf of respondents reported that they are unprepared for an activist challenge.
Activists aren’t practicing black magic; they are performing effective due diligence and smart analytics on their holdings. Boards need to think like activists and anticipate the issues these investors may raise. Do your company’s metrics fall outside industry norms? Does your board composition have any perceived weaknesses? Do you engage with management about the assumptions that undergird your company’s strategy? In 2016, NACD will continue to provide resources that can help your boards to anticipate—and respond to—emerging issues.
M&A activity reached record levels in 2015. Given this phenomenon, it’s more critical than ever that boards understand their role in M&A. We believe it boils down to readiness and oversight.
At any given time, directors may need to consider either the sale of their own company or the purchase of another company. The board must carefully weigh all opportunities to buy or sell as part of its routine corporate oversight. Be on the lookout for NACD’s new M&A Board Resource Center, which will be available later this quarter. The center will serve as a one-stop shop to help boards participate effectively in the evaluation of proposed M&A transactions.
NACD Cyber Summit
On a final note, I’d like to call your attention to the 2016 NACD Cyber Summit, which will be held on June 15 in Chicago. With Congress now considering passage of a bill that would require companies to publicly identify the “cybersecurity experts” on their boards, scrutiny of the board’s role in cybersecurity oversight has never been greater. This year’s Cyber Summit will equip directors and management with the tools they need to foster cyber resiliency and confidently oversee cyber-risk management.
If you would like to receive additional resources on the three issues mentioned above or more information about the Cyber Summit, I encourage you to contact your dedicated NACD Concierge. If you have not yet had a chance to meet the concierge assigned to you, give us a call at 202-775-0509, and we’ll connect you.
Thank you for being an NACD member. I wish you a successful year ahead.
For the 1,200-plus directors convened at this year’s NACD Global Board Leaders’ Summit, Delaware Supreme Court Chief Justice Leo E. Strine Jr. had words of advice that ranged from improving time management to establishing a Tobin-like tax on financial transactions. The nation’s leading jurist on corporate matters also cautioned against using electronic devices during board meetings for unrelated matters because that information may one day be discoverable in court.
Interviewed on Tuesday, Sept. 29, by NACD President Peter Gleason, Strine was at his provocative best. The proliferation of technology in the boardroom, Strine observed, may lead to an unintended consequence: the ability to discern just how engaged directors are and by what in board meetings. Strine warned of the possibility, and even the probability, of a shareholder suit that alleges inattention and seeks to support that allegation with a review of the director’s online activity when in board meetings—measuring just how much time was spent looking at material on the board portal versus sending e-mails, text-messaging family or friends, or playing fantasy football.
Boards also need to assess whether they are using their time to best effect. “There are no disciplined studies about how boards should be scheduled and what you do in certain committees,” Strine said. “The pattern is that if something is required legally or by statute, then that tends to get done first. A real challenge is to think like business people about your function as a director and how you use your time, and [recognize] that it reflects the priorities that you (as a board) set.” Strine challenged directors to set “a board budget of hours.”
Strine repeated a suggestion he has made previously that U.S. tax policy be adjusted to include a so-called Robin Hood or Tobin tax. Such a tax is named for the late Nobel Prize-winning Yale economist James Tobin, who in 1973 recommended a levy on short-term currency swaps in order to thwart speculation. A similar tax on stock trades, Strine maintains, would discourage short-term fund-hopping and generate new revenue.
Strine took issue with the voting practices of some large asset managers, noting that the sheer volume of votes created by shareholder proposals and the numbers of companies in each fund make informed voting impossible. Even the most “rational” investors, such as Fidelity Investments and the Vanguard Group, tend to vote their funds in one direction for the sake of expedience, he said. (See related content:Taking the Long View with Bill McNabb.) “It would be good for index funds to have their own voting policies. Why is the index fund voting the same way as the dividend fund?” Strine asked. “Why?”
One of the CEO’s most important jobs is to develop the next generation of leadership, Strine reminded the assembled directors, and boards should have opportunities for regular contact with up-and-comers.
Strine also recommended that boards consider the benefits of adopting a forum-selection bylaw. The inclusion of such a bylaw would allow corporations to determine where court cases are adjudicated when suits cover more than one jurisdiction. The state of Delaware in May enacted an arbitration law that is intended to provide speedier, more cost-effective dispute resolution as long as one of the companies in the dispute is domiciled in Delaware.