Archive for the ‘Director Education’ Category

Complexity and the Boardroom

October 14th, 2014 | By

At the final plenary session of the 2014 NACD Board Leadership Conference, NACD President and CEO Ken Daly spoke with Steven Reinemund, director of Walmart, Exxon Mobil, Marriott, and American Express, and Gen. H. Hugh Shelton (Ret.), chairman of Red Hat and director of L-3 Communications on the issue of business complexity. The current environment is dynamic, fast-paced, and tumultuous, Daly observed. Not only must boards stay vigilant of disruptive forces—including those identified by NACD’s Directorship 2020®: economics, geopolitics, competition, technology, demographics, innovation, and environment—these forces rarely appear solo. Indeed, multiple forces can strike a company at once, creating a formidable force: complexity.

Drawing from his military background, Gen. Shelton suggested applying a process of “branches and sequels” in boardroom discussions to reduce unknown factors. This process requires that strategy development takes into account all possible actions of your adversaries or competitors—forcing directors to consider the “knowns and the unknowns.”

Reinemund used different terminology to address unknown and unanticipated factors. He said that boards may wish to view disruptors and risks through both offensive and defensive lenses. Most importantly, boards must also combine the two. Although defensive moves can be easier for boards to understand and address, by considering offensive actions the board can help move the business forward.

Turning to the topic of innovation, Daly noted that an unusually high number (95%) of the Standard and Poor’s 500 company earnings have been used to buy back stock or pay dividends. He posed the question: does returning earnings to shareholders reduce or limit the funds available for innovation or acquisitions?

Both panelists agreed that many companies have a large amount of cash available, but often the board can’t find a potential acquisition that fits the company strategy, or the target has such a high multiple that it is not a good purchase. Despite these potential issues, though, the panelists agreed that most large companies need to invest in innovation, through acquisitions or otherwise. Above all, the board has to think in terms of the amount of risk they are willing to take and—if necessary—encourage management to make innovation a priority.

The session ended with a discussion on board accountability. The panelists noted that directors must hold each other accountable for recruiting the right leaders, keeping their skills current, and maintaining the right mix of directors on the board.

Generational Dynamics in the Boardroom

October 13th, 2014 | By

During today’s keynote address at the 2014 NACD Board Leadership Conference, Chuck Underwood—founder and principal of The Generational Imperative, a consulting firm that provides training and research on generational demographics to businesses and governmental officials—shared some key takeaways on how generational demographics affect corporate governance. He began by sharing three key points about generational dynamics.

  1. “Between birth and the late teens or early 20s, individuals form core values molded by teachings and personal experiences, and those core values are by and large kept for life. People who are approximately the same age group and who have been shaped by similar teachings and experiences are considered to be a generation.
  1. American life in the last 100 years has changed frequently and sharply, and life expectancy has increased because of advances in medicine and improved overall wellness. Individuals now live an average of 30 years longer in 2014 than in 1914. The increased life expectancy, coupled with frequent cultural changes, means there are now five living generations in the United States.
  1. The core values held by each generation exert powerful influence over that generation’s core choices, career decisions, lifestyle preferences, and behaviors—including leadership behavior in companies and in the boardroom,” said Underwood, who hosts the PBS national television series “America’s Generations With Chuck Underwood.”

Boards and company management can benefit from learning the core values of the five living American generations and by understanding how to relate to each generation in the marketplace and in the boardroom. The five generations are:

  1. The G.I. Generation, born from 1901 to 1926, is shaped by the experiences of economic prosperity during the roaring 1920s followed by the setbacks of the Great Depression;
  2. The Silent Generation, born from 1927 to 1945, is more financially secure than any other generation that has reached their age;
  3. Baby Boomers, born from 1946 to 1964, currently account for 25 percent of the U.S. population and 50 percent of its wealth;
  4. Generation X, born from 1965 to 1981, is shaped by a materially comfortable childhood that was also emotionally difficult because of divorced and career-driven parents; and
  5. Millennials, born from 1982 to 1996—possibly longer, depending on whether individuals born after 1996 hold to the same core values of Millennials—and living an extended adolescence while also wanting to change the world for the better.

Underwood said that each generation has its own leadership style that is shaped by its unique experiences. He has found there are four general points about generational leadership:

  1. Each generation leads for about two decades.
  2. Each generation’s unique core values determine America’s direction.
  3. Some generations deliver good leadership, some deliver bad.
  4. A generation’s leadership era begins when the oldest are about 65 years old.

The United States is currently undergoing a transition, Underwood said, from one leadership era–that of the Silent Generation—to another: the Baby Boomers.

“Silent Generation white males (minorities and women were allowed the same opportunities) came into an environment in which the corporation was the highest priority, rather than employees. Team players were valued more highly than mavericks,” Underwood said. The value of conformity was stressed to this generation.

They enjoyed lifestyles their G.I. Generation parents never were able to receive because of the Great Depression, and they measured their value based on their material wealth.

The Silent Generation had the expectation that if they conformed and put the company’s needs above their own personal needs, they would be rewarded. Their strong desire for reward, however, led in some cases to corporate corruption.

“This,” Underwood said, “is why eyes are focused on the incoming generation of corporate directors and managers—Baby Boomers, who in their youth helped bring social change through the civil rights’ and women’s rights movements, for example—to help set corporate America back on a solid track.”

Recalibrating the Dialogue on Strategy Development

October 13th, 2014 | By

Rethink strategy. Briefly, that sums up the message in NACD’s new Blue Ribbon Commission Report on Strategy Development released today at the 2014 Board Leadership Conference. It is well known that the operating marketplace is fast-paced, volatile, and more dynamic than ever before. Companies must be able to react to disruptive forces quickly and correctly–the inability to do so is a real risk to an organization’s health and longevity. And yet, the role of the board in strategy has not evolved to meet the accelerated pace of business. Many boards still oversee strategy development with a “review and concur” approach: management creates a fully formed strategy that is presented to the board for approval with little discussion, and reviewed on an often annual basis.

How, then, can boards become more engaged in the strategy development process without crossing the line into management’s purview? To answer this question, earlier this year NACD convened a group of leading directors, strategy experts, and investors. At the second panel of the day, commission co-chair Raymond Gilmartin, former chairman, president, and CEO of Merck, commissioner Barbara Hackman Franklin, director of Aetna, and Bill McCracken, former chairman and CEO of CA, discussed with Wall Street Journal’s Management News Editor Joann Lublin the key recommendations from the report. These include:

Move to a higher level of engagement in the strategy formulation process. Gilmartin noted that moving past the “review and concur” model is important in light of unpredictability, uncertainty, and the unthinkable. “As directors, we are responsible for the creation of shareholder value, and also the long-term survival of the firm,” noted Gilmartin. “Failure in strategy is the reason why firms fail.”

Engage early with management, and continually. As strategy is formulated and reformulated, Franklin observed that boards need to engage on the underlying assumptions, strategic alternatives that are being considered, the risks involved, and how you manage success or not. And after there is concurrence with the board and management, at every board meeting there should be an update. “In effect, the strategy discussions are going on all year,” summarized Franklin.

Prepare for the future. In addition to becoming more engaged in strategy, McCracken stressed the importance of preparing for the future. Board agendas should be created to discuss the environment, competitors, and opportunities for innovation. “Often, activist investors are coming after [boards] for a lack of bold innovation on the behalf of directors.”

Putting It Into Practice

Panelists also discussed how they have incorporated the report’s recommendations at their respective boards. These areas include:

Director Knowledge and Education

Optimal engagement in strategy development necessitates that directors have the knowledge and context to understand the information presented by management, which requires continual education. From his experience on the board of General Mills, Gilmartin encouraged directors to visit plants and operations to gain context and the ability to interpret reports. Boards need to have a framework to interpret current events, and a common language so that they can discuss it with management.

Board Composition

Gilmartin stressed that boards “really must understand what the capabilities are and what skills are needed to effectively oversee this strategy.” While the board of General Mills does not use individual director evaluations to assess director effectiveness, Gilmartin believes that because of the interactiveness of the board “director evaluation occurs in every meeting with how they participate.”  

Director Time Commitment

Board agendas are packed with little time for discussion–how can directors be encouraged to make the time for more engagement in strategy development? “A board that makes strategy a priority will spend the time on it–this doesn’t require persuasion,” observed Franklin. From her experience, the shift to becoming more engaged in strategy didn’t happen overnight at Aetna. Now the process begins with several meetings on underlying assumptions to the strategy that leads to a full day session on the plan. Once we get to the [full day] meeting we all own it–not just management. After selecting a strategy, the Aetna board receives an update on the plan at every meeting and a deep dive on one element of the strategy.

Board/C-Suite Relations

Panelists noted that as the board moves to a more engaged role in strategy development, management may feel defensive or territorial. Having served as both the non-executive chair and then CEO of CA, McCracken has experienced this situation from both viewpoints. As non-executive chair, McCracken observed: “I set up things for the board to engage more in strategy once I became CEO.” To move CA from a mainframe company to the cloud, McCracken created a task force of directors who knew the industry best and experts from management–encouraging the board to become more engaged. “Then when I was CEO,” McCracken recalled, “the then-elected chair asked me ‘what do you think of this activist board’? I said: I created it–I’ll have to live with it.

The Report of the NACD Blue Ribbon Commission on Strategy Development can be found at the NACD Library.