Archive for the ‘Investor Relations’ Category

Long-Term Strategy and Short-Term Success Are Complementary – Not Contradictory

September 30th, 2015 | By

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.

The Role of the Board in Long-Term Value Creation

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:

  1. 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?”

  1. 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.”

  1. 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.”

  1. 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, 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

Servant Leadership: An Interview With Wawa Chair Richard D. Wood Jr.

September 29th, 2015 | By

What happens when a company places service before leadership? Wawa Inc. did just that, and its chain of convenience stores has soared as a result. Jeffrey M. Cunningham, founder of NACD Directorship magazine and professor of leadership and innovation at Arizona State University, spoke with Wawa Chair Richard D. (“Dick”) Wood Jr. on the main stage at NACD’s 2015 Global Board Leaders’ Summit about the inner workings of the regional convenience-store chain that has grown into a $9 billion empire.

Richard Wood from Wawa

Originally an iron foundry established in New Jersey in 1803, the Wawa company has weathered many rounds of disruption to become one of three genuine cult businesses in the country, the other two being In-N-Out Burgers and Chic-fil-A. Wood ascribed his success at the privately-owned company that he has served since 1970 to the concepts of servant leadership and being a steward of investment in advanced technologies and innovations. A member of Wawa’s legal counsel at the beginning of his career, this descendant of the founder now serves as non-executive chair of the company’s nine-person board.

For the first half of the event, Cunningham interviewed Wood about the history of the company and Wood’s commitment to the philosophy of servant leadership. In a business context, this philosophy puts service to every stakeholder before any other facet of the enterprise. Wood takes justifiable pride in Wawa’s commitment to its 26,000 employees, including their ownership in the company. Wawa’s Employee Stock Ownership Program (ESOP) has created such value for employees at every level that the organization last year received 300,000 applications for its available 3,000 open positions. The Wawa model has proven to be profitable not in spite of but because of its commitment to family and service.

Once the conversation opened up to questions from the floor, Wood described some of the business challenges he’s faced over the years and how he has surmounted them. When asked about his reputation as “Chief Paranoia Officer” and how even good CEOs often misread the signs, Wood said, “Every time it comes back to hubris. It always comes back to hubris. CEOs didn’t have enough paranoia.”

Wood’s observations on a form of CEO self-awareness that some dub paranoia was fascinating in relation to the earlier keynote presentation by Kwame Anthony Appiah on honor’s place in business. One way that Wood practices honor in his business is to ensure that Wawa’s six core values—Value People, Delight Customers, Embrace Change, Do the Right Thing, Do Things Right, and Passion for Winning—are so thoroughly woven into the company culture that every employee can recite them; and dozens of times each month, Wawa employees recognize their peers in writing for exemplifying those values day to day. Wood’s leadership of Wawa illustrates the type of professional ethics that Appiah touched on in his keynote speech.

Before closing, Wood addressed Wawa’s next step in its innovation cycle: a move toward diesel fuel. “Two big products are going to disappear,” Wood declared. “One is cigarettes, and the other is gasoline. We’re looking into alternatives to replace a commodity we think will disappear.” To support diesel as the anticipated new market source in fuel, Wawa plans to retrofit its filling stations.

Katie Grills is assistant editor at NACD Directorship magazine.    

Executive Compensation—What Matters Most to Activists?

September 10th, 2015 | By

Executive compensation is a perpetual hot-button topic and one that activist investors frequently use to court shareholder support for their proposals. In a recent BoardVision video, Semler Brossy managing directors Roger Brossy and Blair Jones talk with Ken Bertsch, partner at CamberView Partners, about the following questions:

  • What compensation practices are red flags for activists?
  • What happens when an activist investor, or their representative, joins a board?
  • What are some practical considerations for boards and compensation committees?

Semler Brossy BoardVision

Here are some highlights from that conversation.

Roger Brossy: [Activists have] $200 billion under management in various funds. We could see, at current pace, as many as 700 campaigns in corporate America led by activists. Blair, what does executive compensation have to do with this?

Blair Jones: It certainly is not the primary issue that an activist is using as they pursue a company, but it is a hook to engage other investors and also to engage the public at large if it’s a very public fight. The kind of thing they’re looking at is the magnitude of pay. So they would look at the “how much is too much?” question. They might look at certain elements of pay, like retirement or special supplemental retirement benefits, that only executives get. They love to look at pay and performance. Their favorite chart is a pay level that stays steady or even goes up, contrasted against a performance level that’s going down. That’s one of their key areas of focus and interest. They like to look at whether the metrics that they care about are included in the compensation programs, and they also look at say-on-pay votes. And if the company has a pattern of lower say-on-pay votes, it’s often an indication that there may be other governance problems underlying some of the decision-making at the company.

Brossy: Ken, we’ve engaged with activists who are very, very thoughtful about executive pay and have a very reasoned point of view about what the structure of programs ought to look like. But we’ve also been in situations where it felt like stagecraft, and we weren’t sure there was a lot of conviction. Maybe it was more just sort of a point to embarrass or try to curry favor with others. How do you see this fitting in?

Ken Bertsch: Well, I saw both things happen. This is a bit of a campaign—a political campaign—and people use things in campaigns that may make people look bad, which might not always be authentic to what’s going on. On the other hand, I wouldn’t want to overstate that, because I think executive pay does often get to, or is linked to, underlying strategy. Blair talked about discussion of metrics and what makes sense. If the investor has a view on what’s going wrong at the company and the pay strategy fits into that, that’s going to be a useful—and in some ways illuminating—piece of the campaign. So I think it’s both things, and it makes it hard to deal with.

Brossy: So what is your advice for boards?

Bertsch: Number one, be as clear as possible about executive pay. Disclosures have gotten a lot better in recent years, and I think that’s very important. Why are people being paid what they’re paid, and what’s the strategy behind it? How does it link to the company strategy? A lot of the investors who are not activists but [are] potentially voting on activism, that’s what they care about. So you want to be logical about what you’re doing. I think you want to avoid some of the practices that tend to get a lot of criticism. I think, also, you want to listen to the activists, to your shareholders, and try to hear if there is merit in the arguments being made.

Brossy: Blair, when we’ve had boards take activist slates into the board, obviously a very unusual and interesting environment ensues. People who might have been in sort of antagonistic public stand[off]s with each other are now looking to find a constructive way forward, and there may be a variety of points of views or degrees of willingness to have that happen. What should compensation committees do at that stage as they’re taking new members onto the board and potentially onto the compensation committee?

Jones: I think that’s a great question, and one of the most important things is to get a clear articulation of the philosophy of the compensation program. It’s important for the new board members to hear the history of how you got to where you did, but it’s also important for the whole board to talk about where the program is and to either affirm where they are or say there are some things that need to change. They do that as a group where they’re revisiting it. I think that’s job number one.

I think job number two is to … think about the people and the talent. Considering we’re in the situation we’re in, do we have any talent out there that we need to shore up and ask to stay and work with us through the process of taking this company into the next era? That may mean looking at things like severance arrangements so people feel like they have some protection. It may be selective retention or special programs that have new measures related to whatever the objectives of activists’ campaign were.

Additional NACD Resources

Report of the NACD Blue Ribbon Commission on the Compensation Committee: Executive Summary

NACD Directorship:  “Attacking Executive Compensation”

NACD Board Leaders Blog:  “FAQs on the New SEC Pay-Ratio Rule”