Archive for the ‘Leadership’ Category

Nonprofit Boards: Five Reasons to Consider Serving

August 28th, 2015 | By

It’s August – a month associated with vacations in many parts of the world—and  a good time to contemplate the meaning of life from new viewpoints. As you break away from your everyday routine to view the big picture, be sure to give nonprofit board services some consideration. An educated guess would put the number of registered nonprofits worldwide at about 10 million—and in the United States alone there are 1.5 million charities, according to the National Center for Charitable Statistics. This includes about one million charitable organizations (501 c 3s), more than 100,000 private foundations, and nearly 400,000 other nonprofits ranging from chambers of commerce, to civic leagues, to fraternal organizations. All of them have boards of directors, and most are looking for volunteers. How about you?  Here are five good reasons to consider the call.

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Reason #1: Nonprofits Serve Worthy Causes

The first and foremost reason to serve on a nonprofit board is to make a difference in the world by advancing a worthy mission. Nonprofit organizations make the world a better place through a variety of channels including the arts, education, health, relief services, and public safety, and serve a variety of beneficiaries including both animals and humans throughout life cycles ranging from the very young to the very old. This is not to say that serving on a for-profit board lacks meaning; after all, businesses create jobs and provide useful goods and services. Still, for sheer moral pull, the typical nonprofit has greater “why” appeal. (If it didn’t the government wouldn’t grant it nonprofit status in the first place.)

Reason #2: Nonprofits Need Directors

Another good reason to consider serving on the board of a nonprofit is that you will have a fairly good chance of finding a seat; if you are a good match. Compared to for-profit companies, charities offer more opportunities for service, judging from turnover rates reported by the National Association of Corporate Directors (NACD). The 2014-2015 NACD Nonprofit Governance Survey, released this month based on responses from 750 board members, revealed high turnover: 88 percent of respondents indicated that their board had added or replaced at least one director in the previous 12 months. This compares to only 64 percent of public company boards and 57 percent of private company boards. This difference rate is understandable, as nearly two-thirds of nonprofits surveyed (64 percent) limit the terms of their directors, compared with only 8 percent for public companies and 14 percent for private companies.

Reason #3: Nonprofits Need You

Yet another reason to serve on a nonprofit board is that your particular skills are likely to be a good match. When asked what two skills were the most sought-after in their most recent director search, 35 percent of respondents to the NACD nonprofit survey said that experience in their particular field was a top consideration, but almost as many (31.6 percent) said that a top trait was leadership – a skill that all executives should have. Other popular choices (each selected by 10 percent of respondents or more) were strategy, finance, marketing, and diversity. Given the range of these criteria, most executives are likely to find a nonprofit board seat with their name on it.

Reason #4: Nonprofit Experience Can Help You Serve a For-Profit Board

A fourth reason to consider serving on a nonprofit board is the simple value of board experience. As you continue your career in the business world, chances are that you will eventually be reporting to or serving on for-profit board of directors. Do you know how boards work with their agendas, minutes, committees, calendars, and deep deliberations and decisions? You can read books and articles on the topic but the best teacher is experience. NACD has a Directors Registry where individuals can list their qualifications for board service, so that boards (both for-profit and nonprofit) can find them. Many for-profit boards looking for directors consider nonprofit board service to be a plus.

Reason #5: Nonprofit Board Experience Provides a Channel for Giving

As a nonprofit director, you won’t get paid much, if anything. NACD stats show that most nonprofit boards (88.7 percent) do not pay their directors, and those that do offer compensation pay very little (a retainer of less than $30,000 and meeting fees that are a fraction of that). The rewards, however, are great. This post has named four of them – including the worthy causes that nonprofits serve. But there’s more. By helping those causes you yourself will benefit. As Saint Teresa of Calcutta, aka Mother Teresa, one wrote: “At the end of life we will not be judged by how many diplomas we have received, how much money we have made, how many great things we have done. We will be judged by ‘I was hungry, and you gave me something to eat, I was naked and you clothed me. I was homeless, and you took me in.’” Nonprofit board service provides a channel to give in these important ways.

This blog was originally posted on July 29, 2015 at Bluesteps.

FAQs on the Role of the Board in M&A

August 14th, 2015 | By
  1. What is the current trend in M&A?

Right now, M&A deal value is at its highest since the global financial crisis began, according to Dealogic. In the first half of 2015, deal value rose to $2.28 trillion—approaching the record-setting first half of 2007, when $2.59 trillion changed hands just before the onset of the financial crisis. Global healthcare deal value reached a record $346.7 billion in early 2015, which includes the highest-ever U.S. health M&A activity. And total global deal value for July 2015 alone was $549.7 billion worldwide, entering record books as the second highest monthly total for value since April 2007. The United States played an important part in this developing story: M&A deal value in the first half of 2015 exceeded the $1 trillion mark for announced U.S. targets, with a total of $1.2 trillion.

  1. What is the board’s role in M&A?

This question can be answered in two words: 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 key word here is may: nothing obliges a board to buy or sell if a transaction is not in the best interests of the company and its owners. After all, internal growth and independence usually remain options for a company under ordinary circumstances. Nonetheless, the board must still carefully weigh all opportunities to buy or sell as part of its routine corporate oversight.

Director responsibilities will vary by industry and company, but in general, corporate directors have duties of care and loyalty under state law which also apply in the M&A context.

  • Duty of care. The duty of care requires that directors be informed and exercise appropriate diligence and good faith as they make business decisions and otherwise fulfill their general oversight responsibilities. When reviewing plans to sell a company unit or to buy or merge with another company, the board must exercise proper oversight of management, especially with respect to issues of strategy and compliance with legal obligations such as mandatory disclosures. Pricing is another important consideration, and boards should be wary of claims of synergy. Academic studies offer mixed opinions on the track record for merger returns. Some find positive returns compared to non-acquiring peers (Petrova and Shafer, 2010), especially for frequent acquirers (Cass Business School and Intralinks, 2014). Other studies, for example a recent Fiduciary Group study citing McKinsey, claim a 70% failure rate.
  • Duty of loyalty. The duty of loyalty requires that a director act in the best interests of the corporation, including in the M&A context. Boards can maintain independence from an M&A transaction by appointing a standing committee of the board composed entirely of independent, non-conflicted directors to review the terms of a particular deal with the help of an independent third party, who can render a fairness opinion. (NACD submitted an amicus curiae letter on this issue in May 2015.) For a substantive legal discussion of the board’s role in M&A transactions, see this article by Holly J. Gregory of Sidley Austin, which appeared in Practical Law (May 2014).
  1. Should the board be proactive in M&A, and if so, what are the most important questions directors should ask management about the opportunities and risks that M&A entails?

Even if your board is not currently considering an M&A transaction, it is important to remain aware of M&A as a strategic potential for the company, whether as buyer or seller. Here are some questions to ask, as noted in a recent article by Protiviti:

  • What potential opportunities and risks are involved in growing through acquisition?
  • Does M&A activity align with our current strategy and in what ways?
  • Looking at our portfolio of products and company units, are there any we might consider selling at this time? Why or why not?
  • Do we know the current market value of our company and its various units (if these are separable)?
  1. What impact will a merger have on the boards of the combining companies, and how can boards weather the change?

M&A typically leads to a change in board composition, with the board of the acquired company (often referred to as the target board) usually being absorbed into the acquiring board. According to a study by Kevin W. McLaughlin and Chinmoy Ghosh of the University of Connecticut, among the mergers of Fortune 500 companies, most directors on the acquiring board (83%) stay on, while only about one-third of directors from the target board (34% of the inside directors and 29% of the outside directors) continue to serve after the merger. The study also shows that for acquiring company boards, outside directors who sit on more than one other outside board have a higher chance of remaining members. For both acquirers and targets, outside directors with CEO experience are more likely to keep their seats.

In the September–October 2014 issue of NACD Directorship, Johanne Bouchard and Ken Smith consider these findings and offer “Advice for Effective Board Mergers.” Their article outlines what boards can do to prepare for their own mergers. “Whether the board composition changes as a result of the merger or acquisition,” they note, “the board will benefit from holding a special session (or sometimes multiple sessions) to regroup and align before going into the first official board meeting.” At that first meeting they can get to know each other and the leadership team, check strategy, transfer knowledge, establish the role of the board chair, and “begin to function as an effective board.”

  1. If the board is approached by management or a third party with a proposal to buy another company, what issues and questions should directors raise?

The extent of the board’s involvement in a proposed transaction will vary depending on the size of the acquisition and the risks it may pose. If a very large company regularly buys smaller companies in its industry and has already developed a process for finding, acquiring, and integrating these firms, boards need not focus on the details of any particular transaction. They can and should, however, periodically review the entire merger process, from strategy to integration, in the context of strategic opportunities, attendant risks, and operational implications, to make sure that the process is sound and functional.

The board’s primary role is to perform a reality check on management’s plans. A common claim in proposed mergers is that the whole will be greater than the sum of its parts—what Mark Sirower of Deloitte calls “the synergy trap” in his classic book of that name. But the challenges of integration can often result in a loss of value, an issue that is explored in noteworthy articles from McKinsey and Protiviti. Drawing on these articles as well as the thoughtful questions raised in the Report of the NACD Blue Ribbon Commission on Strategy Development, we have compiled a few queries the board may wish to put to managers and advisors.

  • Strategic considerations: Why are we considering this deal? If there are synergies, what hard evidence indicates that they will materialize?
  • Tactical considerations: What processes are now in place to create a pipeline of potential acquisitions, close deals, and execute the post-M&A integration?
  • Risk: What is the company’s current risk profile, and how does it correspond to the company’s risk appetite?
  • Capital and cost implications: Does our company have the cash on hand, projected cash flow, and/or available credit to commit to this transaction?
  • Operations: What changes will need to be made to the current operating structure and logistics following the merger? Will the supply chain be affected?
  • Talent: As we blend the human resources from the two companies, will we have the right talent to make this merger a success?
  • Technology: Is the company’s technology infrastructure capable of supporting the planned merger? How will the acquired company’s technology be treated post-merger?
  • Culture: Will the merger involve a blending of two different cultures? Do we foresee conflicts? If so, what are our plans for resolving them? Will there be a new postmerger culture? How can we ensure that all retained employees thrive in the new environment?
  • Monitoring Progress: What are the dashboard components for this deal? What elements will management monitor and how frequently? What dashboard metrics will the board use to measure the transaction’s overall success?
  1. If the board is approached by management or a third party to sell the company or a company unit, what issues and questions should directors raise?

While many constituencies will have a stake in any proposed company sale (including notably employees), shareholders’ main focus will be price. The two critical legal considerations in this regard are the Revlon doctrine (for public companies) and fraudulent conveyance (for asset-based transactions, usually relating to private companies).

  • Revlon doctrine. In the landmark case of Revlon Inc. vs. MacAndrews & Forbes Holdings (1986), the court described the role of the board of directors as that of a price-oriented “neutral auctioneer” once a decision has been made to sell the company. This Revlon “doctrine” or “standard” is alive and well even today. It was cited in the In re: Family Dollar Stores decision of December 2014, in which the court denied a stockholder action claiming that the Family Dollar Stores board had violated its Revlon duty by merging with Dollar Tree Inc. and by failing to consider a bid from Dollar General Corp. According to recent commentary by Francis G.X. Pileggi, a regular columnist for NACD Directorship, this case showed an “enhanced scrutiny standard of review for breach of fiduciary duty claims under the Revlon standard.”
  • Fraudulent conveyance. All company directors, whether of public or private companies, have a duty to make sure that the company being sold is represented accurately to the buyer. Otherwise they can be sued for approving a “fraudulent conveyance,” especially in an asset sale. Fraudulent conveyance lawsuits became very common during the leveraged buyout era of the 1980s, when acquirers that overpaid for assets using borrowed funds failed to generate returns and tried to recoup losses. This longstanding legal concept, like the Revlon doctrine, is still in current use and was recently cited in relation to the LyondellBasell merger, according to the law firm of Kurtzman Carson Consultants LLC.

In light of these concerns, questions to ask before approving the sale of a company or a division might include the following:

  • Are we certain that the sale is our best option? Have we assessed alternatives?
  • Under state law and/or our bylaws, do shareholders need to approve this sale?
  • Have we received a valid fairness opinion on the price?
  • Does this sale conform with the Revlon doctrine?
  • If this is an asset sale, are we sure that the assets have been properly appraised?

By asking the kinds of questions discussed in this brief commentary, boards can improve the chances that any M&A transaction, if pursued, will create optimal value for all participants.

Additional NACD Resources

NACD BoardVision – Mergers and Acquisitions

Litmus Test for M&A: Part 5

NACD BoardVision – M&A Information Security

In-Boardroom Development Program: Role of the Board in Mergers & Acquisitions

Forum Covers Managing Risk ‘Before It Manages You’

August 12th, 2015 | By

While the Internet initially was a communication tool between the U.S. Department of Defense and multiple academic organizations, it has become the backbone of a global economy and government operations, the Hon. Tom Ridge told a rapt audience of more than 200 directors at the NACD Strategy & Risk Forum in San Diego. The first secretary of the U.S. Department of Homeland Security, Ridge currently serves as president and CEO of the strategic consulting firm Ridge Global and is a director for the Hershey Co. Ridge delivered the opening keynote to directors convened for the two-day forum co-hosted by the National Association of Corporate Directors (NACD) and its sponsors.

“We’ve come a long way from a simple communication tool,” Ridge said. “What’s really remarkable is the tool is designed to be an open platform.… It wasn’t designed to be secure. It wasn’t designed to be global. The ubiquity of the Internet is its strength, and the ubiquity of the Internet is its weakness. For every promise of connectivity, there’s a potential vulnerability.”

A report released last year by McKinsey & Co. and the World Economic Forum found that more than half of all respondents surveyed—and 70 percent of executives from financial institutions—view cybersecurity as a strategic risk to their companies. The report was based on interviews with more than 200 chief information officers, chief information security officers, law enforcement officials, and other practitioners in the United States and around the world.

“In this world, you’ve got to manage the risk before it manages you,” Ridge advised the audience.

Support for the forum was provided by BDO USA, the Center for Audit Quality, Dechert, Dentons, ­Diligent, Heidrick & Struggles, KPMG’s Audit Committee Institute, Latham & Watkins, Pearl Meyer & Partners, Rapid7, and Vinson & Elkins.

The Chattering Class

Risks to reputation are nuanced and numerous. Jonathan Blum, senior vice president and chief public affairs and global nutrition officer for Yum! Brands Inc., which operates 41,000 KFC, Pizza Hut, and Taco Bell restaurants worldwide, has seen firsthand the damage that can be done to a company’s reputation. He recounted an incident that hit the brand’s reputation and bottom line, and ultimately spurred substantial changes in the company’s supply chain.

In December 2012, a state-owned television network in China reported that some local poultry suppliers were putting unlawful amounts of antibiotics in chicken. One of the many suppliers investigated happened to be one of KFC’s suppliers, albeit one of the restaurant chain’s smallest. “But, because we’re the largest brand in China, not just the largest restaurant, we obviously bore the brunt of the publicity,” Blum said.

The most damaging aspect of the negative attention, according to Blum, was not the investigative report that aired on television, but rather the chatter on social media in the wake of the report. The fallout was a tarnished reputation, a sharp downturn in sales, and some decisive action.

“Consumer trust plummeted. Belief in our brand plummeted. Our sales plummeted. We saw a huge drop in our stock,” Blum said. “Now, this was at the end of 2012, so the impact on our financial results that year was negligible. Up until 2013, we had had a 10-year run of at least 10 percent [earnings per share] growth year over year, which is pretty unusual. In 2013, given the ditch we were in in China, our earnings per share dropped 9 percent. We lost $270 million in profit as a result of this incident, and it took about a year to rebound.” In the aftermath of the negative publicity, Yum! Brands learned that its stakeholders wanted answers to three questions:

  1. What happened?
  2. What was being done about it?
  3. How would the company would prevent it from happening again?

Yum! Brands apologized to the public, fired about 1,000 small poultry suppliers, and worked with the Chinese government to upgrade the quality of the poultry supply.

“Over time, that rebuilt consumer trust,” Blum said.

The company also took a significant step toward managing its reputation on social media.  “As a result of this incident, around the globe, 24/7, we monitor what consumers are saying about us and we immediately respond,” Blum said.

More information on managing reputation risk is available in the publication Board Oversight of Reputation Risk, part of the Director Dialogue series by NACD and global consulting firm Protiviti.

Additional coverage of the forum is available in the July/August 2015 issue of NACD Directorship magazine.