When former Zale Corp. CEO Theo Killion shared his leadership lessons of turning around Zales at a recent NACD TriCities Chapter program in Austin, Texas, it jogged some childhood retail memories for me.
Growing up in the 1960’s, my small hometown of Marshville, North Carolina, boasted a thriving town square of mom-and-pop stores. Because my family’s home was a hop, skip and a jump from these businesses, they became my playground. I was their frequent visitor, and with those visits came benefits. For example:
Remember when white go-go boots were all the rage? Mr. Gaddy, who owned the shoe store, made sure my sister and I scored pairs from his first shipment.
As a child, I received a personal call from Mr. Creech, the toy store owner, when his long-awaited skateboards arrived.
One spring, I stood with other locals as the Chrysler dealer eagerly removed the drop cloths revealing that year’s beautiful new big-fended models. (The fact the dealership offered up lots of free doughnuts, coffee, and soft drinks didn’t hurt either.)
I was rapt throughout the program as Melissa Fruge interviewed Killion, a modern-day version of my favorite childhood shop-owners, but on a grander scale.
Zales was on the brink of bankruptcy in 2004. Something had to be done. The bold and unvarnished self-assessment undertaken by the company’s senior leadership uncovered the business’s truths. These revelations, combined with sheer perseverance not to fail, brought the national jeweler back from the edge.
Here are some of my top take-aways from Killion about what executives and boards should do to turn around a struggling business:
1. Stay humble. Killion prefaced his remarks by stating that they were his opinion, and that many of the tenets he spoke about originated from great thought leaders. A mark of a strong leader is his or her ability to acknowledge with humility the admired ideas of others.
2. Interim in any title keeps you focused. By the time Killion took the reigns, Zale Corp. had had six CEOs in 10 years. When Killion’s best friend was fired as CEO, the board needed a quick fill. Killion was named interim CEO—leaving him keenly aware that he was considered temporary. He entered the role ready to make the most of the time he had.
3. Follow the money. Zales had six short months before its cash ran out. The company was in desperate need of an equity infusion. From day one, Killion and his finance team were reaching out to possible providers.
4. Dig deep for insight. Over a three-month period, Killion and his two-member strategy team worked 12- and 14-hour days, including weekends, to put a decade of operational decisions under a microscope. They carefully ferreted out what worked, what didn’t work, and why. They then presented these findings to the board. Killion observed and reported that management’s bad decisions were made on the board’s watch. He wanted the board to feel the same deep discomfort that the executive leadership team was feeling.
5. Detail the new strategy. Zales’ new strategy document totaled 150 pages and spelled out in clear, concise details what the company would do going forward—and why. For example, severe cost cutting had reduced the customers’ experience of buying an engagement ring into a commodity. Consider, for instance, that the customer left the store with the ring—which often times is one of the most meaningful, expensive jewelry purchases a person will make—in a plastic bag.
The new strategy brought customer emotion and meaning back to a purchase at Zales. The purchase process was no longer treated as a transaction, and store training ensued to make it a well-crafted, loving, and memorable customer experience.
6. Flip the pyramid. Before Killion stepped in, the leadership philosophy of the company placed management at the top of the pyramid. The pyramid was inverted and a customer-focused culture was born. It looked like this:
Top tier: customers of Zales’ 1,100 stores;
Middle tier: 12,000 employees; and
Bottom tier: corporate management.
7. Think like Jeff Bezos. Bezos has built Amazon.com to be customer-obsessed, keen on technology and analytics, and is always testing new concepts. Killion sees this as a road-map for any retailer succeeding today.
8. The nominating and governance committee is key to matching strategy to board composition. Killion pointed out that Zales needed board directors with skill sets that matched the company’s five-year plan. Retail expertise was a must, and the nominating and governance committee needed to ensure its goals matched those needs. This committee must ask itself what skill sets the business needs. In retail today, Killion advises, a board member with deep literacy in e-commerce is essential.
9. Apply lessons from Vanguard’s 2017 Open Letter. Killion admires Vanguard CEO F. William McNabb’s open letter to public company boards of directors. Vanguard has 20 million investors, and currently is the second largest fund manager in the world. McNabb is keenly aware of the responsibility boards play in the success of the companies that the fund invests in. Here are the highlights of McNabb’s message to directors that especially resounded with Killion:
Sell quality things.
Practice good governance.
Pay close attention to the compensation program crafted for senior management.
Understand the company’s risks, and especially the role of climate risks.
Inclusion of women and other directors from diverse backgrounds on boards is important.
10. Brick-and-mortar retail is not dying. Instead, Killion believes retail is entering its golden age partly because of the many ways today’s retailer can reach a customer and make a sale.
The program is available to view via NACD Texas TriCities Chapter’s YouTube channel. It’s a meaty discussion and well worth your viewing time.
By the way, to this day I’m a recreational bargain shopper. Simply walking into a favorite store lifts my spirits, and I’m glad that Killion and the directors of companies are working to help the retail industry thrive in the twenty-first century marketplace.
It’s way too early to make any judgments on board conduct in the Equifax controversy. That’ll be for the courts to decide, and they’ll take a long time getting there. But it’s not too early to draw some useful governance lessons from the situation, if media reports are to be believed. And these are lessons that apply regardless of whether the board serves a publicly held, privately owned or nonprofit corporation.
Some of these lessons relate to the board’s crisis management responsibilities. Others relate to the oversight of the board-CEO relationship. Still others invoke expectations of board cybersecurity oversight.
All of the possible lessons are premised on the increasing recognition of the inevitably of crisis, be it black swan or foreseeable, cybersecurity-related or “from out of left field.” For most complex enterprises, crises are just going to happen. The only questions are when, how big the crisis will be, and from what direction it will come. The most prescient of boards will embrace this inevitably and prepare for a corporate governance version of Defcon 3.
The other lessons are more practical in nature.
1. Emergency Succession The swiftness of Mr. Smith’s removal speaks to the “nuts and bolts” value of having an emergency executive succession plan. The sudden Smith transition is a shocking example of how emergency succession applies to circumstances beyond customary triggers such as death, health care and family considerations. In today’s crisis-oriented environment, the need to separate from, and replace even the youngest, seasoned and most successful executives can arise at a moment’s notice.
Succession is a part of the board’s basic responsibilities that often gets lost amid the confluence of best practices and consultant messaging. Such planning can be complicated. According to the New York Times, the Equifax board regarded many of its original replacement candidates as “tainted” by ties to the cyber breach—including some executives who are believed to have sold company stock after the breach was discovered but before it was disclosed to the public.
2. Structuring the Separation There’s also the need to anticipate both the classification and the financial terms of executive separation in the context of a crisis environment. According to media reports, Mr. Smith’s separation was described as a retirement. Yet, the board announced that it was reserving the right to retroactively classify the separation as for-cause termination, based upon the ultimate findings of a board special committee charged with the responsibility for reviewing the data breach. Such a reclassification would have obvious and material implications for Mr. Smith’s compensation arrangements, including valuable stock awards.
This action by the Equifax board reflects several key realities of the crisis environment.
It will often be difficult to fairly ascertain the presence of cause for termination purposes in the direct aftermath of a crisis. The consideration of the results of an internal investigation may be a necessary and equitable precondition.
While not yet considered best practice, the use of clawbacks and other forms of executive compensation disgorgement arrangements is increasingly viewed as an effective response to executive fraud, malfeasance, or other misconduct. Clawback application has most recently been demonstrated by the actions of a financial services company board in response to a significant corporate controversy.
Boards must face the harsh reality of the need to impose separation in advance of intense scrutiny by the media, regulators, and possibly even legislators. The sometimes corporate brutality of “throwing executives under the bus” may be perceived as both part of an effective board response (i.e., to demonstrate board accountability), and necessary to preserve the reputation of the company and the interests of its stakeholders. According to the Wall Street Journal, the departures of the Equifax information officer and chief security officer were not considered by the board to be actions significant enough in stature. Thus, the concept of “strict accountability” for executives in the context of major corporate controversies may increasingly be considered an indirect part of the compact between the board and management.
3. The Standard of Conduct Another lesson is for the board to reconsider the effectiveness of its own cybersecurity oversight efforts. The leading judicial decisions have to date established a high Caremark-style barrier for demonstrating breach of cybersecurity oversight responsibilities. Notable in this regard was the decision of the court in the Home Depot case to extend the protection of the business judgment rule to the board’s conduct, despite its clearly expressed concerns about the speed with which the board implemented protective measures.
However, boards should not place unreasonable reliance on Caremark protection. As instances of cyberbreaches become more egregious, it is reasonable to project a stricter approach to director liability in future cases.
4. The Self-Critique Perhaps the most basic governance lesson from Equifax is the need for board self-evaluation. Any board-driven internal investigation of a corporate controversy will benefit from consideration of the adequacy of the full board’s related oversight efforts. For example, the Wall Street Journal reported that weaknesses in Equifax’s cybersecurity measures were “apparent to outside observers in the months before the hack.” Was the board made aware of these weaknesses? If not, why not? Such a self-critique has been an accepted component of truly comprehensive internal investigations since the “Powers Report” from the Enron board. The willingness to consider how possible governance inadequacies may have contributed to crises can serve as a powerful demonstration of the board’s good faith and assumption of ultimate responsibility.
Equifax is not, as some have characterized it, the second coming of Enron. That’s unnecessary hyperbole at this point. As exaggerated as commentary may be, what is known about the crisis offers a valuable teaching moment to boards about expectations of fiduciary conduct in crisis situations, cybersecurity or otherwise.
Michael W. Peregrine, a partner in McDermott Will & Emery, advises corporations, officers and directors on matters relating to corporate governance, fiduciary duties and officer/director liability issues. His views are his own and do not necessarily reflect the views of McDermott Will & Emery, its clients, or NACD.
The practice of conducting full-board, committee, and/or individual-director evaluations has largely become commonplace. Ninety percent of respondents to the 2016─2017 NACD Public Company Governance Survey: Aggregate Resultssay their companies conduct full-board evaluations. Approximately 78 percent of respondents facilitate committee evaluations, and 41 percent conduct individual director evaluations, the survey finds.
The New York Stock Exchange since 2003 has required listed companies to disclose how their boards address evaluations. Although Nasdaq-listed companies have no such requirements, many conduct these assessments to enhance governance standards. NACD has long been an advocate for routine board, committee, and individual-director evaluations as part of a larger strategy of continuous improvement.
In keeping with these listing requirements and recommendations from our research, NACD recently created the Resource Center on Board Evaluations. Resource centers are repositories for NACD content, services, and events related to top-of-mind issues for directors. In these resource centers, individuals can find practical guidance, tools, and analyses on subjects varying from board diversity to cyber-risk oversight. Below we have highlighted a sample of helpful materials from our new board-evaluations resource center.
The NACD Directorship magazine article “The Argument for Yearly Board Evaluations” by Salvatore Melilli, national audit industry leader for private markets at KPMG, examines the importance of assessments specifically for private company boards. Less than half (48%) of respondents to the 2016─2017 NACD Private Company Governance Survey say their boards conduct full-board evaluations. Melilli’s article highlights several reasons why evaluations are critical to improving oversight evaluations. They can help vet company and board culture, identify gaps in talent or skillsets, and streamline processes for the board to engage in difficult conversations with the executive team.
Boardroom Tools & Templates
This resource center’s boardroom tools and templates are segmented by evaluation type—full-board, committee, and individual-director levels. The tools offer questions and considerations that help boards and directors ask questions that can drive healthy conversations about strengths and areas of improvement.
Videos & Webinars
An NACD video series featured in the resource center focuses on the role board evaluations play in improving governance practices. One video in the series, called “Why Confidentiality is Key,” focuses on the benefits of confidentiality in the evaluation process. Another video, “Transform Insight into Action,” discusses the value of creating tailored educational or development programs based on insights that emerge from evaluations.
If you would like help finding resources on a specific subject matter, please let us know. We welcome the opportunity to engage with directors on pressing needs and concerns.