A recent survey of executives and directors globally found that the top two risks discussed are disruptive change to the business model and the organization’s resistance to change. This incongruence captures what may be one of a board’s most fundamental fears.
No established incumbent wants to fall into the category of companies that were yesterday’s success stories but today are in decline, suffering “death from a thousand cuts.” Yet it happens all too frequently. One well-known CEO says it begins with “stasis”—a state of inactivity that leads to “irrelevance” and is followed by an “excruciating, painful decline” until, ultimately, there is an abrupt demise of the enterprise.
This kind of decline is unmerciful. Its low velocity is one of the primary reasons it is so difficult to spot. Left unabated, it leads a once-proud company to the point where very little can be done to save it as it continues down its committed path. In the digital age, cloud computing, robotic process automation, machine learning, and other technologies are disrupting every industry by presenting opportunities to reimagine business models. With physical locations, people, and infrastructure barriers virtually gone, it’s possible for “born digital” start-ups to disrupt an established company with a hyper-scalable business model that can accommodate rapid growth without significant upfront capital.
Time and speed in business have changed. Business has evolved beyond the tactical to emphasize a more strategic and holistic view of challenging conventional thinking and disrupting traditional ways of working as well as long-established value chains. Managing to the speed of business may seem like a strange notion to some, but why shouldn’t every organization evaluate its processes given the speed of change in the marketplace and within the industry? Considering the stakes, it’s worth a serious look.
Following are 10 thoughts on managing to the speed of business and its implications to board oversight.
Set the tone for speed at the top. Directors should support the CEO in setting the tone for speed through both actions and words, emphasizing the importance of staying close to the customer, keeping an eye on relevant market trends, organizing for speed, and embracing change.
Focus on high-velocity and high-quality decision-making. Many large companies make high-quality decisions but make them too slowly. There is a time and a place for formality, but for many activities, an unstructured approach is sufficient.
Inculcate a culture of speed. Members of the executive team should have a stake in initiatives to improve and sustain speed. A company must be at least as fast as—and endeavor to be faster than—agile followers of the latest trends in its industry.
Focus on the customer experience. The speed-conscious organization is customer-centric. Accordingly, it places strong emphasis on gaining access to market insights efficiently and in a timely manner, likely through big data solutions and advanced data analytics.
Establish an organizational structure that directly supports lean business behaviors. Open, flexible, and agile structures with flat hierarchies drive efficiencies, speed up innovation cycles, and facilitate collaboration, communication, and faster decision-making and execution. Focused, dedicated teams armed with purpose and clear objectives should be empowered by executive sponsors to tackle well-defined tasks and assisted by appropriate alliance partners. Sponsors keep the effort on the fast track with a fail-fast mentality.
Select the talent who will lead to success. Trite as it might be to say, the best and most diverse talent wins in the digital era. Talent strategy must set the foundation for speed.
Understand external trends. Speed places a premium on recognizing global megatrends and their impact timely. Boards should ensure that management is focused on becoming more future-oriented, mindful of external developments, and resilient in the face of change in the digital age.
Speed must deliver desirable outcomes. Speeding up processes and decisions is not the endgame. Outcomes that are on-strategy validate a faster process.
Learn at the speed of business. A committed learning organization fosters a positive culture that embraces open-mindedness, critical thinking, fresh ideas, and contrarian points of view—all of which are vital to speed. Ongoing knowledge-sharing, networking, collaboration, team learning, and admission of errors and learning from them facilitate speed. Feedback loops regarding interactions with customers, suppliers, regulators, and other outside parties that maximize broad employee participation helps to root out unconscious bias.
Speed requires effective change enablement. When processes and functions are reimagined, and products and services require improvement, the organization should have an established process to organize the necessary stakeholder commitment and drive the needed change.
What do Atari, Blockbuster, Borders, Palm, and Polaroid have in common? Each failed to keep pace with the market and suffered a long decline before entering bankruptcy or being acquired or liquidated. Each case illustrates how difficult it is to turn away from a business model or a segment of the market that has served the entity’s stakeholders well over the years.
Confidence in facing the future is what every director and leader wants. Speed is dictated by the market—meaning that external and internal factors influence it. The tailwind effect of embracing change and managing to speed breeds desirable confidence in the digital economy.
To be a public company or to be a private company—that is the question for an increasing number of directors of both private and public enterprises. And given the recent rise in public-to-private buyouts and private-to-public initial public offerings (IPOs), corporate directors need to be comfortable in both worlds.
Heading toward the public markets are our newest IPOs. As of May 10, 2018, according to statistics from Renaissance Capital, the United States has seen pricing of 67 IPOs worth over $50 million—up 28.8 percent from the same period last year. Last year 160 IPOs got to the pricing stage—up 52 percent from the previous year. As for filings, the first quarter of 2018 saw 44 of them in the United States valued at over $50 million; last year featured 140 such filings—both numbers up from the previous periods, signaling a recovery from the dismal market of ten years ago.
However, the number of publicly traded companies on the market has still not rebounded to the pre-dotcom bust levels. Many companies now see an advantage in going private, with major examples in recent times being Panera and Staples. In both of those cases, the move came amid concerns about short-term mindsets on Wall Street inhibiting the companies’ ability to create long-term value. Earlier this year, Univision, a one-time public company that went private in 2007 after a buyout deal, withdrew from an IPO citing “prevailing market conditions.”
There’s also some speculation that companies want to leave public markets because activist shareholders have spooked them. The 2017-2018 NACD Public Company Governance Survey shows that 16 percent of respondents serve on boards that have been approached by activists during the previous 12 months—down from the previous two years but still a level high enough to motivate meetings with shareholders, reported by half of all respondents and the highest level reported since 2015. A Fortune article written at the time of the Safeway and Dell buyouts observes that both companies decided to go private because of the specter of investor activism. The article quotes a private equity executive speaking on background, saying: “Public company boards are scared to death of activists and will do all kinds of things to avoid proxy contests.”
With this business context in mind, the May/June issue of NACD Directorship magazine focuses on entrepreneurship and activist shareholders: who they are, what they want, and why they want it.
The dispersed global ownership of companies today, enabled through technology, has evolved into the complex adaptive system we call the global stock market. As we know from its recent volatility, the market can act a little crazy. But behind every single share that is traded there is a person who made a decision to buy or sell—often as a fiduciary (in the case of institutions). Directors can and should learn from them, even as they maintain their roles as representatives of all stakeholders.
Board members own the sustainability agenda; it requires taking the long view. Yet, directors continue to struggle with the subject, often referring to sustainability issues under the umbrella of environmental, social, and governance (ESG) matters. This is especially true today.
Consider the auto sector—undergoing more change in the current five-year period than the last 100 years combined. The century-long run of churning out cars and trucks (the linear economy model) is giving way to various forms of sustainable mobility (e.g., electric vehicles, autonomous vehicles, ride sharing, etc.).
It’s not just the auto sector. Every industry is undergoing transformation. Sustainability is not always the main driver, but ESG factors are indeed at play. Sharing economy companies such as Airbnb, Uber Technologies, and Lyft are great circular economy stories—with the increased utilization of assets, lower carbon emissions, and more.
“How do we stack up?” That’s the question I have been asked in over 50 board meetings over the past 25 years. In virtually every case, the directors wanted to know: Where does our company stand today, vis-à-vis sustainability, compared with competitors, peers, and best practices? Are we top quartile?
It’s a good question, and it deserves an answer. That’s why in 1997, after two Fortune 200 company board meetings where we discussed ESG, I began developing the Corporate Sustainability Scorecard—a board and C-suite rating tool applied one company at a time. The scorecard is a web-based tool created by industry for industry that maps a company’s posture and performance along a four-stage maturity path.
Fast forward 20 years: in early 2018, 60 blue chip companies completed the scorecard as a cohort. The results—the first of their kind for board-relevant sustainability data—suggest that many companies may not be “future ready.”
So what are directors to do? I distilled years of boardroom experience into a short book titled Sustainability—A Guide for Boards and C-Suites. The book has three key messages for board members:
1. Think of ESG within the scope of strategy, not just risk. The challenge for directors is to help your CEO think through how to profit from ESG trends, not just how to stay out of trouble. Ask strategic questions, such as:
How can we leverage ESG trends for growth?
What new market opportunities might we be missing out on?
Scorecard data suggest the boardroom conversation is still mostly about risk. Only 20 percent of companies rate themselves three or higher (on a scale of one to four) for growing revenue from more sustainable products and services. Nearly half of the 60 companies (47%) do not see ESG attributes as a revenue driver.
2. Build robust sustainability governance. Without getting governance right, it is hard to get anything else right. This is true in creating robust brands and delivering consistent and strong financial results. It is also true in showing how your company plans to capture value from leveraging ESG trends for growth.
Scorecard data suggests some big gaps here: only 11 percent of companies say their board is actively engaged on ESG issues between board meetings, and only 10 percent say they have planned ESG learning as part of board meetings.
3. Measure your company against your peers. By encouraging your company’s senior management to fill out a survey like the scorecard mentioned above, you will be doing them and yourselves the favor of getting an overview of your company’s comparative weaknesses and strengths in sustainability.
Knowing how your company stacks up on ESG is more important than ever. This statement was reinforced by BlackRock CEO Larry Fink in his January 16, 2018 letter to CEOs:
“Society is demanding that companies, both public and private, serve a social purpose…To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Without a sense of purpose, no company, either public or private, can achieve its full potential.”
The 2017–2018 NACD Public Company Governance Survey reinforces the need for board action. A strong majority of respondents in every industry sector ascribed importance to improving ESG strategy over the next 12 months, with only a small minority saying that improving ESG was “not at all important.” However, responses varied by industry. Improving board oversight of ESG is viewed as being most important in materials, utilities, energy, and healthcare—and least critical in information technology.
Every industry has its version of what “sustainable mobility” is doing to the auto sector. ESG factors will increasingly impact how companies choose new businesses to buy, old businesses to reshape or shed, new offerings to create, and suppliers with which to partner. Those decisions will be made in the boardroom.
Gib Hedstrom runs his own advisory firm, working with mostly large companies on oversight of ESG issues. He also runs three executive councils for The Conference Board. His latest book is available on Amazon or at www.hedstromassociates.com. Thoughts expressed here are his own.