NACD takes pride in being not only the voice of the director but also a center of knowledge on governance-related topics. Our research team generates thought leadership, issue analysis, and practical guidance in various formats throughout the year—and you may find out about these new resources through e-mail, here on the blog, or by visiting our home page.
Visit the NACD Nominating and Governance Committee Resource Center.
What’s a Resource Center? Resource Centers are online portals curating our most relevant and recent content about major board responsibilities, emerging issues, and core governance requirements. The resource centers also highlight advisory services, upcoming events, and replays of recent webinars.
Resource Centers are the best way to explore the depth and breadth of NACD’s offerings on a particular topic. If we don’t have a resource center now for a particular topic, one is likely in the works.
Our department recently released the Nominating and Governance Committee Resource Center to present our most relevant content on the topic. We aim to help directors solve for hot-button issues like shareholder pressure to diversify the board and C-Suite, and support perennial activities such as strengthening the relationships between independent and inside directors. Complementing our own thought leadership, we recently partnered with Egon Zehnder to bring our readers even more insights about the role and responsibilities of the Nominating and Governance Committee.
Below we have highlighted a sample of helpful materials from this Resource Center, by section.
Egon Zehnder’s Board Effectiveness Reviews (open to all) – The oversight responsibilities of the board have taken on a new level of complexity. Disruptive business models can come from any direction, and the types of risks the board must monitor have multiplied. Board evaluations can help directors review their performance, exceed standards, and satisfy investors.
Guide to Board Composition for Energy Companies Emerging from Bankruptcy (open to all) – Every sector faces unique challenges. While NACD is here first to help with big-picture governance questions, our resources also address granular topics. Egon Zehnder’s report on how to structure board composition for an energy board is a great example of industry-specific knowledge offered to boards.
In 2016, the National Association of Corporate Directors (NACD) and Protiviti co-hosted a series of roundtables that brought together more than 60 directors to discuss current challenges and effective practices in board-level mergers and acquisitions (M&A) oversight. Based on insights from the roundtables and our experience serving clients in the M&A space, we offer the following keys to the board’s M&A oversight.
1. View M&A through the lens of the growth strategy. Companies pursuing growth through M&A should articulate the strategic underpinnings of the growth strategy. Doing so provides a context for evaluating prospective targets and their strategic fit (e.g., additive to the core business, diversification into a new line of business, entrance into new markets, and/or transformation of the organization). Understanding the strategic context provides a strong foundation for directors and executive management to agree, long before a deal is placed on the table, on the appetite for risk and metrics for measuring deal success.
2. Oversee M&A as an end-to-end cycle, rather than a transaction. The board should focus on the M&A life cycle which begins with identifying the right markets and targets consistent with the growth strategy and acquisition criteria, and continues with:
Defining and executing a thorough, efficient due diligence process;
Preparing a robust, phased integration plan to capture targeted deal values;
Pricing and financing the deal;
Following up a consummated deal with a well-resourced and effectively communicated execution of the integration plan according to the established timetable;
Conducting a post-mortem to identify opportunities to improve the process.
Directors should be engaged throughout the process (see next point).
3. Determine the extent of board involvement in each phase of the process. For complex and risky transactions, the board should expect periodic updates at various stages of the due diligence process, as well as on the progress of the integration strategy after approval and consummation of the deal. The board needs to decide where the point of oversight should reside—with the full board or one or more standing committees. To the extent necessary, the board should avail itself of the advice of subject-matter experts on due diligence, tax, valuation, corruption, antitrust, cybersecurity, and other issues.
4. Make sure the critical competencies are in place to execute the full M&A process. It takes talent and expertise to manage the M&A life cycle. Viewing M&A as an end-to-end process provides a powerful context for evaluating the management team’s capabilities to execute each phase of that process.
5. Challenge deal assumptions and expected synergies. When M&A targets are proposed, either the full board or a designated standing or special committee should assess deal assumptions and synergies. Are management’s revenue and cost assumptions reasonable? Are the expected synergies that were reflected in the deal pro formas realistic? Is the integration plan to execute on the assumptions likely to deliver the synergies after consummation of the deal? For complex deals, the board may want management to stress-test deal assumptions against well-defined scenarios and alternative futures before deal approval.
6. Manage senior management’s emotional investment. A clear business case should outline why the transaction is essential to the growth strategy. Deal presentations that hype optimistic projections and accentuate only positive possible outcomes are a red flag. The board should insist that management also provide a balanced contrarian view that articulates the deal risks and what can go wrong—perhaps through a “red team” that challenges deal assumptions to discover fatal flaws and temper complacency that often follows past successes. Executive sessions are another means of ensuring the board has access to candid and dissenting views on such matters as target suitability, deal pricing, and go/no-go decisions.
7. Constructively engage management in due diligence. To accomplish the due diligence objectives, the inclusion of objective third parties on the due diligence team may be warranted, particularly for financial, tax, compliance, human resources, cybersecurity, and industry-specific issues. Despite management’s and the board’s best efforts, due diligence often has inherent limitations when it is not possible to gain access to the required information. Despite these limitations, an acquirer should be cautious about making a deal without sufficient due diligence, even when time may be of the essence. No one should be in a rush to make a serious error.
8. Understand the integration plan and its viability before approving the deal. The board should carefully review management’s integration plan. The review should seek clarity of the plan’s intended purpose, how it is to be achieved, who is leading the effort, and the change management and other obstacles that could frustrate the plan’s execution. The board should satisfy itself that the integration plan is compelling and robust. The plan should engender confidence that management understands how the integration effort and team will deliver the expected deal value, whether through changing the current operating structure, blending talent from the two companies, addressing the technology infrastructure, or overcoming cultural challenges. The board should sign off on the duration of time in which the expected value will be delivered and consider holding leaders accountable even when they have moved into other areas of the company.
9. Stay on top of the integration process. When the deal is consummated, the hard work toward delivering the expected deal value has just begun. Effective integration requires continued vigilance, including periodic tracking of progress, attention to managing cultural differences, making decisions quickly, retaining key personnel, staying on schedule, and maintaining accountability for results. During the NACD roundtables, several directors reported that their boards used information from the pro formas generated during the due diligence phase to hold management accountable through periodic (say, quarterly) reports after a deal closes. The idea is twofold: (a) gauge management’s success comparing pro formas with actual results; and (b) drive more realistic pro formas during the deal evaluation phase. When sponsoring executives know that pro formas will be the board’s baseline for evaluating deal performance, they are incentivized to set realistic integration goals.
10. Continuously improve the process through look-backs. Once significant deals have run their course, the board should consider conducting a post-mortem review of completed transactions to determine what worked well, the lessons learned, and specific improvements to address in the future. Reviews conducted with a focus on learning should not resort to finger-pointing.
In summary, effective board oversight of M&A can create competitive advantage and enterprise value through consummation of successful deals. Likewise, it can help avert the loss of enterprise value through preventable deal failures.
This blog post is one installment in a series related to board oversight of corporate culture. The National Association of Corporate Directors (NACD) announced in March that its 2017 Blue Ribbon Commission—a roster of distinguished corporate leaders and governance experts—would explore the role of the board in overseeing corporate culture. The commission will produce a report that will be released at NACD’s Global Board Leaders’ Summit, Oct. 1–4.
In a recent study by Stanford University’s Rock Center, less than half of directors surveyed strongly believe their boards tolerate dissent, and 46 percent expressed concern that a subgroup of directors has disproportionate influence on boardroom decisions. A 2015 survey cited by Heidrick & Struggles reflects similar concerns about culture in companies as a whole: 87 percent of organizations listed culture and engagement as a top challenge, with half of business leaders ranking the issue as “urgent”—a 20 percent increase from the prior year.
Sound, ethical culture in the boardroom sets the tone for the rest of the organization.
In light of the importance of the culture issue for boards, NACD, Heidrick & Struggles, and Sidley Austin LLP cohosted a meeting of the Nominating and Governance Committee Chair Advisory Council on March 28, 2017. The session and a related conference call brought together nominating and governance committee chairs from Fortune 500 corporations to discuss how boards can improve their own cultures and, by doing so, reinforce the elements of good culture in their corporations. The discussion was held using a modified version of the Chatham House Rule, under which participants’ quotes (italicized below) are not attributed to those individuals or their organizations, with the exception of cohosts. A list of attendees’ names are available here.
The council meeting resulted in the following takeaways:
1. Recognize and implement characteristics of a strong board.
Council delegates at the meeting listed a number of indicators of productive boardroom culture:
Extensive and thorough preparation on the part of every director, without exception. “Every board member needs to have an in-depth understanding not just of the company, but its peers, competitors, and the broader industry. Passive reliance on management presentations for information is no longer sufficient.” Another director added, “Intellectual curiosity and learning agility are essential ingredients of good board culture.”
Directors are able to strike the right balance between collegiality and directness, challenging one another―and management―constructively. “Attack the issue, not the individual,” said one director.
The board has well-functioning continuous improvement processes, including regular evaluations, director and committee succession planning, and review of needed skill sets in light of current and future strategy. This includes the notion that board service is not a guarantee, but subject to the needs of the board and the strategic direction of the company.
The board should model the culture that the corporation as a whole desires: “Walk and talk the culture you’re expecting.”
Holly Gregory, partner at Sidley Austin, added that the notion of teamwork as an element of productive board culture goes beyond semantics. “Boards are teams in the legal sense,” she said. “The board’s authority is as a body, and board decision making is by collective action.”
2. Use inflection points as opportunities to address board culture.
Directors agreed that changes in board leadership—such as a committee chair, lead director, or nonexecutive chair—can be good opportunities to reevaluate board culture and performance. According to one delegate, “How are you challenging yourselves? Your board may be working fine today, but maybe you’re missing a chance to take the board’s performance and culture to an entirely different level.”
Council members also suggested a number of other inflection points to use as opportunities to examine board culture:
Patterns of breakdowns or concerns regarding compliance and ethics—“If we see two or three ethical violations and we don’t do anything about it, what does that say about our strategy and the performance of the board?”
Major transactions—“After a large acquisition, [a culture-consulting firm] came in to work with management. Then [the firm] came back and did a session for the full board. We got a much better understanding about how our culture was aligned with where the company was going.” Another director observed, “Creating the culture for a spin-off board was easy compared to [changing culture on] an established board. [In either case], team-building on the board is actually a good idea.”
CEO succession—“The previous CEO had a very strong demeanor in the boardroom and [held strong control] over strategy. After he stepped down, the lead director was in a position to take a much more active leadership role that coincided with a significant regulatory change. The board was much more challenged and became much more engaged in strategy and more productive and useful to the company.”
3. Proactively examine board culture at scheduled periods.
Although the inflection points described above can be useful opportunities to review board culture, council meeting participants agreed that boards should be proactive about assessing and molding their cultures. “You don’t know the culture you have before you hit a bump in the road,” one director said. “Be that person that says, ‘maybe we can improve by doing XYZ.’ If our major shareholders had been listening to the process we just went through, how would we feel about that?” Theodore Dysart, a vice chairman at Heidrick & Struggles, observed, “It’s important for boards to be able to rally after a crisis, but how can that cohesiveness of purpose be made more routine? We are seeing a growing number of boards making use of tools and processes to embed cultural assessments more deeply, but it is not yet a widespread practice.”
Directors provided a number of examples where their boards took a proactive approach to evaluating culture:
Board succession planning—“On one board, we initiated a self-examination of our culture in anticipation of some turnover coming up due to director retirements. We realized it was an opportunity to clarify what we stand for as a board, how we want to operate, and the elements of board performance we want to evaluate.”
Reviewing key management reports—“We use the review of the company’s sustainability report as an annually scheduled inflection point [to review culture]. It has extensive statistics on environmental, safety, and other issues, as well as key stakeholders and the firm’s interactions with them. It helps us see the cultural underpinnings of the company and also drives deep discussion about our own culture as a board.”
Risk appetite discussions—“Our board’s discussions about risk appetite led us to a conversation about culture. It emerged that we were not all on the same page with respect to the level of risk we felt was appropriate for the strategy. Some directors were gung ho; others were more reserved. The work we went through to gain alignment highlighted some important aspects of our board culture and dynamics.”
Council delegates emphasized that both measuring and changing culture can be extremely challenging, but the benefits are significant. As one director observed: “The board can have a culture and interact with senior management to form what you believe is the tone at the top. It takes a different curiosity to see if that trickles down into the institution. There’s no magic here; this is really hard work, but directors can have enormous positive impact when they model and reinforce the company’s desired cultural attributes.”