September 30, 2015
September 30, 2015
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.
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:
“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?”
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.”
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.”
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 www.nacdonline.org/value, the report contains the following practical guidance for the directors and boards of public, private, and nonprofit organizations: