Listening to Dr. Robert A. Howell at NACD’s Director Professionalism® course here in Tampa reminds me of a video of Warren Buffett during a Berkshire Hathaway annual meeting – high energy, insightful, and focused on results. The key takeaway for the 85 directors and corporate governance professionals in attendance during this session, and for me as well, is that one does not need to be a financial expert to understand the board’s role in defining, monitoring and driving value for shareholders.
Dr. Howell’s remarks were grounded in one key theme: Free cash flow is king. All other performance metrics are secondary when understanding how much value an enterprise has created (or destroyed). As Dr. Howell states, “What other metric can you take to the bank? Do you walk up to the bank teller and say, ‘I’d like to deposit 25 earnings per share (EPS) or 50 returns on equity (ROE)?’ No. You go to the bank and deposit cash. All other metrics are based on accounting techniques and can be engineered. You load up cash and take it to the bank.”
From a background perspective, it’s important to realize that Dr. Howell is a distinguished professor at Dartmouth College’s Tuck School of Business. He has been the CFO of two very large publicly traded companies, and he’s been involved in practicing and teaching finance for over 50 years. Dr. Howell is an icon of finance, and all directors focused on demonstrating exemplary board leadership will benefit from Bob’s guidance and insights. As one attendee stated, “That session was worth the price of admission. I have been a director on public company boards for over 10 years, and I have never heard finance positioned in such a simple manner. All directors should come to NACD’s Director Professionalism program.”
The session started with a brief discussion of how much time directors and corporate governance executives spend, or should allocate, on various phases of the business:
- Monitoring the firm’s performance
- Challenging results and practices
- Assessing projected performance
- Driving sound economic decisions, and
- Increasing firm value
Attendees’ perspectives on time allocation across these five phases varied. While most admitted that they wished the majority of time was on numbers three to five (the future), many were challenged to really determine the most effective way to quickly define numbers one and two (the past) and allocate more time to overseeing strategy and future efforts to unleash potential shareholder value.
During the two-hour interactive discussion, Dr. Howell emphasized the importance of selecting the right performance metrics and focusing the board’s role on the financial objective of the firm: driving long-term shareholder value. Specifically, through the future stream of cash flows, management’s mission is to generate more cash, preferably sooner than later, and at a lower discount rate. Many performance metrics were discussed, and Professor Howell stated that “Traditional metrics are lousy descriptors of value. Good ones are grounded in cash flow. ROIC (return on invested capital) and ROEmarket (return on equity, based on market value) are probably the two best. Read NACD’s new Report of the NACD Blue Ribbon Commission on Performance Metrics: Understanding the Board’s Role to get a good understanding of how to identify, prioritize and measure performance of management and your company.”
Through the right combination of compensation, metrics and value creation, the board can efficiently scrutinize financial statements and add valuable oversight for management. These efforts enable directors to disaggregate the component parts of the business and determine which are creating (or destroying) value.
Thanks, Bob, for a fantastic session, and we look forward to seeing you in 2011. The directors and board leaders of Corporate America, the guardians of capitalism, are dependent upon your insights, tutelage and guidance.