As NACD works with corporate directors of public, private, and nonprofit boards to oversee and ensure the long-term sustainability of the enterprise and bolster investor confidence, I am frequently asked: “What companies have the most significant challenges?” While unique challenges certainly exist across boards of all company types, many view the roles of small-cap public company boards to be quite challenging.
These unique challenges span time and effort (workload) requirements, compensation, talent, financing, regulation, risk, strategy, competition, and internal resources, just to name a few. Small-cap directors and governance professionals may identify and prioritize the unique challenges of these companies differently, however, but one thing remains constant and that is that small-cap companies represent the majority of companies listed on U.S. exchanges, and the long-term prosperity of these small-cap companies is essential to a growing, thriving economy.
So where can small-cap company directors turn to reinforce their strategic agility?
Second, I highly recommend that all directors read NACD’s Board Building white paper, another high-impact, quick read. Most important in this resource is the skill set matrix enclosed in the appendix. Many companies are now using the skill set matrix to both determine and articulate the experiences and talents required for their future strategies.
Lastly, I suggest that current and aspiring small-cap directors attend NACD’s Small-Cap Forum on April 10 in San Antonio or on July 17 in San Francisco. Both sessions will focus on current and emerging issues facing small-cap boards, and these interactive events will include a range of interactive, peer-to-peer networking opportunities for robust dialogue.
Contact me at hstoever@NACDonline.org if you have specific questions or suggestions on how NACD can assist you, your board, and other small-cap directors advance exemplary board leadership.
JPMorgan Chase & Co. has frequently made headlines since news of the London Whale broke. In a candid interview with Jeffrey M. Cunningham, managing director and senior advisor of the National Association of Corporate Directors (NACD), Director and Audit Chairman Laban Jackson shares how the company is navigating current challenges and preparing for future ones.
The London Whale Investigation
Jackson noted that one of the root causes of the London Whale was tied to culture. “The culture totally broke down,” he explained. “The real culture at JPMorgan–or at any great company–is if you have a problem and you raise your hand, it becomes everyone’s problem. If you don’t raise your hand, it’s your problem.”
On CEO Jamie Dimon
“Jamie Dimon is the best manager I’ve ever seen, and I’m old,” Jackson said. “He has absolute integrity.” Jackson went on to note that Dimon is human and has flaws as every human being does.
“One thing to do as a director–and I didn’t learn this early enough–the first job you have is to get the CEO right. The second is to get the next CEO right,” Jackson explained. “But while you have that CEO, figure out his or her flaws and help them with them.”
Ramifications of the London Whale
The board fired five people and clawed back $100 million and cut the CFO and CEO salaries in half. “We wanted to get the respect back of the people at the company,” Jackson said.
When asked by the Council of Institutional Investors if JPMorgan had done enough, “We said well, we can’t shoot ’em,” Jackson said.
Big Enough to Succeed?
In a business where the motto is often “go big or go home,” laws and regulation play key roles in ensuring companies are operating in an effective manner. Some regulations, however, may be difficult for companies that do not have the same scale as JPMorgan to comply with.
“We move trillions [of dollars] a day in and out of JPMorgan in 156 countries,” Jackson said. “I don’t know many companies that can do that. If big banks are broken up, I don’t know who can do this.”
Around the World
Jackson spends several weeks a year visiting JPMorgan offices across the globe and meeting with regulators. He notes that he has started meeting with up-and-coming JPMorgan employees: “I learn so much from them–it has been a wonderful thing for me.”
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.