In June, NACD convened general counsels (GCs) from across the country for a one-day meeting in New York City on the role of the GC in supporting boards of directors. Program panels consisted of directors, GCs, and subject-matter experts on legal issues affecting board decision making.
The Evolving Role of the GC
According to Richard D. Buchband, senior vice president, GC, and secretary for ManpowerGroup, the GC must clear the way for the board to focus on strategic matters. Though each company is different, long past are the days when the GC’s role was to take minutes in the corner of the boardroom.
A clue to how a general counsel will be perceived in any given company may be found in the interview process, when a candidate should take note of whether board members participate. Also, in assessing how the board will utilize the GC, a candidate or sitting GC should be aware of whether board members hail from countries in which the GC traditionally takes a smaller role, reporting not to the CEO but to the CFO, according to Yvonne E. Schlaeppi, director for Stallergenes Greer and former GC for several companies, including Johnson Controls Europe.
Once connected to the board, the general counsel can be of value for many facets of the enterprise, leveraging his or her unique position in the organization to assimilate information and data from across the business. Several suggested that the general counsel should always offer a recommendation when providing input to the board. In fact, judgment is a critical part of what a GC offers the board. “The crux of a GC being a strategic advisor to the board is having your good judgment on the complex mix of puzzles which general counsels deal with all the time—including commercial, legal, and people challenges—recognized and valued,” said Schlaeppi.
Further, the career of Robert Bostrom, senior vice president, GC, and corporate secretary for Abercrombie & Fitch Co., illustrates how the general counsel can be the glue for an organization in turmoil. During a prior role as general counsel at Freddie Mac, he saw several CEOs and CFOs come and go around the time of the 2008 financial crisis and when the government appointed a conservator. Today, Bostrom co-chairs Abercrombie’s enterprise risk management group and leads the organization’s crisis management team, taking point on risks affecting the company’s reputation.
Moving the Board Forward
Of course, given that the GC is often the most knowledgeable person about issues of corporate governance, the GC brings tremendous value by providing advice and counseling on governance matters. Gillian A. Hobson, partner, capital markets and mergers & acquisitions at Vinson & Elkins, pointed out that such governance matters include issues such as independence, diversity, proxy access and others outlined in Commonsense Corporate Governance Principles, published in 2016 by a group of leading executives and investors. In addition, in order to move a board forward, the general counsel has a number of specific tools at his or her disposal. The general counsel can:
Suggest formats for a board evaluation and skills matrix;
Bring outside information (such as NACD’s Blue Ribbon Commission Reports) and outside perspectives (such as those from ISS, BlackRock and others) to the board; or
Develop relationships with board members, including board leadership and more progressive board members.
William E. McCracken, director for MDU Resources Group and for NACD, suggested that when boards get “stuck,” the GC is in a “unique position to lift the board’s vision up to see what else is happening out there.” Steven Epstein, corporate partner and co-head of mergers and acquisitions at Fried Frank, agreed. “The GC will be up to speed on the general M&A landscape and the latest thinking of the courts and will be well-positioned to combine that knowledge with the business objectives of the company, which is extremely valuable to the board.”
No Surprises and Keep It Short
Several times throughout the day, panelists espoused the best practice of imparting “no surprises” to the CEO or the board. For example, if the GC sets up lunch with a board member, Buchband suggests a check in with the CEO after the meeting is set but before the lunch takes place. “I ask the CEO if there are any issues he would like me to raise or discuss,” said Buchband. Keeping the board informed on matters affecting governance is equally important.
Also, all panelists reiterated how important it is for the GC to keep materials short and topline for the board. “We can be victims of our own desire to be thorough,” noted Buchband.
Enterprise Risk Management and Compliance Make the GC’s Job Easier
The role of risk assessment is not to avoid all risk, but rather to identify and manage risk, said George J. Terwilliger III, partner at McGuire Woods. In fact, Bostrom noted that enterprise risk management at Abercrombie helps him and the company prioritize risks. If a risk rises to the top, then a cross-functional, high-level team has agreed that it should be there, and he doesn’t have to champion the cause as a lone voice.
Daniel Trujillo, senior vice president and chief ethics and compliance officer for Wal-Mart International, stressed that a culture of compliance must start at the top. A program must then be implemented that is effective, consistent, data driven, efficient and sustainable. Terwilliger echoed that compliance has to be part of the fabric of the company, with the compliance council acting as a convener rather than as “internal police.” Today, predictive analytics help his team spot trouble early at Walmart, at the country or even the store level.
Consider Cross-Border Complexities
Just as Wal-Mart operates globally, so too do companies like Abercrombie. David H. Kistenbroker, global co-head of white collar and securities litigation at Dechert, reminded the audience to consider cross-border complexities when advising the board. Long-arm statutes in the United States and United Kingdom can impact deals all over the world. Due to such complexities, the GC is in a unique position to be a strategic asset to companies operating globally, especially where board members are all based in in the United States.
NACD would like to thank the panelists for sharing their experiences with attendees, and for these generous sponsors for their support of the event: Dechert, Fried Frank, KPMG, and Vinson & Elkins.
Kimberly Simpson is an NACD regional director, providing strategic support to NACD chapters in the Capital Area, Atlanta, Florida, the Carolinas, North Texas and the Research Triangle. Simpson, a former general counsel, was a U.S. Marshall Memorial Fellow to Europe in 2005.
The uncertainty of looking to the future presses boards to consider how confident their senior executives and supporting teams are in executing strategy. How can the board help the companies they oversee to face the future with a greater sense of confidence?
Confidence is neither a cliché nor an assertion of mere optimism. Rather, it is a quality that drives leaders and their companies forward. The Oxford English Dictionary defines confidence as “the state of feeling certain about the truth of something” and “a feeling of self-assurance arising from one’s appreciation of one’s own abilities or qualities.” This definition focuses on the board and management’s appreciation of the collective capabilities of the enterprise, including the ability to carry out a company’s vision. It raises three fundamental questions:
Do weknow where we’re going directionally and why? Are our people committed to achieving a common vision that is clearly articulated, meaningful, and aspirational?
Are we prepared for the journey? Does our staff have the capabilities to execute our strategy? Do we have a great team, a strong roadmap, and the required processes, systems and alliances, and sufficient resources to sustain our journey?
Dowepossesstheability, will, anddiscipline to cope withchange alongthe way,nomatterwhathappens? Does our board have the mental toughness to stay on course? Is our management team agile and adaptive enough to recognize market opportunities and emerging risks, and capitalize on, endure, or overcome them by making timely adjustments to strategy and capabilities?
Definitive, positive responses to these questions from the board will enable confidence across the organization.
Looking back on experiences working with successful companies, seven attributes were identified that organizations must have when facing the uncertainty of future markets.
How to Build the Foundation for Confidence
Confidentorganizationssharecommitmenttoa vision. Commitment to a vision provides a shared “future pull” that is both inspiring and motivating. This perspective fuels enterprise-wide focus and energy to learn, which encourages participation and altruistic camaraderie. An effective vision crafted by the board and executive team leads people at all levels of a company to recognize that the enterprise’s success and their personal success are inextricably linked.
Confident organizations have a heightened awareness of the environment. A confident organization constantly reality tests its market understanding by facilitating effective listening to customers, suppliers, employees, and other stakeholders. Boards should encourage companies to generate sources of new learning, encouraging systemic thinking in distilling and acting on the environment feedback received, with the objective of driving continuous improvement. The confident organization fosters a culture of sharing and supports formal and informal continuous feedback loops to flatten the organization, get closer to the customer, and promote a preparedness mindset.
Confidentorganizationsaligntheirrequiredcapabilities. It is a never-ending priority of the board to ensure that the right talent and capabilities are in place to achieve differentiation in the marketplace and execute strategies successfully. Capabilities include an enterprise’s superior know-how, innovative processes, proprietary systems, distinctive brands, collaborative cultures, and a unique set of supplier and customer relationships.
How to Sustain Confidence
Achieving a foundation of confidence is necessary, but alone is not enough without concerted efforts to sustain confidence. Astute directors and executives know that the ability, will, and discipline to cope with change are also needed to sustain their journey. Those winning traits are enabled by the attributes below.
Confidentorganizationsare risk-savvy. The confident organization is secure in the knowledge that it has considered all plausible risk scenarios, knows its breakpoint in the event of extreme scenarios, and has effective response plans in place (including plans to exit the strategy if circumstances warrant). Most importantly, the confident organization should have an effective early-warning capability in place to alert decision-makers of changes in the marketplace that affect the validity of critical strategic assumptions. In a truly confident organization, no idea or person is above challenge and contrarian views are welcomed.
Confidentorganizationslearnaggressively. Confident organizations improve their learning by: creating centers of excellence; embracing cutting-edge technology to drive the vision forward; fostering an open, transparent environment of ongoing knowledge sharing, networking, collaboration, and team learning; perceiving admission of errors as a strength and requiring learning from the missteps; and converting lessons learned into process improvements. Aggressive learning stimulates the collective genius of the entire enterprise.
Confidentorganizationsplaceapremiumoncreativity. Innovation should be an integral part of the corporate DNA of the confident company, and should be evidenced by setting accountability for results with innovation-focused metrics at the organizational, process, and individual levels to encourage and reward creativity. Companies committed to innovation have the creative capacity to take advantage of market opportunities and respond to emerging risks. When innovation is a strategic imperative, companies empower and reward their employees to take the appropriate risks to realize new ideas without encumbering them with the fear of repercussions if they aren’t successful.
Confidentorganizationsare resilient. Confident organizations have adaptive processes supported by disciplined decision-making, and are committed to adapt early to continuous and disruptive change. They have the will to stay the course when the going gets tough, and are prepared to act decisively to revise strategic plans in response to changing market realities. They do not allow competitors to gain advantage by building large capital reserves, having great relationships with their lenders, and by cultivating trusting relationships with their customers, vendors and shareholders. The strategies that their boards approve include triggers for contingency plans that directors and management will implement if certain predetermined events occur or conditions arise.
In summary, the speed of change continues to escalate, creating more uncertainty about future developments and outcomes. If there was ever a time for a board to assess an organization’s confidence, we believe it is now. It’s one thing to have a confident CEO, but if the people within the entity lack confidence, the organization itself may not have the creativity and resiliency needed to sustain a winning strategy.
Jim DeLoach is managing director with Protiviti, a global consulting firm.
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:
Make short-term goals the building blocks of long-term strategy.
“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?”
Independent inquiry is not optional.
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.”
Conduct regular individual-director evaluations.
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.”
Be prepared to engage with shareholders.
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:
Ten recommendations on the board’s role in driving long-term value creation
Eleven red flags that indicate a lack of alignment between short-term goals and long-term strategy
Specific steps directors can take regarding CEO selection and evaluation, capital allocation, and other elements related to long-term value creation
Eight appendices that offer detailed insights and practical boardroom tools