A recent survey of executives and directors globally found that the top two risks discussed are disruptive change to the business model and the organization’s resistance to change. This incongruence captures what may be one of a board’s most fundamental fears.
No established incumbent wants to fall into the category of companies that were yesterday’s success stories but today are in decline, suffering “death from a thousand cuts.” Yet it happens all too frequently. One well-known CEO says it begins with “stasis”—a state of inactivity that leads to “irrelevance” and is followed by an “excruciating, painful decline” until, ultimately, there is an abrupt demise of the enterprise.
This kind of decline is unmerciful. Its low velocity is one of the primary reasons it is so difficult to spot. Left unabated, it leads a once-proud company to the point where very little can be done to save it as it continues down its committed path. In the digital age, cloud computing, robotic process automation, machine learning, and other technologies are disrupting every industry by presenting opportunities to reimagine business models. With physical locations, people, and infrastructure barriers virtually gone, it’s possible for “born digital” start-ups to disrupt an established company with a hyper-scalable business model that can accommodate rapid growth without significant upfront capital.
Time and speed in business have changed. Business has evolved beyond the tactical to emphasize a more strategic and holistic view of challenging conventional thinking and disrupting traditional ways of working as well as long-established value chains. Managing to the speed of business may seem like a strange notion to some, but why shouldn’t every organization evaluate its processes given the speed of change in the marketplace and within the industry? Considering the stakes, it’s worth a serious look.
Following are 10 thoughts on managing to the speed of business and its implications to board oversight.
Set the tone for speed at the top. Directors should support the CEO in setting the tone for speed through both actions and words, emphasizing the importance of staying close to the customer, keeping an eye on relevant market trends, organizing for speed, and embracing change.
Focus on high-velocity and high-quality decision-making. Many large companies make high-quality decisions but make them too slowly. There is a time and a place for formality, but for many activities, an unstructured approach is sufficient.
Inculcate a culture of speed. Members of the executive team should have a stake in initiatives to improve and sustain speed. A company must be at least as fast as—and endeavor to be faster than—agile followers of the latest trends in its industry.
Focus on the customer experience. The speed-conscious organization is customer-centric. Accordingly, it places strong emphasis on gaining access to market insights efficiently and in a timely manner, likely through big data solutions and advanced data analytics.
Establish an organizational structure that directly supports lean business behaviors. Open, flexible, and agile structures with flat hierarchies drive efficiencies, speed up innovation cycles, and facilitate collaboration, communication, and faster decision-making and execution. Focused, dedicated teams armed with purpose and clear objectives should be empowered by executive sponsors to tackle well-defined tasks and assisted by appropriate alliance partners. Sponsors keep the effort on the fast track with a fail-fast mentality.
Select the talent who will lead to success. Trite as it might be to say, the best and most diverse talent wins in the digital era. Talent strategy must set the foundation for speed.
Understand external trends. Speed places a premium on recognizing global megatrends and their impact timely. Boards should ensure that management is focused on becoming more future-oriented, mindful of external developments, and resilient in the face of change in the digital age.
Speed must deliver desirable outcomes. Speeding up processes and decisions is not the endgame. Outcomes that are on-strategy validate a faster process.
Learn at the speed of business. A committed learning organization fosters a positive culture that embraces open-mindedness, critical thinking, fresh ideas, and contrarian points of view—all of which are vital to speed. Ongoing knowledge-sharing, networking, collaboration, team learning, and admission of errors and learning from them facilitate speed. Feedback loops regarding interactions with customers, suppliers, regulators, and other outside parties that maximize broad employee participation helps to root out unconscious bias.
Speed requires effective change enablement. When processes and functions are reimagined, and products and services require improvement, the organization should have an established process to organize the necessary stakeholder commitment and drive the needed change.
What do Atari, Blockbuster, Borders, Palm, and Polaroid have in common? Each failed to keep pace with the market and suffered a long decline before entering bankruptcy or being acquired or liquidated. Each case illustrates how difficult it is to turn away from a business model or a segment of the market that has served the entity’s stakeholders well over the years.
Confidence in facing the future is what every director and leader wants. Speed is dictated by the market—meaning that external and internal factors influence it. The tailwind effect of embracing change and managing to speed breeds desirable confidence in the digital economy.
“What would you do if I sang out of tune? Would you stand up and walk out on me? Lend me your ears and I’ll sing you a song, and I’ll try not to sing out of key. Oh, I get by with a little help from my friends.”
When The Beatles first recorded that song in 1967, it’s a safe bet they weren’t thinking about corporate governance and the role of the board of directors. Yet, as I’ve pondered the array of corporate scandals over the past decade, I found these fifty-one-year-old lyrics floating to the forefront of my mind.
Whenever there is a highly publicized failure of corporate governance, the first question that’s typically posed is, “Where was the board?” However, in my experience—after 20-plus years of service in public and private companies, both in the for-profit and nonprofit sectors—that question rarely gets to the heart of the matter because process isn’t the primary culprit. A better question is, “What happened and why?”
Conventional wisdom examines whether the board had sufficient information, process, and the right reports. What often doesn’t get scrutinized is whether the board had the right people in the right places and if the chair or lead director is doing his or her job setting the tone at the top.
In this rapidly changing, complex world, it is incumbent upon the chair or lead director to continuously improve both the process and substance of governance, even in the strongest and healthiest of companies. This is where The Beatles’ lyrics come into play.
The Complexities of Conducting
The role of the chair or lead director is similar to that of an orchestra conductor. The conductor’s primary duties are to interpret the musical score of the composer via an ensemble of players. Using indications within the score, the conductor sets the tempo, shapes the phrasing, and guides the players to perform in concert. While it sounds simple enough, it’s a task of enormous complexity.
The sheet music that an orchestra is given can be likened to the committee charters and board responsibilities. The paper needs to contain the “right tune” and the right mix of notes, etc., but those same notes can be played beautifully or poorly, in harmony or in discordance. Even if individual performers are playing well, one bad violinist can wreck the whole orchestra if his or her part is not minimized or if the conductor doesn’t have the power or influence to get rid of the bad player. Taking the analogy further, the conductor also has to spot the talented players (i.e. board members), even if they are hidden away or young, and feature them.
Then there’s the pacing of the score—think board process. Whether it’s played loudly, softly, fast or slow, is a matter of feel. That’s what the conductor is expressing with his or her gestures and baton-waving. And, of course, the conductor has to be ahead of the music, so the sound carries to the audience, as well as anticipate what’s next.
So, you can have all the scores (or board processes) you want, but if the conductor can’t make the band of sterling musicians work together, the net result is less than stellar performance.
It’s doubly challenging in cases where the board doesn’t have an independent chair because the power of the lead director is usually quite limited, leaving him or her to conduct solely through influence versus explicit authority. In the corporate realm, these are some of the factors that must be considered when making governance better.
Soft Yet Hard
In its recent report, the NACD Blue Ribbon Commission on Culture as a Corporate Asset aptly stated, “While it is often perceived as a ‘soft issue,’ [culture] is actually a hard issue—both in the sense of having concrete impact, and in the sense of being difficult to assess.” The same is true of tone at the top. It can be incredibly hard to assess because it’s ethereal in nature, like the orchestra conductor filling the concert hall with melodious music.
But it does come down to the interactions among the board and its committees, and the transparency of information flow between management and the board at all levels. The responsibility for the “tone” of these interactions, i.e., getting the music to sound good, resides with the board chair or lead director.
In the collective interest of corporations and shareholders everywhere, there’s much to be gained by the ongoing tuning of this tone. Regularly posing the following questions is one example:
Are your governance processes appropriate for the speed of change today?
Is there sufficient clarity about the roles and responsibilities of the directors and management?
Are the right people in the right places for today and tomorrow?
Is the orchestra playing in concert in the eyes of the audiences, i.e.. customers, employees, shareholders and the broader community?
The answers are less important than asking the questions and bringing this kind of curiosity to the board room now.
As the aforementioned NACD Blue Ribbon Commission reported, even for companies with healthy cultures, resting on laurels isn’t an option. The stakes are simply too high and the operating environment too volatile not to seek continuous improvement.
It concluded that, “Performed properly, culture oversight not only can be embedded into directors’ existing activities, but also can significantly improve the quality and impact of the board’s work overall.” This notion of making the music match the words when setting the tone at the top goes right along with the Commission’s finding. That, and a little help from friends, might even mean singing on key.
Roger O. Goldman is chair of the executive committee of American Express National Bank, lead director of Seacoast Bank, and former chair of the board for Lighthouse International. Opinions are his own.
Today is Day Three of your M&A Litmus Test (three down, two to go!), so we’ll continue by testing your sense of…
Does your board know its role in strategy? NACD has been emphasizing the importance of board involvement in strategy since time immemorial. Most recently, NACD, with the help of wise counsel (thank you, Ira Millstein and Holly Gregory of Weil Gotshal), boiled down governance guidance from boards, shareholders, and management into ten Key Agreed Principles, including Principle VII: Attention to Information, Agenda & Strategy. We declared that “Governance structures and practices should be designed to support the board in determining its own priorities, resultant agenda, and information needs and to assist the board in focusing on strategy (and associated risks).”
So true! The Report of the NACD Blue Ribbon Commission on the Role of the Board in Corporate Strategy provides specific guidance:
Boards should be constructively engaged with management to ensure the appropriate development, execution, and modification of the company’s strategy.
The nature and extent of the board’s involvement in strategy will depend on the particular circumstances of the company and the industry in which it is operating
While the board can—and in some cases should—use a committee of the board or an advisory board to analyze specific aspects of a proposed strategy, the full board should be engaged in the evolution of the strategy
Moreover, strategy development should be a cooperative process.
Management and the board should jointly establish the process the company will use to develop its strategy, including an understanding of the respective roles of management and the board.
Management and the board should agree on specific steps for strategy development.
To participate effectively in the strategic thinking process, boards should be prepared to ask incisive questions—anticipating, rather than reacting to, issues of major concern.
So, what does this have to do with M&A? Here’s your answer (with help from the McGraw-Hill M&A Series that yours truly coauthors).
By being actively engaged in the formulation of strategy, boards will typically already have some involvement in considering possible acquisitions, since all acquisitions should be consistent with a company’s strategy.
The extent of the board’s involvement in a proposed transaction (for example, questions of disclosure, financing, pricing, structuring, and due diligence) will vary depending on the size of the acquisition and the risks that it may pose. If a very large company regularly buys small companies in its industry and has already developed a process for finding, acquiring, and integrating these small transactions, boards don’t have to focus on the details of any particular transaction. They can and should, however, periodically review the entire merger process, from strategy to integration, in the context of strategy opportunities, attendant risks, and operational implications, to make sure that the process is working.
Selling is a big decision, whether or not a company is private or public. Back during World War II, my dad founded a research company, which he sold after twenty years for one million dollars—in paper. The disastrous experience forced him to launch the publication, Mergers & Acquisitions, in 1964—and it’s still going strong. For public companies, the negotiation is even more critical, involving not only an entrepreneur’s wealth, but a host of fiduciary and disclosure considerations.
The board of directors of a public company being acquired via a tender offer must be mindful of its fiduciary responsibilities under state corporate law. Traditionally under state law, as represented by Delaware law and the Model Business Corporation Act, the directors’ fiduciary duty is to shareholders. In the landmark case of Revlon Inc. vs. MacAndrews & ForbesHoldings, Inc. (1986), the court described the role of the board of directors as that of a price-oriented “neutral auctioneer” once a decision has been made to sell the company.
Whether buying or selling, don’t let M&A transactions trigger micromanaging on the part of the board. Directors can help management achieve greater effectiveness. Individual board members may have expertise in various phases along the M&A route, and can help improve the process. Management would be wise to take full advantage of this expertise on an as-needed basis. Major transactions merit formation of an independent committee of the board to analyze the value of the transaction with the help of an independent third party, who can render a fair opinion. But don’t leave valuation up to the experts; boards can take an active role in determining the value of the company they are buying or selling. A great source for that knowledge is the Report of the NACD Blue Ribbon Commission on Performance Metrics, co-chaired by John Dillon and Bill White. Also, there are numerous good books on corporate valuation. (I know because I just coauthored one with Bob Monks and the worthy competition could well kill us!)
Shout Out to Sources
NACDKey Agreed Principles to Strengthen Corporate Governance for U.S.Publicly Traded Companies. Download a complimentary copy at www.NACDonline.org/LeadingtheWay.