Long-term value growth and preservation demands a competitively differentiated talent driven board and C-suite.
- Boards are ultimately responsible for the long-term success of their organizations.
- What is the company’s ecosystem?
- What is the purpose of the corporation?
- What is governance?
- What is the purpose of governance?
- What is value?
- What is the board’s decision-making model?
- What decisions, actions, and behaviours have the greatest impact on value?
- What are the implications for individual director requirements?
The purpose of this article (supported by a one-page slide) is to provide a framework, process, and facts to enable discussion and action planning among owners/shareholders, boards of directors, CEOs, and advisory boards as to whether or not directors should have a role in creating value, and if so, what that role is. There is no one-size-fits-all answer. The approach and action plan will be unique to the specific situation of each corporation.
Boards are ultimately responsible for the long term success of their organizations. 1
The entire discussion around boards creating value assumes that boards are accountable for creating value. If this is not the case for your corporation, there’s no need to read further. Many discussions regarding the value of directors use words such as “oversight”, “noses in, fingers out”, and other vague definitions of board accountability. It’s critical to be absolutely clear regarding board accountability.
What is the company’s ecosystem?
You need to understand the environment within which the company must be able to succeed i.e. the company’s ecosystem.
The company’s ecosystem is the network of people and organizations, including stakeholders and third parties, directly and indirectly involved in the operation of the business through both competition and cooperation. The idea is that each entity in the ecosystem will affect and is affected by the others, creating a constantly evolving set and nature of relationships in which each entity must be flexible and adaptable in order to survive, as in a biological ecosystem. The actions and behaviours of the ecosystem vary, depending upon what attribute of the company is considered. For example, the ecosystem has different behaviours when regarding the second to second corporate delivery of products or services versus when the company is dealing with CEO succession.2
What is the purpose of the corporation?
What is the purpose of the corporation? Is it solely to make money for shareholders and the C-Suite?
Why have societies and governments put in place the legal and regulatory framework for corporations? Is it to enable the creation of financial wealth for shareholders and the C-Suite? Is it so a “business can thrive and sustain growth while enhancing the wealth of its stakeholders and the well-being of societies in which it operates?”3
The U.S. perspective on the relationship between the corporation and society has changed radically in the past 37 years, as shown below by publications from the U.S. Business Roundtable.
In 1981: “Corporations have a responsibility, first of all, to make available to the public quality goods and services at fair prices, thereby earning a profit that attracts investment to continue and enhance the enterprise, provide jobs, and build the economy.” “Business and society have a symbiotic relationship: The long-term viability of the corporation depends upon its responsibility to the society of which it is a part. The well-being of society also depends upon profitable and responsible business enterprises.”4
In 2016: “Core guiding principles: The board approves corporate strategies that are intended to build sustainable long-term value.”5 There is no mention of responsibility to society.
Peter Drucker said: “Because the purpose of business is to create a customer, the business enterprise has two–and only two–basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.” 6
What is governance?
“Corporate governance involves a set of relationships between a company’s management, its board, its shareholders, other stakeholders, and third parties. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.”7
Based on the above definition, there are four aspects to corporate governance:
- The focus is on relationships among different types of people.
- Setting objectives. People set objectives. The board directors, company management, shareholders, stakeholders and third parties all have different interests and personal objectives. The conflicts of interest need to be understood and managed to agree upon objectives for the board and for management.
- Determining how to meet objectives. People have to develop plans which reflect what they will do to achieve the objectives. Both the board and management have objectives and plans.
- Monitoring performance. The performance of people (the board and management) is monitored. Everyone needs to understand the personal consequences of not achieving objectives.
The board and management have two way communications with the ecosystem to enable mutual understanding and hopefully support for the company’s (i.e. board and management) objectives.
What is the purpose of governance?
Governance is the mechanism by which the purpose and objectives of the corporation are achieved.
A critical challenge of board governance is understanding and managing the broad range of conflicts of interest.8 These conflicts need to be addressed when determining: the company’s ecosystem, the purpose of the corporation, defining what is value, and how to allocate value (both the benefit and cost components) among stakeholders, third parties, and society. A company’s management, its board, shareholders, stakeholders and third parties all have different interests, which impacts both objective setting and allocating value.
The four tiers of conflict of interest are:
#1 between a board member and a company. For example, in a company sale, the directors should not give any consideration to the impact on their future roles if the company is sold.
# 2 compromising the director’s duty to act in the best interest of a particular stakeholder (e.g. in Canada – the corporation, in U.S. – the shareholder).
#3 between: stakeholders and the company; between different stakeholders; and within the same stakeholder group.
#4 between the company and society e.g. when a company acts in its own interests at the expense of society. What should a director do when the company’s purpose is in conflict with the interests of society?
What is value?
Is value (or wealth) simply the financial returns to shareholders and the C-Suite? Ecosystem members may have varying and conflicting interests regarding benefits and costs they incur. Value may be more than only financial value.
The corporation can create value (both benefits and costs) throughout its ecosystem. How are benefits and costs allocated among the directors, management, shareholders, other stakeholders, third parties, and society? For example, if an unprofitable facility is shut down in a region with no other employment, who should bear the cost of keeping the former employees fed and housed? Should the corporation focus on shifting as many costs as possible onto society and minimize the benefits provided to society?
Determining what value is based on the purpose of the company, and considering the interests of different members of the company’s ecosystem.
What board decisions, actions, and behaviours have the greatest impact on value?
This is a discussion for the board and management. I have often heard that these include: a) the appointment/termination of the CEO b) the approval of the strategy and strategic plan. The board may decide how to allocate value (benefits and costs) among: directors, management, shareholders, other stakeholders, third parties, and society. Many directors and shareholders believe the focus should be on increasing shareholder value, and subject to laws & regulations, minimizing benefits to others and maximizing costs to others.
Value creation (or destruction) by director can occur by: the decisions they make, the nature of their relationships, if any, with the members of the company’s ecosystem, the behaviour which demonstrates to the ecosystem the values, morals, and ethics of the board.
What is the board’s decision-making model?
There are several types of decision-making models, including:
- The jury – 12 non-experts make a decision.
- The parliamentary or congressional model – non-experts make decisions, which may be based in whole or in part on advice.
- The judge model – a expert in making decisions based upon rules & principles.
- The meritocracy model – an expert making decisions based on personal experience and skills.
- Or some combination of the above.
All of the above models have a degree of subjectivity to them, and are influenced by conscious and unconscious biases.
Sometime there is confusion between a fiduciary or decision-making board vs an advisory board. The advisory board asks the CEO questions and challenges their thinking in order to help the CEO. The decision-making board asks the CEO questions and challenges their thinking in order to make decisions which impact the long-term value of the corporation. If the decision has no material impact on the long-term value of the corporation, why are the directors making that decision? If laws and regulations require directors to make decisions which have no long-term material value impact, the directors must put in place processes which minimizes their time while still being legally compliant. Sometimes boards fall into the trap of spending the bulk of their time on compliance.
What are the implications for individual director requirements?
All directors must share a common set of VME (values, morals, and ethics) in order to be nominated and to remain as directors. These VME are the company’s VME. VME are a framework and input for making decisions, behaviours, and actions.
The traditional skills matrix must be transformed to the long-term value growth matrix. What are the decisions, actions, and behaviours which have the greatest impact on long-term value growth? What experience must directors in achieving long-term value for each of these? How many directors must have this experience?
The following is an illustration of the process each board should use. What if the board considers CEO appointment or termination as one of the biggest impacts on long-term value growth. Must a director have experience in and accountability for: the appointment and termination of CEOs? Or C-Suite members? Or middle management? Or is any experience at all required? If experience is required, how many directors of those voting on the CEO appointment/termination must have relevant experience? All directors? Majority? One?
What do you do if you are a SME?9
You need to determine the scope of your ecosystem. e.g. are you a small manufacturing company, with a handful of customers within 50 kilometers or are you a small fin tech operating globally with millions of users. The broader the scope of the ecosystem, the greater the implications to your company.
You need to define what value is and which director decisions, actions and behaviours have the greatest impact on value. This can only be done once you understand the company’s purpose, ecosystem, and how to allocate value (both benefits and costs) among the different components of the ecosystem.
Your next steps
To enable discussion with your board of directors, CEO, and advisory board, download the following one-page slide:
Questions for your board and CEO/management to consider?
Ask the following questions and document the agreed upon answers, as well as points of disagreement. Remember, the Supreme Court does not always have a unanimous point of view.
- Is your board ultimately responsible for the long term success of your organization? If not who is, and what is the board accountable for?
- What are the components of your company’s ecosystem and how do impact your company?
- What is the purpose of your company? Define the relationship between the company and society.
- What is your company’s definition of governance? What are the relationships among the board, management, shareholders, other stakeholders and third parties including society?
- How are the objectives for the board and for management set?
- How is the performance of the board and of management monitored?
- What is the purpose of governance? How are the conflicts of interests among directors, management, shareholders, other stakeholders, third parties and society managed? What are the VME (values, morals, and ethics each director requires?) Are the directors VME aligned with the company’s VME?
- What is value?
- What board decisions, actions, and behaviours have the greatest impact on value?
- Do you have a one paragraph description of each decision, action, and behaviour? For example: i) what do you mean by strategy? ii) does appointing the CEO mean meeting with the short list of candidates prepared by the search firm and picking one?
- What are the implications for individual director requirements? What experience in achieving long-term value do directors need in order to make decisions? How many directors, of those voting, need to have the necessary qualifications?
- What is the action plan, if any?
1 Professor Didier and Estelle Metayer, “Does your board really add value to strategy?”, IMD, Global Board Center, https://www.imd.org/research-knowledge/articles/board-strategy/
2 Adapted from Investopedia 2018 May 11
3 Dr. Didier Cossin, Boon Hwee Ong, Sophie Coughla, “Stewardship fostering responsible long-term wealth creation”, IMD, Global Board Center 2015, https://www.imd.org/globalassets/board-center/docs/stewardship_2015.pdf
4 U.S. Business Roundtable, 1981 October “Statement of Corporate Responsibility”,
5 U.S. Business Roundtable, “Principles of Corporate Governance 2016”, https://businessroundtable.org/sites/default/files/Principles-of-Corporate-Governance-2016.pdf
6 Jack Trout , “Peter Drucker on Marketing”, Forbes, 2006 July 3, https://www.forbes.com/2006/06/30/jack-trout-on-marketing-cx_jt_0703drucker.html#3495ded7555c
7 based on “G20/OECD Principles of Corporate Governance”, 2015 I added the concept of “third parties”, https://www.oecd.org/daf/ca/Corporate-Governance-Principles-ENG.pdf
8 Professor Didier Cossin and Abraham Hongze Lu, “The four tiers of conflict of interest”, IMD, Global Board Center, https://www.imd.org/research-knowledge/articles/the-four-tiers-of-conflict-of-interest-faced-by-board-directors/
9 Industry Canada definitions (2018 May 9): Small business: < $5 million in revenue, < 100 employees; Medium business: between $5 million and $20 million in revenue, 100 to 499 employees.
- Jeffrey Sonnenfeld, Melanie Kusin, and Elise Walton “What CEOs really think of their boards.”, Harvard Business Review 2013 April, https://hbr.org/2013/04/what-ceos-really-think-of-their-boards
- Larry Fink’s 2018 letter to CEOs on how companies must have a social purpose and pursue a strategy for achieving long-term growth. https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter
- Mark Leonard, CEO of Constellation Software, his final annual CEO letter. “Qualified and competent Directors are very rare, and not surprisingly, the track record of most boards is awful. According to the 2017 Hendrik Bessembinder study of approximately 26,000 stocks in the CRSP database, only 4% of the stocks generated all of the stock market’s return in excess of one – month T-Bills during the last 90 years. The other 96% of the stocks generated, in aggregate, the T-bill rate over that period. This means that 4% of boards oversaw all he long-term wealth creation by markets during that period. Even more disturbing, the boards for over 50% of public companies saw their businesses generate negative returns during their entire existence as public companies. “ His 2018 April 20 letter also includes “CSI Board Role Search Criteria” “ http://www.csisoftware.com/wp-content/uploads/2018/04/Presidents-Letter-April-2018-Final.pdf
- This article suggests enhancing the board’s role in value creation three ways: assessing the full suite of options for value creation; evaluating how strategic options affect total shareholder return; and understanding long-term shareholders’ views on value creation. The authors are from: Norton Rose, BCG, and RBC Capital Markets http://www.nortonrosefulbright.com/knowledge/publications/137271/beyond-governance-a-canadian-perspective-on-preempting-shareholder-activism-through-value-creation