Focus your project on user and customer value achievement

Focus your project on user and customer value achievement

The two-fold purpose of this article is to:

  • Enable boards of directors and CEOs to better assess projects and potential project success.
  • Enable those preparing project presentations and business cases to increase the success of project success.

Projects which succeed in enabling users/customers to achieve value have a greater potential of achieving revenue and profits.

Looking back over the past 40 years, many, perhaps most, of the project presentations and business cases that I have led or have seen contained major flaws, which led to reduced or no benefits. The following outlines my current thinking, based on observations of countless initiatives and research.

You may download a PDF of this article from: Focus your project on user and customer value achievement

What is a customer value achievement project?

  • Create a sustainable scaling product/service which profitably enables users/customers (e.g. users are people doing searches on Google, customers are people paying money to advertise on Google) to achieve value in a changing competitive environment.
  • Many projects will not succeed, especially those innovating with new target users/customers, new user/customer problems, new channels, new partners, etc.

How to read this article

This article outlines the different components of the project starting with the oral presentation.

 The project has three phases

  • The startup phase, which concludes with the determination that there are a sufficient number of potential cash paying customers to create a scalable solution. Many projects will be terminated before this phase completes. The initial capital approval will be at most to complete this phase. Additional capital may be required during this phase, depending upon what is learned.
  • The getting ready to scale phase concludes with the business having the talent and cost-efficient scalable resources and activities in place. Additional capital approval(s) will be required for this phase.
  • The scaling phase, focuses on increasing the number of distribution channel and partners, combined with marketing and sales investments. Additional capital and resources may be required.

 The 20-minute oral presentation of your project

The purpose of the oral presentation is to demonstrate the leader’s:

  • In depth understanding of the project.
  • Ability to communicate complex ideas and concepts in an easy to understand manner.

The leader’s oral presentation will have 10 sections.

  • What is the problem and who has it (target users/customers)?
  • How will the users/customers see and achieve the benefits of your solution?
  • Why is now the right time to do this project?
  • What is the size of the market i.e. how many users have an urgent need and how much customer would be willing to save money?1
  • What is the product and/or service you are going to create?
  • Who is the project team and what is their relevant experience? The team may include advisors, consultants and partners.
  • What is the business model? e. how you are going to get users/customers and how will you make money?
  • Who is the competition and how are you unique?
  • What are the financials i.e. 24-month cash flow forecast by month as well as years 3-5 by year.
  • What are you asking for to launch the first phase of the project?

The outcomes of the project leader’s oral presentation

The main outcomes of the project leader’s oral presentation are that the audience will:

  • Support sending the project onto due diligence.
  • Have trust and confidence in the leader.
  • Have a clear understanding of who the users and customers will be, their urgent problems and needs, and the potential revenue from cash paying customers.
  • Know how the solution will meet the customers needs and problems.
  • Understand why users and customers will prefer this solution to the competitions.
  • Have confidence that the leader and her team have the relevant skills, and plans to close any skill gaps.
  • Trust that the leader will carefully manage the capital and resources based upon seeing a 24-month cash flow forecast, by month.
  • Understand that the initial project stages will consist of a series of experiments, prototypes, pilots, and phased releases reflecting the requirement to constantly validate user/customer problems as well as what the customer is actually willing to pay for.

The due diligence done on the project

The due diligence will include: review of material, calls/meeting with customers, and potential customers, calls. meetings with team members, and in-depth Q&A sessions with the leader and team. The written material for due diligence is in an online data room.

The outcome of due diligence is an IM (Investment Memo) which is the  recommendation as to whether or not to proceed.  The IM is based on the information provided by the project, information collected by the due diligence team, and due diligence team analysis and judgement.

The written material in the data room will include:

  • Who are your target user/customer segments? What is the user/customer market size?1 How did you validate your assumptions?
  • What is the customer’s perceived value proposition of your solution? How are you different from, and better than, the competition?  The value proposition includes all of the customers’ costs and benefits associated with adopting your solution, which includes any transition costs from existing solutions.
  • What are your customers’ expectations of their relationship with you? g., if it’s a software product, how often will there be updates with new features?  How easy will it be to install a new version?  Will customer service be a chatbot or a live person? Etc.
  • What will be your channels to the customer?
    1. Communications channels with potential customers?
    2. Sales channels which result in a sales transaction?
    3. Logistics channels which deliver the product or service to the customer?
  • Who are your key partners? A partner is more than a channel. A partner may be: enhancing your credibility due to their reputation; adding value to your solution due to their resources; or enabling you to close sales.
  • What are the key activities? Which processes and actions are required to manage partners, channels, and resources in order to enable customers to achieve their value proposition.
  • What are the key resources to enable customers to achieve their value proposition? These include: intellectual property, technology, people, contracts, financial and physical assets.
  • What is the cost structure to create and deliver the value proposition?
  • What are the revenue streams? These could include: subscription-based per person per month, free for a basic service, with multiple tiers of extra services with fees, etc.
  • What’s the talent required for the project? What are the gaps and your plans to address the gaps?  What are the project team member descriptions and how are their skills, experience, and network relevant to this project?
  • What is the 24-month cash forecast, by month, showing key milestones and accomplishments.
  • The oral presentation deck. Designed to support the oral presentation. Lots of visuals, with few words.
  • The written presentation deck

Ongoing project reporting

The following reporting is ongoing from startup through to the business scaling the solution

The written report will include:

  • New customer value achievement leading indicator (e.g. for Slack it was 2,000 team messages sent within 60 days).
  • New customer success metric (e.g. % of new customers achieving new customer value achievement indicator within 60-90 days).
  • Net Promoter Score.2
  • Customer churn.
  • Customer retention.
  • Customer acquisition costs.
  • Lifetime customer value.
  • Issue and problems – there are always problems and issues
  • What help is needed – help is always needed
  • 24-month cash flow forecast – actuals vs plan

There is a monthly review meeting 100% focused on issues, problems, and the asks for help.  The written report is distributed and read prior to the meeting.

Any requests for additional capital will require an updated Investment Memo,

Startup Phase

The additional reporting in the startup phase reflects that there may be many experiments, pilots/prototypes, and a series of evolving revenue generating solution, until the project determine whether there is a solution which meets the cash spending demands of a large enough number of customers and the needs of enough users.  What’s being done is often inefficient and even manual.

Reporting reflects what is being learned, what assumptions are validated or invalidated and what new assumptions are being made.

Getting ready to scale phase

The additional reporting in this phase is now focused on the efficient gaining of users/customers and the profitable meeting of their needs.  (e.g. The onboarding process in the startup phase may have had the CEO call each person who signed up on the website within 30 seconds.  This will be impractical in the long term) The reporting will reflect the talent, process, and technology changes required.

Scaling phase

The additional reporting will reflect the learnings and associated metrics arising from: new geographies, new distribution channels, new partners, etc.

Your next steps

  • Document your current project approval and project management process.
  • Compare your current situation to what I’ve outlined above.
  • Identify the critical improvement requirements and related assumptions.
  • Begin piloting the revised project approval and project management process to validate your assumptions.

 Footnotes

1 Market size

What is TAM (Total Addressable Market)?

  • What would be the project’s revenues with their future solution if 100% of the customers demanding a solution to their problem bought the project’s solution. This assumes all potential distribution channels and partners
  • There is a critical difference between customer needs and customer demands. Customers have a large number of needs.  Demand is customers deciding that they will spend time, effort, and money to get a solution for what they believe is an urgent need.  Often this means that customers will spend less money to meet other needs.
  • Is the project’s TAM large enough to launch and grow the company? For example, the global smart phone TAM is huge, but the global TAM for smart phones that have a keyboard is tiny.
  • The best way to calculate TAM is with a bottom up calculation, starting with a clear description of the target customer segment, its needs, and then considering the subset of customers who will actually provide revenue, and the revenue per customer. Recognize not everyone in every country will be able to afford the solution.

What is SAM (Serviceable Addressable Market)?

  • This is the portion of the TAM that is within the reach the project’s distribution channels and partners, and your ability to deliver and support your solution. Geography may be a constraint. This still assumes 100% market share of those customers demanding a solution. SAM will change over time, as growth occurs in geography, the number of distribution channels and partners, and the volumes from each distribution channel and partner.
  • How will customers connect with the startup?  If they are seeking a solution, how will they find the project?  How will the project make customers aware of the solution?

What is SOM (Serviceable Attainable Market or Share of Market)?

  • SOM will be lower than SAM for two reasons: there will be competitors, and every customer who is demanding a solution may not actually buy a solution.

TAM, SAM, and SOM will vary at different points of the 5-year forecast.  TAM, SAM, and SOM will also change as the project validates assumptions by progressing through: initial assumptions, customers interviews, feedback from prototype in customers hands, feedback from initial revenue producing customers, feedback from MVP (initial revenue producing customers who are delighted from the initial set of value they achieve from the solution), customer feedback as solution capabilities are enhanced to provide value to a greater set of customers, etc.

2 NPS (Net Promoter Score) The single most important question is asking  “Would you recommend our solution to others?”  (Follow on questions could be “If so, why?  If not, why not?”) This metric is known as NPS.  What is your NPS? Above 0 is good. Above 50 is excellent. Above 70 is world class. How do you compare to your industry and competitors? What has been your NPS trend?

The Net Promoter Score concept was initially developed by Bain.  The following is a link to the Bain website homepage for Net Promoter Score, which contains several short articles:

http://www.netpromotersystem.com/about/why-net-promoter.aspx

The following is a quick overview of using Net Promoter Scores:

https://www.forbes.com/sites/shephyken/2016/12/03/how-effective-is-net-promoter-score-nps/#1b1391b423e4

 

 

 

How can restructuring grow value? V2

The purpose of this article is to provide a framework for thinking about restructuring. Any size of company may need to restructure.

You can download a PDF of this article from:How can restructuring grow value V2

What are the different types of restructuring?

Restructuring is much larger change than the day-to-day continuous improvements being made in the company, or the pivoting (i.e. changes to the business model canvas1).

  • Merging with or acquiring a company.
  • Divestiture i.e. selling a subsidiary or major assets to a third party.
  • Spinning of part of the business and assets to create a new standalone company.
  • Changing the legal structure of the business.
  • Changing the financial and capital structure of the business e.g. common stock become worthless, bond holders take a write-off.
  • Turning around the company due to poor performance in the current market place.
  • Repositioning the company to a new marketplace.
  • Reducing costs.

Restructuring is often focused on short-term cost reduction, with workforce shrinkage playing a major role. There is the risk that restructuring addresses short-term issues but does not position the company for long-term value growth and preservation.

What is value?

How is value measured by different people and organizations?

  • Shareholders may look at share prices and dividends. Different shareholders have different expectations and metrics. Angel investors, venture capitalists, short-term hedge funds, private equity, and pension funds look at value differently.
  • Society looks at the value the company is providing to or extracting from society. Some shareholders, such as Blackrock and some pension funds are also starting to look at the value a company delivers to or extracts from society.  A common issue is the impact on climate change.
  • The CEO and C-Suite have very clear measures of value, which are their personal compensation plans.
  • Employees and other stakeholders have their own perspectives on value.

Who and what are the fundamental drivers of the decision to restructure?

  • The board of directors and C-Suite want to transform the company before revenue and profits are impacted. The leadership may perceive future risks.  This is the concept of fix it before it’s broken.  Few companies are this forward looking.
  • To achieve the growth strategy requires closing gaps in: talent, customer relationships, technology, intellectual property, and external partnerships.
  • There are assets (talent, customer relationships, technology, intellectual property, and external partnerships) that are not needed to achieve the growth strategy. These assets may be divested or spunoff.
  • The customers are driving the need to restructure. Customer needs have changed and thus the marketplace is shrinking.  Customer needs for phones with keyboards shrank, resulting in a major impact on Blackberry. Customer needs are changing and there are competitors better able to meet those needs.
  • The company’s debt burden may be destroying profits or the company is getting close to breeching covenants or may have already breeched covenants. Breeched covenants may result in major decision authority residing in third parties.
  • Major shareholders may be driving change. Hedge funds may want a large short term return on their investment.  Pension funds may want climate change addressed.
  • Regulators are driving change.
  • There is the opportunity to make internal changes which do not impact the strategy e.g. changes in legal structure to reduce taxes or risks.

What are the general stages of thinking?

  • The board of directors, CEO, and C-Suite need to have a fact-based description of what is driving the need for change, assess how different types of restructuring will impact the change drivers and impact value.
  • The very first step is to determine if there are the right people on the board and right CEO to conduct this assessment and make the appropriate decisions. For example, a complacent board of directors who have not stayed in touch with the evolving customer needs and market place that resulted in massive losses is clearly not the right talent.
  • The company needs the talent to address the current situation, not the talent that was need in a very different past. Every director and every CEO is not appropriate for any and all situations. The necessary changes to the board of directors and CEO must be made quickly.
  • The board and CEO must agree on the decision-making process. Restructuring may be a rare or unique decision.  The usual decision making process may not be
  • The most critical component of the strategy must be validated: the size of the market place demand and the customer needs.  Market place demand is the number of customers willing to pay to meet their needs.  For example, the number customers with needs for a keyboard based cellphone dropped. The single best measure of the degree to which meeting current needs is the NPS2 (Net Promoter Score).  If your customers are not recommending your solution, then you have a crisis.   The NPS must be supplemented with customer interviews.
  • The board and CEO must agree on the facts and assumptions regarding what is driving the need for restructuring. Any assumptions need to be quickly validated or invalidated.
  • The board and CEO must agree on the restructuring options and impact on the value. There should be a common understanding of what success and value will look like in the future.
  • Then set out the restructuring objectives.  These objectives will be broader than short-term financial targets and consider things such as: reputation, customer retention, employee morale & ability to attract employees in the future, the need for long-term investments, etc.
  • Assign accountability for achieving objectives to specific members of leadership.
  • Assemble a plan, which includes both short-term options (e.g. terminating current and planned consulting projects, eliminating discretionary spending, staff reductions) and longer-term options (e.g. continuing to invest in projects with clear business cases to grow and preserve value, continuing with selected innovation and trials, reviewing and revising the organizational structure.)

Your next steps

Prepare a plan for your specific situation, based upon the above framework.

Footnotes:

1 The business model canvas is the documented story of who your customer is, why they buy from you, and how you make a profit. The story consists of both narrative text and numbers. For futher information go to: https://koorandassociates.org/the-startup-journey/what-is-a-business-model/

2 NPS (Net Promoter Score) The single most important question is asking  “Would you recommend our solution to others?”  (Follow on questions could be “If so, why?  If not, why not?”) This metric is known as NPS (Net Promoter Score).  What is your NPS? Above 0 is good. Above 50 is excellent. Above 70 is world class. How do you compare to your industry and competitors? What has been your NPS trend?  You can find links to more information about NPS in the Further Reading section.

Further Reading

The Net Promoter Score concept was initially developed by Bain.  The following is a link to the Bain website homepage for Net Promoter Score, which contains several short articles:

http://www.netpromotersystem.com/about/why-net-promoter.aspx

The following is a quick overview of using Net Promoter Scores:

https://www.forbes.com/sites/shephyken/2016/12/03/how-effective-is-net-promoter-score-nps/#1b1391b423e4

How do you interview potential customers?

You can download a PDF of this article from: How do you interview potential customers?

 Why interview potential customers?

You don’t want to spend time and money to build a solution for which there are no customers with a problem or need you can satisfy  You interview potential customers to understand their problems and needs, with an absolute focus on listening.  This is very different than trying to sell a solution.

The overall process is to:

  • Document some hypotheses: What are the characteristics of a potential customer? What are the potential customers’ problems and needs?
  • Test the hypotheses by interviewing potential customers. You may have to contact 10 or more people for each interview, which is best done face-to-face. The absolute minimum number of completed interviews is 10.  50 completed interviews are better.  One founder completed 300 interviews in a year.
  • The interview process will either validate or disprove your hypotheses.
  • During the interview process you will likely revise some hypotheses, as well as set down some facts (i.e. validated hypotheses).

You document your hypotheses in the business model canvas1.  This framework ties together customers, their needs, your solution, and what’s required to build your solution.  Your business model canvas will change as your hypotheses change, are validated, or are invalidated.

What are the dos and donts?

  • Do document and execute a structured process.
  • Do define your target customers and select potential customers who are representative. For example, if you are creating a venture capital fund which will focus on providing investor exits within 3 years, do not interview potential investors who seek a 20+ year exit in-order to facilitate inter-generational wealth transfer.
  • Do face-to-face interviews. Video calls are a distant second best.  Phone calls are a very distant third best.  Don’t do emails or surveys because those do no allow interactive dialogue and understanding.
  • Do get out and interview lots of customers. The absolute minimum number of customer interviews in 10.  50 interviews are a better number.  One founder completed 300 interviews in one year.  You will have to contact many people to get the necessary interviews because most people will decline.  They are strangers with busy lives.
  • Do ask potential customers if it’s OK to record the interview for later analysis. If not, have a second person take detailed notes.  Do not conduct a non-recorded interview by yourself.
  • Do document the criteria for assessing the answers. This will avoid confirmation bias, in which you’ll ignore information which invalidates your hypotheses.
  • Do not interview friends, family, or those you have a personal connection with. You need brutal honesty, rather than hearing from people who do not want to hurt your feelings.
  • Do focus on the people who actually have the problem or need for which you are creating the solution.
  • Do create questions which require quantitative answers or specific descriptions. Don’t ask for subjective or hypothetical feedback.
  • Do create questions that help you understand how customers think, and why they take the actions they do.
  • Do not talk about your solution in your initial meeting.
  • Do not ask about price or what customers are willing to pay. Do ask about the customers costs’, budgets, etc.
  • Do not use or send a survey form. These tend to ask closed-end questions, while you want open-ended responses to open-ended questions.
  • Do finish each interview with two questions: “Who else would you recommend I interview?”, and “What should I have asked but did not ask?”
  • Do create a data collection form for each interview. This will contain things such as: the description of the customer profile, your open-ended questions, which hypotheses were confirmed and why, which hypotheses were invalidated and why, which hypotheses you gained no insight into and why, what changes you should make for the next interview (target customer profile, hypotheses, questions to ask).
  • Do review and update your business model canvas as you validate your hypotheses regarding target customers and their needs.

Other customer understanding techniques to consider:

  • Watch the customers (or video record them) as they carry out their work.
  • Actually do the customer’s work yourself.
  • Focus on the user who is suffering the greatest pain and determine their work-around solution(s).
  • Understand what the customers’ required outcomes are, as well the problems in achieving that outcome.

What are the challenges in interviewing potential customers

  • The founders, or existing companies, passionately believe that they have created right solution. They believe there is no reason to interview potential customers. They are focused on building the solution and selling it. Their passion results in them being unable to listen to and understand what the customers are saying.
  • The founders, or existing companies, believe any sales and marketing problems can be fixed by changing the sales deck and changing the website.
  • The founders, or existing companies, are passionate that they have the right solution. Hearing brutal feedback from potential customers requires founders who are self-confident, self-aware that they don’t have all the answers, and have the ability to learn and adapt.  I’ve observed many people who are not able to learn and adapt.
  • The founders lack the personality and skills to contact a large number of strangers to setup and conduct interviews.
  • Doing interviews appears to be lack of progress. Building a solution is more fun and appears to be progress.

Conclusion

You will fail if your customers do not believe your solution addresses a key problem or need.

 Footnotes:

1 “What is a business model canvas?”  The following is a link to my article https://koorandassociates.org/tools/what-is-a-business-model/

 

 

 

How do you determine employee talent requirements?

If you don’t have the right talent, your company cannot survive or prosper.  You cannot put in place talent recruitment, development, compensation, and exit plans until you know what the talent requirements are.

This document focuses on management and staff, excluding the board of directors, founders/C-Suite, and advisory board. The following is a broad framework.  You need to customize it for your specific situation.

To succeed, a company’s target customers must perceive they are obtaining competitively differentiated value over time.

The four 4 questions you must answer are:

#1 What is that competitively differentiated value?

#2 Which components of the business framework1 are required to deliver that value?

#3 What roles are required, and how will each role help deliver that value?

#4 What are the characteristics of the person in that role?

The answers to the 4 key questions depend upon the specific situation of the company.

Where is the company now, what’s the future direction, and what are the upcoming challenges? Some of the possible situations include:

Startup has no MVP2 (Minimum Viable Product) yet, is targeting a major market, and hopes to grow to 100+ employees.

#1 What is that competitively differentiated value?

At this point the founders are still figuring this out.

#2 Which components of the business framework1 are required to deliver that value?

The startup is focused on just a few components of business framework, and only a few pieces of the business model – who are target customers, what are their needs?

#3 What roles are required, and how will each role help deliver that value?

There are no detailed role descriptions. Everyone working on everything.

#4 What are the characteristics of the person in that role?

Everyone must be comfortable in chaos, dealing with daily new problems, have the ability to make rapid personal changes, and be relentless in overcoming obstacles.

Startup, has Product/Market Fit3, a small niche market, and will grow to a handful of employees.

#1 What is that competitively differentiated value?

The founders have determined this.

#2 Which components of the business framework1 are required to deliver that value?

The founders have identified and documented this.

#3 What roles are required, and how will each role help deliver that value?

There must be clearly defined roles for a stable business. The days of chaos should be over.

#4 What are the characteristics of the person in that role?

What are the necessary skills, experience, values, morals, and ethics to carry out that role?  Each person must have the ability to learn and change over time as the company continues to evolve.

Large company, with Product/Market Fit.

#1 What is that competitively differentiated value?

This must be documented.

#2 Which components of the business framework1 are required to deliver that value?

All the components are required for continued success.

#3 What roles are required and how will each role help deliver that value?

For each role, there must be a clear definition of the future challenges, issues, changes, obstacles to overcome and expected outcomes for that role.

#4 What are the characteristics of the person in that role?

Focus on the skills, experience, values, morals, and ethics to carry out the role.  Every company has a small number of roles that enable the bulk of competitively differentiated value. These roles are not based on management hierarchy.  You must identify and target these roles.

Large company that has lost Product/Market Fit, the market is shrinking, there is intense competition, and the company must be transformed.

#1 What is that competitively differentiated value?

At this point the company does not have competitively differentiated value with a large percentage of customers recommending the company to others. The leadership must rethink who the target customers are, what their problems are, and how the company can provide a solution which solves those problems.   In some cases, such as many paper-based publications, there is no future value and the company will disappear at some point.

#2 Which components of the business framework1 are required to deliver that value?

All components are required. It’s likely all components will undergo major changes.

#3 What roles are required, and how will each role help deliver that value?

First there must be the right board of directors and CEO.  The current board and directors got the company into this situation.  Leadership transformation begins at the top.

#4 What are the characteristics of the person in that role?

The board of directors and CEO are dealing with the same issues as an early stage startup.  Everyone must be comfortable in chaos, dealing with daily new problems, have the ability to make rapid personal changes, and be relentless in overcoming obstacles.

Some of the challenges in determining talent requirements include:

#A Many large companies do not realize they no longer have Product/Market Fit, and are hiring the talent based on invalid historical requirements.

#B Many startups attempting to scale don’t understand that the talent that got the company to this point is not what is going to help them create a successful future

#C Many startups simply do not have the CEO and founder talent to succeed. There is some combination of the founders: not understanding the customers problems, not understanding what solution is required, and not able to attract the necessary talent and help that talent work together.

Your next steps:

Define your current situation, based upon facts.  Your advisory board can challenge your thinking and help you understand your company’s situation.

Footnotes

1 Business Framework has inter-related 10 components:

#1 What can only the CEO do

#2 Company purpose

#3 Values, morals, and ethics

#4 Customer perceived value proposition

#5 Business model

#6 Talent management

#7 Capital and cash management

#8 Investor management

#9 Exit management

#10 Governance

2 A product or service with just enough features to delight early customers, and to provide feedback for future development.

3 Product/Market Fit.  Marc Andreessen’s definition of product/market fit:

“The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can.” On product/market fit for startups

 

 

 

Survey – How do asset managers assess Private Equity fund managers?

I asked asset managers the following question: “How do you assess PE (Private Equity) funds, and their leaders) to determine which fund to invest in?”  Asset managers included: pension funds, large global asset managers, and family offices.  Insight was also provided by advisors to asset managers.

The following illustrates the consolidated set of assessment approaches used.  Many asset managers use similar approaches.  Some approaches are used by only one asset manager.  This document is focused on what is done, not on how assessment is done or specific analytical techniques.  (Some asset managers shared their techniques.  That information is confidential). There is no recommendation as to what is a good or bad approach.

Analysis of performance

  • PE firms may provide detailed financial and operational data on all portfolio companies.
  • What is the consistency of returns over time? Many respondents noted that persistence of returns is declining, perhaps due to high purchase valuations leading to difficulty in PE partners achieving significant value increase.
  • What have been the exit results? What have been the successful and unsuccessful exits?
  • How much additional return has the PE fund been generating, taking into account both financial leverage and public market returns of similar companies?
  • Avoid funds and firms with historical returns in the 3rd or 4th

Analysis of strategy

  • Industry focused or generalists?
  • Limited range of deal size?
  • How consistent has the strategy been over time?
  • What is the leverage being used? 3-4 times or 7-8 times?
  • Is the strategy to have similar returns from all portfolio companies or depend upon one company to provide outstanding returns which compensate for poor returns with other companies? This impacts the volatility of the portfolio.
  • Is the PE firm due diligence approach supporting the strategy? Do reference checks with the portfolio companies confirm the stated due diligence approach and fund strategy?

Analysis of PE fund partners

  • How long have they been with the fund?
  • What’s been their previous history?
  • What have been their personal achievements, rather than the achievements of the companies they’ve been with?
  • What has been the partner experience with business operations, rather than finance or investment banking?
  • If the strategy is changing, how has the PE team talent changed to bring in the experience with the new strategy?
  • How much of the fund capital is provided by the partners?
  • How have the partners increased the value of portfolio companies, in addition to providing capital?
  • How do portfolio company CEOs like working with the partners?
  • Run background checks on the partners: social media and publicly available records.
  • Hire a third party to work with the PE partner to conduct a deep psychological and historical analysis. This could include questioning colleagues, subordinates, other asset managers, friends, and family.  This could conclude with a multi-hour walk through with the partner of their entire life

Relationship Management – Between asset managers and PE funds.

  • Proactively seek out emerging PE funds.
  • The asset manager re-underwrites each new PE firm deal with different staff, to avoid the bias of personal relationships.
  • The asset manager maintains a long-term personal relationship with the PE fund partner(s).

Observations that were made to me

  • There are lots of good PE firms and partners. Asset managers can only deal with a small number of PE firm.  Each firm requires management time.
  • There are not enough good opportunities for PE funds. There is over a trillion dollars of PE capital not invested, with valuations at all time highs.
  • Sovereign wealth funds are a partial enabler of high valuations, because some funds are satisfied with single digit returns.

My observations

  • Some asset managers make a major effort in assessing the talent of individual PE partners.
  • Some asset managers are heavily focused on performance metrics.
  • The nature and degree of quantified, comparative (or benchmark) analysis varies enormously among asset managers.

How can the the board of directors create value? (V3)

I have added a 4th article to the “Further Reading Section” of my article “How can the board of directors create value?” https://koorandassociates.org/points-of-view/how-can-the-board-of-directors-create-value/

This 4th 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

 

 

 

Long-term value growth demands a talent driven board and C-Suite.

Business competition is intense.  It is competitively differentiated board and C-Suite talent which develops differentiated strategies, business models, plans, and successfully executes them.

 Few companies survive the competition.

Most public companies will not survive. A

  • A Fortune 500 company will survive an average of 16 years.
  • The typical half-life of a North American public company is 10 years.
  • Global public companies with $250 million+ market cap have a typical half-life of 10 years.
  • 50% of all U.S. companies survive for 5 years.

Most venture-backed start-ups will fail.B

  • Three quarters of venture backed firms in the U.S. don’t return investors capital.
  • 30-40% of high potential start-ups lose all of the investors money. Many start-ups do not have any venture-backing. The overall start-up failure rate is very high.

 Few companies generate significant value.

  • McKinsey analyzed the world’s 2,393 largest corporations from 2010 to 2014. The top 20% generated 158% of the total economic value (i.e. profit after cost of capital) created by those corporations.  The middle 60% generated 16% of the total economic value.  The bottom 20% lost 74% of the total.C
  • 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.”  http://www.csisoftware.com/wp-content/uploads/2018/04/Presidents-Letter-April-2018-Final.pdf

 CEO and leadership development programs are ineffective.

7% of CEOs believe their companies are building effective global leaders.  Only 10% of CEOs say their leadership development initiatives have a clear business impact.  Just 11% of global executives agree that their leadership-development interventions achieve and sustain the desired results.D

 Board direction selection and development processes are broken.

A McKinsey survey of board directors revealed that “Only 16 percent said directors strongly understood the dynamics of their industries, just 22 percent said directors were aware of how their firms created value, and a mere 34 percent said directors fully comprehended their companies’ strategies.”E

 Boards must also consider the company’s role in society.

Larry Fink articulated the challenge in his 2018 letter to the CEOs of Blackock’s investee companies. “Furthermore, the board is essential to helping a company articulate and pursue its purpose…..Companies must ask themselves: What role do we play in the community? How are we managing our impact on the environment? Are we working to create a diverse workforce? Are we adapting to technological change? Are we providing the retraining and opportunities that our employees and our business will need to adjust to an increasingly automated world? Are we using behavioral finance and other tools to prepare workers for retirement, so that they invest in a way that will help them achieve their goals?”F

1981 US Business Roundtable Statement on Corporate Responsibility: “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.”G

 External talent must also be part of your talent pool.

No company has all of the talent it requires.  External talent can include: your personal network, advisory board, strategic advisors, consultants, lawyers, accountants and other experts.

 What do you do about it?  

  • Determine the talent needed over the next 5-10 years on the board and in the C-Suite, in order to grow long-term value and beat the competition.
  • What’s the talent your company has (both internally and externally)?
  • How do you close the gap with a combination of internal and external talent?
  • What talent and processes need to go in place to ensure the gap does not reappear?

This sounds easy, but incredibly difficult to do in practice.

 Footnotes

A “Corporate Longevity”, Credit Suisse, February 7, 2017

B “The venture capital secret : 3 out of 4 start-ups fail”, Deborah Gage, Wall Street Journal Small Business, September 19, 2012  discusses research by Shikhar Ghosh, Harvard Business School

C Chris Bradley, Martin Hirt, and Sven Smit, “Strategy to beat the odds”, McKinsey Quarterly February 2018, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/strategy-to-beat-the-odds , Tom Koor analysis

D Claudio Feser, Nicolai Nielsen, and Michael Rennie, “What’s missing in leadership development?”, McKinsey Quarterly August 2017, https://www.mckinsey.com/featured-insights/leadership/whats-missing-in-leadership-development

E Eric Kutcher, “Corporate Boards need a facelift”, McKinsey May 4, 2018, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-strategy-and-corporate-finance-blog/corporate-boards-need-a-facelift

F Larry Fink, “Larry Fink’s Annual letter to CEOs.  A sense of purpose”, Blackrock,  https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter

G Ralph Gomory and Richard Sylla, “The American Corporation”, April 2013, page 6, The Wall Street Journal http://online.wsj.com/public/resources/documents/50b74ca9c91e6TheAmericanCorporation11292012.doc.pdf

 Further reading

My website has several points-of-view relating to value growth and talent.

Survey – how do board directors impact long-term corporate value?

This report contains the high-level findings from my survey regarding ” How do board directors impact-long term corporate value?”  A PDF with more detailed data is available for download here. (How do board directors impact long-term value?) People I know from three groups (7 CEOs/Presidents, 8 directors, and 10 major investors) responded to my two questions.

The survey findings are intended to help discussion among your board, C-Suite, and major investors.  You should do a similar survey, focused just on your company.  My survey findings are not conclusions regarding the overall views of all directors, CEOs, or major investors.  The sample size was too small.

What follows are:

  • Summary observations
  • Summary data
  • A link to the spreadsheet with detailed data

Summary observations

Question #1  What are the three board of directors decisions (or actions, behaviours) which have the greatest impact on long-corporate value?

Most major investors believe CEO selection is one of the top 3 value impacting decisions made by directors.  A minority of directors and CEOs responded this way.  Investors believe that the talent of the CEO has a massive impact on value growth.  80% of investors responded that CEO selection was one of the top 3 decisions.  Only 38% of directors, and 43% of CEOs responded that way.

Major investors and CEOs, unlike directors, believe that directors should challenge and approve the strategy, resource allocation, and major initiatives. Investors and CEOs want directors to help with the creation of robust plans and resource allocation.  Several investors told me that the allocation of capital and talent by the board has a major impact on long-term value.  One director was quite blunt – the board does not get involved with talent allocation. 50% of investors and 57% of CEOs responded.  Only 13% of directors responded directors should challenge and approve the strategy, resource allocation, and major initiatives.

Many CEOs want to have a both a deep and challenging discussion with directors.  50% of directors responded only to approve the strategy. No CEOs or investors responded that only approve the strategy was sufficient involvement.

Question #2 In order to make those three decisions, what skills, experience, values, morals, and ethics must each director have?

Every CEO and most investors (70%) responded that directors should have skills relevant to the company.  Only 50% of directors responded this way.  I wonder how directors are able to make decisions which impact long-term corporate value if they don’t have skills relevant to the company.

Most directors, unlike CEOs and investors, perceive that values, morals, ethics, and courage to make tough decisions are required to make the top 3 decisions.  63% of directors responded with some or all attributes of values, morals, ethics, and courage to make tough decisions.  Only 29% of CEOs and 30% of investors responded.

Each group provided similar responses regarding diversity i.e. about 30%.  No-one mentioned gender diversity.  One interpretation is that the requirement for board gender diversity in 2018 is a given.  Thus, it no longer appears as a critical director requirement enable the three major value creating decisions.

Independent of management had a 0% response from investors, only 14% from CEOs while 25% from directors.  My interpretation is the perception that independence does not drive value growth.

I was surprised by the low response regarding the need for a broad personal network. All three groups had similar responses – approximately 12%.  No-one has a perfect and complete set of skills.

25% of directors responded with the ability to work together on the board.  No CEOs or investors responded.  I suspect that this an issue only for directors.

Overall observations

  • Directors, CEOs, and investors often have very different points of view as to:
    1. how a board can enable long-term value creation.
    2. what a director has to bring to the table in order to make those long-term decisions.
  • There was a extremely broad range of responses.
  • Some people saw a direct link between directors’ actions and the types of directors required for those actions (e.g. decision making on succession planning require experience in senior executive succession planning). Others did not see a link.
  • The words “strategy”, “strategy planning”, etc. mean very different things to different people. Cleary each company requires a written definition of the terminology they use, given that directors will come from different backgrounds where the words had different meanings.
  • Directors without skills relevant to the company will have difficulty in value creating challenges and approvals of strategy, resource allocation, and major initiatives.
  • At first it might look good that 63% of directors responded with some aspect of values, morals, ethics, and courage. This will actually have limited impact on the company because only 13% of directors will challenge the strategy, resource allocation, and major initiatives.  Only 13% of directors responded with establishing the right culture.  Although the directors may have high moral, values, and ethics, it’s not clear those beliefs will be reflected in management.

Summary Data

Question #1  What are the three board of directors decisions (or actions, behaviours) which have the greatest impact on long-term corporate value?

CEO Selection” – 56% The individual group rankings were:  Investors 80%, CEOs 43%, directors 38%

Strategy approval” – 56% The individual group rankings were: Directors 63%, CEOs 57%, Investors 50%

“Strategy approval” has two sets of responses:

Response #1 was only “Approve the strategy”.  The individual group rankings were: Directors 50%, CEOs 0%, Investors 0%

Response #2 was some or all of “Challenge and approve the strategy, resource allocation, and major initiatives”. The individual group rankings were: CEOs 57%, Directors 13%. Investors 50%

Set the long-term direction or management goals”– 36% The individual group rankings were: Investors 70%, Directors 25%, CEOs 0%

Ensure the right talent in management and staff – 20% The individual group rankings were: Directors 38%, CEOs 14%, Investors 10%

Set compensation for CEO and C-Suite” – 12% The individual group rankings were: Investors 20%, CEO 14%, Directors 0%

Challenge and validate what management says -12%  The individual group rankings were: Investors 30%, CEOs 0%, Directors 0%

Establishing or ensuring the right culture – 8% The individual group rankings were: CEOs 14%, Directors 13%, Investors 0%

Ensure management meeting objectives” – 4% The individual group rankings were: Investors 10%, CEOs 0%, Directors 0%

There were three other sets of replies, each with a total of 4%:

Ensure C-Suite and succession plans in place; establish the culture; and ensure management meeting objectives.

Here were 13 unique replies which I did not put into any of the above groups.  Those replies are listed in the detailed findings PDF.

Question #2 In order to make those decisions, what skills, experience, values, morals, and ethics must each director have?

Skills relevant to the company” – 72% The individual group rankings were: CEOs 100%, Investors 70%, Directors 50%

“Skills relevant to the company” was comprised of distinct sets of responses, as shown below in terms of total respondents: 44% – “up-to-date industry and ecosystem knowledge”

4% each for the following 7: operational skills in the company’s industry; public company directors have public company experience; understand how the director can enhance the company’s long-term value; skills relevant to the company’s long-term value creation; understanding the impact of technology; and relevant to the company.

Values, morals, ethics, and courage to make tough decisions (some or all of these) – 40%

The individual group rankings were: Directors 63%, Investors 30%, CEOs 29%

Diversity – 28% The individual group rankings were: Investors 30%, CEOs 29%, Directors 13%

Respondents identified 3 different types of diversity: skills; opinions; industry and society backgrounds.

C-Suite experience – 12% The individual group rankings were:

Directors 25%, Investors 10%, CEOs 0%

Respondents identified 3 different types of C-Suite experience: Been a CEO before; Retired CEO or C-Suite executive; significant C-Suite experience

Independent of management – 12% The individual group rankings were:  Directors 25%, CEOs 14%, Investors 0%

Experience in succession planning for senior roles – 12% The individual group rankings were: Investors 20%, Directors 13%, CEOs 0%

Broad personal network, relevant to the company” – 12%  The individual group rankings were: CEOs 14%; Directors 13%; Investors 10%.

4% of the replies were very specific “Every director must have a personal network relevant to the company”.

Ability to work together on the board – 8% The individual group rankings were: Directors 25%, CEOs 0%, Investors 0%

Ability to engage in constructive conflict – 8% The individual group rankings were: CEOs 14%, Investors 10%, Directors 0%

Here were 19 unique replies which I did not put into any of the above groups.  Those replies are listed in the detailed findings PDF.

How was input gathered?

The two questions were asked. Question #1 focused on what was most important.  Question #2 focused on what was necessary to achieve the responses in Question #2.  This approach was designed to capture top of mind thinking, without the guidance of a check-the-box survey.  I had to interpret the responses and many times seek clarification.

I did not use a check-the-box survey because

  • I wanted to understand the breadth of what people were thinking. A check-the-box survey constrains the breadth.  In term of question #1 I was surprised by some of the responses. I would never have guessed at some of them.
  • Question #2 was based on the response to question #1. This would have required a massive list of options.
  • I wanted top-of-mind responses. g. what are the first things that come to mind when you think about director decisions which impact long-term value.

Your next steps

This report draws no conclusions or observations regarding the overall views of directors, CEOs, or investors.  You must conduct your own anonymous survey with your directors, C-Suite, and major investors. You must ask open ended questions to obtain top-of-mind responses, rather than a guided check-the-box survey. In the course of this you must define the terminology for your company e.g. what exactly is meant by the word “strategy”. You can then have a discussion specific to your company regarding the findings, observations, and conclusions.

You can download here the PDF containing the detailed excel spreadsheet showing the results.

How do board directors impact long-term value?

How can the board of directors create value? (V3)

Long-term value growth and preservation demands a competitively differentiated talent driven board and C-suite.

 Overview

  • 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.

 Conclusion

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:

How can the board of directors create value?

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?
    1. 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?

Footnotes

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.

Further reading