Purpose of this article

The purpose of this article is to help board directors and the C-Suite determine if they understand: the strategy, how value is created, and industry dynamics.

You can download a PDF of this article from: https://koorandassociates.org/wp-content/uploads/2021/02/leaders-dont-understand-the-strategy-for-creating-value.pdf

Most company directors do not understand: the strategy, how value is created, and industry dynamics.

• A McKinsey survey of board directors showed that most had little understanding of their companies. Only 16 percent said they strongly understood the dynamics of their industries, just 22 percent said they were aware of how their firms created value, and a mere 34 percent said they fully comprehended their companies’ strategies.¹
• I believe this lack of understanding reflects the lack of understanding of the CEO and C-Suite.
• Directors are not stupid and lazy. The CEO and C-Suite are not hiding things from the board directors.  The leaders simply lack the company facts and knowledge to enable their understanding.

 Leaders’ lack of knowledge results in few major companies having sustained value creation.

• McKinsey analyzed the world’s 2,393 largest corporations from 2010 to 2014. The top 20% generated 158% of the total economic profit (i.e. profit after cost of capital) created by those corporations.  This was an average economic profit of $1,426 million per year. The middle 60% generated little economic profit, an average of $47 million per year. The bottom 20% all generated negative economic profit, with an average loss of $670 million per year.²
• Less than 13% of global companies had sustained value creation in the 1990s.³
• 12% of public companies had sustained value creation from 2002 to 2012.⁴
• Mark Leonard, CEO of Constellation Software, in his final annual CEO letter said: “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 the 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.”⁵

Leaders’ lack of knowledge results in most companies not surviving.

Few major companies survive:

• 16% of major companies in 1962 survived until 1998.⁶
• Of the 500 companies in the S&P 500 in 1957, only 74 remained on the list in 1997. Only 12 of those 74 outperformed the 1957-1997 S&P index.  An investor who put money into the survivors would have done worse than someone who invested only in the index.⁶
• 31% of Fortune 500 companies went bankrupt or were acquired from 1995 to 2004.⁷
• 50% of the S&P 500 will not be on the list in 10 years’ time.⁸

 Most public companies will not survive.⁹

• 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.

Companies do not recover from crisis.¹⁰

• 20% of companies grow from insurgency to incumbency, but then two-thirds of them stall out and less than 1 in 7 stall-outs recover.
• At any given moment, 5%-7% of companies are in free fall or about to tip into it. Only10%-15% of companies pull out of free fall.

What are the missing facts and knowledge?

The following outlines some critical facts and knowledge the leadership must have.  This is not intended to be a comprehensive list.

#1 What is value?

• Define value and how it’s measured.
• In today’s purpose driven work, there are multiple stakeholders with different types of value expectations.
• What is value to the customers? What problems and needs are urgent enough that they are both willing and able to pay for a solution?
• Another value measure is economic profit(total profit minus cost of investor and lender capital) as a percentage of invested capital.
• A critical value driver is the number of customers who believe they have an urgent problem or need that they are willing and able to spend money to address. Do these customers perceive that your company’s solution provides more value than the competition?

#2 How does the company create and preserve value?

There are two major ways the company enables value creation and preservation.

• The first way is growth in the number of customers, growth in the number of problems and needs being addressed, and growth in what the customers are both willing and able to pay. The customers must perceive your company has a better solution that both the competition and the status quo.
• The second way is retaining customers by ensuring they don’t perceive they’d be better off with a competitors solution or no solution at all.

Financial and human capital is allocated towards value growth initiatives and value preservation activities.

#3 What is the strategy?

The strategy must describe what is, how value is being created and preserved.

• The customers, and their perceived urgent problems and needs for which they are willing able to spend money to address. How many of these customers are there?
• How do customers perceive the competition?
• Where is the financial and human resource capital being deployed?
• What are the specific growth initiatives? What is the expected impact on customers and their spending?  What is the economic profit expected from each initiative?  Who within the company is accountable for: the changes in customer behaviour and the economic profit?
• What capital and human resources are devoted to customer retention? What customer perceived weaknesses would be addressed? How was it validated that these perceived weaknesses would change customer buying behaviour? E.g. My wife and I own Apple iPhones which are expensive.  But that is not a competitive weakness.  We’re not going to buy a $100 Android phone.
• What are the future scenarios? It is impossible to predict the future, therefore what is the company’s approach for being successful in a variety of emerging future scenarios?

#4 What are the industry dynamics?

First look at the historical trends leading up to the current situation:

• How have customer problems and needs changed?
• How has customer perception of your company changed relative to the competition over the years? What have competitors done to change this perception?
• How has the ways in which customers interact with your company changed?
• What new entrants have come in? Startups? Major players from adjacent markets?
• How have market sizes changed? i.e. the number of customers?
• How has the competition changed in terms of Mergers & Acquisitions or exits?
• Why have competitors failed?
• How have your benchmarking comparisons changed?

Then look at the external trends

It is impossible to predict the future, therefore you must consider scenarios, not just a single forecast.

• What are the trends? Technology, Demographics? Economic? Regulatory?  Public expectations of company behaviour?  Political? Talent availability?
• What are the implications of these trends? What will be the future problems and needs customers will be willing and able to spend money to address? How will customers expect to interact with your company? (I.e. how will the customer experience change)? How big will the market be? (i.e. how many customers?). Who will be the new competitors (i.e. startups, new entrants)? How will existing competitors respond?  What will be the M&A activity? How should you perform in your future benchmarking?

Your next steps

• Build a list of questions, relevant to your situation, using the above questions as a starter.
• Review your strategic plan including the supporting appendices.
• What are the facts? What are the unvalidated assumptions?
• What are the long-term implications of your findings?
• What changes are need to your planning, monitoring, and risk management processes?

Footnotes

¹ “Corporate Boards need a facelift”, Eric Kutcher, (McKinsey Partner) McKinsey website, 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

² 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

³ “Profit from the Core” by Chris Zook. 1,800 companies in seven countries with sales in excess of $500 million analyzed.  Criteria were: 5.5% after inflation sales growth; 5.5% real earnings growth; total shareholder returns exceed cost of capital.

⁴ Christoph Loos, CEO Hilti Group, Swiss AmCham Luncheon, September 1, 2015.  Analysis based on about 2,000 public companies in 2002 with revenues greater than $500 million.  Sustainable value creation defined as: real revenue growth exceeding 5.5% per year, real profit growth exceeding 5.5% per year, and earning cost of capital.

⁵ https://www.csisoftware.com/docs/default-source/investor-relations/presidents-letter/presidents-letter-april-2018-final.pdf

⁶ “Creative Destruction – why companies that are built to last, underperform the market”, by Richard Foster & Sarah Kaplan

⁷ “Unstoppable” by Chris Zook, 2007, page 7

⁸ “2018 Longevity Report” by Innosight Consulting

⁹ “Corporate Longevity”, Credit Suisse, February 7, 2017

¹⁰ “The founders mentality”, by Chris Zook and James Allen, 2016

Further reading:

Do you understand your customers?

https://koorandassociates.org/understanding-customers/do-you-understand-your-customers/

Traditional strategic planning dooms companies to failure.

https://koorandassociates.org/strategy-and-strategic-planning/traditional-strategic-planning-dooms-companies-to-failure/

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

 

 

 

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

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

 

 

 

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 3^rd or 4^th

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.

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?