The debate seems as vociferous as it’s ever been. Are companies best served by focusing on delivering short-term results – a “beat the quarter” mentality – or by turning their gaze to the horizon and focusing on the long haul? Enter the National Association of Corporate Directors, which recently released its Blue Ribbon Commission Report on the Board and Long-Tem Value . Longtime directors Karen Horn, Vice Chair of NACD, and William McCracken, one of NACD’s top 100 most influential people in boardroom, discuss with MCC how corporate boards can help their companies align short-term necessities with long-term objectives. Their remarks have been edited for length and style.
MCC: Tell us about your interest in long-term value creation and the genesis of the NACD Blue Ribbon Commission report.
Horn: Over the years, I’ve heard people who work for large corporations say, "If I owned this business, I'd do it such-and-such a way." That’s often in connection with some kind of opposition between short-term and long-term goals. Most owners, not to mention other stakeholders, want long-term value creation. In an environment like the one we’re in now, in addition to the usual incentives to think about long-term and short-term goals in opposition to each other, aspects of the financial environment itself can lead to that kind of thinking. The idea of sitting down with a diverse group of people who can make different contributions and talk about how we can use the short term constructively to lead to long-term value creation seemed very appropriate.
McCracken: The environment, with respect to corporations and investors, is changing dramatically. Boards have traditionally been responsible for corporate governance, and the executive management team was responsible for defining their targets and running after those. In large part, this went unchallenged. Now activists and others are looking inside and saying, "Maybe this could be done differently, maybe this could be done better."
In addition, the changes in the geopolitical environment, international economies, and the major meltdown we had in the U.S. in 2008 have put great stress on investing organizations. They weren't able to produce the results they needed for their investors, so they started looking around for ways to increase returns for their investors. Put those two things together and we've moved, in the last five years, to a situation where folks have said, "I want to have a say about this because, frankly, you're hurting my business. I need the returns.”
MCC: The timing of the report is interesting. This has been an ongoing debate, but the issue of maximizing short-term performance at the expense of long-term value creation has received substantial attention lately. Do you think will help drive the alignment between the short term and the long term the report envisions, or will it make things more difficult?
Horn: Probably some of each. The attention can stimulate very constructive responses, and hopefully our report is exactly that. There’s an intense focus on this issue, and a need to do better. That's exactly why we did this report.
McCracken: Frankly, this issue is getting attention from retail investors, which comprise 30-40 percent of the investing community. The most recent example was at DuPont, and it is also getting attention from the likes of Steve Schwarzman of Blackstone, Larry Fink of BlackRock and Bill McNabb of Vanguard, among others. It provided an environment for NACD to step back and try, in a very balanced way, with inputs from all constituencies, to look at what guidance we could give to boards so they can better deal with long-term value creation within today’s environment.
MCC: In its report the commission ticks off factors that drive the “beat the quarter” mentality. Activist investing, which is not the focus of this report, definitely gets some attention. It was interesting, therefore, that the commission recommends taking a page out of the activist playbook by, for example, holding a mirror up and taking a dispassionate view of their own performance. Are we moving to an if-you-can’t-beat-‘em-join-‘em approach?
Horn: I wouldn't put it that way. We're moving to an era where we have to be open to all kinds of new ideas. Activists have some of those ideas, though I don't think they have the majority of them. There's no reason not to look carefully at what they're suggesting. Some of them spend a lot of time learning about the business and have developed some very interesting perspectives.
McCracken: I’ve put it this way in the past: “It's time for the board to go on offense, not play defense.” Boards can’t sit back and wait for an industry assessment, competitive assessment, a margin assessment, or a technology dislocation assessment. As a board you have to get engaged in where the company's going and get talking about those things in the boardroom. You have to do it early and do it on a continuous basis. Then build an offense for where you want to take the company both long term and short term, and tie those things together.
A decade ago boards weren't that active. What we need now are activist boards, where they get engaged and get out in front of what's going on. If they do, they probably aren't going to have too many conversations with activists.
Horn: Bill says it very well. We need activist boards and activist managements, in the constructive sense of the word.
MCC: The report talks about directors being active students of the business rather than passive recipients of data from management. It encourages directors to put in the time it takes to prepare for their board duties. It seems like a real challenge for directors to do what the commission is asking. Is that fair to say?
Horn: It is a big challenge. If you have the right people sitting around the board table, you have a lot of experienced people in a variety of disciplines that bring real wisdom to the process. If these people are, as Bill said, engaged, you have an incredibly rich situation.
McCracken: The amount of time a director needs to spend to prepare today is orders of magnitude greater than it was even five years ago. They need to be studying. They need to be looking at more than what management hands to them. They need to look at industry trends. Who are the new companies entering this industry? Who is introducing new technologies?
That was not in the director’s vision in the past. The information was shipped to you, you reviewed it, and you went to the board meeting. Last year, during meetings of NACD’s Blue Ribbon Commission on strategy development, we said, "If you know all the information sent to you for the board meeting, then you're not prepared when you go to the board meeting." There's a lot more homework you have to do.
MCC: In calling on boards to draw connections between the short term and the long term, the report says short-term moves are not necessarily shortsighted moves. You need, however, to be able to draw a clear line from day-to-day goals to long-term objectives. What specifically can directors do to help draw that line?
Horn: Think, for example, about the annual budgeting process. When you're looking at something in a one-year time frame, either cost-cutting or investment, you have to have the discipline to address it in a longer-term context because cost-cutting may be good for re-arranging priorities, but it might not be such a good thing if it's going to leave the company, down the road, with too few resources. Investment is another one of these issues. If you need to invest now, that's going to be reflected in your annual budget as lower profitability. Your investors need to understand that. You have to look at each situation in both the short-term and long-term context and think hard about what you’re doing.
McCracken: Major brick-and-mortar retailers are under attack from Amazon. Holiday shopping in the last three years has shifted dramatically from people picking things up from a brick-and-mortar store to ordering online. If that's where a retailer is going, a board member might ask is: Does it take an organizational change? Can the same people who ran the store system run a fulfillment center?" Does it take new skills? Do you need to hire those skills? Do you need to bring an executive who has grown up in that industry? The answer is probably no.
Board members can ask those questions of management and ensure they're not just saying they're going there, but in fact are doing things today that will allow them to get there tomorrow. This year maybe we start selling more aggressively on social media as opposed to advertising in the stores. It may be that we outsource some distribution in the process of building our own capability. Those are the kinds of things that directors and boards can ask of management to be sure that they're doing things this year to contribute to success next year, and the year after that.
MCC: The report discusses the definition of “long term.” How do you define long term in the age of Twitter? The whole world has sped up – supply chains, news cycles. How do you think about long-term value when the very definition of long term is in flux?
McCracken: To some extent it depends on the industry. You go from the technology industry, where things may double in eight months, to the pharmaceutical industry, where that could be eight years. But when you start connecting the short term with the long term, it takes on more meaning. You consider where you want the business to go, back up, and consider what it should be doing today. That's why it’s so important to look at where you want to take the company. That dictates when you need to start.
Horn: This is helped by having a good group of people around the table. Management can get very focused on what it needs to do to execute appropriately. Around the board table, people can broaden the context. That's very valuable.
McCracken: One of the Fortune 50 CEOs doesn't permit his direct reports to talk to him about quarterly earnings, conference calls and those kinds of things. He wants them focused on the objectives he sets for each of them and to ignore “earnings season,” as the press calls it. Boards can do those things, too. You probably shouldn't start a strategy discussion by having presentations on what we’re doing now because that's backwards looking. You ought to have presentations on what the competition is doing, what some of the new entrants in the marketplace are doing. Those are the kinds of things boards can watch for to make sure the company isn’t too focused on the current quarter.
MCC: Boards develop group dynamics. Are some boards more or less geared toward shorter-term or longer-term thinking? Or is it all over the place?
Horn: When it comes to boards, one size obviously doesn't fit all, but good boards have a reasonable amount of this focus in their discussions. One of the things we talk about in the report, board composition, is really important because boards need to continuously manage their composition and group dynamics, and good boards are doing more and more of it.
McCracken: Karen is right. Board composition will change in the future. That means boards need to be looking at themselves in a critical way. Some of the things they had to have three years ago may not be needed in three years. It's going to cause some changes in the boardroom from a refreshment point of view. Board composition and refreshment are an important part of the discussion about where you're taking the corporation.
MCC: Investor communications is cited in the report as a critical component in aligning short-term thinking and long-term thinking and drawing lines between them. The report specifically mentions preparing members of the board to engage directly with investors. Can you talk about the thinking behind this recommendation and the importance of investor communications?
Horn: Investor communications traditionally has been management’s area, and it still is. More and more investors, however, want to talk to board members, and I think that's in part because of a growing understanding of what the role of the board is, and how important a role it is. There are a number of investors who want to assure themselves that the board is playing this enhanced, and, to use Bill's term, very engaged role.
McCracken: That is an evolving trend. I think it was Vanguard that sent out letters to the Fortune 500 this year about the desire to have a dialogue with some of their directors – not in an activist kind of way, but in an active way to understand where they were going and what they were seeing. I was once the non-executive chairman of a board, and I had dialogues with our major shareholders. I later became a CEO, and continued to have conversations with our major shareholders, but they also then wanted to talk with the new chairman because they're different roles and they take on different perspectives.
The day-to-day needs of running an organization consume executive management, as it should. The director, by virtue of the role, can step back from day-to-day operations and have a broader perspective. They're better able to listen, as opposed to sell, which in some cases is what shareholders want. They don't necessarily think you're going to do everything they want, but they want to know that you care and have listened to them.
MCC: Given the difficulty of the issues we’re discussing, did the commission look at different options in preparing its recommendations beyond the alignment of the long-term and the short-term?
Horn: It was actually quite interesting how the commission came to the word “aligned.” We spent a great deal of the first meeting talking about the relationship between short-term and long-term and, after considerable discussion, coalesced around the term. To virtually everyone around the able, it made sense out of how we should be managing our companies.
McCracken: That's right. We started out talking about the demands of the short-term and came around, as a group, to understanding that it's not as much about the short-term as it is about looking at the long term and asking whether you have the short term connected to it. It was a very good discussion, and it became clear how we wanted to follow up. The Blue Ribbon Commission was very bold in the recommendations we made. We didn't hold back. We put it out there the way we saw it.
MCC: What happens next? I'm sure you've heard feedback. Is it getting a positive reception?
Horn: The examples Bill gave show just how timely the issue is and what an important role a report like this plays.
Published November 3, 2015.
