Directors need to focus on building a great business
By Scott Hamilton and Larry Cabaldon
Scott Hamilton is the CEO of the Executive Next Practices Institute (ENP) and Larry Cabaldon is the CEO of the boardroom performance group and the board practice leader for ENPI.
Many directors have been CEOs or significant investors, so they know company value is really what creates shareholder value. They enjoy the accomplishment of building the enterprise, not just complying with the law or getting more fees or stock. Therefore, most would prefer to move from the compliance board model to the value-creating model.
But the transition between these two oversight models can be more complicated than many directors realize, as certain habits of the traditional “compliance board” model can be hard to break.
To evolve successfully, directors must participate in developing the criteria for value creation. They must also examine new ways of generating growth and efficiencies throughout their businesses, and to encourage management to achieve alignment between departments. Half of effective transitioning will come from taking assertive, proactive measures, and the other half will come from avoiding unproductive behavior that is tied to the past. Below are the dos and don’ts that are crucial to making the move from the “compliance board” to the value-generating board.
Don’t Overemphasize Corporate Governance
In the post-Sarbanes-Oxley Act environment, directors have been conditioned by regulators, accountants and lawyers to focus on governance. Board members attend seminars, briefings and risk conferences and subscribe to various publications, all stressing the need for more board governance oversight. Internally, the nominating and governance, risk, audit and compensation committees have become the board watchdogs for good governance. But despite all the “improved governance,” we still experienced a severe financial meltdown.
Directors must ask if they are doing the right things to create value, or just robotically following governance rules and responding to outside pressures.
Don’t Buy Into the Myth of Shareholder Value
In her book The Shareholder Value Myth, Cornell University professor Lynn Stout provides compelling arguments against obsessing over shareholder value. A director’s main duty is to the corporation, not shareholders, she argues. Most compelling is her thesis that, despite all the focus on shareholder value, shareholder value has not been enhanced.
Overall, most directors can do a better job of avoiding the distractions that come from focusing on shareholder value at the expense of other priorities, such as reinvesting in businesses and penetrating new markets.
Directors Must Define Value Creation
Too many companies focus on financial engineering and manipulation, not building great products. In contrast, Steve Jobs knew Apple needed to produce new products that could change the world. He ignored the stock price as his main objective because he knew great products would create company — and, eventually, shareholder — value.
Board members must understand what it takes to build a valuable company. It takes new products, talent, strategy, motivation of employees and a high-performance culture. Directors who are focused on these goals and can properly define them will build business for the future. Boards must ultimately step up and recapture the satisfaction of actually building something great, not just creating market value.
Build a Culture of High Performance
Technology company boards will usually have CEOs from the technology industry, former senior executives and board advisors, who understand the industry and have proven track records of success. They are careful not to overpower the CEO, but know when to offer advice and make changes. Hewlett-Packard’s board struggled with the changes an inaptness of its CEOs over the last few years. However, these same directors understood HP’s culture, where it had been and where it needed to go. This is an example of a value-creating board, not a compliance board.
Indeed, all directors should take a closer look at their board composition, strategic oversight processes, succession planning efforts and CEO evaluations and ensure they are in line with larger value-creation goals.