A CEO’s joke may have elicited chuckles, but it’s no laughing matter that corporate executives and boards face pressure to produce consistent and immediate returns for hungry investors.
Robyn Bew, director of strategic content development at the National Association of Corporate Directors (NACD), relayed an opening line from a board member at a business roundtable.
“He said, ‘I was a CEO for 52 quarters,’ ” Bew said. “It’s funny, but it was not funny. That [pressure to meet quarterly earnings guidance] is how it can feel to management day to day.”
External pressure to focus on short-term results such as a public company’s quarterly financial results, instead of driving long-term value, is one key obstacle to board oversight. It’s an issue that has cropped up twice in recent survey reports, one from PwC and another from the NACD.
The NACD explored issues limiting boards’ effectiveness in its 2016–17 Public Company Governance Survey, including the amount of time spent on strategy and the quality of information supplied by management. Here are the top barriers to the board’s ability to oversee company strategy and the percentage of respondents who say those barriers moderately or greatly hinder that oversight:
Not enough time in meetings for strategy discussions (44%). This is an issue – despite time commitments to board service growing over the years, from 204.5 hours annually in the 2010 survey to 245.1 hours in the 2016 survey.
Effective boards have used several strategies to address the issue of wasted time, Bew said. One is grouping routine items, such as approval of meeting minutes, into a consolidated consent agenda. Another is coaching management on ways it can better deliver information. For example, Bew said, some boards tell executives, “Assume we have read all the materials. Don’t walk us through the slide deck.”
Another tactic that enables more strategy discussion but might require more commitment from individual board members is scheduling committee meetings so that all members can attend. That way, all directors can learn about complex topics, such as those covered in audit committee discussions, and will need less catch-up time in the full board meeting.
Difficulty testing the validity of assumptions underlying the strategy (43%). That “so many variables affecting a company’s growth now change quickly makes it hard for both management and boards to shape successful strategies,” the report said.
Inadequate performance metrics to assess progress (32%). A board sometimes receives a “polished” version of company progress from management. What it needs is an honest assessment of where the company stands. Bew said an activist investor recently recalled a company providing information on the overall health of the company instead of breaking down the financial performance division by division – obscuring the fact that poor performance in the core division was dragging overall results down.
Insufficient information about strategy (30%). Information given to the board should include past results and lagging indicators, but not as much time should be spent on the past. For directors to better contribute to strategy discussions, a board meeting must include a discussion of trends and forward-looking indicators.
Insufficient understanding of the industry or business environment’s effect on strategy (29%). Board members can overcome this barrier by better educating themselves. “It is important for board members to access other, outside sources of information beyond what management is providing,” Bew said. “Reading [information supplied by management] is necessary, but it’s not sufficient.”
Seeking outside information is not a sign of distrust in management, Bew said. A few sources for learning more about the business environment are industry-specific publications, analyst reports about the company, and public information about competitors.
Pressure to focus board attention almost exclusively on short-term performance matters (29%). Boards have tools at their disposal that can help align short-term goals with long-term performance, Bew said. For instance, boards choose and evaluate CEOs, and they have the power to remove the chief executive if needed.
Additionally, boards can steer discussion about capital allocation decisions, executive compensation, and other incentive compensation strategies. “Boards should ask probing questions, such as what are the incentives in the rest of the organisation, what is the philosophy, and how does our long-term strategy cascade down?” Bew said. “All that has to be communicated clearly to investors so they can understand what’s happening short term and long term.”
Respondents also were asked specifically about short-term pressure’s effect on long-term strategic goals. Seventy-five per cent said the pressure from external sources at least slightly compromised management’s focus on long-term strategy.
—Neil Amato (firstname.lastname@example.org) is a CGMA Magazine senior editor.