How boards can better drive long-term value creation

More than ever before, corporate shareholders are taking an active role in company performance, and directors are paying attention.

Shareholder activism is not new. For more than two decades, shareholders have been exercising their ownership rights to influence corporate behaviour. And modern investors are exerting more influence on how boards and management operate now than ever before, according to the PwC’s 2016 Annual Corporate Director’s Survey.

The report shows that directors are becoming more responsive to investor pressure on a wide range of corporate governance issues, including board composition, executive compensation, and risk management, and they are addressing the tension that exists between long-term value and short-term gains.

Long-term value creation is a key responsibility for the board and management, but it can be challenging in a world of quarterly earnings reporting. Boards, especially, must be sensitive to balancing short-term results with long-term value.

“The theme of this survey is shareholder empowerment,” said Paul DeNicola, managing director of PwC’s Governance Insights Center in New York City. “Companies become targets of activist shareholders who apply pressure on boards to make modifications to long-term plans in order to achieve short-term goals.”

But as boards focus on their fiduciary responsibility to their shareholders, they are beginning to value direct engagement with them. Boards recognise that regularly communicating their long-term strategy and performance to shareholders is an effective way to relieve pressure to capitalise on short-term returns.

“This is an overall trend that didn’t exist 10 or even five years ago, and it was not common for such dialogues to take place,” DeNicola said.

Eighty per cent of directors agree, at least somewhat, that their board received valuable insights from dialogue with shareholders, the survey showed.

Incorporating management

As a result of this dialogue and engagement, board members are more involved with strategy, talent, technology, IT, cybersecurity, and other issues. They are also spending more time with management than ever before.

Corporate boards are responsible for the future of their business. Therefore, they must keep management focused on long-term strategic goals, said Nigel Davies, FCMA, CGMA, managing director of Nigel Davies Chartered Management Accountants of South Wales.

“It is the board’s duty, role, and responsibility to keep management’s eye on long-term shareholder value,” said Davies, who serves as a nonexecutive director for Thomas Carroll Group PLLC and as a member of council for the Chartered Institute of Management Accountants.

The best boards extend their fiduciary responsibilities beyond the conference room and foster strong collaboration with their top management to establish a forward-looking agenda, define performance goals, and reinforce accountability through dynamic dialogue. Boards these days rely on management to ensure their strategies are executed, and they keep their fingers on the pulse of progress in a variety of ways.

Periodic and ongoing monitoring: The survey found that the average time commitment for directors serving on their boards was about 248 hours last year. Boards are beginning to expand their areas of oversight beyond fiduciary responsibilities into strategic planning, ongoing review of investment proposals, talent wrangling, risk management, decision-making, and board education.

Senior management and boards should have a culture of information sharing, open dialogue, and constructive debate. Most boards meet quarterly to receive reports from management. But more frequent communication and monitoring are critical, Davies said. “While formal meetings every three months are important for regulation, communication between the board chair and management in between those meetings is vital to keeping the decision-making process active,” he said.

Board composition and evaluation: The days of passive boards comprised of generalist directors are fading into the past. Modern boards are striving to attract directors with specific business expertise. The PwC survey ranked financial expertise as the most important skillset directors should possess. Today’s directors must also have experience in operations, IT, and risk management. While board leaders often serve as sounding boards for their CEOs, relevant industry expertise enhances their effectiveness.

Board recruitment becomes even more critical when long-term focus comes into play. Therefore, boards should constantly assess the skills and experience of their fellow directors and fill gaps whenever they have the opportunity. The PwC survey showed that as a result of board self-evaluation, more than one-third of directors thought at least one fellow board member should be replaced, but only 8% of directors said they decided not to re-nominate someone.

In addition to a formal board appraisal system, Davies recommends ongoing communication and connecting between meetings to build a culture of openness, and points to his relationships with his own boards as an example.

“At the end of board meetings, the chairman often rings me up and asks, ‘How did I do?’ ” Davies said. “We look at the bits he did well and focus on improvement on the others. Communication between board meetings is vital to facilitate the decision-making process outside the formal meetings.’ ”

Strategic planning: Because one of the board’s primary responsibilities is strategic oversight, directors must be sufficiently expert in industry trends to effectively guide a company’s long-term strategy. At the same time, management should maintain key statistics to ensure that the company stays on its long-term strategic trajectory, and top executives should be able to clearly communicate the metrics to their boards and investors, according to DeNicola.

“Execution of strategies is a fundamental board expectation,” DeNicola said. “The board’s role is to prod and ask questions and to monitor management’s progress.”

Corporate culture: A board that merges an interest in corporate culture with its goals for achieving long-term value will result in developing an effective management team. Boards may tie incentive plans to long-term value creation, but they can also look to product quality and customer satisfaction, which also lead to long-term value creation and should be emphasised in performance assessments.

Employee engagement, morale, contribution to revenues, and retention are important. “If your employees are happy in their jobs, the monetary rewards will follow,” Davies said. 

At the end of the day, the board’s role is to focus on long-term value goals and help management reach these goals using short-term objectives to reach fulfillment. 

“We want sustainable growth and profit, and the journey to get there is the way of life,” Davies said. “If your goal is the destination, change the picture and enjoy the journey. Define success by hitting your targets, and focus on happiness, compliance, customer satisfaction, and best practices.” Davies also advises corporations to hone their business reputations by giving back to their communities through volunteerism, giving boards, and management. This imparts a feel-good factor in addition to bringing out the best in their organisation and employees.

Teri Saylor is a freelance author based in Raleigh, North Carolina.