Tag Archives: Board of directors

Customers First, Investors Last: What were they thinking?

For years now, my colleagues and I here at BoardBench, have been saying that Wall Street has it backwards.  In the boardroom, directors have been fed, with a very large spoon, the mantra that they are beholden to the shareholder, that their purpose is to “maximize shareholder value.”  If you asked a large group of directors if this is true, you’d see a lot of bobbleheads in the room.  Many believe this is a legal requirement and in line with good business sense and good corporate governance.  Unfortunately, the concept of “shareholder primacy” is a relatively recent phenomenon.  It is also simplistic (shareholders’ wants are not homogeneous), has no legal basis anywhere (go ahead, try to prove me wrong), and, as many are now pointing out, usually damaging to companies, and the economy as a whole.

What we believe is real, and will eventually be proven again as real to the Street, is that customers, and employees are the two key drivers of corporate success.  When I say “again” I’m referring to Peter Drucker’s famous quote from decades ago: “the purpose of a business is to create and keep customers.”  So many seem to have forgotten this, or have never even heard of it.

But the basic premise is this: if you take care of your customers, and have great employees who are well supported and appreciated for being curious and excited about what they do such that they will ensure that customers love the products and services that the company offers, the company and shareholders will reap the rewards, too.  Of course other things come into play, like managing R&D investments (with the customer in mind), operations, and supporting a corporate culture that has strong values and morals.  The basic premise may be slightly oversimplified, but it applies, and should resonate with the board.

It appears that I’m finally not standing alone on this either.  In a recent interview, Jack Ma, the world’s newest CEO darling, made two bold public statements.  He basically shunned the current thinking of the Street by stating, on national TV, that “our customers come first, ouJack.jpgr employees second, and our shareholders third.”   He continued: “We aim to be larger than Wal-Mart by 2016, or sooner.”  If – no, when – Jack succeeds, and executes flawlessly on his statement, that customers and employees take a front seat over shareholders/investors, then he’s got an excellent chance of passing Wal-Mart as the world’s largest retailer.  Note, Wal-Mart just slapped some of its employees, who have the most direct relationship with their customers, by cutting their insurance benefits. This was probably done to cut costs, but it will probably also have a long-term impact on their customer relationships, too. But, I digress.

It seems that too many directors, CEOs, and business leaders, have become obsessed with what Wall Street, its analysts, and shareholders think.  Many have learned to play these groups exceptionally well, too. Countless analysts and shareholders have been taken in by companies’ projections, quarterly earnings estimates, and highly creative financial management and reporting.  Don’t get me wrong, the importance of the exchanges and the markets cannot be downplayed, but a balance is needed.  Focusing on Main Street is just as important, if not more so.

If you follow Main Street, you know about big box discount stores. Costco Wholesale Club, founded by Jim Sinegal and Jeffrey Brotman, believe in serving the customer first, and that if employees are treated properly, they will work with, and treat the customer well too.  Jim, the public face, is a “hands on guy” who is known for visiting each individual Costco store.  Jim is also outspoken about his views on Wall Street.  He’s been known to say that he puts his customers and employee needs above “pleasing shareholders.”  This philosophy must be working: Costco’s five year return is +116.73%.  If you bought the stock earlier, your return would be closer to 354%.

American Express is another company known for taking good care of its customer/members.  Personally I’ve been a fan of the company’s customer service representatives over the years, and tell them that every time I’ve called for help.  Don’t get me wrong, working at this company must be tough: when I was younger, AmEx employees were nicknamed The Dragons.  Perhaps because they were seehat2.jpgn as willing to fight for the company and their customers nearly to the end.  By the way, if you invested in American Express five years ago, your return on investment would be up 149.46%.

If you’ve worked with the general retail public, as I did during my college years, then you know just how tough this can be.  Sadly, not everyone who enters a store, calls a helpline, or dines in a restaurant is a kind and thoughtful customer.  Amazon deals with all sorts of customers from nearly every continent in the world, and I’m sure they have some interesting stories to share.  However, the company is noted for being one of the best customer service organizations in the world.  Amazon has more than one customer base, as many do: retail members, and consumers.  Jeff Bezos clearly divided the customer’s connection to Amazon into two categories: the experience and the service.  At this level, he notes that customer service is part of the full customer experience.  If it’s unpleasant, it’s a negative customer experience.  He supports the idea that a positive customer experience creates greater loyalty with Amazon.  If you’ve ever dealt with an Amazon Customer Service rep, you know that they work quickly to resolve your issue, they get the job done for you, and you are nearly always satisfied and left feeling good about your relationship with Amazon.  And, if you invested in Amazon five year ago, your return on investment is now up 236.64%.

While it’s much more pleasant to focus on the “good guys,” there are dark clouds.  Some companies are noted for their poor customer service.  Some survive because there are few alternatives: think of phone companies and cable providers, and some you can name on your own (take a look at their five-year ROIs).  However, when it comes to poor customer experience these days, I think sadly of that American icon Sears.  Whenever I bring them up these days, all I hear is: “Oh my gosh, I could tell you about the time when…”  Sears is a sad story101.jpg about the decline of a once great and loved retail giant.  Many years ago, the Sears catalog used to be called a “wish book.”  Families would anxiously wait for it to arrive in the mail.  It was nearly 5 inches thick. Moms, dads, sisters, and brothers would argue over whose turn it was to browse through and select from among the items they wanted for birthdays, holidays, special occasions and more.  Some people even bought their homes out of the Sears catalog.  But, it has lost its way, and it’s touch with its customers and has already begun its drop down that magical slide once pictured in its own catalog.  The entire company and its hopes for the future look pretty dismal: sell off of units and real estate, store closings, etc.  Sadly, if you invested in Sear’s five years ago, your return on investment would be -58.50% and it’s still falling today.

To sum up and put things into even sharper perspective, I recently spoke with the General Counsel of one of the largest, most recognized corporations in the world.  He told me, succinctly, that the biggest problem with their board is that not one director had any understanding of who their customers were and are or what they want.  I can also assume that they don’t understand their employees either.  So I will watch how this company slides in the next few years (Note: their record has been negative for some time), and report back with an update, unless, that is, they somehow figure it out and turn it around.

Do you need to focus on board improvement: composition, strategy, direction, execution, oversight?  Boards are our specialty. Give us a call.

Nancy May

Corporate Advisory Boards: “Show Me the Money”

Tell me, simply: What’s the purpose of being in business? We shopped this question around to board members and executives, and heard many different (sometimes long-winded) answers. “Maximize value for stakeholders ― Have a flexible business strategy/model to stay relevant ― Make and sell goods or services ― Get and keep customers ― Derive monetary and psychic satisfaction, and a host of other interesting opinions. However, if you put all their responses into a big pot, lit a fire under it (one I like to call scrutiny), skimmed off all the fat, political correctness, esoteric ideals, and highfalutin’ thinking, you could boil it down to one simple, honest truth: “To make money!”

So what type of board can most directly make you more money? Traditional (governing) boards can, although not always directly, since their activities focus on many other things including compliance, fiduciary duties, long-term protection of stakeholder interests, etc. What about advisory boards? Companies have formed these kinds of board for lots of reasons. Often they do so to deal with  temporary issues like legal/compliance, getting closer to customers, bolstering management, etc.: issues that probably could be more efficiently addressed through consultants. But, for the most part, companies build and keep advisory boards with the long view in advisors.jpgmind, and to make even more money.

It’s common to see start-ups and high-growth firms use advisory boards to get them over the hurdles, so that they can start or continue to generate more revenues than expenses. But, what’s more intriguing is the number of large, global, and/or well-established corporations that are quietly trying to think like entrepreneurs so that they can “get their groove back.” In response to this challenge, they are building and using advisory boards to reinvigorate their processes, products, sources of capital, and new business opportunities, among other things. Ultimately, of course, to make even more money. But are advisory boards really worth it? After all, for young and well-established companies, it takes thoughtful planning, time, and considerable resources to build, maintain, exploit, and execute on what they can give you. Apparently, some are convinced.

Recently, International Flavors and Fragrances, a global corporation, built a Scientific Advisory Board. The reason: to enhance their research team’s abilities and expand their innovation pipeline. The Advisory Board’s internal leader, Senior Vice President of Research and Development, Ahmet Baydar, had the support and backing of the company’s CEO and the entire board. Focus, time, and the right resources, have delivered results. Ahmet shared: “This effort has significantly increased our innovation development thresholds. Our Advisory Board members have given us sound guidance, introduced issues, partners, and opportunities that have all brought relevant value to our business.

Mid-cap private companies use such boards to give them extra muscle, or in some cases, to tap the brakes a bit, when needed. Jim Taylor, CEO of Abarta Oil & Gas and Chairman of Abarta, Inc., a diversified family-owned holding company, told of his experience. Having built a board of independent advisors, Jim shared that these folks have “challenged us, made us accountable for our decisions and actions, and pushed us to articulate our objectives and vision more clearly. In addition, the board has helped us identify new lines of business, which equate to new revenues.” He added that “without our board I would move more quickly, but probably recklessly, with less measured perspective.” The board helped them divest itself of a business it had owned for 63 years (originally bought by Jim’s grandfather). “They helped us realize a better value on the business than we could have expected.”

Then there’s Deutsche Bank Americas: different scale, different industry. A few years back, they correctly decided that their senior team could benefit from having, on tap, a broad and diverse group of globally-renowned advisers. They took the time to focus, find the talent, and commit to building an impressive group. They also made sure that the respect and support went both ways — as it should with a good advisory board. Bill Woodley, Deputy CEO, who oversees the Advisory Board shared: “We’ve assembled a world-class group of independent advisers who offer a diverse and rich perspective to our senior management. The Advisory Board has helped us look at our current and prospective clients differently, resulting in more sustainable and balanced business prospects.”

Although many companies keep information about their advisory boards’ ROI private, our discussions with both large and smaller companies point to real and considerable financial returns. Larger corporations, with mature advisory groups, tell us that returns in the early stages range from $100 million to over $500 million.  For some smaller companies, advisory boards have accounted for higher valuations for spinoffs, avoiding poor decisions (unlike one company we know, without a board of advisers, that paid 60% more than it should have for an acquisition), and yes, many new clients, too.  Either way, when you add it all up, well-constituted and managed advisory boards can create significant returns.

Now, let’s say you wanted to acquire such a board.  How would you approach it? The process may seem simple, yet it’s anything but. As with any good business, clearly defined objectives are the keys to a successful advisory board and solid ROI. This includes identifying gaps in expertise, among many other things. Also, be bold: understand that those who you think are beyond your reach may be the best suited to test your capabilities and push you beyond your corporate comfort zone. You’ve also got to realize that greed is NOT good and that thinking only about your own bottom-line with your advisory board may make you very lonely and deeper in debt.fin.jpg

Recognizing what’s in it for your adviser prospects will be one of the golden keys to soliciting their help. Done properly, your newfound advisers can open a five-lane freeway of relationships, insights, resources, and client opportunities. However, remember that you get what you pay for. You have to carefully sort out how your advisers will perceive your valuation of their time and efforts. Some companies have been lucky enough to find highly experienced and skilled advisors who are no longer financially motivated. For the most part, I believe this species has been over-hunted to the brink of extinction. Other “free” advisers may be secretly hoping to gain some other advantage from you down the line. I believe that appealing to someone’s self-interest is a safer bet than relying on their generous nature. Either way, to align their interests more securely with your company’s, your advisers should be compensated for their efforts through annual retainers, meeting fees, marketable equity, bonuses, commissions, in-kind services, or other creative incentives. Your recruitment process should include compensation negotiations, to increase your odds of success. Otherwise, your interests will most likely take a backseat to those of others who, they believe, value them more.

Once built, understand that constructive tension can be your best friend. You stand to gain a lot of good advice from each director one-on-one. However, getting them together periodically, accelerates the brainstorming and one-upping process among them, boosting your take-away potential. Being open to a push or a hard kick in the seat (no, I’m not into pain) from your advisers should enable you, and your management team, to drive business beyond where it’s been. That’s held true for small, mid-cap, and large global companies. The tough part is learning how to let go. Listen and debate the issues with an open mind, but once consensus is achieved, act on what your advisors recommend. If you don’t, you’ll lose their trust and interest, and your investment will likely go south. This is just the tip of the iceberg when it comes to building, running, and extracting value from a well oiled advisory board.

So what are you going to ask of your hard-won and newly-acquired set of (what you hope will be), precious expert advisers, the moni.jpgfirst time you sit down with them? That will depend on how you’ve assessed their personalities and egos, and on your own comfort and ability to balance subtlety with candor in what you say and do. But, even if you don’t straight-out say it to them, then you should be thinking it – all the time: “show me the money!” A little jump up and down for emphasis (behind closed doors) won’t hurt, either.

Now, once more, from the top: What’s the purpose of a business and an advisory board?

Nancy May

Diversity in the Boardroom: Resistance is Futile

If you’re reading this, chances are you sit on at least one board.  If that board happens to be one that understands the value of diversity (and here I’m speaking of gender diversity) or has moved aggressively to get the board there, I applaud you. Your board will benefit, the company will benefit, and other boards will benefit (I’ll explain more later). If you align with board members who are still unconvinced – please consider that diversification sooner rather than later is in your best interest, the best interest of your fellow directors, and all boards. Let me present to you both the carrot and the stick:

The Carrot: Studies indicate diverse boards tend to be better
boards and lead to more stable companies.c2.jpg

There are studies with hard data from Pepperdine University, Catalyst, McKinsey and others that overwhelmingly suggest that companies with more women at the top are better off. More studies like these continue to come out and point to virtually the same things.

Recently, Credit Suisse Research Institute looked at the performance of selected companies with at least one female director over the last six years. While it noted little or no correlation with company performance between 2005 – 2007 when the economy was robust, between 2008 and 2012, the stock prices of companies with at least one woman on board yielded a 26% higher return than those with none. The assessment was that a more diverse board means less “volatility and more balance” during tough economic cycles.

A recent Thompson Reuters study, Mining the Metrics of Board Diversity, revealed how the increase in female participation on boards affects organizational performance. The study drew upon information on 4,300 global companies and over 750 data points that covered every aspect of sustainability reporting. According to the study, on average, companies with mixed boards show marginally better or similar performance measured against a benchmark index. Companies with no female board members underperformed relative to organizations with women on their boards, and had slightly higher tracking errors, indicating potentially more volatility. The study went on to suggest that the performance of companies with mixed boards matched or outperformed companies with male-only boards, stronger evidence that gender equality in the workplace makes good investment and business sense.

The value of board diversity, from directors themselves:

Michael Critelli, board member of Eaton Inc. and former Chairman and CEO of Pitney Bowes, built a strong reputation for advocating using diversity to make his company and board even better. On having one of the most diverse boards during his tenure as Chairman/CEO he said: “Boards are most likely to do their job effectively when they have diversity of life experience and insight.  Groupthink on a board is very dangerous. The advantages of diversity are only realized when a board is inclusive in its membership and when it invites and values diverse thinking relative to board responsibilities.”

Linda Rabbitt, Chairman and CEO of Rand Construction Corporation, Lead Director of Towers Watson, and Chairman of the Federal Reserve Bank of Richmond notes: “As a woman I have had to overcome many obstacles as an entrepreneur and in the corporate environment. As a result of these experiences I see the world and business through a different lens. Having large obstacles to navigate around teaches you how to solve problems, identify opportunities and associated risks, and bring up new talent in a way different than the men who built the road before you. These skills bring a new value to the boardroom that has not been there before.”

Maggie Wilderotter, Chairman and CEO of Frontier Communications said: “Company leaders and directors, male and female, must do more to advance women in their ranks, and it is incumbent upon women to be responsible for their advancement as well. After all, doors successfully open and close when we push.” Mrs. Wilderotter added: “A recent Catalyst report shows a continuing shortage of women in America’s C-suites, Boards of Directors and as top earners. Studies show that companies with three or more women on their boards perform better financially than those with fewer members. Diversity in the board room and in the C-suite is a competitive advantage.”

The Stick: The rise of the ““Sheconomy.”

Even for those with a minimal grasp of the obvious, some things are plain. We have moved into a new economy, one overwhelmingly influenced by women. Consider these points raised in research by MassMutual, Fleishman-Hillard, the Spectrem Group, and other noteworthies:

  • Senior women over 50 control net worth of $19 trillion and own more than three-fourths of the nation’s financial wealth.
  • High net-worth women account for 39% of the country’s top wealth earners; 2.5 million of them have combined assets of $4.2 trillion.
  • Over the next decade, women will control two thirds of consumer wealth in the United States and be the beneficiaries of the largest transference of wealth in our country’s history. Estimates range from $12 to $40 trillion.
  • Wealthy women investors in the U.S. are growing at a faster rate than that of men: over a two-year period, the ranks of wealthy women in the U.S. grew 68%. The number for men was 36%.
  • Women account for 85% of all consumer purchases, including everything from autos to health care.

It’s hard to believe that many women could not apply for a credit card in their own name until 1974, when the Equal Credit Act was passed.

The point here: traditional boards cannot ignore the influence, control, and power that women hold as decision-makers, consumers, and, as investors, to go away. Or that they can have a dramatic impact on sales and have gained, through their dominant use of new media, a growing ability to advocate for or against a company’s products and services. Companies that understand and reflect this in their boardrooms will have the advantage over those who do not.

Here are some questions to ponder. With women’s dominant role in customer and financial decisions, coupled with growing transparency of company operations and board composition, plus the rise of electronic reporting and social media allowing everyone to easily see where a board is aligned or not with its customer base and markets (and this new economy), where do you want your company to be? What is the likelihood that if your board has a negative attitude toward more women in the boardroom, your company will be targeted for activist or populist actions and retaliations at a speed, and scale, never previously imagined?

Quotas are coming! Quotas are coming?

Board diversity, especially the number of women serving on boards, has become regular headline news, reflecting a growing pressure on boards to change or explain why their composition is appropriate. Legislative bodies worldwide find themselves under enormous pressure, and have started instituting changes. Outside the U.S., 16 countries have mandated some type of quota, threatening fines and, in some cases, dissolution if corporations don’t meet deadlines for achieving legislated. Formal quotas were introduced nine years ago in Norway where resident companies were required to have 40% of their board seats occupied by women by January 2008. Quota requirements are going global. This past November, Germany legislated a requirement that 30% of all non-executive board seats be occupied by women by January 1, 2016. At the close of last year, women held 14.1% of all non-executive board seats there. In our own backyard—Canada—the Province of Quebec requires that women occupy half of all board seats on state-owned institutions.

In this country, it’s important to gauge the increasing momentum behind gender diversity quotas. Currently, women hold 16.9% of the board posts in U.S. Fortune 500 Companies, have barely improved in their 16.6% performance since 2012. The numbers are even smaller among Fortune 1000 and mid-cap companies. Boards’ failure to respond to these changes will invite legislative and regulatory mandated quotas, if only to relieve the pressure regulators feel. If history is any example, the slower the pace of voluntary change, the faster the pace of imposed change. The more boards resist, the more likely change will come in ways they might not anticipate or want.

Sooner is better than later.

I’m no fan of imposed regulations in the board room. Regulations and mandates, while well-intentioned, often produce unintended effects and consequences. Quotas, with aggressive time limits can easily translate into board seats Nancy-May2.jpgoccupied by people who don’t belong. I applaud boards that see diversity positively now, and are going on to adopt, adapt, and improve. Boards that carefully consider and bring on excellent, relevant female board members improve their perspective and ability to deliberate. Diversity contributes to better board governance, because, as the number of qualified and valued women increases and becomes known, the perceived need for external actions (i.e. quotas) will start to fade. Thus, as your board grows more diverse, the pressure on other boards to do likewise will increase, even if only in a very small way.

So, “fellas,” here’s where this leaves us: this boardroom diversity “thing” isn’t going away. Diversity and equality in the boardroom is coming. How soon you face it and embrace it is up to you. Resistance is futile.

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