Sep 252012

Dr. Earl R. Smith II
Managing Partner, The Federal Circle

Boards operate in complex environments that require them to balance a wide range of issues and challenges. Their charter – to preserve and extend shareholder value – might sound simple enough but the pursuit of that objective can quickly bring on some very complex questions.

The board of directors has ultimate responsibility for the long-term increase in shareholder value. This principal of corporate governance is very familiar and accepted in American capitalism and in most other parts of the world. Capitalism has led to the greatest accumulation of wealth in history. Astute board leadership understands and balances the needs of the customer, the employees and the demands of the shareholder for increased wealth. There are eight main areas of focus for this leadership.

Customers hold the ultimate veto power over a corporation’s strategies. Directors understand this. Products and services, no matter how little they cost or how big the profit margin, are nothing but if not demanded by the customer. Becoming the low cost provider or producer in the market place does not ensure a high stock valuation. Boards must always keep customer demands at the top of product development committee meeting agendas. The company’s pricing and competitive advantage are central to arriving at an effective sales strategy.

Directors should also expect management to address the needs of the employees during board meetings. Investing in the personal growth and leadership development is a tried and true strategy for raising performance and productivity levels throughout a company. A critical part of this process is succession planning – a company must develop plans for the eventual replacement of every key member of its team.

Boards of directors respond to market pressures to reduce the cost associated with accidents and inefficiencies. For example, boards form internal advisory boards of corporate experts to assist committees with understanding processes and operational procedures, and the cause of industrial accidents. Advisory boards report and make recommendations to the CEO for ways to reduce accidents and prevent lost-time claims and worker’s compensation claims. Experienced directors and CEO’s understand the cost of forming such committees and the cost of implementing such strategies will show up as an expense on the income statement in the short-term. Inexperienced directors only see the measures as an expense; however, seasoned directors understand the savings gained through increased productivity, increased employee morale, and lowered worker’s compensation claims is greater than the expense on the income statement.

Stockholders invest in companies expecting a return on their investment. Corporate leadership understands the relationship between stock value and profits, and strives to maximize shareholder wealth. Investors understand and reward corporate boards investing in research and development. Much of the breakthrough ‘wonder drugs’ have come out of the laboratories of publicly owned companies with investors seeking to maximize their returns by investing in aggressive research and development companies. Many of these investors backed corporate boards for years before being rewarded in the market place. Capitalism, through investors, will ensure money flows to companies achieving the appropriate balance of risk and reward.

Shareholders, investing for the long-term, will demand boards balance the needs of the company with the needs of the employees and the demands of the customers. Investors understand the importance of this relationship. They will reward directors for leadership. Many boards consider the following areas critical to enhancing shareholder value for the long-term:

  • Employee assessment and development
  • Assessments of customer demands
  • Research and development strategy
  • Strategic product placement
  • Leadership development
  • Succession planning
  • Cost control and operational efficiency
  • Pricing and competitive advantages

Good governance must balance the short-term cash flow needs with the long-term viability of the company. It must understand the difference between an employee ‘give away’ and investing in employee personal development to boost morale and productivity. It must address and master the hard issues of succession planning and operational efficiencies. Board governance requires strategic planning and oversight. Boards should encourage the CEO to develop operational plans investing in employees and in understanding the market forces driving customer demands.

Boards are complex organizations that are dealing with some very complex issues. The organization and resourcing of the board will determine largely whether it will be able to meet its obligations to the shareholders. Many new directors are shocked to discover how difficult the director’s role is. Others realize that they need to develop some special skills in order to full the role. My work with boards often centers on this educational process. Being an effective member of a board means balancing competing agendas and issues in ways that support the interests of the shareholders. It is not a game for the inept of faint of heart.

If you want to know more about board service and my work with boards, send me an e-mail and we will arrange a time to talk.

© Dr. Earl R. Smith II


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