A new book by three governance experts argues that boards should focus on a new kind of TSR. Instead of “total shareholder return,” the authors propose “talent, strategy and risk” as a measure of performance that can help the corporation meet institutional investor pressure for a longer-term outlook balanced with short-term results.
The book, Talent, Strategy, Risk: How Investors and Boards are Redefining TSR, was released in July 2021 by Harvard Business Review Press. Its authors are Ram Charan, Dennis Carey and Bill McNabb.
Charan is an advisor to CEOs and boards who has written more than 30 books, including Boards That Deliver and Boards That Lead. Carey, vice chair of Korn Ferry, has published six books, including Go Long. McNabb is the former chairman and CEO of institutional investor Vanguard and has substantial experience in balancing the short and long term.
The authors drew on their own experiences and interviewed executives and board directors including Warren Buffett, Mary Barra and Nelson Peltz.
“Part of the reason we wrote this book was to take a much more holistic look at business,” McNabb says. “As a former operator, talent, strategy and risk were the way we thought about running the company. Get the right talent, develop strategy and understand how much risk you’re taking on.”
To explore this topic in more depth, Directors & Boards’ managing editor, April Hall, interviewed the authors. Charan and Carey were interviewed together; McNabb was interviewed separately. Responses have been edited for length and clarity.
Directors & Boards: In the book, you discuss elevating potential leaders even before they have the skillsets or experience you need. Should corporations open the aperture wider than they do now to find and develop talent?
Charan: We recommend identifying people who have the leadership “seeds” and the business acumen to become the CEO. Find someone with extraordinary communication skills and an ability to build bridges, who is also outstanding in dealing with uncertainty and focusing on the right issues.
Then develop them by putting them through a crucible of assignments that allow them to vastly expand their capabilities in a short time.
At GE, high-potential employees also attended the company’s management training program, where CEO Jack Welch was known to spend a solid five hours at a time coaching up-and-coming leaders on the assignments they had been given. The basis for learning was the work itself, not just books or case assignments.
Jack did that as a regular practice. It was worth his time to find an ounce of gold in a ton of ore.
McNabb: I would say the best companies do look pretty far and wide for talent. It has become a much more intensive approach in terms of reaching down multiple layers in an organization. Even at the highest levels in big, complicated companies, you’d be shocked at how many rising stars the senior team will know.
At Vanguard we were very disciplined about this. We knew the top thousand people out of the 15,000-employee company. Most of us collectively knew who below the senior management level we should keep an eye on. And we had mechanisms to identify them. It became a matter of pride among the senior leaders as to who could spot talent in somebody at a young age.
I was recently talking to a former colleague about a young woman we met when she was 23, just starting out of college and working the phones for us. She attended a listening session I held for our young crew members where they could ask me whatever they wanted. This young woman asked questions that were five times better than anybody else in a room. I jotted her name down and went back to her manager, who said, ‘Yeah, she’s pretty sharp. I hear she wants to go to business school. We should think about whether we want to sponsor her.’ We helped her with school, she came back to Vanguard and she’s now in a senior role at the company at a young age.
D&B: It’s been said that potential talent wants to work with companies whose views align with their own. If that’s so, should a CEO make statements on potentially controversial social issues? Should the board control those statements?
Charan: We all work in a societal context, but what is relevant for an oil company is not as relevant for an insurance company. In areas where you have expertise, you must have a voice. In other areas, you don’t shoot your mouth off. Your most important thing is brand. If you’re going to take positions that are societally important, which parts are relevant to your cadence, your long term, your brand? Just shooting off your mouth for the sake of doing it is not the best idea.
There can be areas of general society where, for example, damage is being done to the Constitution. That’s different. Then you are a citizen and you have a voice. But the board and CEO should be aligned.
McNabb: The short answer is, it depends. This is where the gray area is. Where do you draw the line?
My personal philosophy on this has always been that I don’t like speaking on things that I have no expertise in. I felt like that was not in the company’s best interests, nor, frankly, in the issue’s best interest.
There are certain topics, though, that transcend this. What happened in Charlottesville in 2017, for example. I did speak out about that. People could certainly have said, “You’re not an expert on this.” Blah, blah, blah. But I had really close ties to Charlottesville through family, and the event itself really bothered me. I didn’t get board permission to do that. Should I have? Maybe. To me, the issue of CEOs taking a stand is still an emerging thing.
If you’re going to make a very major statement about a particular social issue and you know there are going to be implications for the company’s reputation one way or the other, you ought to let the board know. I don’t necessarily think the board needs to make a judgment, but there may come a time when something is so big that you want the board’s approval.
It’s almost like a capital allocation decision. Most boards give management a lot of leeway in how they allocate capital up to a certain point, after which they’re going to need to sign off on it.
D&B: One of the issues many CEOs are speaking out about is racial equity. We’ve been talking about gender and ethnic diversity and equity for a long time. Why does it seem so difficult to get this right? Is this a tipping point?
Charan: Number one, we all know that diversity is the right thing. I don’t need to justify that. Everybody knows that.
But, again, you need to find raw talent. For example, in the early 1990s, I was working with Corning Glass. A young lady at the third level in the company made a presentation which caught my eye. I proposed her as a board member for a pharmaceutical company. They met her but thought she was too young. I then took her to Larry Bossidy, the CEO of Honeywell, and he brought her in to run a division that was worth $2 billion. Then I called Harman International Industries CEO Dinesh Paliwal, who said, “I’ll put her on a board.” He took her to Raytheon. Now she is the CEO of a company in Seattle.
Carey: I’ve noticed over the years that diversity happens in fits and starts. There seemed to be, at least for a short time, a huge interest in getting female directors. There’s a huge interest now in getting African-American directors. Unfortunately, those efforts seem to peter out over a period of time.
As it becomes better known that there is a direct link between diversity and performance, I think this ball will get rolling again very quickly. Some of the data now suggests that the people who are adding the most value are the new ones coming into the boardroom. They might be younger — that’s one element of diversity they may have. People of color — they might be globally enriched in terms of their experience. We define diversity in a much broader way now than just gender and race.
McNabb: I think it’s different this time. You’re already seeing tremendous change at the board level. Large investors are looking at board composition very carefully. They want diverse experience, diverse opinions, diverse skillsets. A lot of that comes with diversity as we define it in terms of gender, race, sexual preference, et cetera. I would say broader inputs generally lead to better decisions. Many investors have come to that conclusion.
As diversity grows on boards, it’s almost a given that those boards are going to push their management teams and say, “OK, we have a pretty diverse board. What does our leadership team look like? What does our employment base look like? What does our customer base look like?”
This is much more than a fad. There are a handful studies out there that suggest more diverse boards lead to better results. But I can tell you anecdotally, as I watch the boards on which I sit become more diverse, we perform better.
D&B: Let’s talk risk. There were companies that completed mergers and acquisitions during the pandemic and times of social upheaval. Do you think that was the right thing to do in a high-risk time? Do you think deals made over the last two years will be able to stand up to an evaluation of success any time soon?
Carey: My favorite expression is, “Risk is not always a four-letter word.” Risk is also equated with opportunity. We’ve seen during this pandemic — especially during its early stages — that supply chains were cut off. There were situations which required otherwise world-class companies to reevaluate their potential in the market both with or without certain partners.
During the pandemic we also saw an increase in companies buying companies that were falling short in one area but were superb in other areas. There were a lot of marriages that were made in heaven. But it was a marriage made with a risk.
McNabb: Whatever case the business development folks, the CEO and the management team make for a deal doesn’t actually happen far too often. You know what happens? You do an acquisition, it doesn’t play out the way you want, you reset the dial and you create a whole new set of parameters.
A board shouldn’t accept that. A board should say, “This is what you said was going to happen, and this is actually what happened.” There may be really good explanation. It may be that we thought we’d be out of the pandemic by the fall. All the early evidence was that the U.S. was headed in a great direction. Then the Delta variant hits and now everything’s back in turmoil. We’re not getting back to work as quickly as we thought. We’re not going to see the synergies that we expected, at least initially, and that’s going to affect our return. Those are all legitimate reasons.
I’ve been in enough boardrooms where what’s done is done and nobody looks back. You don’t want to be a slave to looking back, but the flip side is you definitely want to learn as much as you can. Part of that is looking at the results versus the original set of expectations. It’s a good discipline, and a couple of companies that I’ve looked at that do this really well — they are the best acquirers in the world.
D&B: In the book, you suggest a restructuring of committees. Audit and nom/gov would stay as is, as prescribed by law, but you suggest a realignment of others. First, a talent, compensation and execution committee, then a strategy and risk committee and other ad hoc committees that could cover any number of issues that are “keeping the CEO awake at night,” including technology or geopolitical risk. Why suggest the committee changes?
McNabb: I think the big message would be that committees need to reflect the nature of the business and shouldn’t be bound by tradition.
Dividing up into too many committees is not necessarily a good thing, either. I see boards where all of the directors want to understand certain issues. One board I’m on, for example, puts risk and audit together. In the audit committee, we look really hard at cyber, but the whole board is interested in cyber because it’s so critical. There are times when you may have a “committee of the whole” concept. Or, if you have a separate committee, encourage the rest of the board to attend those meetings.
On another of my boards, almost everybody attends some of the audit committee meetings. It’s the best way to learn about and see the breadth of the company.
Everybody wants to hear what the CFO is saying, what the street is asking and what kind of questions we can expect from investors.
I think the less silos there are, the more everybody is engaged.
D&B: Any final thoughts on the state of corporate governance?
McNabb: I’m watching this evolve, and it’s pretty fun and gratifying to see. Fifteen years ago, when we at Vanguard started writing about governance, if you polled most board members they would say they have one job and one job only: They choose the right CEO and get out of his or her way.
Being a director is a way more difficult job than it was 15 years ago, way more comprehensive. That’s exciting and good for the capital markets and good for companies, but it doesn’t make the task any easier.