Fast-growing companies provide governance formulas for accelerating value.
It's no secret that consistently fast-growing companies such as Apple and Google's parent company, Alphabet, operate differently than other companies. But do they govern themselves differently?
Research our firm conducted suggests that they do. We found that these and other high-performing organizations we've dubbed “superaccelerators” fall into four strategic categories and each has a style or type of board associated with each approach.
• Portfolio Investor strategy → Working Board
• Customer Intimate strategy → Thinking Board
• Execution Engine strategy → Responsive Board
• Talent Magnet strategy → Inspiring Board
Though it's possible for a board to embody more than one type, each is quite distinct and understanding them can help any board clarify how their dynamics potentially enhance or impede a range of strategies.
What makes a “superaccelerator”
Before exploring the four types of boards our research examined, it's useful to begin with a quick explanation of how we identified high-performing companies. To determine which were genuinely elite we applied four stringent criteria to the 500 largest companies in the world by market capitalization.
To qualify, a company must:
1) Place in the top 20% for revenue growth in both the previous three and seven years,
2) Generate no more than 20% of its growth inorganically (through acquisitions),
3) Receive no more than 20% of its revenue from its home government (eliminating state-sponsored behemoths like Saudi Aramco and some Chinese banks), and
4) Not see its profit margin drop more than 20% as a percentage of revenue during company growth.
In 2016 only 23 companies passed all four of those tests, and in 2017 only 25 made the cut.
Overall, the companies come from a wide range of industries, not just high tech. But all are indeed high performers. For instance, the companies on the 2016 list grew their revenues 20% a year, on average, over the seven-year period from 2009 to 2015 — four times the growth rate achieved by the entire 500 companies over that span.
A question of board composition
In our initial research in 2016, we found some intriguing differences in board composition among superaccelerators and other companies.
These so-called “superboards” were smaller, averaging under 11 members versus almost 13 members for other boards. Median tenure on the superboards averaged more than nine years versus less than seven years for non-superaccelerators. (Our hypothesis: The smaller number of members may help these boards to make decisions more quickly and, combined with the continuity provided by longer tenures, to do so over time.)
More recently, the differences in size have narrowed to an average of 11 members for superboards and only slightly over 12 for the nonaccelerators. Meanwhile, median tenure for superboards is 7.6 years versus 4.8 for nonaccelerators. These numbers are worth watching in the coming years.
Acceleration strategies and the boards that support them
Beyond the numbers lie the four formulas for acceleration and the type of board that helps create value in a way that is consistent with the company's strategy. While our descriptions of the types are necessarily reduced to thumbnail sketches here and the data behind them are largely invisible, they do suggest the roles boards can play in pushing companies into the charmed circle of the elite:
Portfolio Investor/Working Board. Portfolio investors, as the name suggests, approach business opportunities and allocation of resources almost as a venture capitalist would (think Alphabet). They aggressively divest and acquire businesses, without regard to tradition, and are as quick to adopt new initiatives as they are to abandon old ones. Because they often operate in volatile environments, their resource allocation processes are flexible, fast and unbound to hierarchy. That includes resources devoted to innovation, a capability that is valued throughout the organization and integral to talent management.
|
The Responsive Board holds management's feet to the fire on the company's top priorities, the scalability of its initiatives, and its allocation of resources to core competencies and projects. |
The working board encourages management to be uncompromisingly objective about opportunities, the allocation of resources, and “make or buy” decisions. Directors shoulder a heavy workload, typically requiring several hundred hours a year. That's because working boards tend to rely on numerous ad hoc committees to consider the many acquisition and divestment opportunities that arise. While many boards take the position that management can hire functional expertise, working boards prefer to have such expertise on the board to provide fine-grained insight opportunities.
In addition, a subset of directors often forms a working council with the CEO, who welcomes their involvement and establishes a regular cadence of strategic discussions with them. In sum, the working board is both nimble, like the company it oversees, while attuned to longer term strategic planning, much like the boards of private equity firms.
Customer Intimate/Thinking Board. Customer intimate companies put customers at the center of everything they do. (Tata Consultancy Services is a good example.) They immerse themselves in the customer experience and co-innovate with customers. In performance management, they give metrics like customer turnover pride of place over financial measures. Because they typically operate in environments where customer needs evolve rapidly and customer loyalty is hard to keep, they regularly convene user groups and establish customer advisory boards.
The thinking board keeps the customer at the center of critical discussions and decisions. Directors are adept at representing the perspectives of stakeholders, and they see customer intimacy and loyalty as the royal road to accelerating revenue growth.
Board members typically have a genuine passion for the company's product and they often go to great lengths to appreciate the customer experience. For instance, we know of a retailer's board whose members spend part of a day working in a company store as part of the onboarding process. These boards typically include among their members chief commercial officers, chief marketing officers, and executives who understand digital disruption. And all directors share a customer-first ethos that reflects the company's ability to accelerate performance in time with — or ahead of — customer needs.
Execution Engine/Responsive Board. Companies that pursue an execution engine strategy often compete in markets where low costs are the key to success. They focus on operational excellence, efficiency and effectiveness in order to reduce unit costs and increase margins. They marry a handful of priorities with simple, consistent and scalable processes. They strive for continuous improvement, learn from mistakes and disseminate learning and best practices throughout the organization. (Arguably, Apple belongs in this category given its supply chain expertise, innovative manufacturing processes and ruthless focus on innovation — though Apple also demonstrates a customer intimate strategy.)
The responsive board holds management's feet to the fire on the company's top priorities, the scalability of its initiatives and its allocation of resources to core competencies and projects. It challenges management to keep things simple and fast. It asks how each given initiative is going to work with every customer, every day, everywhere. And it casts a cold eye on anything that doesn't serve the core. The responsive board typically includes CEOs who understand how to make money, directors who can read the numbers and ask detailed questions, general manager types and consultants who are operationally focused, and executives with deep industry experience. As a whole, the board is hands-on, understands where major business levers lie, and knows how to pull them.
Talent Magnet/Inspiring Board. Though it's almost a truism today that good people are a company's greatest competitive advantage, talent magnets not only believe it, but also live it. (Think Google, which was left to carry on unambiguously as a talent magnet while Alphabet pursues its portfolio strategy.) They often operate in knowledge-intensive industries but may also be found in highly operations-based companies. They focus on all aspects of talent management: recruiting, assessment, development and retention. Employees are empowered to exercise their talents, offer candid input in decisions and stretch themselves in new assignments and responsibilities. Turnover is low among valued employees and high among those who are mediocre. The real talent magnets are known for their strong employer brand, and that reputation strengthens their position in the marketplace.
The inspiring board, often found in the talent magnet company, puts people development and management high on the meeting agenda. They see ongoing CEO succession planning as one of their highest responsibilities, and because they are acutely attuned to talent risk they make sure management has best-practice succession planning in place for all key roles.
These boards are themselves magnets for talent, often including among their members “best athletes” who are known for their accomplishments and track records, though not necessarily in the company's industry. Membership may also include CHROs, CEOs and GMs with reputations for developing leaders and attracting talent. Inspiring boards are also typically diverse and its members are often active in promoting diversity in the company, working with employee resource groups and mentoring high potentials.
Obviously, no one type of board is best and, as we've noted, boards may reflect more than one type. But among superaccelerators the board's approach to its responsibilities is tightly fitted to the particular company's highly successful approach to outperforming competitors year after year. And it may not be too much of a stretch to imagine that such congruence is at least part of the reason that these companies are superaccelerators in the first place.
(Research for this article was adapted from Accelerating Performance: How Organizations Can Mobilize, Execute, and Transform with Agility, Wiley 2017.)
Bonnie W. Gwin is vice chairman and co-managing partner of the Heidrick & Struggles' CEO & Board Practice. She is based in New York. Andrew LeSueur ([email protected]) is the managing partner of Heidrick & Struggles' Leadership Consulting Practice in the Americas. He is based in New York. Jeff Sanders ([email protected]) is vice chairman and co-managing partner of the CEO & Board Practice. He is based in the firm's New York and San Francisco offices.