In an environment of increasing global competition, constant technological innovation, and greater shareholder activism, public company CEOs who partner with hands-on, active board members can better drive equity value creation.
Board members spend a significant amount of their time on governance and oversight — e.g., approving budgets, choosing auditors, reviewing operational and financial processes and controls, determining executive compensation, developing CEO succession plans, and ensuring proper SEC disclosure. While these tasks are critically important to the proper functioning of the corporation and the protection of shareholder interests, board members and CEOs should dedicate more of their time collaborating directly on strategic and tactical issues.
By partnering with their board members to develop business strategies, create key performance indicators, explore M&A opportunities, and optimize investor positioning, CEOs expand the intellectual and professional resources available to the company to address critical corporate goals. In addition, for small and mid-cap companies, which generally have a more limited management bench, board members can extend the analytical bandwidth of the company and assist the CEO with long-term or bespoke strategic projects which, at times, are crowded out by nearer-term priorities.
Valuable assets
Board members who are willing to devote the time and effort to deeply understand the operational aspects of their businesses become valuable assets to the CEO and the company. Board members who, for example, attend internal product training sessions, sit in periodically on executive staff meetings, observe the customer sales process, and attend trade shows and investor conferences are better able to synthesize and report relevant information and insights back to the CEO and the board, thereby improving corporate decision making.
Some may question whether this hands-on board member approach threatens board independence and crosses the bright line between board and management responsibilities. While independence and objectivity are critical for nonexecutive board members to fulfill their fiduciary duties, I would argue that many board members are too removed from the facts, details and context of important strategic decisions.
For example, it is not uncommon for board members to receive board materials a few days prior to the board meeting and be expected to offer value-added feedback and to approve key decisions based on a relatively brief review of the information. Given that management has likely worked on the analysis for weeks or months, it would seem more logical for the board to be involved from the outset in the evaluation and analysis process rather than just in reviewing the finished product.
Deeper understanding
When CEOs partner with their board members from the outset of the strategy development process — be it technology, product or go-to-market strategies — both groups gain a deeper understanding of the risks and opportunities of the business and board members can contribute more constructively to the strategy development and its implementation. This deeper and more frequent level of involvement helps board members better assess the viability of such strategies and allows them to better support the CEO if modifications, mid-course corrections, or wholesale changes are required.
As an active board member, I have experienced firsthand how this type of board involvement enables more nimble and effective decision making. In one prior board situation, I was asked to serve on a strategy committee that was tasked with working with the CEO to develop a go-to-market strategy in a new segment of our business. After working for several months with an outside consultant and internal resources, we finalized a plan that was accepted by the board. However, within a few months of the plan's implementation we found that our product was gaining greater traction in an adjacent market which we had not originally anticipated and which had longer-term strategic benefits to us.
It became clear to me, my fellow committee member, and the CEO that the best move for the company would be to immediately modify several aspects of the original plan and go aggressively into this adjacent market. The fact that I and another board member had participated in the development of the original strategy gave the CEO and the broader board the confidence to disregard several aspects of our accepted plan and shift rapidly in a different direction. As independent directors, we felt no pride of authorship to stick to our original plan in the face of new information; and, of equal importance, our CEO had the support from the two of us to reverse several aspects of what he had previously recommended.
The right move
While the decision to make a rapid mid-course correction in light of changing facts may seem like ordinary course business for any well-functioning board — regardless of who developed the strategy — the fact of the matter is that for a CEO to argue for a change in a strategy that he/she just put forth and gained acceptance on can be difficult. Further, board members who were not intimately involved with the strategy development might be more inclined to hedge the decision or give the accepted plan more time to play out before making a rapid change. In our case, the quick decision allowed us to establish a key position in a new market ahead of our competition and create long-term competitive differentiation.
This hands-on board approach to working with management is standard operating procedure in the private equity industry. As corporate owners, private equity firms staff boards with experienced professionals who work closely with management on a number of key projects that drive near- and long-term value creation. This type of board member is called an operating partner and he or she assists management on a range of operational, strategic and financial issues.
But why is this approach less relevant for public companies? Shouldn't public company CEOs be afforded the same support and assistance that private equity-owned companies provide? My view is that this “public company operating partner” approach to board membership can significantly improve company performance. Board nominating committees should seek out hands-on, strategic board members who can play the role of public company operating partner; shareholders should expect their board members to play a more active role in shaping — not just reviewing and approving — key decisions; and CEOs should demand more active board participation and leverage more directly their board members to help them drive equity value creation for shareholders.