They knew it and felt it before they arrived at the recent Directors Forum in Dallas, but the board members who attended had their situation—and their responsibilities—put plainly to them by Leo E. Strine Jr. in one session of the Corporate Board Member magazine and the American College of Corporate Directors conference.
“Corporations have eternal existence; they can’t get sentenced to death, they don’t go to prison,” said Strine, former chief justice of the Delaware Supreme Court and now a corporate attorney. “They have immunities and privileges that go beyond those of human beings. So, in exchange, they should be good corporate citizens. And what is the concept of good corporate citizenship that we can all get behind? Making money the right way.”
Leading their companies in making money the right way was the focus of the two-day annual event. Here’s much of what Directors Forum attendees heard and discussed:
M&A: The New Rules Of Engagement
Over the past two years, Myrna Soto has been involved in 11 successful M&A transactions as a board member—and one that was an unmitigated disaster.
As a director of CMS Energy, TriNet and Popular, as well as a member of other company boards, she observed the execution of transactions that seem to be working out well. However, Soto is also on the board of Spirit Airlines, which in March saw its proposed $3.8 billion merger with JetBlue Airways blocked by a federal judge who said it would hurt consumers who depend on Spirit’s lower fares.
From those dozen experiences and others, Soto distilled this advice for fellow board members about wading into the M&A arena.
Deal with the negatives. Directors need to examine key assumptions for deal logic, says Soto, who participated in successful mergers such as the 2013 acquisition of NBCUniversal by Comcast during her executive career. “Any integration cost that I hear in the boardroom,” Soto said, “I double in my head. Then, if it costs us twice as much as what we’re being told, would we still do the deal?
“Even in a straightforward deal, I’d encourage every [director] to think, ‘If this blows up, what does it mean for us?’” she added. Directors need to “pressure test” proposed deals. “If we completely ignore synergies—because history has shown that not all will come true, and they may even be marginally negative—would we still look at this [deal] as an asset to our strategic business?”
Factor in disruption. “Understand the top-line revenue growth of the asset alone, if you did nothing. And what are the efficiency ratios around operational expenses, and their margin? Razor-thin numbers are a big red flag because [a merger] will disrupt them no matter what. That company could be growing at a tremendous pace but when acquired, there will be some disruption.”
Require management’s skin. Soto urges boards to attach performance objectives to a deal that are directly related to management’s short- and long-term compensation. “Because many deals have been done in which companies only got about 30 percent of what they expected,” she explained.
Dig into employee sentiment. Given the increasing importance of talent as an asset in the knowledge age, directors need an understanding of a target’s employee retention prospects. “For one company we purchased, the board said, ‘We know you do an employee engagement survey; we would like to see those results,’” she said. “It was interesting because those results gave us some indicators. Then, we wanted to see verbatim comments from employees, which provided insights into the sale organization and the culture of the organization.”
AI Uber Allies
It’s difficult to overestimate the impact of generative AI on the future of corporations and, therefore, on board deliberations, argued Florin Rotar, chief AI officer for Avanade, and Tariq Shaukat, board member of Public Storage and Gap and co-CEO of Sonar. “Every single company will be consuming generative AI in some form, even if they don’t know it,” said Rotar. “The majority will do their own GenAI.”
In preparation, board members should be cognizant of three developments under way:
AI education is more important. Manipulating GenAI will become “much more important than knowing how to search the internet, and as important as how to read and write,” Rotar said. “And it doesn’t come naturally to everyone. As industry leaders and board members, we should focus on everyone the board needs to be literate around AI and not outsource it.”
Regulation is coming quickly. “There are very specific and very serious guidelines [coming from governments] around what will be permitted and what won’t, and a huge gray area,” Rotar said. “The EU’s regulations will become mandatory in about two years. Other developed countries will be doing the same thing; it is inevitable.”
Legal issues are emerging. “The entire GenAI industry is built on massive copyright theft; whether courts agree is a different question,” Shaukat said. “How does your company determine with certainty that you’re not violating any copyright? Every company must have an acceptable-use policy. There is a legal and representational risk [that] can ruin your reputation as an ethical company.”
It’s about opportunity. “If you get buried in the risk-averse, you’re not truly focusing on the opportunity,” Rotar said. “This thing has the power to help us as humans [with] poverty or education or health care or financial responsibility, and in businesses to thrive and grow and do things that you couldn’t have imagined to do. Leapfrog the possible around growth and flexibility.”
Three Questions For A Climate Of Change
Board members may tire of hearing about climate change as an ESG topic, but they need to get ahead of the realities of how changing weather patterns pose risks—and create opportunities—for their companies, agreed panelists in a session on climate resilience moderated by Kensey Biggs, a managing director at Teneo.
“Focus more on a balanced approach,” said Korab Zuka, vice president of corporate affairs, purpose and ESG for Bristol Myers Squibb. “It’s easy to sit down and come up with your three biggest risks around climate and start talking about catastrophic enterprise or corporate risk. [But] also push your organization to start talking about things that are going to be opportunities.”
He and Sam Holroyd, board member of Chord Energy and Amerant Bank, suggested directors’ approach to climate resilience include these three questions:
How do you balance materiality and risk? “Materiality needs to be front of mind as you consider this,” Holroyd said. Zuka agreed, adding, “Make sure [management has] a clear plan in terms of how material topics including climate get addressed. They need to move from wishful thinking to action.”
But, Zuka noted, boards “must have an honest discussion [about] risk appetite. They’re not going to be able to mitigate everything. They’ll come up with 100 risks and talk about eight. What are you going to put into mitigating that [list]? Define your appetite for that.”
How do you keep up? “Create a focus group at board level who says we’re going to talk about [climate change] topics regularly and keep abreast of all regulatory changes,” Holroyd said. “Talk to industry experts at the board level, beyond the management team.”
Zuka said boards should “bring in external speakers” as well as include climate-change competency among criteria for future board members. “Now, that’s a nice-to-have, but we’ll see that skill set become a competency that’s required.”
How will politics affect things? Holroyd noted that European regulators are ahead of the U.S. in requiring companies to document the effects of their activities on climate. In this country, the future of such regulation hangs in the balance in this fall’s national elections.
But, Zuka said, directors should “focus as an organization not on becoming super-liberal when there’s a Democratic administration or super-conservative in a potential Republican administration but on topics that matter most to your business, and drive them forward in a clear and consistent way.”
Five Takeaways For 2024
On leadership:
“It’s about hearing people so you know you’re all deliberately deciding to go in the same direction together, making sure the CEO and board are aligned, the board members are aligned, the CEO is aligned with the leadership team and that it penetrates all the way down, so everyone understands where the company is going, why you’re going there and how they can contribute to that.”
—Karel Czanderna, Former CEO, Flexsteel; Board Member, Cibo Vita and Soteria Flexibles
On specialist members:
“You can’t have a board full of one-trick ponies, but generalists who can make decisions and understand the issues facing the organization and move on from there. [You] might consider having a cybersecurity expert on the board, [for example], but that doesn’t excuse the rest of the directors from understanding the risks that cyber poses to the organization. Don’t pawn it off.”
—Amy Rojik, Director of the U.S. Center for Corporate Governance, BDO
On board diversity:
“One of the most important things on a board is diversity. Not gender or color, but diversity of thought. [You] don’t want everyone to have the same background. People bring different experiences and intellect. It’s magical when you have a board culture where everyone recognizes different backgrounds but we have all earned our way to the table, and to open dialog and conversation.”
—Nina Vaca, Chair and CEO, Pinnacle Group; Board Member, Austin Industries, Cinemark and Comerica Bank
On overseeing culture:
“The workplace should be like Thanksgiving Day. With the crazy uncle. You talk about the football game and how good the cornbread stuffing is, and because we’ve seen the crazy uncle over time we appreciate his humanity and see he has blind spots, and we see we have blind spots of our own.”
—Leo E. Strine Jr., Former Chief Justice, Delaware Chancery Courts; Counselor, Wachtell, Lipton,
Rosen & Katz
On executive coaching:
“If you’re going to coach [a CEO], you not only have to understand their context, they need to know that you’re learning about them. If I, as a coach, become an agent for what you’re trying to do in the context you’re in, I stand a much better chance of being useful to you. [This] isn’t something you always see.”
—Matt Paese, SVP of Leadership Insights at Development Dimensions International
Are You Pricing Right?
Companies can be cowed into passivity about increasing prices amid high interest rates and inflation. But boards need to work with top management to avoid falling into that trap. “The axis in value has shifted,” advised Adam Echter, partner at the global consulting firm Simon-Kucher. “The customer needs to see how your product is more valuable today. How have your value communications kept up with the perception of your price? In a lot of cases, this axis has moved a lot more than the rate of inflation, and the case for raising prices is a lot better than many [of your] salespeople think.”
Echter stressed that “everything about pricing is about segmentation” and boards can test for success by “creating a new package or structure that justifies jumping over a threshold [to] get people beyond that, and then hit the next one and the next one.” Packaging of add-on amenities or services to a base price is one great way to do that.
Another method is flipping a service “from a cost item to a line item,” such as an industrial-service company adding a “field surcharge” to an invoice that used to swallow the expense. In any pricing strategy, board members themselves “should be checking the market.” That means asking top management how they can monetize better and talking with customers themselves. “You can’t write a pricing strategy without having talked to the market,” Echter said.
