How Boards Lose Focus

Norm Augustine
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Norm Augustine, who weathered massive industry upheaval as CEO of Lockheed Martin and as director of several Fortune 500 companies, weighs in on the biggest risks facing companies right now.

Talk about a downturn. In the early 1990s, Norm Augustine, former chairman and CEO of Lockheed Martin, steered his defense company through a post-Cold War cutback that slashed its market by more than 50 percent virtually overnight. Five years later, only one-third of its peers had survived. In hindsight, the 1995 merger of Lockheed and Martin Marietta might seem like the natural response to an extreme market contraction in an industry where dominant players routinely partnered with one another, but at the time, it was anything but, says Augustine. 

“The choices were buy, sell or slowly die,” he says. “And none of them were good. The problem with buying was you were doubling down on an industry that was collapsing. Under the circumstances, selling was a great short-term strategy, but didn’t do a thing for your shareholders or for you in the long term. It was a real-world existential crisis.”

The situation ignited spirited debate within his industry about the future of the defense sector, with plenty of predictions about a new era of peace in which the need for investment in national defense would continue to wane. Augustine, however, reflected on history to make a pivotal decision about what the future would hold. “I recalled Churchill’s quotes at the end of World War I, and it was clear to me that humans were humans and were not going to learn to get along, so the long-term strategy in my view was to be a buyer,” he explains. “Over the next five years, we combined 17 companies to create Lockheed Martin. Initially, we didn’t do as well as those who took a short-term strategy, but in the long term it clearly paid off.”

In the decades since, the task of stepping away from the daily fray to read the tea leaves has, if anything, grown more challenging—yet it’s more necessary than ever. Between the frenetic pace of change, rampant disruption, rising social and political tensions, there’s plenty to distract CEOs from focusing on longevity-ensuring strategic decisions. “You have to try to stand back and look at the big picture so you don’t get eaten by the ducks of the day-to-day pressures nibbling at you,” says Augustine. 

And this, he says, is where boards play a critical role in the life of a company. “When you’re too close to the problem, it can be hard to be objective,” he says. “That’s where the value of a board with a diverse set of perspectives comes in—sitting down with people with other insights, other sources of knowledge, who you respect, and having these conversations.”

At this time of tremendous volatility and change, we asked Augustine for his thoughts on how to navigate and not get distracted by the crisis du jour. Here’s some of what he told us, edited for length and clarity. 

Investor pressure vs. strategizing for long-term survival

As CEO of Lockheed Martin, whenever I talked to a group of employees I would talk about three things. One, we will operate the company legally and ethically. Two, we will take care of our customers. And three, we will treat all people with respect. If you do those three things, it works out pretty well. We made a profit. Shareholders were generally happy. At the same time, I once spoke on Wall Street and cited those as the three principles I used in managing the firm. At the end, one of the analysts stood up and said, “You didn’t mention profit.” I said, “Well, if you do this, the profit takes care of itself.” But I don’t think I convinced anybody in the room.

Throughout my career, I always objected to the near-term focus on profit. China operates on a 20-year series of plans. Our government operates on a two-year cycle. Our companies are on a four-month cycle that causes us to not invest in research and development as we should and does not encourage training our people as we should. I’ve always thought we should take a longer-term perspective.

When I first went into the business world, the average time an investor held shares was eight years. Right now it’s five months and declining. So shareholders don’t really care what happens to you 10 years from now, when that research project really pays off. They’ll have your competitor’s stock by that time.

A long time ago, when I was CEO of Martin Marietta, we had a research lab doing fairly fundamental research, as companies did at that time. We had some really exciting projects underway, and we were excited about investing more money in those projects and about those opportunities. We sent the president of the company to give investors a briefing on the research. When he finished, the audience ran—didn’t walk—out of the room and sold our stock. The stock dropped 11 percent in four days and stayed down for a long time.

A few days later, I happened to run into one of the members of the group at the briefing. I asked him, “What did we do wrong?” He said, “Don’t you understand? Your shareholders don’t care what happens to you 10 years from now. They want to know what happens in the next quarter.” I’ll quote this precisely because I’ll never forget it. He said: “Our firm does not invest in companies with such shortsighted management.” I’m still shaking my head. That’s a fundamental issue. 

Getting smart people in the room

You’ve got to pay attention to what’s going on outside the company, what your competitors are doing and what’s going on outside your industry. There are so many examples of that. Looking at the set of encyclopedias I’ve got in my library here, who in the encyclopedia business ever thought that some guys—Bob Noyce and Jack Kilby—messing around with electronics were going to come up with the idea of a microcircuit and drive them out of business? 

One of the responsibilities of the CEO and the board is to bring in perspectives about the world around you. We did that at Martin Marietta. We did not foresee Russia collapsing. I wish I could say we did, but we didn’t. But we could see Russia spending a lot less on defense, so we were looking at a hard period of time and thinking, how do we get ready for it? 

One of the things we did was to get the management team together, just the very key people—the CEO, COO, CFO, president and the person in charge of mergers and acquisitions—and get out of the headquarters. We went down to my basement actually, to sit around a table. We invited people from the outside who were specialists in other parts of the world, and we’d sit there and just visit with them for the afternoon for very candid, off-the-record conversations. These were academics, people from Wall Street who specialized in a particular industry, book authors. And we learned so much from them. 

Then we would invite the ones who were really outstanding to brief our board. It exposed the board to some of the stuff that we thought was pretty provocative and interesting—it was very refreshing for all of our minds. So when the Berlin Wall suddenly collapsed, we hadn’t predicted that, but we were predicting a tough time and were ready for it. We were pretty well prepared to deal with what happened. 

Defining the board’s role

Back when your objective was to maximize shareholder return, not specifying how long or over what period, being on a board was simpler. When your objective is to take care of your employees, society, communities and your shareholders, that exposes you to risk from a lot more directions. The opportunity to make mistakes is greater. 

One of the problems that I observed occurring occasionally was board members who have a single perspective or viewed themselves as representing a given point of view. For example, I’m the environmentalist, the banker or the scientist on this board. You need people who are willing to look outside of their own profession, their own specialty, and represent the company and its stakeholders as a whole entity. The key is to build the right board in the first place that can deal with these broad existential issues that are coming up more and more today, not one made up of all bankers, lawyers, engineers or whatever.

The amount of regulation that impacts board members has also grown enormously. And as a result, it’s going to get more difficult to attract the kind of people you want for the role and be more difficult for the boards to focus on strategic issues they should deal with—who should run the company, should we make this investment, and so on—instead of the day-to-day problems. 

A board’s purpose is not to manage the company, it’s to see that the company is managed well. So when boards drift into daily management, that doesn’t usually work out well—except for their competitors. It works out well for them.

Looking for opportunities

This is a time of enormous change and opportunity. Just like when the Berlin Wall fell and the defense budget collapsed, that was a time of great opportunity. We could never have built Lockheed Martin in normal times. Prior to the Berlin Wall falling, to buy an aerospace company, you had to pay about a dollar per dollar of sales. After the Berlin Wall fell, it dropped to 25 cents on the dollar per dollar of sales. So it was a great opportunity, also a great risk. 

Now is a time of great change in so many areas, more areas than usual at any one time. People forget Russia has the population of Mexico. It has the GDP of Spain. Why is it such a big power? The answer: it has 1,650 deployed nuclear warheads. I think it was John McCain who basically said, Russia is a filling station with nuclear weapons, which is really true. Its government gets over half of its income from oil that it sells. Russia is in a very precarious position and hopefully doesn’t do something really stupid. Russia is on its way down. 

China, on the other hand, is still on its way up. What China has accomplished in the last 20 years I would argue no other country has even approached. They invest heavily in research and development. They’ve moved more people into the middle class in the last few decades than there are Americans altogether. They’ve got plenty of problems. They’ve got a problem of an aging population. They’ve got a lack of innovation. They’ve got subsets of their population that are not very happy. Their population is going to diminish substantially in the next half century, three-quarters of a century. They’ve got plenty of challenges. They also have the challenge of any dictatorship, that if the dictator gets it wrong, the whole thing goes off the cliff. Whereas hopefully, with our checks and balances, it’s less likely. 

I’m often asked if I’m an optimist or a pessimist, and I answer that a pessimist is a person who wants to be an optimist but has a knowledge of the facts. I used to put myself in that category. But I just finished reading a little book that used the word “possibilist.” Now I like to think of myself in that context. What’s possible here? What might we be able to do, and how do we do it?

And I think the possibilities are great. Throughout our history, anybody who studied history knows we’ve had great challenges. Just in my lifetime, I was born in the Great Depression, saw World War II, the Korean War, the Vietnam War, the Cold War, economic collapses, environmental issues. There have always been problems, but it seems like we have a particularly broad set of them right now. And it’s important we get it right. I happen to think that the business world, America’s economy, along with its freedom and democracy, is the heart of what we have. Our economy supports education, our economy supports national security, and supports the quality of life of our citizenry. So we have to have a strong economy, and that’s where business and the free enterprise system come in.

We have an enormous advantage in that regard. If you’re a China, your closest allies are North Korea, Iran and, putatively, Russia. How do you like that? Incidentally, they’re 17 percent of the world’s GDP combined. If you just take Europe and the United States, that’s about 50 percent of the world’s GDP. If we can get together with our allies, both in business and government, we should be quite optimistic about what we can accomplish.  

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