The Board and Long-Term Value Creation

The co-chairs of the Blue Ribbon Commission Report on The Board and Long-Term Value Creation introduce the report's actionable guidance.

Phrases such as “long-term profitable growth,” “sustainable competitive advantage,” and “value creation over time” are common features in annual reports and investor roadshows. Yet companies—from the CEO and executive team to the newest hire—generally operate on a month-to-month or quarter-to-quarter basis and must be prepared to respond to events as they arise. It can be extremely difficult for management (and often for boards) to set aside immediate demands and concerns in the interest of long-term goals that might seem distant and abstract. 

In part, this is because factors encouraging a short-term focus are stronger now than ever before. Some are external, such as macroeconomic volatility, regulatory uncertainty, and an increasingly large and vocal activist-investor community. Other potential sources of short-term pressure are, however, not only within a company’s control but are directly within the board’s sphere of responsibilities, including the strategy development process; capital allocation; management incentives; oversight of corporate culture; and communication with analysts, investors, and other constituencies. Indeed, leaders from the SEC, the Delaware Supreme Court, the Delaware Court of Chancery, and institutional investors such as BlackRock and Vanguard have all commented on the board’s critical role in ensuring that company operations and business strategies promote the creation of long-term value.

We believe boards of directors have a fundamental responsibility to help management navigate today’s complex and changing business environment without allowing a “meet or beat the quarter” mentality to undermine or dilute the com- pany’s focus on long-term strategic objectives. Directors must ask four key questions: 

1. Do we have a coherent long-term strategy? 
2. How closely do our short-term actions and targets connect with that strategy?
3. Can the management team, and members of the board, articulate the connection?
4. Do current and potential shareholders have a sufficiently clear understanding of the connection to make informed investment decisions?

This report will focus on the important levers primarily within the board’s purview that can help encourage stronger alignment between short-term activities and long-term value creation:

SECTION ONE discusses the need for corporate leaders to reframe the relationship between short-term results and longterm value creation in terms of alignment rather than tension or opposition. This section goes on to illustrate what we mean by alignment between short-term activities and long-term goals, and then to highlight indicators of potential mis-alignment that are worthy of directors’ attention.

SECTION TWO outlines specific actions directors can take regarding:

• CEO selection, evaluation, and succession planning;
• discussions about strategy and performance;
• capital allocation decisions;
• incentive plan design; 
• board composition and performance assessment; and
• shareholder communications and engagement.

SECTION THREE summarizes the Commission’s ten recommendations for boards.

Taken together, the recommendations in this report have significant implications for how individual directors and boards as a whole spend their time. Directors need to be active students of the business, seeking out information from multiple sources in preparation for boardroom discussions rather than being passive recipients of data from management. And rather than being dominated by retrospective analysis of past performance, board agendas should provide adequate time for substantive discussion of long-term strategic choices, risks, and opportunities.

In addition to ideas and insights from this year’s distinguished Commissioners, the report draws on the work of several previous Blue Ribbon Commissions, mentioned in the footnotes. We encourage readers to refer to those publications for additional guidance in areas such as the board’s role in strategy, talent development oversight, performance metrics, board-shareholder communications, and more.

The question of how to encourage long-term thinking and behavior by corporations—from boardroom to C-suite and beyond—has been at the center of debates among leaders around the world for some time. We hope this report will make a useful contribution to that ongoing dialogue.

Karen Horn

Bill McCracken