When the Business Roundtable publicly stated that the purpose of a corporation is, “To create value for all stakeholders,” they changed the North Star for corporate boards. The purpose of a firm is no longer simply to deliver quarterly earnings; instead, organizations are directed to have a positive impact on customers, employees and the community.
With boards (and board members) being increasingly held accountable for company behavior beyond the balance sheet, they are challenged to resist the drumbeat of quarterly capitalism, and instead, lead the company for the long-term.
I recently spoke with former Apple CEO and PepsiCo President John Sculley, who currently sits on several boards, as well as Brian Stafford, CEO of Diligent whose firm provides modern governance software to 50% of Fortune 1000 boards. These two leaders with deep board expertise gave great insights surrounding the evolution of the board, and what board members should be doing right now to set their firms up for success:
Sculley and Brown’s insights revealed three key pillars for transforming the role of corporate boards:
1. Push back against short-termism
The majority of corporate boards were built to be successful in a traditional quarterly capitalism model. Yet the data tells us, a long-term strategy driven by a customer-focused purpose produces better financial results over time than a short-term push to hit quarterly earnings targets. Brian Stafford, CEO of Diligent, concurs, noting, “The evolution towards stakeholder capitalism (vs. shareholder) allows CEOs and board to put a different framing around what the goals are. Stafford suggests, “In a crisis, it’s appropriate for a board to focus on the short-term, to ensure the survival of the firm.” However, going forward he says, “People who are long-term focused hope that when the pandemic is over, we don’t go back to the quarterly earnings sessions.”
When a board overemphasizes backward-looking metrics like quarterly earnings, margin and revenue, company leaders cascade that overemphasis downward, often with disastrous consequences. It’s been well documented that overemphasizing short-term metrics has a chilling effect on long-term strategy. Often referred to as strategy surrogation, when a metric (like new accounts added) overrides a larger strategy (like creating a differentiated customer experience) employees wind up caring more about the metric than they do the customer, i.e. Wells Fargo.
Boards, both public and private, can shift the lens from short-term internal numbers towards longer-term, market impact by being explicit about a 5 to 10 year customer-driven strategy. Stafford says, “Boards are typically good at managing to a stated strategy, a longer horizon requires that boards adjust their cadence and ask different sets of questions.” Shifting to a longer horizon requires a new lexicon and metrics.
Boards and leaders can drive this shift by focusing on leading indicators, like customer and employee engagement, two key metrics that have been proven to yield positive long-term financial results.
2. Be clear about your noble cause
John Sculley famously describes his early days as Apple CEO, sitting in the Mac engineering lab late at night, listening to conversations between Steve Jobs and Bill Gates talking about how they wanted to change the world, “These guys were talking about a noble cause. This was 1983 and I had never heard those words before. It stuck with me.”
The jaded amongst us may believe that high-minded ideals like noble cause or purpose are reserved for doctors, teachers, and non-profits. Our experience tells a different story. Giants like Apple and Microsoft aside, in our firm we’ve helped less high-profile organizations, like a commercial bank who galvanized their team around fueling prosperity for their clients, an IT firm whose franchisees’ purpose is to make small businesses more successful, and a concrete firm who is redefining their entire industry. These seemingly everyday businesses are able to leverage their noble cause because their board and senior leaders put their purpose at the center of their strategy.
It no coincidence that the pursuit of a purpose bigger than money created two of Americas most valuable companies (Apple and Microsoft). The challenge for many firms is that when there is driving noble cause at the top of the organization, leaders often struggle to cascade that sense of purpose and meaning down. Sculley says, “People become professional managers, trained to hit KPI’s.” While KPI’s are important, it’s crucial that they be framed in the service of the noble cause, not as the cause themselves.
Sculley suggests that in addition to the usual board committees, tax, audit, comp, etc. boards can also have a small group of people focused on the noble cause, and committed to driving it down into the business. Boards and leaders can start by inserting questions such as these into board meetings, and reports: How is the company fulfilling its purpose? What is our customer base concerned about? What do we think they’ll be concerned about two years from now? How are we differentiating ourselves in the market? How well do our employees understand customer’s challenges? How engaged are employees in innovating for customers?
While these may seem like leadership questions (versus board issues) experience tells us, the questions boards ask the leadership team, become the issues the leadership team drives down into the business.
3. Push for customer-driven innovation
Innovation rarely happens during board meetings. In fact, after 20 plus years in consulting, I can’t think of a single incidence where someone had a product breakthrough while looking at a quarterly report. The best innovations, those that truly disrupt the market, uncover unspoken customer needs that the competition did not.
When a board asks the CEO, “How are you going to make more money?” they (unintentionally) point the CEO and her or his team in the wrong direction. Instead of looking outward, towards customers, they tend to look inward, towards financial instruments, like stock buybacks, which have risen to record-breaking levels in recent years.
Sculley says, “Stock buybacks means you have no ideas.” While buybacks are lucrative for senior leaders, they don’t drive innovation or create future value. Instead of asking how can we make more money of our existing model, boards (and the companies they serve) can drive more innovation by asking: How can we use their funds to expand R&D, or better serve our customers? What are the unsolved problems in the market that we can address?
There will always be pressure for short-term earnings. Yet time and time again, we see that the firms who resist this pressure, who look across a longer horizon, towards a noble cause bigger than quarterly earnings, are the organizations who create lasting value.
Boards play a powerful role in shaping both the narrative and the strategic direction of the organizations they serve. We are at a critical juncture. Boards have a choice, they can succumb to the pressures of quarterly capitalism, or they can decide that their noble purpose is to create something more lasting, and ultimately more valuable.
By: Lisa Earle McLeod
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