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Visionary Board leadership. Stewardship for the Long term.

What are the areas where boards need to focus on to help the company increase its long-term value?

In this post we will comment the article by the CFA Institute “Visionary Board leadership. Stewardship for the Long term”, by Matthew Orsagh, CFA, CIPM. (1)

They try to describe Visionary Directors: directors that are “committed to working with management to make a company successful in the long-term”. In other words, a Visionary Director does not allow for “corner-cutting strategies to meet fleeting short-term expectations”. Directors, (if properly embedded in visionary boards) strengthen leadership and foresight to fight against the short-termism reigning in the boardroom.

There are some areas in which a director can make a difference; (i) for instance, if he/she develops and appropriate role in strategic planning and oversight; (ii) if they correctly define the risk appetite of the firm, if they ensure an Enterprise Risk Management system is in place and they oversee its execution; (iii) if they establish Compensation systems that push employees and managers to long-term value creation; (iv) or if they define the correct long-term culture of the firm.

Nevertheless, we will focus in two other areas where directors can help firms to have a stronger view on long-term value, and that sometimes are not so well depicted:

  1. Quarterly Earnings. A visionary board expects management to deliver enough information on the long-term value drivers for the company. In order to push management to do that, they mainly:
    1. Provide support so that everybody focuses in the long-term strategy and its execution, (avoiding to engage in the Quarterly earnings game).
    2. Help oversee the guidance process.
    3. Evidently look for additional sources of information, (other than the managements packages and feedbacks).

Sometimes companies waste too much time and resources giving guidance for the short-term, (next quarter). It may be a result of boards being committed to give feedback on earnings to investors; that is, boards act controlling the earning message, or passing the correct messages to analysts so that they correctly value the company. Visionary boards help companies move to more long-term guidance, through the correct metrics and ranges that reflect long-term goals and strategy. How do they do that? Let`s see:

a)      First, they need to ask for more information than EPS, or quarterly earnings;  long-term goals should more often be confronted with facts.

b)      Moreover, they need to listen carefully to earnings analysts calls, (both their firm`s ones and their competitors`s ones). Reading analysts reports should also let them better understand the market and the investor community`s perception.

c)      Finally, choosing the kind of investor you want and adapting the message to this one is critical in an era of impatient capital. This contact must be held in an ongoing basis, not just when the company faces tough times.

  1. Shareowners` communications. A visionary board ensures there are constantly open, diverse, appropriate lines of communication between board (or the designated directors) and investors, it works with management to enlarge the opportunities for discussion and enhances the use of all valuable inputs out of these conversations. These conversations should avoid day-to-day matters and be mainly focused on long-term aspects; directors should mainly hear what shareowners have to say and ask, and answer only when it is appropriate. As a consequence of recent rules granting more power to shareowners, communications have become decisive in many aspects of corporate law governance, (just think of the vote on compensation as a tool in the hands or shareholders to punish board and management for whatever reason that a conversation could have raised in advance).

The board should have a Communication Plan, that sets who is responsible for communicating what; the lead director may the one designated, or perhaps he could just coordinate all conversations; sometimes the subject could recommend to name another person. Boards also need to jointly work with the Investor Relations department so as to assure that big and stable investors are engaged, and they need send the message that the board “wants to hear from them”. Particular meetings can be held with investors, or groups of smaller investors. Besides, these governance calls or meetings need to be held separated from analyst calls or other meetings. Meetings can give broad access if held virtually. The Proxy statement should be considered part of this, so that long-term, forward-looking disclosure, is included.

As the author concludes, “by focusing on what is important over the long-term, Visionary Boards can also ensure more enduring and sustainable value creation for shareholders”.

(1) CFA Institute “Visionary Board leadership. Stewardship for the Long term”, by Matthew Orsagh, CFA, CIPM. http://www.cfainstitute.org/learning/products/publications/ccb/Pages/ccb.v2012.n3.1.aspx

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