They knew and felt that before they attended the recent Directors' Forum in Dallas, but the directors in attendance were made clear their situation and responsibilities by Leo E. Strine Jr. during one of the forum's sessions. Director magazine and the American Institute of Corporate Directors conference.
“Corporations exist forever, they don't get the death penalty, they don't go to prison,” says Strine, a former chief justice of the Delaware Supreme Court and now a corporate lawyer. “Corporations have immunities and privileges that exceed those of humans, so instead they should be good corporate citizens. And what is the concept of good corporate citizenship that we can all get behind? It's making money the right way.”
The focus of the two-day annual event was guiding companies to profit the right way. Here's what Directors Forum attendees heard and discussed:
M&A: New Rules of Engagement
Over the past two years, Myrna Soto has been involved in 11 M&A transactions as a director, one of which ended in complete failure.
As a director of CMS Energy, TriNet and Popular, as well as other companies, Mr. Soto has overseen the execution of deals that seem to be working. But he also sits on the board of Spirit Airlines, whose proposed $3.8 billion merger with JetBlue Airways was blocked in March by a federal judge who said the deal would harm consumers who rely on Spirit's low fares.
Drawing from these dozens of experiences and more, Soto has compiled this advice for other directors about entering the M&A field:
Deal with the negativity. Directors should examine the key assumptions of the deal logic, says Soto, who has experience running successful mergers as an executive, including Comcast's acquisition of NBCUniversal in 2013. “Every integration cost you hear in the boardroom, you double it in your head,” Soto says. “And then if it was going to cost twice what you were told, would you still do the deal?”
“Even if it's a simple transaction, I [director] “We need to think, 'If this fails, what does that mean for us?'” she added. Directors need to “pressure test” the proposed deal. “If we ignore the synergies entirely, would we still consider the deal because history has shown us that they don't all materialize and may even be slightly negative? [deal] How can it be positioned as an asset to our strategic business?
Take confusion into account. “If you did nothing, figure out what your revenue growth rate is on assets alone. And what about the efficiency of your operating expenses and their margins? Anything less is a big red flag.” [a merger] “They're going to be disrupted no matter what. The company may be growing at a tremendous rate, but if they get acquired, there's going to be disruption.”
Admin skin required. Soto is urging boards to build performance targets into deals that are directly tied to executives' short-term and long-term compensation, because “in many deals in the past, companies have only gotten about 30% of what they expected,” he explained.
Dig into employee emotions. Given that talent is an increasingly important asset in the knowledge age, directors need to understand the employee retention outlook for their target companies. “At one company we acquired, the board said, 'I know you run an employee engagement survey, we'd like to see the results,'” she says. “The results were interesting because they gave us some metrics. Then we wanted to hear the raw comments from employees, which provided insight into the sales organization and the culture of the organization.”
AI Uber Ally
It's hard to overestimate the impact generative AI will have on the future of the enterprise and, ultimately, on boardroom deliberations, argue Florin Rotal, Avanade's chief AI officer, and Tariq Shaukat, a director at Public Storage and Gap and co-CEO at Sonar. “Every company will be using generative AI in some form, even if they don't realize it,” Rotal says. “The vast majority of companies will be doing their own GenAI.”
In preparation, board members should be aware of three ongoing developments:
AI education is more important. Rotter said navigating GenAI “will be much more important than knowing how to search the internet, and as important as knowing how to read and write,” “and it's not something that everyone can do naturally. As industry leaders and executives, we should be focused on making sure all of our executives are AI-savvy, and we shouldn't outsource AI.”
Regulation is moving fast. “There are very specific and strict guidelines [coming from governments] “There are debates about what is and isn't allowed, and a very large grey area,” Rotter said. “The EU regulation will become mandatory in about two years. Other developed countries will do the same. It's inevitable.”
Legal issues are emerging. “The entire GenAI industry is built on copyright theft on a grand scale. Whether a court would agree is another matter,” Shaukat said. “How can your company be confident that it is not infringing copyright? Every company should have an acceptable use policy. There are legal and representational risks.” [that] It could ruin your reputation as an ethical company.”
It's a question of opportunity. “When we get caught up in risk aversion, we can't really focus on opportunity,” Roter says. “This has the power to help us as humans. [with] “The way out of poverty, education, healthcare, financial responsibility, etc. is to thrive, grow and do things in business that you never thought possible — exponentially increasing what's possible in terms of growth and flexibility.”
Three questions about climate change
Board members may be tired of hearing about climate change as an ESG topic, but they need to get ahead of the reality of how changing weather patterns pose risks and opportunities for their companies, agreed panelists at a session on climate resilience moderated by Teneo Managing Director Kenzie Biggs.
“There needs to be a lot more emphasis on a balanced approach,” said Korab Zuka, vice president of corporate affairs, purpose and ESG at Bristol-Myers Squibb. “It's easy to sit down and come up with the three biggest climate risks and start talking about there being catastrophic risks to companies and corporations. [But] Also, encourage discussion about opportunities for your organization.”
He and Sam Holloyd, a director at Code Energy and Amerant Bank, suggested that directors’ approach to climate resilience should include three questions: What is the best way to protect our planet?
How do you balance importance with risk? “When we look at this, we have to keep the importance in mind,” Holloyd said. Zuka agreed: [management has] “We need a clear plan for how we tackle key issues, including climate. We need to move from wishful thinking to action.”
But Zuka noted that the board “has to have an honest discussion.” [about] Risk tolerance. You're not going to be able to mitigate everything. You name 100 risks and you're going to talk about eight. What are you going to do to mitigate them? [list]• Define your desire for it.
How do you keep up? “We held focus groups at the board level. [climate change] “You need to cover the topic regularly and stay up to date on all regulatory changes,” Holloyd said. “Speak to industry experts at board level, not just your management team.”
Zuka said the board should “bring in outside speakers” and include climate change competencies in its requirements for future directors: “Today it's a nice-to-have, but that skill set will become a must-have.”
How do politics affect things? Holroyd noted that European regulators have gone further in requiring companies to document the climate impact of their activities than the United States, where the future of such regulations will be decided in a federal election this fall.
But, Czka said, directors should “not be ultra-liberal in a Democratic administration or ultra-conservative in the event of a potential Republican administration, but rather focus as an organization on the issues that matter most to the business and advance those in a clear and consistent way.”
Five lessons for 2024
On leadership:
“The key is to listen to everyone and make sure that everyone is making intentional decisions to move in the same direction. Align the CEO with the board, the board members, the CEO with the executive team, and make sure that trickles down to the bottom so that everyone understands where the company is going, why it's getting there, and how they can contribute.”
—Karel Zanderna, former CEO of Flexsteel and board member of Cibo Vita and Soteria Flexibles
About Professional Membership:
“You can't fill your board with one-thing people. You need generalists who can make decisions, understand the problems the organization faces and move forward from there.” [You] Perhaps consider adding a cybersecurity expert to your board of directors. [for example]But that doesn't absolve other directors from not understanding the risks that cyber poses to their organizations. They shouldn't be forced to do that.”
—Amy Rojczyk, Director, BDO US Corporate Governance Center
Diversity on board:
“One of the most important things about having a board of directors is diversity. Not gender or color, but diversity of thought.” [You] “You don't want everyone to come from the same background. People bring different experiences and intelligence to the table. If you have a board culture that acknowledges that everyone has a different background, but still has a pathway for everyone to come to the table and start the dialogue and the conversation, that's magical.”
—Nina Vaca, Chairperson and CEO of Pinnacle Group and Director of Austin Industries, Cinemark and Comerica Bank
Regarding cultural supervision:
“The workplace should be like Thanksgiving. It's a workplace with a crazy uncle. We talk about football games and how good the cornbread stuffing is. We've been watching the crazy uncle for so long that we understand his humanity and realize he has blind spots and we have blind spots too.”
—Leo E. Strine, Jr., former Chief Justice of the Delaware Court of Chancery and counsel to Wachtell Lipton
Rosen & Katz
About Executive Coaching:
“If I were to become a coach, [a CEO]Not only do you have to understand their situation, but they have to know that you are learning about them. If I, as your coach, can be a surrogate for what you are trying to do in your situation, it has a much better chance of being helpful to you. [This] It's not something you see all the time.”
—Matt Paese, Senior Vice President of Leadership Insights at Development Dimensions International
Are you pricing it right?
Companies can be reluctant to raise prices amid high interest rates and inflation. But boards need to work with management to avoid falling into that trap. “The value axis is shifting,” advises Adam Echter, partner at global consulting firm Simon-Kucher. “Customers need to know how much more valuable your product is today. How well does your value communication keep up with price perceptions? In many cases, this axis has moved more than the rate of inflation, making the case for a price increase much better than it would be in many other cases.” [of your] This is how salesmen think.
Echter stressed that “pricing is all about segmentation,” and that the board can “test success by creating new packages or structures that justify jumping the threshold.” [to] “Take people there, and then to the next destination after that.” Packaging additional amenities and services into the base price is one great way to do that.
Another is to move services “from a cost item to a line item,” such as an industrial-services company adding a “site surcharge” to its invoice that previously absorbed the expense. With any pricing strategy, executives themselves “need to check the market,” which means asking management how to improve monetization and talking directly to customers. “You can't create a pricing strategy without talking to the market,” Echter says.
