2017 Directors Dialogue Synopsis
Each year the Center for Corporate Governance brings together a small group of world-renowned corporate directors to engage in candid and highly interactive discussions on key governance topics, informed by the latest research. On April 4, 2017, the ninth Directors Dialogue titled, “Defining the Future State for Boards,” built on this legacy and brought together business leaders representing over 50 public company boards.
Keynote speakers Jack Brennan, Chairman Emeritus for Vanguard Group, and Bill McNabb, Chairman of the Board for Vanguard Group, followed the event at the Directors Dialogue Dinner - attended by over 300 professionals - and highlighted the need for boards and the companies to be agile and ready to make quick decisions, and, if need be, to pivot, but always with long-term shareholder investing in mind.
Through dynamic conversation amongst industry leaders, members in attendance found new ways to think about board and company relationships and strategy.
Thinking Offensively and Defensively
When PwC’s Governance Insights Center asked over 800 public company directors what posed the greatest oversight challenge to the board, almost three-quarters named strategic/disruptive risks as one of their top five concerns.
Even if the board does believe they have a handle on spotting potential disruptors, some directors at the Directors Dialogue contended that it is not enough. Boards need to be thinking offensively as well – how can we be a disruptor? One participant urged fellow directors to look at the issue from the perspective of customers, competitors, and partners:
- Find out what customers what and what experience they are seeking
- Examine traditional competitors as well as digital natives
- Be open to the idea of partnering with companies, especially digital natives
Positioning the Board for Long-Term Success
What should boards be doing now? First, recognize that the pace of change means that strategy, disruption and technology needs to be on the agenda at every board meeting. The board needs frequent updates - not only from management, but from third party advisors who have a different view of the industry. When PwC’s Governance Insights Center asked corporate directors which type of third party advisors they have used in the past year, only about one-third said they have used external IT or cybersecurity advisors. It is time for those boards that do not engage third parties to rethink that approach.
Companies should be open to implementing an “innovation sandbox” – a space where the company can experiment on a small scale without risking its brand. By using an innovation sandbox, the company may be able to bring in unique partners and test new ideas and methods. If the experiments are successful, they could be integrated into the larger business.
Tying Capital to Strategy
Capital allocation needs to be a part of the strategic planning process from the start. Dividends and share buybacks are popular, partly because we have been in a low-grow environment since the financial crisis. When PwC’s Governance Insights Center conducted its Annual Corporate Directors Survey last year, the most common action a company took in response to investor demands was to increase its share buybacks. The second most common action was to increase dividends.
But at the Directors Dialogue, some directors shared their view that a company shouldn’t be doing buybacks or granting dividends just because shareholders are pushing them to do so. The company’s capital allocation needs to relate to and promote its long-term strategy.
Engaging with Shareholders
When companies engage with shareholders, capital allocation is nearly always on the agenda. Several directors shared that when the topic comes up, the shareholder’s question is: buybacks or dividends?
Directors need to help to change the conversation – in part because the pace of technological change is so fast. Any company not investing capital in staying ahead of the curve will soon find itself falling behind. When a shareholder wants to engage with the board about returning cash via buybacks and dividends, companies should be prepared with real data about the value creation that comes from their M&A activity. That can add a more nuanced perspective to the conversation, bringing it from a “buybacks or dividends” discussion into a wider view of the options available.
Looking Into the Future
The 2018 Directors Dialogue will be held on April 16. Details are forthcoming.