Helping shareholders connect strategy and capital allocation

Communication and transparency help shareholders connect strategy and capital allocation, according to a recent roundtable of directors and investors convened by NACD and KPMG in San Francisco.

A roundtable of directors and investors convened by NACD and KPMG in San Francisco in January brought together large-company directors with governance advisors to review and advance the findings of the 2015 Report of the NACD Blue Ribbon Commission on the Board and Long-Term Value Creation.

Directors at the roundtable agreed that the board needs to ensure that management is being transparent about strategy and its connection to capital allocation. Investors would benefit from an understanding of what specific aspects of the strategy are more long-term oriented, what actions are short term, and how they are connected. Noted one director: “We have a good deal of control over long-term strategy, big capital decisions, and communicating with investors. We need to get better at all of these things.”

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Indeed, with investors sharpening their focus on how companies are deploying their capital and competitive pressures, requiring more frequent shifts in strategy and spending priorities, “it’s clear that the board has a key role to play in helping to articulate the company’s strategy for investors,” said Dennis T. Whalen, who heads KPMG’s Board Leadership Center. “Done thoughtfully, effective board-shareholder communication is also an opportunity to demonstrate that the board is actively engaged on strategy [and] understands where the company is heading and how it plans to get there.”

Attendees agreed on four priorities for directors:

  • Capital allocation
    • "Shareholders will ask management to justify the way they are deploying capital to maximize returns over time.”
    • “The board’s role is to ensure management is using the balance sheet not just to get a short-term bump in the stock price through share buybacks, but to invest for the medium and long term.”
  • Board compostition and committee structure
    • “Board succession planning is going to stay on the top of everyone’s agendas. Do we have the right people, especially in leadership positions such as committee chairs?”
    • “The board can’t put all of the action in the committees, or directors will become too siloed.”
    • “As board workloads have grown, committees have absorbed more duties to allow the full board adequate time on strategy. That’s an important priority, but one consequence is that different directors could end up with different pieces of information because so much is happening at the committee level.”
  • Talent
    • “Look beyond the CEO and C-suite when considering how the company’s talent development and compensation plan design helps reinforce long-term objectives.”
    • “The BRC report made me as a director think about how far down in the company we should be extending long-term incentives. So many key decisions get made at the middle levels of management. We need to make sure those decisions are not undermining the long-term strategy.”
    • “We need to talk to people in the trenches. Are they aligned? How consistent is the culture at lower levels of the company with what the board and senior management are emphasizing?”
    • An investor said, “We are looking at whether there is a good fit between the rising leaders in the company and the strategy that’s been articulated. How well do they match? So we hope that the board is looking at this as well.”
  • The relationship between the CEO and the board
    • “Investors are paying attention to how the CEO and board work together, or don’t work together. Do they have real conversations about strategy and building the business, or is the CEO just using the board as a compliance check?"

This article is an excerpt from “What Investors Want Now” in the May/June 2016 issue of NACD Directorship magazine.