In the sporting world, plenty of fresh-faced coaches end up fired after the failure to get results renders their long-term plans irrelevant. For businesses, the pressures may be different but there is an increasing sense that boards are too focused on the short term as opposed to having the strength of character to make decisions and investments for the future.
“Boards must be committed to working on strategy even though they may currently have a limited ability to implement it,” says Norman Bell, Group Development Director at building material supplier Travis Perkins. “The biggest danger is in taking decisions that address the short-term perspectives with which a business tends to be viewed these days, as opposed to positioning it to be fit for the growth that we all expect to be coming at some point a little way down the line…
“Making investments that pay back in a year, for example, is much harder for publicly-quoted businesses, because if you post profits that are lower than expected then your valuation is severely impacted. Therefore, somewhat inappropriately, you’re always conscious of looking at quick wins.”
This raises questions around internal and external communication, directors’ pay, shareholder incentives, the value of innovation and just how to approach strategy when many industries and the global economy continue to be in state of flux. Forcing a boardroom discussion about where the business is heading in five or ten years’ time and how to get there could easily expose weaknesses on the board.
All the more reason then to bring executive and non-executive directors together to tackle strategy head on. Vanda Murray, Non-executive Director at construction and support services company Carillion and also Chairman of alternative energy concern VPhase, comments: “Sometimes you have to take decisions that won’t pay back immediately, and if you run the company simply for the next three to six months then you can’t possibly be creating long-term value for shareholders. Everyone wants results but you can’t always deliver results today if you’re investing for the future, so boards need to be strong enough to make longer-term decisions and explain to investors why they’re taking them.”
It’s a point taken up by Roger McDowell, Chairman of clean-tech concern Alkane Energy: “A board needs to be very strong on communication as well as delivery. While we criticise capital markets for being too focused on quarterly reporting I have found that, providing you can articulate a really good growth strategy, the more forward-thinking shareholders will be patient and will understand it… but it does have to be convincing.”
Thinking fast and slow
In some ways, it doesn’t matter if a company is quoted or backed by private investors as poor performance will lead to executives being axed. “The average tenure of chief executives isn’t long and if a company gets into difficulty and the management team cannot sort it out quickly then people will be fired,” says Vanda.
Bryan Marcus, Regional Director of the South America Region for Volkswagen Financial Services, says: “What you don’t want to have is your long-term strategy becoming a strait jacket and that you’re so rigid and focused that you don’t recognise the practicalities and the pragmatic issues of the here and now.”
A well-balanced board will understand how to manage both the operational and strategic priorities. “Short-termism is a disease,” insists Richard Oosterom, Executive Vice-President of Group Strategy & Business Development at communications provider Colt Technology Services. “It is the cause of decisions that hurt the company in the longer term and it often confuses the workforce and destroys investment.”
Bryan says: “If you don’t have some kind of investment in forward thinking and are prepared to potentially lose that money, the organisation inevitably will be damaged. The company that made buggy whips and carriages probably had a long-term strategy but they didn’t foresee that the automotive industry was about to take off. You must have that long-term perspective and the capacity to adjust your business model as circumstances change.”
If the executive team are becoming too tied up in trying to hit quarterly targets and are losing sight of wider issues for the business, which does happen and is understandable, then the non-executive directors will need to step in.
Ian Harley, Criticaleye Associate and Senior Independent Director at John Menzies, a media distribution company which has also developed an aviation division, explains: “The really good boards, in my experience, are the ones which take a longer-term view of the business’s future. Yearly board evaluations are often a useful way of assessing how the board is working as a unit and whether it could perform more effectively.
“If a conventional board evaluation suggests that there’s a potential strategic gap, and the board doesn’t feel comfortable that it is driving strategy the way it should be, there may also be a place for a specific third-party evaluation.”
There is a view that companies in the UK, compared to those in Germany and the US, have become particularly bad at looking at the bigger picture. The UK’s Corporate Governance Code does specifically recommend board evaluations are conducted at least once every three years, although it’s debatable whether companies are using this as an opportunity to drive forward thinking.
It’s a complex issue and the answers are not easily found. In order to make businesses more ambitious and bold, perhaps there is an argument for quarterly reporting not being compulsory for plcs, while a suggestion that changes to shareholder rights post a takeover could help to make M&A more strategic immediately sets off alarm bells. The latter point also suggests that shareholders are to blame for faults that may well lie in the boardroom itself.
There are many directors who have been in the plc and private equity camps who insist that the latter is much better at promoting a longer-term approach. Again, there is certainly some truth to that but there are also numerous instances of private equity-backers being outrageously risk averse and lacking in ambition.
It comes back to the mix of people on the board. Is the chairman right? Do the NEDs have the insights and commitment? Are the executives up to the task and, fundamentally, do they have the support to achieve success?
Those are the questions that need to be asked.
Vanda says: “Getting a balance means having good financial management, running the numbers and understanding the rate of return and the investment criteria… [and] you should set yourself a model to balance those things that you’re going to deliver for short-term benefit with the strategic things that are absolutely must-do for the business in the longer term.”
No-one can afford to be complacent.
These days, the margin for error is just too small.