It is not in dispute that the role of the board of directors is to provide oversight of management and advise on the strategic direction of the corporation. However, the delineation of roles and responsibilities between management and directors in setting corporate strategy can often become blurred.
In collaboration with The Boston Consulting Group and RBC Capital Markets, we have released a paper offering a fresh perspective on an enhanced role for the board of directors in value creation and setting corporate strategy. We recommend that board members should engage regularly with management to critically examine value creation alternatives with the same scrutiny that an investor in the company would, and then pursue the corporate strategies that generate the greatest shareholder value. Such collaboration has the potential not only to unlock shareholder value but also to equip management teams and boards to respond more effectively to criticisms from the investor community and defend the company’s course of action.
We believe that directors who take a strong role in overseeing shareholder value creation can be powerful allies of the management team. Board members have the depth and breadth of experience that make them well suited to serve as thought partners with senior management by challenging their assumptions and offering innovative ideas on strategy. In addition, given that directors are removed from day-to-day operations, they can offer a fresh perspective on the company’s approach to value creation.
Board or committee?
The board as a whole can increase its engagement with value creation or the company can form a committee of board members with oversight responsibility. The oversight activities and the nature of the interaction with management should be analogous to the role played by members of the audit committee with respect to financial matters. Board members must understand the value-creation alternatives available to the company and be comfortable with the specific opportunities that management recommends pursuing. To ensure that board members can provide effective oversight, the management team should rigorously evaluate and clearly present the company’s value-creation alternatives and be receptive to the board’s guidance. We have prepared a sample charter setting out the mandate for a value-creation committee that outlines key activities for directors undertaking this role.
Full suite of strategic alternatives
Directors should require senior management to evaluate and present the full suite of alternatives for creating shareholder value. These options might include M&A activities or divestitures, significant investments to accelerate organic growth, cost reductions, alternative capital strategies, or transformational programs. Board members should be sufficiently engaged to understand the sensitivities, risks, and opportunities related to each such option. In applying the insights and input gained from its collaboration with management, the board should encourage bold moves to transform the company’s stand-alone operational performance.
Impact on TSR
A clear view is needed of what a company’s basic strategic plan will deliver in terms of total shareholder return (TSR) if executed successfully. Consideration should also be given to how the company’s various capital and transaction alternatives would affect TSR and how those returns compare with internal and market expectations. Management and board members can apply this evaluation to defend the company’s chosen strategy as the best option to unlock long-term shareholder value.
A useful source of insight for the board and management in evaluating strategic moves that the capital markets will reward is seeking an understanding of how the research and investment community values the company as a whole. For example, is a sum-of-the-parts valuation approach applied and, if so, does the company trade at a discount to its intrinsic net asset value? Investigating how management’s opinion about the company’s valuation differs from that of the research and investment community can provide a critical input in setting a strategic course.
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