The director’s role in balancing short-term results and long-term value creation

The Board and Long-Term Value Creation is a part of the NACD Blue Ribbon Commission Report Series.  This comprehensive report’s content covers reassessing the relationship between short-term results and long-term value creation, the role of the board and recommendations.  It is worth reading as a board member to ensure that your focus is aligned with the recommendations created by 28 dedicated members of this high-level Commission, including such notable board experts as Reatha Clark King, Dennis T. Whalen, Michele Hooper, Olympia Snowe and many others.  

Creating greater alignment between both short-term activities and long-term value creation is an important role of the board.  Directors need to ensure that the CEO and management articulates this alignment effectively.  Boards have a significant responsibility to ensure that the board’s CEO selection and evaluation processes take this into account.

Board agendas should spend a fair amount of time around long-term strategic choices, risks, and opportunities.  Directors need to factor substantial preparation time into their board duties.  It is important that major capital allocation and budget decisions reflect both long-term objectives and short-term strategies.  Having a dashboard and incentive/compensation systems that reflects progress against both long and short term plans for the CEO, C-level executives and mid-level executives is important.   

The Nominating and Governance Committee needs to ensure that their process for nominating new directors to the board takes into account the long-term plans for the organization to ensure that director skills are appropriate for future needs of the entity.  Communication plans should be designed to engage stakeholders in the understanding of long-term strategic goals.

It is very easy as a director, to become focused on short-term issues that loom larger than ever before – including macroeconomic volatility, regulatory uncertainty and activist investors.   But directors need to enhance discussions on both short and long term strategy, seeking information about the organization’s business environment, it’s relative performance, emerging risks, and opportunities from sources that are both within and outside of the entity.  

When looking at succession planning questions for a future CEO, the following should be considered:

• Do we have a clear understanding of the organization’s strategy, both short and long term?
• What did the prior CEO do well and where were the major performance gaps?
• What criteria is most important in selecting the next CEO?
• Do board members have a clear and thorough understanding of the current internal and external talent?
• What issues need to be considered regarding compensation?
• What issues need to be considered for the new CEO’s onboarding and transition period?
• How robust is our current/emergency succession plan?

These 7 important questions should give everyone enough to think about in their role as a director.