A great deal has been written about the shortcomings of corporations, with fingers pointed in all directions: CEO and executive self-enrichment, “tweaking” the rules of the game for the benefit of insiders and focus on short-term performance at the cost of longer-term health. Often, the failure is not one of operating performance. In fact, successful near-term operating performance may be masking the greater failure: not building long-term, sustainable value that adds jobs, creates wealth at all stages of the value chain and addresses real challenges confronting society.
Put another way, companies that appear to operate effectively in the short-term, checking all the compliance boxes, may be our worst performers when measured against such fundamental factors as purpose and building long-term value for the benefit of all its constituents, including customers, shareholders and, ultimately, society. Many boards of directors have fallen into the trap of believing their primary role is one of ensuring compliance; they look backward, not forward, and don’t spend enough time on matters of strategy and direction.
The problem, of course, is shared. Some CEOs operate without vision or strategy and with short-term results in mind; short-term institutional investors are more interested in a quick stock price gain and subsequent exit than longer-term success; and boards of directors focus primarily on the compliance checklist.
To be clear: Overseeing operations in order to ensure that proper laws, regulations and good-governance guidelines are met is important and are clearly part of understanding and executing fiduciary duty. However, a board of directors also needs to understand and balance the risks of the business; ensure the company has a clear purpose, direction and set of goals, as well as a strategy to realize those goals; and establish metrics to assess performance and hold management accountable.
In short, boards of directors need to allocate more time and give a more active focus on purpose, goals, strategy and metrics.
Purpose is foundational: It states a company’s reason for being. Purpose should not be diminished by being stated from the perspective of investors “to maximize value for shareholders.” It should be defined in the context of a contribution to society or to customers. Without a worthwhile purpose, there will be no customers to serve and no business to run.
A company must have clear goals – both a long-term vision and shorter-term operating goals. Employees need to judge whether they want to work for the company, and investors need to know whether they want to invest. Furthermore, by establishing clarity around goals, a company puts in place a rationale for making tradeoffs and operating decisions.
Strategy is how you get there from here. Strategy links operating plans to goals and purpose. In order to judge a proposed operating plan, a board needs to know what the company is seeking to accomplish and how it proposes to get there. Without strategy, the critical metrics cannot be established and, at the most basic level, a critical component of management performance cannot be assessed.
Metrics need to measure performance on many dimensions. Wall Street focuses on output metrics such as revenue, profit, margin and growth. These metrics are “rear-view mirror” and indicate how a company performed – last quarter. A board needs to focus on progress metrics – those that indicate whether the company is operating well in accordance with its strategy. Part of measuring progress is being aware of the input metrics – those that will drive progress and lead to desired results.
Strategies – and strategic goals – are not accomplished in a quarter. Being clear about purpose and strategy will push a company beyond simply delivering short-term performance – often at the expense of the long-term health of the company – and begin to realign corporate performance with societal needs and expectations.
This balanced focus serves to give a CEO the space to balance the always conflicting demands of a company’s different constituents – short-, medium- and long-term investors, employees, customers and communities. It allows a CEO to balance near- and longer-term goals, to be able to invest for longer-term positioning and product development, and to avoid buckling to the short-term pressures of cutting costs and investment in order to maximize near-term profits.
Boards must hold CEOS accountable for performance but also give CEOs and management teams the time and space to act responsibly and make wise decisions. Boards also must help CEOs counter the short-term pressures of the market and ensure that companies do not make short-term, accommodating decisions that are not in their long-term interest as responsible contributors to society.
Sustainable high-level corporate performance is a team sport. It takes strong CEO leadership, competent executive and operating management, aligned shareholders and an engaged board of directors that understands its role in a strategic – not just a compliance – context. Focusing predominantly on compliance is relatively easy but grossly insufficient. Those of us who serve on boards of directors, either full time or from time to time, need to step up to the strategic responsibilities of the job if business is to regain its needed position as a valued contributor to the long-term health of society and an economic engine that enhances the quality of life and well-being of all its members.
About the Author
David H. Langstaff is the president and chief executive officer of TASC Inc., an advanced systems engineering and integration firm that serves national security and other federal customers. He is also a senior seminar moderator on values-based leadership for The Aspen Institute. During the course of his career, Langstaff has held chief executive positions for both private and public companies in addition to serving on for-profit and non-profit boards of directors.