It may not seem so, but the CEO has many masters. Managing expectations of the C-Suite, employees, customers, shareholders, broader stakeholders, and the board of directors can make for challenging sailing.
Often, the Board of Directors focuses on the KPIs set out for the CEO and C-Suite in the remuneration report to gauge progress and success. Falling short of goals puts short term pressure on the CEO to implement initiatives to maintain board support lest he/she risk a loss of confidence. In parallel with this, the CEO needs to be focused on a clearly articulated and effective corporate strategy to ensure success and longevity over time. Creating buy-in and support internally may be easier given the medium to long term outlook of employees, but shareholders are far less patient.
Shareholder structure has evolved over the past 20+ years, with passive index investors often holding 15-20% of a company. While not focusing on company financial fundamentals, these funds have a huge influence on governance and sustainability, with increasing influence on non-financial metrics that may impact optimal decision making that is in the best interests of all shareholders. The broader hedge fund community continues to punch above their weight, often taking a more active role in trying to influence capital allocation to drive short term shareholder returns, possibly at the expense of the longer term health of the business. Traditional long only investors, while regularly taking a longer term view of investments, will nonetheless often side with activist campaigns much to the surprise of management team who believed they had full support and strong relationships.
Our recent research supports the notion that, while the broader investment community maintains a focus on ESG, ultimate investment decisions are still driven by company fundamentals. (The vast majority of investors say not meeting ESG targets does not prevent them from investing). This means companies must take a nuanced approach to how they integrate their ESG messaging into the investment thesis. Investors need tangible evidence of solid and improving growth and financial metrics that will drive cash flow and shareholder returns, first and foremost.
So, where does this leave the CEO? It is crucial to ensure the best possible alignment between the board and C-Suite. Outside of the Chairman and lead independent director, the capital markets knowledge and understanding of the broader board may be limited. Conducting Board Alignment Research achieves three important goals. First, it identifies key knowledge gaps across the board that can be readily improved. Second, it builds greater board confidence in the CEO and C-Suite as a proactive initiative to create the best possible alignment. Lastly, it creates a more unified and consistent message to the investment community, creating a longer runway to execute on the strategy and drive investment into the company. I just don’t see how companies can ignore this critical piece of long term value creation.
To learn more, contact us at john.parker@jpadvisorsltd.com
