News & Insights

Directors Governance Center

March 17, 2016

Board Leadership and Long-Term Value Creation (State Street Global Advisors)

Maximizing long-term shareholder value is a bedrock of corporate governance and a common area of focus of institutional and other investors. In recent years, some institutional investors have been increasingly focused on ensuring that public companies have the proper practices and procedures in place to ensure that this goal is achieved. Several commentators have suggested that this renewed focus on long-term firm value will necessitate a fundamental shift in current board thinking, giving rise to a new paradigm of corporate governance.

Most recently, on February 26, 2016, investment management firm State Street Global Advisors issued a letter to corporate directors discussing the tension between short-term focus and long-term value creation, and proposing that the tension be resolved through strong board leadership and independence to ensure proper focus on the long-term value and sustained success of the corporation.

The State Street letter offers the following advice and suggestions to help a company maintain a healthy focus on long-term value creation:**Board Independence and Structure* . Merely dividing the roles of CEO and board chair is not sufficient to create the meaningful board independence required to align focus on the long-term. Rather, State Street suggests that attention should be placed on the overall manner in which a company empowers their board to be more independent. This includes earnest engagement with company leaders and clear articulation of the roles and responsibilities of an independent board leader in overseeing management. Similarly, there is no one-size-fits-all approach for establishing the leadership and independence required to optimize long-term value creation. Often, an effective independent leadership model entails separation of the CEO from a board chairperson role. In certain instances, meaningful leadership is attainable through a combined CEO and chair and an independent lead director working together.

**Board Diversity* . Board recruitment of director candidates with diverse backgrounds and varied expertise can be a useful tool in establishing long-term focus. In organizations where existing directors lack the requisite expertise to constructively challenge and critically evaluate managements decision-making, recruiting directors with fresh and pertinent backgrounds can help bridge such a skill gap. Continual assessment of a boards collective skills set can also further this objective. Further, ensuring that a companys board is composed of directors whose collective experience spans a variety of industries can ensure that a company is ready to meet new challenges that may be new to its specific industry.

**Performance Metrics* . The State Street letter cautions against solely relying upon traditional approaches to corporate governance to align properly organizational focus: no amount of change to management incentives, investor behavior or the like will be sufficient to ensure a focus on the long term. Boards should eschew typical metrics and operating benchmarks, such as quarterly earnings per share, in evaluating corporate success, and instead, replace those metrics with probative questions framed in the context of a companys longterm goals, such as: Given a companys stated objectives for the next 5, 10 or 20 years, did management execute as well as possible? Did the company meet its milestones and exceed its benchmarks? See the full letter from State Street Global Advisors here.