The Board’s Impact on Long-term Value
Posted by Shawn Cooper (Russell Reynolds
Associates) and Sarah Keohane Williamson (FCLTGlobal), on Thursday,
June 25, 2020
long-term approach in business leads to superior performance.
orient themselves around a long-term time horizon while also delivering against
short-term objectives have been shown to outperform their peers on several key
business measures, including revenue, earnings, economic profit, market
capitalization and job creation. These companies were hit hard during the last
major economic downturn—as were most businesses—but saw a higher-than-average
rebound after markets recovered.
According to one
economic analysis, had short-term-oriented companies behaved more like
long-term-oriented ones, the global economy would have created an additional
$1.5 trillion in returns on invested capital in the years following the Great
What Is “Long-Termism”?
It is how
boards and executives think and act in regard to the practice of applying
a long-term approach to business and investment decision-making, including
focusing on key elements of performance such as competitive advantage,
long-term objectives and a strategic plan matched with clear capital
allocation priorities. It stands in contrast to short-termism, or a
continued focus on quarterly or other near-term performance issues, and is
increasingly in demand from stakeholders who want a fundamental rethink
around how companies operate and create value.
While the benefit
of long-termism is clear, the path to getting there is not. By all accounts, and
for a variety of reasons, taking a long-term orientation in business can be
difficult, especially for executives. But if the board of directors is committed
to taking the long-view, there are a number of specific steps to they can take
to get there, beginning with asking a key set of questions:.
As a board, are
we satisfied with our company’s performance?
Is the company
being fully valued in the market?
Is the board
playing an appropriate role in creating shareholder value?
is a combination of two things: short-term performance and long-term potential.
When executives over focus on one of the two—and directors don’t correct
course—a company risks becoming either a flash in the pan, or a dreamer that
fails to survive long enough to realize its vision. To avoid either fate, boards
need to find the right balance between short-term and long-term issues, partner
with executives to ensure the company is managed the same way, and engage with
the market to build support for their vision and goals. It is no easy task.
challenges, there are companies that align around a long-term time horizon that
successfully oriented themselves this way. In these companies, management and
the board share an explicit set of behaviors that focus themselves—and often the
investors too—on the long term. How did this happen? And what differentiates
those boards of directors that have been the most successful at focusing their
company on the long term from those that have not?
a clear divide between companies that align for the long term and those that do
In late 2019,
Russell Reynolds Associates and FCLTGlobal (Focusing Capital on the Long Term)
launched an extensive research effort to understand how corporate directors
consider time horizons in their work; how the topic is discussed in the
boardroom, facilitating alignment between and among management and the board and
investors; and how a long-term orientation influenced director recruitment,
assessment and selection. This research included an in-depth global survey of
163 corporate directors. Respondents hailed from all major industry segments and
all corners of the world: Fifty-six percent of respondents were at companies
headquartered in the Americas, 26 percent in Europe (including the United
Kingdom), and 18 percent in the Asia Pacific region.
directors served on a board where directors and management were not aligned on
their time horizon focus (i.e., management was long-term oriented, while
directors were short-term oriented, or vice versa).
It is worth
noting, of course, that different industries are influenced by different market
forces, some of which naturally result in a bias toward being more short-term or
long-term oriented. The data highlighted in this report is for all respondents,
and all industries, combined. See Appendix for a breakout of results by
geography and industry and a brief discussion of differences between and within
While the two
groups were identified based solely on their primary time horizons, as we
analyzed their responses, we saw significant differences between short-termers
and long-termers on almost 30 factors measured in the study—from why they
decided to be board directors in the first place through to how they conduct
themselves in the boardroom.
There is a stark
contrast in motivation to board service between short-termers and long-termers.
Long-termers are more likely to identify a primary motivation that is
company-focused or altruistic in nature, such as providing skills and experience
to help the company succeed, being interested in the nature of the company or
industry or believing in the purpose or mission of this specific company.
contrast, overwhelmingly indicated that their motivation to serve was about
benefiting themselves. They were more likely to say they were motivated out of a
desire for exposure to an interesting and challenging role, enhanced career
development and experience, improved personal brand and business reputation,
financial compensation for board service, or building a broader business
network. In fact, not a single long-termer identified either of those last two
reasons as a motivation for their board work.
intentionally goes in search of short-termer director candidates, but we found a
higher prevalence of them than we would have expected to. It is a reminder that
boards need to stay vigilant when identifying and assessing director candidates,
and on addressing bad behaviors when they show up in the boardroom. For more
guidance on this, see “From Insight to Action” below.
Once on the
board, long-termers and short-termers act differently. They report focusing on
different issues, discussing different topics and keeping an eye on different
trends and metrics.
When it comes to
identifying the most significant threats to the company’s performance, short-termers
focus on issues in the here and now, like failure to execute and operate the
business efficiently and failure to respond to changing customer preferences.
There are times when every organization should focus on these issues, but short-termers
appear to stay fixated on them beyond the point where a transition to other
topics would create longer-term value.
long-termers oriented around concerns that are more likely to play out over
years or decades. They identified regulatory uncertainty, macroeconomic
uncertainty and a failure to realize a return on innovation investments as their
top areas of worry.
Table Stakes: What Every Board
Has on the Agenda
shared a common understanding of the top three drivers that were important
to the company’s strategy and success: innovating to produce new products
or services, reducing cost or improving efficiency, and innovating to
improve existing products or services. Given the shared focus on these
issues, it seems fair to consider them table stakes for corporate boards.
They are also likely topics where board leadership can focus discussion to
create alignment among directors given the shared appreciation of their
importance to the company. Interestingly, however, the two groups diverged
significantly on what the next most important drivers were.
were highly focused on issues related to delivering immediate results:
increasing profitability, improving existing customer perceptions and
satisfaction and increasing revenues. In contrast, long-termers were all about
growing and expanding the business: increasing market share, expanding into new
markets and growing through acquisition. Again, we see a continuation of the
theme of short-termers focusing on the present and long-termers focusing on the
While it is
certainly true that companies which are in free fall, or which are facing doubt
about their ability to survive, should be more focused on the immediate than the
future, it would be wrong to assume that the short-termers in this study are all
facing those challenges. In fact, 61 percent of short-termers reported that
their business was in a period rapid growth in revenue or market share (13
percent) or in a period of moderate and stable growth with substantial market
penetration (48 percent). Another 13 percent reported moderate to rapid growth
in revenue and market share following a period of sustained poor performance.
These directors are not standing on burning platforms.
Not only do long-termers
and short-termers report focusing on different topics during board meetings, but
they also report that their board meetings operate differently from each other.
Long-termers report that their board meetings are more organized and better
structured relative to short-termers, that their fellow directors have a
stronger grasp of organizational culture and talent issues and that their peers
also have a greater level of expertise about the broader industry.
One area where
both groups are united? Long-termers and short-termers both say that their
fellow directors rate high on business acumen (the scores between the two groups
are separated by only one percentage point). It isn’t that one group is
recruiting high-performing and capable directors and the other is not. But there
is ample evidence that long-termers are more likely to dig in to better
understand the business and industry and to come to meetings better prepared and
more likely to focus on the work at hand. They are applying their skills and
boardroom table, long-termers report being significantly better informed about
the company, strategy and operations—outperforming short-termers in every single
aren’t just better informed about long-term topics relative to short-termers,
but they are also better informed about short-term ones. Long-termers are
significantly stronger on issues related to current products and services, sales
activities, operational plans, financial performance, and immediate operational
risks. It is clear that long-termers understand something critical: A long-term
orientation isn’t undertaken in lieu of short-term focus, but in addition to it.
We see similar
results when asking short-termers and long-termers to rate the performance of
their fellow directors on behavioral issues: In every single case, long-termers
dramatically outperform short-termers.
It is clear that
the way the board is led, and how it uses its time, matters. Long-termers report
that their board meetings are highly organized and structured, resulting in a
strong board culture focused on long-term growth and performance. What can board
leaders do to create an environment like that?
research outlines seven specific activities directors and board leaders can take
to have a positive impact on boardroom culture:
The chair needs
to purposefully foster and facilitate high-quality debates around the
In the course
of the board’s deliberations, the chair should intentionally draw out the
relevant expertise of the independent directors
need to keep the discussion focused on the matter at hand and eliminate
tangents during meetings
the onboarding process and continuing throughout their tenure, directors
should build and demonstrate trust through their words and actions with their
The board must
be careful to avoid crossing the line from oversight into operations or
Everyone in the
boardroom must be open to new ideas and ways of doing things
directors should remain willing to constructively challenge management when it
is appropriate to do so
In addition to a
willingness to challenge management, there is a need for open and honest
communication between the board and management so management is clear about
their board’s goals and desires for the company. Directors may desire a
long-term orientation for the organization, but if they don’t guide and
incentivize executives to take the same view, they’ll never get alignment
between the board and management. A well-functioning corporate board of
directors—one that is aligned on time horizons and communicates clearly with
management—wields the power to meaningfully influence the purpose, culture and
direction of the organization. There are many ways they can do so,
focusing on both the long term and the short term in their board work. But it
can be easy to create the mistaken impression of being overly focused on
short-term issues by the way directors engage with executives in the
boardroom. Directors need to be clear that while they are asking about both
time horizons, their primary interest is on the long term. Board agendas
should be crafted to include agenda items that are focused solely on long-term
issues, and to frame short-term issues relative to their impact on long-term
strategy. Directors may also wish to regularly review past agendas as one
indicator of if they are focusing on long-term issues as much as they think
they are. 
explicit guidance to management to be long-term While it may sound simple, it
is critical for the board to explicitly communicate to executive and other
employees that the board desires a long-term orientation. This doesn’t have to
be complex—it can simply be a series of ongoing statements that occur during
the natural course of doing business. Repetition of the message will help it
become part of the culture over time.
At the same
time, making sure directors are not sending mixed messages to executives via
other If a board is explicitly focused on the long term, but something like
executive compensation is based on short-term performance measures, executives
will naturally be conflicted. Executive compensation should be explicitly
linked to long-term value creation, and the board should examine all of the
key performance criteria and metrics to ensure they are not inadvertently
incentivizing management to focus on the wrong thing.
compensation to long-term value creation for the board, not just CEOs and
other senior executives aren’t the only ones who should have their
compensation tied to long-term value creation. Companies should compensate
board members primarily in stock and consider locking up their stock awards
through or beyond their terms of service.
board statement of purpose that emphasizes long-term Amazon is perhaps the
most well-known example of this, saying, “The board of directors is
responsible for the control and direction of the company…. The board’s primary
purpose is to build long-term shareowner value.”
 A statement of purpose like this
makes clear the role of the board and the importance of embracing a long-term
orientation, and it sends a clear message to investors about how the board
approaches its job.
It takes a
village to create a long-term-oriented organization. While this study focused
primarily on the board and management, it is also critical to establish early,
frequent and open engagement with external stakeholders, including majority
shareholders. They need to understand the intent, strategy and approach to
creating a long-term organization. Perhaps most importantly to them, they need
to understand the investment required and the anticipated payoff of taking this
approach. Unless investors are persuaded, it’s likely the board will lose their
support, and it may also face increased investor activism.
a long-term-oriented organization requires getting the right directors into the
boardroom. Based on this research, it is important for nominating and governance
committee chairs to understand how director candidates think and then seek to:
Evergreen Board Recruitment Process:
Many boards move
from director search to director search, treating succession planning and
director recruitment as transactional processes. Switching to an evergreen
process, where boards start to identify pools of potential director candidates
months if not years in advance of when they are needed, allows for boards to
thoughtfully identify and vet candidates with the right motivations, mindset and
motivated to board service for a variety of reasons. Look for candidates who
talk about service-oriented motivations (providing skills and experiences to
help the company succeed, exposure to an interesting and challenging role,
interest in the nature of the company or industry, belief in the purpose or
mission of the specific organization) rather than motivations that focus on
benefiting themselves (enhanced career development and experience, improved
personal brand and business reputation, financial compensation for board
service, building a broader business network). Remember to continue to probe on
past experiences to get beyond cursory answers and understand how director
candidates truly think.
Ask Candidates to
Discuss Their Current Company’s Strengths and Threats:
short-termers focus on very different things when talking about their company.
When talking about threats, look for candidates who focus on more macro or
long-term issues (regulatory uncertainty, macroeconomic uncertainty, failure to
realize a return on innovation investments) as opposed to day-to-day issues
(failure to execute and operate the business effectively, failure to respond to
changing customer preferences). Similarly, look for a discussion of strengths
that is focused on growth and expansion (increasing market share, expanding into
new markets) rather than incremental changes (increasing profitability,
improving customer perceptions and satisfaction). When doing so, remember to
take into consideration broader circumstances: If the company was in a
turnaround, it’s both reasonable and expected for the board to be focused on
shorter-term issues, but not so much when the company is in a period of
prolonged growth and success.
Onboard New Directors:
onboarding for new directors sets them up for success. It also proves a method
through which to help new directors understand the board’s perspective on
business issues, including their long-term orientation. To maximize the impact
of the onboarding process, ensure it is both well designed and thoughtfully
Remember that new directors often have very different backgrounds from current
directors due to a desire to bring in leaders with different skills and
experiences, and these directors may well need an onboarding that emphasizes
topics and issues than weren’t covered for previous directors.
For most boards
of directors, there is a large gap between their current way of operating and
being able to honestly say that their primary purpose is to “build long-term
shareowner value.” But the benefits of doing so—to the board, management, the
company and shareholders—are overwhelming, and the way to do so is clear.
It is clear
that the way the board is led, and how it uses its time, matters. Long-termers
report that their board meetings are highly organized and structured,
resulting in a strong board culture focused on long-term growth and
performance. What can board leaders do to create an environment like that?
Purposefully foster and facilitate high-quality debates
Intentionally draw out the relevant expertise
discussion focused on the matter at hand and eliminate tangents
demonstrate trust through their words and actions
crossing the line from oversight into operations or management
to new ideas and ways of doing things
Constructively challenge management when it is appropriate to do so
well-functioning corporate board of directors—one that is aligned on time
horizons and communicates clearly with management—wields the power to
meaningfully influence the purpose, culture and direction of the
language during discussions to emphasize that the primary focus is on
boards agendas to include items that are focused on long-term issues
review past agendas and meeting minutes to confirm time is being spent
explicit guidance to management to be long-term oriented
directors are not sending mixed messages to executives via other means
Explicitly link executive compensation to long-term value creation
all of the key performance criteria and metrics to ensure they do not
encourage a focus on the short term
compensation to long-term value creation for the board, not just
Compensate board members primarily in stock and consider locking up
stock awards through
or beyond the term of service
board statement of purpose that emphasizes long-term interests
critical to establish early, frequent and open engagement with external
Communicate intent, strategy and approach
the investment required and the anticipated payoff of taking a long-term
building a long-term-oriented organization requires getting the right
directors into the boardroom. Based on this research, it is important for
nominating and governance committee chairs to understand how director
candidates think and then seek to:
an evergreen board recruitment process
candidates to discuss their current company’s strengths and threats
Understand candidate motivations
Thoughtfully onboard new directors
and Industry Breakdown of the Data
leisure and hospitality, media and entertainment, retail, and consumer products.
Healthcare includes medical devices, pharmaceuticals and healthcare services.
Industrial includes automotive; chemicals, materials and packaging; energy and
natural resources; industrial goods; and industrial services. Technology
includes hardware, software, services and telecommunications.
emerge from the industry breakdown of data:
has an elevated percentage of directors who indicated that they and the company
are short-termers. This difference is driven mainly by directors from retail
companies, who naturally are more impacted by short-term changes in the market
and in consumer preferences.
has an elevated percentage of directors who indicated that they and the company
are long-termers. This difference is driven mainly by directors from banking and
insurance companies, who often must ride out short-term disruptions in the
market and measure their success over longer periods of time.
has a very small percentage of directors who indicated that they and the company
are short-termers. This difference is driven mainly by directors from
pharmaceuticals, who deal with multibillion-dollar investments and decades-long
time horizons for drug development.
has an elevated percentage of directors who indicated that they and the company
are short-termers. This difference is driven mainly by directors from technology
hardware businesses, who, like retailers, are naturally more impacted by
short-term changes in the market and in consumer preferences.
McKinsey & Company, “The Data: Where Long-Termism Pays Off,” Harvard Business
Review, May–June FCLTGlobal, “Predicting Long-Term Success for Corporations
and Investors Worldwide.”
2 Russell Reynolds Associates, “Going for Gold:
The 2019 Global Board Culture and Director Behaviors Survey.”
3 FCLTGlobal, “Is My Board Cultivating the Long-Term
Habits of a Highly Effective Corporate Board?”
4 FCLTGlobal, “Time Visualization Meter.”
5 Amazon.com, “Guidelines on Significant Corporate
6 Russell Reynolds Associates, “Enhancing New
Director Performance and Impact.”
Harvard Law School Forum
on Corporate Governance
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