Chapter Summary

Arguably among a company's biggest untapped strategic assets, a well-functioning corporate board of directors wields the power to meaningfully influence the purpose, culture, and direction of an organization. While many boards may display good corporate governance principles, the most effective boards at leading companies for long-term value creation are truly long-term boards. These long-term boards may look different around the world, but they share a few key characteristics:

• Time Spent on Strategy: Long-term boards prioritize the future of the business, including spending significant time on strategy, business model, risks, and the company's value creation proposition.
• Directors as Owners: Long-term boards build and perpetuate an effective board over time by acting like owners, aligning the board's interests with shareholders, often via stock ownership.
• Board-Level Engagement with Shareholders: Long-term boards possess a strong understanding of the objectives of long-term shareholders and regularly engage with them on topics of strategic importance.

However, achieving this combination of characteristics presents the board with three meaningful dilemmas:

1. Should boards devote more time to strategy by spending less time on routine matters or do they need to spend more time on board work overall?
2. Can board members be meaningful owners of the companies they serve without getting caught up in the short-term pressures caused by gyrations in market valuation and volatility?
3. How do board members engage with shareholders without distracting or undermining management?

Through a series of in-depth interviews with institutional investors, senior directors, and board consultants we gathered perspectives on how leading boards have tackled these challenges and found that getting these things right often creates a virtuous cycle that entrenches a long-term approach to value creation at the board level.

Introduction: Making the Case for Why Boards Should Care About Being Long-Term

Research from FCLTGlobal and others confirms that long-term companies outperform on financial metrics, including revenues, profitability, and stock price, as well as nonfinancial ones like job creation and sustainability. As a recent study of large public companies in the United States found, from 2001–2014 long-term companies cumulatively grew their revenues 47 percent more on average as compared to their shorter-term peers, and with less volatility. During the same period, these same long-term companies similarly outperformed on measures of economic profit, cumulatively growing by more than 80 percent on average compared to peers, and earnings, cumulatively growing by over 35 percent compared to peers.¹

This outperformance appears at least in part to be influenced by a consistent willingness to invest in the business on a long-term horizon. Over that same study period, long-term firms cumulatively invested almost 50 percent more in research and development (R&D) than other companies. Most notably, they continued to increase their R&D spending throughout the global financial crisis. From 2007 to 2014, average R&D spending for long-term companies grew at an annualized rate of 8.5 percent versus just 3.7 percent for other companies.

How do these companies maintain their relentless focus on the long term, investing even in the face of significant upheaval and global market uncertainty? Time and time again, we find that successful companies, in addition to producing compelling financial returns, have long-term-oriented cultures and values underscored by a framework of consistent governance principles that guide them through tough times. Values and culture are shaped by the tone and actions from the top of an organization—and the board is the ultimate top.

The benefits of taking a long-term approach are clear, with strong links to superior value creation over time. But it is also clear that resisting the short-term pressures of the capital markets is an ongoing challenge for public companies. A vast majority of corporate executives agree that short-term pressure is growing, that it is impacting their business decisions, and that it is ultimately destroying long-term value.²

While short-term pressures are often thought to be external, in fact corporate management teams frequently cite their own board as one of the primary sources of short-term pressure on their organization.³ Meanwhile, the National Association of Corporate Directors (NACD) found in their 2017–2018 Public Governance Survey that three in four directors themselves admit that short-term pressure has compromised management's focus on strategic goals.⁴ However, despite this pressure, some organizations are able to ignore the distractions and follow their long-term strategies, even while peers succumb to chasing short-term performance.

Arguably among a company's biggest untapped strategic assets, a well-functioning long-term corporate board of directors wields the power to meaningfully influence the purpose, culture, and direction of an organization. Directors, as long-term stewards of their companies with average tenures that typically exceed management, are uniquely positioned to keep a company focused on the distant horizon, setting an appropriate long-term tone for both corporate management and shareholders—ultimately driving long-term value creation.

There is a lot of energy spent by management teams trying to contain and control boards, rather than inviting them in. These are talented people who want to help and are a wasted asset at many companies.

—Roger Brossy, Semler Brossy

Boards who can get this right offer a significant potential source of value for their companies—but getting it right requires addressing three key dilemmas for boards:

1. Time Spent on Strategy: Long-term boards spend almost twice as much time on strategy, business model, risks, and the company's value-creation proposition than short-term boards. But is this achieved by devoting more time to strategy and spending less time on routine matters or do board members need to increase their overall time commitment to board work?
2. Directors as Owners: Long-term boards build and perpetuate an effective board over time by acting like owners. Most achieve this by encouraging directors to be owners themselves via direct stock ownership. But can board members be meaningful owners of the companies they serve without getting distracted by their own financial incentives, becoming short-term oriented when faced with market volatility?
3. Board-Level Engagement with Shareholders: Long-term boards possess a strong understanding of the objectives of long-term shareholders and regularly engage with them. But how do board members engage with shareholders without distracting or undermining management?

The Dilemma of a Time-Constrained Board

McKinsey has demonstrated companies that outperform have boards which spend almost twice as much time on strategy-related work as their average peers.⁵ Prioritizing strategy for these boards doesn't just mean having one strategy meeting a year, but rather addressing progress on strategy in every meeting as well as devoting significant time outside of regular meetings to gathering information relevant to key strategic priorities and risks to better inform the board's decision making. This foundational homework is a mosaic of conversations with management and other employees, site visits, competitor product comparisons, discussions with external stakeholders like suppliers or customers, and a continuous review of industry competitive analysis from both internal and external sources—among other things. That information gathering effort then informs the board's decision making, sparking more meaningful discussion and debate around key strategic priorities and risks.

But a majority of boards and directors individually struggle to make time in their agendas for this important work. Why don't more boards prioritize strategy today? In our conversations with subject matter experts, a few problems were consistently surfaced.

Many directors believe there simply isn't enough time to discuss strategy in a meaningful way. Board time is increasingly spent on compliance and risk according to PwC's 2017 annual directors survey⁶ and this is work that cannot be eliminated. These regulatory and compliance–related tasks are required and often consume significant board attention and time in their agendas. As one company secretary we spoke with noted, “At a large multinational company, simple regulatorily required tasks take the equivalent of four days minimum, and there is no getting away from that.” With the average director of a global company spending around 30 days equivalent on board-related work,⁷ that means at a bare minimum one full day per quarter of board time is unavoidably earmarked for compliance, with many boards spending far more time on the topic.

Apart from compliance, experts we spoke with were also quick to note that being a director isn't a full-time job so just scheduling more board meetings is not a viable solution. And the push for better board diversity and representative skillsets on corporate boards has meant drafting an increasing population of directors who are still working (mid- to late-career)—as opposed to the more traditional retired director of the past with perhaps fewer time constraints.

When asked how these already time-constrained directors could conceivably devote more time to strategy, many experts noted the real problem lies in the setting of board agendas. More than half (51%) of directors report their boards spend an inadequate amount of time discussing strategy during board meetings,⁸ that this stems from the organization of the board's agenda, and that this is an important barrier to effective strategic engagement.

Time constraints aside, many directors don't believe an “excessive” focus on strategy is really their job. These directors take the more traditional approach to board service, believing the board's role is to review and supervise, not get too deep in strategy development. The perspective that directors should be “noses in, fingers out” is a frequent refrain we hear, with many directors believing that more meaningful involvement in strategy at the board level encroaches on management's role. Many of these same directors were once members of the C-suite themselves and want to give management deference in strategy setting.

Along with the belief that a focus on strategy isn't really the board's job, a few more cynical experts we spoke with pointed out that there is really no upside for the board in spending more time on strategy. These people were quick to note that the CEO typically gets the credit if the company's strategy succeeds—and that the board's job is to find a new CEO if the strategy fails—leaving directors little incentive to spend time prioritizing strategy items on their agendas.

Finally, if more time is required, is more director pay required as well? We heard several times that directors are not getting paid enough for the additional level of time and effort that a focus on strategy requires, but there seems to be little appetite for paying directors more. Many argued that more time means directors will need more compensation and that shareholders will object. As executive say-on-pay shareholder votes become more common and additional compensation disclosure requirements take effect,⁹ these disclosures have naturally led shareholders and others to ask similar questions about director pay levels—likely contributing to the rise in shareholder lawsuits about excessive director compensation levels.¹⁰

We know that boards with the most impact over the long-term spend twice as much time on strategy-related work as their average peers.¹¹ The Nordic companies offer a good example of boards that drive long-term strategic direction. These regional champions prioritize strategy and consistently outperform over long horizons.¹²

While it's fair to acknowledge there likely isn't much glory for directors in getting company strategy right, there may be significant downside from getting it wrong. Directors have a lot on the line in terms of reputational risk in a company crisis. Fhalenbrach, Low, and Stulz found outside directors have incentives to resign to protect their reputations when they anticipate that the firm will underperform.¹³ Making sure a company doesn't flounder means devoting significant time and attention to strategy in the first place.

Most directors acknowledge they need to do better. Sixty-seven percent report their boards must improve their contribution to the development of strategy¹⁴ and are simply struggling now with how to achieve that. Ninety-two percent of directors said the amount of time devoted to governance and risk work has increased in the past three years while 66 percent feel they should be devoting more time to strategic planning.¹⁵

Finally, when asked about their primary motivations for serving as directors in the first place, 71 percent of directors very strongly agreed that a desire for intellectual stimulation was a driving factor while 85 percent noted a sense of being needed to help the company succeed.¹⁶ Both responses send a clear signal that directors want to spend time on strategic work and are simply struggling with the dilemma of how to achieve the right balance.

The Dilemma of Using Stock Ownership as a Means of Aligning Interests

Principal-agent theory suggests that directors as agents will not always act in shareholders' best interests. One solution to this agency problem is for directors to own stock in the companies they serve, aligning their interests with shareholders by being shareholders as well, thus linking a director's individual wealth to the company's long-term success. There is a counterargument that director stock-ownership actually inspires short-term behavior by drawing excessive focus on stock price movements. Indeed, this fear of introducing an excessively short-term perspective to the boardroom has induced some countries, like the United Kingdom, to go so far as to consider directors who own significant amounts of a company's stock (or represent a significant shareholder) to no longer qualify as independent, reclassifying these directors as insiders.¹⁷ The Australian Stock Exchange's “Corporate Governance Principles and Recommendations” similarly list being “a substantial security holder of the entity” as a factor that may cast doubt about the independence of an individual director.¹⁸ As one Australian investor described it, “Australian directors are compensated primarily in cash and the payments are very nominal—comprised of very little stock and no options—indeed, we believe director stock ownership drives bad behavior and often discourage it.”¹⁹

Independent of broader governance codes or exchange requirements, many companies have taken an equally dim view of director share-ownership themselves. The corporate charters or other governance documents of several European companies, for example, prohibit the compensation of independent directors in stock (although they still allow for director ownership via other means—such as direct purchase).²⁰ This is likely reflective of a point best highlighted in our conversation with Timothy Youmans, director, Hermes EOS, who noted, “Director fiduciary duty in most places includes the four duties of loyalty, prudence, care, and impartiality toward beneficiaries. People usually forget that fourth dimension, but it is important and relevant; directors are meant to be objective referees that reasonably balance the interests of future shareholders with the interest of current shareholders. However, excessive pressure from current shareholders can make this impartiality very difficult to achieve.” Our research found that when directors themselves are current shareholders, balancing these competing demands can be even more challenging.

There is also a concern about limiting director supply to the wealthy. The boards of the world's most notable companies for decades looked like an “old boys' club” drawn from the same small pool of well-networked, well-heeled individuals. However, with increasing attention on board diversity and the demonstrated value diversity can bring to the boardroom,²¹ major progress has been made remaking public company boards to be more representative of their employee and customer bases while bringing a diversity of thought, skill, and experience relevant to the company's growth opportunities. Wachtell, Lipton, Rosen and Katz partner Sabastian Niles put it best: “Imposing a requirement on all directors to buy stock out of their personal wealth to satisfy desire for better shareholder alignment could affect director supply, skewing it to older, wealthier candidates. No one wants to go back to overly narrow pools for directors or creating disincentives to serve.”

Finally, many believe that focusing on director stock ownership misses the point entirely. They argue that most directors serve for nonfinancial reasons and that giving directors stock or requiring they accumulate shares personally won't have any impact on behavior. According to Blair Jones, managing director at compensation expert Semler Brossy Consulting Group, “When rewards are intangible—things like pride of affiliation, networking prospects, prestige in the community, a sense that skills are valued and relevant—directors' behavior is more influenced by how much they find their input and knowledge to be meaningful. Directors who feel they aren't able to be impactful may become disengaged and that is when short-term unproductive behavior can take over. Owning stock or receiving more stock won't fix that problem.” Essentially, underestimating the psychological or nonfinancial reasons directors serve on boards misses a crucial piece in the long-term value-creation puzzle.

Nevertheless, evidence links director stock ownership to long-term value creation and firm outperformance, demonstrating financial incentives are important and play a role. Bhagat et al. in an examination of 1,700 U.S. public companies (S&P 500, S&P mid-cap 400, and S&P small-cap 600 using ExecuComp data), found the greater the dollar value of the outside director equity ownership (using the median independent director's holdings as the model): (i) the better the company's overall performance as measured by three-year growth in operating income, three-year growth in sales, stock returns, and ROE; and (ii) the more likely in a poorly performing company that there will be a disciplinary-type CEO turnover.²² In a follow-up study, Bhagat and Bolton (2011) confirmed the dollar value of director stock ownership is positively related to firm operating performance.²³

In a more recent study, Hotson, Kaur, and Singh examined director trading patterns on the Australian Stock Exchange and found directors across the market cap spectrum (small-, mid-, and large-cap companies) earned abnormal returns with their pattern of stock trading.²⁴ Moodley, Muller, and Ward similarly examined 13,840 director trades on the Johannesburg Stock Exchange from 2002 to 2013 using a portfolio time series approach and found an investment strategy which followed director net buying and selling outperformed the portfolio benchmark over the same period.²⁵ It is fair to argue that this correlation could simply be an indication that directors possess superior information about a company's future prospects and so make better-informed investment decisions. But we can't rule out the possibility that directors who are owners themselves encourage the superior long-term performance we see linked to director stock purchases.

As one board consultant we spoke to observed, “Owners take better care of something than ‘renters’—no one has ever washed a rental car. Directors should not be impartial observers, they should care passionately about their work; this passion is inspired by stock ownership.”

Nowhere is the phenomena of directors-as-owners better exemplified than in the experience of companies with a significant anchor or family shareholder. As EY highlighted in their 2014 survey²⁶ of 2,400 of the world's largest family-owned businesses from the top 21 global markets, family companies are used to continually innovating to grow and pass on a thriving business to the next generation. Lady Lynn Forester de Rothschild, CEO of E.L. Rothschild and director of Estee Lauder, agreed, “Companies with an anchor family or shareholder have an advantage in their approach. They are used to planning in terms of generations. This generational planning is the ultimate long-term management horizon. We need to get more traditional directors to start to think of themselves that way and behave like family owners.”

While there are some concerns about the short-term hazards director stock ownership may create, the preliminary evidence seems to point toward linkage with long-term benefit, but only if the ownership structure is aligned with long-term goals. The real dilemma here for companies wishing to take a longer-term approach may in fact be a question of how to structure director's stock ownership appropriately, not whether directors should be owners at all.

Shareholder Engagement: The Dilemma of How and When Directors Should Engage

Large institutional investors are increasingly requesting direct access to the board, but many directors feel ill-equipped to interact with shareholders or perceive that interaction to be solely the job of management. Likewise, many management teams get nervous about the idea of directors meeting with shareholders, fearing their authority will be undermined or that directors may stray off script. However, we find the boards of successful long-term companies are often the most adept at engaging directly with their long-term shareholders, finding such direct interactions to be a valuable source of insight and a means for establishing solid relationships of mutual trust and respect. Indeed, one of the true hallmarks of a long-term board is the possession of a strong understanding of the objectives of long-term shareholders, an understanding most often built by hearing from shareholders directly.

Traditional arguments against direct board-level engagement with shareholders generally hinge on the idea that it isn't the board's role to engage as a normal course of business (i.e., unless the company is in crisis), that direct engagement undermines management, and that such engagement may run afoul of disclosure regulations. A recent 2017 PwC survey of directors of large global corporations found few directors believe regular dialogue with shareholders is necessary. In response to the question “Under which of the following circumstances is it appropriate for directors (other than the CEO) to meet with shareholders,” only 22 percent of directors thought regular engagement with shareholders was appropriate.²⁷

Why the reluctance? Many directors are uncomfortable when meeting with investors and worry that they may not be well placed to comment on certain topics or have the depth of knowledge to answer every question. Depth of knowledge aside, in a somewhat related vein, directors (as well as their management, investor relations officer, and corporate general counsel) also worry about compliance with disclosure regulations. The SEC's Regulation Fair Disclosure (Reg FD),²⁸ passed to prevent selective disclosure of material nonpublic information by public companies to market professionals and certain shareholders, and Japan's Fair Disclosure Rules, requiring listed companies to equally disclose inside information to all investors,²⁹ are two examples of regulations causing director discomfort. Adopting a blanket policy of not taking external meetings on behalf of the companies they supervise is a simple solution, allowing directors to avoid concerns about both conversation content and compliance altogether.

Board-level engagement also makes management and investor relations professionals uncomfortable when it comes to company messaging, believing unified messaging is more easily delivered by a select and well-prepared team to ensure the company message does not become disjointed. Directors agree with management on this point, with 84 percent saying director involvement in shareholder engagement poses too great a risk of mixed messages.³⁰ But disjointed messaging isn't the only thing management teams fear when it comes to board-level engagement with the investor base. Many managers worry this sort of engagement blurs the lines of responsibility, undermining their authority to lead and manage the business.

Messaging and optics aside, there is a very real debate about where a director's duty actually lies which also could be impacting directors' willingness to engage. Many shareholders believe that directors owe a fiduciary duty to shareholders and, on this basis, demand access to the board. However, this shareholder-centric view of a director's responsibility is not clearly spelled out in a strictly legal sense.

To settle this question, global law firm Baker McKenzie and the World Economic Forum reviewed the legal codes of eight of the biggest listed markets in the world.³¹ They found that in all jurisdictions, directors' primary fiduciary duty is to the company they serve, as opposed to owing a duty to shareholders directly.³² While the goal of the study was likely to strike a blow to the shareholder-centric model of corporate governance, this study also presents directors with a convenient excuse for not being more responsive to shareholder requests for meetings.

Despite those objections, board-level engagement is becoming more common. In their most recent proxy season review, EY found 25 percent of S&P 500 companies disclosed their directors had engaged with investors over the prior year versus just 10 percent in 2015.³³ Remarks from then-SEC chair Mary Jo White may have inspired the recent improvement we have seen. In a 2013 speech she emphasized, “The board of directors is—or ought to be—a central player in shareholder engagement.”³⁴ Directors are also becoming more willing to engage—in PwC's 2017 survey 77 percent of directors agreed direct engagement impacts proxy voting (vs. just 59% agreeing in 2016).³⁵ While U.S.-listed companies may be slow to embrace an open dialogue with shareholders, it is already common practice in Western Europe for nonexecutive directors to meet with shareholders to discuss strategy, governance, executive compensation, risk, and other matters within the board's purview.³⁶

Directors are coming to terms with the regulatory constraints placed on conversations with investors. In their 2018 Annual Corporate Directors Survey PwC found just 19 percent of directors “very much agree” that there is too much of a risk of disclosing nonpublic information and violating Regulation FD—down from 42 percent holding this view in 2014 (although an additional 50% of directors still “somewhat” agree with this sentiment).³⁷ This increasing level of comfort may stem from the growing practice of board-level engagement with shareholders.

We also find those very real fears about lacking a depth of knowledge or familiarity with the business and strategy to speak externally among the very reasons to opt to engage with investors. Engagement is a convenient forcing mechanism. Shareholder engagement forces directors to be well versed in the nuances of the company's industry and business and develop a deeper understanding of the company's strategy. This engagement arguably makes them better directors by having a well-established foundation of knowledge, which aids and informs long-term board decision making.

Along those same lines, long-term directors find engagement offers valuable perspective on the company's strategy. Questions that one company likes to ask their long-term shareholders include, “What do you think we could do better?” and “What is our competition doing that we aren't doing?” Some investors are better equipped to offer feedback than others, but companies tend to know which investors are insightful, and long-term boards make use of those insights. According to Sarah Teslik of strategic communications firm Joele Frank, “Long-term shareholders are like consultants, but free. Shareholders have a massive financial stake in their advice being accurate and a big motivation to share that information, but few ask for that input often enough. Smart long-term boards recognize and avail themselves of this valuable resource.”

Engagement carries other benefits but chief among them is the ability to establish a relationship of mutual trust and respect with long-term shareholders—relationships that become increasingly valuable in a proxy battle, hostile takeover, or when under activist attack. John Vaske, head of Americas at Singapore's Temasek, agreed: “Boards in crisis don't seem to ever know anything about shareholders' mindsets—they constantly seem to be surprised in a proxy battle. Directors need an in-depth perspective on what shareholder constituencies need and want and that has to happen before you have a problem—engagement is the only way you get there.”

One of the questions boards are struggling with these days is how to rebuild and sustain a greater degree of trust with their shareholders. As Ben J. S. Mathews, group company secretary of HSBC Holdings Plc, observed, “There is a big imbalance between what people on the street think companies are doing and what companies are actually doing. Boards would do well to be more transparent and open with their stakeholders about what they are doing to clear that gap up—this is where engagement is valuable and can help emphasize a company's long-term perspective and build greater trust amongst the investment community.”

Boards are often considered best positioned to discuss the issues of succession planning and executive compensation,³⁸ but to build a relationship of mutual trust with their investors, long-term boards have embraced a much broader range of topics for shareholder conversations, including strategy- and risk-related questions. Direct engagement ensures the board receives a more balanced (or unfiltered) view of investors' perspectives. Corporate boards often hear the perspective of the “noisy” short-term players—the sell-side analysts and media—as well as from more vocal short-term members of the investment community. They may also receive summary reports from investor relations about shareholder composition and activity. But nothing beats direct engagement for delivering an unfiltered perspective, and long-term boards recognize the value in cultivating those relationships. Some companies have embraced the benefits a direct dialogue with shareholders provides and taken engagement one step further, enshrining and encouraging board-level engagement in their governance codes and principles.

Leading countries are taking a parallel approach. The UK's most recent update to their Corporate Governance Code, taking effect January 1, 2019, states, “In order for the company to meet its responsibilities to shareholders and stakeholders, the board should ensure effective engagement with, and encourage participation from, these parties.”³⁹ Japan's Corporate Governance Code, which the Tokyo Stock Exchange has adopted into its listing rules on a comply-or-explain basis, similarly states, “In order to contribute to sustainable growth and the increase of corporate value over the mid- to long-term, companies should engage in constructive dialogue with shareholders even outside the general shareholder meeting. During such dialogue, senior management and directors, including outside directors, should listen to the views of shareholders and pay due attention to their interests and concerns, clearly explain business policies to shareholders in an understandable manner so as to gain their support, and work for developing a balanced understanding of the positions of shareholders and other stakeholders and acting accordingly.”⁴⁰

The Canadian Institute of Corporate Directors (ICD) took it one step further, issuing a guidance paper for director-shareholder engagement which clearly sets out their position: “The Institute of Corporate Directors believes that the boards of directors of Canada's listed companies should directly engage with their significant investors.… Boards have a responsibility to take a leadership position in this discussion that recognizes their central role as stewards of their companies.”⁴¹ Most notably, the position paper goes on to specifically cite the benefits to alleviating short-term capital markets pressures that engagement presents, emphasizing that the ICD, “are of the view that the tension caused by the current dynamics in our capital markets may be mitigated through direct and meaningful exchanges by directors with significant investors.”⁴²

With the world's largest institutional investors increasingly demanding board-level engagement and regulators encouraging this engagement as well, the real dilemma for boards today may not be a question of “Should we engage?” but rather “How best to engage?”

Solutions for Long-Term Boards

FCLTGlobal is a not-for-profit organization dedicated to developing practical tools and approaches that encourage long-term business and investment behaviors. We take an active approach to achieving our goals by engaging the world's top asset owners, asset managers, and corporations to problem-solve and test approaches that create long-term value, conducting research and developing practical evidence-based ideas, and developing educational resources that are available and applicable globally. The following potential solutions to these dilemmas facing public company boards were developed as a result of FCLTGlobal's ongoing work on the topic.

Conclusion

The boards of public companies today are under significant amounts of pressure, often getting distracted by near-term concerns and losing their way in the process—even becoming a source of short-term pressure themselves. However, it's clear the corporate board of directors wields meaningful influence over a company's approach to long-term value creation and can provide the steady hand needed to steer a company toward a distant horizon. Setting the right long-term tone at the top is a critical role for the board, helping insulate management and the company as a whole from short-term market pressures.

Allocating sufficient time to strategy work, adopting an ownership mentality, and meaningfully engaging with long-term investors are all places where we see boards struggling today. But boards who have succeeded in adopting a long-term approach have often mastered these three dilemmas and found that work on one area comes with benefits in another. That's because these three dilemmas are actually three mutually reinforcing principles which can encourage directors, executives, and shareholders to take a longer-term view.

When a director is an owner with properly structured long-term incentives, this simply increases his or her stakes in the success of the company. But ownership also adds an additional perspective that enriches engagement. The director's conversation with shareholders will be one of “owner-to-owner.” This engagement helps provide a deeper understanding of the company to other shareholders, which in turn brings the benefit of making them more long-term as well. (See Figure 34.1.)

In their engagement with other shareholders they can help ensure investors understand company strategy and gain confidence that management and the board are in alignment. Engagement with other owners can help identify areas where better explanations need to be given about the company's strategy. It can also identify areas where the strategy needs adaptation and improvement. The largest shareholders will typically have analyzed (or even own) the stocks of competitors and much can be gleaned from the questions they ask and perspectives they share.

Engagement is a process for ensuring ongoing improvements in strategy. When shareholders are comfortable that such a process is in place, it is an incentive for them to take a longer-term view in order to capture the benefits from it. This incentive also applies to directors as owners, which can encourage them to increase their ownership stake in the company, creating a virtuous circle. Ownership enhances the quality of engagement, which improves the company's strategy to the benefit of all owners, including directors, thereby further deepening the quality of their engagement and focus on strategy, and so forth.

Boards who have devoted significant time to strategy work are well versed in the company's prospects and can clearly articulate these prospects to shareholders when engaging with them directly. They find shareholder engagement offers new perspectives on their strategy and can use that feedback to inform future board work. And they are often prepared to answer the questions of shareholders because they are indeed shareholders themselves and have thought through the very same questions with an ownership mindset. This virtuous cycle or positive feedback loop helps boards transform themselves into a valuable long-term strategic asset to their company. By relentlessly prioritizing and focusing on strategy-related work, becoming long-term owners themselves via director stock purchase and long-term lock-ups, and engaging with long-term shareholders to establish mutual trust and respect while gathering valuable feedback on company performance and direction, long-term boards establish a self-reinforcing cycle of behavior that ultimately leads to a board culture focused on long-term value creation.

About the Authors

Ariel Fromer Babcock, CFA, is an equity investment professional with over 15 years of experience in the financial industry. As a managing director of research at FCLTGlobal (Focusing Capital on the Long Term), her work has focused on how frictions stemming from the intersection of public companies with their shareholders may drive longer- or shorter-term behaviors on both sides of the aisle. Her research on the investor-corporate dialogue and use of long-term shareholder communications as a tool to better align public companies and their long-term institutional shareholders earned her recognition among the inaugural class of the National Investor Relations Institute's 40 Under 40 in 2019.

After starting her career as a trader and research analyst at a long-short financial sector focused hedge fund, she moved on to managing value- and equity-income focused mutual fund strategies at both American Independence Financial Services and Calamos Investments. Most recently Ariel worked with clean energy company Tecogen Inc. (NASDAQ: TGEN) as director of Investor Relations and Corporate Communications. While at Tecogen she was instrumental in establishing a unified corporate communications platform and in developing the company's growth strategy alongside executive management.

Ariel holds a BA in economics and environmental studies from Tufts University and holds the Chartered Financial Analyst (CFA) designation. She is an active member of CFA Society Boston where she is a financial literacy alliance leader.

Robert G. Eccles is a leading authority on the integration of environmental, social, and governance (ESG) factors in resource allocation decisions by companies and investors. He is also the world's foremost academic expert on integrated reporting.

Currently Eccles is a visiting professor of Management Practice at the Said Business School, University of Oxford, where he is engaged in a number of research projects. Eccles has been a visiting lecturer at the Massachusetts Institute of Technology, Sloan School of Management and was a Berkeley Social Impact Fellow at the Haas School of Business, University of California Berkeley. He was a professor at Harvard Business School and received tenure in 1989.

Eccles is a senior advisor to the Boston Consulting Group. He is on the board of the Mistra Center for Sustainable Markets at the Stockholm School of Economics, was the founding chairman of the Sustainability Accounting Standards Board, and was one of the founders of the International Integrated Reporting Council. In 2011, Dr. Eccles was selected as one of the Top 100 Thought Leaders in Trustworthy Business Behavior—2012 for his extensive, positive contribution to building trust in business. In 2013, he was named the first non-accountant Honorary Fellow of the Association of Chartered Certified Accountants (ACCA), one of only nine since 1999. In 2018 he was named by Barron's as one of the top 20 influencers in ESG investing and cited for being an “ESG research trailblazer.” Also in 2018 he received “The CSR Lifetime Achievement Award” at “The 8th International Conference on Sustainability & Responsibility” in Cologne, Germany.

Dr. Eccles received an SB in mathematics and an SB in humanities and science from the Massachusetts Institute of Technology and an AM and PhD in sociology from Harvard University.

Sarah Keohane Williamson, CAIA, CFA, is the chief executive officer of FCLTGlobal (Focusing Capital on the Long Term). In this role, she leads FCLTGlobal's efforts at conducting innovative, practical research, engaging with the organization's global membership, sharing perspectives and research with constituents globally, and building the FCLTGlobal team.

Williamson assumed her current role in July 2016, after spending over 21 years at Wellington Management in Boston and San Francisco, most recently as a partner and director of alternative investments. Prior to joining Wellington Management, Williamson spent over five years with McKinsey & Company Inc. in London, Dallas, and Boston. She was also a special assistant at the U.S. Department of State and was a mergers-and-acquisitions investment banker in New York and London for Goldman, Sachs & Co.

In her FCLTGlobal capacity, Williamson is a cochair of the World Economic Forum Global Future Council on Long-term Investing, a member of the Advisory Board for the Millstein Center for Global Markets and Corporate Ownership at Columbia, and a member of the Hong Kong Institute for Monetary and Financial Research Council of Advisers.

Williamson also serves as a director of Evercore (NYSE: EVR) and is a member of the Harvard Business School Board of Deans Advisors, the Boston Children's Hospital investment committee, and the board of the Whitehead Institute for Biomedical Research. She earned her MBA with distinction from Harvard Business School and her BA in economics with honors from Williams College. She holds the Chartered Financial Analyst and the Chartered Alternative Investment Analyst designations.