Strategy Implementation

November 3, 2015 By Don Springer Leave a Comment

Overcoming Bad Compensation Standards

Is ISS, and other governance watchdogs, leading us to mediocrity and sub-par shareholder returns?

Speaking at a recent NACD North Texas event, Marc Hodak, noted compensation advisor, teacher at NYU Stern School of Business, and CEO Trust member, promised we would hear something we had never heard and he completely fulfilled that promise.

Co-sponsored by CEO Trust and UT Dallas’ Institute for Excellence in Board Governance, the well attended event provided board directors an opportunity to hear the latest compensation research set in a context of expert and candid advice.

Marc organized extensive research in the field by asking and answering the following questions:

What is the value of equity to managers?
What is the value of management equity to investors?
What to do about “underwater options”?
How should incentives be awarded?

The research findings for each were startling, especially in the context of most board room compensation discussions today. Boards predominantly “benchmark” their compensation plans asking questions about their peers and ISS guidelines rather than asking key questions about how a plan would truly motivate revenue growth and cost improvements over the shareholders’ investment horizon.

Among the findings, companies with uncapped bonuses significantly outperform their industry peers and no research study has contradicted this. On the other end of the “incentive curve”, thresholds have stimulated extreme behavior to cross the line at best and scandals like Enron and WorldCom at worst. Additional research findings contradicted the standard practices of “non-performance” pay, handling underwater options, budget-based management incentive plans, and others.

Once the empirical data was established, Marc continued by providing a general framework for compensation plans that do, in fact, increase shareholder value and properly incentivize management, as well as the entire workforce. They hinge on single metrics such as net income, earnings, or EVA, and support longevity to reinforce profit building behavior.

Marc has elsewhere written, “In a world where every dollar denied to management is thought to be a dollar more in the shareholders’ pockets, the accumulated public company compensation requirements and standards make perfect sense. But in the real world, where costs must be intelligently traded off with retention risk and alignment, SEC requirements and ISS standards get in the way of well-intentioned boards.”

Focusing on standards at the exclusion of research data and market dynamics can lead to unproductive compensation plans. Marc also candidly added that focusing on proxy approval can create continuing engagements with many compensation consultants as the standards ebb and flow.

As directors in attendance, we recognized a need for incentives that truly promise rewards to drive behavior for the benefit of the shareholders. Now armed with new information, we will be wary of an advisor who merely monitors an ISS checklist for proxy support. Instead, we will prefer a research based compensation advisor to help guide the development of a value based plan.

October 6, 2015 By Don Springer Leave a Comment

Pruning Your Business

Strategically, it is just as important to formulate what to stop doing as it is to formulate what to start doing. In Rita McGrath’s book, The End of Competitive Advantage, she argues for healthy disengagements of businesses.

It is a case of recognizing decline as soon as you can and appropriately disengaging from the business in a way that conserves resources and supports your strategic direction.

Signs of decline can easily be spotted and usually long enough before it creates a crisis. But as McGrath identifies, the measurements for decline are not the usual routine operational measurements. She lists the categories of declines as:

Diminishing Returns to Innovation – next generation innovations start to be smaller and smaller improvements in the user’s experience
Increasing Commoditization – alternatives start to be increasingly acceptable to potential customers
Diminishing Returns to Capital Employment – growth rates in certain portfolio offerings begin to perform below an acceptable target

Once a portfolio business becomes a candidate for shifting resources or divestiture, you have to act quickly to conserve the value as it declines. McGrath identifies three reasons a business should be removed from the corporate portfolio:

Capability-Offering is core – the offering is heading for obsolescence, but customers, suppliers, and the organization need to be transitioned to a new platform or service offering
Capability-Offering has value, but not for us – divest for reasonable prices
Capability-Offering is in decline – optimum pay for customer support while decreasing investment

Of course, to complicate each of these reasons and actions is the element of time. If there is relatively little time pressure, then the delineated approach can work in a deliberate fashion, but if time pressure exists, the response becomes more urgent. A migration becomes a divestiture, divesting for reasonable prices become bargain prices, and continuing support becomes transitional in an end-game.

To equip your business to prune in a healthy manner, McGrath recommends that you identify the warning signs of decline, create metrics to highlight the import, and once the decision for disengagement has been made, pick the appropriate approach in accordance with value to the business, the reason for decline, and the pressure of time.

Pruning your business is an important on-going strategic action for businesses who desire to build and exploit transient competitive advantages.

September 29, 2015 By Don Springer Leave a Comment

A Tightrope for Growth

With markets in continual turbulence and competitive advantage transient, how do companies grow and thrive?

In her book, The End of Competitive Advantage, Rita McGrath contends that companies must continuously reconfigure. They do that by balancing flexibility with stability and thus avoid integration breakdown on one hand or stalling innovation on the other.

When facing extreme uncertainty for extended periods of time, most people become ineffective or even paralyzed with inaction. The high performing business today understands that and provides a ballast to stability in terms of social architectures. McGrath addresses several of these social structures:

Ambition – using stretch goals to keep a company from becoming complacent with today’s market advantages
Identity and Culture – investing in common corporate identities, culture, and leadership
Deployment via Development – educating employees when shifting from one market focus to another
Strategy and Leadership – establishing and reinforcing consistent strategic priorities and guiding principles
Stable Relationships – maintaining long term relationships with past and present employees and partners

Despite the internal systems and social structures above, today’s high performance business must create processes that foster strategic agility. McGrath found that high performance companies do this via the following principles:

Shape Shifting – leveraging industry evolutions and embracing the change rather than dramatic restructurings
Fast Budgeting – centralizing flexible resource allocation to avoid budget hostage situations by powerful executives in the business
Frequent Adjustments – adjusting strategy and changing resources quarterly versus annually
Innovation is the Norm – innovation is continuous and mainstream for everyone rather than episodic
Options Oriented Pattern to Market Exploration – entering markets to test response with small initial investments

McGrath found that the high performance companies “navigate seeming incompatible demands deftly”. While grand strategic priorities, values, and guiding principles are kept stable over time, the companies initiate prodigious amounts of experimentation and innovation.

The very stability of certain principles, culture, and leadership provide organizational energy enabling effective innovation in accordance with market evolutions as well as sheer change.

September 8, 2015 By Don Springer Leave a Comment

Evolving Constraints

Writer’s block can arise when staring at a blank page. Likewise for the business strategist, indecision can surface when facing a market of limitless possibilities. Rather than unbounded freedom, we need form to define the problem space of our work and we need problems to help formulate the work itself.

Constraints and obstacles can be assets to new ventures in that they facilitate and enhance design creativity. “Constraints shape and focus problems and provide clear challenges to overcome”, says Google’s Marissa Mayer, and thus constraints provide direction to our work.

Once you accept that constraints can actually improve your new product, initiative or business, can you identify all of the necessary business constraints at one time, prior to launch? New ventures and products are more about design and discovery than they are about executing a rigid comprehensive plan.

Over time, new constraints are continually revealed, highlighting appropriate problems at the appropriate time. For example, at the heart of agile software development is the segmentation of projects into small problems to be solved. The initial problems are derived from initial user needs. Minimal products with minimal features are then developed and released in a progressive manner, quickly and often. This allows frequent user feedback and product enhancements.

Traditionally, software is developed using a “waterfall” method where the “entire solution” is completely designed, detailed and planned prior to project initiation. Team members have their roles and tasks from the beginning of the development process to the end.

In contrast, agile projects reveal problems and constraints during each phase of software release and use. Small teams encounter new problems and learn as they progress, changing objectives, roles, and product features as needed. This progressive approach can be used for the development of new products and businesses of every kind.

To enter a market quickly, minimizing the cost of entry and ensuring success, it is important to let constraints direct and enhance your initiative or new business. While present markets are predictable to some extent, new markets and offerings are best discovered.

Constraints not only provide focus for creativity, they reveal the reality of markets progressively over time. Leveraging constraints, obstacles, and problems as they arise will enhance your adaptation to the dynamic business environment of today.