Strategy, Firm Valuation, and Boards of Directors

This article is the tenth in a series on what causes a firm’s value to increase

Boards of directors should play a more direct role in helping to grow the value of their firms. This is a relatively new mandate as many boards historically have served only a high level review role during quarterly board meetings. But firms like Newell/Rubbermaid, SABMiller Beer and Whole Foods Markets are charting a new course for transparency of operations and board involvement.

As a previous article discussed, the legal and ethical issues surfaced by actions at Enron, Worldcom and Tyco caused the Sarbanes/Oxley (SOX) act to be passed. This act, among other key mandates, put pressure on publically traded firms to have their boards become more directly involved in their firm’s affairs. But how? Could the same disciplines help the boards of our region’s mostly privately held companies? I think yes.

This article will focus on the kind of skills, philosophy and processes needed on the board to help its organization increase firm valuation. I will borrow from Don Townsend of Dallas, Texas (, who has worked in and studied boards of directors for many years. Having served on only one for-profit company board, Nitro Security that recently sold to MacAfee, I need some more expert help here.

According to Don, there are two skill sets that make big differences in the effectiveness of a board helping with valuation growth. One is being able to directly work with management on strategic matters. For this, the board needs a granular understanding of the management’s strategy setting process. Good directors make sure they understand the process management uses and they work hard to insure that process is highly productive. This is quite different from actually evaluating the strategy or strategic initiatives. That’s dicey for a director. For one thing, it presumes a level of knowledge most directors don’t have. For another, it co-opts the director and makes it difficult for him or her to be objective in the future. The second skill set needed is interpersonal. The best directors are those who have the skill and the willingness to ask hard questions in a soft way. It sounds easier than it is and it’s one of the reasons that directors are generally people with considerable experience. In addition to having learned a lot, they’ve learned how to ask questions of management in a way that doesn’t invite defensiveness.

Now, when it comes to philosophy for boards, the view is they should be watchdogs for shareholders/owners. They should strive to insure that shareholders/owners are maximizing the value of their investment. This rests on the old bedrock principles of the duty of care, the duty of loyalty and the business judgment rule. The duty of care requires directors to be diligent in discharging their responsibilities. The duty of loyalty requires a director to put the interests of the company ahead of personal interests. No board of directors will be right all the time; that’s why we have the business judgment rule. We should not expect perfection but we have every right to expect care and loyalty.

What process will allow boards to become more directly involved but not fall into the trap of micromanaging? Bart Madden ( thinks these new duties can be carried out with a Shareholder Value Review (SVR) that he also thinks should be mandated by the SEC. This one review can help board members focus on the key leverage points and get the biggest bang for the time they allocate to being a board member. The SVR is these five steps:

  1. Map the strategy making process and know who holds primary accountability at each decision point in the process. One or two of these individuals should be asked to present “high lights and low lights” of the process at each board meeting
  2. Get a detailed accounting of the asset base in the firm, by category of asset and amount of investment in each
  3. Compare economic returns with the cost of capital. For firm valuation to grow, economic returns must be greater than the cost of capital
  4. Get a detailed accounting of the re-investment rates of those economic returns in the business
  5. Get a picture of the “fade” in the firm. Bart’s remarkable data on 7000 companies show over time both economic returns and re-investment rates almost always fall due to the crush of competition. Something very spectacular needs to be done to reverse these trends. The board must demand strategies from the strategy making process that will forecast and then achieve favorable future fade rates.

These five steps can arm the board with many of the valuable hard questions that can be framed in a soft way. They also prevent the board from micromanaging. The data and insights from just these five steps can fill a half to whole day of a board meeting for a highly productive use of time.

Next Up: Futuring: The Exploration of the Future

Bill Bigler is Director of MBA Programs and associate professor of strategy at LSU Shreveport. He spent twenty five years in the strategy consulting industry before returning to academia full time at LSUS. He is the incoming president of the board of directors of the Association for Strategic Planning, one of the leading professional associations in the field of strategy. He can be reached at