Short-sightedness in boardroom decision making can take on many forms, e.g. failure to consider how the decision will be perceived outside the boardroom (optics) or failure to understand how the decision will affect the company over time (precedence). No matter the type of myopia, the impact is consistent: sub-optimal decisions that lead to conflict and public disillusionment. There is an easy-to-implement remedy: a decision sieve that helps boards review a series of questions to make sure they are consistently evaluating their decisions against the organization’s vision, mission, values and strategies and against the perceptions of stakeholders (e.g. employees, shareholders, vendors, community).
It’s not hard to find examples of myopic decision making in the boardroom. Recently, the Walt Disney Company announced that its board had appointed Bob Iger as Chairman in addition to his role as CEO and that Bob Iger’s annual compensation package would increase from $26M to $30M (a little over a 15% increase…$30M represents over 300,000 day tickets to Walt Disney World!).
Proxy advisory services (ISS and Glass Lewis), as well as the Treasurer of Connecticut (whose pension fund is a large institutional shareholder) urged shareholders to vote against reelection of various board members involved. Additionally, proxy advisory services were not supportive of the increase in Iger’s annual compensation package from $26M to $30M. In 2004, Disney had faced public perception that it had a weak governance model and a rubber stamp board of directors. At that time, Disney separated the position of CEO and Chairman. Eight years later, the Disney board has proven that boardroom myopia is alive and well. It should be noted that 73% of shareholders approved the slate of board directors (who made the decision to combine the positions) and 57% of shareholders approved the company’s compensation packages in an advisory vote. Roy Patrick Disney was quoted saying “The stock’s at $43, we’re happy” (note, a year ago, Disney stock was trading in the $41 – $42 range…so, the share price has increased at best 5% this past year while Mr. Iger’s compensation has increased 15%…I’m not sure why Roy Patrick Disney is happy).
Disney denounced the negative reaction as lack of public understanding about what is best for Disney and its shareholders. They justified their decision to combine the CEO and Chair role as best for long-term succession planning. Disney stated that Mr. Iger’s $30M compensation package is competitive with his peer group. Perhaps…but, it appears that Disney’s board missed two of the key questions that if asked, could have led to different decisions or better prepared the company to address stakeholder concerns.
The Question of Optics:
Boards make decisions in private, closed sessions; many of the decisions are considered to be material information to investors and cannot be discussed outside of the boardroom prior to public announcement. This creates a situation where boards do not have the opportunity to solicit feedback on decisions.
In this situation, it is critical that boards ask themselves about the optics of the decision they are about to make. How will employees react to the decision? How will shareholders react to the decision? How will the media react to the decision? Asking these questions might not lead to a different decision, but it will better prepare the board and the organization for potentially negative reaction. If the Disney board had addressed the question of optics in their decision to increase Mr. Iger’s compensation package, there might have been a discussion on the current public sensitivity to perceived excessive executive compensation. Who knows if it would have led to a different decision, but, at a minimum, it would have helped the organization to proactively and thoughtfully address stakeholder concerns.
The Question of Precedence:
Myopia can also take the form of short-term focus. Boards should ask themselves if the decision that they are about to make will set a precedent for the organization. If so, is it a precedent that they will be willing to live with over time? Asking this question will help boards avoid public perception of ‘flip-flopping’ or the application of situational values in critical governance and leadership decisions.
In Disney’s case, the decision to combine the CEO and Chair position could be either a one-time decision for a transitional succession plan or it could signal that the Disney board supports the combination of the CEO and Chair roles. In any event, stakeholders perceived that the Disney board was reversing its 2004 decision on the separation of the positions and stakeholders questioned the decision.
Effective Board Suggestion: Decision Sieve
Boards should establish a Decision Sieve: a series of questions against which all decisions are measured. The Decision Sieve should address the consistency of the decision in supporting the strategic goals and mission, vision and values of the organization. The Decision Sieve should also consider questions of stakeholder reaction, e.g. the questions of optics and precedence.
The consistent use of a Decision Sieve will help ensure that boards are asking themselves the right questions for all decisions they make. The application of a consistent process to evaluate all decisions will also minimize the discomfort factor that some directors might feel when faced when with difficult and complex decisions.
The creation and use of a Decision Sieve is also a useful tool to create shared understanding of the organization’s values, mission and strategic priorities in the boardroom.
Utilizing a Decision Sieve will increase the probability of consistent and thoughtful decision making in the boardroom and help cure boardroom myopia.
image credit: sunilreddy.com
Kaye O’Leary is the Governance Editor for Innovation Excellence and is a founding partner of Tevera Consulting. Tevera where she has served as the interim CFO of Shock Doctor Inc. and Caribou Coffee (NASDAQ: CBOU), and has advised many public and private companies on a variety of board governance and strategic growth projects.