6th Annual Directors Forum: The Role of the Board of Directors in

6th Annual Directors Forum:
The Role of the Board of Directors in
Strategic Planning
May 31, 2012 (Silicon Valley)
June 6, 2012 (Boston)
©2012 Goodwin Procter LLP
Delaware law provides that the business and affairs of a
corporation shall be managed by or under the direction of a
Board of Directors. Under Delaware law, a director is
required to perform his or her duties:
› in good faith;
› in a manner he or she reasonably believes to be in the best interests
of the corporation; and
› with the care that an ordinarily prudent person in a like position would
use under similar circumstances.
So, what role should the Board of Directors play in a
corporation’s strategic planning process?
Goodwin Procter LLP
Role of the Board in the Strategic Planning Process
“The primary responsibilities of the Board include: evaluating the performance of the
Chief Executive Officer; succession planning for the Chief Executive Officer and other
senior executives; reviewing and overseeing the implementation of the Company’s
strategic plans and objectives; overseeing legal and ethical compliance; overseeing
the integrity of the Company’s financial statements and the Company’s financial
reporting processes; overseeing the Company’s processes for assessing and managing
risks; nominating directors, appointing committee members and shaping effective
corporate governance; advising and counseling management regarding significant
issues facing the Company; and reviewing and approving significant corporate actions.”
-- Guidelines on Corporate Governance Issues, Caterpillar Inc.
“The business of the Company is managed under the direction of the Board. Normally it
is management's job to formalize, propose and implement strategic choices, and the
Board's role to approve strategic direction and evaluate strategic results. However, as a
practical matter, the Board and management will be better able to carry out their
respective responsibilities if there is an ongoing dialogue among the Chief Executive
Officer, other members of top management and Board members.”
-- Corporate Governance Guidelines, Xerox Corporation
“The Board of Directors annually reviews the Corporation’s long-term strategic plans
and principal issues. Periodically during the year the Board receives strategic updates
from management of the Corporation.”
-- Governance Guidelines, Target Corporation
Goodwin Procter LLP
Strategic Plan #1 –
Organic Growth
Introductory Thought
“The essence of strategy is choosing what not to do.”
-- Michael E. Porter, Professor, Harvard Business School
Goodwin Procter LLP
Background of Wide World of Widgets
Wide World of Widgets, Inc. is a leading widget company both in the
United States and abroad. The Company operates through a network
of owned and franchised stores located throughout the United States
and in numerous international markets. In addition, the Company has
a vertically integrated manufacturing and supply chain system that
enhances the quality and consistency of its products and leverages
economies of scale. The Company benefits from strong brand
During the past year, domestic sales grew by 4% and international
sales grew by 7%. In fact, the Company has posted same store sales
growth for the past 18 years. Earnings per share for the past year
increased by double digits in comparison to the prior year.
The Company is leveraged primarily as a result of a prior
recapitalization. Historically, a large portion of the Company’s cash
flows from operations has been used to make payments on this debt as
well as distributions to shareholders in the form of stock repurchases.
Goodwin Procter LLP
Strategic Plan for Wide World of Widgets
Continue to execute on its mission statement – “Exceptional
franchisees and team members on a mission to be the best widget
company in the world”
Increase domestic sales by 1-3% and international sales by 3-6%
over the long term, with the budget for the current year targeting
sales growth at the top end of each of these ranges (performance
goals for executives will be set at 100% of these growth targets)
Expand its global store base with a capital expenditure budget of
Promote its brand name and enhance the Company’s reputation as
a leader in widgets through the launch of a new advertising
campaign and the use of digital marketing and social media
Continue to actively repurchase shares on the open market through
an increase in the authorization for its open market stock
repurchase program
Goodwin Procter LLP
What the CEO is NOT Telling You…
Wide World of Widget’s performance over the past few years has
been consistently positive, but there is concern among investors
that the Company will have trouble sustaining that growth in the
days ahead.
› The analyst community projects that the Company’s stock price will
remain flat for the next 12 months.
› The P/E ratio is a hefty 23 and since the Company does not pay a
dividend, the predicted performance would mean little or no gain in
2012 for shareholders.
The widget industry is highly competitive. The Company competes against
regional and local companies as well as national and international players.
In fact, one of its largest competitors, Golden Widgets, had a great year in
2011 with its stock price appreciating by 50%, and its stock is being
heralded as the “hottest” in the industry.
The Company has used performance-based bonus and equity plans to
incentivize management. Over the past three years, the Company’s
achievement of the performance metric of adjusted income has been 100%,
183% and 136%.
Goodwin Procter LLP
Strategic Plan #2 –
Planning in Public
Introductory Thought
“Announcing that his organisation would undertake a
formal program of strategic planning was almost like a
public announcement that he was going to quit
smoking. It forced the Chief Executive to attempt to
change his own behaviour in a way that he knew was
-- Economists Peter Lorange and Richard F. Vancil
Goodwin Procter LLP
Background of Widgets.com
Widgets.com is a leading services company with a suite of brands and
widget offerings on the web. Among its product lines is Local Widget,
which the Company views as a specific area for growth. The
Company’s Chairman and CEO was a significant investor in Local
Widget before it was acquired by the Company.
The Company is in the midst of executing a multi-year strategic plan to
reinvigorate its revenue growth and profitability by taking advantage of
the continuing migration to the internet. Both the Company’s operating
performance and stock price have declined over recent years; however,
implementation of the strategic plan is starting to show some positive
A hedge-fund stockholder has sent a public letter to the Board
criticizing the Company’s strategy and nominating a short slate of
directors. The stockholder has also questioned the Company’s
executive compensation practices and the independence of, and lack
of significant stockholdings by, the directors.
Goodwin Procter LLP
Responding to the Dissident’s Plan for Widgets.com
Dissident: The Company’s primary business unit is not being operated
efficiently and changes need to be made to make it profitable on a standalone basis.
› CEO recommendation: Stay the course.
Dissident: Local Widget has been losing money and is not a viable
business model. The Company should sell, joint venture, restructure or
shut down this business.
› CEO recommendation: Retain and continue to invest.
Dissident: The Company should publicly commit to specific operating
targets, and executive compensation should be strictly tied to these targets.
› CEO recommendation: Meet them halfway. Provide limited guidance in ranges.
Retain flexibility in compensation given the current turmoil in the business.
Dissident: The dissident’s nominees should be added to the Board to
oversee a turnaround of the Company.
› CEO recommendation: No settlement with the dissident if it would include Board
Goodwin Procter LLP
Responding to the Dissident’s Plan for Widgets.com
Relevant Public
Company Board
Company CEO/CFO
Deborah Dissident
Dwight Dissident
All Company Nominees
Dissident Nominees:
David Dissident
Goodwin Procter LLP
Strategic Plan #3 –
Introductory Thought
“Business success is a function of fit between a host
of key variables within an organization. Strategy,
values, culture, employees, systems, organizational
design, and the behavior of the senior management
team all have to be in alignment."
-- Michael Beer, Professor, Harvard Business School
Goodwin Procter LLP
Background of Championship Widgets
Championship Widgets Inc. is a leading provider of widgets and related
services to individual consumers and commercial businesses. Its
operations are organized in several segments, including the Patriots
Widget Group, the Bruins Widget Group and the Sox Services Group.
Among the Company’s products is a new Widget-on-the-Go offering
designed to compete with the hottest new widgets in the market. The
Company recently appointed a new CEO.
The Company is facing intense competition in all areas of its business
activity, including among major corporations with long-established
positions and a large number of new and rapidly growing firms.
The Company has been criticized for making only modest incremental
investments in its products, and it has had several challenging quarters
from an earnings perspective. In addition, its new Widget-on-the-Go
initiative has not met internal milestones and financial targets, nor has
the product been well received in the marketplace. Morale among the
employees is low.
Goodwin Procter LLP
Strategic Plan for Championship Widgets
Prioritize those categories of products and services with higher
value/higher margin growth, which generally reside in the Bruins
Widget and Sox Services Groups
Consider the spin-off or divestiture of its Patriots Widget Group, with
the exploration of alternatives to be completed in the next 12-18
Acquire one or more companies that complement the Company’s
existing product and service offerings or provide access to new
markets or innovations to accelerate the Company’s growth
› The CEO has identified a target company, Celtics Pride Inc., that she
believes will provide strategic benefits to the Company and will be
accretive to earnings in the first full year following the closing. The
acquisition of Celtics Pride, if funded from available cash, would leave
the Company with limited cash on hand for near-term investment.
Discontinue its expensive Widget-on-the-Go initiative, which will
allow investment in other R&D projects
Goodwin Procter LLP
The Strategic Planning Scenarios
The three strategic planning scenarios that we reviewed were loosely based on
real-life examples:
Strategic Plan #1 – Organic Growth: Domino’s Pizza, Inc.
› Domino’s has shown consistent organic growth, and has actively promoted its
brand through its “Oh Yes We Did” campaign and digital marketing and social
media initiatives.
Strategic Plan #2 – Planning in Public: AOL Inc.
› AOL is currently in a proxy contest with a dissident stockholder in which the
dissident is seeking three seats on AOL’s eight-person board of directors. The
dissident has attacked AOL’s current strategy and certain of its corporate
governance practices.
Strategic Plan #3 – Transformation: Hewlett-Packard Company
› The plan to transform the company was announced by then CEO Leo Apotheker.
On the following day, HP’s share price dropped 20%, and one month later,
Apotheker was replaced as CEO by Meg Whitman. Within 30 days following her
appointment, Whitman decided to retain the PC business, which Apotheker had
proposed spinning off, and further invest in it.
Goodwin Procter LLP
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