Despite unprecedented levels of cash on U.S. public company balance sheets, management continues to treat the asset as a scarce commodity. Shareholders’ insatiable appetite for growth remains even as many companies grapple with continued economic uncertainty and heightened regulation across many sectors. And so, management looks for a more informed and efficient use of capital across its wide array of deployment alternatives—mergers and acquisitions, dividends and share repurchase programs, and organic growth opportunities. In light of shareholder demands for transparency and good governance, what is the board’s role in helping to shape those investment decisions?
Deciding where to focus investment requires a productive working relationship between management and the board. Working with the board, management is responsible for defining and executing strategy, prioritizing investment opportunities— often across multiple businesses, functions and geographies—and delivering results. The board has a critical role providing oversight and holding management accountable for results. It also adds value through the collective wisdom that seasoned directors contribute through their advice to management, serving as a sounding board for management and weighing in on investment decisions.
Evolving to capital efficiency
More and more, we observe organizations move beyond a static approach to capital deployment to a dynamic approach focused on capital efficiency. This may allow management the strategic flexibility to change course—for example, doubling down on organic investments as new information is learned about the competitive environment—and helps to mitigate the constraints of an annual budgeting cycle.
Enhanced capital efficiency can typically be realized through incremental steps—for example, by focusing on a particular line of business and then building on that base over time. While this can serve the interests of shareholders by increasing management flexibility, it also presents a challenge to the board in fulfilling its oversight role. This makes having a well-defined process and associated rules of the road all the more important.
The process may incorporate checkpoints and require, for example, board approval of annual budgets, investments exceeding a certain size, or investments outside the standard profile as defined by the company. Policies may be established where special board committees are required either on a one-time or a standing basis, to consider transactions of a certain size or type, or where director independence is important to the board fulfilling its responsibilities to shareholders.
The process should allow for an appropriate exchange of ideas between management and the board, and provide the board with sufficient information to challenge management’s thinking in a constructive manner to make sure that decisions are well-informed and in the interests of stakeholders. A rigorous analysis, often with a standard framework, may be used, taking a meta-view on how to deploy capital across the organization. Board oversight may also extend beyond the process to encompass the tools, talent, methodologies, and cadence of how such decisions are made.
As evidenced by the steady build-up of cash, management is prudently considering its investment alternatives. Boards of directors can play a key role in capital allocation decisions, both serving and protecting shareholder value through advice, strategic direction and oversight.
The Board’s Dual Role: Some Key Responsibilities
To serve: increase shareholder value through advice, counsel and strategic direction.
- Put in place a qualified and competent management team (and advisors)
- Provide feedback and guidance on process and analysis
- Challenge strategy and tactical business plans and review alternatives
To protect: safeguard shareholder value through governance and oversight, as required by board responsibilities, in particular duty of care and duty of loyalty.
- Oversee major capital decisions as the stakeholders’ representative
- Oversee management, including providing the flexibility for management to implement the defined strategies
- Hold management accountable for actual versus expected performance
Chris Ruggeri is a principal and M&A leader of Deloitte Financial Advisory Services LLP. Sara Elinson is a principal with Deloitte Financial Advisory Services LLP.