The Board of Directors and Shareholder Value

Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com

The first responsibility of any Board of Directors is to protect and extend shareholder value. This fiduciary responsibility is the binding legal connection between board members and the shareholders. Sound Corporate Governance Will Result In Increased Shareholder Value

Corporations operate in a diverse and complex marketplace. They must not become distracted from their principle obligation of protecting and increasing shareholder value. Directors must be competent and willing to react to changes in the market forces driving sales and profits. Corporate board members must also have the confidence in the Chief Executive Officer of the company to carry out the strategies established to deal with the challenges and setbacks that will inevitability come.

In today’s global market place, successful companies no longer limit their company’s market to the United States. Professionally managed corporate boards understand the need to broaden their markets – and their company’s reach- to other countries with different values and varying business practices. World-class companies reach out and include business leaders on their corporate boards to diversify skills and signal their willingness to include other values and perspectives into their company’s board room. Most corporate boards will adjust all but the most sacred corporate cultural values as the struggle to increase shareholder value intensifies.

A board must see that the company lives up to expectations. Industry analysts make predictions regarding expected corporate performance. Industry standards are set and company results are compared to those standards. Shareholders and large institutional investors use these reports and their expectations to direct investment activities. These large corporate investment decisions play a major role in the price of an individual company’s stock price. The opinion institutional investors have of a company’s board of directors and the track record of the company’s financial performance is critical in the market’s determining the value of a company’s stock price.

Corporate boards are under intense scrutiny from the media, unions, customers and shareholders. Technology allows shareholders, competitors and customers to view decisions of boards virtually in real time. Markets react to any reports that do not reflect the expectations of shareholders. Corporate boards must make decisions independent of market reactions, but the board must explain its decisions in a way that satisfies shareholders- and demonstrates that increased share value is to be reasonably expected.

Corporate directors must guard confidential information. Premature release of such information can aid competitors and damage the interests of the shareholders. Information leaks allow competitors to devise strategies to react quickly to counter the new strategy leaked by a weak director. Speed to market is a key to enhancing shareholder value as well as retaining the confidence of stockholders, suppliers and customers. Corporate directors leaking information, intentionally or unintentionally, should be removed from board quickly in order to keep the confidence of stockholders high.

Corporate boards must be sensitive to access to information. The internet and twenty-four hour news allows stockholders and competitors almost instant access to any corporate decision. A corporate board considering, for instance, the purchase of a rival company must guard this information. A leak of this information will cause the rival company’s stock price rise and erode any shareholder value the purchase would have brought to the company.

Corporate directors must make decisions based upon market conditions and the need to maximize shareholder value. Allowing other factors to enter the equation will erode shareholder confidence thereby driving down the market cap of the company. Directors must understand that a company’s value is determined by the market place, and that the ability to increase shareholder value is dictated by the company’s ability to deliver goods and services to the market place more effectively and efficiently than its competitors do.

Good corporate governance begins with an engaged and committed Board of Directors. The Chairman of the Board must keep his members engaged, informed, and focused on the job of devising strategies to that will increase shareholder value and maintaining the trust of the investment community.

© Dr. Earl R. Smith II

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Related Articles:

• Board Assessment – A Critical Part of Good Governance

• Good Governance and Delegation

• Developing Visionary Leadership – Board Contributions

• Corporate Governance and Informal Committees

• Corporate Ethics and Good Governance Leadership

• Corporate Boards in a Green World

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