Goodwin Procter LLP 2 Introduction 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 corporations strategic planning process?
Goodwin Procter LLP 3 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 Companys strategic plans and objectives; overseeing legal and ethical compliance; overseeing the integrity of the Companys financial statements and the Companys financial reporting processes; overseeing the Companys 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 Corporations 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 5 Introductory Thought The essence of strategy is choosing what not to do. -- Michael E. Porter, Professor, Harvard Business School
Goodwin Procter LLP 6 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 recognition. 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 Companys 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 7 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 $25-35M Promote its brand name and enhance the Companys 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 8 What the CEO is NOT Telling You… Wide World of Widgets 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 Companys 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 Companys achievement of the performance metric of adjusted income has been 100%, 183% and 136%.
Goodwin Procter LLP 10 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 desirable. -- Economists Peter Lorange and Richard F. Vancil
Goodwin Procter LLP 11 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 Companys 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 Companys operating performance and stock price have declined over recent years; however, implementation of the strategic plan is starting to show some positive trends. A hedge-fund stockholder has sent a public letter to the Board criticizing the Companys strategy and nominating a short slate of directors. The stockholder has also questioned the Companys executive compensation practices and the independence of, and lack of significant stockholdings by, the directors.
Goodwin Procter LLP 12 Responding to the Dissidents Plan for Widgets.com Dissident: The Companys primary business unit is not being operated efficiently and changes need to be made to make it profitable on a stand- alone 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 dissidents 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 seats.
Goodwin Procter LLP 13 Responding to the Dissidents Plan for Widgets.com Industry Expertise Relevant Public Company Board Experience Company CEO/CFO Experience All Company Nominees Dissident Nominees: David Dissident None Deborah DissidentNone Dwight Dissident None
Goodwin Procter LLP 15 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 16 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 Companys 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 17 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 months Acquire one or more companies that complement the Companys existing product and service offerings or provide access to new markets or innovations to accelerate the Companys 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 18 The Strategic Planning Scenarios The three strategic planning scenarios that we reviewed were loosely based on real-life examples: Strategic Plan #1 – Organic Growth: Dominos Pizza, Inc. Dominos 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 AOLs eight-person board of directors. The dissident has attacked AOLs 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, HPs 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.