Jul 172015

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An artful business clinic at Chicago’s Booth School addresses board responsibility in strategic corporate leadership and management. What can be called a “Batts Strategic Board Management” clinic, taught by a corporate director extraordinaire, Warren L. Batts, this exceptional knowledge and learning experience has inspired many (including me) towards a calling in corporate governance, not only at the Booth School, but also at the Wharton School and UCLA Anderson School.

Inside his strategic board management clinic, Batts tosses his “kitchen cabinet” at us filled with an extensive amount of comprehensible concepts of strategic leadership at the highest levels of big business enterprises.

Below we discuss with you a brief taste of three fundamental ideas many have taken away from “Batts Strategic Board Management,” through insights he shared with us from his long-time colleague and friend, The Late John G. Smale, who also outlined eight essential business responsibilities for modern boards to excel in steering global corporations nowadays.

The single most important responsibility of the board is to establish a winning strategy for the corporation.” – Warren L. Batts

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Mr. Warren L. Batts, 82, serves as the Chairman of Chicago Children’s Memorial Medical Center. He serves as the Chairman of the National Association of Manufacturers and the National Association of Corporate Directors.

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Since 2001, he has been a Director of Methode Electronics Inc. (Mr. Batts is shown standing immediately right of the NYSE bell in the above photo of Methode Electronics’ ringing of the NYSE morning bell on Wednesday, October 17, 2014). He served as the Non-Executive Chairman at Methode Electronics Inc., since September 15, 2004 until September 13, 2012.

A member of the Advisory Board at CTPartners Board Consultants, Mr. Batts serves as a Director of Chicago Climate Exchange Inc.

In the past, Mr. Batts headed Mead Corporation from 1978 until 1980 and was chief executive of Premark Corporation from 1986 until 1996. He then led Tupperware Corporation from 1996 until 1997. Batts also served on the boards of Allstate, Sears, Roebuck and Co., Sprint Corporation, British Columbia Forest Products, Temple Inland, and International Minerals and Chemicals.

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Mr. Batts is currently an adjunct professor of strategic management at the University of Chicago Booth School of Business. He is a graduate of Georgia Tech and he holds a Masters in Business Administration from Harvard Business School.

Inside the clinic of “Batts Strategic Board Management,” I felt as if I was sitting on the board of directors of a Fortune 50 company, flying at 38,000 feet, while simultaneously pulling all the value levers of strategic leadership – brokerage (creating value),cohesion (delivering value), reputation and trust (transferring value), and partnerships(sustaining value).

I also came away with understanding more fundamentally what constitutes a “great firm,” a term purposefully and deliberately used in the title of this piece. To briefly flush out why, probably what is appropriate at this point is a metaphorical sidebar illustration of the facts of such a “great firm.”

Her Majesty Queen Elizabeth II, Supreme Governor of The Church of England, and the Royal Legacy of the House of Windsor, is an institution of strategic leadership by right or privilege exclusive to The Royal Prerogative, but not of personage. For Her Majesty is a “great firm” of asset-richness in value, yet comparably limited in her cash spending on the endowment of her inherited Crown Estate.

The Queen in securing Her Royal Prerogative is given an annual allowance by her government amounting to nearly US$60 million plus US$20 million in private income from commercial rents. In 2014, she nearly over-spent her cash to a tune of US$75 million, nearly placing a slight deficit against her annual cash reserves of the firm.

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Photo Credit: Britain’s Queen Elizabeth II, Prince William, the Duke of Cambridge (shown left), and her husband Prince Philip, the Duke of Edinburgh (shown right), and her son Prince Charles of Wales, known alternatively in Scotland as Duke of Rothesay and in South West England as Duke of Cornwall (shown just off photo far right), watch a Royal Air Force flypast to mark the 75th anniversary of the Battle of Britain from a balcony at Buckingham Palace, in London, Friday, July 10, 2015. On July 10, 1940, during World War II, the Battle of Britain began as the Luftwaffe started attacking southern England. (AP Photo/Matt Dunham)

According to financial experts, Her Majesty’s allowance comes from the Crown Estate, which holds property assets valued at over US$12 billion on behalf of the Monarch. These firm assets produce annually about US$428 million in earnings.

(One of the oldest trusts in America, Harvard University, in contrast to The Crown Estate, as a great firm, has invested holdings in 2014 valued at US$42.8 billion. However, as reported recently by the New York Times, “describing the results as “disappointing,” Harvard University reported on Tuesday, September 19, 2017 that its $37.1 billion endowment earned an 8.1 percent return for its most recent fiscal year.

The endowment’s new chief executive, N. P. Narvekar, said that the fund was in the middle of a major revamping and that problems in the endowment would “require time to overcome.”

That return significantly trails the mean one-year return of 12.7 percent for more than 400 institutions tracked by Cambridge Associates, which manages money for many nonprofit organizations. And while many of the nation’s largest endowments have yet to report returns, this month the Massachusetts Institute of Technology posted a 14.3 percent return for its $14.8 billion endowment.”)

Note that The Queen does not own the firm assets (including the Royal Art Collection, the Crown Jewels, and the Palaces, such as Buckingham Palace and Windsor Castle), which altogether constitutes one of the largest property portfolios in the United Kingdom.

Rather, all of the asset holdings are held in trust for the reigning monarch, which is a “great firm” of tradition, reputation and trust, serving as a going concern since 1066. Continuing this ten century tradition of The Royal Prerogative, Her Majesty Queen Elizabeth II gets about 15 percent of the firm’s value as a beneficiary of The Crown Estate Trust.

An essential takeaway fully appreciated now in this tradition of the “great firm” is modern boards of great corporations (and their associated philanthropic charitable trusts, working in partnership for their beneficiaries) must focus on strategic integration simultaneously across two fronts: maximizing value to shareholders (the property owners), while at the same time, paying attention to the values of stakeholders (the keepers of the firm’s reputation and trust and its transferrable value through the corporation’s employees, customers, suppliers, and the communities where the company operates).

This focus on strategic integration of firm interests has become especially acute in the age of demography shift and heightened engagement of stakeholders and increased activism of shareholders.

There is one axiom that will remain true regardless of how fast the marketplace, technology and society itself may change. That axiom is that people, not physical assets, are any organization’s most valuable resource.” – John G. Smale, former Chairman of the Board of Directors, General Motors Corporation, October 21, 1993, also former member of the Board of Directors of Eastman Kodak, J.P. Morgan, and Procter & Gamble.

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The Late John G. Smale, 84, “as chief executive led Procter & Gamble through a period of extraordinary growth, and then helped engineer a turnaround of General Motors as its chairman,” according to the New York Times.

Mr. Smale, the national newspaper wrote upon his passing, “ran Procter & Gamble from 1981 until 1990. During his tenure the company strengthened its position internationally, pushing aggressively into Eastern Europe and Asia. He also oversaw a series of major acquisitions, including the US$1.2 billion purchase of Richardson-Vicks in 1985. The largest deal in Procter & Gamble’s history at the time, it brought the company well-known brands, including Vicks cold medicine, Olay skin care products and Pantene shampoo.”

A 1949 graduate of Miami University in Oxford, Ohio, Mr. Smale started out his career expertise in brand management in 1952, managing Procter & Gamble’s new Cresttoothpaste brand. He eventually garnered a first-of-its-kind, prestigious and extremely lucrative in value transferred, American Dental Association endorsement of the toothpaste brand.

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Rising up through the internal ranks of Procter & Gamble for nearly three decades, and eventually reaching his nine-year legacy, as chief executive through the “seven fat years” of the 1980’s, Mr. Smale oversaw a doubling of Procter & Gamble’s overall revenue to over US$24 billion with earnings to US$1.6 billion. In 1982, he was named to the board of directors of General Motors, eventually becoming the automobile manufacturer’s chairman in 1992.

Mr. Batts shared with us extremely valuable insights Mr. Smale gave to his audience at the Commonwealth and Commercial Clubs of Cincinnati, Ohio on October 21, 1993, in which Smale suggested the roots of failure of all organizations, including businesses, governments, nations, civilizations and societies, exists years before the result.

Mr. Smale said, “there are very few “Acts of God” behind these failures. The fault is not in the stars, it is in ourselves.”

Poignantly, Smale offered his practical view of industry leadership held by a firm along three threads: intellectual, capability, and results.

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1. Intellectual Leadership

When a firm is an intellectual leader, it establishes the pace of innovation across the industry, be it establishing new untapped gaps in the market and/or creating new products that consumers can experience.

What first comes to mind here is the technology juggernaut, Apple, in which Steve Jobs has completely shifted how millennial consumers quickly experience and adopt a firm’s innovative products.

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Procter & Gamble did the same in innovating brands in the consumer products industry in the 1930s; Alfred Sloan did the same in shifting consumer behavior for the auto industry in the 1950s; George Eastman did the same in shaping family experiences for the camera industry in the 1960s; Thomas Watson did the same in defining what it means to have high performance computing inside key punched IBM computers in the 1970s; Bill Gates did the same teaming up with IBM to produce revolutionized computer software for the banking industry in the 1990s.

Altogether, these mega-firms in their unique times, considered the trends but jumped at addressing the risks and uncertainties, to radically created a new paradigm and vision of their products in the marketplace. They also specifically addressed how a diverse group of consumers desire to engage their innovative products. This intellectual leadership and strategic vision forced established industry leaders to rethink how they were doing their businesses, and thus, leaving these industrial rivals with only two choices: “to either adapt or give up their leadership.”

In the final analysis of whose in front of the industry, an intellectual leader is aknowledge leader and an innovative leader.

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2. Capability Leadership

Next, a firm being as a capability leader of an industry is all about doing things right to the best of their ability, as opposed to doing the right things, aligned to the vision of the intellectual leader of the industry.

Here, the capability leader of the industry “develops an edge in product design, manufacturing or marketing … an edge that becomes the standard by which all competitors are measured,” defined Smale. He further suggested the industry’s capability firm is the one you use, when you are benchmarking your own firm’s capabilities.

When Sears, Roebuck and Company shifted from its 1940s catalogs to its 1960s super mall retailing, they re-invented how retailers benchmark themselves on consumer shopping during the peak holiday season. Eventually, the “Softer Side of Sears” campaign in the 1990s refocused industry upscale specialty stores, deep-discounters, and “everyday low prices” retailing.

Complacency of the 1990s Sears campaign, ultimately, radically shifted the industry further up the supply chain to “absolutely the lowest prices always” of WalMart (and Meijer in the Cornbelt Midwest). The super inventory management approach of WalMart’s warehouses in shopping primarily shifted the retail industry towards the desires of millennial consumers living in the rural suburban “edge” cities.

Now, downtowns are no longer consumer shopping experiences of the huge department stores (Chicago’s Marshall Fields, Columbus’ Lazarus, Cincinnati’sShillito’s, Little Rock’s Dillard’s, Cincinnati’s H&S Pogue’s, New York’s Gimble’s, to name a few now gone by the wayside).

This fundamental quote on strategic leadership and management by an ‘American Salesman in London,’ a century ago, just about sums it all up about what this capability leader possessed in establishing the global retailer, London’s Selfridge

A boss says ‘Go!’ A leader says ‘Let’s Go!’ ” – Harry Gordon Selfridge (1909)

What was before Henry Ford’s mass production and “factory physics” operational capabilities in the 1930s, an automobile manufacturer being a capability leader nowadays is doing things right, differently. Such an auto firm capability leader has now shifted to lean manufacturing processes of “smart cars” leveraging information, touch computers, and advanced communications technologies, as the primal basis of automobile industry competition in the millennial age.

Have you been inside a General Motors Buick lately? It looks and feels like a BMW or Mercedes, but at half the price.

In the end, a capable leader is an able leader and the most competitive one in front of the industry.

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3. Results Leadership

Finally, a firm being a results leader of an industry focus on “the art of putting all elements of vision and capability together to produce superior results on the bottom line in market share, profitability, cash flow, and return on investment,” counseled Smale.

He adds: “It is the most visible aspect of leadership and probably the most tangibly rewarding.”

Results leadership encompasses three perspectives:

  • Hindsight – Respect all aspects of the organizational mission and its history by motivating, acknowledging, and honoring the people that have shaped the results of the organization.
  • Oversight – Show the pathways for the organization to achieve its results goals and objectives through enrolling others using sound executive judgment.
  • Foresight – Craft a vision for a promising future of the organization’s mission that clearly establishes what’s possible as superior results.

‘Bridging the Trust Gap’ starts with ‘The End in Mind.’ That is, Being in the future of possibilities. Doing what enrolls others. Saying whatever acknowledges good results.”

Most of all, a results leader is the most visible leader shaping the future status and sustainability of the industry.

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Role of the Board of Directors in Ensuring Industry Leadership

Smale believed, “the Board of Directors bears a unique responsibility and must play a unique role in trying to ensure that the company’s management and its culture are able to anticipate and adapt to change.”

A highly excelled board is where the buck stops on executive judgment, acting in empathy as “an independent auditor of management’s progress, and asking the tough questions that management might not ask itself.” And finally, adhering to an excelling board’s duty of service in care, trust, and loyalty, plus most of all, the board’s duty of independence.

Smale’s own view of the responsibility of a board is “to represent the owners’ interest in the successful perpetuation of the business.”

Competitively advantaged companies create a culture of competency by the nature of the board’s strategic questions and request for information from its strategic management, as the board monitors and oversees management’s responsibilities. Yet, the board stands apart from management’s daily engagement of the successful perpetuation of the corporation as a going concern.

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Several principle procedures allow corporate directors to function in order to ensure the integrated intellectual, capability, and results leadership of the firm across their industry.

Smale outlined eight essential business responsibilities for modern boards to excel in steering global corporations nowadays.

  1. There clearly should be a majority of outside directors, and as a general safeguard, the Chairman and CEO should not be the same director.
  2. The independent directors should select a lead director, so the board of directors don’t move later than they should, and to help move up the timetable of board intervention when required.
  3. The independent directors should meet alone in executive session on a regularly scheduled basis … at least twice a year. Such meetings should be perceived as part of the board of director’s normal procedure in meeting its responsibilities, not as extraordinary or threatening events.
  4. The independent directors should take responsibility for all board procedures, create its own operating policies and committee structure, and review its own performance.
  5. The board of directors should have the basic responsibility of its own constituency, meaning selection of its own members based on the evaluation of the skills and characteristics required by the board at the time.
  6. The board of directors should conduct in executive session regularly scheduled reviews of the performance of the CEO and the key executives of the company, examining performance of the business, accomplishment of long-term strategic business objectives, development of management, just to name a few objective criteria.
  7. The board of directors must understand and fully endorse the company’s long-term strategies, as an independent business judgment of the soundness of the company’s strategy for the future.
  8. The board of directors must ensure that it spends an adequate amount of time and attention on its most important single responsibility: the selection of the CEO, where “proper fit” towards achieving the company’s strategy for the future is key.

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As Aristotle said more than two millenniums ago, “Whom the gods want to destroy, they send forty years of success.” –– The challenge for the great companies that are the backbone of America’s competitiveness in today’s interdependent world is to escape that fate.” – John G. Smale


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