The world of business is often like sports, especially when it comes to boards of directors who have to square off against a shareholder activist. It’s convenient, then, that the NBA-champion Toronto Raptors’ home arena is located at the start of Bay Street, the heart of the nation’s financial district. As Canada celebrates the Raptors’ win, it is useful to see what directors can learn about building not only a winning team, but also a resilient one.
Like the Raptors at the start of the season, companies have a strategy they plan on executing. But, unlike the Raptors, many companies are unprepared to critically evaluate that strategy as it rolls out, to make needed adjustments and to respond to adversity.
This season the Raptors had injury issues, Kawhi Leonard missed 22 games as part of his play-management protocol, and Serge Ibaka was sent to the reserve unit. For boards, when targets are missed, results fall short of guidance and adversity – such as a short-seller or activist shareholder – strikes, what changes are they prepared to make in response? Or, more importantly, what has been done to prepare and build resiliency into the enterprise in advance?
Coach Nick Nurse dealt with each of these delicate situations effectively and won the respect of players and fans in the process, demonstrating that accountability matters. Directors need to be able to put their companies into a constant state of internal review, to challenge the underlying assumptions of their strategy and to make changes when needed to maintain shareholders’ and the market’s confidence.
Boards need to ensure a balance of expertise so they are not only able to question plans effectively but also to adequately evaluate management to ensure they get their No. 1 job right: Hiring the right chief executive officer (and firing the old one if needed).
Right people for the right time
Raptors president Masai Ujiri’s decision to fire the coach of the year and trade fan favourite DeMar DeRozan for the often injured, rental player Mr. Leonard left many people scratching their heads. But Mr. Ujiri was enacting a lesson that many boards fail to appreciate: Regardless of your affinity for an individual and their past contributions, the team that got you to where you are might not be the team to get you where you want to go.
Take the gold industry for example: Directors with exploration and development experience may need to be replaced with mine builders and operators at the appropriate time. Core to this refreshment is succession planning, especially for the CEO role which was a key issue in Paulson & Co.’s recent proxy fight against Detour Gold Corp. Unlike the Raptors who identified Mr. Nurse as Dwane Casey’s successor after five years as an assistant coach, Detour Gold was vulnerable because a lack of succession planning had left it with a revolving door at the CEO position. In the cannabis industry, we have seen and will continue to see the need for founder-CEOs to be replaced with CEOs who can absorb the massive scaling up and growth in the industry. Such was the case with Aphria Inc. where both co-founders recently moved on from the company.
Just like fans see a general manager’s willingness to make bold moves as an indication of the team’s commitment to win, shareholders view succession planning and an ongoing commitment to board refreshment as an indication the company is committed to long-term success.
Develop your bench players
The Raptors built a team with a strong bench, understanding that individual players – even stars – aren’t always available or appropriate to get the job done. By ensuring adequate depth and competence beyond front-line players, they were able to outlast and outcompete teams that relied heavily, or entirely, on superstars.
Similarly, in the corporate world, there are clear benefits to understanding where you can effectively slot in new talent during periods of adversity or change. Furthermore, it is critical to be tapped into industry professionals beyond the company’s immediate cohort and to continually attempt to shore up obvious weaknesses and any skill gaps that may be desirous following a change in market or operational conditions. Like fans, you can bet your shareholders will be making similar comparisons.
Deliver for your fans
For boards, this means your shareholders. Prior to this season, Mr. Ujiri remarked that being good wasn’t good enough, the Raptors needed to be great and directors would be wise to adopt a similar mindset. Like fans of the Raptors, which had become a reliable 50-win team without a championship, shareholders of companies who deliver consistent results can be prone to demand even more if opportunity is seen to exist, as illustrated in M&G Investments’ recent proxy fight against Methanex Corp. and JANA Partners’ campaign against Agrium when it was the second-best performer against its peer.
In Canada, where our unique regulatory regime paves an easy road for shareholder activists, a company’s performance does not allow it to escape an activist attack if more is expected. Boards need to be willing to explore strategic opportunities, evaluate their company through the eyes of an activist and be prepared to explain why a particular course of action does not make sense. As Mr. Ujiri has remarked, sometimes the best moves are the ones you don’t make. Where an opportunity to create value is seen but boards are unable or unwilling to deliver on, shareholders will be quick to replace them with directors who can.
Do you reward your stars for past results or meeting future expectations?
As the decision by Raptors management looms on how much they need to offer free agent Mr. Leonard to stay in Toronto, the core question for them to consider is one familiar to boards: How much is a winner worth? Too many boards are judged by shareholders to have overpaid for CEOs who demonstrated success previously, without adequately tying pay to future performance metrics, such as total shareholder return. While boards will argue that large make-whole payments are needed to attract unique talent or voluntarily retiring executives are deserving of a special payout or severance, shareholders are likely to see things differently. Many simply do not buy into the “CEO-superstar” narrative that boards have used to justify eye-popping pay packages.
As Mr. Ujiri demonstrated in re-signing Serge Ibaka and Kyle Lowry two years ago, success hinges on not overpaying for talent and appropriately incentivizing them to succeed. Die-hard fans and shareholders are generally in it for the long haul, with both expecting year-over-year performance for their loyalty and the sound investments in talent that requires.
To apply these lessons to your company, you don’t need to be an expert in basketball or even a fan. Just a fan of good governance.
Ian Robertson is executive vice-president of communication strategy at Kingsdale Advisors.