Reviewing the Corporate Counsel’s Playbook

Hurricanes. Hostile Mergers. Data breaches. A misconstrued comment on social media. These are a few of the real and figurative storms that companies weather regularly with the help of internal and external staff, and regular advice from their general counsel (GC).

James Barron

The National Association of Corporate Directors (NACD) recently convened its General Counsel Steering Committee. Crisis communications counsel James Barron, a managing director of the New York office of Sard Verbinnen & Co. (SVC), a specialist financial and crisis communications firm, led a discussion of more than 30 GCs from top companies in a discussion on topics that keep them awake at night, including cyberattacks, scandals, and the delicate art of communicating to stakeholders when a crisis occurs.

Barron emphasized that often times the GC plays “the role of the company quarterback,” having witnessed this many times during his tenure at SVC. Directors often turn to their GCs to understand the roles they should play during a crisis, being cautious not to open themselves to future liability. General counsel can also be instrumental in ensuring that leadership proactively creates a response plan and then follows that plan should a crisis arise.

Concepts to include in the GC’s crisis playbook follow:*

1. Create a crisis response plan that is usable. No one has time to read dense policies in a crisis. “While there are some crises that can be anticipated and materials can be prepared in advance, I don’t believe in crisis plan books that are six inches thick,” Barron said. He pointed out that companies should take the time to identify and drill on the most likely crises, then use the lessons learned to refine crisis response processes and assign senior executives and board members to appropriate tasks.

2. Drill the plan. No company can prepare for every scenario that will emerge in a crisis, Barron noted that tabletop exercises can help GCs and boards identify their blind spots and fine-tune assignments of who will be responsible for what portion of the response. One Steering Committee member also pointed out that tabletop exercises surface differing opinions about how to handle a crisis. Consider, for instance, that the GC and the director of public relations often times have very different opinions regarding messaging and speed of outreach. Hashing out disagreements before an event occurs will encourage the GC, executives, and directors to present a united front when a crisis occurs.

3. GCs are Quarterbacks. Barron said GCs often play the role of organizing the team and breaking down silos. “GCs find themselves corralling multiple groups, including senior management, the Board, operational management and communications functions. In addition, they have responsibility for outside counsel and often specialist PR firms such as Sard Verbinnen,” he said. “Their role is often to balance competing needs, particularly where there is a tension between the business needs and legal requirements.”

4. Identifying the need for public communication. Barron reminded the members of the Steering Committee that during times of peace at the company, they should consider mapping out which scenarios will need to be communicated publicly and which shouldn’t, what regulatory and legal ramifications exist for disclosing and not disclosing certain matters, and communicate the plan to the board and senior executives accordingly.

5. Understand who must be included in a crisis response plan. One Steering Committee member brought to the group’s attention that sometimes regulations demand that the CEO is involved in response to a crisis. Still another mentioned that the board at his company could not be involved in crisis response because they could not move at the speed that their senior management team could respond.

6. Seek outside counsel when a key player acts out of step with the plan. Barron pointed out that even with a plan in place, sometimes a key executive speaks out of order during a crisis, causing tension and discord between the board, and other executives. In this case, Barron notes that it’s “sometimes easier for an external legal advisor or communications group to ensure that the right decisions are made.”

7. Update your corporate contacts regularly. Several participants pointed out that having the right phone numbers for the right people is essential when management, the board, and GCs have only minutes to respond to a crisis. While this seems like a fairly simple task, Steering Committee members pointed out that having a list of who needs to be contacted immediately should exist in the crisis-response playbook—including every possible phone number or other contact needed to reach that person. Contacts should also be kept fresh for essential regulators, outside counsel, and other stakeholders who may need to be contacted.

8. Plan for the long-haul. One GC pointed out that some crises require weeks and even months of attention from top-level executives and the board. In addition to planning for immediate response, Steering Committee members agreed that a chain of assistance should be built to support the work done by responding executives and GCs. Not doing so could create undue risk within the organization caused by neglected leadership.

NACD’s General Counsel Steering Committee brings together progressive general counsel from leading companies to engage in frank, informal discussions with each other and with NACD leaders about corporate governance practices and the changing business and regulatory environment. These conversations help inform the development of NACD resources, education programs, and events with a goal of strengthening the partnership between the general counsel and the board. NACD thanks the Steering Committee for its participation, and for strengthening and supporting the work of corporate directors across the country.

*All General Counsel Steering Committee meetings are held under Chatham House Rule. The names of GCs and companies are removed accordingly.

10 Turn-Around Lessons from Zale Corp.’s Theo Killion

Jill Griffin

When former Zale Corp. CEO Theo Killion shared his leadership lessons of turning around Zales at a recent NACD TriCities Chapter program in Austin, Texas, it jogged some childhood retail memories for me.

Growing up in the 1960’s, my small hometown of Marshville, North Carolina, boasted a thriving town square of mom-and-pop stores. Because my family’s home was a hop, skip and a jump from these businesses, they became my playground. I was their frequent visitor, and with those visits came benefits. For example:

  • Remember when white go-go boots were all the rage? Mr. Gaddy, who owned the shoe store, made sure my sister and I scored pairs from his first shipment.
  • As a child, I received a personal call from Mr. Creech, the toy store owner, when his long-awaited skateboards arrived.
  • One spring, I stood with other locals as the Chrysler dealer eagerly removed the drop cloths revealing that year’s beautiful new big-fended models. (The fact the dealership offered up lots of free doughnuts, coffee, and soft drinks didn’t hurt either.)

I was rapt throughout the program as Melissa Fruge interviewed Killion, a modern-day version of my favorite childhood shop-owners, but on a grander scale.

Zales was on the brink of bankruptcy in 2004. Something had to be done. The bold and unvarnished self-assessment undertaken by the company’s senior leadership uncovered the business’s truths. These revelations, combined with sheer perseverance not to fail, brought the national jeweler back from the edge.

Here are some of my top take-aways from Killion about what executives and boards should do to turn around a struggling business:

1. Stay humble. Killion prefaced his remarks by stating that they were his opinion, and that many of the tenets he spoke about originated from great thought leaders. A mark of a strong leader is his or her ability to acknowledge with humility the admired ideas of others.

2. Interim in any title keeps you focused. By the time Killion took the reigns, Zale Corp. had had six CEOs in 10 years. When Killion’s best friend was fired as CEO, the board needed a quick fill. Killion was named interim CEO—leaving him keenly aware that he was considered temporary. He entered the role ready to make the most of the time he had.

3. Follow the money. Zales had six short months before its cash ran out. The company was in desperate need of an equity infusion. From day one, Killion and his finance team were reaching out to possible providers.

4. Dig deep for insight. Over a three-month period, Killion and his two-member strategy team worked 12- and 14-hour days, including weekends, to put a decade of operational decisions under a microscope. They carefully ferreted out what worked, what didn’t work, and why. They then presented these findings to the board.  Killion observed and reported that management’s bad decisions were made on the board’s watch. He wanted the board to feel the same deep discomfort that the executive leadership team was feeling.

5. Detail the new strategy. Zales’ new strategy document totaled 150 pages and spelled out in clear, concise details what the company would do going forward—and why. For example, severe cost cutting had reduced the customers’ experience of buying an engagement ring into a commodity. Consider, for instance, that the customer left the store with the ring—which often times is one of the most meaningful, expensive jewelry purchases a person will make—in a plastic bag.

The new strategy brought customer emotion and meaning back to a purchase at Zales. The purchase process was no longer treated as a transaction, and store training ensued to make it a well-crafted, loving, and memorable customer experience.

6. Flip the pyramid. Before Killion stepped in, the leadership philosophy of the company placed management at the top of the pyramid. The pyramid was inverted and a customer-focused culture was born. It looked like this:

  • Top tier: customers of Zales’ 1,100 stores;
  • Middle tier: 12,000 employees; and
  • Bottom tier: corporate management.

7. Think like Jeff Bezos. Bezos has built Amazon.com to be customer-obsessed, keen on technology and analytics, and is always testing new concepts. Killion sees this as a road-map for any retailer succeeding today.

8. The nominating and governance committee is key to matching strategy to board composition. Killion pointed out that Zales needed board directors with skill sets that matched the company’s five-year plan. Retail expertise was a must, and the nominating and governance committee needed to ensure its goals matched those needs. This committee must ask itself what skill sets the business needs. In retail today, Killion advises, a board member with deep literacy in e-commerce is essential.

9. Apply lessons from Vanguard’s 2017 Open Letter. Killion admires Vanguard CEO F. William McNabb’s open letter to public company boards of directors. Vanguard has 20 million investors, and currently is the second largest fund manager in the world. McNabb is keenly aware of the responsibility boards play in the success of the companies that the fund invests in. Here are the highlights of McNabb’s message to directors that especially resounded with Killion:

  • Sell quality things.
  • Practice good governance.
  • Pay close attention to the compensation program crafted for senior management.
  • Understand the company’s risks, and especially the role of climate risks.
  • Inclusion of women and other directors from diverse backgrounds on boards is important.

10. Brick-and-mortar retail is not dying. Instead, Killion believes retail is entering its golden age partly because of the many ways today’s retailer can reach a customer and make a sale.

The program is available to view via NACD Texas TriCities Chapter’s YouTube channel. It’s a meaty discussion and well worth your viewing time.

By the way, to this day I’m a recreational bargain shopper.  Simply walking into a favorite store lifts my spirits, and I’m glad that Killion and the directors of companies are working to help the retail industry thrive in the twenty-first century marketplace.

It’s the Best Networking Time of the Year!

Many job seekers think that they need to slow down their job seeking through the holidays, because nothing is going to happen between now and the end of the year.  Businesses are hard at work closing this year’s deals as well as preparing for next year.  Job seekers need to be doing the same thing.  Holidays or not, businesses need talent.

Smart job seekers capitalize on holiday networking opportunities to find smart ways to build their job search momentum.  They challenge conventional wisdom, and find the reality is a whole lot different than the myth!  Here are six reasons why the holidays are a great time to accelerate your job search.

Competition decreases

Conventional wisdom may be widely accepted, but it is not always wise.  The belief that nobody is hiring during the Holidays is a good example.  This is great news for you, the wise but unconventional job seeker!  Less competition!  It’s time for you to intensify your search and take advantage of the fact that others have slowed down their efforts and made an early start on ugly sweaters and egg nog.

Business travel slows down

One benefit of being a job seeker is that you don’t have to fight the airport crowds doing yet another business trip.  And maybe you’re not the only one.  Maybe those busy executives – the ones who are always on the road and hard to reach – have decided to give the TSA a miss, too.  They’re back in town over the holidays and available to meet with you to give some valuable advice and key referrals that will help you in your job search.

People are more receptive

Tis the season to be jolly!  Holiday parties with family, friends, and industry associations give you many opportunities to network.  Decision makers, like everyone else, are in the holiday mood and more accessible.  What’s more, if you play your cards right, they might invite you to that holiday party where you can meet other senior execs for more advice and information.

Budgets drive decisions

Without budget approval, there is no job.  When budgets expire at the end of the year, no hiring manager wants to have to go to their boss and ask for new approval to hire next year simply because they didn’t get around to filling the position this year.  They need to get that vacancy filled in a hurry!  Target that hiring manager and show them you are the talented person they have been looking for.  It’ll solve their problem – and yours!

Recruiters want their commissions

If there’s a recruiter involved, you can rest assured they want to maximize their year-end commission.  And they don’t get paid unless you – or someone like you – gets hired before the end of the year.  You’re well qualified, experienced and prepared.  So, why shouldn’t it be you in that position?

You want to maintain your momentum

Winning that great job does not happen over night.  You have to work at it diligently and persistently.  Building and maintaining momentum is key.  Your competition, having decided that partying and shopping is more important than job seeking, has dropped back to the end of the line.  And, even if you haven’t already won the job, you’re ahead of the game and at the front of the line come the beginning of January!  Ready, willing and able!

 

So, re-write the lyrics of the familiar holiday tune and sing “It’s the Best Networking Time of the Year!”  Ask your Career Coach to help you change your thinking and adopt a different approach, to end up with the job you want, one where you can succeed.  Remember that finding employment is a business transaction – you win the job because you demonstrate that you can solve the business problem that keeps the hiring manager awake at night.  Become effective and impassioned in selling a product you know best – YOU!

 

 

Brian Hinchcliffe is Director, Executive Career Transition Services, with Career Partners International in Houston, Texas.  He prepares executives for their next career opportunity.

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Avoid Deal Failure: Ask These Tough Questions Before Any Acquisition

Justin Johnson

Justin Johnson

It is easy to get caught up in the excitement of a deal—the unvarnished optimism of the corporate development team, the bullish spreadsheets from the bankers, the juicy steaks at the closing dinner. The numbers, however, don’t lie. It is estimated that at least half of all merger and acquisition (M&A) deals ultimately fail, destroying shareholder value for the acquirer instead of increasing it. A disciplined valuation analysis—ideally conducted with minimal involvement of the deal team and bankers—can help board members avoid unsuitable matches and support deals that are a good long-term fit.

A Synergistic Match

Assume your company has identified an acquisition target operating in your business and serving similar customers. Cost savings from the combination are expected as the result of an overlapping distribution network and because redundant production and administrative staff can be eliminated. This is a classic synergistic deal, where the acquirer boosts overall profit by adding the target’s revenue to its topline while eliminating many costs associated with achieving that revenue.

The first step in evaluating such a transaction is establishing the market value of the target without regard to buyer-specific synergies. While acquirers are usually most interested in the valuation of the combined company, there are good reasons for first establishing a baseline market valuation of the target on a stand-alone basis:

  • It gives the buyer insight on a valuation the target might expect to receive in the deal.
  • It provides a reference point the buyer can use to evaluate how much synergy it brings to the table.

Determining Baseline Value                             

There are several common approaches for deriving the market value of an acquisition target, and an acquirer should undertake as many of them as possible to establish a baseline valuation matrix. The two common techniques for publicly traded entities are straightforward. They entail analyzing the target’s historical stock price and the premium at which its stock trades after the deal is announced. For our purpose, assume the target is not public and review the four valuation approaches commonly applied to private companies.

  1. One of the most common techniques is by referencing the trading multiples of comparable publicly-traded companies. Care is required in the selection of comparable public companies to ensure similarity of operations, size, and growth prospects with the target company.
  2. Another common method is to consider recent M&A deal multiples for similar companies. For this approach, make sure to distinguish between financial sponsor deals and strategic deals, as strategic deals frequently pay higher multiples due to acquirer-specific synergies. Value indications from these approaches entail applying observed market multiples to the target’s standalone earnings, typically before interest, tax, depreciation, and amortization (EBITDA).
  3. If a long-term forecast is available for the target, financial advisors sometimes use a discounted cash flow (DCF) analysis. It should be stressed, however, that this analysis is only as accurate as the underlying forecast, which may be suspect. For this reason, a DCF analysis often is underweighted—and sometimes omitted altogether—from a valuation exercise. Additionally, a “haircut” may be applied to the forecast itself before it is put into the model.
  4. Finally, if the target is likely to attract financial buyers, advisors may employ a leveraged buyout (LBO) analysis. This approach values the target by establishing what a financial buyer would be willing to pay for the company under the financing structure it might be expected to use—often a combination of debt and equity. If a company is underperforming its peers, the LBO model may also include some assumptions about reorganization and/or add-on acquisitions.

Once as many of the preceding approaches as practicable have been performed, financial advisors triangulate the various pricing indications to establish a baseline market valuation range for the target.

Establishing Pro Forma Value

The next step is assessing the value of the acquirer after acquisition. This analysis is different than the market valuation analysis because it factors in synergies to show the value of the acquisition to that specific buyer. A word of caution: Board members should be wary of synergy projections from bankers or corporate development personnel who are emotionally or financially invested in the deal. Considering the stakes, engaging an outside advisor not connected to the prospective transaction to provide an independent valuation and estimate the potential synergies can be a sensible course of action.

No matter who is performing the pro forma analysis, a number of factors should be evaluated: the amount of expected synergies, the costs associated with realizing those synergies, the amount and type of purchase consideration, and the trading multiples for the acquirer’s stock.

Even for a disinterested third party, it is challenging to estimate synergies with accuracy, so it is prudent to perform a sensitivity analysis of the transaction’s impact on the acquirer’s share price. This is best revealed in a sensitivity table that varies both the amount of assumed synergies and the purchase consideration. Layering in an additional variable to the sensitivity analysis, the estimated one-time integration costs incurred to achieve synergies can further enhance precision. These costs can be just as difficult to project as synergies, so a range of estimates is appropriate.

The resulting sensitivity table can provide board members a powerful visual tool to understand how much it makes sense to pay at varying levels of synergy and costs. If the resulting analysis shows that a deal increases shareholder value—even if actual synergies realized are at the low end of expectations and one-time costs incurred to realize those synergies are at the high end—the deal likely will turn out well from the acquirer’s standpoint. An even better deal is one that increases shareholder value if synergies are below the low end of the estimated range and integration costs are above the high end.

Conversely, deals that are only accretive at or near the most favorable ends of the two ranges are likely to destroy shareholder value.

Other Impacts on Value

What about the impact of the type of purchase consideration on value? An acquisition can be financed with available cash, new debt, stock, or some combination of these. Debt financing will create a drag on future earnings in the form of interest expense, another cost of realizing synergies that must be considered. If acceptable to the seller, using stock may be advantageous to the buyer.

A final factor to consider is the valuation multiple of the acquirer. If historically it has been somewhat volatile, it is a good idea to run a sensitivity analysis on the pro forma value of the stock, assuming a range of valuation multiples for the acquirer consistent with its recent trading history. The lower the valuation multiple, the lower the increase in value from transaction synergies.

Know the Difference

Board members are unlikely to bless a strategic acquisition with the intent to destroy value. Yet, too often, that is exactly what ends up happening. A disciplined, thorough, and independent valuation analysis can make the difference in helping a board distinguish a suitable match from a bad one. After establishing both the market value of the target and its pro forma value to a particular acquirer, a buyer is well-positioned to negotiate and—if all goes well—finalize the deal.

Justin Johnson is co-CEO of Valuation Research Corp. where he sits on the firm’s board and is a member of the firm’s Private Equity Industry Group and Financial Opinions Committee. Prior to joining VRC, Johnson held positions with Arthur Andersen, Merrill Lynch, and PricewaterhouseCoopers.

Governance at 30,000 Feet

American Airlines Group director Alberto Ibargüen recently led a fireside chat with the company’s CEO and Chair Doug Parker during the NACD Florida Chapter’s season kick-off event at Miami International Airport. With more than 100 in attendance, the program featured insights into the highly competitive airline industry along with some key considerations for directors.

A New Day for the Airline Industry

From left to right: Sherrill Hudson, NACD Florida Chapter Chairman; Lauren Smith, NACD Florida Chapter President: Doug Parker, American Airlines Group Inc. and American Airlines CEO and Chairman, and American Airlines director Alberto Ibargüen

From 1978 until deregulation of the airlines, the airline industry yielded no return on capital; however, since the merger of American Airlines and US Airways less than four years ago, American has generated $20 billion in profits. Three airlines—American, Delta, and United—are now leading the pack in rationalizing and leveraging the hub model to offer passenger service across the globe while generating positive returns. Parker insists this is the industry’s “new normal” and spends a great deal of time convincing constituents that the industry is not simply experiencing a temporary “up” in a long-term cycle.

Parker explained that the company must now invest in its people and its products, taking a long-term view of the business. For example, American invested in new aircraft and now has the youngest fleet of any U.S. airline. With regard to employees, many of whom are unionized, Parker raised wages in the middle of a contract term in order to fulfill his promises to them during the merger. He explained, “I use the ‘look them in the eye’ test when it comes to the 120,000 people on the American payroll,” emphasizing the importance of transparent communication with employees. Another area of investment is data protection, and the board routinely raises the issue of cyber risk.

Merger Advice

“Never undertake a merger when there’s not a clear strategy,” cautioned Parker, when talking about the successful US Airways and American merger. Recognizing the herculean amount of work required to meld systems and go-to-market philosophies, he added, “You shouldn’t put your team through one unless two plus two will equal five, not 4.2.”

In terms of building a post-merger board, the merged company board consisted of two American board members, three US Airways board members, including Parker, and five members from the creditors’ committee. With this blended group, directors did not focus on the “this is how we did things” historical perspective, but rather the group was able to move forward as a relatively cohesive unit from the beginning.

Communication and tone at the top became priorities for the board and management after the merger as well. Parker began holding town hall-style meetings, taking questions from employees. These sessions are recorded and offered to American’s employees worldwide.

A Strategic-Asset Board Focused on the Customer Experience

Parker emphasized that by asking the right questions, the board has had an enormous impact on management, “ensuring that the team has a strategic focus.” Given the day-to-day demands of running an airline, pulling the team from those responsibilities can be challenging. Still, the board insisted on an offsite focused on strategic planning, which proved to be very valuable. “I put off the retreat for two years because we were so busy with the integration,” said Parker. “But the offsite was valuable because we were forced to articulate our strategy in a way that could be understood by others, like the teams and investors.”

American Airlines director Susan Kronick, who was in the audience, added that the board works well because it is diverse. “Our board is diverse in terms of gender, ethnicity, and, most importantly, points of view,” she said. “We have rich discussions, and everyone is moving forward together.” She added that a keen focus on the customer experience is a unifying factor. “We take the proactive perspective that the culture of the company is a competitive advantage for us with customers.”

Parker added that the board members aren’t afraid to speak up, and his job is to ensure his team is communicating well to the board. He also echoed the board’s focus on the customer.

“We are transporting people at 525 miles per hour, so we are constrained by the laws of physics,” said Parker. “But we can make sure the rest of the experience is as efficient and comfortable as possible.”

The NACD Florida Chapter would like to thank American Airlines and Miami International Airport for supporting this event and the behind-the-scenes airport tour that preceded the program.

Kimberly Simpson is an NACD regional director, providing strategic support to NACD chapters in the Capital Area, Atlanta, Florida, the Carolinas, North Texas and the Research Triangle. Simpson, a former general counsel, was a U.S. Marshall Memorial Fellow to Europe in 2005.

Career Partners International’s High-Tech Career Coaching Delivers Extraordinary Results

Career Partners International (CPI) is one of the largest career transition and outplacement firms in the world, offering consistent support to clients across the globe, whether they separate a single employee or are faced with a large-scale layoff. With a Net Promoter Score of +78 and 97% of candidates reporting full satisfaction, Career Partners International is pleased to offer its best-in-class services to clients and participants across continents.

Career Partners International prides itself on having industry-leading technology with a digital suite of tools and resources that assists job seekers. However, in today’s career transition industry, technology can become a crutch that elongates an individual’s job search success when used in lieu of the personal interaction that leads to meaningful results. In our highly digital world, the data still supports that  70% of candidates find their next position through networking not sitting in front of a computer.  For example, Career Partners International’s online job search tool is a great gateway to find opportunities, but the team’s one-on-one career coaching is what determines candidates their next best step to connect directly with decisionmakers in their target companies. The average tenure of CPI coaches is well over 10 years, so CPI knows what it takes for a person to effectively move through a transition, conduct a job search, and onboard themselves into a new role.

“One-on-one mentoring provided customized evaluation of my personal career options, relevant companies, and offered concise evaluation. My coach was an excellent mentor providing honest feedback to how I should proceed during the job search process,” said a participant who successfully landed a new role. “All training sessions completed the learning of how to successfully apply for a job. Resume development, job offer negotiation, and dealing with external recruiters were other important skills that I improved on as a result of this program.”

“All the people at Career Partners International were supportive, informative and made my journey easy,” said another successful participant. “I don’t think I would have found a job so quickly without their help.”

Career Partners International’s exceptional candidate landing time of 2.73 months is a direct result of the personal interaction its coaches offer to clients and candidates. While CPI has the industry’s most advanced and robust technology, it is its 1:30 coach to candidate ratio (as opposed to the industry standard of 1:200 candidates) that allows for the most satisfactory results.

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