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Corporations are awash in cash. In early 2013, nonfinancial U.S. corporations had more than $1.5 trillion in cash and equivalents.1 However, a recent survey of 50 Standard & Poor’s 500 companies found that they were planning to increase capital spending by only 2%, indicating a dearth of big growth opportunities.2 Given the sluggish economy and the level of cash on hand, one would think the top priority for many companies would be finding investment opportunities where they can create value — and that management and boards of directors would be focusing on this pressing challenge together. Yet, in the current discussions about the growth challenge, the pivotal role corporate boards might play seems to be missing. Why does the business community appear to be giving short shrift to the board’s responsibility and effectiveness in overseeing the creation of value? One reason, we believe, is that the business community has lowered its expectations about what boards can and should do. It has come to expect boards to act more as watchdogs and stewards of existing value than as creators of new value.
Boards of directors have two broad responsibilities on behalf of shareholders and other stakeholders: overseeing the protection of existing value and creating new value. Even though most boards take growth seriously, in practice their responsibilities have evolved to the point where oversight has become unbalanced.3 Risk management and risk-based thinking dominate many board agendas, and board members devote much of their time and energy to risk issues. Moreover, there is a well-developed risk-management industry to support boards in risk oversight.4
Unfortunately, boards devote far less attention and resources to overseeing the creation of new value. Although opportunity oversight is as central to value creation as risk oversight is to value protection, few boards of directors get deeply involved in overseeing a company’s underlying opportunity-generating capability.5 A company’s opportunity-generating capability is how it searches for, recognizes, creates and pursues value-creating opportunities. Although it’s common for boards to pay attention to individual opportunities as they arise, the phrases “opportunity oversight” and “opportunity-generating capability” are rarely heard in boardrooms.
The imbalance between board risk and opportunity oversight is a potentially serious problem.
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1. Cox, J. “Why Pressure’s Building for Firms to Part With Cash,” CNBC.com, Feb. 7, 2013.
2. Thurm, S. “Companies Fret Over Uncertain Outlook,” Wall Street Journal, Feb. 10, 2013.
3. In everyday board usage, in an interesting perceptual twist, the “protection of existing value” is frequently phrased as “preventing the destruction of value.”
4. This “industry” includes accountants, lawyers, consultants, shareholder organizations, academics, software development, websites, social media and nonprofit service organizations.
5. The term “opportunity-generating” is awkward. We are hampered here by the fact that the word “opportunity” does not have a verb form in English, whereas “risk” can be used as both a noun and a verb. We are left with an awkward phrase to describe the organizational actions that seek and realize opportunities.
6. See Kahneman, D. “Thinking, Fast and Slow” (New York: Farrar, Straus and Giroux, 2011) and J. Zweig, “Are You Wired for Wealth?” Money magazine, Oct. 1, 2002.
7. Gevurtz, F.A. “The Historical and Political Origins of the Corporate Board of Directors,” Hofstra Law Review 33, no. 1 (May 2011): 89-129.
8. 3M, “Culture of Innovation,” http://solutions.3m.com/wps/portal/3M/en_US/3M-Company/Information/AboutUs/WhoWeAre/.
9. Ibid., p. 3.
10. Hindo, B. “At 3M, a Struggle Between Efficiency and Creativity,” BusinessWeek, June 10, 2007.