AG Deal Diary

Strategic Planning Considerations

Strategic planning continues to be a high priority for directors and one to which they want to devote more time.ⁱ Figuring out where the company wants to — and where it should want to — go, and how to get there, is not getting any easier, particularly as companies find themselves buffeted by macroeconomic and geopolitical events over which they have no control. In addition to economic and geopolitical uncertainty, we highlight below a few other challenges and considerations for boards to keep in mind as they strategize for 2016 and beyond:

• Economic/geopolitical outlook. On the economic front, the U.S. economy is going strong, at least compared to the rest of the world. The global economic outlook remains tenuous. Growth in China, the world’s second largest economy, dipped to a six-year low in the third quarter of 2015, and economists predict its slowdown may continue for some time.ⁱⁱ Japan, the world’s third largest economy, has fallen back into a recession despite “Abenomics,” the economic stimulus program crafted in 2012 to revitalize Japan.ⁱⁱⁱ Rising geopolitical tensions, including apprehension about the spread of ISIS terrorism, instability in the Middle East, and the ongoing Syrian conflict and refugee crisis, are also casting a shadow over the world economic picture. Directors need to consider, among other things, how this global uncertainty and volatility could likely impact their company’s business and ensure that the company’s strategic direction takes these factors into account.
• Achieving growth. One of the biggest challenges facing companies is finding ways to drive top-line growth, preferably through organic growth, which is often the toughest to achieve. After the financial crisis, profit growth was driven largely by cost-cutting. With costs now cut to the bone, many companies have turned to M&A to drive growth, leading to another record-setting year for M&A. With so few options available for top-line growth these days, directors face important strategic decisions about how best to deploy their assets to grow profits, particularly with U.S. economic growth predicted to be around 2.5 percent in 2016.
• Short-term vs. long-term. Short-term successes breed immediate economic gain. We live in a world where patience seemingly is no longer a virtue. Accordingly, it has become more and more difficult for directors to focus on long-term goals and enhance long-term shareholder value in the face of “What have you done for me today?” Despite mounting pressures to deliver short-term results, directors must remain focused on governing for the long term and achieving long-term shareholder value. According to PricewaterhouseCooper’s (PwC) 2015 Annual Corporate Directors Survey, an increasing number are doing just that. Fifty-eight percent of directors surveyed say their company’s strategic time horizon is five years or longer, compared to just 48 percent in 2011.^iv And only 39 percent of directors now say that they use a one-to three-year horizon, compared to 52 percent in 2011.^v
• Effect of low oil and gas prices. Another year of record low oil and gas prices has continued to both boost and wreak havoc on companies, depending on the industry. The low prices have benefited many sectors of the U.S. economy, including consumers who are enjoying the extra money in their pocketbooks. At the same time, however, these low prices have truly challenged energy companies, as they have watched their stock prices drop and have had to cut costs, reduce workforces, delay investments and significantly reduce capital spending. The cheaper valuations have created synergistic opportunities for some, while others continue to seek partners or other lifelines to get them through this rough patch. Directors in all industries need to understand the challenges and opportunities that low oil prices may create for their companies and ensure that the companies’ strategies address them.
• Cash stockpiles. U.S. companies continue to stash cash, having grown their cash stockpiles to $1.4 trillion as of mid-2015.^vi Ultimately, companies will need to make important strategic decisions on whether, and when, to deploy these funds, particularly as shareholders demand more return on their investments. Many companies have already increased their stock buybacks and dividends, which are on track to hit a new high of $1 trillion this year.^vii While stock buybacks and dividends create shareholder value, directors need to consider whether choosing to buy back stock and issue dividends in lieu of other investment and growth opportunities is the best use of corporate funds.
• Climate change. Climate change can be a highly polarizing topic, but it is hard to ignore the headlines blaming climate change on melting ice sheets, extreme heat waves, droughts, flooding, wildfires and more. Companies should assess — or reassess — and quantify the opportunities and risks that climate change and resource scarcity may present to the company and determine what role it may play in the company’s strategy. Companies also need to pay attention to their disclosures on climate change risk and liabilities as government agencies have recently turned up the heat in this area, and many expect it to continue. In November 2015, New York Attorney General Eric Schneiderman subpoenaed Exxon Mobil, seeking documents to determine whether the company lied to investors and consumers or withheld information about the effects of climate change. Also in November, Peabody Energy reached a settlement with Schneiderman after a two-year investigation found that Peabody’s disclosures about the potential impact of climate change did not always square with its internal financial projections.
• Corporate social responsibility. Climate change is only one aspect of the broader corporate social responsibility initiative. More and more companies are integrating corporate social responsibility into their businesses, and more and more shareholders are asking companies to conduct their business in a socially and environmentally responsible manner. Boards should try to understand their stakeholders’ views on this topic and any related investment policies they may have. Several U.S. companies now publish corporate social responsibility annual reports to, among other things, help shareholders understand what the company is doing to be a good corporate citizen environmentally, socially and ethically. Although social responsibility is of growing importance to many shareholders, in addition to the benefits of being socially responsible, boards must also weigh the consequences that could arise if corporate assets are deployed for social causes rather than profit, as well as the potential liability if the company does not live up to the social responsibilities that it discloses to shareholders.

This post was excerpted from our annual Top 10 Topic for Directors in 2016 alert. To read the full alert, please click here.

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ⁱ PwC’s 2015 Annual Corporate Directors Survey, at p. 20.

ⁱⁱ Mark Magnier, “China Economic Growth Falls Below 7% for First Time Since 2009,” The Wall Street Journal (October 18, 2015).

ⁱⁱⁱ Keiko Ujikane, “Japan Falls into Recession For Second Time Under ‘Abenomics,’” Bloomberg Business (November 15, 2015).

^iv PwC’s 2015 Annual Corporate Directors Survey, at p. 27.

^v Id.

^vi Patrick Gillespie, “America’s Companies are Hoarding $1.4 Trillion in Cash,” CNN Money (September 25, 2015).

^[vii] Id.