Month: December 2016

Guidance On Board Director Independence By The Delaware Supreme Court

NB: Additional Guidance on Determining Board Director Independence Provided by the Delaware Supreme Court.

Posted on LinkedIn

The opinion makes clear that directors’ independence must be carefully evaluated by companies faced with stockholder derivative suits and their counsel because of the potentially far-reaching implications.

Seyfarth Synopsis: The Delaware Supreme Court recently reversed the dismissal of a derivative complaint for failure to plead demand excusal because it found that certain directors of Zynga Inc. were not independent due to their relationships with the Company’s founder and an interested director. The opinion makes clear that directors’ independence must be carefully evaluated by companies faced with stockholder derivative suits and their counsel because of the potentially far-reaching implications.

Background

Plaintiff stockholder filed a derivative suit alleging that certain directors and officers of the Company who participated in an April 2012 secondary offering breached their fiduciary duties by selling shares while in possession of non-public, adverse information concerning the Company. Plaintiff further asserted a duty of loyalty claim against the directors who approved the sale. The Delaware Chancery Court dismissed the suit in February 2016 in an opinion by Chancellor Andre Bouchard because it found that the plaintiff failed to demonstrate that the procedurally required demand upon Zynga Inc.’s board of directors to initiate such litigation would have been futile.1 The Delaware Supreme Court in an unusual 4-1 split decision reversed the Chancery Court’s opinion on December 5, 2016. In doing so, the Supreme Court in a majority opinion written by Chief Justice Leo Strine found that the plaintiff had pled “particularized facts regarding three directors that create[d] a reasonable doubt that these directors can impartially consider a demand.”

Takeaways

1. Facts Signaling a Close, Personal Bond Between Directors May Preclude a Finding of Independence. The Court of Chancery found that director Ellen Siminoff was independent even though she and her husband co-owned an airplane with founder and controlling stockholder Pincus. The Delaware Supreme Court in finding otherwise relied on plaintiff’s argument that “owning an airplane together is not a common thing, and suggests that the Pincus and Siminoff families are extremely close to each other and are among each other’s most important and intimate friends.” Both the majority and the dissent called the decision on independence a close call and questioned the adequacy of the work done on behalf of the plaintiff. The majority supported its analysis with Delaware opinions that (1) found that a director was not independent for pleading stage purposes where the director had a friendship of over 50 years with an interested party and the director’s primary employment was as an executive of a company over which the interested party had a substantial influence and (2) noted that if a friendship involved the parties serving as each other’s maids of honors, being college roommates, sharing a beach house with their families each summer for a decade, and generally being as thick as blood relations, that context is different from parties who occasionally had dinner over the years, went to some of the same annual gatherings and referred to each other as “friends.”

2. Designating a Certain Director As Non-Independent Under Stock Exchange Rules May Also Affect Whether a Director Can Be Considered Independent Under Delaware Law. The Court of Chancery likewise found that directors William Gordon and John Doerr were independent even though the Zynga board had previously determined that Gordon and Doerr did not qualify as independent directors under the NASDAQ Listing Rules. The Delaware Supreme Court in reversing the Chancery Court wrote that “to have a derivative suit dismissed on demand excusal grounds because of the presumptive independence of directors whose own colleagues will not accord them the appellation of independence creates cognitive dissonance that our jurisprudence should not ignore.” The Court further noted that the fundamental determination a board must make to classify a director as independent under the NASDAQ rules—whether a director has a relationship which, in the opinion of the Company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director—is also relevant (but not dispositive) under Delaware law.

3. Mutually Beneficial Ongoing Business Relationships May Affect the Court’s View on a Director’s Independence. The plaintiff alleged that Gordon and Doerr were both partners at a venture capital firm that controlled 9.2 percent of Zynga’s equity and that the same venture capital firm is also invested in a company that the controlling stockholder’s wife co-founded and additionally invested in a company that another interested director serves on and invests in. Defendants attempted to argue that the relationships among these directors flowed all in one direction in which Pincus was beholden to the other directors for financing. In rejecting this contention, the Delaware Supreme Court noted that venture capital firms “compete with others to finance talented entrepreneurs like Pincus, and networks arise of repeat players who cut each other into beneficial roles in various situations.” The Court found that the combination of these facts and the Zynga board’s determination that these two directors did not qualify as independent under the NASDAQ rules created a pleading stage reasonable doubt as to the ability of the directors to act independently.

Attorneys:
Gregory A. Markel, Heather E. Murray

Government Relations Is Serious Business, And More Than Just Lobbying

Lobbying Is Not Enough to Build Influence Among U.S. Lawmakers
Michael D. GottliebElise Gurney
DECEMBER 28, 2016

Posted in The Harvard Business Review, December 2016

Lobbying Is Not Enough to Build Influence Among U.S. Lawmakers

dec16-23-154325021

As organizations shift their focus toward understanding and investing in their Washington brands, they add more structure and certainty to their government affairs strategies. By collecting and heeding the most relevant data—the feedback of policymakers—companies equip themselves to make the most informed decisions about their investments in Washington.

Every budget item should justify its existence. But when it comes to influencing federal policy, companies don’t always used the right yardstick—or any yardstick at all—for determining and improving return on investment. A firm may have seen success on past legislation, but how much of that outcome had to do with our company’s engagement? And how will we fare in the next policy fight? With so many moving parts in the policy space, determining a Washington strategy (and a budget) can seem equal parts art and luck.

Enter the concept of a Washington brand, which is the measure of a company’s long-term reputation and influence among the powerbrokers of DC—from K Street to Capitol Hill to the White House—who write the laws and regulations affecting corporate bottom lines. Just like consumer and employer brands, a Washington brand captures how the audience perceives a company, and how those perceptions influence their future behavior. Do these policymakers respect a given company? Do they care what that company thinks, and actually listen? Is that company their first call when they have a question? As it relates to DC, a strong brand offers an upper hand in influencing policy outcomes.

Importantly, that Washington brand can be measured, tracked, and analyzed. Through an annual survey of more than a thousand federal policymakers (and subsequent interviews with over 400), National Journal’s Policy Brand Research captures and quantifies Washington’s perceptions of 100 organizations across 15 industries, from energy to healthcare to technology. The last several years of this research have surfaced the specific activities and approaches to advocacy that can strengthen a Washington brand—and those that can’t.

Building a Strong Washington Brand

So how does a company build and maintain a strong Washington reputation? Not, as it turns out, through lobbying alone. Lobbying represents just one of twelve key activities that contribute to long-term efficacy and influence in Washington. But the best path forward depends on each organization’s unique situation, shaped in part by its corporate practices and the realities of the industry; a strategy that strengthens one company’s reputation can have the opposite effect on another. Crafting an optimal approach therefore requires a critical assessment of each organization’s strengths and weaknesses.

Consider a Fortune 100 company whose history of vocally opposing regulations landed it in the lower half of the Washington reputation ranking. National Journal’s Policy Brand Research identified this refusal to compromise as a major roadblock to the company’s Washington brand, and guided the organization toward a more collaborative posture—not just on rules and regulations, but around workforce development and diversity initiatives. Federal agency and White House staff in particular took note; they began inviting the company into conversations and seeking out its perspectives. Eventually, cross-Washington respect for the company’s input rose.

The outcome was drastically different for another Fortune 100 company that sought to boost its reputation in the wake of a corporate crisis. Without first assessing its standing in Washington, the company ran a high-profile ad campaign to promote its corporate social responsibility to policymakers. For a company that had already created a strong impression of its corporate conduct, this would have likely bolstered existing perceptions and provided a reputational boost. But this company enjoyed no such effect. Because it had failed to address the issue head-on, Washington influentials saw the campaign as nothing more than a public relations ploy that increased their existing skepticism.

As organizations shift their focus toward understanding and investing in their Washington brands, they add more structure and certainty to their government affairs strategies. By collecting and heeding the most relevant data—the feedback of policymakers—companies equip themselves to make the most informed decisions about their investments in Washington.

Companies have long relied on data-driven approaches to track and improve every other business function. Why should government affairs be any different?

Michael D. Gottlieb is Executive Director of National Journal’s Policy Brands Roundtable, a research and consulting firm that serves corporations and associations.

Business Leaders And Boards-Strategic Issues and Analytics In Business Planning and Competitive Action

Shared on LinkedIn.

The age of analytics: Competing in a data-driven world, suggests that the range of applications and opportunities has grown and will continue to expand. Given rapid technological advances, the question for companies now is how to integrate new capabilities into their operations and strategies—and position themselves in a world where analytics can upend entire industries.

Is big data all hype? To the contrary: earlier research may have given only a partial view of the ultimate impact. A new report from the McKinsey Global Institute (MGI), The age of analytics: Competing in a data-driven world, suggests that the range of applications and opportunities has grown and will continue to expand. Given rapid technological advances, the question for companies now is how to integrate new capabilities into their operations and strategies—and position themselves in a world where analytics can upend entire industries.

The age of analytics
Big data continues to grow; if anything, earlier estimates understated its potential.
A 2011 MGI report highlighted the transformational potential of big data. Five years later, we remain convinced that this potential has not been oversold. In fact, the convergence of several technology trends is accelerating progress. The volume of data continues to double every three years as information pours in from digital platforms, wireless sensors, virtual-reality applications, and billions of mobile phones. Data-storage capacity has increased, while its cost has plummeted. Data scientists now have unprecedented computing power at their disposal, and they are devising algorithms that are ever more sophisticated.

Earlier, we estimated the potential for big data and analytics to create value in five specific domains. Revisiting them today shows uneven progress and a great deal of that value still on the table (exhibit). The greatest advances have occurred in location-based services and in US retail, both areas with competitors that are digital natives. In contrast, manufacturing, the EU public sector, and healthcare have captured less than 30 percent of the potential value we highlighted five years ago. And new opportunities have arisen since 2011, further widening the gap between the leaders and laggards.

Progress in capturing value from data and analytics has been uneven.
Would you like to learn more about the McKinsey Global Institute?
Visit our Technology & Innovation page
Leading companies are using their capabilities not only to improve their core operations but also to launch entirely new business models. The network effects of digital platforms are creating a winner-take-most situation in some markets. The leading firms have remarkably deep analytical talent taking on various problems—and they are actively looking for ways to enter other industries. These companies can take advantage of their scale and data insights to add new business lines, and those expansions are increasingly blurring traditional sector boundaries.

Where digital natives were built for analytics, legacy companies have to do the hard work of overhauling or changing existing systems. Adapting to an era of data-driven decision making is not always a simple proposition. Some companies have invested heavily in technology but have not yet changed their organizations so they can make the most of these investments. Many are struggling to develop the talent, business processes, and organizational muscle to capture real value from analytics.

The first challenge is incorporating data and analytics into a core strategic vision. The next step is developing the right business processes and building capabilities, including both data infrastructure and talent. It is not enough simply to layer powerful technology systems on top of existing business operations. All these aspects of transformation need to come together to realize the full potential of data and analytics. The challenges incumbents face in pulling this off are precisely why much of the value we highlighted in 2011 is still unclaimed.

The urgency for incumbents is growing, since leaders are staking out large advantages, and hesitating increases the risk of being disrupted. Disruption is already happening, and it takes multiple forms. Introducing new types of data sets (“orthogonal data”) can confer a competitive advantage, for instance, while massive integration capabilities can break through organizational silos, enabling new insights and models. Hyperscale digital platforms can match buyers and sellers in real time, transforming inefficient markets. Granular data can be used to personalize products and services—including, most intriguingly, healthcare. New analytical techniques can fuel discovery and innovation. Above all, businesses no longer have to go on gut instinct; they can use data and analytics to make faster decisions and more accurate forecasts supported by a mountain of evidence.

The next generation of tools could unleash even bigger changes. New machine-learning and deep-learning capabilities have an enormous variety of applications that stretch into many sectors of the economy. Systems enabled by machine learning can provide customer service, manage logistics, analyze medical records, or even write news stories.

These technologies could generate productivity gains and an improved quality of life, but they carry the risk of causing job losses and dislocations. Previous MGI research found that 45 percent of work activities could be automated using current technologies; some 80 percent of that is attributable to existing machine-learning capabilities. Breakthroughs in natural-language processing could expand that impact.

Data and analytics are already shaking up multiple industries, and the effects will only become more pronounced as adoption reaches critical mass—and as machines gain unprecedented capabilities to solve problems and understand language. Organizations that can harness these capabilities effectively will be able to create significant value and differentiate themselves, while others will find themselves increasingly at a disadvantage.

About the author(s)

Jacques Bughin and James Manyika are directors of the McKinsey Global Institute, and Michael Chui is an MGI partner; Nicolaus Henke and Tamim Saleh are senior partners in McKinsey’s London office, Bill Wiseman is a senior partner in the Taipei office, and Guru Sethupathy is a consultant in the Washington, DC, office.
Article Actions

McKinsey on Disruptive Technology-Driven Change In The Automotive Industry.

McKinsey Dec 2016
Shared previously on LinkedIn:

“Technology-driven trends will revolutionize how industry players respond to changing consumer behavior, develop partnerships, and drive transformational change.”
You will note that some of the strategic issues raised, are similar to issues being faced by manufacturers of other complex products.The ability to recognize and effectively respond to these issues will be of increasing concern and value.

Today’s economies are dramatically changing, triggered by development in emerging markets, the accelerated rise of new technologies, sustainability policies, and changing consumer preferences around ownership. Digitization, increasing automation, and new business models have revolutionized other industries, and automotive will be no exception. These forces are giving rise to four disruptive technology-driven trends in the automotive sector: diverse mobility, autonomous driving, electrification, and connectivity.

Most industry players and experts agree that the four trends will reinforce and accelerate one another, and that the automotive industry is ripe for disruption. Given the widespread understanding that game-changing disruption is already on the horizon, there is still no integrated perspective on how the industry will look in 10 to 15 years as a result of these trends. To that end, our eight key perspectives on the “2030 automotive revolution” are aimed at providing scenarios concerning what kind of changes are coming and how they will affect traditional vehicle manufacturers and suppliers, potential new players, regulators, consumers, markets, and the automotive value chain.

This study aims to make the imminent changes more tangible. The forecasts should thus be interpreted as a projection of the most probable assumptions across all four trends, based on our current understanding. They are certainly not deterministic in nature but should help industry players better prepare for the uncertainty by discussing potential future states.

1. Driven by shared mobility, connectivity services, and feature upgrades, new business models could expand automotive revenue pools by about 30 percent, adding up to $1.5 trillion.

The automotive revenue pool will significantly increase and diversify toward on-demand mobility services and data-driven services. This could create up to $1.5 trillion—or 30 percent more—in additional revenue potential in 2030, compared with about $5.2 trillion from traditional car sales and aftermarket products/services, up by 50 percent from about $3.5 trillion in 2015 (Exhibit 1).

Connectivity, and later autonomous technology, will increasingly allow the car to become a platform for drivers and passengers to use their time in transit to consume novel forms of media and services or dedicate the freed-up time to other personal activities. The increasing speed of innovation, especially in software-based systems, will require cars to be upgradable. As shared mobility solutions with shorter life cycles will become more common, consumers will be constantly aware of technological advances, which will further increase demand for upgradability in privately used cars as well.

2. Despite a shift toward shared mobility, vehicle unit sales will continue to grow, but likely at a lower rate of about 2 percent per year.

Overall global car sales will continue to grow, but the annual growth rate is expected to drop from the 3.6 percent over the last five years to around 2 percent by 2030. This drop will be largely driven by macroeconomic factors and the rise of new mobility services such as car sharing and e-hailing.

A detailed analysis suggests that dense areas with a large, established vehicle base are fertile ground for these new mobility services, and many cities and suburbs of Europe and North America fit this profile. New mobility services may result in a decline of private-vehicle sales, but this decline is likely to be offset by increased sales in shared vehicles that need to be replaced more often due to higher utilization and related wear and tear.

The remaining driver of growth in global car sales is the overall positive macroeconomic development, including the rise of the global consumer middle class. With established markets slowing in growth, however, growth will continue to rely on emerging economies, particularly China, while product-mix differences will explain different development of revenues.

3. Consumer mobility behavior is changing, leading to up to one out of ten cars sold in 2030 potentially being a shared vehicle and the subsequent rise of a market for fit-for-purpose mobility solutions.

Changing consumer preferences, tightening regulation, and technological breakthroughs add up to a fundamental shift in individual mobility behavior. Individuals increasingly use multiple modes of transportation to complete their journey; goods and services are delivered to rather than fetched by consumers. As a result, the traditional business model of car sales will be complemented by a range of diverse, on-demand mobility solutions, especially in dense urban environments that proactively discourage private-car use.

Consumers today use their cars as all-purpose vehicles, whether they are commuting alone to work or taking the whole family to the beach. In the future, they may want the flexibility to choose the best solution for a specific purpose, on demand and via their smartphones. We already see early signs that the importance of private-car ownership is declining: in the United States, for example, the share of young people (16 to 24 years) who hold a driver’s license dropped from 76 percent in 2000 to 71 percent in 2013, while there has been over 30 percent annual growth in car-sharing members in North America and Germany over the last five years.

Consumers’ new habit of using tailored solutions for each purpose will lead to new segments of specialized vehicles designed for very specific needs. For example, the market for a car specifically built for e-hailing services—that is, a car designed for high utilization, robustness, additional mileage, and passenger comfort—would already be millions of units today, and this is just the beginning.

As a result of this shift to diverse mobility solutions, up to one out of ten new cars sold in 2030 may likely be a shared vehicle, which could reduce sales of private-use vehicles. This would mean that more than 30 percent of miles driven in new cars sold could be from shared mobility. On this trajectory, one out of three new cars sold could potentially be a shared vehicle as soon as 2050.

4. City type will replace country or region as the most relevant segmentation dimension that determines mobility behavior and, thus, the speed and scope of the automotive revolution.

Understanding where future business opportunities lie requires a more granular view of mobility markets than ever before. Specifically, it is necessary to segment these markets by city types based primarily on their population density, economic development, and prosperity. Across those segments, consumer preferences, policy and regulation, and the availability and price of new business models will strongly diverge. In megacities such as London, for example, car ownership is already becoming a burden for many, due to congestion fees, a lack of parking, traffic jams, et cetera. By contrast, in rural areas such as the state of Iowa in the United States, private-car usage will remain the preferred means of transport by far.

The type of city will thus become the key indicator for mobility behavior, replacing the traditional regional perspective on the mobility market. By 2030, the car market in New York will likely have much more in common with the market in Shanghai than with that of Kansas.

5. Once technological and regulatory issues have been resolved, up to 15 percent of new cars sold in 2030 could be fully autonomous.

Fully autonomous vehicles are unlikely to be commercially available before 2020. Meanwhile, advanced driver-assistance systems (ADAS) will play a crucial role in preparing regulators, consumers, and corporations for the medium-term reality of cars taking over control from drivers.

The market introduction of ADAS has shown that the primary challenges impeding faster market penetration are pricing, consumer understanding, and safety/security issues. Regarding technological readiness, tech players and start-ups will likely also play an important role in the development of autonomous vehicles. Regulation and consumer acceptance may represent additional hurdles for autonomous vehicles. However, once these challenges are addressed, autonomous vehicles will offer tremendous value for consumers (for example, the ability to work while commuting, or the convenience of using social media or watching movies while traveling).

A progressive scenario would see fully autonomous cars accounting for up to 15 percent of passenger vehicles sold worldwide in 2030 (Exhibit 2).

6. Electrified vehicles are becoming viable and competitive; however, the speed of their adoption will vary strongly at the local level.

Stricter emission regulations, lower battery costs, more widely available charging infrastructure, and increasing consumer acceptance will create new and strong momentum for penetration of electrified vehicles (hybrid, plug-in, battery electric, and fuel cell) in the coming years. The speed of adoption will be determined by the interaction of consumer pull (partially driven by total cost of ownership) and regulatory push, which will vary strongly at the regional and local level.

In 2030, the share of electrified vehicles could range from 10 percent to 50 percent of new-vehicle sales. Adoption rates will be highest in developed dense cities with strict emission regulations and consumer incentives (tax breaks, special parking and driving privileges, discounted electricity pricing, et cetera). Sales penetration will be slower in small towns and rural areas with lower levels of charging infrastructure and higher dependency on driving range.

Through continuous improvements in battery technology and cost, those local differences will become less pronounced, and electrified vehicles are expected to gain more and more market share from conventional vehicles. With battery costs potentially decreasing to $150 to $200 per kilowatt-hour over the next decade, electrified vehicles will achieve cost competitiveness with conventional vehicles, creating the most significant catalyst for market penetration. At the same time, it is important to note that electrified vehicles include a large portion of hybrid electrics, which means that even beyond 2030, the internal-combustion engine will remain very relevant.

7. Within a more complex and diversified mobility-industry landscape, incumbent players will be forced to compete simultaneously on multiple fronts and cooperate with competitors.

While other industries, such as telecommunications or mobile phones/handsets, have already been disrupted, the automotive industry has seen very little change and consolidation so far. For example, only two new players have appeared on the list of the top-15 automotive original-equipment manufacturers (OEMs) in the last 15 years, compared with ten new players in the handset industry.

A paradigm shift to mobility as a service, along with new entrants, will inevitably force traditional car manufacturers to compete on multiple fronts. Mobility providers (Uber, for example), tech giants (such as Apple, Google), and specialty OEMs (Tesla, for instance) increase the complexity of the competitive landscape. Traditional automotive players that are under continuous pressure to reduce costs, improve fuel efficiency, reduce emissions, and become more capital-efficient will feel the squeeze, likely leading to shifting market positions in the evolving automotive and mobility industries, potentially leading to consolidation or new forms of partnerships among incumbent players.

In another game-changing development, software competence is increasingly becoming one of the most important differentiating factors for the industry, for various domain areas, including ADAS/active safety, connectivity, and infotainment. Further on, as cars are increasingly integrated into the connected world, automakers will have no choice but to participate in the new mobility ecosystems that emerge as a result of technological and consumer trends.

Automotive & Assembly