Month: July 2019

Aptiv Becoming a More Sustainable Business

In “Aptiv Becoming a More Sustainable Business” in our Spring issue, the President and CEO of Aptiv presents and then discusses his progress in carrying out his “long-term plan” to transform an automotive parts supplier that was once part of General Motors into a “global technology company.” The company’s mission is to maintain and strengthen its current position as “a partner of choice” of the world’s largest automakers in designing and manufacturing “the brain and the nervous system of the vehicle”—and in so doing, to make vehicle transportation “safer, greener, and more connected.”

With 15 major tech centers and 126 manufacturing sites spread across 44 countries, and with over 160,000 employees, including 18,600 engineers and scientists, the company has the scale and resources to carry out that mission. And attesting to the resilience of its business model, in 2018, a year in which the global number of cars sold actually went down, the company increased its revenue by 10% and its operating cash flow by 50%.

In the area of safety, the company is helping its customers build vehicles that move the industry closer to its goal of zero traffic fatalities and accidents by delivering the building blocks of active safety systems—which include perception and vision systems, and the high-speed and high-reliability networks that connect them. (And promising even greater gains in safety, the company’s advances in fully automated vehicles are helping make self-driving cars a reality.) In terms of green initiatives, the company is focused on minimizing the vehicles’ “total lifecycle impact on the environment” by providing the high-voltage distribution and connection systems for electric cars, while also using “smarter” vehicle architectures to achieve significant reductions in weight and mass. Finally, the company is helping the industry incorporate the increased connectivity that aims to provide a seamless integration between the passenger, the vehicle, and the Internet of Things.

The company’s commitment to corporate social responsibility goes well beyond its products and solutions. As an important part of its disciplined approach to creating sustainable long-term value for its shareholders, the company tracks a range of key performance indicators designed to ensure that “we devote the right amount of time and attention to each of our key stakeholders.” Along with its stakeholder programs and ongoing investment in human capital, which have helped the company win the designation “one of the world’s most ethical companies” in seven consecutive years, the CEO also cites the important roles played by its highly collaborative and engaged board of directors, and by a long-term incentive pay plan for its senior management team that, along with standard financial measures, uses a “strategic results modifier” that reflects the company’s success in meeting “non-financial goals that are related to talent, culture, and product quality.”

Authored by Kevin P. Clark

A Fireside Chat with Raj Gupta (or What It Takes to Create Long-Term Value)

Starting off our Spring issue, the chairman of two public companies (and former chair and CEO of Rohm and Haas) draws on his experience as a director of five private and 15 public companies in discussing the challenges and opportunities facing today’s corporate boards.

Perhaps the most formidable challenge is the pace of technological change, which is making business models “in all industries and countries” obsolete and forcing companies to adapt much more quickly than in the past. Along with the risk of obsolescence is the increase in “reputational risk” associated with an “information age” in which companies are forced to monitor the nearly continuous flow of fact, hearsay, and outright fabrication.

The author recommends that public company boards adopt a new “partnership” model. Besides ensuring an “ethical tone at the top,” corporate directors should aim to become partners with the senior management team by playing more active roles in strategic planning, risk management, and the design of performance evaluation and incentive pay systems. In the most striking departure from current practice, the author urges directors to seize the opportunity created by the “reconcentration” of ownership of U.S. public companies by actively engaging large institutional investors in a strategic dialogue about the companies’ strengths and vulnerabilities. In so doing, proactive directors can help their management teams preempt shareholder activists and create long-run value by creating a more effective two-way channel of communication, one with the potential to give management more confidence when undertaking large strategic investments with longer-run payoffs.

A conversation with Raj Gupta with Mark Tulay

Do Large Blockholders Reduce Risk?

In the sixth article of our Winter issue, the authors review the role and influence of companies with “blockholders” — shareholders with large positions in a particular company

The conventional assumption in the asset pricing literature is that the identity of a company’s owners is largely irrelevant, but studies of companies with “blockholders”—shareholders with large positions in a particular company—provide grounds for questioning this assumption.  Unlike the well-diversified investors of modern portfolio theory, blockholders have strong incentives to monitor corporate performance and, when necessary, to exert control over ineffective managements and boards. The findings of many studies support the idea that blockholders have a positive effect on rates of return.

The authors of this article report the findings of their recent investigation of whether blockholders might also have a positive effect on shareholder value by reducing the risk of the companies in which their holdings are concentrated. After distinguishing between companies with individual as opposed to corporate blockholders, and those with one share, one vote as opposed to those with dual-class shares, the authors find that ownership of large positions by individuals—but not corporations—was associated with lower systematic risk (when using both Fama-French multiple factor and CAPM models). At the same time, they find that the firm-specific risk of such companies was higher, but “biased” toward positive outcomes—that is, smaller downsides with larger upsides. What’s more, this upward shift in performance and risk-profile was achieved at least partly through increases in productivity as reflected in higher profit margins, profitability, profit per employee, and operating leverage, and lower costs of goods sold, SGA, and cash holdings. By contrast, in the case of blockholders in companies with dual-class share structures, all of these positive associations with blockholders were either significantly weaker, or reversed. That is, whereas the presence of individual blockholders appears to increase productivity and value under a one share, one vote governance regime, blockholders in companies with dual-class structures were associated with higher systematic risk and reduced productivity and value.

Authored by David Newton and Imants Paeglis