Most boards do not make participation with management in developing and monitoring a corporate long-term strategy a primary objective.
The present-day problem is that boards have become too involved in monitoring compliance. Good board governance means not just compliance, but also a board that makes a significant contribution to the business. With the passage of Sarbanes-Oxley (SOX), little or no guidance was given by the Public Accounting Oversight Board. The lack of specific guidelines for internal control reporting requirements at the inception of SOX created a great deal of confusion and focused the boards' primary attention on controls rather than being involved in creating long-term value for their companies. The need to comply with ill-defined SOX requirements created a great deal of confusion and wasted effort.
Boards and management are not always communicating effectively on strategy. Only 16 percent of directors in a recent survey say the board and management work together. The Jack in the Box board, working with management, has made strategic planning its priority. The more board members know about the business, the better contribution they can make, particularly in discussion of corporate strategy. Thus, the Nominating Committee of the board has chosen candidates with varied skills, but with particular attention to previous business experiences and individual insightfulness that pertain to the effective development of a strong strategic plan. Board members have the obligation to learn about the industry sector in which their company competes.
Jack in the Box has a very diverse board of directors. One member has been the chief executive officer of a large publicly traded franchised restaurant chain; but members have extensive experience in management, not only of public companies. There are also those with advertising and public relations backgrounds, a chief financial officer and another chief legal counsel and administrative officer of two major retail chains. The board and management have developed a strategy to convert Jack in the Box from predominantly a company-owned restaurant chain to a controlled process of converting to a 70 percent franchised restaurant operation, while continuing growth and the objective of becoming the most admired brand in the fast food sector.
Jack in the Box also has another branded restaurant chain, Qdoba Mexican Restaurants. The restaurants are in the sector of the market called fast casual dining. Qdoba is primarily a franchised operation that has grown since the acquisition by Jack in the Box, from 45 locations to more than 450 in five years. The experience gained at Qdoba has helped management and the board implement the franchising strategy at Jack in the Box.
Management and the board examined the differentiating factors of Jack in the Box from its competition. Some of the most distinguishing factors are the advertising campaign (the longest running and one of the most awarded campaigns in American advertising) and the company's ability for menu innovation. An additional incentive for franchise operators is the high level of return on investments generated by most established Jack in the Box restaurants. The quick success of new Jack in the Box restaurants opened in contiguous markets has also been attractive to franchises.
How do these factors support the company's strategic objectives? We learned that we should grow our new markets in areas contiguous to our existing markets to take advantage of the spillover advertising and brand identification. We also must adapt our menus to local tastes. Other fast food chains have much larger advertising budgets, so our campaigns needed to be focused and primarily address our target audience, which is 19- to 35-year-old males. When we chose to enter the Southeast, we needed to add items not served in our other geographic locations. We have also expanded our development activities with potential franchise operators throughout the United States.
Management and the board of directors continually review the strategic plan and the success of its implementation. We use customer surveys called Voice of the Guest to test our performance against our goals. The board also uses the improvement of the scores in the surveys as one performance compensation criteria for management. We also review the progress of our new store openings and rebranding of existing stores against our strategic development plan.
With the help of our independent auditors, internal auditor group and external consultants, management and the board of directors focused quickly on related matters dictated by SOX compliance. With an excess of caution we eliminated or enhanced any procedure that could have been classified as a serious deficiency. We most likely incurred excessive costs but it allowed the management and the board of directors to return to its most important function, developing a long-term strategy to create value for our shareholders.
Hutchison has been a director of Jack in the Box since May 1998. In this capacity he is being honored as Director of the Year for Companies in Transition. He also is currently on the board of directors at Teppco Partners LP, Huntington Hotel Corp., Cadiz Inc., The Olson Co., Cardium Therapeutics Inc. and The Hubbs-SeaWorld Research Institute.
Nov. 20, 2009, 5 p.m. -- San Diego's web video news: Today's breaking major business events, economic, and financial announcements from the Daily Transcript/San Diego Source newsroom.
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