It’s now been several years since the global financial crisis, but the pressure on boards and directors to raise their game remains considerable.
According to a survey of more than 770 global directors, there are dramatic differences in how directors allocate their time across functions and this has a direct bearing on the perceived effectiveness of the board.
The report by McKinsey and Company revealed that more than one in four of the directors assessed the board’s impact as “moderate or lower”, while others reported having a “high impact” across board functions. So what marks the agenda of a high-performing board?
An analysis of the survey by Chinta Bhagat (McKinsey Singapore) and Conor Kehoe (McKinsey London) surmised that the distinction between higher and lower impact is directly related to breath of the issues directors tackle and the time they dedicate to them.
Breadth of function
Directors who reported having a low to moderate impact said that their boards undertake “the basics” of ensuring compliance, reviewing financial reports, and assessing portfolio diversification, depending on the function. Directors who said that their boards have a higher impact undertake the ‘core’ activities, but also add a series of other practices in every function.
The McKinsey report said: “In the area of strategy, for example, this means becoming more forward looking. Boards with a moderate impact incorporate trends and respond to changing conditions. More involved boards analyse what drives value, debate alternative strategies, and evaluate the allocation of resources. At the highest level, boards look inward and aspire to more “meta” practices—deliberating about their own processes, for example—to remove biases from decisions.”
The report also observed a similar hierarchy across other board functions. In performance management, for instance, many boards start with a basic review of financial metrics. More involved boards add regular performance discussions with the CEO, and boards at still higher levels of engagement analyse leading indicators and aspire to review robust nonfinancial metrics. In the areas of risk, M&A, and talent management boards follow comparable progressions.
Putting the time in
Working at a high level takes discipline – and time. Directors who believe that their activities have a greater impact reported spending significantly more time on board activities, on average, than those who serve on lower-impact boards. The survey also found that directors reporting that they had a very high impact worked for their boards about 40 days a year, while those who said that their impact was moderate or lower averaged only 19.
Higher-impact board members also spent about three extra workdays on each of the following: performance management, M&A, organisational health and risk management.
The survey report said: “The data suggests that less engaged boards correctly identify the next step up in the hierarchy but underestimate the time it would take to meet this aspiration. When low- to moderate-impact directors are asked how much time they ideally should spend on their duties, they suggested increasing the number of days to 27, from 19. While spending more time can never assure a high impact, even very high-impact directors would increase their commitment to 45 days, from 40.”
A final implication of our survey is that CEOs need not fear that a more engaged board may constrain their prerogative to set a company’s direction.
“Highly committed boards are not spending the extra time supplanting management’s role in developing strategic options. Rather, they are building a better understanding of their companies and industries, while helping senior teams to stress-test strategies and then reallocate resources to support them.
“Some CEOs find that task to be lonely and difficult when they face internal “barons” who protect their fiefs. In short, engaged boards can still be supportive of management. And the directors serving on them, our research suggests, are not only more effective but also more satisfied with their work.”
Credit: Alicia Buller
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